url stringlengths 56 59 | text stringlengths 3 913k | downloaded_timestamp stringclasses 1 value | created_timestamp stringlengths 10 10 |
|---|---|---|---|
https://www.courtlistener.com/api/rest/v3/opinions/8500092/ | MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
Louis A Scarcella, United States Bankruptcy Judge
I. Introduction
Plaintiffs Rocco and Josephine Marini bring this action against defendant Harold Adamo, Jr., the debtor in this chapter 7 *644case, to have their debt arising from a judgment entered in the United States District Court for the Eastern District of New York (the “District Court”) excepted from discharge under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6).1 Following limited discovery, plaintiffs now move for summary judgment (the “Motion”). [Adv. Dkt. No. 36].2 They argue that the material facts are undisputed and that, on those facts, collateral estoppel precludes the defendant from re-litigating in this action the finding of fraud made by the District Court. Defendant opposed the Motion [Adv. Dkt. No. 40], and plaintiff replied. [Adv. Dkt. No. 43].
The Court has carefully reviewed the moving, opposing and reply papers and considered the parties’ oral argument and, for the reasons set forth on the record at the hearing and as discussed below, the Motion is granted with respect to the First Claim for Relief under § 523(a)(2)(A).3
II. Jurisdiction
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) in which final orders or judgment may be entered by this Court pursuant to 28 U.S.C. § 157(b)(1).
III. Background
. A. Factual Background4
On September 30, 2008, plaintiffs brought an action in the District Court against defendant, his wife, Lisa Adamo, The Bolton Group, Inc., and H. Edward Rare Coins and Collectibles, Inc., alleging claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), as well as state law claims for fraud, breach of fiduciary duty, unjust enrichment, and money had and received, in connection with the sale of rare coins by defendant to plaintiffs. Plaintiffs sought to recover out of pocket losses of $11,304,079, plus interest, and punitive damages.
On February 6, 2014, after a twelve-day bench trial, the District Court decided in favor of plaintiffs.5 The District Court concluded that “plaintiffs presented overwhelming evidence that [defendant] defrauded Marini by making a series of false and material misrepresentations in order to induce Marini to buy numerous coins from [defendant], for investment purposes, at grossly inflated values over a period of several years.” Marini v. Adamo, 995 F.Supp.2d 155, 163 (E.D.N.Y. 2014), ajfd, 644 FedAppx. 33 (2d Cir. 2016). On the *645issue of common law fraud, the District Court expressly found that “plaintiffs’ have satisfied their burden, and that they have shown by clear and convincing evidence that defendants committed fraud. under New York law.” Id. at 198-99.
On April 16, 2014, the District Court entered judgment (the “Judgment”)6 on all counts against defendant, H, Edward Rare Coins and Collectibles, Inc., and The Bolton Group, Inc. in the sum of $11,304,079, plus (i) prepetition interest calculated at 9% from January 1, 2005 to April 16, 2014 on the state law claims and 9% interest from April 5, 2006 to April 16, 2014 on the section 10(b) claims, and (ii) post-judgment interest on all claims to be calculated pursuant to the federal rate set forth in 28 U.S.C. §..1961 (the “Judgment Debt”).7
On August 6, -2014, defendant filed a petition for relief under chapter 118, thus staying all collection efforts on the Judgment Debt pursuant-to- §. 362(a).
B. Procedural History
On January 12, 2015, plaintiffs filed a complaint to determine the dischargeability of the Judgment Debt under §§ 523(a)(2), (4) add (6). [Adv. Dkt. No. 1], The complaint relies on the findings made by the District Court, and seeks a determination that the Judgment .Debt is nondis-chargeable on the basis of fraud, breach of fiduciary duty, and willful and malicious injury. On February 19, 2015, defendant answered, denying liability. [Adv. Dkt. No. 10].9
On November 11, 2015, after discovery, plaintiffs moved for summary judgment. [Adv. Dkt. No. 36]. Plaintiff filed a declaration [Adv. Dkt. No. 36-1] and a memorandum of law (“Marini Br.”) [Adv. Dkt. No. 37] in support of the Motion, arguing that under the doctrine of collateral estoppel the findings made by the District Court and the Judgment entered in their favor and against defendant resolved all triable issues necessary for this Court to determine that the Judgment Debt is nondis-chargeable. Marini Br. 12.
On December 18, 2015, defendant filed a declaration [Adv. Dkt. No. 40] and a memorandum of law in opposition to the Motion (“Adamo Br.”) [Adv. Dkt. No. 41], contending that collateral estoppel does not apply because: (i) the District Court only found that defendant committed fraud against Rocco Marini, and not against Josephine Marini, (ii) defendant had appealed the District Court decision, and (iii) the District Court’s finding that defendant had defrauded plaintiffs was “tainted” because the District Court reached that conclusion only after determining that defendant owed a fiduciary duty to plaintiffs, and defendant is not a fiduciary for purposes of § 523(a)(4). According to defendant, this Court cannot give preclusive effect to the *646Judgment as the District Court’s findings did not resolve all triable issues necessary to determine whether the Judgment Debt is nondischargeable. Adamo Br. 10-11. On January 19, 2016, plaintiff filed a reply brief. [Adv. Dkt. No. 43].
The Court held argument on the Motion. At the conclusion of the hearing, and for the reasons set forth on the record, the Court granted plaintiffs’ motion for summary judgment under § 523(a)(2)(A). This Memorandum Opinion and Order explains further the bases for the Court’s ruling.
IY. Discussion
A. Applicable Legal Standards
1. Summary Judgment
Under Rule 56(a) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7056, a moving party is entitled to summary judgment if it can “show[ ] that there is no genuine dispute as to any material fact and [it] is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material if it “might affect the outcome of the suit under the governing law,” and a factual dispute is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The moving party bears the burden of demonstrating the absence of a genuine dispute as to any material fact. Celotex, 477 U.S. at 322-23, 106 S.Ct. 2548. The evidence on each material element of its claim or defense must be sufficient to entitle the moving party to relief as a matter of law. Vermont Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir. 2004). If the moving party meets its initial burden, the opposing party must then produce “specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. at 324, 106 S.Ct. 2548; see Fed. R. Civ. P. 56(c). “A party may not rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment.” Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citations and internal quotations marks omitted). A party must offer more than a “scintilla of evidence” that a genuine dispute of material fact exists, Anderson, 477 U.S. at 252, 106 S.Ct. 2505, or that there is some “metaphysical doubt as to the material, facts.” Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
In determining whether there exists a genuine dispute as to a material fact, the Court must “construe all evidence in the light most favorable to the nonmoving party, drawing all inferences and resolving all ambiguities in its favor.” Dickerson v. Na-politano, 604 F.3d 732, 740 (2d Cir. 2010). The Court is not “to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Ciojfi v. Averill Park Cent. Sch. Dist. Bd. of Ed., 444 F.3d 158,162 (2d Cir. 2006) (citing Anderson, 477 U.S. at 249,106 S.Ct. 2505 (1986)).
2. Collateral Estoppel
“Under collateral estoppel, once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case.” Allen v. McCur-ry, 449 U.S. 90, 94, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); see Marvel Characters, Inc. v. Simon, 310 F.3d 280, 288 (2d Cir. 2002) (“[c]ollateral estoppel, or issue preclusion, prevents parties or their privies from relitigating in a subsequent action an issue of fact or law that was fully and fairly litigated in a prior proceeding.”).
*647Collateral estoppel applies in a non-dischargeability action. Grogan v. Gamer, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (“[i]f the preponderance standard also governs the question of nondischargeability, a bankruptcy court could 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.”); see also Ball v. A.O. Smith Corp,, 451 F.3d 66, 69 (2d Cir. 2006); Evans v, Ottimo, 469 F.3d 278, 281 (2d Cir. 2006).
“[T]he application of the collateral estoppel doctrine differs based on the forum in which the first judgment was entered.” Guggenhiem Capital, LLC v. Bimbaum (In re Bimbaum), 513 B.R. 788, 800 (Bankr. E.D.N.Y. 2014). The pre-clusive effect of a prior judgment resolving issues of federal law is governed by the federal standard for collateral estoppel. See Ball v. A.O. Smith Corp., 451 F.3d at 69,10 However, when a federal court reviews the preclusive effect of state law claims decided by a federal court exercising supplemental jurisdiction under 28 U.S.C. § 1367 in a federal question case, the reviewing court applies the law of the state in which the federal court exercising supplemental jurisdiction sat. See In re Ferrandina, 533 B.R. 11, 23 (Bankr. E.D.N.Y. 2015) (“[SJtate law rules of preclusion should be applied to state law claims that have been determined by a federal court exercising pendent or supplemental jurisdiction under 28 U.S.C. § 1367 in a federal question case”).
Here, the District Court exercised supplemental jurisdiction over the state law claims under 28 U.S.C. § 1367. Accordingly, the Court will apply New York’s rules of preclusion. Under New York law, “collateral estoppel bars relitigation of an issue when (1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from relit-igating the issue had a full and fair opportunity to litigate the issue in the prior action.” Evans, 469 F.3d at 281 (citing Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455-56, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985)). The party seeking to invoke collateral estoppel bears the burden of establishing the first element, while the party opposing collateral estoppel has the burden of showing the absence of the second element. Evans, 469 F.3d at 281-82.
3. Actual Fraud — 11 U.S.C.
§ 523(a)(2)(A)
Under § 523(a)(2)(A), a debtor is not discharged from a 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).
A creditor seeking to except a debt from discharge under this provision must prove: (i) that the debtor made a false representation; (ii) that at the time made, the debtor knew the statement was false; (iii) the misrepresentation was made with an intent to deceive; (iv) that the creditor reasonably relied on that misrepresentation; and (v) that the creditor was *648damaged as a result of the misrepresentation. In re Wisell, 494 B.R. 23, 37 (Bankr. E.D.N.Y. 2011); In re Crossfield, No. 8-11-72505-REG, 2012 WL 3637919, at *5 (Bankr. E.D.N.Y. Aug. 22, 2012); In re Schulman, 196 B.R. 688, 693 (Bankr. S.D.N.Y. 1996). The burden of proof in an action to determine dischargeability is on the creditor to prove the elements of its nondischargeability complaint by a preponderance of the evidence. See, e.g,, Grogan, 498 U.S. at 286, 111 S.Ct. 654; In re Benshaw, 222 F.3d 82, 86 (2d Cir. 2000).
B. Analysis
Applying these legal principles to this case, it is clear that the fraud findings made by the District Court requires that summary judgment be granted on the grounds of collateral estoppel.
First, there can be no dispute that defendant had a full and fair opportunity to litigate the fraud issue in the prior action. “The [District] Court held a bench trial beginning on October 22, 2012, and continuing over twelve days of testimony. The [District] Court heard closing statements from both parties on April 12, 2013. Both sides submitted exhibits to be considered by the [District] Court — including excerpts of depositions — as well as post-trial proposed findings of fact,” Marini v. Adamo, 995 F.Supp.2d at 164; see also Defendant’s Response to Plaintiffs” Local Rule 7056-1 Statement ¶¶ 3-8 [Adv. Dkt. No. 40^1], Accordingly, the Court finds that defendant has failed to meet his burden of showing the absence of the second preclusion element, i,e., that he did not have a full and fair opportunity to litigate the fraud issue in the District Court.
Second, the fraud issue was actually litigated and decided in the District Court action, and is decisive of the issue before this Court in plaintiffs non-dis-chargeability action. This is made plain by comparing the elements of common law fraud under New York law and the findings required under § 523(a)(2)(A). “Under New York law, the elements of common law fraud are a material, false representation, an intent to defraud thereby, and reasonable reliance on the representation, causing damage to the plaintiff.” Marini v. Adamo, 995 F.Supp.2d at 197 (quoting Chanayil v. Gulati, 169 F.3d 168, 171 (2d Cir, 1999)). These elements are virtually identical to those required for a judgment for fraud under § 523(a)(2)(A). “The elements for ‘five finger’ fraud under New York state law and for ‘actual fraud’ under the Code are roughly the same...” In re Crossfield, 2012 WL 3637919, at *5; In re Wisell, 494 B.R. at 37.
In the prior action, the District Court concluded that plaintiffs “have shown by clear and convincing evidence that [defendant] committed fraud under New York law.” Marini v. Adamo, 995 F.Supp.2d at 198-99. To reach that conclusion, the District Court must have found in favor of plaintiffs on each of the elements of their fraud claim under New York law, and it did just that. “[Plaintiffs have met their burden of proof on all of their claims against [defendant], including meeting their burden of proof under the ‘clear and convincing’ standard required to prove each element of the common law fraud claim.” Id. at 162. Because the Second Circuit Court has determined that “entry of a.. .judgment, grounded in a finding of actual fraud.. .resolve[s] all issues necessary to establish nondischargeability under § 523(a)(2), Evans, 469 F.3d at 283, there is no doubt that plaintiffs have met their burden of satisfying the first prong of the collateral estoppel test. See also In re Pul-ver, 327 B.R. 125, 133 (Bankr. W.D.N.Y. 2005) (giving preclusive effect to an underlying fraud judgment and granting summary judgment in favor of the plaintiff in an action under § 523(a)(2)(A)); In re Hanna, 163 B.R. 918, 925-26 (Bankr. *649E.D.N.Y. 1994) (discussing cases providing same relief).
In opposition to the Motion, defendant presents several arguments, each of which lacks merit. First, defendant argues that issue preclusion cannot apply because the District Court only found that defendant defrauded Rocco Marini, and not both Rocco .and Josephine Marini. The Court disagrees. Defendant’s argument is grounded on the District Court’s use of the defined term “Marini” in referring to Rocco Mari-ni, and that the decision is replete with references to “Marini” and not to Mrs. Marini. The Court does not view this distinction in the same light as defendant. In the first place, the decision makes clear that defendant defrauded plaintiffs, and “plaintiffs” is defined to include Mrs. Mari-ni. Marini v. Adamo, 995 F.Supp.2d at 162. Second, the Judgment “is in favor of plaintiffs on all claims against [defendant].” [Distr. Dkt. No. 249]. Third, as noted by the District Court, funds used to purchase coins from defendant came from both Mr. and Mrs. Marini, “Mrs. Marini agreed to use her and her husband’s money to purchase coins from [defendant], but stated that her husband made all of the decisions regarding coin purchases. She confirmed that they spent over $16 million on coins through [defendant].” Marini v. Adamo, 995 F.Supp.2d at 171, fn. 11 (citations to trial transcript omitted). Fourth, even if the Court were to accept defendant’s unfounded argument, it is evident that the District Court (at the very least) implicitly found that defendant defrauded Mrs. Marini as well. Implicit findings can support the basis for applying collateral estoppel. See BBS Norwalk One, Ine. v. Raccolta, Inc., 117 F.3d 674, 677 (2d Cir. 1997) (“[t]he prior decision need not have been explicit on the point, since ‘[i]f by necessary implication it is contained in that which has been explicitly decided, it will be the basis for collateral estoppel’ ”).
Defendant’s second argument in opposition to the Motion is equally unavailing. Defendant contends that collateral es-toppel does not apply because he filed an appeal. The pendency of an appeal does not preclude application of the doctrine of collateral estoppel. See Christopher D. Smithers Found., Inc. v. St. Luke’s-Roosevelt Hosp. Ctr.,. No. 00 CIV. 5502 (WHP), 2003 WL 115234, at *2 (S.D.N.Y. Jan. 13, 2003) (“Collateral estoppel applies once final judgment is entered in a case, regardless of whether an appeal from that judgment is pending”); see also In re Bodrick, 534 B.R. 738, 744 (Bankr. S.D. Ohio 2015); Guion v. Sims (In re Sims), 479 B.R,. 415, 421 (Bankr.. S.D. Tex. 2012). In any event, this argument is moot as the Second Circuit has affirmed the decision of the District Court. See Marini v. Adamo, 644 Fed.Appx. 33 (2d Cir. 2016).
Defendant’s final argument — that the District Court’s finding of fraud was “tainted” because it reached that conclusion only after determining that defendant owed a fiduciary duty to plaintiffs, and defendant is not a fiduciary for purposes of § 523(a)(4) — likewise fails. Although, the District Court found that defendant had a fiduciary relationship with plaintiffs and that he breached his fiduciary duty during the course of his relationship with plaintiffs, the District Court independently found defendant liable for fraud under New York common law. Marini v. Adamo, 995 F.Supp.2d at 197-201.
V. CONCLUSION
For the reasons set forth. above,- the Court grants plaintiffs’ motion for summary judgment. Accordingly, the- Judgment Debt is excepted from discharge under § 523(a)(2)(A). Plaintiffs’ remaining claims for relief under §§ 523(a)(4) and (a)(6) are -dismissed as moot, and this adversary proceeding shall be closed four*650teen days after entry of this Memorandum Opinion and Order.
SO ORDERED.
. All statutory references to sections of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq., will hereinafter be referred to as "§ (section number)”.
. Unless otherwise stated, citations to docket entries in the adversary proceeding, Adv. Pro. No. 15-8008, are cited as "(Adv, Diet. No. -)”, and docket entries in the main bankruptcy case, Case No, 14-73640, are cited as “(Bankr. Dkt. No.-)”.
. Because the Court finds that plaintiffs' judgment debt is excepted from discharge under § 523(a)(2)(A), the Court need not determine whether the judgment debt is excepted from discharge under §§ 523(a)(4) and (6). See Evans v. Ottimo, 469 F.3d 278, 283 (2d Cir. 2006).
. The following facts are taken from the parties' submissions in connection with the Motion, and are undisputed unless otherwise indicated.
. See Marini v. Adamo, 995 F.Supp.2d 155 (E.D.N.Y. 2014), aff'd, 644 Fed.Appx. 33 (2d Cir. 2016). The District Court, however, dismissed the unjust enrichment and money had and received claims as against Mrs. Adamo.
. Case No.: 2:08-cv-03995-JFB-ARL [Distr. Dkt. No. 249],
. Although plaintiffs have not filed a proof of claim in this case, they have asserted that, as of the date of entry of the Judgment (April 16, 2014), the Judgment Debt aggregated $20,756,994.21 and, as of the date defendant filed his chapter 11 case (August 6, 2014), the Judgment Debt aggregated $20,764,705.68. See Complaint ¶ 2 [Adv. Dkt. No. 1], '
. On July 13, 2016, the chapter 11 case was converted to a case under chapter 7. [Bankr. Dkt. No. 300],
.On February 19, 2015, defendant also moved for relief from the automatic stay imposed under § 362(a) to permit him to prosecute his pending appeal of the District Court decision. [Bankr. Dkt. No. 120], Plaintiffs opposed. [Bankr. Dkt. No. 129], On April 20, 2015, the Court entered an order granting stay relief tb permit prosecution of the appeal in the Second Circuit [Bankr. Dkt. No. 171]. On March 23, 2016, the Second Circuit, following briefing and oral argument, affirmed the District Court decision. S.ee Marini v. Ada-mo, 644 Fed.Appx. 33 (2d Cir. 2016).
. A party seeking application of collateral estoppel under federal law must show (1) the identical issue was raised in a previous proceeding; (2) the issue was actually litigated and decided in the previous proceeding; (3) the party had a full and fair opportunity to litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final judgment on the merits. Ball v. A.O. Smith Corp., 451 F.3d at 69. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500093/ | MEMORANDUM OPINION RECOGNIZING FOREIGN MAIN PROCEEDING AND GRANTING RELIEF
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Pending before the Court are the Chapter 15 Petition for Recognition of a For*652eign Proceeding (the “Petition,” ECF Doc. # 1) and the Foreign Representative’s Motion for Order Granting Final Relief in Aid of a Foreign Proceeding (the “Motion,” ECF Doc. #5), filed by Jaime Javier Barba in his capacity as the authorized foreign representative (the “Foreign Representative”) for Inversora Eléctrica de Buenos Aires S.A. (“IEBA” or the “Debtor”). The Foreign Representative seeks, an order (i) granting the Petition and recognizing the restructuring proceeding pursuant to an acuerdo pre-ventivo extrajudicial (“APE”) under, the provisions of Title II, Chapter VII of the Argentine Bankruptcy Law No. 24,522 (as amended) (the “Argentine Bankruptcy Law”) before the National Commercial No. 1 Court sitting in the City of Buenos Aires, Argentina (the “Argentine Court” and, such proceeding, the “Foreign Proceeding”) as a foreign main proceeding under section 1517 of the Bankruptcy Code; (ii) recognizing and enforcing the Argentine Court’s order approving the APE (the “Homologation Order”); (iii) permanently enjoining all parties from commencing or taking any action in the United States to obtain possession of, exercise control over, or assert claims against the Debtor or its property; and (iv) granting such other relief as may be just and proper. In support of the Motion, the Foreign Representative filed the Declaration of Jaime Javier Barba (the “Bar-ba Declaration,” ECF Doc. # 2).
The Petition and the Motion are unopposed. For the reasons explained below, the proceeding in Argentina is recognized as a foreign main proceeding and the Motion for final relief is granted.
I. BACKGROUND
A.The Debtor’s Business
IEBA is the Argentine holding company of Empresa Distribuidora de Energía At-lántica S.A. (“EDEA”), which operates the distribution of electricity in the eastern region of the Province of Buenos Aires. (Barba Decl. ¶ 11.) IEBA was formed to acquire EDEA when EDEA was privatized by the Province of Buenos Aires. (Id.) In 1997, EDEA was granted an exclusive 95-year “concession” under which EDEA would provide electricity to 17 districts in the Province of Buenos Aires (the “Concession”). (Id. ¶ 12.) Under the Concession (and applicable Argentine law), EDEA receives revenue through tariffs charged for electricity distribution. (Id.) EDEA services approximately 513,000 customers, of which 90% are residential. (Id.)
B. The First Reorganization and the Old Notes
Following an economic crisis in Argentina in 2002 and poor management and governance, IEBA experienced a dramatic drop in revenues. IEBA defaulted in payment of its then-outstanding notes, and commenced a reorganization proceeding (the “First Reorganization”). (Id. ¶22.) IEBA’s Series C Notes and Series D Notes (together, the “Old Notes”) were issued in 2007 in connection with the First Reorganization restructuring plan. (Id.) The payment obligations under the Old Notes were not secured by any of the Debtor’s assets, but “had the benefit of’ two pledges of shares totaling 11% of IEBA’s capital stock and voting rights. (Id. ¶ 28.) Additionally, Camuzzi Argentina S.A. jointly and severally guaranteed the payment of interest under the Old Notes through a commercial guarantee. (Id.)
C. The Current Reorganization
IEBA has recently experienced financial hardship as a result of difficulties in securing the appropriate tariff rates. (Id. ¶ 21.) IEBA represents that regulators have not permitted the tariffs that are charged for electricity to increase at levels necessary *653to sustain its business. (Id.) Because of the “prolonged” time period in which EDEA has been unable to set appropriate tariffs, EDEA has been unable to pay dividends to IEBA; in turn, IEBA has been unable to make coupon payments on the Old Notes from and including its payment date on December 26, 2014. (Id. ¶ 26.) As a result, IEBA sought to restructure the Old Notes. (Id.)
On November 9, 2015, pursuant to a Solicitation Memorandum (Barba Decl. Ex. A), IEBA began soliciting the; tender of the Old Notes in order to execute an exchange offer in connection with the APE. (Id. ¶ 29.) The APE is supported by over 91% of the holders of the Old Notes. (Id. ¶ 33.) . .
On December 23, 2015, IEBA commenced a restructuring of its obligations pursuant to the APE under- the provisions of Title II, Chapter VII of the Argentine Bankruptcy Law No. 24,522 before the Argentine Court. (Id. ¶ 32.) On September 8, 2016, the Argentine Court entered the Homologation Order approving the APE. (Id.) On September 26, 2016, IEBA- consummated the transactions approved in the APE with respect-to the consenting noteholders by making certain cash payments and issuing and delivering new notes (the “New Notes”).
Holders of Old Notes who did. not participate in the solicitation were to receive a combination of cash and exchange notes, (Id. ¶ 32.) Under the terms of the APE, the closing of the transactions described above had to occur within 30 days of the Homologation Order. (Id. ¶ 34.) On September 27, 2016, IEBA informed the Argentine Court that it would seek relief under Chapter 15 with this Court, and the 30-day period for closing the transactions with non-consenting creditors was tolled pending that request. (Id.) On October. 12, 2016, IEBA filed its Chapter 15 Petition and the Motion with this Court. (ECF Docs. ## 1, 5.)
D, The Debtor’s United States Assets
IEBA’s assets in the United States primarily consist of property held in accounts located in New York. These accounts include (i) an escrow account in New York at Bank of New York Mellon Corporation (“BNY Mellon”) containing unclaimed Old Notes; and (ii) cash in a bank account at a New York branch of Barclays Bank PLC. (Mot. at, 5-6-) Additionally, the indenture governing the Old Notes (the “Old Notes Indenture”) is governed by New York law and includes a New York forum selection clause. (Id. at 6.) BNY Mellon will not exchange the Old Notes it holds in escrow for cash and exchange notes without an order from a U.S. court, making this chapter 15 proceeding necessary to carry out the terms of the APE.
II. LEGAL STANDARD
A. Recognition of Foreign Proceeding
Bankruptcy Code section 1517(a) provides that the court shall, after, notice and a hearing, enter an order recognizing a foreign main proceeding if:
(1) such foreign proceeding for which recognition is sought is a foreign main proceeding ... within the meaning of section 1502;
(2) the foreign representative applying for recognition is a person or body; and
(3) the- petition meets the requirements of section 1515.
11 U.S.C. § 1517(a).
“While not explicit in this section [1517(a) ], the foreign proceeding and the foreign representative must meet the definitional requirements set out in sections 101(23) and 101(24).” 8 Collier ok Bankruptcy ¶ 1517.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014). A for*654eign proceeding is a “collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23); see also In re ABC Learning Ctrs. Ltd., 445 B.R. 318, 327 (Bankr. D. Del. 2010). A foreign representative is “a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.” 11 U.S.C. § 101(24).
A foreign main proceeding “shall be recognized ... if it is pending in the country where the debtor has the center of its main interests.” 11 U.S.C. § 1517(b)(1). The Bankruptcy Code provides that “[i]n the absence of evidence to the contrary, the debtor’s registered office ... is presumed to be the center of the debtor’s main interests.” 11 U.S.C. § 1516(c); see also In re Bear Stearns, 374 B.R. 122, 130 (Bankr. S.D.N.Y. 2007). Case law in other countries “establishes that the presumption in favor of place of registration can be rebutted by showing that the ‘head office’ functions were carried out in a jurisdiction other than where the registered office was located.” 8 Collier on BankRuptcy ¶ 1516.03; see also Bear Stearns, 374 B.R. at 130. To determine a debtor’s center of main interests, courts in this circuit also look to a nonexclusive list of factors, including “the location of the debtor’s headquarters; the location of those who actually manage the debtor ...; the location of the debtor’s primary assets; the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes.” Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 137 (2d Cir. 2013) (quoting In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006)).
The Bankruptcy Code further provides that an order of recognition shall be entered if the foreign representative applying for recognition is a person or body, and that the petition meets the requirements of section 1515. 11 U.S.C. § 1517(a)(2)-(3). The requirements of section 1515 include presentation of (i) a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; (ii) a certificate from the foreign court affirming the existence of the proceeding and appointment of the representative; or (iii) in the absence of (i) or (ii), evidence which the court deems sufficient to confirm the existence of the foreign proceeding and appointment of the foreign representative. 11 U.S.C. § 1515(b). The petition must also be accompanied by a statement identifying all known foreign proceedings with respect to the debtor, 11 U.S.C. § 1515(c), and if applicable, a translation of the evidentiary materials into English. 11 U.S.C. § 1515(d).
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 have property in the United States to be eligible to file a chapter 15 petition. Id. at 247. Where a foreign debtor does not have a domicile or place of business in the United States, the focus shifts to whether the debtor has sufficient property present in the United States to form the basis for jurisdiction. This Court has found that an undrawn attorney retainer held in a United States bank account provides a sufficient basis for jurisdiction. In *655re Berau Capital Res. Pte Ltd, 540 B.R. 80, 82 (Bankr. S.D.N.Y. 2015) (citing In re Octaviar Admin. Pty Ltd, 511 B.R. 861, 369-74 (Bankr. S.D.N.Y. 2014)). Further, dollar-denorainated debt subject to New York governing law and a New York forum selection clause is independently sufficient to form the basis for jurisdiction. Id. at 83.
B. Additional Relief Available Upon Recognition
Upon an order recognizing a proceeding as a foreign main proceeding, section 1520 of the Bankruptcy Code makes the automatic stay under sections 361 and 362 applicable with regard to a stay of actions against 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 the debtor’s property located in the United States. In re Pro-Fit Holdings Ltd., 391 B.R. 850, 864 n.48 (Bankr. C.D. Cal. 2008).
Section 1520(a) also applies sections 363, 549 and 552 of the Bankruptcy Code to any transfer of a debtor’s interest in property within this, same jurisdiction; it allows a foreign representative to operate a debtor’s business by exercising the rights and powers of a trustee under sections 363 and 552; and .it applies section 552 to property of the debtor that is within the territorial jurisdiction of the United States. 11 U.S.C. § 1520(a).
Section 1521(a) outlines the discretionary relief a court may order upon recognition. The Bankruptcy Code confers exceedingly broad discretion, since a court may grant “any appropriate relief’ that would further the purposes of chapter 15 and protect the debtor’s assets and the interests of creditors. See Leif M. Clark, ANCILLARY AND OTHER CROSS-BORDER INSOLVENCY Cases Under Chapter 15 op the BanKruptcy Code, § 7[2] (2008). “Section 1521(a)(7) authorizes the court to grant to the foreign representative the sort of relief that might be. available to a trustee appointed in a full bankruptcy case,” including the turnover of property belonging to the debtor. Id. Section 1521(a)(7) carves out, however, avoidance powers under sections 547 and 548, which are only available to the trustee in a full case under another chapter. 8 Collier on Bankruptcy ¶ 1521.02.
III. ANALYSIS
A. The Foreign Proceeding is Entitled to Recognition
The Debtor has established that it has sufficient assets in the United States to form the basis for jurisdiction here. The Debtor has (i) dollar deposits in a New York bank account, (ii) an attorney retainer also on deposit in New York, and (iii) New York law-governed debt containing a New York forum selection clause; whether considered alone or together, these provide a sufficient basis for jurisdiction and venue in New York. See In re Berau, 540 B.R. at 82-83; In re Octaviar, 511 B.R. at 369-74.
The Debtor has readily shown that this case may properly be maintained under chapter 15. An APE is a “court-supervised insolvency proceeding brought under the laws of Argentina that is designed to enable debtors that are unable to pay all or part of their debts as they become due to restructure those obligations in a manner that is binding upon all creditors -of the debtor.” (Mot. at 7.) This type of proceeding clearly falls within section 101(23)’s definition. Likewise, Barba is a proper “foreign representative” — he is authorized to take actions required to give effect to the Foreign Proceeding, including com*656mencing this chapter 15 proceeding, and is therefore “authorized in a foreign proceeding to administer the reorganization ... of the debtor’s assets or affairs or to act as a representative of such foreign proceeding” as defined in section 101(24). This case was properly commenced when it was filed by the Foreign Representative attaching proof of the foreign proceeding and an English translation.
It is clear that IEBA’s center of main interests is in Argentina. “[Substantially all of the Debtor’s property, operations and customers are located.in Argentina.” (Mot. at 9.) A lengthy list of the Debtor’s connections to Argentina notably includes: (i) the Debtor’s registered office is in Argentina; (ii) EDEA, the Debtor’s main asset, is in Argentina; (iii) EDEA’s main assets are electrical infrastructure properties in Argentina; and (iv) corporate governance for the Debtor is directed from Argentina. {Id. at 10-11.)
The Foreign Representative states that the purposes of this case are to restrict IEBA’s creditors from taking actions in the United States that would undermine the APE; to facilitate the implementation of the APE and the cancellation of the Old Notes Indenture; and to facilitate enforcement of the APE in the United States. {Id. at 8-9.) Recognition of this case is consistent with chapter 15’s stated purpose to fairly and efficiently administer cross-border insolvencies and “protect[] the interests of all creditors, and other interested entities, including the debtor.” 11 U.S.C. § 1501(a)(3).
B. Discretionary Relief is Warranted and the APE and Homologation Order Should be Enforced in the United States
The Foreign Representative has shown that exercising the Court’s discretion to enforce the Homologation Order and APE is appropriate. An APE is similar to a “prepackaged” proceeding under chapter 11 in the United States. An APE allows a debtor to negotiate a restructuring plan, organize a vote on that plan, obtain approval from a majority of its creditors, and submit the plan to an Argentine court for endorsement. (Mot. at 12.) Further, the Argentine Bankruptcy Law provides similar creditor protections and rules governing the distribution of debtors’ estates as the Bankruptcy Code. {Id. at 12-13.) As Judge Lifland concluded in 2006, “[t]he rules governing an APE are consistent with the Bankruptcy Code.” In re Bd. of Directors of Telecom Argentina S.A., No. 05-17811 (BRL), 2006 WL 686867, at *22 (Bankr. S.D.N.Y. Feb. 24, 2006). An APE, like a chapter 11 prepackaged plan, provides for fair distribution to the creditors by requiring “approval of the holders of two-thirds of the unsecured indebtedness and more than half of the number of claims affected by the proceedings.” Id. at *22. The APE and Homologation Order will also ensure a fair distribution to the holders of the Old Notes.
The Foreign Representative argues and the Court agrees that enforcement of the APE and Homologation Order is consistent with (i) section 1525’s provision that “the court shall cooperate to the maximum extent possible with a foreign court”; (ii) section 1527’s provision that such cooperation may be implemented by “coordination of the administration and supervision of the debtor’s assets and affairs”;' and (iii) the general purpose of chapter 15 and United States public policy. {Id. at 19-23.) Enforcing the Homologation Order and APE promotes comity with Argentine courts, the centralization of disputes involving the debtor, and the orderly and fair administration of the Debtor’s assets.
The Foreign Representative also seeks (i) an injunction against asserting claims arising under the Old Notes or Old Notes Indenture and in violation of the Homolo-*657gation Order against the Debtor and its property; and (ii) an order directing the Depository Trust Company (“DTC”) and BNY Mellon as indenture trustee (the “Indenture Trustee” and, together with DTC, the “U.S. Intermediaries”) to carry out the ministerial actions necessary to consummate the Homologation Order and to provide that, upon the completion of such duties, the Indenture Trustee for the Old Notes is relieved of any further obligation. (Mot. at 17.) The Court concludes that this requested relief is consistent with section 1521(a) — it “will give clear direction and authority under United State law to the U.S. Intermediaries to carry out the requirements of the IEBA APE” and will benefit the Debtor and its estate. (Id. at 18.)
IV. CONCLUSION
For the reasons explained above, the Petition for Recognition and the Motion are GRANTED. A separate Order granting relief will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500094/ | MEMORANDUM OPINION
RICHARD E. FEHLING, United States Bankruptcy Judge
I. INTRODUCTION
Ask a 5th or 6th grade school child how many days are in three months. I expect that most would tell you 90 days (which does not account for months with 28/29 or 31 days, but you get the idea). Ask that child whether 60 days equals 90 days and you would get a funny look. These simple riddles, among other hand-wringing, brow-furrowing aspects of this case, were brought out through the testimony of. Defendant water authority’s employee during examination by her counsel (and the court1), resulting in a decidedly unusual answer: When is 60 days equal to both 90 days and three months? The answer: When Defendant says it is. This hubris and numerological fallacy highlight a troublesome and unsettling aspect of Defendant’s record-keeping, administration, and arguments in this case. It is just plain wrong. Details are below.2
Pro se Plaintiff tried unsuccessfully for some time to wrest information about his account from Defendant. He was determined not to pay invoices that he did not understand. His efforts included filing four bankruptcies in about. 13 months. Plaintiff was completely right and completely wrong in some of what he did. And he was completely right and completely wrong in some of what he did not do. This case sets up a classic dispute of an individual citizen versus a monolithic government agency-^in this case a water utility. In many instances, a public utility has, and must have, rules and regulations to govern its rights and actions and the rights and actions of its customers. This Memorandum Opinion examines the good, the bad, and the ugly3 of (1) the automatic stay established upon the filing of a bankruptcy case, (2) Plaintiffs' refusal to pay some of RAWA’s bills because he misunderstood Defendant’s rules and regulations, and (3) the administration and application of those rules and regulations to Plaintiff.
I address this tri-faceted dispute between a customer and a municipal water authority, to determine (1) whether Defendant, through its collection efforts, violated the automatic stay (it did not violate the stay-good), (2) Plaintiffs objection to Defendant’s claim, which alleges that Plaintiff had failed to pay the principal amount of his water and sewer bills (he had not paid-bad), and (3) Plaintiffs objection to Defendant’s claim for collection fees (Defendant’s treatment of delinquent accounts-ugly).
II. FACTUAL AND PROCEDURAL DISCUSSION
This Memorandum Opinion resolves the dispute between Plaintiff/Debtor, Ronald *659Luther Heckman (“Heckman”), and Defendant/Creditor, Reading Area Water Authority (“RAWA”), addressing first whether RAWA’s collection efforts violated the automatic stay and second Heckman’s water and sewer bills and collection costs (as contained in RAWA’s claim). The trial on Heckman’s claim of a violation of the automatic stay and the hearing on his objection to RAWA’s claim number 6 were heard together. Over a period of five days in February and March 2016,4 the parties presented their evidence, creating a consolidated record consisting of testimony and exhibits. Heckman and RAWA filed timely briefs, after which Heckman asked leave to reply to RAWA’s brief. RAWA made no similar request. I granted Heck-man’s request and he timely filed his reply brief. Both matters (RAWA’s alleged violation of automatic stay and Heckman’s objection to RAWA’s claim) are now ready for disposition.5
A. Procedural History
Heckman filed this chapter 13 case on December 29, 2014, as the fourth bankruptcy case he had filed in about 13 months. His first case, No. 13-20461REF, was filed on December 2, 2013, and was dismissed on January 9, 2014. Heckman’s second case, No. 14-10537REF, was filed on January 24, 2014, and was dismissed on November 20, 2014. His third case, No. 14-19877REF, was filed on December 17, 2014, and was dismissed on December 19, 2014,6
On December 29, 2014, Heckman filed his petition in this chapter 13 case, which remains pending. Heckman’s three prior bankruptcy cases had been dismissed within one year before this fourth bankruptcy case was filed. The automatic stay, therefore, had not gone into effect when this bankruptcy case was filed. See 11 U.S.C. § 362(c)(4)(A)(i). On January 12, 2015, Heckman filed a motion to extend the automatic stay under 11 U.S.C. § 362(c)(4)(B), which I granted over the objection of RAWA in my Order dated February 19, 2015.
RAWA filed its proof of claim on May 7, 2015, alleging that it holds a secured claim in the amount of $5,608.09. Heckman filed both his adversary complaint and his objection to RAWA’s proof of claim on July 10, 2015. The adversary complaint alleges that RAWA engaged in certain collection activity that violated the automatic stay of Section 362. RAWA filed its answer to the complaint on August 12, 2015, and its motion for partial summary judgment on December 10, 2015. Heckman opposed the summary judgment motion about a month later. On January 26, 2016, I granted, in part, RAWA’s motion for partial summary judgment on the adversary complaint and the case proceeded to trial.
In my January 26, 2016 Order granting in part RAWA’s motion for partial summary judgment, I explained that my February 19, 2015 Order granting Heckman’s motion to extend the automatic stay under 11 U.S.C. § 362(c)(4)(C) was not retroactive.7 Therefore, I concluded that any conduct by RAWA that occurred prior to Feb*660ruary 19, 2015, could not have violated the automatic stay because no stay existed. I granted, in part, RAWA’s motion for summary judgment, concluding that only conduct by RAWA that occurred on or after February 19,2015, could constitute a violation of the automatic stay. Because Heck-man had alleged sufficient facts from which I might find that RAWA’s post-February 19, 2015, conduct might have violated the automatic stay, I denied the balance of RAWA’s summary judgment motion.
Both the adversary complaint dealing with the automatic stay and Heckman’s objection to RAWA’s proof of claim are now ready for me to decide.
B. Factual History
Heckman owns two rental properties in Reading, Pennsylvania. One is located at 101 Walnut Street (“101 Walnut”) and the other is located at 153 Walnut Street (“153 Walnut”). RAWA provides water and sewer service to all properties in Reading, including the two properties owned by Heckman.
The present difficulties between RAWA and Heckman began in earnest when Heckman received a letter from RAWA dated February 28, 2012. Exhibit D-l, contained in Tab P-1, The letter advised Heckman that RAWA’s February 10, 2012, water meter reading for 101 Walnut showed excessive consumption compared to average usage. The letter included a reference to a RAWA resolution that provides, among other things, that a customer may qualify for relief from an excessive charge if the excessive consumption was caused by a leak in the customer’s water service and if certain procedures are followed, as outlined in the resolution and the letter. The letter further instructed that once the steps outlined in the resolution8 were completed, a customer must fill out a complaint form and send it to RAWA with a copy of the plumber’s permit, showing that the plumber was licensed in Reading, and a copy of the plumber’s invoice, showing that the leak was repaired by the licensed plumber within thirty days after the date it was discovered. N.T. 3/22/16 trial, p. 7.9
Rather than have the leak repaired by a licensed plumber, however, Heckman repaired the leak himself. He sent RAWA a letter dated May 7, 2012 (over two months after the February 28 letter from RAWA), confirming that he found a leaking toilet and fixed it himself, by simply replacing the flapper and chain in the toilet. Exhibit D-l, contained in Tab P-1. Heckman’s May 7 letter goes on to state that on March 2, 2012, he had heard the sound of running water from the meter. He described the situation as “the meter going wild [with] [t]the needle circling like crazy.” Id. Heckman further explained in the letter that he flushed the meter and turned the water on and off several times before the sound of running water stopped. It appears to me that none of these func*661tions requires a licensed plumber to resolve, Regardless who should have remedied the problem, Heckman failed to comply with the other elements required to make an effective request to reduce the water charges.
Heckman’s May 7, 2012 letter to RAWA also analyzed the water consumption at 101 Walnut over the course of approximately one year. Heckman eschewed, expert consultation, but he concluded that the excessive water consumption was caused by problems with the water meter or from trucks and vibrations from repairmen fixing the street after a sinkhole had appeared. Heckman’s May 7 letter concludes by requesting relief in the form of a credit to his bill in the amount of $952.54, RAWA denied his request in, its letter dated October 12, 2012. Exhibit D-l, contained in Tab P-1. RAWA explained that Heckman’s request for an adjustment in his bill was denied because a toilet was running during the period of excess water consumption and Heckman, had failed to comply with RAWA’s leak adjustment qualifications.
Heckman filed an informal complaint with the Pennsylvania Public Utilities Commission (the “PUC”) on November 13, 2012,- asking the PUC to direct RAWA to investigate his situation to determine if the excessive water consumption was caused by a defective water meter or other equipment causing the water meter to malfunction. Exhibit D-l, contained in Tab P-1. The PUC responded to Heckman’s informal complaint by stating that it does not regulate municipal authorities.
Thinking his May 7, 2012 letter to RAWA created a legitimate dispute, Heck-man began withholding payments to RAWA, erroneously relying on a provision of a RAWA ordinance that deals with “applications for water service.” See Exhibit D-l, contained in Tab P-2, June 30, 1994 RAWA Resolution, Rules and Regulations, § 5(c)(iii), Heckman was already receiving water service from RAWA and the regulation on which- he relied applied only to applications for new water service. That regulation therefore did not apply to Heck-man’s situation or account and did not authorize Heckman to withhold payment of any . bills that were due on his account. Because Heckman withheld his payments, his account with RAWA went into delinquent status.
And then the enmity and problems really accelerated. Not only was. Heckman dealing with a largely unaccountable municipal entity in RAWA, but he was also forced to deal with a collection entity that had no accountability to anyone or for anything other than collecting bills owed to RAWA and taking collection fees for itself. RAWA’s current policy (in effect during this dispute) dictated that an account be turned over to its collection agent, Accounts Recovery Bureau, now known as Arcadia Recovery Bureau (“ARB”),10 when it became 91-days11 delinquent and had a *662balance due of more than $100. N.T. 3/9/16 trial, p. 14.
When an account was turned over to ARB for collection, bills sent by RAWA to its customer show only the current charge and state “MUST CALL” beside the column marked “PAST DUE AMOUNT.” RAWA’s decision not to provide its customers with sufficient information on their bills to understand the status of their accounts may have saved RAWA the costs, expenses, and headaches of collection efforts, but it led to tremendous uncertainty in, at- least, Heckman’s ability to calculate his bills. Furthermore, Heckman was forced to deal with a collection agency that made its money, not by providing goods or services to residents of the city of Reading, but by extracting collection fees12 out of RAWA’s customers.
"Whén an account was turned over to ARB for collection, RAWA would no longer process payments sent to it by its customers. Instead, RAWA forwarded any payments it received from a delinquent customer to ARB. ARB would deduct its collection fee and remit the remainder of the payment to' RAWA. RAWA then applied the payment balance to the customer’s oldest outstanding bill. RAWA turned Heckman’s account over to ARB for collection'in August 2012. N.T. 3/9/16 trial, p. 15. Consistent with RAWA’s internal policies and procedures, when Heckman’s account was turned over to ARB, most of the bills Heckman received from RAWA showed only the dollar amount of the current charge with a notation “MUST CALL” beside the column marked “PAST DUE AMOUNT.” A customer cannot possibly determine the total amount owed from the invoice sent by RAWA.
Wh¿n Heckman began receiving bills from ARB, he erroneously relied upon a statement contained in the ARB invoices about disputing a bill as authorization for him to withhold payments to ARB that he believed were not owed. Audio record of Feb. 19, 2016 trial, 10:21:06-10:29:08; Exhibit D-l, contained in Tab P-5. Nothing in the bills, however, authorized a customer to withhold payment of disputed bills. The bills merely advised customers that they had the right to dispute a bill within thirty days of the date they receive the bill. In such a case, ARB will obtain, and send to the customer, verification of the debt or a copy of a judgment if one exists. Nothing in any bill Heckman .received from ARB authorized him to withhold payment of the bills he disputed.
To further complicate matters, Heckman was confused by the “PAST DUE”, “MUST CALL” language contained in RAWA’s bills. He testified convincingly that he never knew the total amount of his outstanding balance. This led him to send checks to RAWA with restrictive endorsements such as “Final owed” and “Paid in Full” written on the memo line of the checks. As time went on, Heckman began to believe that RAWA and ARB were not properly accounting for payments he made and that they owed him a refund of $368.71. Specifically, Heckman believed that RAWA or ARB failed to apply $299.24 that he had paid on his account and, as a result, he was improperly charged $69.47 in collection costs.
*663In March 2013, Heckman filed a complaint with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau claiming: “Fulton Bank as agent for [RAWA] refuses to pay me $368.71 in monies missing from my payments and unfounded penalties added on: $299.24 total missing $69.47 penalties.” Fulton Bank and the Office of the Comptroller of the Currency responded in writing to Heckman’s complaint on March 22, 2013, and March 26, 2013, respectively. Both concluded that Fulton Bank was acting simply as a payment collection agent, otherwise known as a lockbox service provider, for RAWA and that Fulton Bank deposited all payments made by Heckman into RAWA’s checking account. They also both confirmed .that Fulton Bank has nothing to do with assessing penalties on customer accounts.. See Exhibit D-l, Tab P-5.13
On November 26, 2013, Heckman received a delinquency door tag at 101 Walnut, which tag stated that his.water service would be turned off without further notice if payment in full were not received within ten days. The amount, indicated as required to be paid to avoid service interruption was $2,694.03. See Exhibit D-4. In December 2013, Heckman filed the first of his four chapter 13 petitions, which case was dismissed on January 9, 2014. On January 24, 2014, Heckman filed his second chapter 13 petition, which was dismissed on November 20, 2014. On December 5, 2014, ARB sent two notices to Heckman advising him that water service would be turned off at both 101 Walnut and 153 Walnut if payment in full were not received on each account within ten days. The amount to be paid to avoid service interruption at 101 Walnut was $1,906.61; the amount to be paid to avoid service interruption at 153 Walnut was $247.52. Delinquency door tags were also hung at both locations, on that date. Heckman filed his third chapter 13 petition on December 17, 2014, and on December 19, 2014, the third case was dismissed. On December 29, 2014, Heckman filed the chapter 13 case that is presently pending, his fourth bankruptcy filing in about 13 months.
III. SUBSTANTIVE DISCUSSION
A. Heckman’s evidence relating to violation of the automatic stay failed to establish that RAWA violated the stay, that he suffered actual damages as a result of the alleged violation, or that he is entitled to punitive damages.
Section 362(k)(l) of the Bankruptcy Code provides, in relevant part:
[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, in- ' eluding costs and attorneys’ fees, and, in ' appropriate circumstances, may recover ' punitive damages.
11 U.S.C. § 862(10(1). Section 362(k)(l) is straightforward and mandates the imposition of damages against a creditor if the debtor can establish that (1) the creditor willfully violated the automatic stay and (2) the violation of the stay caused the debtor some injury. In re Miller, 447 B.R. 425, 433 (Bankr. E.D. Pa. 2011); Wingard v. Altoona Regional Health Systems and Credit Control Collections (In re Wingard), 382 B.R. 892, 900 (Bankr. W.D. Pa. 2008).
Heckman maintains that RAWA violated the automatic stay because they sent invoices to him, which invoices allegedly sought to collect pre-petition debts, *664Before addressing the merits of his argument, I reiterate, the decision in my February 19, 2015, and January 26, 2016 Orders. Because Heckman had three prior bankruptcy cases pending within one year of the date, this fourth bankruptcy case was filed, each of which was dismissed, no automatic stay went- into effect when Heckman filed this bankruptcy case. See 11 U.S.C. § 362(c)(4)(A)(i). Instead, the stay did not exist until February 19, 2015, when I entered an Order in the main bankruptcy case granting Heckman’s motion to extend 14 the automatic stay under 11 U.S.C. § 362(c)(4)(C).
I previously ruled in my January 26, 2016 Order, that my February 19, 2015 Order was not retroactive, and therefore, the automatic stay was not retroactively imposed back to the petition filing date of December 29, 2014. Instead, the automatic stay first took effect in this bankruptcy case on February 19, 2015. 11 U.S.C. § 362(c)(4)(C). As I previously concluded in my January 26, 2016 Order, therefore, any action taken by RAWA from the filing date of the bankruptcy petition through February 18, 2015 (the day before the automatic stay was, imposed in this case) did not and could not violate the automatic stay, which did not then exist.
I have reviewed the invoices RAWA sent to Heckman from February 19, 2015, and forward. See Exhibit D-l, Tab P-3. One invoice for 101 Walnut, dated March 6, 2015, with a due date of March 31, 2015, has the figure “4528.68” inserted inside a box marked “PAST DUE AMOtFNT.” This invoice and possibly others, could be construed to seek payment of a total past due amount of $4,528.68. I suppose from the large amount that was past due that at least part of the $4,528.68 past due balance might have included some pre-petition charges. But Heckman did nothing to prove his point and therefore my thoughts remain suppositions of limited merit. Several other such bills contained the words “MUST CALL” inside the box adjacent to the words, “PAST DUE AMOUNT.” Those bills were statements of the amount owed to RAWA and ARB. Heckman did not call ARB so he was never asked, encouraged, or told to pay the bills.
Heckman argues that mailing these statements constituted attempts to collect pre-petition debts because they advise Heckman that he “MUST CALL” to find out whether he owes a past due amount, which supposedly could include pre-petition balances. I do not construe them that way and, once again, Heckman relies on supposition.
The burden was on Heckman to prove: (1) RAWA violated the automatic stay by mailing the invoices; and (2) RAWA’s violation of the automatic stay caused him some injury. Even if Heckman did show that RAWA’s mailing of the invoices violated the automatic stay (which I find that he did not), he showed nothing about any injury or damage as a result of the alleged violation. Typically, a debtor can receive an award of attorney’s fees if he proves that a creditor willfully violated the automatic stay. Heckman, however, is appearing pro se and has not incurred any attorney’s fees that could form the basis for such a recovery. Nor has Heckman presented evidence of his costs of litigating the adversary proceeding or any other type of injury or damage he suffered from *665RAWA’s mailing of the bills. The burden was on Heckman to prove with reasonable certainty that he suffered actual injury or damage as a result of RAWA’s mailing the bills. Mere speculation, guess, or conjecture about damages cannot suffice. Iskric v. Commonwealth Fin. Sys., Inc. (In re Iskric), 496 B.R. 355, 364 (Bankr. M.D. Pa. 2013). Heckman failed to meet his burden, so I will not award actual damages.
Turning to Heckman’s request for punitive damages, I note that “punitive damages may be awarded against a [creditor under section 362(k)(l) ] to punish him for outrageous conduct and to deter him, or others like him, from similar conduct in the future,” Id. at 365. Heckman’s argument is that some of RAWA’s mailed statements possibly included pre-petition amounts allegedly owed and therefore constituted outrageous conduct. Nothing on the record, however, establishes this as an outrageous, reckless, or otherwise egregious act. To the contrary, it is possible that, if any erroneous inclusion of pre-petition charges in the statements existed, the error stemmed from the fact that Heckman confused the record by filing four chapter 13 bankruptcy petitions within about 13 months. His serial filings may well have made it difficult for RAWA to insure that no bill included charges incurred while any of the four bankruptcy petitions were pending. For these reasons, I find that Heckman failed to meet his burden of proving both that RAWA violated the automatic stay and that he suffered any actual injury or damage as a result of RAWA’s mailing the offending statements. Similarly, I find that Heckman did not prove that RAWA acted in an outrageous, reckless, or otherwise egregious fashion by mailing the offending bills to Heckman; As a result, I will enter judgment on Heck-man’s Section 362(k)(l) complaint in favor of RAWA and against Heckman.
My finding of no proof of outrageous conduct, recklessness, or otherwise egregious acts by RAWA in my analysis of the automatic stay issue does not pertain to the issue of the amount of the debt owed to RAWA by Heckman as described in RAWA’s claim. My review of Heckman’s objection to RAWA’s claim number 6, including RAWA’s conduct and administration of the collection fees that are part of the Heckman accounts, follows.
B. Heckman’s objection to RAWA’s claim is sustained in part and overruled in part; RAWA holds a secured claim in the amount of $5,011.90, less all ARB collection , fees included in RAWA’s claim and all collection fees that Heckman paid since February 2012.
On May 7, 2015, RAWA filed proof of claim number 6, in which it alleged that it is .the holder of a secured claim in the amount of $5,608.09 for water and sewer charges, late payment penalties, and, collection fees. RAWA’s claim relates to the water and sewer service RAWA provided to Heckman’s rental properties located at 101 Walnut and 153 Walnut. Heckman filed both his objection to RAWA’s claim and his adversary complaint on July 10, 2015. Heckman maintains that he does not owe RAWA any money for water, sewer charges, or collection fees. Heckman alleges that RAWA owes him a refund for alleged overpayments on his account and for certain payments he alleges he made that were never credited to his account. During the trial, RAWA withdrew the portion of its claim that relates to 153 Walnut. The élimination of the 153 Walnut matter from contention reduced RAWA’s claim to $5,212.94. The remainder of this Opinion therefore will address RAWA’s claim as it relates only to 101 Walnut.
Suzanne Ruotolo, the Customer Account Manager for RAWA,15 testified at length *666and in detail chronicling invoices sent to Heckman and payments received from Heckman, that were credited to his account for 101 Walnut. Ms. Ruotolo identified and authenticated three Exhibits that track the billings sent, and the payments made, on Heckman’s account for 101 Walnut. Exhibit R-2 is a Customer History Report for Heckman’s account for 101 Walnut (the “CHR”). The CHR was generated on software known as “Caselle,” which RAWA began using in May 2012 (a few months after the present difficulties between the parties started). Ms. Ruotolo accepted the data she received from Ca-selle and incorporated it into her reports. Exhibit R-5 is a Utility Account Summary for Heckman’s account for 101 Walnut (the “UAS”). The UAS was generated on software known as “Hansen” which RAWA had used until May 2012, when it switched to Caselle. Exhibit R-l is a spreadsheet Ms. Ruotolo created by extracting, compiling, and manipulating information from both the CHR and the UAS.
Presumably because he is acting pro se, Heckman did not raise any objection about Ms. Ruotolo’s failure to develop a full foundation for these documents. She said little about who actually entered the data in the reports that she compiled for the purpose of this litigation. She also testified that she got some of the data from the city of Reading rather than ARB. N.T. 3/9/16 trial, pp. 6-8, 55-56. Similarly, she acknowledged that the original Hansen charts and numbers were not available for further review. N.T. 3/9/16 trial, p. 55-56. Despite a lack of a full foundation about the genesis,. recording, and storage of the data on which she relied, I find that the reports were records on which RAWA relies on a regular basis in conducting its business. On that basis, I disregard any possible taint on the admissibility of the CHR, the UAS, and the spreadsheets.
Ms. Ruotolo testified that the last date Heckman’s 101 Walnut account had a zero balance was March 29, 2011. As reflected in Exhibit R-l, the total water and sewer charges billed to Heckman’s account for 101 Walnut (excluding collection fees and late payment penalties) from March 29, 2011, (when the account last had a zero balance) until December 4, 2014, was $13,409.05.
Late payment penalties for 101 Walnut for this time period totaled $1,228.84 and collection fees for 101 Walnut for this time period totaled $707.17. Hence, the total charge billed to Heckman’s account for 101 Walnut for all water and sewer charges, all collection fees and all late payment penalties for the time period beginning March 29, 2011, and ending December 4, 2014, was $15,345.06. Exhibit R-l also shows that the total amount paid by Heckman for all charges on his account for 101 Walnut (including collection fees and late payment penalties) for this time period was $10,132.12. RAWA calculated the amount of its claim for 101 Walnut by subtracting the total amount paid by Heckman on his 101 Walnut account for this time period ($10,132.12) from the total amount billed ($15,345.06) to Heckman’s 101 Walnut account for this time period. The difference between these two amounts equals $5,212.94, and forms the basis for RAWA’s proof of claim for water and sewer charges, late payment penalties, and collection fees for 101 Walnut.
Heckman maintains that this claim is erroneous because RAWA failed to apply or properly credit certain payments he allegedly made. He referred to these payments as the “missing payments” *667throughout his testimony and in many of his Exhibits. Heckman listed these “missing payments” in Exhibit D-3, Tab P-8. Ms. Ruotolo, however, credibly testified that all of the alleged “missing payments,” except four, had been credited to Heck-man’s account. See N.T., 3/19/16 trial, pp. 17-18. As I discuss in more detail below, Ms. Ruotolo was able to explain why three of the alleged “missing payments” were not credited to Heckman’s account, which leaves a single “missing payment” that Heckman actually paid, but which RAWA did not credit to his account.
Heckman listed the following “missing payments” in Exhibit D-3, Tab P-8: $141.83, $352.24, $310.13, $600.00, $316.92, $500.00, $170.33, $306.59, $418.83, $153.54, $175.57, $893.37, $59.36, $225.75, $262.10, $207.65, $201.04 and $329.71. Ms, Ruotolo testified that all of these alleged “missing payments” had been applied to Heckman’s account except the following four: (1) The “alleged missing payment” of $306.59; (2) the alleged “missing payment” of $418.83; (3) the alleged “missing payment” of $207.65; and (4) the alleged “missing payment” of $201.04.
Regarding the alleged “missing payments” of $306.59 and $418.83, Heckman was unable to produce receipts or canceled checks to prove that these amounts were actually paid and Ms. Ruotolo credibly testified that RAWA never received these payments. Ms. Ruotolo explained that while these, figures appear on Exhibit R-2, they are accounting entries used to classify two payments in the amount of $170.33 and $153.54 that RAWA received from Heckman and then sent to ARB for processing and payment of the collection fee. After ARB received these two payments from RAWA, it deducted the collection fees and sent the remaining amount to RAWA to credit to Heckman’s account. See N.T. 3/9/16 trial, p. 21. The $306.59 and $418.83 figures, therefore, were accounting entries made by RAWA to account for (1) its initial receipt of payments from Heckman, (2) RAWA’s forwarding to ARB of the payments it received from Heckman, and (3) RAWA’s subsequent receipt of the balance of the payments from ARB after deduction of the collection fees. Based on Ms. Ruotolo’s credible testimony and Heckman’s failure to produce receipts or canceled checks to prove that he made the alleged “missing payments” of $306.59 and $418.83, I find that these alleged “missing payments” were, never actually paid and are therefore not “missing.”
I turn next to the alleged “missing payment” of $207.65. Heckman admits that he wrote “PAID IN FULL” on this check. Exhibit D-3, Tab P-8. Ms. Ruotolo credibly testified that RAWA received Heckman’s check for $207.65, but did not process it because of the restrictive endorsement “PAID IN FULL” on the check. N.T. 3/9/16 trial, pp. 36-37. In addition, Heckman never produced a canceled check to prove that RAWA actually negotiated it. Based on this evidence, I find that the check in the amount of $207.65 was never processed or cashed by RAWA due to the restrictive endorsement on the check. The $207.65 check is not a “missing payment.”
Finally, I address the last “missing payment,” which was $201.04. Heckman produced a copy of a check dated March 26, 2013 in the amount of $201.04 made payable to RAWA (check 3623). Exhibit D-3, Tab P-8. Ms. Ruotolo testified that RAWA did not credit Heckman’s account with this payment although the check was received and processed by ARB. N.T. 3/9/16 trial, pp. 37-38. Based on this evidence, I find that RAWA, through its agent, ARB, actually received the “missing payment” of $201.04, and that neither ARB nor RAWA applied the payment to Heckman’s account. This $201.04 payment is actually a *668“missing payment” and Heckman is entitled to a credit against RAWA’s proof of claim in the amount of $201,04. As a result, RAWA’s proof of claim in the amount of $5,212.94 for 101 Walnut alone must be reduced by $201.04, which brings the amount of RAWA’s claim to $5,011.90.
Heckman also argues that he was entitled to withhold payment to RAWA and ARB of disputed bills while the disputes were being investigated. He erred in this argument based on two incorrect contentions. First, Heckman contends that a provision of a RAWA ordinance that deals solely with initial applications for water service permitted him to withhold payment of disputed bills. See Exhibit D-l, contained in Tab P-2, June 30, 1994 RAWA Resolution, Rules and Regulations, § 5(c)(iii). Because Heckman was already receiving water service from RAWA, this regulation did not apply to Heckman’s account.16
Second, Heckman contends that a statement contained in the ARB invoices that deals with disputing a bill authorized him to withhold payments to ARB of amounts he believed were not owed. See audio recording of 2/19/16 trial, 10:21:06-10:29:08; Exhibit D-l, contained in Tab P-5. This portion of the ARB invoice, however, does not authorize a customer to withhold payment of disputed bills. It merely advises customers that they have the right to dispute a bill within thirty days after they receive the bill.17 It goes on to state that in such a case, ARB will obtain, and send to the customer, verification of the debt or a copy of a judgment if one exists. Nothing in the invoices Heckman received from RAWA, ARB, or otherwise authorized him to withhold payment of a bill he disputed. For these reasons, Heckman was not enti-tied to withhold payment from RAWA and ARB of disputed bills.
Heckman challenges whether RAWA may charge him with a service fee during the time that water service had been shut off due to non-payment. The record shows, however, that water service was only shut off for 153 Walnut. The water service to 101 Walnut was never shut off. RAWA, however, withdrew its proof of claim for water and sewer charges, late payment penalties, and collection fees for 153 Walnut. Because RAWA does not seek to collect a service fee for either 101 Walnut or 153 Walnut, the question whether the service fee may be charged when water service was shut off is moot.
Finally, it was apparent (although not specifically addressed) during the trial on March 9, 2016, that RAWA systemically miscalculated the number of days its customers were delinquent on their water bills. I am reminded that RAWA’s stated policy is to impose collection fees when a customer becomes 91 days delinquent and has a balance due of more than $100. In one example of the miscalculations, the water bill for 101 Walnut dated January 11, 2013, was due to be paid by January 31, 2013. N.T. 3/9/16 trial, pages 123-129; Exhibit D-7. Ms. Ruotolo testified that as of her April 4, 2013, email to Heckman, Exhibit D-3, Tab P-8, he was over 90-days delinquent on the bill that had a due date of January 31, 2013. She noted that his bill remained unpaid the fourth month after it was due. Ms. Ruotolo’s calculations, however, violate RAWA’s delinquency policy.18
When Heckman failed to pay the bill due January 31, 2013, by February 28, 2013, he was 28-days delinquent. When Heckman failed to pay the January bill by March 31, *6692013, he was another 31 days late, which made the total delinquency 59 days. Ms. Ruotolo’s email on April 4, 2013, informed Heckman that he was over 90-days delinquent, presumably as of April 1, when the total delinquency was actually 60 days, not 91 or more. See NT. 3/9/16 trial, pp. 123— 140. Heckman was not over 90 days late on this bill, it should not have been in collection, and no collection fee should have been added to his bills.
More importantly, when pressed on the basic arithmetic highlighting this bogus procedure, Ms. Ruotolo did not say that this calculation was an aberration. She explained that the over. 90-days delinquency was imposed on the .fourth month a payment was not made. She acknowledged that the number of delinquent days was far less than 90. N.T. 3/9/16 trial, pp. 123— 140. RAWA’s policy was that any invoice that had not been collected by the fourth calendar month after the due date was deemed to be delinquent, without regard to whether it was over 90 days late. The invoice examined above was due January 31 and therefore became delinquent, according to RAWA, in April — the fourth calendar month that the invoice was due, despite the passage of only 60 days. A June invoice, payable on June 30, would be delinquent on September 1, the fourth calendar month later, but only 63 days later. Stuff and nonsense!19
RAWA’s faulty calculations appear to have been systemic,' which is extremely troublesome and very unsettling. Ms. Ruo-tolo’s testimony about this practice, which violated the 90-day delinquent account policy, was straightforward and innocently given. She acted as if the. clear difference between practice and policy was of no consequence. RAWA’s practice casts a dark shadow on the entire system of RAWA declaring delinquency and ARB imposing collection fees on RAWA’s customers. RAWA’s calculations of when collection fees should be sought is rendered totally suspect. I find and conclude therefore that •I will not consider as reliable or accurate any of RAWA’s over 90-days delinquency calculations. I find and conclude that all of the collection fees assessed against Heck-man’s account for 101 Walnut shall be stricken and disallowed. I will order RAWA to account for every collection charge included in the claim amount. Moreover, I will order RAWA to account for every collection fee that Heckman paid to either ARB or RAWA since February 2012 even if it is not in the present amount of RAWA’s claim. All collection fees from and including February 2012 that were paid by Heckman to either ARB or RAWA shall be deducted from RAWA’s claim. If the accounting of collection fees to be reimbursed leads to a refund to Heckman, so be it. To be clear, any collection fees in RAWA’s claim number 6 shall be stricken and disallowed from the amount claimed. And any collection fees paid by Heckman that exceed’the amount of RAWA’s claim number 6 shall be refunded to him in one of two ways; First, Heckman would get a credit against the amount he owed to RAWA on its proof of claim or, second, if the credit exceeds the amount of RAWA’s claim, RAWA would pay the excess amount to Heckman on or before December 30,2016.
IV. CONCLUSION
For the reasons discussed, above, I find and conclude that Heckman failed to meet the burden required to establish RAWA’s violation of the automatic stay. I also find and conclude that Heckman failed to meet *670the burden required for damages or sanctions to be imposed against RAWA for its alleged violation of the automatic stay. Heckman also failed to prove that RAWA acted in an outrageous, reckless, or otherwise egregious fashion as it pertained to the automatic stay and I find and conclude that his request for actual and punitive damages against RAWA for violating the automatic stay must be denied.
Furthermore, I find and conclude that RAWA, through its agent, ARB, received a payment from Heckman in the amount of $201.04, but failed to apply it to Heckman’s account. As a result, RAWA’s proof of claim for $5,212.94 for 101 Walnut alone must be reduced by $201.04, resulting in RAWA’s claim for 101 Walnut being $5,011.90.
Finally, I find and conclude that RAWA systemically miscalculated the number of days before a bill could be considered 91-days delinquent and referred to arb for collection. At least one of Heckman’s bills was incorrectly declared to be 91-days delinquent and was improperly sent to collections. RAWA presented no evidence that the faulty delinquency determination for that bill was an aberration and not endemic to RAWA’s standard practices. This is extremely troublesome and unsettling. The entire delinquency date calculation system used by RAWA is therefore suspect. This leads me to find and conclude that none of RAWA’s delinquency date calculations relating to Heckman can be deemed reliable. I find, therefore, that all collection fees assessed against Heckman’s account for 101 Walnut must be stricken from RAWA’s claim and disallowed. In addition, RAWA shall account for any and all collection fees paid by Heckman since February 2012 and shall reduce its claim by all amounts paid by Heckman for collection fees since February 2012.
I will enter an Order that accompanies this Memorandum Opinion: (1) entering judgment on Heckman’s section 362(k) complaint against him and in favor of RAWA; (2) sustaining in part and overruling in part Heckman’s objection to RAWA’s claim and determining that RAWA holds á secured claim in the amount of $5,011.90, minus all collection fees assessed against or paid by Heckman whether included in RAWA’s claim or paid by Heckman to ARB from February 2012 to present; and (3) directing RAWA to (a) file an amended proof of claim reflecting (i) the deduction of all collection fees included in the present claim and (ii) the deduction of all collection fees not included in the present claim but paid by Heckman since February 2012, and (b) pay to Heckman a refund of all collection fees paid since February 2012 in excess of the amount in RAWA’s claim, consistent with the terms of this Memorandum Opinion and accompanying Order.
ORDER
AND NOW, this 6 day of December, 2016, based on the discussion and reasons set forth in the accompanying Memorandum Opinion dated and filed today in the litigation between Plaintiff Ronald L. Heckman (“Heckman”) and Reading Area Water Authority (“RAWA”), IT IS HEREBY ORDERED that JUDGMENT ON Heckman’s complaint insofar as it prays for relief pursuant to Section 362(k)(l) is ENTERED IN FAVOR OF RAWA and the complaint is otherwise DISMISSED.
IT IS FURTHER ORDERED that Heckman’s objection to RAWA’s claim number 6, is HEREBY SUSTAINED IN PART AND OVERRULED IN PART and I HEREBY FIND that RAWA holds a secured claim in the'amount of $5,011.90, less all collection fees included in its claim and less all collection fees paid by Heck-man to RAWA and ARB (as identified in *671the Memorandum Opinion) since February 2012.
IT IS FURTHER ORDERED that RAWA shall prepare, file in the main case above, and serve on Heckman, all on or before December 30, 2016, an accounting of all collection fees paid' by Heckman from February 2012 through the date of this Order, shall deduct the total of such collection fee payments from its claim, and shall reimburse Heckman for any collection fee payments that exceed the amount of RAWA’s claim.
IT IS FURTHER ORDERED that RAWA shall file an amended proof of claim, consistent with this Memorandum Opinion and Order on or before December 30, 2016.
IT IS FURTHER ORDERED that if RAWA’s accounting of collection fees paid by Heckman results in a credit in excess of RAWA’s claim, RAWA shall pay the excess to Heckman as a refund on or before December 30, 2016.
IT IS FURTHER ORDERED that each party shall bear his or its own costs.
.During the trial, I explained my rationale for pressing this issue through my questioning the witness. See N.T., 3/9/16 trial, p. 129: "I started off at the first hearing saying the District Court requires us to bend over backwards with creditors [sic] [pro se parties]. And my view has always been to try to find out what's going on, regardless of whether I ask questions or not.” I want to find out relevant facts, even if I must ask questions of witnesses myself.
. See p. 11, n. 11, and text at pp. 27-30, infra.
. With apologies to Sergio Leone, Clint Eastwood, Lee Van Cleef, and Eli Wallach in The Good, the Bad, and the Ugly (1966).
. The hearingdrial dates were February 8, 19, & 29, and March 9 & 22, 2016.
. Disposition of this dispute took an extraordinary amount of time to prepare, The legal issues are relatively simple, but the factual issues are buried in the minutiae and detail of hundreds of pages of transcripts and exhibits, which contain, inter alia, invoices, summaries of the account, emails, rules, and regulations.
. Heckman had filed more bankruptcies before December 2013, but the four listed in this paragraph are the cases that are relevant here.
. ' Section 362(c)(4)(C) provides that a stay imposed under subparagraph (B) shall be effective on the date the order is entered allowing the stay to go into effect. Throughout this *660case, however, Heckman has pressed his belief that my Order was, in fact, intended to be retroactive, At all times throughout this case, however, I definitely meant, I have definitely stated, and I definitely mean that the Order was not retroactive.
. Two of the required steps in the resolution were to hire a licensed plumber to fix the leak and to have the leak repaired to the satisfaction of RAWA within thirty days of the discovery of the leak.
. Ms. Ruotolo testified that according to the Plumber Standards for the City of Reading, owners are permitted to fix small issues on their own for property that is owner occupied. The owner may then submit the request for an adjustment of the bill caused by the leak. If the property is a rental unit, however, Reading’s code requires that work be done by a licensed plumber. Ms. Ruotolo expressed no view about how or why this dichotomy exists.
. At some point in time (the record is unclear when), a company known as Kadent sold Accounts Recovery Bureau to a company known as Arcadia Recovery Bureau; and Accounts Recovery Bureau is now known as Arcadia Recovery Bureau and continues to be known as ARB. N.T, 3/9/16 trial, pp. 3-5. Because the exact identity and name of the collection agency is irrelevant to the outcome of this proceeding, I will refer to the collection agency generically as ARB throughout this Opinion, :
I note, however, that both collection entities use the word “Bureau” in their names, which might very well lead a customer to believe incorrectly that they were affiliated with the city of Reading as one of its bureaus, thereby perhaps having some accountability to citizens.
. Ms. Ruotolo testified that the fourth calendar month after an invoice was due to be paid it would be considered delinquent and equivalent to being 91 days delinquent. N.T. 3/19/16 ■ trial, pp. 15-20. A bill sent out in the middle *662of September would be payable on September 30, according to RAWA’s policies. That counts as month one. October and November count as months two and three. The first day of December is considered the fourth month. So one day in September, 31 days in October, 30 days in November, and one day in December equals 90 days delinquent. For more on this issue see pp. 27-30, infra.
. The amount of the collection fee was originally set at 20%, but was reduced to 16.66% sometime around October of 2014. N.T. 3/9/16 trial, p. 18.
. It is unclear, based on the record before me, whether the Consumer Financial Protection Bureau responded to Heckman’s complaint, but I would not expect its conclusion to be any different.
. This is the nub of Heckman’s argument. Because I- ordered that the automatic stay would “extend” throughout the duration of this case (unless relief from stay were sought and granted), Heckman argues that I must have meant the stay was extended from the day his petition in bankruptcy was filed. To the contrary, on February 19, 2015, I extended the automatic stay from that date until it might be challenged at some other time in this case. See also, p. 6, n. 7, supra.
. Ms, Ruotolo had been employed by RAWA from about 2010 to the dates of the hearings. *666Before that, she was employed by ARB for 15 years. While she worked for ARB, she han-died the RAWA account.
. See also discussion, supra, at p. 9-10.
. See discussion, supra, atpp. 12-13.
. As a 5th or 6th grade school student would have observed. See p. 1, supra.
.' An exclamation of incredulity, first published in The London Times, June 1827: "[A]ll notions of concerting and of dictating to the King in the exercise of his prerogative, was mere stuff and nonsense.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500095/ | MEMORANDUM OPINION
LENA MANSORI JAMES, UNITED STATES'BANKRUPTCY JUDGE
THIS MATTER came before the court for hearing on August 25, 2016, after due and proper notice, upon the verified Motion to Set Aside Entry of Default and Default Judgment (“Motion”) filed by defendant Joseph Edward, Zering (“Debtor”). The Plaintiff did not file an objection or response to the Motion. Samantha Brum-baugh appeared on behalf of the Debtor and John Sperati appeared on behalf of the plaintiff, Kelli Ferguson (“Plaintiff’). Having considered the Motion, the record in this case and the arguments from counsel, for the reasons stated below, the court will grant the Motion.
I. Background
The Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code on November 3, 2015. On the petition, the Debtor listed his residence as 250 Sugar Gum Lane, Apt. #252, Pinehurst, North Carolina, 28374 (“250 Sugar Gum Lane Property”), and he listed his mailing address as P.O. Box 4120, Pinehurst, North Carolina, 28374 (“Post Office Box”). There *674is no United States postal service available at the 250 Sugar Gum Lane Property. On Schedule A, the Debtor listed the 250 Sugar Gum Lane property as well as real property located at 18 Sunset Hill Road in Brookfield, Connecticut (“Connecticut Property”). The Debtor’s Statement of Financial Affairs indicated that he vacated the Connecticut Property in November 2014. Also, the Debtor indicated his intent to surrender the Connecticut Property on his Statement of Intent, and the court entered an order granting relief from stay regarding the property on January 4, 2016. In January 2016, the Debtor notified his prior attorney, Michael McCrann, that he would be located in Massachusetts caring for his ailing mother. Mr. McCrann notified the Bankruptcy Administrator of the Debtor’s change in location, but Mr. McCrann did not file a notice of change address on the docket.
The Plaintiff filed a complaint commencing the above-captioned adversary proceeding on February 2, 2016 (“Complaint”). In the Complaint, the Plaintiff asserts claims objecting to dischargeability of debt under 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(4), incorporating a complaint from a state court proceeding commenced by the Plaintiff in the Superior Court, Judicial District of Danbury, Connecticut as an exhibit. In the state court complaint, the Plaintiff asserted claims arising from a failed business relationship against multiple defendants, including the Debtor: (1) breach of contract and covenant of good faith and fair dealing, (2) promissory estoppel, (3) failure to pay wages in violation of Conn. Gen. Stat. § 31-72, (4) violation of Conn. Gen. Stat. § 42-110a et seq. Connecticut Unfair and Deceptive Trade Practices Act, (5) breach of fiduciary duty, (6) unjust enrichment, (7) breach of personal guarantees, and (8) constructive trust. Docket No. 1, Exhibit A. The Complaint also incorporates a default judgment awarding compensatory damages for amounts due on claims in the amount of $192,507.75, prejudgment interest of $33,688.86, punitive damages pursuant to Conn. Gen. Stat. § 42-110g(a) of $92,363.86, attorney fees as additional punitive damages of $31,561.25, and costs of $1,457.42 for a total judgment amount of $351,579.14.
On February 17, 2016, the Plaintiff filed a certificate of service certifying that service of the summons and Complaint was made on the Debtor by first class United States mail addressed to the Post Office Box. On April 6, 2016, the Plaintiff filed a motion for entry of default as to the Debt- or due to his failure to answer or otherwise respond. The clerk did not enter default, and on April 13, 2016 the Plaintiff requested reissuance of the summons in order to serve the Debtor at the physical address for the 250 Sugar Gum Lane Property (Docket No. 7). The clerk reissued a summons, and on April 25, 2016, the Plaintiff filed a certificate of service certifying that service of the Complaint and reissued summons was made on the Debtor by first class United States mail addressed to both the 250 Sugar Gum Lane Property and the Connecticut Property. On June 3, 2016, the Plaintiff filed another request for entry of default. The clerk entered default on June 15, 2016, and the court entered a default judgment on June 21, 2016.
The Debtor now requests that the court set aside both the entry of default and default judgment, asserting that lack of proper service of the Complaint, initial summons, and reissued summons constitutes good cause.
II. Legal Standard
Federal Rule of Bankruptcy Procedure 7055, incorporating Federal Rule of Civil Procedure 55 by reference, provides that once a default judgment has been entered, the court may set aside the entry *675of default for good cause and may set aside the default judgment under Federal Rule of Civil Procedure 60(b), incorporated by reference by Federal Rule of Bankruptcy Procedure 9024. Whether a default judgment should be set aside is in the court’s discretion. Aikens v. Ingram, 652 F.3d 496, 501 (4th Cir. 2011). Where a default judgment is at issue, the Fourth Circuit takes a more liberal view of Rule 60(b). Augusta Fiberglass Coatings, Inc., v. Fodor Contracting Corp., 843 F.2d 808, 811 (4th Cir.1988). Courts encourage disposition of matters on the merits. Heyman v. M.L. Mktg. Co., 116 F.3d 91, 94 (4th Cir. 1997); U.S. v. Moradi, 673 F.2d 725, 727 (4th Cir. 1982). “Any doubts about whether relief should be granted should be resolved in favor of setting aside the default so that the case may be heard on the merits.” Tolson v. Hodge, 411 F.2d 123, 130 (4th Cir. 1969).
III. Rule 60(b)threshold Factors
To succeed under Rule 60(b), the movant must show that (1) the motion is timely, (2) the movant has a meritorious defense, and (3) the opposing party will not be unfairly prejudiced. Park Corp. v. Lexington Ins. Co., 812 F.2d 894, 896 (4th Cir. 1987); Nat’l Credit Union Admin. Bd. v. Gray, 1 F.3d 262, 264 (4th Cir. 1993). After meeting these three threshold requirements, the movant must then satisfy one of the six grounds for relief enumerated in Rule 60(b).
A TIMELINESS
Turning to the first of the three threshold requirements, Rule 60(c) provides that a motion “must be made within a reasonable time — and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.” Here, the court entered the default judgment on June 21, 2016. The Debtor filed his Motion under Rule 60(b) less than six weeks later on July 29, 2016. After a review of the record and the particular circumstances presented here, including that the Complaint, summons, and reissued summons were not mailed to an address at which the Debtor received mail, the court finds that the Motion is timely for the purposes of Rule 60(b).
B. MERITORIOUS DEFENSE
As to the second requirement, the movant must show a meritorious defense. “A meritorious defense requires a proffer of evidence which would permit a finding for the defaulting party or which would establish a valid counterclaim.” Augusta, 843 F.2d at 812.
Default judgment was entered against the Debtor on two counts, 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). Pursuant to § 523(a)(2)(A):
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
[[Image here]]
(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 ...
Thus, to establish nondischargeability pursuant to § 523(a)(2)(A), a plaintiff must prove: *676Winston-Salem City Employees’ Federal Credit Union v. Casper (In re Casper), 466 B.R. 786, 793 (Bankr. M.D.N.C. 2012) (Aron, J.); see Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir. 2007). Further, pursuant to § 523(a)(4), a § 727 discharge does not discharge a debt- or from any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
*675(1) the debtor made a representation;
(2) at the time the representation was made, the debtor knew the representation was false; (3) the debtor made the false representation with the intention of deceiving the creditor; (4) the creditor relied on such representation; and (5) the creditor sustained the alleged loss and damage as the proximate result of the false representation.
*676In defense of these claims, the Debtor asserts that the Complaint is subject to dismissal for (1) failure to state a claim pursuant to FRCP 12(b)(6); (2) failure to plead with specificity the elements of fraud, reasonable reliance, and that the Plaintiff independently investigated and conducted due diligence as it relates to the statements made by the Debtor pursuant to FRCP 9; (3) being based on conclusory statements, subject to dismissal pursuant to Ashcroft v. Iqbal, 556 U.S. 662, Z129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); and (4) failure to meet the elements of § 523(a)(2)(A) and (a)(4) on its face, as the Complaint appears to involve a dischargea-ble debt owed to a disgruntled creditor.
At the hearing, counsel for the Plaintiff argued that the Debtor’s potential defenses are technical, rather than on the merits, thus preventing the Debtor from satisfying this second element of Rule 60(b). However, counsel’s assertions are inapposite, as meritorious defenses for the purposes of Rule 60(b) are not only limited to whether a party might defeat a case on its merits after a full trial, but also include defenses. that would permit a finding for the defaulting party. Augusta, 843 F.2d at 812. The Plaintiff also argues that res judi-cata precludes the Debtor from litigating the claims on the merits. Thus, satisfying the second threshold factor turns on whether the Debtor may raise any defense to the Plaintiffs claims that would have altered the outcome of the litigation, on the merits or otherwise.
1. 12(b)(6) claim sufficiency and pleading requirements
Taking the Debtor’s alleged claim sufficiency defenses together, to say that a complaint fails to state a claim upon which relief can be granted under Rule 12(b)(6) is to say that it is subject to dismissal pursuant to Iqbal and Twombly. A Rule 12(b)(6) motion is a defense to a claim for relief and provides for dismissal where a party has failed “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). The facts alleged must be sufficient “to raise a right to relief above the speculative level” and state a claim “that is plausible on its face.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. When considering a motion to dismiss, the court must take all well-pleaded factual allegations as true. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. Plaintiffs may proceed into the litigation process only when their complaints are “justified by both law and;fact.” Francis v. Giacometti, 588 F.3d 186, 192-93 (4th Cir.2009).
To determine plausibility, all facts set forth in the Complaint are taken as true. However, “legal conclusions, elements of a cause of action, and bare assertions devoid of further factual enhancement” will not constitute well-pled facts necessary to withstand a motion to dismiss. Nemet Chevrolet, Ltd. v. Consumerafffaifs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009). Here, the default judgment is based on two claims brought by the Plaintiff, one pursuant to § 523(a)(2)(A) and the other pursuant to § 523(a)(4).
With regard to the sufficiency of the Plaintiffs first claim pursuant to § 523(a)(2)(A), there is a split as to whether heightened pleading is required. Rule 9(b), incorporated by reference via Bank*677ruptcy Rule 7009, states, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Section 523(a)(2)(A) includes. three alternate grounds on which, a creditor can oppose dischargeability, namely false pretenses, false representation, or actual fraud; whether heightened pleading is required pursuant to Rule 9(b) for any of the three grounds, or whether Rule 9(b) heightened pleading is only required when alleging actual fraud, is an unsettled question of law in the Fourth Circuit. Compare Dark v. Thomas (In re Thomas), No. 10-80835-C7D, Adv. No. 10-9071, 2011 WL 65882, *2 (Bankr. M.D.N.C. Jan. 10, 2011) (Stocks, J.) (finding that allegations fall far short of meeting the heightened pleading requirements for § 523(a)(2)(A) based on alleged fraud), with Bennett v. Smith (In re Smith), Case No. 05-10041, Adv. No. 05-2079, 2006 WL 3333801, *5 (Bankr. M.D.N.C. Nov. 16, 2006), (Waldrep, J.) (determining that as the non-fraud alternate grounds were sufficiently pled pursuant to Rule 8, heightened pleading pursuant to Rule 9(b) was not, necessary to state a claim pursuant to Rule 12(b)(6)). See also Fields v. Kimmel (In re Kimmel), Case No. 14-00247-5-RDD, Adv. No. 14-00006r 5-RDD, 2014 WL 5764491, *2 (Bankr. E.D.N.C. Nov. 4, 2014) (determining that plaintiffs must show alleged fraud as a requirement of § 523(a)(2)(A), and that heightened pleading therefore applies); McGinnis v. Fatone (In re Fatone), Case No. 13-00081-8-RDD, Adv. No. 13-00085-8-RDD, 2013 WL 5798999, *2 (Bankr. E.D.N.C. Oct. 25, 2013) (stating that a false contractual promise alone is insufficient to support a § 523(a)(2)(A) claim, and that heightened pleading is required); USAA Federal Savings Bank v. Stalsit (In re Stalsitz), Case No. 12-07973-8-ATS, Adv. No. 13-00020-8-ATS, 2013 WL 5426005, *2 (Bankr. E.D.N.C. Sept. 27, 2013) (linking claims brought pursuant to § 523(a)(2)(A) with the heightened pleading requirement pursuant to Rule 9(b)); Flintlock v. Stephenson (In re Stephenson), Case No. 12-00357-8-JRL, Adv. No. 12-00228-8-JRL, 2013 WL 593900, *5 (Bankr. E.D.N.C. Feb. 15, 2013) (finding that the plaintiff properly alleged fraud pursuant to Rule 9(b) in setting forth a § 523(a)(2) claim); Parkvale Bank v. LaPosta (In re LaPosta), Case No. 08-1966, Adv. No. 09-32, 2010 WL 3447660, *2 (Bankr. N.D.W. Va. Aug. 30, 2010) (setting forth the required elements of fraud a plaintiff must plead pursuant to Rule 9(b) with regards to § 523(a)(2)(A) and (a)(4)); Household Credit Services Inc. v. Herring (In re Herring), 191 B.R. 317, 320 (Bankr. E.D.N.C. 1995) (requiring that allegations for a § 523(a)(2)(A) complaint based on actual fraud must be more specific than a mere assertion that the debtor did not have the ability or intention to repay) abrogated on other grounds by First Card Services, Inc. v. Koop (In re Koop), 212 B.R. 106 (Bankr. E.D.N.C 1997). But see Drennan v. Hunnicutt (In re Hunnicutt), 466 B.R. 797, 799-800 (Bankr. D.S.C. 2011) (evaluating' a § 523(a)(2)(A) claim for its sufficiency according to standard pleading requirements); Legrande Hospitality, LLD v. Peel (In re Peel), Case No. 09-04770-8-SWH, Adv. No. H-09-00167-8AP, 2010 WL 2775057, *2 (Bankr. E.D.N.C. July 13, 2010) (requiring only the circumstances constituting fraud to be pled with particularity, while all else may be pled generally).
Further, even if Rule 9(b) were inapplicable to pleading under § 523(a)(2)(A), the Debtor’s argument that the Plaintiffs first claim fails to allege facts necessary to substantiate false pretenses, false representation, or actual fraud is of sufficient merit to satisfy the threshold requirement of Rule 60(b). See Strum v. Exxon Co., 15 F.3d *678327, 331 (4th Cir. 1994) (“Because Strum has done nothing more than assert that Exxon never intended to honor its obligations under the March agreement, the district court’s dismissal of the first cause of action was entirely appropriate.”); In re Herring, 191 B.R. at 319-20 (Bankr. E.D.N.C. 1995) (“A complaint that seeks a determination that a debt is nondischargeable under § 523(a)(2) need not be elaborate, but if it is based on “actual fraud,” the allegations must be more specific than the mere assertion that the debtor did not have the intention to pay. Furthermore, false pretenses and false representations must be supported by more than a bare allegation that the debtor did not have the ability to pay and a general statement that the debtor did not intend to pay.”). See also In re Fatone, 2013 WL 5798999 at *2-3 (finding that the plaintiffs allegations of the debtor’s fraudulent conduct based on engaging in negotiations and signing a contract one month prior to filing for bankruptcy, thus amounting to having no intent to pay, were insufficient to meet pleading requirements for fraud under § 523(a)(2)(A), in addition to failing to sufficiently allege reliance).
With regard to sufficiency under Twom-bly and Iqbal for the Plaintiffs second claim pursuant to § 523(a)(4), the Plaintiffs claim pleads either fraud or defalcation while acting in a fiduciary capacity, and is unclear as to the grounds on which the claim rests. As to the first element, the Plaintiff does not allege fraud pursuant to Rule 9(b), which requires “particularity” in pleading “the circumstances constituting fraud or mistake,” as insofar as the Plaintiff fails to plead with sufficient particularity as to her first claim, so too here does the Plaintiff fail to allege fraud with sufficient particularity. However, even were the Plaintiff to be alleging defalcation, the Plaintiff must sufficiently allege a fiduciary duty owed to the Plaintiff by the Debtor. See NC & VA Warranty Co., Inc. v. Fidelity Bank (In re NC & VA Warranty Co., Inc.), 554 B.R. 110, 125 (Bankr. M.D.N.C. 2016) (Kahn, J.) (stating that alleging the mere existence of a contractual relationship is not satisfactory in meeting pleading requirements for fiduciary duty). After review of the Complaint, the court finds that the Debtor sufficiently raises a meritorious defense, namely, that the Plaintiff may have insufficiently pled one or more or the elements of §§ 523(a)(2)(A) and 523(a)(4), so as to satisfy the second threshold factor of Rule 60(b).
2. Preclusion on the merits
Even were the Plaintiffs claims well-pled, the Debtor additionally argues that, on the face of the claims, the Complaint appears to involve a dischargeable debt owed to a disgruntled creditor, impliedly suggesting that the Debtor would succeed in defending the claims at trial. At the hearing, counsel for the Plaintiff asserted that' res judicata prevented the Debtor from defending against the Plaintiffs claims in the adversary proceeding as a result of the default judgment entered in the Connecticut case. Whether the Debtor is to be afforded the opportunity to defend against Plaintiff’s claims rests with the preclusive effect, if any, of the default judgment that serves as the basis for Plaintiffs claims.
In this case, the default judgment in question was entered by a Connecticut court. The preclusive effect of state court judgments in subsequent federal lawsuits, such as the instant Connecticut judgment, is determined by the full faith and credit statute, providing that state court proceedings “shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken.” 28 U.S.C. § 1738; Marres e v. Am. Acad, of Orthopaedic Surgeons, 470 U.S. 373, 373-74, 105 S.Ct. *6791327, 84 L.Ed.2d 274 (1985) (citations omitted) (quoting Kremer v. Chemical Construction Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982)). The Fourth Circuit has stated, “[flederal courts must give the same preclusive effect to a state court judgment as the forum that rendered the judgment would have given it.” Sartin v. Macik, 535 F.3d 284, 287 (4th Cir. 2008) (citing Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980)); Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir.1997)). Here, the Plaintiff obtained a default judgment in Connecticut, so the court must look to Connecticut law to determine its preclusive effect.
Connecticut courts observe the doctrine of collateral-estoppel to “protect the finality of judicial determinations, conserve the time of the court, and prevent wasteful relitigation.” Gionfriddo v. Gartenhaus Cafe, 15 Conn.App. 392, 546 A.2d 284, 290 (1988), aff'd, 211 Conn. 67, 557 A.2d 540 (1989). Collateral estoppel prohibits parties from relitigating issues that have already been “actually litigated and necessarily determined in a prior action.” Aetna Cas. & Sur. Co. v. Jones, 220 Conn. 285, 596 A.2d 414, 421 (1991). The Connecticut Supreme Court explained:
An issue is ‘actually litigated’ if it is properly raised in the pleadings or otherwise, submitted for determination, and in fact determined .... An issue is necessarily determined if, in the absence of a determination of the issue, the judgment could not have been validly rendered .... If an issue has been determined, but the judgment is not dependent upon the determination of the issue, the parties may relitigate the issue in a subsequent action.
Dowling v. Finley Associates, Inc., 248 Conn. 364, 727 A.2d 1245, 1251 (1999) (quoting Jackson v. R.G. Whipple, Inc., 225 Conn. 705, 627 A.2d 374, 378 (1993)). For collateral estoppel to apply and preclude rehearing an issue, the issue must have been (1) fully and fairly litigated in the first action, (2) the issue must have been actually decided in the first action, and (3) the decision must have been necessary to the judgment in the first action. Id. at 378 (quoting Virgo v. Lyons, 209 Conn. 497, 551 A.2d 1243 (1988).
a. Fully and fairly litigated
As to whether the Plaintiffs claims have been fully and fairly litigated prepetition, Connecticut courts have found that collateral estoppel can be applied to judgments entered on default. Slattery v. Maykut, 176 Conn. 147, 405 A.2d 76, 82 (1978) (stating that a judgment by a court with proper personal and subject matter jurisdiction operates as res judicata even if obtained by default, and is as conclusive as a determination on the merits at trial). Connecticut courts have found that since default judgments reduce entries of default — mere interlocutory rulings — into final judgments that provide affirmative relief, default judgments are on the merits. Segretario v. Stewart-Warner Corp., 9 Conn.App. 355, 519 A.2d 76, 78-79 (1986) (quoting 1 E. Stephenson, Connecticut Civil PROCEDURE § 156(b), at 625-26 (2d ed. 1970 & Supp. 1982)); see also Bruno v. Getter, 136 Conn.App. 707, 46 A.3d 974, 987 (2012) (“Other final judgments, however, whether rendered by dismissal, default or otherwise, generally are. considered judgments on the merits for purposes of res judicata.”).
In the instant case, the Debtor appeared and answered the Connecticut complaint, and default was only subsequently entered when the Debtor failed to continue to defend against the Plaintiffs claims. The Connecticut Supreme Court considered a case where default was entered under similar circumstances:
*680The defendant filed an appearance in the original action and was on notice of all proceedings in that case. He had an ample opportunity to assert any defenses but did not avail himself of that opportunity. His default for failure to plead is, therefore, “substantially similar to a judgment upon a contested action.”
Meinket v. Levinson, 193 Conn. 110, 474 A.2d 454, 456 n. 5 (1984) (quoting Restatement (Second) of Judgments 5 Intro. Note (Am. Law. Inst. 1982)). Here, the Debtor had opportunity to assert any defenses in the Connecticut lawsuit, but did not avail himself of the opportunity, as was the case in Meinket. Thus, under Connecticut law, the default judgment may have preclusive effect.
6. Actually decided issues
In determining whether the judgment in fact precludes the current adversary proceeding, a court must next determine whether the issues were actually decided in the Connecticut lawsuit. In the Plaintiffs Connecticut lawsuit, multiple counts were alleged, and default was entered, but the court’s order is ambiguous as to what grounds default was entered. The Connecticut Supreme Court has held, “Where there is more than one possible reason for ... [a judgment], and the court ... cannot say that any one is necessarily inherent in the [judgment], the doctrine of collateral estoppel is inapplicable.” Dowling v. Finley Assocs., Inc., 248 Conn. 364, 727 A.2d 1245, 1252 (1999) (quoting United States v. Irvin, 787 F.2d 1506, 1515-16 (11th Cir. 1986)); see also Automated Salvage Transport Co. v. Swirsky (In re Swirsky), 372 B.R. 551, 565 (Bankr. D. Conn. 2006). Here, there is more than one possible reason for the judgment. Docket No. 1, Exhibit B. The only claim on which judgment was affirmatively entered was the Connecticut Unfair Trade Practices Act (“CUTPA”). Conn. Gen. Stat. § 42-110b. Thus, CUTPA is the only ground that might prove preclusive.1
Section 42-110b provides, “[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” Conn. Gen. Stat. § 42-110b. A violation of CUTPA may be established either by showing an actual unfair or deceptive practice, or by showing a practice to violate public policy. Web Press Servs. Corp. v. New London Motors, Inc., 203 Conn. 342, 525 A.2d 57, 64 (1987). A practice is unfair if it meets one of three criteria: *681Conaway v. Prestia, 191 Conn. 484, 464 A.2d 847, 852 (1983) (quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 n. 5, 92 S.Ct. 898, 31 L.Ed.2d 170 (1972)). A plaintiff need not satisfy all three criteria, but rather need only meet one to a strong degree, or multiple criteria to lesser degrees. Cheshire Mortgage Serv., Inc. v. Montes, 223 Conn. 80, 612 A.2d 1130, 1143-44 (1992) (quoting Disclosure Requirements . and Prohibitions Concerning Franchising and Business Opportunity Ventures, 43 Fed.Reg. 59,614, 59,635 (Dec. 21, 1978) (to be codified at 16 CFR pt. 436)). Alternatively, an act or practice is deceptive if it meets three elements: “[fjirst, there must be a representation, omission, or other practice likely to mislead consumers. Second, the consumers must interpret the message reasonably under the circumstances. Third, the misleading representation, omission, or practice must be material-that is, likely to affect consumer decisions or conduct.” Caldor, Inc. v. Heslin, 215 Conn. 590, 577 A.2d 1009, 1013 (1990) (quoting Figgie International, Inc., 107 F.T.C. 313, 374 (1986)). As a claim under CUTPA can be decided under multiple criteria for unfair practices, and under entirely separate elements for deceptive practices, CUTPA cannot preclude the Debtor’s ability to defend against Plaintiffs nondischargeability claims in the present proceeding, as it is unclear on what basis within CUTPA the Connecticut court granted its monetary award. As such it is impossible to determine on what issues the Connecticut court must have actually decided, even if the decisions the Connecticut court made were necessary to issuing the judgment. Pursuant to the Connecticut Supreme ’ Court’s ruling in Dowling, this court cannot say that any one possible reason is necessarily inherent in the judgment.
*680(1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise — whether, in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers
[[Image here]]
*681c. Necessity
However, even were the Connecticut court’s default judgment under CUTPA more clear, the Plaintiffs instant claims under §§ 523(a)(2)(A) and 523(a)(4) both require intent and reliance. Wrongful intent is required for § 523(a)(2)(A),. even if the claim does not allege actual fraud. See Auton v. Smith (In re Smith), Case No. 14-17306, Adv. No. 14-00461, 2016 WL 3943710, *5 (Bankr. D. Md. July 14,2016). See also Husky Int’l Elecs., Inc. v. Bitz, — U.S. , 136 S.Ct 1581, 1586, 194 L.Ed.2d 655 (2016). Neither reliance nor intent are requirements under CUTPA. See Associated Investment Co. Ltd. Partnership v. Williams Associates IV, 230 Conn. 148, 645 A.2d 505 (1994). CUTPA does not require proof of intent to deceive, defraud, or to mislead. Id. at 510; see, e.g., Web Press Services Corp. v. New London Motors, Inc., 203 Conn. 342, 525 A.2d 57 (1987); Sportsmen’s Boating Corp. v. Hensley, 192 Conn. 747, 474 A,2d 780 (1984); Hinchliffe v. American Motors Corp., 184 Conn. 607, 440 A.2d 810 (1981). As key elements of § 523(a)(2)(A) are irrelevant to a determination under CUTPA, the default judgment cannot be preclusive as to the Plaintiffs first claim in this proceeding.
As for pleading under § 523(a)(4), a fiduciary capacity is required. Here, the default judgment pursuant, to CUTPA is not specific enough to conclude that a fiduciary duty was found. Thus, the Debtor is also not precluded from defending against the Plaintiffs § 523(a)(4) claim.
After consideration of the allegations made in the Complaint and the defenses raised by the Debtor in his verified Motion, including that the Complaint is not sufficiently well pled and that even if ⅛ were, the .allegations as presently stated suggest that the Debtor could succeed in defending the claims on the merits at trial, the court concludes that the defenses set *682forth are sufficient to satisfy the second threshold factor of Rule 60(b).
C. Unfair Prejudice
Finally, to proceed under Rule 60(b), the Debtor must show that the Plaintiff would not be unfairly prejudiced if the default judgment is set aside. The Plaintiff has neither argued nor provided evidence of unfair prejudice. The Plaintiffs additional time and cost of adjudicating the matter on its merits, standing alone, do not constitute unfair prejudice. See Werner v. Carbo, 781 F.2d 204, 207 (4th Cir. 1984). Thus, the court finds that the Debtor has satisfied the threshold requirements of Rule 60(b), and will grant the Debtor’s motion if it satisfies one or more substantive grounds for relief.
IV. Grounds for Relief
Having satisfied the threshold factors, the Debtor is entitled to relief under Rule 60(b) if one of the six grounds for relief is met:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief.
In his Motion, the Debtor relies on Rule 60(b)(4), that the judgment is void by reason of improper service, as well as Rule 60(b)(6). Rule 60(b)(4) is concerned with proper service in instances where personal jurisdiction has not yet been established, as the Fourth Circuit has noted “[a judgment] is void only if the court that rendered it lacked jurisdiction of the subject matter, or of the parties, or if it acted in a manner inconsistent with due process of law.” Schwartz v. U.S., 976 F.2d 213, 217 (4th Cir. 1992) (quoting 11 Charles Alan Wright & Arthur R. MilleR, Federal Practice and Procedure § 2862 (1973)). The Plaintiff argues that subsection (b)(4) is not applicable in the instant case because the court clearly has both subject matter and personal jurisdiction over the Debtor. The court need not reach a determination on the applicability of Rule 60(b)(4) to the instant case as the court finds it appropriate to grant the Debtor relief under subsection (b)(6).
Rule 7004(b)(1) provides that service may be made within the United States by first class mail postage prepaid “[u]pon an individual other than an infant or incompetent, by mailing a copy of the summons and complaint to the individual’s dwelling house or usual place of abode or to the place where the individual regularly conducts a business or profession.” Not one of the three addresses at which the Plaintiff attempted to serve the Complaint, the summons, and reissued summons on the Debtor by first class mail satisfies the requirement of Rule 7004. The record clearly establishes that the Connecticut Property was not the Debtor’s usual place of dwelling or abode, as he last lived there in November 2014. Clearly, a post office box does not qualify as a dwelling or abode, and the 250 Sugar Gum Lane Property does not receive United States mail service.
In addition, there is no evidence that Debtor was attempting to avoid service. In fact, the parties do not dispute that the Debtor provided his previous attorney with updated contact information in Massachusetts.2 At the hearing, counsel for the *683Plaintiff argued that the Debtor was only visiting his mother in Massachusetts to avoid service, indicating that while the Debtor’s Post Office Box had been closed, the Debtor had left no forwarding address with the post office.3 Whether the Debtor had actually established residency in Massachusetts or was merely in the state for an extended period of time is of no consequence. Even if the Debtor had continued to reside at the 250 Sugar Gum Lane Property throughout the relevant time period, the Plaintiff’s method of service was improper and ineffective given that first class United States mail service is not available at that address. Moreover, it appears that the Plaintiff did not mail the Complaint, summons, and reissued summons to an address at which the Debtor could actually receive them, depriving the Debtor of an opportunity to timely answer or otherwise respond. Therefore, this court holds that the Debtor has shown grounds exist under Rule 60(b)(6) and will vacate the Default Judgment.
V. Rule 55(c)
Having vacated the default judgment pursuant to Rule 60(b), good cause exists under Rule 55 to set aside entry of default. The Fourth Circuit determines “good cause” under Rule 55 using the following factors, “(1) whether the moving party has a meritorious defense, (2) whether it acts with reasonable promptness, (3) the personal responsibility of the defaulting party, (4) the prejudice to the party, (5) whether there is a history of dilatory action, and (6) the availability of sanctions less drastic.” Baker v. Durham Cty. S.W.A.T. Team, No. 1:14CV878, 2016 WL 2621972, *2 (M.D.N.C. May 5, 2016) (quoting Payne ex rel. Estate of Calzada v. Brake, 439 F.3d 198, 205 (4th Cir. 2006)). In the instant case, there is a meritorious defense, the Motion to Vacate was filed within weeks of judgment being entered, and the defaulting party was not served pursuant to Rule 7004; moreover, the Complaint, summons, and reissued summons were mailed only to undeliverable or stale addresses. Further, the Debtor has no history of dilatory action in this adversary proceeding and there is no prejudice to the Plaintiff for having to litigate on the merits. Finally, there are no sanctions less drastic, as either the default judgment stands and the Plaintiffs claim is adjudicated nondischargeable, or default is vacated and the parties are left to try the claims.
VI. CONCLUSION
Thus, consistent with constitutional principles of due process, as well as the Fourth Circuit’s more liberal application of Rule 60(b) when a default judgment is at issue, with any doubts resolved in favor of setting aside the default so that the case may be heard on the merits, and in this court’s discretion, the court shall vacate the default judgment and set aside the entry of default. A separate order shall be entered consistent with this memorandum opinion.
SO ORDERED.
. The damages in the Connecticut case, less Plaintiffs costs and interest, are awarded in two tranches, compensatory damages for amounts due on claims for $192,507.75, and punitive damages pursuant to CUTPA for $92,363.86 plus $31,561.25 in attorney fees as additional punitive damages. Docket No. 1, Exhibit A. Pursuant to Dowling, the claims on which the compensatory damages are awarded cannot be preclusive, as it is unclear on what grounds judgment was entered; the seven non-CUTPA claims require disparate elements, and the order makes no findings but for the default. In contrast, the punitive damages and attorney fees as additional punitive damages pursuant to CUTPA are recorded on the judgment separately, making CUTPA the only firmly established ground for the judgment.
. There is no indication on the record as to whether Mr. McCrann initially received a *683copy of the Complaint, and he does not represent the Debtor in this adversary proceeding.
. There is no evidence or documentation to support the Plaintiff's claim that the Debtor was staying with his mother in Massachusetts to avoid service. Counsel for the Plaintiff disclosed at the hearing that he was aware that the Debtor had actually closed the Post Office Box. Regardless of the Debtor's intent, it is worrisome that the Plaintiff ever requested default based on service at a post office box. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500097/ | Opinion After Trial Dismissing Complaint To Determine Nondischargeable Debt
Phillip J. Shefferly, United States Bankruptcy Judge
Introduction
This matter is before the Court on a complaint in á Chapter 7 bankruptcy case *712to determine a debt to be nondischargeable under § 523(a)(4) and (a)(6) of the Bankruptcy Code. The plaintiff is a corporation engaged in providing restoration services for existing structures. The defendant is an individual who owned a home that suffered water damage and hired the plaintiff to perform restoration services. The plaintiff claims that the defendant owes a debt for services that it performed. The plaintiff further claims that the debt is nondischargeable because the defendant’s conduct constitutes defalcation while acting in a fiduciary capacity, embezzlement, larceny, and a willful and malicious injury to the plaintiff or its property. The defendant denies that she owes any debt at all to the plaintiff, but even if she does, any outstanding debt is purely a debt from a breach of contract and is not within any exception to her discharge. This opinion constitutes the Court’s findings of fact and conclusions of law following trial. For the reasons explained in this opinion, the Coürt finds that the defendant does owe a debt to the plaintiff, but the debt is not excepted from the discharge in the defendant’s Chapter 7 case.
Jurisdiction
The District Court for the Eastern District of Michigan has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a) and (b). Pursuant to 28 U.S.C. § 157(a) and E.D. Mich. LR 83.50(a), the District Court has referred this adversary proceeding to the Bankruptcy Court. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The Court has both the statutory and constitutional authority to adjudicate and enter a final judgment in this adversary proceeding.
Procedural History
On July 28, 2014, Marla T. Woodford (“Debtor”) filed a petition under Chapter 7 of the Bankruptcy Code. On October 20, 2014, Initial Investments, Inc. (“Initial Investments”) commenced this adversary proceeding by filing a complaint alleging that it performed restoration services at the Debtor’s home pursuant to a contract it entered into with the Debtor. The complaint alleges that the Debtor owes an unpaid balance to Initial Investments in the amount of $34,285.60, plus interest, costs and attorney fees. The complaint further alleges that the Debtor failed to turn over to Initial Investments two checks that were issued by the Debtor’s insurance company for work performed by Initial Investments.
Count I of the complaint alleges that the debt is nondischargeable under § 523(a)(4) of the Bankruptcy Code because the Debtor’s failure to turn over the insurance checks constitutes fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. Count II of the complaint alleges that the debt is non-dischargeable under § 523(a)(6) of the Bankruptcy Code because the Debtor’s failure to turn over the insurance checks constitutes a willful and malicious injury to Initial Investments or its property.
After the Debtor filed an answer and affirmative defenses to the complaint, the Court held a scheduling conference and issued a scheduling order with dates for a final pretrial conference and trial. Just pri- or' to the scheduled trial date, the parties negotiated a settlement. Unfortunately, for reasons discussed later in this opinion, the settlement fell apart, and the Court rescheduled the adversary proceeding for trial.
On November 16 and 17, 2016, the Court held the trial. Initial Investments called three witnesses: Carletta Flowers (“Flowers”), the president and owner of Initial Investments; Harold Crittenden (“Critten-den”), a heating and cooling contractor hired by Initial Investments; and Paul Verona (“Verona”), an electrical contractor hired by Initial Investments. The Debtor *713called two witnesses: herself and Leon Mancour (“Mancour”), a consultant regarding rehabilitation and construction' of houses. The Court received into evidence Initial Investments’ exhibits 1-3, 5-6, 8-9, 11, 14, 18-19, 21-22, 24, 34, 39-44, 47, 52, 54-56 and 58 (page two only), and the Debtor’s exhibits A and C-E. Following the trial, the Court took the matter under advisement.1
Facts
. The Court finds the following facts from the record made at the trial. .
The Debtor and Flowers were long time friends. When the Debtor’s home at 16169 Prest, Detroit, Michigan (“Property”) experienced water damage in early 2012, the Debtor hired Flowers’ company, Initial Investments, to perform the restoration services. Initial Investments had been in business since 1999 and Flowers was experienced and knowledgeable about construction, restoration services and insurance.
On April 15, 2012, the Debtor signed a “work authorization” (“Work Authorization”) (exhibit 1) on an Initial Investments form. The Work Authorization stated that Initial Investments would perform restorar tion services on the Property and that the Debtor would pay for all of the work performed upon receipt of an invoice from Initial Investments. The Work Authorization contained a place for the Debtor to designate her insurance company. The Debtor designated “Hanover/Citizens” (“Hanover”). The Work Authorization provided for the Debtor to authorize Hanover “to pay all proceeds due [Initial Investments] payable under our policy directly to [Initial Investments]. If our names are included on the payment, we agree to promptly endorse said payments to [blank] (within 3 days of receipt.)” The Work Authorization stated that as the owner of the Propérty, the Debtor would pay for all the work not covered by insurance. Finally, the Work Authorization provided that “if it becomes necessary for [Initial Investments] to retain counsel” to enforce the Work Authorization, the Debtor will pay Initial Investments’ attorney fees and court costs, and that interest shall accrue at the rate of 1-1/2% per month on any unpaid balance beginning 30 days after the Debtor receives abiding statement.
About the time that the parties signed the Work Authorization, Initial Investments prepared an estimate (exhibit 2) of the cost of its restoration services. The estimate was subsequently revised once the work began. Initial Investments performed the restoration services on the Property from April 15, 2012 through November 28, 2012. In addition to the restoration services covered by the Debtor’s insurance, Initial Investments also made a number of upgrades to the Property that were requested by the Debtor but were not covered by her insurance.
The billing paperwork prepared by Initial Investments is confusing to say the least. It appears that Initial Investments had the Debtor sign various papers that were sent by Initial Investments to the City of Detroit, Hanover, and to the company that serviced the Debtor’s mortgage on the Property, Seterus, Inc. (“Seterus”). During her testimony, Flowers acknowledged that the paperwork was not altogether consistent, and admitted that even she did not know how to reconcile all the different paperwork that was introduced into evidence, at one point describing it as a “mess.”
Although she started out with “complete blind trust” in' Initial Investments, the *714Debtor became dissatisfied with its work and the relationship between the Debtor and Flowers soured. Eventually, there was a complete breakdown in their relationship. However, prior to that breakdown, and regardless of any confusion in the paperwork, it is not disputed that while the work was being performed, some payments were made to Initial Investments by the Debtor for the work not covered by insurance, by Hanover for the work covered by insurance, and by Seterus out of proceeds that it received from Hanover for the work covered by insurance.
Much of the evidence at the trial concerned the payments made by Seterus from proceeds that it received from Hanover. On May 23, 2012, Hanover issued a three party check (exhibit D) in the amount of $45,652.91 payable to the Debt- or, Initial Investments and Seterus. The Debtor and Initial Investments both endorsed the check over to Seterus. From there, Seterus made payments to Initial Investments that were basically draws against the $45,652.91 for work as it was being performed. Although the date is not clear in the record, the first of those draws was made in the amount of $15,217.64, by means of a two party check from Seterus made payable to the Debtor and Initial Investments, which the Debtor endorsed and delivered to Initial Investments. Similarly, a second draw in the amount of $7,608.82 was made in September, 2012 by means of a two party check from Seterus made payable to the Debtor and Initial Investments, which the Debtor again received, endorsed and turned over to Initial Investments. Finally, another draw in the amount of $7,608.82 was made in October, 2012 by means of a two party check from Seterus made payable to the Debtor and Initial Investments, which the Debtor again received, endorsed and turned over to Initial Investments. Out of the $45,652.91 paid by Hanover to Seterus on May 23, 2012, Seterus disbursed a total of $30,435.28 by the end of October, 2012, in the form of three checks, each made payable jointly to the Debtor and Initial Investments, and each of which the Debtor endorsed and delivered to Initial Investments. That left a remaining balance of $15,217.63 held by Seterus out of the $45,652.91 of proceeds that it received from Hanover.
Hanover also made a separate payment for restoration services that did not go to Seterus but instead went directly to the Debtor and Initial Investments. On September 24, 2012, Hanover issued a two party check (exhibit E) in the amount of $10,910.97 made payable jointly to the Debtor and Initial Investments. This check was for work required in bringing the Property up to code and for permit fees. Like the three draws from Seterus, the Debtor received this check, endorsed it and delivered it to Initial Investments.
Apart from the payments made by Hanover or by Seterus out of proceeds from Hanover, the Debtor herself also made payments to Initial Investments totalling $7,500.00.
Although the Debtor endorsed and turned over to Initial Investments four separate checks from Hanover and Seter-us, and made payments on her own to Initial Investments, the Debtor was becoming increasingly dissatisfied with the work that Initial Investments performed. At some point the Debtor decided that she was not going to make any more payments herself, nor endorse any more insurance checks to Initial Investments.
When Initial Investments finished its work on the Property, a final inspection was conducted on November 28, 2012. Notwithstanding the Debtor’s dissatisfaction, Initial Investments’ work was approved both by the City of Detroit (exhibit 11) and by QBE Inspection (“QBE”), the inspector for Seterus.
*715On December 4, 2012, Initial Investments sent the Debtor a “Final Invoice” (exhibit C) for $88,131.85, representing the cost of all of its services, including both those that were covered by insurance and all of the upgrades to the Property requested by the Debtor that were not covered by insurance. The Final Invoice stated that there was an “outstanding balance due immediately” of $34,285.60. On December 5, 2012, Initial Investments sent Seterus a “demand for payment in full” (exhibit 52) requesting final payment under the Work Authorization. According to the demand, the outstanding balance of $34,285.60 was made up of: (i) the remaining draw of $15,217.63 still held by Seterus out of the $45,659.91 proceeds it had received from Hanover; (ii) insurance depreciation and deductible of $16,550.97; and (iii) revisions and upgrades of $2,517.00 owed by the Debtor.
Despite the fact that Initial Investments’ work had been inspected and approved by both the City of Detroit and by QBE, the Debtor refused to sign the bottom of the Work Authorization acknowledging that the work was completed and approved, refused to endorse and deliver any more checks from Seterus and Hanover, and refused to make any further payments on her own to Initial Investments. The Debt- or denied that Initial Investments was owed anything more for the work it had performed on the Property, and drew up a list of complaints (exhibit 41) that she sent to the State of Michigan, the City of Detroit and Hanover. Further, to rectify what she believed to be problems with the work performed by Initial Investments, the Debtor went out and hired her own contractors to alter some of Initial Investments’ work.
On December 20, 2012, Initial Investments filed a claim of lien against the Property. On May 9, 2013, Initial Investments filed a complaint against the Debtor in the Wayne County Circuit Court, case no. 2013-006120-CH (“Wayne County Lawsuit”), alleging breach of contract and seeking foreclosure of the lien. Hanover and Seterus were also named as defendants in the Wayne County Lawsuit. Although the record is silent as to the timing and the circumstances, the’ Debtor and Flowers agree that the court in the Wayne County Lawsuit eventually ordered Seter-us to place on deposit with that court a check in the amount of $15,217.63, and that Seterus complied with the order. The Wayne County Lawsuit was stayed as to the Debtor by the filing of the Debtor’s bankruptcy case. Since then, Initial Investments and the Debtor have vigorously litigated this adversary proceeding.2
As noted earlier, on the eve of the first trial date in this adversary proceeding, the parties managed to reach a settlement. On October 27, 2015, they filed a stipulation approving a settlement agreement (“Settlement Agreement”) (exhibit 56). On October 28, 2015, the Court entered an order (“Order Approving Settlement”) approving the Settlement Agreement. The Settlement Agreement recites that the Debtor disputes the amount claimed to be owing by her to Initial Investments. Notwithstanding this dispute, the Settlement Agreement provides that this adversary proceeding will be settled and dismissed upon receipt by Initial Investments of two checks. Recital H of the Settlement Agreement begins as follows: “According to Initial Investments, Hanover has issued checks payable to [the Debtor] and Initial Investments _” Recital H then de*716scribes two checks as being in the amount of $15,550.97 and $15,217.63, and refers to them collectively as the “Insurance Proceeds.” Recital L of the- Settlement Agreement states that Hanover is holding $15,550.97 of the Insurance Proceeds (“Hanover Proceeds”), and that the remaining Insurance Proceeds of $15,217.63 are being held in escrow in the Wayne County Lawsuit (“Seterus Proceeds”). Basically, the. Settlement Agreement provides that if the Insurance Proceeds - consisting of these two amounts - are delivered to Initial Investments, this adversary proceeding will be dismissed and the Debtor and Initial Investments will mutually release each other, without any further payment by the Debtor and without any further claim by Initial Investments. The Settlement Agreement binds the Debtor and Initial Investments to execute and deliver any documents reasonably necessary in order to effectuate the purposes of the Settlement Agreement.
Because the Settlement Agreement - including the dismissal of the adversary proceeding — was predicated on Initial Investments receiving the Insurance Proceeds, consisting of the two checks described in the Settlement Agreement, the Court adjourned the trial. In the Order Approving Settlement, the Court directed the Debtor and Initial Investments “to take the appropriate steps as expeditiously as possible to cause the Insurance Proceeds to be remitted to Initial Investments.” Further, because the Settlement Agreement did not provide for the dismissal of the adversary proceeding until such time as Initial Investments actually received the Insurance Proceeds, the Order Approving Settlement stated that the Court would monitor the progress of the parties in obtaining those proceeds by scheduling a status conference approximately 90 days later, on January 25, 2016. The Order Approving Settlement provided that the status conference would be can-celled if Initial Investments received the Insurance Proceeds prior to the date of the status conference.
Following entry of the Order Approving Settlement, the parties ran into difficulty obtaining the Seterus Proceeds from the Wayne County Circuit Court. As a result, Initial Investments filed a motion in this Court to assist it in obtaining those funds. Because of the pendency of that motion, the Court adjourned the status conference until March 7, 2016, Fortunately, by the adjourned status conference date, Initial Investments had received word from the Wayne County Circuit Court that it would soon release the Seterus Proceeds to Initial Investments, and it did just that.
Unfortunately, a more serious problem surfaced with respect to the Hanover Proceeds. At the adjourned status conference on March 7, 2016, Initial Investments informed the Court that it had not received the Hanover Proceeds from Hanover. Worse still, Initial Investments informed the Court that it had now learned for the first time, that Hanover no longer held the Hanover Proceeds. Because they did not yet know all of the facts regarding what had happened to the Hanover Proceeds, the attorneys for the Debtor and Initial Investments requested . that the Court again adjourn the status conference to give them time to further investigate. The Court adjourned the status conference to April 11, 2016.
At the adjourned status conference, Initial Investments told the Court it had now learned that in fact, more than three years earlier, in December, 2012, Hanover had issued a two party check (“Hanover Check”) in the amount of $15,550.97, made payable jointly to the Debtor and Initial Investments. Rather than endorsing the Hanover Check and delivering it to Initial Investments when she received it, it turns out that the Debtor had instead returned it *717to Hanover and somehow got Hanover to issue another check (page 2 of exhibit 58) on April 19, 2013 in the identical amount, only this time the check was made payable solely to the Debtor, and the Debtor promptly cashed it. As a result, it was now clear that one of the conditions under the Settlement Agreement for dismissal of the adversary proceeding - receipt of the Hanover Proceeds — could not be met.
Initial Investments accused the Debtor of perpetrating a fraud by inducing Initial Investments to enter the Settlement Agreement when she knew all along that the Settlement Agreement could not be performed because the Hanover Check had previously been sent by Hanover to the Debtor, returned by the Debtor to Hanover, and replaced by Hanover with a check made payable solely to the Debtor, that the Debtor had already negotiated. Outraged by these facts, and with the trial of the adversary proceeding having now been delayed for months, Initial Investments requested the Court to reschedule the trial. Because the Settlement Agreement could not be performed without the Hanover Proceeds, the Court agreed that the adversary proceeding would now have to proceed to trial.
Having now fully considered the evidence adduced at trial, the Court finds that Initial Investments did the work that it was hired to do to restore the Property. Flowers testified credibly, supported by extensive documentary evidence, that the work was performed pursuant to the Work Authorization, and that it was approved both by the City of Detroit and by QBE, despite the Debtor’s failure in some instances to provide product ’ specifications by required deadlines. The credible testimony of Crittenden and Verona corroborates Flowers’ testimony that all of the work that Initial Investments was hired to perform was fully performed.
Although the Debtor testified that Initial Investments did not fully perform all of the work that it had agreed to perform, and that some of the work that it did perform was defective, the Court does not credit that testimony. The Court has no doubt that the Debtor sincerely believes that the work was unfinished and deficient. But that does not prove that it was, or that the Debtor’s belief is factually accurate.
The only evidence in the record that even arguably supports the Debtor’s testimony regarding Initial Investments’ work came from Mancour and his report (exhibit H). As noted earlier, the Court took under advisement the question of whether Mancour’s report should be admitted into evidence. The Court did so because the parties had agreed during trial to accommodate Maricour’s schedule by allowing the Debtor to call Mancour as a witness out of sequence during the presentation of Initial Investments’ case in chief. At that time, it was not clear to the Court whether the report would assist the Court, as the trier of fact, to understand and determine any fact at issue in this adversary proceeding. Now that the record is complete, and the Court has had the opportunity to consider the report in the context of the entire record, the'Court finds that the report must be excluded from the evidence. The report is based entirely on Mancour’s observations about the Property that he made during two inspections, one on December 9, 2013 and the other in July, 2014. Both of these inspections took place more than a year after Initial Investments completed its work. The record shows that by the time of these two inspections, the Debtor had hired her own contractors to work on the Property after Initial Investments was done. As a result, theré is no way to tell whether any of Mancour’s after-the-fact observations about the Property pertain to work performed by Initial Investments, or by someone else that the *718Debtor subsequently hired, or were caused by the Debtor’s failure to provide timely product specifications. The report does not assist the Court in understanding or determining any facts at issue in this adversary proceeding. Therefore, the Court sustains Initial Investments’ objection to its admission. Moreover, to the extent that Mancour testified during trial about Initial Investments’ work, the Court gives no weight to such testimony because it is directly refuted by the fact that Initial Investments’ work was approved upon completion both by the City of Detroit and QBE. The evidence in the record establishes that the Debtor was without factual basis for the complaints that she made.
The Court finds that Initial Investments’ work was fully performed pursuant to the Work Authorization and that Initial Investments was owed the sum of $83,131.85 for the work that it performed. Of that amount, the evidence shows that, before the Debtor filed bankruptcy, Initial Investments received the following payments:
$15,217.64 from Seterus
$7,608.82 from Seterus
$7,608.82 from Seterus $10,910.97 from Hanover
$7,500.00 from the Debtor
$48,846.25 Total payments received by Initial Investments.
After application of these payments to the invoiced amount, the Court finds that there was an outstanding debt owing by the Debtor to Initial Investments in the amount of $34,285.60 as of the petition date. The Court rejects the defenses asserted by the Debtor that the work was not performed in a workmanlike quality or manner because they are not supported by the evidence. As of the date of the Debt- or’s Chapter 7 petition, Initial Investments held a valid and enforceable pre-petition claim against the Debtor in the amount of $34,285.60.3
Initial Investments’ complaint alleges that there were two checks that the Debt- or refused to endorse and deliver to Initial Investments — one for the Hanover Proceeds and one for the Seterus Proceeds. The evidence shows that there was actually only one check (i.e., the Hanover Check) that the Debtor received and refused to endorse or deliver. In contrast to the Hanover Proceeds, the evidence does not show that there was ever a check received by the Debtor for the Seterus Proceeds. The Court infers from the evidence in the record that Seterus did not issue a check for the Seterus Proceeds because the Debtor refused to sign the bottom of the Work Authorization acknowledging that the work was completed and approved. Instead, Set-erus held the Seterus Proceeds until it was ordered by the court in the Wayne County Lawsuit to deposit the Seterus Proceeds with that court. Ultimately, despite the Debtor’s wrongful refusal to approve the work, Initial Investments has now received the Seterus Proceeds. After application of the Seterus Proceeds of $15,217.63 to its pre-petition claim, Initial Investments is now owed a balance on its claim of $19,067.97, plus attorney fees, costs and interest.
As for the Settlement Agreement, the Court finds from the Debtor’s own testimony that she knew at the time she made the Settlement Agreement that Hanover no longer held the Hanover Proceeds. The Debtor knew that she had received the Hanover Check three years earlier, had returned it to Hanover, and somehow convinced Hanover to give her a check made payable only to her, on April 24, 2013, in *719the identical amount of the Hanover Check.
Discussion
Burden of Proof
As the plaintiff, Initial Investments has the burden of proving each of the elements for nondischargeability “by a preponderance of the evidence. Further, exceptions to discharge are to be strictly construed against the [plaintiff].” Rembert v. AT&T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998) (citing in part Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)) (other citations omitted).
Section 523(a)(4)
Section 523(a)(4) of the Bankruptcy Code excepts from discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny ...Initial Investments contends that the debt owed to it by the Debtor is non-dischargeable under each of these sub-parts of § 523(a)(4). The Court will deal with them in sequence.
The Sixth Circuit has held that defalcation while acting in a fiduciary capacity for purposes of § 523(a)(4) requires that a plaintiff prove a preexisting fiduciary relationship in the form of an express trust or technical trust, that there has been a breach of that fiduciary relationship and a resulting loss. Patel v. Shamrock Floorcovering Services, Inc.’ (In re Patel), 565 F.3d 963, 968 (6th Cir. 2009). Further, the Sixth Circuit has explained that to establish the existence of an express trust, the plaintiff “must demonstrate (1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary.” Id, (internal quotation marks and citation omitted).
Initial Investments argues that the Work Authorization constitutes an express trust because it states that the Debtor authorized her insurance company to pay proceeds to Initial Investments and obligates the Debtor to “promptly endorse” to Initial Investments any payments that it receives. The Debtor makes two arguments in response. First, the Debtor points out that the space provided on the Work Authorization to indicate to whom the endorsements should be made was left blank. Second, the Debtor argues that the Work Authorization does not contain sufficient language to establish an express trust as required by the Sixth Circuit.
The Debtor’s first argument is not persuasive. Flowers testified credibly that the space provided on the Work Authorization to indicate the name to whom the endorsements should be made was inadvertently left blank and should have identified Initial Investments. The Debtor did not dispute this explanation during her testimony and there is no other contrary evidence in the record. The Court rejects the Debtor’s argument that the inadvertent failure to complete this blank space precludes the Court from finding that the Work Authorization creates a trust.
The Debtor’s second argument is more persuasive. The Court agrees that the Work Authorization does not state an intention to create a trust nor does it refer to the Debtor as a trustee. Further, it does not describe any payments received by the Debtor as a trust res and does not designate Initial Investments as a definite beneficiary. To be sure, the Work Authorization expressly obligates the Debtor to pay for the services performed by Initial Investments. And it expressly obligates the Debtor to promptly endorse insurance payments that the Debtor receives for such work over to Initial Investments. The Debtor’s failure to perform on those obligations unquestionably breached her contract. But that is all. The Work Authorization lacks the necessary elements to make it an express trust under controlling Sixth Circuit precedent for purposes of *720§ 523(a)(4). Without an express trust, the Debtor did not have a fiduciary relationship to Initial Investments for purposes of § 523(a)(4).
Even if the Court were to accept Initial Investments’ characterization of the Work Authorization as a trust, the evidence does not show that there was defalcation by the Debtor. In Bullock v. BankChampaign, N.A., — U.S. -, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), the Supreme Court stated that- defalcation for purposes of §, 523(a)(4) requires an intentional wrong. The Supreme Court explained that defalcation includes conduct “that the fiduciary knows is improper [and] also reckless conduct of a kind that the criminal law often treats as the equivalent.” Id. at 1759.
The crux of Initial Investments’ complaint is that the Debtor refused to endorse, and deliver what it alleges were two checks, one from Hanover and one from Seterus. As it turns out, the evidence shows that there was only one check that the Debtor actually received: the Hanover Check. There is no evidence that the Debt- or received a check from Seterus, let alone that she committed some intentional wrong with respect to any check from Seterus. In any event, and as noted earlier, Initial Investments has now received the Seterus Proceeds from the court in the Wayne County Lawsuit. Therefore, there is no longer any unpaid debt relating to the Seterus Proceeds. Receipt of the Seterus Proceeds by Initial Investments moots any defalcation claim regarding these proceeds. That just leaves Initial Investments’ defalcation claim as to the one check that was issued: the Hanover Check.
The Debtor admitted during her testimony, and there is no contrary evidence in the record, that she did not endorse and deliver the Hanover Check to Initial Investments when she received it in late December, 2012. The Debtor explained that the reason that she did not do so was because she did not believe that the work had been performed in a satisfactory manner in compliance with the terms of the Work Authorization. According to the Debtor, Initial Investments was not owed the invoiced amount. The Debtor’s testimony that she was dissatisfied is credible and is supported by documentary evidence (exhibit 41). Even Flowers readily acknowledged during her own testimony that the Debtor was dissatisfied. The Court has already found that the Debtor’s belief was wrong, and that Initial Investments did the work it agreed to do, the work was fully approved, and the Debtor owed Initial Investments the invoiced amount. But the uncontroverted evidence also proves that the reason why the Debtor did not endorse and deliver the Hanover Check when she received it was because she held a sincere, albeit incorrect, belief that the money was not owed to Initial Investments.
There is no allegation, nor any evidence, that the Debtor forged Initial Investments’ signature or otherwise unlawfully negotiated the Hanover Check. The Debtor’s conduct in this case — refusing to pay for what she considered to be subpar work — is simply not the type of intentional or criminal conduct described in Bullock that constitutes defalcation. The Work Authorization does not constitute an express trust, but even if it does, the evidence does not support a finding of defalcation with respect to the Hanover Check.
Nor does the evidence support a finding that the Debtor’s conduct constitutes either embezzlement or larceny. “Federal common law defines embezzlement as ‘the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has unlawfully come.’ ” Williams v. Noblit (In re Noblit), 327 B.R. 307, 311 (Bankr. E.D. Mich. 2005) (quoting Brady v. *721McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir.1996)). “[Ejmbezzlement requires a showing of wrongful intent.” Bullock v. Bankchampaign, — U.S.-, 133 S.Ct. at 1760 (citing cases requiring a finding of “moral turpitude,” “intentional wrong,” or “felonious intent”).
Initial Investments has now received the Seterus Proceeds, so there is no evidence that the Debtor converted or misappropriated these proceeds to her own use. As for the Hanover Check, the evidence shows that the Debtor returned the Hanover Check to Hanover which then stopped payment on it. The Debtor somehow got Hanover to stop payment on the Hanover Check and to issue another check made payable to her in an identical amount. The Debtor testified that she used the proceeds of that check to purchase materials and things to make the Property more livable again, after Initial Investments failed to properly restore the Property. The record is silent as to precisely how the Debtor obtained a check from Hanover made payable solely to her, but what the record does show is that the Debtor did not appropriate or convert the Hanover Check to her own use: instead she sent it back to Hanover.
In contrast to embezzlement, larceny requires “that the original taking must have been unlawful, and is defined as ‘the fraudulent and wrongful taking and carrying away of property of another with intent to convert such property to the taker’s use without the consent of the owner.’ ” In re Noblit, 327 B.R. at 311 (quoting Graffice v. Grim (In re Grim), 293 B.R. 156, 166 (Bankr. N.D. Ohio 2003)).
Once again, the evidence in this ease shows that Initial Investments has now received the Seterus Proceeds and that the Debtor returned the Hanover Check to Hanover. There is no evidence that the Debtor took or carried away any property of Initial Investments. The Debt- or undoubtedly breached the Work Authorization by not endorsing and turning over the Hanover Check and by refusing to sign the bottom of the Work Authorization upon Initial Investments completing the restoration services. But there is no evidence to show that the Debtor committed larceny.
Initial Investments’s, claim for nondis-chargeability under § .523(a)(4) fails.
Section 523(a)(6)
Section 523(a)(6) excepts from discharge any debt “for willful and malicious injury by the debtor to another entity or to. the property of another entity .” To prevail under § 523(a)(6), Initial Investments must prove that the Debtor acted both willfully and maliciously to injure Initial Investments or its property. An act is willful only if the actor intends not only the act itself but also the injury that results from the act, or believes that the injury is substantially certain to occur as a result of the act. Kawaauhau v; Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999); “ ‘Malicious’ means in conscious disregard of one’s duties or without just cause or excuse — ” Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986) (citing in part Tinker v. Colwell, 193 U.S. 473, 486, 24 S.Ct. 505, 48 L.Ed. 754 (1904)) (other citations omitted).
Initial Investments argues that the Debtor’s conduct regarding the Hanover Proceeds and the Seterus Proceeds constitutes a willful and malicious injury. Before considering whether the Debtor’s conduct was willful and malicious, it is first necessary to determine whether the Debtor’s conduct concerning the Hanover Proceeds and the Seterus Proceeds caused any injury.at all.
*722At the time that Initial Investments filed the complaint in this adversary proceeding, it appears to have been under the impression that there was a check for the Hanover Proceeds and a check for the Seterus Proceeds. As noted earlier, the evidence shows that there was only one check, the Hanover Check. Because Initial Investments has now received the Seterus Proceeds in full, the Court finds that there was no injury to Initial Investments or its interest in the Seterus Proceeds. At most, the Debtor’s conduct caused a delay in Initial Investments receiving the Seterus Proceeds. However, the analysis is different with respect to the Hanover Proceeds. The Debtor’s conduct prevented Initial Investments from ever receiving the Hanover Proceeds. While the Debtor and Initial Investments quarreled at trial over the nature and scope of Initial Investments’ property interest in the Hanover Proceeds, the Court need not address that issue because § 523(a)(6) requires only that there be an injury to another entity or to the property of another entity. The evidence proves that the Debtor’s conduct caused an injury regarding the Hanover Proceeds. That is sufficient for purposes of § 523(a)(6) regardless of whether the Court views the injury regarding the Hanover Proceeds to be an injury suffered by Initial Investments or an injury to its property.
The evidence also shows that the Debt- or’s conduct that caused -the injury regarding the Hanover Proceeds was willful. The Debtor’s own testimony demonstrates that she deliberately refused to endorse and deliver the Hanover Check when she first received it in December, 2012. The evidence leaves no doubt that the Debtor knew that her conduct in refusing to endorse the Hanover Check and instead returning the Hanover Check to Hanover, and causing Hanover to reissue a eheck in her name only, was substantially certain to injure Initial Investments or its interest in the Hanover Proceeds because Initial Investments would be deprived of those proceeds.
The more difficult issue is whether the Debtor’s conduct regarding the Hanover Proceeds was malicious. In other words, was the Debtor’s conduct in conscious disregard of her duties or without just cause? Initially, the Debtor endorsed and turned over to Initial Investments four separate checks that she received from insurance— three issued by Seterus, and one issued by Hanover. These four insurance checks were issued at the start of the restoration work and as the work progressed. The evidence shows that it wasn’t until later, as the work neared completion, that the Debtor had become dissatisfied with Initial Investments’ work. As a result, she decided not to endorse and deliver the Hanover Check to Initial Investments but instead to return it to Hanover and ask that another check be issued solely to her. The Debtor’s express reason for not endorsing and delivering the Hanover Check in December, 2012, was because, by that time, the Debt- or did not believe that Initial Investments had performed the restoration services in compliance with the Work Authorization. In other words, it wasn’t owed any more money. The Debtor was adamant in her belief that Initial Investments should not be paid for its work, even with funds from her insurance carrier.
These facts do not prove that the Debtor had a conscious disregard for her duties. She believed that she was under a duty to endorse and deliver insurance checks if the work was done properly and the money was owed, but not when the work was not properly performed. Rather than a disregard of her duty, the record shows that the Debtor complied with her duty when she believed that money was owed, but not otherwise. Stated another way, the Debt- or’s belief that the money was not owed by *723her in December, 2012 provided her with a justification, or excuse, for not endorsing and turning over the Hanover Check to Initial Investments. The Court has now found that there was no factual basis for this belief, and that the Debtor’s conduct was in breach of the Work Authorization. However, the evidence does not prove that the Debtor’s breach was the result of a conscious disregard of her duties.
Initial Investments’s claim for nondis-chargeability under § 523(a)(6) fails.
The Settlement Agreement
In the joint final pretrial statement and at the trial, Initial Investments requested that the Court award it sanctions and attorney fees incurred because of the Debtor’s conduct in connection with the Settlement Agreement. Although Initial Investments did not cite any legal authority to support its request, the Court has an inherent power to award sanctions and attorney fees under Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), as applied to bankruptcy courts by the Sixth Circuit in Grossman v. Wehrle (In re Royal Manor Mgmt, Inc.), 652 Fed.Appx. 330, 342 (6th Cir. 2016) and Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 477 (6th Cir. 1996). This inherent power gives the Court authority to sanction improper conduct and bad faith in order to “ ‘protect the orderly administration of justice and to maintain the authority and dignity of the court ....’” John Richards Homes Building Co., L.L.C. v. Adell (In re John Richards Homes Building Co., L.L.C.), 404 B.R. 220, 226 (E.D. Mich. 2012) (quoting Mitan v. Int’l Fid. Ins. Co., 23 Fed.Appx. 292, 298 (6th Cir. 2001)). “In addition to the inherent authority to issue sanctions as explained in Chambers, 11 U.S.C. § 105(a) grants to federal bankruptcy courts the authority to issue sanctions.” Id. at 227.
Initial Investments is justifiably angry about the time and the money that was wasted in this case by the Debtor entering into the Settlement Agreement with Initial Investments. The Debtor’s testimony unequivocally demonstrates that when the Debtor entered the Settlement Agreement on October 15, 2015, she knew that the terms of the Settlement Agreement were impossible to perform. The Debtor testified that she received the Hanover Check in late December, 2012, returned it to Hanover and procured from Hanover on April 24, 2013, another check in the identical amount made payable solely to her. Simply put, the Debtor knew there were no longer any Hanover Proceeds when she signed the Settlement Agreement. The Debtor had an affirmative obligation to inform Initial Investments and the Court of this fact, yet she failed to do so. The Debtor’s conduct resulted in a six month wild goose chase for Initial Investments. The Court finds that the Debtor acted improperly and in bad faith.
Initial Investments did not specify the amount of sanctions and attorney fees that it seeks. The only evidence at trial of the expenses incurred by Initial Investments because of the Debtor’s conduct regarding the Settlement Agreement consists of the invoices (exhibit 55) sent to Initial Investments by its attorney, Howard & Howard. Those invoices include all services rendered by Howard & Howard to Initial Investments from January, 2013 through July, 2016. The vast majority of the invoices relate to services performed pre-petition, including the Wayne County Lawsuit, and services performed post-petition in prosecuting this adversary proceeding. Those services were not necessitated by the Settlement Agreement, and would have been performed regardless of the Settlement Agreement. The only additional services described in those invoices that were caused by the Settlement Agreement *724consist of $828.00 in October, 2015, $968.00 in March, 2016, and $923.00 in April, 2016.4 Those services total $2,219.00.
The Court finds from the evidence that the Debtor should be sanctioned for her conduct regarding the Settlement Agreement. The Court further finds that a reasonable sanction in this case is the sum of $2,219.00. This sum will fully compensate Initial Investments for the additional, unnecessary attorney fees that it incurred because of the Debtor entering into the Settlement Agreement knowing that it could not be performed, and will put Initial Investments back in the position that it was in prior to the Settlement Agreement.
Conclusion
The Court holds that the Debtor owes Initial Investments $19,067.97 for work performed by it under the Work Authorization. Further, the Court holds that the Work Authorization entitles Initial Investments to recover interest and attorney fees on this debt. Initial Investments proved that the Debtor breached her contract with Initial Investments. However, Initial Investments failed to meet its burden to prove that the debt that arose from this breach of contract is excepted from discharge under § 523(a)(4) or (6) of the Bankruptcy Code.
The Court further holds that Initial Investments is entitled to a sanction against the Debtor in the amount of $2,219.00 because of the Debtor’s misconduct regarding the Settlement Agreement. The Debt- or’s misconduct regarding the Settlement Agreement caused unnecessary delay and expense in the prosecution of this adversary proceeding, but that does not mean that the pre-petition debt owed by the Debtor to Initial Investments is excepted from the discharge in the Debtor’s bankruptcy case.
The Court will enter an order consistent with this opinion.
. The Court also took under advisement the Debtor’s request to admit Debtor's exhibit H, a report prepared by Mancour. The Court now denies that request for reasons that are explained later in this opinion.
. On June 15, 2015, the Court granted Initial Investments’ unopposed motion for relief from the automatic stay in the Debtor's Chapter 7 bankruptcy case to permit Initial Investments to take action in the Wayne County Lawsuit to recover any insurance proceeds held by that court.
. This amount consists of $15,550.97 for the Hanover Proceeds; $15,217.63 for the Seter-us Proceeds; $2,517.00 for additional upgrades; and $1,000.00 for the Debtor's deductible.
. The specific time entries are October 19, 2015 (0.5 hours); October 20, 2015 (0,3 hours); March 7, 2016 (2.0 hours); March 11, 2016 (0.1 hours); March 22, 2016 (0.1 hours); and April 11, 2016 (2.3 hours). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500098/ | MEMORANDUM OF DECISION AND ORDER
■ SCOTT W. DALES, United States Bankruptcy Judge
Fighting about the entry of default with defendants who, despite missteps, clearly intend to oppose a complaint is usually a fruitless undertaking, given the strong preference of the federal courts to decide cases on the .merits. This matter is no different.
Plaintiff Dawn Johnson filed and served a four-count complaint against chapter 7 debtors Scott and Marianne Rye premised on allegations that the Ryes (i) misappropriated funds that Ms. Johnson paid them to rebuild her home after a fire, and (ii) concealed, destroyed, or failed to keep records that would permit creditors to understand their financial condition. For the first category of allegations, Ms. Johnson’s complaint seeks a non-dischargeable money judgment under 11 U.S.C. § 523(a),1 *726and for the second, she seeks an order denying the Ryes a discharge altogether, under § 727(a)(3).
Shortly after Ms. Johnson’s counsel served the complaint on the Ryes, they contacted their lawyer, Dane Bayes, Esq., to prepare their answer to the allegations. Nevertheless, the deadline for answering the complaint passed without a response from the Ryes, and the Clerk noted their default under Fed. R. Civ. P. 55(a). The following month, Ms. Johnson filed Plaintiffs Motion for Entry of Order of Non-Dischargeability of Debt and to Enter Default Judgment (the “Default Judgment Motion,” ECF No. 8), with supporting affidavit.2
The court scheduled a hearing on the Default Judgment Motion, which evidently prompted the Ryes to file an untimely pro se answer, including an explanation that they did not answer the complaint because they assumed their attorney would respond, despite his hospitalization and recuperation following a serious car accident.
When the Ryes appeared at the initial hearing on the Default Judgment Motion, the court explained that they would have to make a motion to set aside the entry of default under Fed. R. Civ. P. 55(c), establishing that the default was not the product of their culpable conduct, that Ms. Johnson would not be prejudiced by setting aside the default, and that they had a meritorious defense to the complaint. The court referred the parties to the Sixth Circuit’s oft-cited decision in United Coin Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839 (6th Cir. 1983), and adjourned the hearing on Ms. Johnson’s motion, conditioned on the Ryes’ payment of $300.00 to Ms. Johnson’s counsel for the cost of his appearance at the initial hearing.
At the adjourned hearing, the court learned that the Ryes had remitted the funds as ordered, and had retained counsel who filed a corrected Motion to Set Aside the Default under Fed. R. Civ. P. 55(c) (the “Rule 55(c) Motion,” ECF No. 21). The court again adjourned the hearing, this time to give Ms. Johnson an opportunity to respond to the Rule 55(c) Motion. After Ms. Johnson filed a brief opposing the Rule 55(c) Motion, the court held a hearing in Marquette, Michigan, on November 2, 2016, to consider the Default Judgment Motion3 and the Rule 55(c) Motion.
Under our rules, a court may set aside a default for “good cause.” Fed. R. Civ. P. 55(c) (applicable to this adversary proceeding under Fed. R. Bankr. P. 7055). Courts in our Circuit are “extremely forgiving to the defaulted party and favor a policy of resolving cases on the merits instead of on the basis of procedural missteps.” Fleet Engineers, Inc. v. Mudguard Technologies, LLC, Slip Op., No. 1:12-CV-1143, 2014 WL 12465464 (W.D. Mich. July 11,2014) (citations omitted).
To find “good cause” under Rule 55(c) the court must consider (1) whether the defendant’s culpable conduct led to the entry of default; (2) whether the defendant has a meritorious defense; and (3) whether the plaintiff would be prejudiced by setting aside the default. United Coin, *727705 F.2d at 845; see also United States v. $22,050.00 United States Currency, 595 F.3d 318, 322 (6th Cir. 2010).4
The Rule 55(c) Motion amply demonstrates that the Ryes’ failure to answer the complaint was not the product of their culpable conduct, but rather the unfortunate result of their counsel’s personal difficulties following his car accident, hospitalization, and recuperation. The e-mails attached to their pro se answer and the Rule 55(c) Motion show that, 'within days of being served with process, they contacted Mr. Bayes about their response, and he assured them he would handle it. As time passed, the correspondence shows increasing frustration with his failure to answer the complaint or move to set aside the default, and their persistent efforts to find alternative counsel, despite his assurance, at least initially, that he would take care of them.
In response to the Default Judgment Motion, they endeavored to file an answer, obviously late, but nevertheless explaining their failure to answer in time, and challenging Ms. Johnson’s version of events. The Ryes’ version of the story differs dramatically from Ms. Johnson’s, and qualifies as a meritorious defense. They admit receipt of the funds, as Ms. Johnson alleges, but explain that the building project ran into immediate roadblocks because, unbeknownst to them when they accepted the job, Ms. Johnson’s residence was in a one-hundred year flood plain. They describe their efforts to address the problem, showing that at least some of the building contract fund was applied to the project.
The court notes the argument of Ms. Johnson’s counsel that the Ryes’ proposed answer and Rule 55(c) Motion together establish liability under, not a defense to, the complaint. This is a fair reading, as the Ryes’ current counsel candidly admitted during the hearing on November 2, 2016. Nevertheless, although the Ryes may not have a defense to liability under the Michigan Building Contract Fund Act (M.C.L. § 570.151 et seq., the “MB OF A”), they clearly offer a defense to the damages. Given the liberality almost universally expressed in the Rule 55(c) cases the court has reviewed in connection with this dispute, the court is satisfied that the Ryes have a meritorious defense, at least to the § 523 counts at issue in the Default Judgment Motion, A defense addressing the measure of damages is nevertheless a defense to the complaint.
. Although Ms. Johnson’s counsel correctly argues that the Rule 55(c) Motion does not expressly offer any defense to the fourth count of the complaint under § 727(a)(3), the defense is implicit in the records attached to the Rule 55(c) Motion, as well as the-statements of their counsel in response to the questions the court posed during the hearing. Again, given the court’s predilection for reaching the merits, the Ryes have offered a meritorious defense to the complaint.
Finally, in part because of the Ryes’ candor in admitting liability under the MBCFA — a concession that will assist Ms. Johnson considerably in establishing her case — the court is satisfied that setting aside the default will not prejudice the Plaintiff. More specifically, counsel’s concerns about the Ryes’ character and their supposedly “deceitful and evasive responses” catalogued in the opposing brief may be addressed at trial, but do not persuade the court that setting aside the default will itself prejudice Ms. Johnson. Moreover, *728the involvement of Mr. Quinnell will go a long way towards ensuring that the Ryes comply with their obligations in connection with this proceeding.
The court’s decision to set aside the entry of default forecloses entry of default judgment, as Ms. Johnson’s counsel suggested during the hearing. And, because Ms, Johnson only moved for judgment on part of her complaint (ie., two of her three counts under § 523(a)), the court would have denied the motion under the single judgment rule in any event. See Fed. R. Civ. P. 54(b).5 The court, therefore, will deny the Default Judgment Motion.-
NOW, THEREFORE, IT IS HEREBY ORDERED that the Rule 55(c) Motion (EOF No. 21) is GRANTED and the Default Judgment Motion (EOF No. 8) is DENIED.
IT IS FURTHER ORDERED that the Ryes shall file a response to the complaint within 14 days after entry of this Memorandum of Decision and Order, and the court will thereafter schedule a pretrial conference in the usual manner.
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 David E. Bulson, Esq. and Timothy C. Quinnell, Esq.
IT IS SO ORDERED.
. Unless otherwise indicated, statutes identified by section number refer to specific sec*726tions of the Bankruptcy Code, Title 11, United States Code.
. Through this motion, Ms. -Johnson only sought relief on the first two counts of her complaint, under § 523(a)(2)(A) and (a)(4); she did not ask for judgment under §§ 523(a)(6) or 727(a)(3).
. During the hearing, Ms. Johnson’s counsel elected to postpone any argument on the De- . fault Judgment Motion until after the court ruled on the Rule 55(c) Motion, reasoning that an order granting the latter would moot the former.
. The court acknowledges that a different, and stricter, standard applies to setting aside a default judgment rather than the entry of default. See Fed. R. Civ. P. 55(c) (referring to Fed. R. Civ. P. 60 when the default ripens into a judgment); Waifersong, Ltd. v. Classic Music Vending, 976 F.2d 290, 292 (6th Cir. 1992).
. A plaintiff who brings a case under § 727 cannot simply or unilaterally dismiss its challenge to a debtor’s discharge given the possible effect of such relief on non-parties. See Fed. R. Bankr. P. 7041. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500099/ | MEMORANDUM OF DECISION AND ORDER
HONORABLE SCOTT W. DALES, Chief United States Bankruptcy Judge
I. INTRODUCTION
Martin Holmes, Esq., filed a fee application (the “Fee Application”) pursuant to 11 U.S.C. § 330(a)(4) seeking, approval of additional fees in the amount of $2,369.95 for representing chapter 13 debtors Sean Allen Long and Meredith Louise Long (the “Debtors”) in connection with their bankruptcy case. What distinguishes this fee application from most is that Mr. Holmes filed it after his clients had completed their payments under the chapter 13 plan. For the following reasons, the court will grant the Fee Application in part, and deny it in part.
II. JURISDICTION
The United States District Court for the Western District of Michigan has jurisdiction over the Debtors’ chapter 13 case pursuant to 28 U.S.C. § 1334(a), but has referred the exercise of that jurisdiction to the United States Bankruptcy Court pursuant to 28 U.S.C. § 157(a) and W.D. Mich. LCivR 83.2(a). Applications for approval of attorney fees under § 330 are “core proceedings” within the meaning of 28 U.S.C. § 157(b)(2)(A) and (B). The court, therefore, has authority to enter a final order resolving the Fee Application, at least to the extent set forth herein.
III.ANALYSIS
Although the Fee Application drew no objection after appropriate service, the court nevertheless set it for hearing, which took place on November 9, 2016 in Grand Rapids, Michigan. Only Mr. Holmes appeared at the hearing. After a brief colloquy with him and a review of the docket, the court has determined that the follow: ing procedural and historic facts are not in dispute.
The Debtors retained Mr. Holmes to represent them in connection with their chapter 13 .case. With the assistance of counsel, they filed their chapter 13 petition on June 15, 2013, together with a proposed plan, which they amended twice before the final confirmation hearing (the “Plan,” EOF Nos. 3, 16 & 22). The court confirmed the Plan on August 14, 2013, approving Mr. Holmes’s initial “no-look” fee for services rendered through confirmation in the amount of $3,000.00. Cf. Memorandum Regarding Allowance of Compensation and Reimbursement of Expenses for Court-Appointed Professionals (as amended effective Oct. 1, 2013) at ¶ 16 (Exhibit 5 to the Local Bankruptcy Rules for the Western District of Michigan, hereinafter the “Fee Memorandum”).
From the record it appears that the Debtors performed their obligations under the Plan largely, though not entirely, without controversy. On September 2, 2016, chapter 13 trustee Brett N. Rodgers (the “Trustee”) filed the Trustee’s Report of Plan Completion (the “Trustee’s Report”). The Trustee’s Report prompted Mr. Holmes to file the Fee Application — his first (and' final) itemization of fees, and expenses — on September 12, 2016 — seeking approval of additional fees in the amount of $2,369.95. Ten days later the *730court entered the Order of Discharge (the “Discharge,” EOF No. 75), absolving both Debtors from “all debts provided for by” the Plan, with specific exceptions as noted in § 1328(a). Evidently anticipating that the Trustee would not be making additional payments, the prayer for relief at the conclusion of the Fee Application requested an order authorizing payment of fees “from the Bankruptcy Estate or to the extent that Funds are not available from the Bankruptcy estate from the Debtor directly.” See Fee Application at p. 2.
The timing of the Fee Application, and counsel’s request to authorize payment from the Debtors directly, caught the court’s attention, prompting it to set a hearing. The court has carefully reviewed the itemization included with the Fee Application and has no reason to quibble with Mr. Holmes’s hourly rates, or the amount of time he spent serving his clients in connection with their chapter 13 case. Both seem reasonable, considering the “relevant factors” enumerated in § 330(a)(3), which the court typically applies regardless of whether it considers fees for representing debtors under §§ 329 or 330. In re Acevedo, Slip Op. Case No. DG 12-06576, 2015 WL 3373030 (Bankr. W.D. Mich. Jan. 26, 2015) (declining to decide whether standards under § 329 or § 330(a) are identical).1 The itemization includes numerous entries for which Mr. Holmes does not seek payment (mostly involving telephone calls from his clients and even for traveling to and from court), and Mr. Holmes does not seek recompense for preparing the Fee Application, though many practitioners routinely request payment for doing so or as the statute contemplates. See Fee Memorandum at ¶ ll(reasonable time for preparing and reviewing application “may be compensable”); 11 U.S.C. § 330(a)(6) (compensation awarded for preparing a fee application must be reasonable). The time entries seem perfectly measured and appropriate. Under the circumstances, the fees of Mr. Holmes are eminently reasonable, and certainly not excessive. 11 U.S.C. § 329(b).
At the hearing, the court inquired whether the unpaid fees were discharged pursuant to § 1328(a), as the Honorable John T. Gregg recently held on similar facts in In re Cripps, 549 B.R. 836 (Bankr. W.D. Mich. 2016). Mr. Holmes acknowledged this authority, but responded with a thoughtful argument based on the fact that (i) the court has not yet approved his fee claim; and (ii) it is too late to pay it as an administrative expense. Therefore, as the argument goes, the court should not regard his claim as an approved administrative expense “provided for” by the Plan. See Tr. at 2:24 through 3:20. In other words, because the unblessed fee claim is not “provided for” by the Plan, it is not included among the debts subject to the Discharge under § 1328(a). This textual argument may find support in the language of the Plan, specifically with respect to the treatment of attorney fee claims,2 *731but it is not without substantial counterpoints, including Cripps, supra, among other authorities.3
Ultimately, resolution of the issue is a matter of interpreting the plan. Wolff v. Johnson (In re Johnson), 344 B.R. 104, 107-08 (9th Cir. BAP 2006) (chapter 13 plan may provide for direct payment of chapter 13 counsel fees by debtor). The court, however, is unwilling to decide at the present time whether counsel’s fees are subject to the Discharge, or not, because Mr. Holmes indicated that his clients are willing to pay him directly. As the Discharge itself notes, nothing in the Bankruptcy Code precludes a debtor from voluntarily paying a discharged debt. See Discharge at p. 2 (citing 11 U.S.C. § 524(f)). If, as Mr. Holmes reports, his clients intend to pay him after the entry of their Discharge, the court perceives no ripe dispute and therefore no reason to decide whether the Debtors must pay him. In other words, the absence of a dispute on the point persuades the court not to declare the rights of the parties on the issue before it is necessary to do so. Cf. 28 U.S.C. § 2201 (declaratory relief requires “case of actual controversy”); see also In re Kavanaugh, Slip Op. Case No. 14-10694, 2016 WL 3355850 (Bankr. D. Me. June 9, 2016) (declining to decide whether debtors will remain liable for payment of approved chapter 13 counsel fees after discharge, and reserving the “complicated” issue for another day).
Moreover, the court typically does not declare whether particular debts are dischargeable, or not, without an adversary proceeding, let alone without an adversary. See Fed. R. Bankr. P. 7001(6) & (9).
IV. CONCLUSION AND ORDER
As noted above, it is not clear whether Mr. Holmes filed the Fee Application to create an administrative claim under § 330 and 503(b) or to simply invoke the court’s supervisory authority under § 329 and Fed. R. Bankr. P. 2016 & 2017. See infra at n. 1. The confusion is understandable, especially where payment will not come from property of the estate.4 Accordingly, the court will simply declare that the fees are reasonable and that the Debtors may pay them if they wish. Given the Trustee’s uncontested notice of plan completion and the entry of the Discharge, the Trustee will not be required to pay Mr. Holmes or otherwise take any action in response to this approval.
NOW, THEREFORE, IT IS HEREBY ORDERED that the Fee Application is GRANTED to the extent it seeks approval of additional fees in the amount of $2,369.95 to be paid by the Debtors if they wish, and DENIED without prejudice to the extent it seeks a declaration that Mr. Holmes’s claim is excepted from discharge.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Memoran*732dum of Decision and Order pursuant to Fed. R. Bankr. P. 9022 and LBR 5005-4 upon Sean Allen Long, Meredith Louise Long, Martin M. Holmes, Esq., attorney for Debtors, Brett N. Rodgers, Esq., Chapter 13 Trustee, and the Office of the United States Trustee.
IT IS SO ORDERED.
. It is not dear whether counsel is seeking the court’s approval under § 329 or § 330. For example, the Fee Application cites §§ 330(a) and 503(b), but at the hearing Mr. Holmes argued that it is too late to recognize any administrative claim. Compare Fee Application at pp. 1 ("Applicant is seeking compensation pursuant to 11 USC § 503(b)”) & 2 ("[T]his petition complies with all provisions of 11 USC 330(a)”) with Transcript of Hearing Held November 9, 2016 (hereinafter "Tr.”) at 3:10-14 (disclaiming administrative claim given the timing of the Fee Application).
. The Plan authorized the Trustee to pay attorney fees and expenses “as allowed by the Order Confirming the Plan or such additional attorney fees as are awarded pursuant to an Order of the Court ...” See Plan at ¶ IV(H)(4) (emphasis added). It also contemplates payment of “[a]dditional ordered attorney fees.” Id. at ¶ IV(K) (emphasis added).
. See, e.g,, In re Conner, 559 B.R. 526, 531-32, 2016 WL 5794636, at *4 (Bankr. D.N.M. Oct. 4, 2016) (citing In re Hanson, 223 B.R. 775 (Bankr, D. Or, 1998) and other authorities holding post-confirmation attorney fees are discharged even if not paid in full if provided for by the plan)'.
. Compare Acevedo, supra (suggesting that state law, rather than court approval under § 330(a)(4), creates right to payment in favor of counsel) with In re Hirsch, 550 B.R. 126 (Bankr. W.D. Mich. 2016) (fees are not earned by chapter 13 counsel until approved by court) and In re Anderson, 253 B.R. 14, 20 (Bankr. E.D. Mich. 2000) (same). Cases involving compensation of professionals retained under § 327, such as In re Sweports, Ltd., 777 F,3d 364 (7th Cir. 2015) and In re 5900 Associates, Inc., 468 F.3d 326 (6th Cir. 2006), may have less force in chapter 13 cases involving professionals who represent the debtor (rather than the estate or an official committee), and whose retention, though subject to scrutiny under § 329, does not require court approval. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500101/ | MEMORANDUM OPINION
Janet S. Baer, United States-Bankruptcy Judge
Plaintiff John H. Sammarco, one-time business partner of debtor-defendant David L. Dini, filed a nine-count adversary complaint against Dini, seeking a determination that he is not entitled to a discharge pursuant to 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4), and (a)(7).1 This matter is now before the Court on the claims that remain at issue in the complaint, those in Counts I, V, and VII. For the reasons set forth below, the Court finds that Sammarco has failed to meet his burden to establish the elements required under the applicable provisions of § 727(a). As such, Dini’s discharge will not be denied.
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).
BACKGROUND
The pertinent facts are drawn from the complaint, the Court’s docket, and the testimony and various exhibits received into evidence at a two-day bench trial that was held on September 13 and 27, 2016. Both Dini and Sammarco testified at that trial, as well as four other witnesses: (1) Elizabeth McDonough, former controller at National Telerep Marketing Systems, Ltd. (“NTMS”); (2) Gregory John Woodin, vice president of credit administration at Signature Bank (the “Bank”); (3) Kevin Bastu-ga, executive vice president at the Bank; and (4) J. Ryan Potts, attorney for the Bank. As established by the applicable documents and the trial testimony, the facts that are relevant to Sammarco’s objection to Dini’s discharge can be summarized as follows.
*744In the early 1990s, Dini founded NTMS, a telemarketing company that sold unused air time to businesses throughout -the United States seeking to advertise on the radio. (Trial Tr. vol. 1, 34:3-20, 167:11-13, Sept. 13, 2016; Trial Tr. vol. 2, 56:12-16, 154:9-11, Sept. 27, 2016,) At its height, NTMS employed approximately thirty salespeople and other staff. (Trial Tr. vol. 2, 177:10-15.) The company operated out of a building in Mount Prospect, Illinois (the “Mount Prospect Property”), which was owned by a trust held by Dini’s wife Laura (the “Dini Trust”). (PL’s Ex. 19 at 282; Trial Tr. vol. 1, 179:25-180:1; Trial Tr. vol, 2, 192:14-24.).Although Dini was responsible for the financial health of NTMS and had a bachelor’s degree in accounting, his primary duties as sole owner and president of the company were not bookkeeping or accounting; rather, he focused on sales, training, and management. (Trial Tr. vol. 1, 39:22-25, 41:6-9; Trial Tr. vol. 2, 53:7-14, 150:19-22,155:5-156:20.)
Several years after NTMS’s genesis, Sammarco, a friend of Dini’s father, met with Dini to talk about his interest in the company. (Trial Tr. vol. 2, 211:18-19, 229:24-231:7.) Subsequently, in 1997, Sam-marco became a shareholder of NTMS through the purchase of stock for which he paid $720,000. (Trial Tr. vol. 2, 56:17-22,. 195:18-196:1, 231:8-12, 232:1.) As a partner at NTMS over the next eleven years, Sammarco worked in various areas of the .company, including sales, operations, collections, customer service, accounting, recruitment, and training. (Trial Tr. vol. 2, 231:20-232:14.)
The Stock Buyout and the Decline of NTMS
In May 2008, Dini and Sammarco came to an agreement whereby Dini would buy out Sammarco’s interest in NTMS. (Trial Tr. vol. 1, 111:6-10, 178:12-24; Trial Tr. vol. 2, 56:23-24, 232:2-3, 233:3-17.) Accordingly, on May 6, 2008, Dini agreed to purchase Sammarco’s NTMS stock for $1,300,000. (Trial Tr. vol. 2, 233:3-17, 234:10-12.) Sammarco was paid $400,000 as a down payment. (Trial Tr. vol. 2, 161:4-5, 233:18-20.) The remaining $900,000 of the purchase price plus interest was to be paid via a promissory note in monthly installments of $17,087.39 over five years. (Trial Tr. vol. 2, 68:24-69:1, 160:20-161:3, 196:20-25,233:21-22,234:24-235:9.)
NTMS made the $400,000 down payment on Dini’s behalf by borrowing on a working capital line of credit in the principal amount of $600,000 that it had obtained from the Bank in February 2008 (the “NTMS Loan”). (See Pl.’s Exs. 1-4; Trial Tr. vol. 1, 167:18-169:2; Trial Tr. vol, 2, 157:10-15, 161:14-19, 163:14-19.) The primary purpose of that loan, in fact, was to buy out Sammarco’s interest in NTMS, (Trial Tr. vol. 1, 175:24-177:3; Trial Tr. vol. 2, 56:23-57:4, 157:10-15, 161:14-19.) In addition to the loan agreement itself, a promissory note and commercial security agreement were also executed, the latter providing the Bank with a security interest in all of NTMS’s assets. (PL’s Exs. 1 & 2; Trial Tr. vol. 1, 170:5-12.) The three documents were signed by Dini in his capacity as president of NTMS. (See PL’s Exs. 1, 2, 4.) Dini also signed a commercial guaranty in connection with the loan which ensured his personal liability for the company’s obligation. (PL’s Ex. 3; Trial Tr. vol. 1, 170:17-171:17.)
In August 2008, subsequent to' Dini’s purchase of Sammarco’s NTMS stock, Dini, his wife Laura (“Laura”), and the Dini Trust (together, the “Group Borrowers”) obtained a loan from the Bank in the principal amount of $700,000 (the “Dini Loan”). (See PL’s Exs. 5 & 6; Trial Tr. vol. 1, 180:11-21; Trial Tr. vol. 2, 59:17-20; *745157:16-19.) Pursuant to the loan agreement,' the loan proceeds were to be disbursed as follows: $400,000 to pay down the NTMS Loan, $300,000 to pay off the second mortgage on Dini’s home in Kil-deer, Illinois (the “Kildeer Property”), and any remaining amounts to be used by the Group Borrowers for working capital purposes. (Pl.’s Ex. 6; Trial Tr. vol. 1,182:12-183:20; Trial Tr. vol. 2, 61:13-62:10,161:20-24.) The note in connection with the Dini Loan was secured by a second position on three pieces of real estate: the Kildeer Property, the Mount Prospect Property, and a condominium owned by Dini on Lar-rabee Street in Chicago (the “Larrabee Property”). (Pl.’s Ex. 5; Trial Tr. vol. 1, 179:22-180:5.) The loan term was one year; thus, the Group Borrowers had to either repay the loan within that time or renew it. (Pl.’s Ex. 5; Trial Tr. vol. 1, 180:22-181:2, Trial Tr. vol. 2,158:14-159:6.) Thereafter, the Group Borrowers, NTMS, and the Bank entered into a series of agreements that modified and extended both the NTMS Loan and the Dini Loan. (See PL’s Exs. 8 & 10-15.) Those agreements provided for, among other things, the cross-col-lateralization of the two loans.3 (See id.)
After making the down payment to Sam-marco for the NTMS stock, Dini began making monthly payments on the $900,000 due under the note. (Am. Pretrial Statement at 6; see Def.’s Ex. 2; Trial Tr. vol. 1, 111:16-22.) Those payments, while made by Dini, came from NTMS through a mechanism called “Loan to Shareholder,” through which Dini was 'paid compensation by the company when money was available, rather than on any kind of regular basis. (Trial Tr. vol. 1, 65:23-69:6, 222:3-20; Trial Tr. vol. 2, 161:25-162:18; 163:21-164:4, 205:23-206:15; see PL’s Exs. 57 & 86.) Dini continued to make full monthly payments to Sammarco through the “shareholder loans” until December 2011. (See Def.’s Ex. 2; Trial Tr. vol. 1, 61:9-11, 215:21-24.)
By that time, NTMS was losing money and its financial condition deteriorating. (Trial Tr. vol. 1, 55:5-56:23, 64:18-65:9, 215:-3-216:17; Trial Tr. vol. 2, 77:15-78:24, 165:25-166:6.) According to the company’s income tax returns for tax years 2009 through 2012, gross receipts had dropped 52% during the four-year period, from $4,586,960 in 2009 to $2,179,745 in 2012. (PL’s Ex. 69; Trial Tr. vol. 2, 77:25-78:24.) McDonough testified that, although the company had always struggled financially, by 2012 she could not “keep up” with NTMS’s bills and, eventually, had concerns about how she would make payroll. (Trial Tr. vol. 1, 55:5-56:23, 60:6-61:5.) She further testified that there were “significant overdrafts” in NTMS’s operating account at the Bank in May of 2012; that, in fact, the account was overdrawn “almost every day”; and that she recalled seeing a *746$60,000 overdraft at some point in 2012. (Trial Tr. vol. 1, 85:25-86:5, 98:22-24; 116:11-24.) According to McDonough, overdrafts were not necessarily reflected in NTMS’s general ledger unless the Bank charged an overdraft fee. That was because bank statements are “fluid,” and Quickbooks, the program used to create and maintain NTMS’s general ledger, showed only the balance of the checks written and deposited, not necessarily the payments that had cleared “at any given point.” (Trial Tr. vol. 1, 35:16-22, 117:3-16.)
Dini similarly testified that, while the balance in the NTMS bank account fluctuated, the account was overdrawn on a daily basis. (Trial Tr. vol. 2,182:8-10.) According to Dini, in the spring of 2012, NTMS’s account was overdrawn by as much as $70,000. (Trial Tr. vol. 2, 182:6-15.) Although he admitted that he had no written documentation supporting an overdraft as high as $70,000, Dini testified that he remembered seeing a figure of “sixty or seventy grand” either on a computer screen or in a document. (Trial Tr. vol. 2, 137:13-22,140:6-141:18, 213:23-214:17.)
Given the declining financial condition of NTMS, Dini testified, he was able to make only partial monthly payments, of $8,000 each, to Sammarco from January to April 2012. (See Def.’s Ex. 2; Trial Tr. vol. 2, 165:21-23, 204:19-23, 235:15-17, 236:2-6.) Subsequently, Dini and Sammarco tried to renegotiate the payment terms under the note. (Trial Tr. vol. 2, 167:24-168:4, 236:13-15.) Those attempts proved to be futile, and, in May 2012, all payments to Sam-marco stopped. (Trial Tr. vol. 1, 216:5-7; Trial Tr. vol. 2, 167:2-168:7, 204:12-205:1, 236:13-20.) By that time, Dini had paid Sammarco a total of $595,883.87 under the note through his “shareholder loans” from NTMS.4 (See Def.’s Ex. 2; Trial Tr. vol. 1, 101:9-17, 112:5-17; Trial Tr. vol. 2, 163:21-164:4.)
Unhappy that the payments had ceased, Sammarco filed a breach of contract suit against Dini and NTMS on July 11, 2012 in the Circuit Court of Cook County, seeking damages of $330,429, a figure that was later increased to $461,730 to account for attorneys’ fees, interest, and costs. (Am. Pretrial Statement at 7; Pl.’s Ex. 32 at ¶ 9; Trial Tr. vol. 2, 168:16-22, 238:13-24.) Subsequent efforts to settle were unsuccessful. (Trial Tr. vol. 2,169:9-21.)
The Funds Borrowed from Keith Creel
At some point in 2012, Dini approached his friend Keith Creel to borrow some money. (Trial Tr. vol. 1, 77:21-78:5, 80:14-16, 114:5-8; Trial Tr. vol. 2, 134:4-9.) In response, Creel provided Dini with a check dated May 4, 2012 in the amount of $100,000. (Pl.’s Ex. 55; see also Trial Tr. vol. 2, 183:8-15.) Dini endorsed the check to NTMS’s lawyers, and $40,000 of the funds were subsequently transferred into the company’s operating account at the Bank. (Trial Tr. vol. 1, 81:1-83:23; Trial Tr. vol. 2, 135:7-10, 184:5-19.) Both Dini and McDonough testified that the money from Creel was used to cure NTMS’s overdrawn account, as well as to pay both personal and business expenses.5 (Trial Tr. vol. 1,114:14-23; Trial Tr. vol. 2,135:23-25, 141:19-142:24,182:19-25,184:16-186:24.)
*747On October 12, 2012, an additional $190,000 was wired from Creel to NTMS. (Def.’s Ex. 5; Trial Tr. vol. 2, 136:14-18.) McDonough testified that Dini borrowed the money to help pay NTMS’s debts. (Trial Tr. vol. 1, 87:23-88:11.) Some of the funds also went to pay Dini’s state and federal taxes, as well as other personal and business expenses incurred through American Express.6 (See PL’s Ex. 60; Def.’s Ex. 5; Trial Tr. vol. 1, 90:2-25, 92:1-18; Trial Tr. vol. 2,186:13-24.)
The Vehicle Trade-Ins
In January 2013, Dini traded in his 2008 Cadillac Escalade (the “Cadillac”), the “family” car that Laura drove, and bought a new 2013 Jeep Grand Cherokee (the “Jeep”). (Pl.’s Ex. 22 at 4; Trial Tr. vol. 2, 143:20-22; 144:3-13,178:21-179:3.) Dini testified that the Cadillac had been paid off at the time of trade-in. (Trial Tr. vol. 2,144:1-2, 179:7-10, 212:20-22.) He further testified that the vehicle had more than 170,000 miles on it and was in need of repairs. (Trial Tr. vol. 2,179:4-6, 212:10-13.) Of the $18,500 he received for the trade-in, Dini used $4,000 as a down payment on the Jeep and took a check for the balance. (PL’s Ex. 22 at 4; Trial Tr. vol. 2, 145:16-22.)
Subsequently, in May 2013, Dini traded in his 1998 Lincoln Navigator (the “Lincoln”) for $2,000 and entered into a three-year lease for a Chrysler 300 (the “Chrysler”). (PL’s Exs. 21 at 15 & 22 at 4; Trial Tr. vol. 2, 146:3-14, 179:19-180:2.) The monthly lease payment was $609.45. (Trial Tr. vol. 2,146:15-17.) Like the Cadillac, the Lincoln had no debt on it, had been driven over 170,000 miles, and was not running well. (Trial Tr. vol. 2, 146:6-7, 180:5-9, 211:22-24, 212:10-19.) Dini testified that he was going to start conducting business with auto dealerships and that he needed a vehicle like the Chrysler that would be appropriate for that purpose. (Trial Tr. vol. 2,180:11-24.)
The Chapter 11 Bankruptcy Filings
With NTMS in financial decline and a decision on Sammarco’s motion for summary judgment in the state court imminent, Dini and NTMS filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on June 18, 2013 (the “Petition Date”). (Bankr. Nos. 13-25077 & 13-25078; see PL’s Exs. 18 & 20; Trial Tr. vol. 2,' 169:25-170:25, 238:25-239:4.) Dini signed a declaration stating under penalty of perjury that he had reviewed the schedules, statements of financial affairs, and accompanying documents that were subsequently filed in connection with both bankruptcies. (PL’s Exs. 19 & 23.) On both petitions, Sammarco was listed among the creditors holding the twenty largest unsecured claims. (PL’s Exs. 18 & 20.) Sam-marco’s claims, reported as contingent, un-liquidated, and disputed, were listed in the amount of $460,000 on the NTMS petition and $330,429 on the Dini petition.7 (Id.)
NTMS’s schedules and statement of financial affairs were subsequently filed on July 9, 2013. (PL’s Ex. 19.) Schedule B reflected NTMS’s accounts receivable, with book values of $428,067.17 for 2010, $217,721.70 for 2011, and $171,675.64 for 2012 and current values, at the time, for 2013 receivables of $139,690.34 for those due as of the Petition Date and $154,616 for those not yet due. (Id. at 8.) Listed as “[o]ther liquidated debts owed to debtor” *748was “Loan to Shareholder — David Dini” with a value of $688,471.64. (Id. at 9.) Schedule D reflected just one creditor holding a secured claim. According to that schedule, the Bank held a “Security Interest,” with a “Blanket Lien on all Assets,” in the amount of $594,000. (Id. at 11.) On schedule H, only Dini was listed as a co-debtor also liable on the Sammarco and Bank debts listed in NTMS’s schedules. (Id. at 22.)
According to its statement of financial affairs, NTMS’s income was $2,750,518.28 for 2011; $2,179,314.74 for 2012; and $1,108,340.27, year-to-date as of the Petition Date, for 2013. (Id. at 24.) “Income other than from ... [the] operation of business” included cash payments received from Dini to reduce NTMS’s “shareholder loans” to him: $21,000 paid on April 21, 2011; $21,867.34 on February 7, 2012; $1,000 on April 24, 2012; and $190,000 on October 12, 2012. (Id. at 24 & 25.)
Dini’s schedules and statement of financial affairs were filed on July 15, 2013, (PL’s Exs. 21 & 22.) Amended schedules B, D, F, and H were subsequently filed on February 18, 2014. (Pl.’s Ex. 24.) Schedule B reflected both the Jeep and, as “[ojther personal property,” a claim for a preferential transfer to an insider for the “repayment of loan” to NTMS in the amount of $190,000. (Id. at 3 & 4.) Schedule G listed a “[t]hree year lease” with Chrysler Financial for the Chrysler. (PL’s Ex. 21 at 15.)
The Bank was included among the creditors holding secured claims on Dini’s schedule D. On the originally filed schedule, only the NTMS Loan was listed, with a notation that Dini personally-guaranteed that loan.8 (PL’s Ex. 21 at 8.) On the subsequently filed amended schedule D, there were two entries for the Bank. (PL’s Ex. 24.) The one that seems to correspond to the Dini Loan was listed in the amount of $601,460.64, with the collateral identified as “Equity Line of Credit[,] Mortgage on 700 N. Larrabee Street, and two properties owned by Laura Dini- Trust (Debtor home and NTMS office building).” (Id.) The other entry, which appears to correspond to the NTMS Loan, was listed in the amount of $596,227.50, with the collateral identified as “Security Interest^] NTMS, Ltd. Loan personally guaranteed by Debt- or.” (Id.) Both claims were marked as “disputed,” with notations questioning whether the collateral securing each also secures the other. (Id.)
In addition to Sammarco, other creditors listed as holding unsecured nonpriority claims on Dini’s amended schedule F were Creel, whose claim totaled $290,000, and NTMS, whose loan-to-shareholder claim was listed in the amount of $688,471.64. (Id.)
Among the entries on Dini’s originally filed schedule H, NTMS was listed as a codebtor on the Bank debt in Dini’s schedules. (PL’s Ex. 21 at 16.) On the later-filed schedule H, Laura and the Dini Trust were added as codebtors as to various creditors, including the Bank. (PL’s Ex. 24.)
Dini’s statement of financial affairs reflected that his income from NTMS totaled $551,805 for 2011; $153,405.15 for 2012; ánd, year to date as of the Petition Date, *749$6,500 for 2013. (Pl.’s Ex. 22 at 1.) Other income included $18,500 for the Cadillac trade-in and $137,423.81 for loans from NTMS,'both in 2013. (Id. at 1,2, 4.) Also in 2013, Dini listed total payments to the Bank, among others, of $11,458.98 made within ninety days immediately preceding the commencement of his bankruptcy case, leaving $597,438,91 still due and owing. {Id. at 2.).The trade-ins of both the Cadillac and the Lincoln were listed under “[o]ther transfers.” {Id. at 4.)
The Bank filed secured proofs of claim in the amount of $1,197,688 each in both the NTMS and the Dini bankruptcy cases. (Pi’s Exs. 28 & 29.) Both claims were listed as secured by liens on the Kildeer Property, the Mount Prospect Property, the Larrabee Property, and NTMS’s accounts receivable. (Id.) The claim in the NTMS case was filed on November 11, 2013, the one in Dini’s case on December 2,2013. (M)
Sammarco also filed proofs of claim in both bankruptcy cases. (PL’s Exs. 61 & 62.) Both unsecured claims were listed in the amount of $513,372.72 each and filed on November 6, 2013. (Id.)
The 363 Sale of NTMS’s Assets
Shortly after the Petition Date, NTMS decided that a sale of substantially all of its assets was “a viable option” as long as a purchaser “would pay cash to unsecured creditors for the assets and assume some or all of the debt owed to the Bank.” (Pl.’s Ex. 32 ¶ 16; see also Trial Tr. vol. 2, 175:11-176:1.) On July 12, 2013, Michael Procaccini, a high school friend of Dini’s, submitted a letter of intent memorializing his willingness to purchase substantially all of NTMS’s assets. (PL’s Ex. 30; see also Trial Tr, vol. 2, 176:4-8.) Thereafter, on August 19, 2013, NTMS filed a motion to set bidding procedures in connection with the sale pursuant to § 363 (the “Sale Procedures Motion”). (PL’s Ex. 32.) That motion proposed Procaccini as the. stalking-horse bidder (the “Stalking Horse”), disclosed his connection to Dini, and set forth the proposed terms and procedures of a public auction for the company’s assets. (Id. ¶¶ 16-25.) Pursuant to the motion, the Stalking Horse offered to buy substantially all of NTMS’s assets in exchange for the assumption of a $594,000 liability to the Bank and a cash payment of $200,000. (Id. ¶¶ 16-25 & 36.) Of that $200,000, $100,000 would go to pay down the liability to the Bank, with the remaining $100,000 available for distribution to NTMS’s creditors. (Id. ¶¶ 22 & 36.) The motion also indicated that the Stalking Horse intended to hire Dini as an employee to run the business. (Id. ¶¶ 20 & 55.)
On August 20, 2013, Sammarco filed an objection to the Sale Procedures Motion. (Bankr. No. 13-25077, Docket No. 36.) According to that objection, the proposed procedures were intended to chill the bidding process, did not provide third parties with an opportunity to make an offer for NTMS’s assets, and ensured that the Stalking Horse would be the winning bidder. (Id. at 1-4; Trial Tr. vol. 2, 242:1-9.) Sammarco also alleged that the sale procedures were a “poorly veiled means” to transfer NTMS’s ownership back to Dini “free and clear.” (Bankr. No. 13-25077, Docket No. 36 at 4-7.)
After reviewing the pleadings and conducting a hearing, the Court entered an order on September 3, 2013, granting NTMS’s Sale Procedures Motion, with modifications based on Sammarco’s objection (the “Sale Procedures Order”). (Bankr. No. 13-25077, Docket No. 50 (granting the motion, “but only upon the terms and conditions set forth” therein).) Pursuant to the order, the hearing to approve the sale was scheduled for October 2, 2013. (Id. ¶ 2.) If there was at least one party, other than the Stalking Horse, who was a qualified bidder, however, the hear*750ing would be adjourned for the purpose of conducting an auction on October 1, 2013.9 (Id. ¶ 3(A).) NTMS was directed to provide potential bidders with “reasonable access to due diligence materials and relevant financial information ... for the purpose of making a bid.” (Id. ¶ 3(L).) On September 5, 2013, NTMS filed notice of the sale, and the terms and procedures thereof, as required by the Sale Procedures Order. (Bankr. No. 13-25077, Docket No. 54.)
Sammarco testified that he subsequently began preparing to become a qualified bidder. To that aim, he paid a participation deposit, and his attorneys exchanged various email messages and telephone calls with counsel for NTMS, seeking the production of due diligence documents. (Bankr. No. 13-25077, Docket No. 68 ¶¶ 14-27; Trial Tr. vol. 1, 252:11-15; Trial Tr. vol. 2, 28:23-29:1, 116:7-10, 244:19-20.) Although some materials were produced, Sammarco alleged that NTMS failed to provide all documents that “any asset purchaser would need to review in order to make a bid on the [company’s] assets.” (Bankr. No. 13-25077, Docket No. 68 ¶ 21; see also Trial Tr. vol. 2, 29:2-7, 245:4-18.)
Accordingly, on September 20, 2013, Sammarco filed a motion to appoint a chapter 11 trustee and to vacate the Sale Procedures Order and the existing sale date. (Bankr. No. 13-25077, Docket No. 68.) In that motion, Sammarco alleged that NTMS breached its fiduciary duties to creditors in its handling of the 363 sale process and that its actions demonstrated that it had “no interest in engaging in a true sale of its assets.” (Id. ¶¶ 1, 28) At best, Sammarco claimed, NTMS was “unprepared for the due diligence process associated with the sale”; at worst, it had “intentionally refused” to provide the kind of materials that a potential buyer would need to make an informed bid. (Id.) With the Court’s assistance, the due diligence issues were ultimately resolved, rendering Sammarco’s motion moot. (See Bankr. No. 13-25077, Docket Nos. 96 & 192; Trial Tr. vol. 2, 245:11-16.)
On October 29, 2013, the Court entered a scheduling order. That order directed the Stalking Horse to file a final asset purchase agreement and tender it to counsel for NTMS and Sammarco by October 30, 2013. It also directed Sammarco to file his bid by November 6, 2013. (Bankr. No. 13-25077, Docket No. 101.) The auction was then re-set for November 12, 2013. (Id.)
In accordance with the scheduling order, an asset purchase agreement between NTMS and the Stalking Horse was filed on October 30, 2013. (Bankr. No. 13-25077, Docket No. 102.) Sammarco, however, did not file a bid. Rather, on November 8, 2013, he filed a motion to amend the Sale Procedures Order to provide that the full cash purchase price of $700,000 generated by the 363 sale of NTMS’s assets be held in escrow pending further order of the Court, on the basis of either equitable subrogation or the marshaling of assets (the “Motion.to Amend”). (Bankr. No. 13-25077, Docket No. 113.) Among the allegations that Sammarco raised in the motion was that NTMS’s obligations to the Bank had not been fully disclosed. Specifically, Sammarco alleged that he had only recently discovered that NTMS had a secured obligation to the Bank by virtue of not only the. NTMS loan, but also the Dini Loan and that the two loans were cross-collater-alized. (Id. ¶¶ 16-23.)
*751On December 4, 2013, the Court conducted a hearing on the sale of NTMS’s assets (the “Sale Hearing”). At that hearing, documents were introduced establishing that the Bank does indeed have two outstanding loans the NTMS Loan and the Dini Loan and that, pursuant to a series of modification and extension agreements, the two loans are cross-collateralized. (Sale Approval Trial Tr., 7:18-25, Dec. 10, 2013.)10 Dini, Procaccini, and Bastuga all confirmed that if the sale to the Stalking Horse were approved, the Stalking Horse would assume NTMS’s loan under its current terms and the Bank would release NTMS from obligations on both the NTMS Loan and the Dini Loan. (Sale Approval 'Trial Tr., 7:1-9.)
Sammarco testified at the Sale Hearing that he was not offered the same terms by the Bank that were offered to the Stalking Horse. That is, he was not offered a loan that would be non-recourse to him. (Sale Approval Trial Tr., 8:3-6.) Bastuga testified that the Bank was willing to make that type of loan only to the Stalking Horse because the Stalking Horse had obtained Dini’s commitment to continue to work for and run the purchased business. (Sale Approval Trial Tr., 8:7-11.) The Bank was not willing to make such a loan to Sammarco with whom it had no relationship and who, the Bank alleged it had learned through due diligence, was unlikely to be able to retain NTMS’s employees to run the business to which the Bank would be making a loan. (Sale Approval Trial Tr., 8:12-17.) Sammarco testified that because the Bank was not willing to offer him a non-recourse loan, he decided that matching or exceeding the Stalking Horse’s bid would be “too much risk” for him to assume. (Sale Hearing Trial Tr., 135:7-138:7, Dec. 4,2013.)
Concluding that the sale to the Stalking Horse was in the best interest of the estate, the Court approved the sale on December 10, 2013. According to the Court, the alternative to the sale would have likely been the liquidation of NTMS, which would have produced no funds for the estate and a significant deficiency claim for the Bank. (Sale Approval Trial Tr., 8:25-9:3.) The Court noted that the testimony with respect to the value of NTMS’s assets and the position of the Bank suggested that'“no alternative bidder would be willing to provide more value to the estate than that being provided by the Stalking Horse.” (Sale Approval Trial Tr., 9:4-9.) Although this was unfortunate, the Court said, it was “not due to any bad faith or wrongdoing on the part of [NTMS] or [the] [S]talking-[H]orse bidder. Rather, it [was] due to financial realities of [NTMS’s] obligations to the [B]ank, its current operations, and the minimal value of [NTMS’s] assets in the event of liquidation.” (Sale Approval Trial Tr., 9:10-16.) The Court went on to find as follows:
The [S]talking [H]orse made a credible bid. In fact, that bid was increased from its original terms in response to demands from the [B]ank. The terms of the bid were fully disclosed, including the relationship between the [S]talking-[H]orse bidder and Dini, Dini’s further employment with the new owner, and the possibility that Dini would have the opportunity at some point in the future to earn back equity in the new entity. The initial failure of the parties to disclose the cross-collateralization of [the *752NTMS -Loan] and the Dini [L]oan was not the result of a purposeful misrepresentation or withholding. And when the cross-collateralization was discovered and disclosed, the [B]ank agreed to sale terms that included a complete waiver of any deficiency claim against [NTMS] on either [its] loan or the Dini [L]oan. [NTMS’s] conduct in proposing the [S]talking-[H]orse offer did not involve any wrongdoing and the process did not take advantage of other bidders. The simple fact is that [NTMS’s] assets did not support a better bid than that received by the [S]talking [H]orse, and the [B]ank was willing to provide the financing terms testified to only to the [Stalking [H]orse because of his ability to secure ... Dini’s commitment to work for the [Stalking [H]orse.
While the [B]ank’s terms did put the [Stalking [H]orse in a favorable position for purposes of the sale, that favorable position did not result [from] any bad faith, collusion or fraud. It was ... simply the reality of the financial position of the parties.
Absent the consent of [the] Bank to the sale, the sale would not be possible under Section 363 .... The financial position of [NTMS] and the conditions under which [the] Bank is consenting to the sale make it unlikely that a bidder other than the [S]talking [H]orse could be the successful bidder, but that does not mean that the sale cannot be approved. The obligations to [the] Bank are such that the [B]ank holds the key to any sale, and the [C]ourt cannot force the [B]ank to accept one borrower over another.
(Sale Approval Trial Tr., 9:17-11:10.) According to the Court, the only alternatives to the sale would have been for the Bank to credit bid or foreclose, neither of which would have provided as much for the estate as the sale. (Sale Approval Trial Tr., 11:11-14.) Accordingly, the Court concluded that the Stalking Horse was a good-faith purchaser under § 363, the sale was approved, and Sammarco’s Motion to Amend was denied as moot. (Sale Approval Trial Tr., 11:14-17, 15:20-23; Bankr. No. 13-25077, Docket No. 156.) An order authorizing and approving the sale was entered on December 19, 2013. (Bankr. No. 13-25077, Docket No. 160.)
Subsequently, NTMS filed a motion to dismiss its bankruptcy case. (Bankr. No. 13-25077, Docket No. 188.) On March 25, 2014, the Court granted that motion, and the case was closed on March 31, 2014. (Bankr. No. 13-25077, Docket Nos. 193 & 195.)
Sammarco’s Motion to Dismiss Dini’s Bankruptcy Case Under § 707(b)
On February 12, 2014, approximately two months after the Court approved the sale of NTMS’s assets to the Stalking Horse, Dini filed a motion to convert his chapter 11 bankruptcy case to a case under chapter 7. (Bankr. No. 13-25078, Docket No. 62.) According to the motion, Dini was not able to generate enough income to pay both his expenses and his unsecured creditors, and, thus, he did not believe that he could propose a feasible plan. (Id. ¶ 9.) On February 19, 2014, the Court granted the motion and entered an order converting Dini’s case. (Bankr. No. 13-25078, Docket No. 70.)
About four months later, on June 4, 2014, Sammarco filed a motion to dismiss Dini’s case pursuant to § 707(b)(3) and requested a one-year bar to filing subsequent bankruptcy cases.11 (Pl.’s Ex. 63.) In *753that motion, Sammarco sought dismissal for “abuse,” arguing that Dini had filed his bankruptcy case in bad faith. (Id. ¶ 1.) Because dismissal under § -707(b) is authorized only in cases involving an individual debtor with “primarily consumer debts,” 11 U.S.C. § 707(b)(1), the Court agreed, at Dini’s request, to first consider the threshold issue of whether Dini’s debts are primarily consumer debts. (See Pl.’s Ex. 64 at 1.)
Not surprisingly, Sammarco argued that Dini’s debts are primarily consumer debts. (Pl.’s Ex, 63.) After performing what he called a “detailed analysis” of the debts listed in Dini’s bankruptcy schedules and claims, Sammarco alleged that $3,877,310.39 of Dini’s total debts of $4,579,012.05, or nearly 85%, are consumer debts, including the $290,000 that Dini borrowed from Creel. (Id. ¶ 11.)
In response, Dini filed an objection to Sammarco’s motion to dismiss, arguing that his debts are primarily non-consumer debts. (PL’s Ex. 59.) According to Dini, Sammarco incorrectly classified eight of the debts, totaling nearly $2,400,000, as consumer debts. (Id. § 2.1.) Of those, Dini argued, $70,000 of the $290,000 debt owed to Creel was to be used to fix the overdraft problem at NTMS and was, therefore, not consumer debt. (Id.) In support of that contention, Dini signed and submitted a “declaration” in which he stated under penalty of perjury that “[a]t one point, NTMS’s bank account at [the] Bank was overdrawn by $70,000, so [he] ■ borrowed money from Creel to cure the overdrawn account.” (Id. at Ex. A ¶ 14.)
On October 21, 2014, .the Court heard evidence and testimony, primarily from Dini, as to whether the contested debts, including the one owed to Creel, are .primarily consumer or non-consumer debts (the “707(b) Hearing”).12 Thereafter, on January 20, 2015, the Court issued an order in which it concluded that Dini’s debts are primarily non-consumer debts (the “707(b) Order”). (PL’s Ex. 64.)
Regarding the debt owed to Creel, in particular, the Court found Dini’s testimony and other responses inconsistent. (Id. at 7.) After detailing those inconsistencies, the Court found that Dini’s testimony that the money he borrowed, from Creel was used for business purposes, and his characterization of that debt as non-consumer debt, were sufficiently disputed by the evidence introduced at trial. (Id. at 7-9.) In particular, the Court noted that NTMS’s company records did not reflect an overdrawn account and failed to disclose a transfer of $40,000 to cure any alleged overdraft. (Id. at 8.) Accordingly, the Court found that Dini’s testimony that $40,000 of the total amount in dispute was used to pay the overdrawn account was unsupported by the evidence at trial. (Id.) Thus, the Court concluded that Dini incurred the Creel debt for primarily personal, family,, or household purposes. (Id. at 8-9.) Despite that conclusion, however, the Court found that Sammarco had failed to establish that a majority of Dini’s debts could be classified as consumer debts for purposes of § 707(b), and, therefore, Sam-marco’s motion to dismiss was denied. (Id. at 13-14.)'
Sammarco’s Adversary Complaint Against Dini
On November 24, 2013, prior to the filing .of his § 707(b) motion to dismiss, *754Sammarco filed a two-count adversary complaint against Dini, objecting to his discharge pursuant to §§ 727(a)(4) and (a)(7). (Adv. No. 13-1332, Docket No. 1.)
With the Court’s permission, Sammarco subsequently filed three amended complaints. In the first, ah eight-count complaint filed on June 4, 2014, Sammarco sought a determination that Dini is not entitled to a discharge under §§ 727(a)(2), (a)(4), and (a)(7). (Adv. No. 13-1332, Docket No. 16.) Subsequently, on September 9, 2014, Sammarco filed a second amended complaint, this one containing ten counts. (Adv. No. 13-1332, Docket No. 33.) In the two new counts, Sammarco objected to discharge on the grounds that Dini made false statements in connection with the use of funds borrowed from both the Bank and NTMS. (Id. ¶¶ 101-119.) On October 7, 2014, Dini filed a motion to dismiss the second amended complaint. (Adv. No. 13-1332, Docket No. 34.) According to Dini, dismissal was appropriate because the complaint was “riddled with concluso-ry allegations,” none of which plausibly suggested that Dini made either the purported false statements or the alleged transfers with fraudulent intent. (Id. at 3.) On June 24, 2015, the Court issued an order, granting Dini’s motion in part as to certain counts and denying the motion in part as to others. (Adv. No. 13-1332, Docket No. 52.) The order also granted in part and denied in part Sammarco’s motion for leave to file a third amended complaint, allowing only six of the counts that Sammarco had proposed. (Id.)
On July 27, 2015, Sammarco filed his third amended complaint (the “Complaint”), the one at issue in this matter. (Adv. No. 13-1332, Docket No. 53.) Although the Complaint contained nine counts, the parties agreed at trial that only three remain at issue. (Trial Tr. vol. 3, 12:23-13:7, 41:12-18, 42:2-4, Oct. 3, 2016.) In Count I, Sammarco alleges that Dini is not entitled to his discharge under § 727(a)(2) based on his transfers of the Cadillac and Lincoln. In Count V, Sam-marco objects to Dini’s discharge pursuant to § 727(a)(7), arguing that Dini knowingly made fraudulent statements in NTMS’s bankruptcy schedules while his individual bankruptcy case was pending. Finally, in Count VII, Sammarco alleges that Dini’s discharge should be denied under § 727(a)(4), because Dini knowingly and with fraudulent intent made false statements in connection with the debt that he owes to Creel.
In response to the Complaint, Sammar-co filed an answer on August 17, 2015. (Adv. No. 13-1332, Docket No. 60.) After multiple continuances and status hearings, the trial was set for September 13, 2016. (See Adv. No. 13-1332, Docket No. 90.)
On September 9, 2016, four days before the trial was scheduled to begin, Sammar-co filed a motion to dismiss Dini’s bankruptcy case pursuant to § 707(a). (Bankr. No. 13-25078, Docket No. 191.) Relying on the Seventh Circuit case In re Schwartz, 799 F.3d 760 (7th Cir. 2015), Sammarco argued in that motion that Dini’s case should be dismissed because both prior to and after filing his bankruptcy petition, Dini unnecessarily spent money on himself and his family while refusing to pay creditors like Sammarco. (Id. ¶ 1.) According to the motion, the Schwartz case “effected a new interpretation of § 707(a) which is directly applicable to Dini’s bankruptcy case.” (Id.)
Also just days before the trial, Dini filed two motions in limine, asking the Court to bar Sammarco from presenting evidence or argument on various issues. (Adv. No. 13-1332, Docket Nos. 103 & 104.) In the first motion, Dini contended that Sammar-co’s cross-collaterization argument set forth in Count V was already decided by the Court and, thus, may not be litigated *755again under the doctrine of issue preclusion. (Adv. No. 13-1332, Docket No. 103.) In the second motion, Dini argued that Sammarco improperly seeks denial of Dini’s discharge based on new claims that do not appear in the Complaint: (1) that Dini and the Bank conspired to put NTMS into bankruptcy in order to “steer” a § 363 sale to the Stalking Horse, and (2) that Dini concealed records from which NTMS’s financial condition could be determined, by failing to notify Sammarco of “fraudulent” invoices created at NTMS which masked the poor financial condition of the company.13 (Adv. No. 13-1332, Docket No. 104.) •
Sammarco filed his response to these motions on September 13, 2016, just hours before the trial was to start. (Adv. No. 13-1332, Docket No. 106.) In addition to addressing the substantive arguments in Dini’s motions, Sammarco argued that both motions should be denied “outright” for being untimely and prejudicial. (Id. at 1.)
Receiving the response only about an hour before the trial was set to begin, the Court declined to consider the motions and, thus, denied them. (Adv. No. 13-1332, Docket Nos. 109 & 110; Trial Tr. vol. 1, 4:8-5:14.) The Court explained, however, that those denials were without prejudice and that Dini could renew the motions and/or the objections therein either during the trial or at its conclusion. (Trial Tr. vol. 1, 5:15-21.) Counsel for Dini renewed the objections set forth in the motions repeatedly throughout the course of the trial.
At the conclusion of the two-day eviden-tiary hearing on September 27, 2016, the Court took the matter under advisement. After a review of all of the relevant pleadings, exhibits, and testimony elicited at trial, the Court is now ready to rule.
DISCUSSION
In the three counts that remain at issue in this adversary proceeding, Sam-marco argues that Dini should be denied a discharge pursuant to §§ 727(a)(2), (a)(4), and (a)(7). Obtaining a discharge is the primary aim of the “fresh start” that bankruptcy is designed to give debtors. Gasunas v. Yotis (In re Yotis), 548 B.R. 485, 494-95 (Bankr. N.D. Ill. 2016). Accordingly, denial of discharge is a “drastic” remedy reserved for only the truly “pernicious” debtor. Stathopoulos v. Bostrom (In re Bostrom), 286 B.R. 352, 359 (Bankr. N.D. Ill. 2002), aff'd, 2003 WL 403138 (N.D. Ill. Feb. 20, 2003). For that reason, the grounds for denial of discharge listed in § 727 are construed strictly against a creditor and liberally in favor of the debt- or. In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996). A creditor seeking an order denying a debtor a discharge bears the burden of proving each of the elements of the applicable claim by a preponderance of the evidence. Peterson v. Scott (In re Scott), 172 F.3d 959, 966-67 (7th Cir. 1999); Muhammad v. Reed (In re Reed), 542 B.R. 808, 823 (Bankr. N.D. Ill. 2015).
A. Section 727(a)(2)(A): Transfer with Intent to Hinder, Delay, or Defraud
In Count I of the Complaint, Sammarco argues that Dini is not entitled to a discharge under § 727(a)(2)(A) based on his trade-ins of the Cadillac and the Lincoln. A debtor’s discharge may be denied under § 727(a)(2)(A) when the debtor, “with intent to hinder, delay, or defraud a creditor ..., has transferred, removed, destroyed, mutilated, or concealed ... property of the debtor, within one year before the date of the filing of the petitionf.]” 11 *756U.S.C. § 727(a)(2)(A). The purpose of the statutory exception is to prevent the discharge of a debtor who tries to avoid paying his creditors by concealing or otherwise disposing of his assets. Blomberg v. Riley (In re Riley), 351 B.R. 662, 670 (Bankr. E.D. Wis. 2006). To prevail under § 727(a)(2), a plaintiff must establish two elements: “an act (i.e., a transfer or a concealment of property) and an improper intent (i.e., a subjective intent to hinder, delay, or defraud a creditor).” In re Kontrick, 295 F.3d 724, 736 (7th Cir. 2002) (internal quotation omitted), aff'd on other grounds sub nom, Kontrick v. Ryan, 540 U.S. 443, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004); Barber v. Herold (In re Herold), Nos. 07-81575, 07-8139, 2008 WL 4855646, at *3 (Bankr. C.D. Ill. Nov. 10, 2008) (citing Kontrick).
The Code defines “transfer,” in relevant part, as “each mode, direct or indirect, absolute or conditional, .voluntary or involuntary, of disposing of or parting with ... property ... or ... an interest in property.” 11 U.S.C. § 101(54)(D). Concealment, for purposes of § 727(a)(2), consists of “failing or refusing to divulge information to which creditors [are] entitled.” Neary v. Mosher (In re Mosher), 417 B.R. 772, 784 (Bankr. N.D. Ill. 2009) (internal quotation omitted).
As for intent,. § 727(a)(2) requires proof of actual intent. Vill. of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir. 2002). Because a debtor is unlikely to admit his fraudulent intent, however, a finding of actual intent may be inferred from the surrounding circumstances. Id. at 790-91; In re Snyder, 152 F.3d 596, 601 (7th Cir. 1998); In re Krehl, 86 F.3d 737, 743 (7th Cir. 1996). Certain factors, or “badges” of fraud, “may warrant the inference.” Cohen v. Olbur (In re Olbur), 314 B.R. 732, 744 (Bankr. N.D. Ill. 2004). These include the debtor’s retention of possession, benefit, or use of the property; the debtor’s financial condition; a lack.of consideration for the transfer; a familial or close relationship between the parties; and the chronology of the events in question. McWilliams, 284 F.3d at 791; Olbur, 314 B.R. at 744.
Here, Sammarco alleges that Dini “upgraded” two vehicles less than one year prior to the Petition Date with the intent to hinder or delay Sammarco. (Am. Pretrial Statement at 2.) Specifically, Sam-marco contends that, “in keeping with his high[-]end lifestyle,” Dini traded in the Cadillac and the Lincoln for “nicer” cars with “complete disregard” for his creditors. (Id.; see also Compl. ¶¶ 77-84.)
Turning to the elements . of § 727(a)(2)(A), the facts sufficiently establish and Dini does not deny that there was a transfer of property for purposes of the statutory provision. According to the undisputed evidence, in January 2013, less than a year before the Petition Date, Dini traded in the Cadillac; he used the money he received for the trade-in for the down payment on the Jeep and took a check for the balance. Subsequently, in May 2013, Dini traded in the Lincoln and, thereafter, entered into a three-year lease for the Chrysler. Dini disclosed both trade-ins on his statement of financial affairs. Those trade-ins constitute transfers under § 727(a)(2). See, e.g., Staniunas v. Delisle (In re Delisle), 281 B.R. 457, 464-65 (Bankr. D. Mass. 2002), aff'd in part, 2003 WL 26085842 (1st Cir. BAP June 9, 2003).
The only issue left to decide, then, is whether Dini intended to hinder, delay, or defraud Sammarco by transferring his interests in the vehicles. Sammarco tries to establish Dini’s intent in this regard by questioning the timing of the transfers. That is, Sammarco alleges that Dini had the requisite intent for purposes of § 727(a)(2) because he transferred the cars on “the eve of bankruptcy.” (See Trial Tr. *757vol. 2, 146:22-147:1; Compl,'int80 & 81,) Sammarco also points to Dini’s financial condition, arguing that Dini traded in the Cadillac and the Lincoln for newer vehicles, thereby “incurring significant additional debt,” at the expense of his creditors. (See Compl. ¶¶ 79-84; Am. Pretrial Statement at 2.)
Despite these contentions, the evidence simply does not establish that Dini intended to hinder, delay, or defraud Sammarco by transferring his interests in the vehicles. Instead, Dini credibly testified at trial as to both the reasons that he transferred the cars and the timing of the trade-ins. Specifically, Dini testified that the cars were old and needed to be replaced. According to Dini, each vehicle' had been driven more than 170,000 miles, neither was running well, and both were in need of repairs. (Trial Tr. vol. 2,146:18-21,179:3-6, 180:6-9, 211:22-24, 212:10-13.)
Dini testified that he traded in the Cadillac, the “family” car that had been purchased primarily for Laura’s use, in order to get a more reliable vehicle. (Trial Tr. vol. 2, 144:3-16, 178:21-26, 179:3-17.) Regarding the timing of the transfer, Dini asserted that he traded in the car in January 2013 because it still “had some value” at that time. (Trial Tr. vol 2,179:17-18.) As a result, he was able to get over $18,000 for the trade-in, some-of which he used to defray the cost of the Jeep.14
As for the Lincoln, Dini testified that he was going to start doing business with auto dealerships and that the fifteen-year-old Lincoln would not convey to prospective clients that he was running a solid company with which they would want to work. (Trial Tr. vol. 2, 180:3-24.)’ Thus, Dini said, he traded in the Lincoln in May 2013 and leased the Chrysler, a vehicle that was in good working condition and appropriate for attracting new customers.
Dini’s testimony in connection with his intent was especially compelling given his financial situation at the time. The evidence amply demonstrated that NTMS was in financial decline, its income dropping and its operating account overdrawn on almost a daily basis. Faced with his company’s financial deterioration, significant debts of his own, and Sammarco’s lawsuit pending against him in state court, Dini’s testimony that he traded in the vehicles with financial motives in mind is convincing. True, his subsequent purchase of the Jeep and lease of the Chrysler caused him to incur'additional debt. He testified, however, that he was able’ to use monies from the trade-ins for both the subsequent purchase and lease, that trading in the older vehicles allowed him to stem repair costs that they were causing him to incur, and that he hoped to attract new clients for NTMS with the Chrysler.
Other than Dini’s testimony, the Court notes that the evidence at trial regarding the transfers of the vehicles in general, and Dini’s intent with respect to those transfers in particular, was scant and inadequate. Notwithstanding the paucity of the evidence, however, the Court finds that Dini’s testimony in connection with his intent was credible. See Deady v. Hanson (In re Hanson), 432 B.R. 768, 776 (Bankr. N.D. Ill. 2010), aff'd, 470 B.R. 808 (N.D. Ill. 2012) (explaining that the Court is in “the best position to assess the credibility of the witnesses and weigh the evidence”); Fosco v. Fosco (In re Fosco), 289 B.R. 78, 87 (Bankr. N.D. Ill. 2002) (noting that “the *758carriage, behavior, bearing, manner, and appearance of a witness in short, his demeanor is part of the evidence” (internal quotation omitted)). Based on that testimony, Sammarco’s failure to present evidence to the contrary, and the directive to construe grounds for denial of discharge strictly against the creditor and liberally in favor of the debtor, the Court finds that Sammarco has not satisfied his burden of demonstrating intent for purposes of § 727(a)(2)(A). Accordingly, Dini’s discharge will not be denied under that statutory provision.
B. Section 727(a)(7): False Oath in Connection with NTMS’s Bankruptcy Case
In Count V of the Complaint, Sammarco objects to Dini’s discharge pursuant to § 727(a)(7), arguing that Dini knowingly and with fraudulent intent made false statements in NTMS’s bankruptcy schedules. Under § 727(a)(7), a debtor will be denied a discharge if he “has committed any act specified in paragraph (2), (3), (4), (5), or (6) of th[e] subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case ... concerning an insider[.]” 11 U.S.C. § 727(a)(7). With the aún of encouraging the cooperation of individuals in contemporaneous, related bankruptcy cases, § 727(a)(7) extends the basis for denial of a discharge to the debtor’s wrongdoing in such related cases. Krehl, 86 F.3d at 741; Posnanski v. Kosth (In re Kosth), Bankr. No. 09-82212, 2012 WL 863634, at *7 (Bankr. C.D. Ill. Mar. 13, 2012). To prevail under § 727(a)(7), Sam-marco must demonstrate that: (1) the elements of § 727(a)(4), the applicable subsection here, are satisfied;15 (2) the acts at issue took place during the current case or within one year before the filing of the petition; and (3) those acts occurred in connection with the bankruptcy case of an insider. See Kosth, 2012 WL 863634, at *7.
The Code defines the term “insider,” in relevant part, as a “corporation of which the debtor is a director, officer, or person in control” if the debtor is an individual and as an “officer of the debtor” if the debtor is a corporation. 11 U.S.C. § 101(31)(A)(iv) & (B)(ii). Here, the parties do not dispute that Dini was the president of NTMS. Thus, he and NTMS were “insiders” of one another for purposes of § 727(a)(7).
Sammarco alleges that Dini made false statements in NTMS’s bankruptcy schedules regarding the amount of debt that the company owed to the Bank while his individual bankruptcy case was pending. Specifically, Sammarco argues that Dini did not disclose in NTMS’s schedules that the company was liable for the obligations of Dini, Laura, and the Dini Trust by virtue of the loan instruments executed in connection with the Dini and NTMS Loans and the first modification agreement. According to Sammarco, Dini knowingly failed to make the required disclosures with the intent to deceive in order to protect Laura and the Dini Trust from liability.
Throughout the trial, counsel for Dini objected to Sammarco’s attorney putting on evidence with respect to the cross-col-lateralization allegations in Count V, as well as allegations that Dini and the Bank conspired to put NTMS into bankruptcy in order, to steer a 363 sale to the Stalking Horse. According to Dini, the cross-collat-eralization argument was already addressed and decided by the Court in connection with the 363 sale and, therefore, may not be litigated again under the doe-*759trine of issue preclusion. The Court allowed Sammarco’s counsel to present evidence with respect to the allegations in Count V, as well as those related to Sam-marco’s conspiracy theory, but-noted that Dini’s objection would be taken under advisement. (See Trial Tr. vol. 1, 43:12-45:4.)
After a review of the facts and applicable case law, the Court now finds that both the cross-collateralization and conspiracy issues were previously decided and that, thus, those issues may not be litigated again under the doctrine of issue preclusion.16 Issue preclusion (also known as collateral estoppel) prevents a party from relitigating an issue that it already litigated and lost. Jensen v, Foley, 295 F.3d 745, 748 (7th Cir. 2002). Under the doctrine, a party is precluded from relit-igating an issue if all of the following elements are met: (1) the issue sought to be precluded is the same as the one involved in a prior action; (2) the issue was actually litigated; (3) determination of the issue was essential to the final judgment; and (4) the party against whom preclusion is invoked was represented by counsel in the prior action. Dexia Credit Local v. Rogan, 629 F.3d 612, 628 (7th Cir. 2010); Crane v. McGuire (In re McGuire), 459 B.R. 348, 350 (Bankr. N.D. Ill. 2011).
All of the elements have been satisfied - in this matter. First, the issues sought to be precluded are the same ones that were involved in connection with the Sale Hearing held by the Court on December 4, 2013. The Court’s oral ruling, read into the record at the hearing approving the sale on December 10, 2013 (the “Ruling”), expressly addressed the failure of both Dini and the Bank executives to initially disclose the cross-collateralization of the NTMS and Dini Loans, the same issue sought to be precluded here. Similarly, the Ruling explicitly discussed the bidding and sale processes, focusing on the parties’ conduct in proposing the Stalking-Horse offer, the Bank’s terms which put the Stalking Horse in a favorable position for purposes of the sale, and the importance of the Bank’s consent to the terms of the sale.
Second, the issues were actually litigated. An issue is “actually litigated” when it “is properly raised, by the pleadings or otherwise, ... is submitted for determination, and is determined.” Restatement (Second) of Judgments § 27 cmt. d (Am.. Law Inst. 1982). In contrast, an issue is not “actually litigated” when judgment is entered “by confession, consent, or default” because a party “choose[s] not to raise [i]t.” Id. cmt. e; see also Chi. Reg’l Council of Carpenters v. Prate Installations, Inc., No. 10 C 5431, 2011 WL 336248, at *5 (N.D. Ill. Jan. 31, 2011). Here, the Court’s Ruling which ultimately resolved the Sale Procedures Motion and Sammarco’s Motion to Amend the Sale Procedures Order satisfy the “actually litigated” requirement. Those matters were briefed, the Court conducted multiple hearings on them, and the Ruling read into the record at the Sale Approval Hearing on December 10, 2013 resolved them.
Third, the determination, of the issues was essential to the final judgment. In reaching that final judgment the approval of the 363 sale the Court was compelled to consider the propriety of the parties’ failure to disclose the cross-collateralization of the loans and the transparency of the bidding and sale processes. In doing so, the Court found that the “initial failure of the parties to disclose the cross-collateraliza*760tion ... was not the result of a purposeful misrepresentation or withholding.” (Sale Approval Trial Tr., 10:1-4). The Court further found that NTMS’s conduct in proposing the Stalking-Horse offer “did not involve any wrongdoing” and that “the process did not take advantage of other bidders.” (Sale Approval Trial Tr., 10:10-13). Although the Bank’s terms put the Stalking Horse in a favorable position for purposes of the 363 sale, the Court said, “that favorable position did not result [from] any bad faith, collusion or fraud. It was ... simply the reality of the financial position of the parties.” (Sale. Approval Trial Tr., 10:19-24). Those determinations were essential to the Court’s ultimate conclusions that the Stalking Horse was a good-faith purchaser under § 363 and that the sale was in the best interest of the NTMS bankruptcy estate.
Finally, Sammarco, the party against whom preclusion is invoked, was represented by counsel both during the Sale Hearing and in all related hearings prior to and leading up to that Hearing. Sam-marco’s counsel at the Sale Hearing also represents him in the adversary proceeding at bar.
Notwithstanding the discussion above, Sammarco argues that issue preclusion does not apply here. According to Sam-marco, the Sale Hearing concerned whether the Stalking Horse was a good-faith purchaser and whether a sale to the Stalking Horse was in the best interest of the estate, not whether Dini’s conduct justifies a denial of discharge. Contrary to Sam-marco’s argument, the Seventh Circuit has explained that issue preclusion “bars successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim'’ Rogan, 629 F.3d at 628 (emphasis added).
Accordingly, the Court finds that pursuant to the doctrine of issue preclusion, Sammarco is bound by the Ruling resolving the issues in the motions that he previously litigated before this Court, and he is precluded from litigating those issues again. Dini’s objection to the presentation of evidence is therefore sustained, and the evidence put on by Sammarco’s attorney in connection with the cross-collateralization allegations in Count V, as well as allegations that Dini and the Bank conspired to put NTMS into bankruptcy to steer a 363 sale to the Stalking Horse, will not be admitted. As a result, Dini’s discharge will not be denied under § 727(a)(7).
C. Section 727(a)(4)(A): False Oath in Connection with Dini’s Bankruptcy Case
Finally, in Count VII of the Complaint, Sammarco argues that Dini’s discharge should be denied under § 727(a)(4)(A), because Dini knowingly and with fraudulent intent made false statements with respect to the debt that he owes to Creel (the “Creel debt”). Section 727(a)(4)(A) enforces the debtor’s obligation to provide full and accurate information about himself and his affairs by denying a discharge to a debtor who has “knowingly and fraudulently, in or in connection with the case[,] ... made a false oath or account[.]” 11 U.S.C. § 727(a)(4)(A); Bostrom, 286 B.R. at 359. To prevail under § 727(a)(4)(A), Sammarco must demonstrate that: (1) Dini made a statement under oath; (2) the statement was material to the bankruptcy case; (3) the statement was false; (4) Dini knew that the statement was false; and (5) the statement was made with an intent to de^ ceive. See Schechter v. Hansen (In re Hansen), 325 B.R. 746, 758 (Bankr. N.D. Ill. 2005).
Sammarco alleges that Dini made multiple false oaths in connection with the *761Creel debt that Dini knew were- false and which he made with fraudulent intent. Specifically, Sammarco contends that Dini made inconsistent, conflicting statements under oath with respect to the amount of the Creel debt at the 707(b) Hearing in order to classify it as business debt. Those statements appeared in Dini’s answers to Sammarco’s interrogatories and requests for admission, as well as in his stipulations in connection with the 707(b) Hearing. (See PL’s Ex. 64 at 7.) Sammarco also alleges that Dini falsely represented in his testimony, as well as in a declaration supporting his objection to the 707(b) motion to dismiss (the “Declaration”), that the Creel debt was used to pay an NTMS overdraft of $70,000. According to Sammarco, Dini’s statements were false and made only for “litigation advantage.” (Compl. ¶ 119.)
Applying the facts to the elements of § 727(a)(4)(A), the Court finds, that Sam-marco is able to satisfy only two. First, Dini made statements under oath, because trial testimony, declarations made under penalty of perjury, and answers to interrogatories and other discovery all constitute statements under oath for purposes of § 727(a)(4)(A). See Hunt v. O’Neal (In re O’Neal), 436 B.R. 646, 661 (Bankr. N.D. Ill. 2010); Buckeye Ret. Props, of Ind., LLC v. Tauber (In re Tauber), 349 B.R. 540, 560-61 (Bankr. N.D. Ind. 2006); Structured Asset Servs., L.L.C. v. Self (In re Self), 325 B.R. 224, 245 (Bankr. N.D. Ill. 2005). Second, all of the statements made by Dini concerned his financial affairs and are thus material to the bankruptcy case. See Neugebauer v. Senese (In re Senese), 245 B.R. 565, 574 (Bankr. N.D. Ill. 2000).
As to the third element, Sammarco stumbles. He seems to suggest that Dini’s statements were false based solely on the conclusions reached by the Court in the 707(b) Order. In that order, the Court found, inter alia, that Dini’s testimony that the Creel debt was used for business purposes was sufficiently disputed by- the evidence - introduced at trial. The Court also found that Dini’s testimony regarding the amount of the Creel debt was inconsistent, and that, contrary to the figures to which Dini testified, the entire $290,000 loan from Creel was incurred primarily for personal, family, or household purposes. As to the overdraft that Dini claimed was cured by the money advanced by Creel, the Court found that NTMS’s records did not reflect an overdrawn account and that, thus, Dini’s testimony in that regard was unsupported by the evidence at trial. The Court reached these conclusions in deciding whether Dini’s debts were primarily consumer debts in the context of § 707(b), and those conclusions were, necessarily, based on the evidence presented at the 707(b) Hearing.
At the hearing on Sammarco’s objection to Dini’s discharge (the “727(a)-Hearing”), however, additional evidence in connection with the Creel debt was introduced. Specifically, NTMS’s former controller Elizabeth McDonough credibly testified that some of the money from Creel was used to cure NTMS’s overdrawn account at the Bank and to pay both personal and business expenses. Significantly, this testimony corroborated Dini’s. As for the NTMS overdraft, Dini testified that NTMS’s account was overdrawn by as much as $70,000 in the spring of 2012 and that he borrowed money from Creel to address that overdraft. That testimony also corresponded to Dini’s statement in the Declaration in which he said that “[a]t one point, NTMS’s bank account ... was overdrawn by $70,000, so [he] borrowed money from Creel to cure the overdrawn account.” (PL’s Ex. 59 ¶ 14.) Despite the fact that Dini was not able to producé any written documentation supporting the amount of the overdraft at issue, he credibly testified at the 727(a) Hearing that he remembered seeing a large deficit, of “sixty or seventy *762grand,” either on a computer screen or in a document. McDonough corroborated Dini’s testimony in that regard and pointed to overdrafts in the documents presented as evidence, stating that the company account was, frequently overdrawn and that she recalled seeing an overdraft of $60,000 at some point in 2012. McDonough also explained that overdrafts were not necessarily reflected in NTMS’s general ledger unless the Bank charged an overdraft fee.
Without the benefit of McDonough’s testimony at the 707(b) Hearing, the Court had to rely exclusively on Dini’s uncorroborated testimony and the “company records” which did “not reflect an overdrawn account.” (PL’s Ex. 64.) Thus, the Court’s finding that Dini’s testimony about the Creel debt was unsupported and disputed by the evidence at trial was based on only that evidence, as the Court repeatedly noted in the 707(b) Order.
Sammarco’s argument that Dini made false statements to gain litigation advantage in connection with the 707(b) motion to dismiss also fails. Statements made in an- effort to prevail in litigation are not necessarily false, and the evidence at the 727(a) Hearing showed that the ones that Dini made regarding the Creel debt were accurate to the best of his knowledge at the time they were made. In that regard, Dini- testified that his focus at NTMS was on sales and that he had no practical experience in accounting, bookkeeping, or finance. Accordingly, he relied on others the NTMS controller, his attorneys, and the Bank employees with whom he did business when he needed financial information, including the figures alleged to be business debt in connection with the 707(b) motion to dismiss. (Trial Tr. vol. 1, 109:25-110:21; Trial Tr. vol. 2, 152:16-156:20). The record does not support a finding that Dini knowingly made false statements in order to gain some advantage with respect to that motion, and, in any event, his statements had no impact on the ultimate outcome of the matter.
For the reasons discussed above, the Court simply cannot find that Dini’s statements regarding the Creel debt were false for purposes of § 727(a)(4)(A). As such, the remaining elements under that statutory provision need not be addressed. The Court finds that Sammarco has not satisfied his burden under § 727(a)(4)(A), and, thus, Dini’s discharge will not be denied thereunder.
All that remains now is Sammarco’s § 707(a) motion to dismiss Dini’s bankruptcy case and bar him from re-filing for three years. (Bankr. No. 13-25078, Docket No. 191.) Dini has already filed a “preliminary response” in which he argues that the motion should be denied under the equitable doctrine of laches. {See Bankr. No. 13-25078, Docket Ño. 192.) Dini is directed to file a “final” response by January 6, 2017. Sammarco is directed to file a reply by February 3, 2017. A status hearing on the motion is set for February 9, 2017 at 10:00 a.m. before the undersigned in Courtroom 615. Because a discharge cannot be entered while a motion to dismiss under § 707 is pending, Fed. R. Bankr. P. 4004(c)(1)(D), the Clerk is directed to delay the entry of discharge in Dini’s bankruptcy case until further notice.
CONCLUSION
For the foregoing reasons, the Court finds that Sammarco has failed to meet his burden to establish the elements required under §§ 727(a)(2), (a)(4), and (a)(7). As such, Dini’s discharge will not be denied. A separate order will be entered consistent with this Memorandum Opinion.
. Unless otherwise noted, all statutory and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101 to 1532, and the Federal Rules of Bankruptcy Procedure.
. All references to exhibits are to those submitted by the parties during the trial.
. According to the first of the agreements, executed in May 2009, "[a] default by [the] Group Borrowers] pursuant to the terms of the [Dini Loan] Instruments shall be deemed a default by [NTMS] pursuant to the terms of the [NTMS Loan] Instruments” and ‘‘[a] default by [NTMS] pursuant to the terms of the [NTMS Loan] Instruments shall be deemed a default by [the] Group Borrower[s] pursuant to the terms, of the [Dini Loan] Instruments.” (Pl.’s Ex, 8 ¶¶ 1(E) & 2(F)). The first agreement also provided that NTMS and the Group Borrowers would be "jointly and severally liable for the obligations” of the other. (Id. ¶¶ 1(F) & ,2(G).) The agreement did not contain “cross-collateralization” language.
In September 2010, the Group Borrowers, NTMS, and the Bank entered into a second agreement. (PL's Ex. 10.) This one referenced the first, noting that, thereunder, the parties had agreed to, inter alia, extend the loan term and "cross collateralize the Loans.” (Id. at 2.) The modifications that followed each referred to the prior agreements and reaffirmed and incorporated the terms and provisions of both the original loan instruments and the prior agreements. (See Pl.’s Exs. 11-15.)
. At trial, Dini testified that he paid Sammar-co more than $595,000 in monthly payments. (Trial Tr. vol. 2, 164:2-19, 197:10-19.) In fact, according to Dini, he paid Sammarco approximately $700,000 under the note. (Trial Tr. vol, 2, 197:15-19.) Despite his testimony, however, Dini was not able to point to any documentation to corroborate that claim. (Trial Tr. vol. 2, 197:18-198:4.) , ,
. According to Dini, he transferred only $40,000 of the money he received from Creel, rather than $70,000 to cure the purported overdraft,' because there were "other things" that he needed to use the balance of the money to pay. (Trial Tr. vol. 2, 185:2-4.)
. McDonough testified that when she saw personal expenses on the NTMS American Express credit card, she would identify them as such and then expense them to the "Loan to Shareholder” account. (Trial Tr. vol. 1, 97:1-8, 119:22-120:11.)
. As noted above, Sammarco’s complaint in the state court seeks damages of $330,429, a figure that was later increased to $461,730 to account for attorneys’ fees, interest, and costs. (Am. Pretrial Statement at 7; PL’s Ex. 32 at ¶ 9; Trial Tr. vol. 2, 168:16-22.)
. The entry reads: "Equity Line of Credit[,] National Telerep Marketing Systems, Ltd. loan secured by mortgage on Debtor’s- residence in Kildeer, IL and Condo in Chicago, IL[,] Secured by all business assets — Debtor has personal guarantee.” (Pl.’s Ex. 21 at 8.) Dini testified that this description corresponded to the NTMS Loan, although he did not know why the Mount Prospect Property was not listed as part of the security, (Trial Tr. vol. 2, 101:15-102:13, 172:14-173:5.) He later testified that the amount of the claim, $597,438.91, corresponded to the Dini Loan, not to the NTMS loan. (Trial Tr. vol. 2, 172:14-173:5.)
. According to the order, to be a qualified bidder, a potential bidder had to timely provide counsel for NTMS with a participation deposit in the amount of $75,000, as well as the potential bidder’s “most recent financial statements ... and such other evidence of financial wherewithal” to demonstrate that the bidder was able to "consummate the transaction.” (Bankr. No. 13-25077, Docket No: 50 ¶ 3(C).)
. The facts that follow were set forth by the Court at a hearing that took place on December 10, 2013, during which the sale was approved (the “Sale Approval Hearing”). The transcript from the Sale Hearing conducted on December 4, 2013 is available at Docket No. 197 in NTMS's bankruptcy case (Bankr. No. 13-25077). The transcript from the Sale Approval Hearing is available at Docket No. 198.
, Section 707(b)(1) provides, in relevant part, that after- notice and a hearing, the Court "may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts 11 U.S.C. § 707(b)(1). In turn, § 707(b)(3) provides, in pertinent part, that "[i]n considering under *753paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter ..., the court shall considerf:] (A) whether the debtor filed the petition in bad faith; or (B) [whether] the totality of the circumstances ,,. of the debtor’s financial situation demonstrates abuse.” 11 U.S.C, § 707(b)(3).
. Although' Bastuga testified briefly at .the trial, the majority of the testimony came from Dini.
. Sammarco’s "fraudulent invoices” argument goes to Count VIII of the Complaint, which the parties agree is no longer at issue.
, Sammarco's counsel failed to elicit testimony from Dini as to what he did with the funds remaining from the trade-in of the Cadillac. During closing arguments, Dini's attorney acknowledged that Dini received the balance of the funds by check and noted, summarily, that he used "some of that money to pay the bills .,. that were coming due.” (Trial Tr. vol. 3, 45:1-8.)
. Section 727(a)(4) is discussed infra in connection with the debt that Dini incurred by borrowing money from Creel.
. Although Dini contends that evidence supporting Sammarco’s conspiracy argument should not be admitted because conspiracy is a new claim that does not appear in the Complaint, the Court finds that the doctrine of issue preclusion equally applies to that evidence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500102/ | ORDER OVERRULING TRUSTEE’S OBJECTION TO CONFIRMATION
Brian D. Lynch, U.S. Bankruptcy Judge
The Standing Ch. 13 Trustee, Michael G. Malaier, objected to the confirmation of Debtors’ Ch. 13 Plan (the “Objection”) (ECF No. 11). The Trustee’s Objection was that Debtors’ proposed Ch. 13 Plan did not propose to pay all of Debtors’ disposable income, and it did not propose to pay 100% of the present value of Debtors’ claims (i.e. with interest).
The Debtors have scheduled $9,982.00 in priority claims and $18,823 in general unsecured claims (ECF No. 1, Schedule E/F, p. 6). Their proposed plan will pay 100% of those claims without interest. (ECF No. 2, p. 3). The Debtors reported net income of $3,038.00 in their Schedules I and J (ECF No. 1, Schedule J, p. 2) but propose a monthly plan payment of only $2,750 (ECF No. 2). The Trustee asserts in his Objection that in order to pay all required secured claims, priority claims, and administrative expenses, the debtors’ plan will run approximately 41 months, but if they paid the full amount of their disposable income every month the plan could complete in approximately 34 months. Debtors do not dispute that their plan does not meet the “disposable income” test under Section 1325(b)(1)(B). However, the Debtors’ plan does propose to pay 100% of allowed unsecured claims in less than sixty months, which is the other option under 11 U.S.C. 1325(b)(1).
*799The sole issue is whether the Debtors’ Plan that proposes to pay 100% of the general unsecured claims while contributing less than their monthly disposable income satisfies the requirements of 11 U.S.C. § 1325(b)(1)(A) if it does not propose to pay interest on those claims. This Court holds that under Section 1325(b)(1)(A), a plan that pays 100% of allowed unsecured claims is not required to pay interest on the claims.
In interpreting the meaning of a statute, a court must start “where all such inquiries must begin: with the language of the statute itself.” Ransom v. FIA Card Servs., N.A. (In re Ransom), 562 U.S. 61, 131 S.Ct. 716, 723-24, 178 L.Ed.2d 603 (2011). Under Section 1325(b)(1), a requirement for confirmation of a plan is that:
“as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
11 U.S.C. § 1325(b)(1). At the heart of this dispute is whether the phrase “as of the effective date of the plan” (the “introductory phrase”) refers to the date for determining whether the Debtors’ plan will provide either (A) payment in full or (B) payment of all projected disposable income during the applicable commitment period,' or whether the introductory phrase, when read together with subsection (A), denotes that the plan must pay the value, as of the effective date of the plan, which suggests that an interest component might be required to provide for present value.
Debtors argue the former, and that the plain language of the statute provides that Debtors shall only need to pay the amount of such allowed unsecured claims on the effective date of the plan, excluding interest. See e.g. In re Stewart-Harrel, 443 B.R. 219 (Bankr. N.D. Ga. 2011).
The Trustee argues that the phrase “as of the effect date of the plan” must be read together with subsection (A) as “the value[, as of the effective date of the plan,] of the property,” a phrase which has been commonly interpreted as requiring a “present value” analysis including interest, as opposed to the face value of the claim. See e.g. In re Hight-Goodspeed, 486 B.R. 462 (Bankr. N.D. Ind. 2012) (providing examples of where courts have interpreted the phrase “the value, as of the effective date of the property” in other sections of the Bankruptcy Code to include interest).
There is no legislative history which addresses the intent of the language. Commentators are divided on the issue of whether 'debtors must pay interest on claims under Section 1325(b)(1)(A). Colliers supports the Stewart-Harrel interpretation that interest on claims is not required, 8 Collier on Bankruptcy ¶ 1325.11[3]' (16th ed.), while Norton and Lundin agree with the Hight-Goodspeed interpretation that interest on claims is required. See 7 Norton Bankr. L & Prac (3d ed.), § 151:19; Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th edition § 168.1 at ¶ 6.
A plain language reading of the statute provides that a plan must provide that “as of the effective date of the plan- (A) the value ... is not less than the amount of such claim.” The value that a Debtor’s plan must provide must be not less than the amount of the creditors’ claims as of the effective date of the plan. Putting the phrase “as of the effective date of the plan” before both (A) and (B) of Section *8001325(b)(1) has the effect of making the phrase applicable to both subsections. That works fine with the Stewart-Harrel holding that the phrase “as of the effective date of the plan” is simply a reference to when the Court determines what is being paid to the allowed unsecured claims, i.e., either (A) the amount of such claim, or (B) the debtor’s projected disposable income in the applicable commitment period. The problem with Hight-Goodspeed and the commentators supporting its interpretation of Section 1325(b)(1)(A) is that while a present value determination makes sense with respect to subsection (A), it does not make sense with respect to subsection (B). Stewart-Harrel, 443 B.R. at 223.
A fundamental principle of statutory construction is that “[ijnterpretive constructions [of statutes] which would render some words surplusage ... are to be avoided.” In re Kun, 868 F.2d 1069, 1071 (9th Cir. 1989). If the Court accepts the Trustee’s argument that subsection (A) must be read as the “value [, as of the effective date of the plan,] of the property” then it must also apply a similar parallel construction of subsection (B), which would render the introductory phrase nugatory (e.g. “the plan, ‘as of the effective date of the plan,’ provides that all of the debtor’s projected disposable income ...”). Neither party has suggested, nor has any case held, that the disposable income requirement of Section 1325(b)(1)(B) has a present value element.
Conversely, the Debtors’ proposed construction allows the introductory phrase to modify both subsections (A) and (B) without creating any inconsistency in meaning or surplusage. The Supreme Court, in Hamilton v. Lanning, 560 U.S. 505, 518, 130 S.Ct. 2464, 2474, 177 L.Ed.2d 23 (2010), held that Section 1325(b)(1)(B) directs courts to determine projected disposable income “as of the effective date of the plan.” “[I]t would make no sense for the phrase ‘as of the effective date of the plan’ to have' different meanings as to each of the following subsections.” In re Stewart-Harrel, 443 B.R. at 223. Thus, a construction of the introductory phrase similar to that in Hamilton v. Lanning’s construction of subsection (B) should also apply to subsection (A).
The Trustee makes other policy arguments in favor of his position, arguing that the Hight-Goodspeed approach provides some protection to unsecured creditors for the risk that over the longer time for payment of the allowed unsecured claims chosen by the Debtors, there might be a change of financial circumstances such that the Debtors would need to amend the plan and reduce distributions to unsecured creditors. However, that is not a risk that the Code protects creditors against. Moreover, if the Debtors made such a motion, the Trustee could point out that the Debtors could extend their plan out longer (from 41 months up to 60 months) to avoid reducing the amount paid to allowed unsecured claims. Likewise, the Code allows a challenge to a plan on the grounds of lack of good faith or feasibility. But the Code gives Debtors the option of paying 100% of the allowed unsecured claims, thereby avoiding having to comply with the .projected disposable income requirement.
WHEREFORE, the Trustee’s Objection to the Debtors’ Plan of Reorganization is overruled. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500104/ | ORDER GRANTING MOTION TO COMPEL
Janice D. Loyd, U.S. Bankruptcy Judge
Plaintiff Nikki Marie-, Waldrop. (“Wal-drop”) initiated this adversary proceeding alleging that the garnishing creditor, Defendant Discover Bank, acting through its counsel, Defendant Stephen L Bruce (“Bruce”) violated the automatic stay imposed by 11 U.S.C. § 362(a). Before the Court is Waldrop’s Motion to Compel Defendant Stephen L. Bruce to respond' with proper Answers to Interrogatories (the “Motion”) [Doc. 43] and Bruce’s Response and Objection to Plaintiffs Motion to Compel Discovery (“Response”) [Doc. 56].
Background
The relevant facts are not in dispute and may be summarized as follows: On or about August 4, 2016, Waldrop issued discovery requests in the form of Plaintiffs Interrogatories to Defendant Stephen L. Bruce consisting of six Interrogatories. [Doc. 43-1]. On September 6, 2016, Bruce submitted to Waldrop his Response to Plaintiffs Interrogatories.1 [Doc, 43-2], Because Waldrop’s counsel obviously took issue with the adequacy of the Answers to Interrogatories, on September 8, 2016, counsel for both sides participated in a telephonic conference in a good faith attempt to resolve their differences as is required by Fed. R. Bankr. P. 7037(a)(1) and Local Rule 7037-1 as a condition precedent to the filing of any motion relating to discovery disputes., Following the telephonic conference, Bruce did supplement the Responses by providing Waldrop’s counsel with a one-page copy of the internal bankruptcy standard operating proce; dures used by Bruce’s law firm.
*810On September 22, 2016, Waldrop’s counsel wrote Bruce’s counsel a lengthy letter detailing his position that Bruce had failed to properly object, to fully answer the Interrogatories or to properly supplement his Responses. [Doc.43-3]. The letter specifically addressed how each of Bruce’s Responses to each of the six Interrogatories was, in Waldrop’s counsel opinion, insufficient. It appears from allegations in Waldrop’s Motion that Bruce has not supplemented his original Answers to Interrogatories. It appears to the Court that Waldrop’s counsel has adequately set forth in the Motion essential facts sufficient to enable the Court to pass judgment on the adequacy and sincerity of the good faith conferment requirement under Rule 7037(a)(1) preparatory to the filing of this Motion.
Analysis
Rule 33 of the Federal Rules of Civil Procedure, made applicable to bankruptcy by Fed. R. Bankr. P. 7033, provides that a “party may serve on any other party no more than twenty-five written interrogatories, including all discrete parts.” Discovery rules ought to be accorded a broad and liberal treatment. Discovery should ordinarily be allowed under the concept of relevancy unless it is clear that the information sought can have no possible bearing upon the subject matter of the action. Miller v. Doctor’s General Hospital, 76 F.R.D. 136, 138-9 (W.D. Okla. 1977). “The party objecting to ... discovery bears the burden of showing why discovery should not be permitted.” Alexander v. FBI, 194 F.R.D. 299, 302 (D. D.C. 2000); Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812, 818 (5th Cir.2004). “The grounds for objecting to an interrogatory must be stated with specificity. Any ground not stated in a timely objection is waived unless the court, for good cause, excuses the failure.” Fed. R. Bankr. P. 7033(b)(4). The Court “looks with disfavor on conclusory or boilerplate objections that discovery requests are irrelevant, immaterial, unduly burdensome, or overly broad.” Sonnino v. University of Kansas Hospital Authority, 221 F.R.D. 661, 670 (D. Kan. 2004); SEC v. Brady, 238 F.R.D. 429, 437 (N.D. Tex. 2006). “[B]oilerplate objections that include unsubstantiated claims of undue burden, over breath and lack of relevancy,” while producing “no documents and answering no interrogatories ... are a paradigm of discovery abuse.” Jacoby v. Hartford Life & Accident Ins. Co., 254 F.R.D. 477, 478 (S.D. N.Y. 2009).
Before discussing in greater detail several of the general objections raised in Answers to specific Interrogatories, the Court notes that Bruce’s general objections, without more, fail to satisfy the burden placed upon him by Federal Rules of Bankruptcy Procedure to justify his objections. Bruce makes little or no effort in the Answers to Interrogatories to explain why he finds the discovery request to be overly broad, burdensome, irrelevant, or not reasonably calculated to lead to discovery of admissible evidence. The Court will address this issue in regard to specific Interrogatories in the remaining portion of this order. Before proceeding to do so, however, the Court is compelled to address Bruce’s Response filed on October 27, 2016 [Doc. 56].
Bruce’s Response does contain a more substantive basis for the objections to the IntexTogatories than the boilerplate, unresponsive objections contained in his Answers to Interrogatories. What is deeply concerning to the Court is that any substantive objections contained in his Response should have been, indeed are required to have been, contained in the Answers to Interrogatories in the first instance. The law is clear that any objections to discovery contain a certain degree of specificity which was completely lacking in Brace’s Answers to Interrogatories. *811The Court should have been able to determine whether Bruce had a legitimate basis for objection to the Interrogatories by looking at the Answers themselves without resorting to his Response after Waldrop felt compelled to file a motion with the Court.
Interrogatory No. 1 asks Bruce to identify all documents, writings, statements and communications that he reviewed, identified, referred to, and/or relied on in answering any of these requests. Bruce’s Answer to the Interrogatory interposes an objection on the basis that the interrogatory is overly broad, unduly burdensome, and some writings requested are subject to the attorney-client privilege. This boilerplate response is insufficient. This type of interrogatory is a standard one to which there is no basis for objection.' As to. the claim of attorney-client privilege, this is also insufficient. It is well settled that when a party withholds documents or any information based on the assertion of a privilege or work product immunity, “a party shall make the claim expressly and shall describe the nature of the documents, communications, or things not produced or disclosed in a manner that, without revealing information itself privileged or protected, will enable other parties to assess the applicability of the privilege or protection.” Fed.R.Civ. P. 26(b)(5); Sonnino, 221 F.R.D. at 668; Peat, Marwick, Mitchell & Co. v. West, 748 F.2d 540 (10th Cir. 1984). To the Court’s knowledge, Bruce did not provide any such information nor provide a privilege log. Under normal circumstances, the Motion to Compel as to this Interrogatory would be granted; however, there is an issue which precludes that determination at this time.
In his Response, Bruce asserts that he “offered to formally amend his response to Interrogatory Number 1 (to withdraw his asserted claim of the attorney-client privilege) but was notified by counsel for Plaintiff that such an amendment would not be necessary.” [Response, Doc. 56, pg.4]. Waldrop’s Motion makes no mention of Bruce’s purported withdrawal of any claim of privilege and “requested Bruce fully answer Interrogatory No. 1 and provide a privilege log for any portions withheld due to claims of privilege.” [Doc. 43, pg. 6]. Given the obviously conflicting assertions of whether the privilege is or is not being asserted, a hearing will be necessary to resolve this issue.
Interrogatory No. 2 seeks the discovery of any insurance policy which Bruce might have covering the claims, damages or actions involved in this lawsuit. Bruce objects on the basis that the same is “irrelevant to the issues raised by the plaintiff in this matter.” There is nothing vague, overly broad or irrelevant about a request for an insurance policy that may apply to a claim. Indeed, this is one of the basic items to be disclosed early on in civil litigation in federal court, without awaiting a specific request. Fed.R.Civ.P. 26(a)(l)(iv).2
Although not stated in the Answer to Interrogatory No. 2, in his Response Bruce asserts that in his Initial Disclosures (to which the Court is not privy) he advised Waldrop’s counsel that there was no such insurance policy in existence. Bruce apparently contends that the absence of any insurance policy is totally consistent with, or equivalent to, his stated objection in the Answer to the Interrogatory that the discovery of any insurance policy was “irrelevant”. This is unaceepta-*812ble playing of word-games. The Court does not regard “irrelevant” as the same as “there is no insurance policy.” The Motion to Compel is granted. If there is no applicable insurance policy the same should be so stated under oath.
Interrogatory No. 3 seeks discovery of any and all lawsuits in which a motion for sanctions or Fair Debt Collection Practices Act claims have been filed or asserted against Bruce in any bankruptcy adversary proceeding with the past ten years. Bruce objects to the same on the basis that the interrogatory is “unduly burden, irrelevant and not reasonably calculated to lead to the discovery of admissible evidence.” Prior similar litigation, however, is relevant, particularly where punitive damages are sought for the violation of the automatic stay. When discovery sought appears relevant on its face, the party resisting discovery has the burden to establish the lack of relevance by demonstrating that the discovery (1) does not come within the broad scope of relevance as defined by under Fed.R.Civ.P. 26(b)(1), or (2) is of such marginal relevance that the potential harm the discovery may cause would outweigh the ordinary presumption in favor broad disclosure. Gassaway v. Jarden Corp., 292 F.R.D. 676, 684 (D. Kan. 2013).
The Court finds that prior similar charges, lawsuits and adversary proceedings regarding Bruce having violated the automatic stay are relevant. In his Response, Bruce states that he “can affirmatively state that he has never been sued in an adversary-proceeding for taking an action which that (sic) the debtor’s own attorney not only consented to but requested.” This response smacks of a “negative pregnant” in which Bruce is not denying whether he has ever been sued in an adversary proceeding but only one in which the exact particular facts of this case are applicable. In effect, Bruce is attempting to unilaterally modify the discovery request by adding new parameters. This he cannot do. The Motion to Compel will be granted in so far as it seeks discovery of lawsuits against Bruce or his firm for violations of the automatic stay or other sanc-tionable conduct in bankruptcy. The Court, however, restricts the scope of time period for such information from ten (10) years to five (5) years preceding the filing of this adversary.
Interrogatory No. 3 also seeks discovery of all suits brought against Bruce under the Fair Debt Collections Practices Act (FDCPA) within the last ten (10) years. Although a more specific objection should have been stated in the Answer to Interrogatory No. 3 rather than solely in Bruce’s Response, the Court does agree with Bruce that the relevancy of an FDCPA violation and a violation of the automatic stay is, at best, tenuous. There are, however, circumstances in which the bankruptcy court and the FDCPA merge, mostly with regard to whether the filing of a proof of claim filed in a bankruptcy case which is barred by the statute of limitations under state law constitutes a violation of the FDCPA. To resolve a conflict between the Courts of Appeal, that issue is presently before the United States Supreme Court.3 The Court will sustain the Motion to Compel as it pertains to Interrogatory No. 3 only in so far as it seeks discovery of claims brought against Bruce under the FDCPA involving a debtor who has sought relief under the Bankruptcy Code within five (5) years preceding the filing of this adversary.
*813Interrogatory No. 4 requests Bruce to identify his “policies and procedures for collection activities and/or treatment of an account once a debtor has filed bankruptcy” including those from Defendant Discover Bank. Once again Bruce objects to the interrogatory as “overly broad, unduly burdensome and not reasonably calculated to lead to the discovery of admissible evidence.” Such materials are clearly discoverable, and any argument to the contrary is simply beyond the pale. In his Response Bruce states that he “can affirmatively state that none of the identified sources make up his firm’s internal procedures.” He should have said so under oath when he initially answered the Interrogatory. The Motion to Compel is granted as to Interrogatory No. 4.
Interrogatory No. 5 requests Bruce to “identify all Discover attorneys, staff, employees and any and all representatives with whom You have communicated regarding to Waldrop.” Bruce’s Answer interposes an objection on the basis that the interrogatory is “overly broad, unduly burdensome and not reasonably calculated to lead to the discovery of admissible evidence. This boilerplate response is insufficient. In his Response, Bruce does not elucidate or even address Interrogatory No. 5. The Motion to Compel will be sustained as to Interrogatory No. 5.
Interrogatory No. 6 requests Bruce to identify how many Discover accounts he has received for debt collection, his fee agreement with Discover (for example, flat fee or percentage of recovery), and the total amount of compensation he has received for these files in 2013, 2014 and 2015.” Bruce’s Answer to the Interrogatory repeats the mantra of “overly broad, unduly burdensome and not reasonably calculated to lead to- the discovery of admissible evidence.” In his Response Bruce explains his objection that such information is not discoverable because (1) Wal-drop has not alleged any facts that would support a claim for punitive damages and (2) Bruce’s financial condition could be better done by a profit/loss statement or information related to Bruce’s current financial condition.
Bankruptcy Code § 362(k) permits the recovery of punitive damages for violation of the automatic stay “in appropriate circumstances.” This Court will have to determine whether there was a violation of the automatic stay, determine any actual damages for same and, if the violation was egregious, i.e. “appropriate circumstances”, whether punitive damages might be awarded. Contrary to that asserted by Bruce in his Response, Waldrop has alleged sufficient facts which if proven at trial may or may not entitle her to punitive damages. Bruce incorrectly conflates “allegation” with “proof’. For discovery purposes, it is not required that a plaintiff “prove” her entitlement to punitive damages before requiring defendant to produce information relative to insurance or financial condition. Information of defendant’s net worth or financial condition is relevant because it can be considered in determining punitive damages. City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 270, 101 S.Ct. 2748, 2761, 69 L.Ed.2d 616 (1981); Ramsey v. Culpepper, 738 F.2d 1092, 1099 (10th Cir. 1984). For discovery purposes, it is sufficient that if as a matter of law the plaintiff is entitled to recover punitive damages and has sufficiently alleged facts entitling her to the same, federal courts permit pretrial discovery of financial information of the defendant without requiring plaintiff to establish a prima facie case on the issue of punitive damages. Mid Continent Cabinetry, Inc. v. George Koch Sons, Inc., 130 F.R.D. 149 (D. Kan.1990); Miller v. Doctor’s General Hospital, 76 F.R.D. 136, 140 (W.D. Okla. 1977); Baker v. CNA Insur*814ance Co., 123 F.R.D. 322, 329-30 (D. Mont. 1988). The Motion to Compel as to Interrogatory No. 6 is granted; however, if Bruce requests the same the court would enter an appropriate Protective Order restricting the dissemination of any financial information disclosed.
The Court has one further observation. Much of Bruce’s Response seeking to prevent discovery appears to be based largely on the premise that Waldrop’s case is so weak and a finding in Bruce’s favor so inevitable that Waldrop is not entitled to discovery to which she is clearly entitled under the Federal Rules. Consistent -with that position, on October 27, 2016, Bruce filed his Motion for Summary Judgment [Doc. 55], and in his Response requests that the Court’s decision on Waldrop’s Motion to Compel be held in abeyance until a decision is rendered on the Defendant’s Motion for Summary Judgment.” [Doc. 56, pg.lj. This Court will not preclude any party from conducting proper discovery simply because the opposing party believes his case to be a “slam-dunk”. This is particularly true where, as here, Waldrop served only six (6) interrogatories of a general, straight-forward nature, and common to much litigation and under no reasonable interpretation could be regarded as imposing an undue hardship. Bruce regards this limited discovery as “abusive”. It is not.
Accordingly, Bruce’s request to hold Waldrop’s Motion to Compel in abeyance is denied. Further, Bruce is ordered to Answer the Interrogatories consistent with the Court’s findings as set forth herein within 10 days of the entry of this Order.
IT IS SO ORDERED.
. To avoid any confusion between the “Response” which Brace filed to Waldrop's Motion to Compel on October 27/ 2016, and Brace's titling his answers to Waldrop’s Interrogatories as a "Response”, the Court will refer to the Response to the Motion to Compel as the “Response” and the actual responses to the Interrogatories as “Answers to Interrogatories” • (notwithstanding the fact that there were, in reality, no “answers” made).
. Although the Initial Disclosures required by Rule 26(a)(1) are not applicable to adversary proceedings by Local Rule 7026-1 A, that does not make disclosure of insurance policies irrelevant, only that they need not be provided or disclosed "without awaiting a discovery request.”
. Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir, 2016), cert. granted — U.S. —, 137 S.Ct. 326, 196 L.Ed.2d 212 (2016). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500105/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF’S MOTION FOR DEFAULT JUDGMENT
KEVIN R. ANDERSON, U.S. Bankruptcy Judge
The matter before the Court is Ray Klein, Inc. dba Professional Credit Service’s (“Plaintiff’) Motion for Default Judgment. The Court has heard the arguments of Plaintiffs counsel, heard testimony of witnesses, and received exhibits into evidence as noted on the record. Daniel Jeff Webb, the Defendant, however, did not appear at the hearing or file an objection to the Plaintiffs Motion. The Court has also read the pleadings and has conducted its own independent investigation of applicable law. The Court is prepared to rule and now issues its findings of fact and conclusions of law. Any of the findings of fact herein are deemed, to the extent appropriate, to be conclusions of law, and any of the conclusions of law herein are similarly deemed to be findings of fact, and they shall be equally binding as both.
I. JURISDICTION, NOTICE, AND VENUE
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) & (b) and 28 U.S.C. § 157(b). The Plaintiffs Motion is a core proceeding under 28 U.S.C. § 157(b)(2)(I), and the Court may enter a final order. Venue is appropriate in this District under 28 U.S.C. §§ 1408 and 1409, and notice of this hearing was properly given to all parties in interest.
*817II. FINDINGS OF FACT
Procedural History
1. On March 13, 2015 Daniel Jeff Webb (“Webb”) filed a joint voluntary Chapter 7 bankruptcy case with Laissa Tereza Call (Case No. 15-22138).1
2. Webb was represented by Leonard J. Carson of Pearson, Butler & Carson, PLLC (“Carson”).2
3. The deadline to object to the Debtors’ discharge or to challenge dischargeability of debts under 11 U.S.C. §§ 523 and 7273 expired after June 22,2015.4
4. On June 19, 2015, the Plaintiff filed an Adversary Proceeding (the “Complaint”) against the Webb. The Plaintiff sought a determination that its debts against Webb were nondischargeable under §§ 523(a)(2) and 523(a)(6).5
5. The Plaintiff properly served the Summons and Complaint on Webb and Carson by mail on June 30, 2015.6
6. Webb filed an answer to the Complaint (“Answer”) on July 28, 2015.7
7. A few months later, on January 28, 2016, the Court entered an Order Granting Second Amended Stipulated Motion to Amend Order Governing Scheduling and Preliminary Matters (“Scheduling-Order”). The Scheduling Order set a Final Pretrial Conference in the case for May 3, 2016.8
8. Before the Final Pretrial Conference was held, Carson filed a Motion to Withdraw as' Attorney of Record for Webb (“Motion to Withdraw”) on April 29, 2016.9 The Motion to Withdraw included a signed declaration showing that Webb had expressly consented to Carson’s request (the “Defendant’s Declaration”). The Defendant’s Declaration likewise stated that Webb “acknowledges and certifies that [he] is prepared for trial as scheduled and is eligible to appear pro se at the trial” and “that he [was] aware of any and all upcoming hearings in this matter.”
9. On May 2, 2016, the Motion to'Withdraw was granted. The order on the Motion to Withdraw stated that “[a] party who fails to file Notice of Substitution of Counsel or Notice of Appearance ... will be deemed to be proceeding pro se and, may be subject to sanction pursuant to Federal Rules, of Civil Procedure 16(f)(1), including but not limited to dismissal or default judgment.”10
10. The next day, May 3, 2016, the Court held the Final Pretrial Conference. Floyd C. Mattson (“Mattson”) appeared tele-phonically on behalf of the Plaintiff. However, Webb did not appear at the hearing. The Court rescheduled the Final Pretrial Conference for June 7, 2016 (“Rescheduled Hearing”).11
*81811. Two days later, on May 5, 2016 the Court mailed notice of the Rescheduled Hearing to Webb at 10894 S. Weiss Drive, South Jordan, UT 84009-7748.12
12. On June 7, 2016, the Court held the Rescheduled Hearing on the Final Pretrial Conference. Mattson appeared telephoni-cally for the Plaintiff; however, Webb did not appear. The Bankruptcy Court’s staff reported that Webb had called the Court shortly before the Rescheduled Hearing to indicate he would be unable to attend the hearing. Though Webb had not previously requested permission to appear telephoni-cally, the Court’s staff nonetheless attempted to reach Webb by telephone so he could participate at the hearing. However, Webb could not be reached. The Court then took a brief recess and reconvened the hearing at 2:00 p.m., but Webb could still not be contacted. The Court stated it would issue an Order to Show Cause for Webb’s failure to appear. The Court also mentioned that it would consider an entry of a default certificate if Webb failed to appear at a subsequent hearing.13
13. On June 9, 2016, the Court filed an Order to Appear and Show Cause (“OSC”) for Webb. The OSC ordered Webb to appear before the Court on June 28, 2016 at 9:30 a.m. and to show cause why he: (1) failed to appear at both the original and rescheduled hearing on the Final Pretrial Conference set by the Court; and (2) failed to file his own Pretrial Order or otherwise respond to the Plaintiffs Pretrial Order. The OSC also stated that “the Court will consider imposing sanctions pursuant to Fed. R. Civ. P. 37(b)(2)(A)(ii)— (vii) for failure to comply with the Court’s Scheduling Order, including but not limited to, striking [Webb’s] answer and/or rendering a judgment by default against ... [Webb] under Local Rule 7055-1.”14
14. A few days after the OSC was issued, Webb filed a Motion to Reschedule Hearing. Webb requested that the OSC hearing be moved until after the middle of July because of his work schedule.15
15. Despite Webb’s request, the Court held the OSC hearing. However, no parties appeared. The Court then rescheduled the OSC hearing for July 26, 2016 at 10:30 a.m. and provided notice to Webb. In addition to the terms in the prior OSC order, the Court ordered Webb to “inform Judge Anderson’s Chambers no later than July 21, 2016 at 4:30 p.m.” if he could not appear at the rescheduled OSC hearing.16
16. On July 26, 2016, the Court held the rescheduled OSC hearing. Mattson appeared telephonically for the Plaintiff. However, once again, Webb did not appear. As a result, the Court sanctioned Webb under Fed. R. Civ. P. 16(f)(l)(A)-(C) and Fed. R. Civ. P. 37(b)(2)(A)(iii) by striking Webb’s Answer to the Complaint. The Court also ordered that no later than August 19, 2016, Plaintiff could file a motion for default judgment and set the matter for hearing.17
17. On August 16, 2016, the Plaintiff filed a Motion for Default Judgment.18 Notice of the Motion for Default Judgment and the Hearing on the Motion were mailed to Webb on August 30,2016.19
18. The Court held a hearing on the Plaintiffs Motion for Default Judgment on October 18, 2016 at 9:30 a.m. Mattson appeared on behalf of the Plaintiff; however, *819Webb did not appear. The Plaintiff called two witnesses at the hearing: 1) David Carleson, who appeared telephonically and 2) Donald Baker who was in the courtroom.20
Exhibits Admitted at the Evidentiary Hearing
19. In June 2010, Webb signed a Vessel Purchase and Sale Agreement (the “Agreement”) to purchase the vessel Sea-Tex, described as a 56 Matthews (the “Vessel”) from Donald and Sue Baker (“Bakers”) for $94,500.21
20. The Agreement provided that Webb would make a down payment of $8,950 and thereafter pay $800 a month.22
21. The Agreement was secured by a Preferred Marine Mortgage between Sea-tex Charters II, LLC (“Seatex Charters”) and the Bakers on August 19,2010.23
22. Webb was the sole member of Seatex Charters.24 Webb formed Seatex Charters in 2009.25 But it was later ended in 2010.26
23. On February 10, 2012, a judgment was entered in favor of the Bakers; Sea-Tex Charters, Inc. against M/Y SeaTex, O.N. 287804, Her Tackle, Apparel, Boats, Appurtenances, in rem; Daniel Jeffrey Web; SeaTex Charters II, LLC, in per-sonam in the U.S. District Court for the Western District of Washington, Case No.: 3-11-CV-05122 (the “Default Judgment”).27
24. The Default Judgment was in the amount of $165,184.36, plus attorney’s fees and expenses in the amount of $14,409, and included the damages assessed by the United States District Court, District of Alaska in its Judgment in Rem of August 9, 2011. The Default Judgment also allowed interest of 8% to accrue per annum, as determined by the Alaska court from January 5, 2011 until paid in full.28
25. On May 11, 2013, Bakers assigned the Default Judgment to the Plaintiff.29
26. As of October 10, 2016, the total amount due from the Default Judgment is $270,124.20.30
David Carleson’s Testimony
27. David Carleson (“Carleson”) has been a yacht broker for 30 years.
28. Carleson testified that he met Webb sometime in 2010 when Webb expressed an interest in purchasing a boat. Carleson later suggested that Webb consider the Vessel.
29. Webb told Carleson that he was interested in the Vessel because he wanted to operate a charter business. Webb also represented that his brother was in the funeral-home business and that he was in the process of obtaining a funeral-home business license as well. Webb also stated that he and his brother had purchased a mortuary business in Tacoma, Washington.
30. Carleson testified that Webb made several representations regarding his financial abilities before he purchased the Vessel, including—
• Webb was a high-level contractor and had performed government repair jobs along the coast with his father.
*820• Webb worked with an heir to the Kraft Foods business and that he and Mr. Kraft did many contracts together. In fact, the Kraft Foods family had helped Webb purchase a condo-at one time.
• Webb was a member of the LDS church and had received their assistance in thé past. Webb also represented that he had the backing and “security” of the Mormon Church.
• Webb had a contract with the Neptune Society — an organization involved with conducting funerals, at sea.
• Webb planned to operate a charter business with the Vessel out of the Seattle area.
31. Afterwards, Carleson passed along Webb’s representations to the Bakers, the owners of the Vessel, before the Agreement was signed.
32. After the Agreement was signed, Carleson testified that he could not locate Webb or the Vessel, and that the Webb had not maintained insurance on the Vessel.
Donald Baker’s Testimony
33. Donald Baker (“Baker”) testified that he owned the Vessel when it was sold to Webb.
34. Baker testified that he relied on Carleson’s representations that Webb appeared to be a valid 'purchaser for the Vessel. These representations included—
• Webb had a plan for the Vessel as a member of the Neptune Society;
• Webb had a charter operation in the Seattle and San Juan area to do burials at sea; and
• Webb’s wife was a daughter to an heir of the Kraft Foods family, and he had their financial backing.
35. After the Agreement was made, Baker said Webb only made three monthly payments, that each payment was late, and that payments ceased after November 2010.31
36. Baker further testified that Webb never insured the Vessel even though it was a requirement of the Agreement. In fact, Baker stated that he covered three months of insurance premiums after the Agreement was signed. At one point, Baker received proof of insurance from Webb, but shortly thereafter, Baker received a notice of eaneéllation from the insurance company because Webb never made the payments.
37. Baker said Webb represented that the Vessel was in Washington around September 2010. However, Baker later learned from another source that Webb had taken the Vessel to Alaska during that period.
38. Baker testified that the.U.S. Mar-shalls later repossessed the Vessel in Alaska in March or April of 2011. Baker discovered that several liens were filed against Vessel for repair work authorized by Webb.
39. Baker stated when he recovered the Vessel from Alaska, it had been completely “trashed.” For instance, the diesel-generator had been removed; the batteries had been removed, broken, or damaged; there was extensive water and freezing damage; and about $40,000 in electronic marin equipment had been removed from the Vessel.
40. Baker testified that it took a week to make repairs to enable the Vessel to return to Washington state.
41. Baker sold the Vessel in August 2011.
*821III. CONCLUSIONS QF LAW
The Plaintiff seeks a determination that the debt related to the Default Judgment is nondischargeable under §§ 523(a)(2) arid 523(a)(6).
A. Section 523(a)(2) — False Pretenses, a False Representation, or Actual Fraud
Section 523(a)(2)(A) prevents the discharge of a debt based, on three separate causes of action: false pretenses, a false representation, or actual fraud.32 Each cause of action is distinct with its own set of elements, and the creditor has the burden to establish each of these elements.33 The Court will outline the elements of each cause of action in the order outlined in Section 523(a)(2)(A).
First, to sustain a claim for false pretenses, a creditor must show that the debtor made “implied misrepresentations intended to create and foster a false impression.”34 “False pretenses can be ‘defined as any series of events, when considered collectively, that create a contrived and misleading understanding of a transaction, in which a creditor is wrongfully induced to extend money or property to 'the debtor.’ ”35
Second, to sustain a claim for a false representation, a creditor must show, by a preponderance of the evidence, that “[1] [t]he debtor made a false representation; [2] the debtor made the representation with the intent to deceive the creditor; [3] the creditor relied on the representation; [4] the creditor’s reliance was reasonable; and [5] the debtor’s representation caused the creditor to sustain a loss.”36
• Third, to except a debt from discharge based on actual fraud, “the creditor must show: (a) the debtor committed actual fraud; (b) the debtor obtained money, property, services, or credit by actual fraud; and (c) the debt arises fi*om actual fraud,”37 Put simply, actual fraud is “anything that counts as ‘fraud’ and is done with wrongful intent.”38 No misrepresentations, however, are necessary to determine actual fraud or wrongful intent.39 Wrongful intent can be manifested “when a debtor intentionally engages in a scheme to deprive or cheat another of property or a legal right.”40
B. Section 523(a)(6) — Willful and Malicious Injury
Turning to the second count in the Complaint, that Webb willfully and maliciously *822injured the Bakers’ property, the Court must look to § 523(a)(6). This section prevents a debtor from discharging a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.”41
To prevail on this claim, a creditor has the burden to prove, by a preponderance of the evidence, that a debtor’s act was l)“willful” and 2)“malicious.”42 Willfulness requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”43 A plaintiff must therefore prove that the debtor “desires to cause the consequences of his act, or that he believes that the consequences are substantially certain to result from it.”44 The inquiry is subjective, focusing on the state of mind of the debtor.45
On the other hand, a finding of maliciousness requires proof that the debt- or either intends the resulting injury or intentionally takes action that is substantially certain to cause the injury.46. The creditor must establish the intent to do harm, not just an intentional act that leads to injury.47
IV. ANALYSIS
Before visiting the merits of the Plaintiffs case, the Court must review the standards for default judgment under Fed. R. BaNKR. P. 7055. Under this rule, the Court may conduct a hearing when it needs to “establish the truth of any allegation by evidence.”48 In this case, the factual allegations are considered true. Webb did not challenge Plaintiffs allegations. The Court gave Mr. Webb ample opportunities to appear and defend his interests at several hearings. Despite these invitations, Webb chose not to appear or otherwise participate in the proceedings. As a consequence, the Court sanctioned Webb by striking his Answer to the Complaint. With this background in mind, the Court still has a duty to find that the facts in this case are sufficient to reach the appropriate conclusions of law.49
In this case, the Plaintiff has alleged sufficient facts to show by a preponderance of the evidence that Webb obtained the debt on the Vessel under false pretenses, false representation, and actual fraud. The Court bases its decision on the record, exhibits, and testimony provided in this case. The Court was particularly persuaded by the testimony of Carleson, who testified that Webb made several representations about his financial ability to repay the debt with the Bakers. Namely, that Webb had special connections to the Kraft Foods business; that he had the *823financial backing and support of the LDS church; that he had a business contract with the Neptune Society; ' and that he planned to open his own charter business using the Vessel. The Court finds Carle-son’s testimony to be credible based on his experience as a yacht broker for at least 30 years and his personal dealings with Webb,
Though Webb never challenged these allegations, the Court finds further support of Webb’s false representations concerning his financial abilities in the record. For instance, in the February 2016 deposition, Webb testified that his only experience in the mortuary business had been in 1996 for less than a year.50 Likewise, in the same deposition, Webb testified that he had “no experience in the charter business when he purchased the [Vessel].”51 These facts, combined with Carleson’s testimony, reveal that Webb knowingly made false representations about his financial ability to make payments on the Vessel.
Furthermore, Webb’s false representations were made with the intent to deceive Carleson and the Bakers, and did indeed cause the Bakers to sustain a significant loss to their property. Specifically, after the Vessel was recovered from Webb, the Bakers were only able to sell it for $12,000 because of Webb’s removal of items from the Vessel and his failure to properly store and maintain it.52
Even if Webb’s statements to Carleson were not actual representations of his financial ability to make payments on the debt, Webb’s conduct clearly showed he intended to create and foster a false impression when he purchased the Vessel. Webb made this impression to Carleson when he stated that he had the backing of well-known and financially-successful organizations, ’ such as Kraft Foods and the LDS church. Webb also made implied representations that he had legitimate business plans related to the purchase of the Vessel. Specifically, that the Vessel would be used for charter work out of the Seattle area, and that he already had begun efforts to obtain a mortuary license. Webb’s misleading conduct ultimately induced the Bakers to enter into the Agreement. Thus, for these reasons, Webb’s actions rise to the level of false pretenses.
Webb’s representations and conduct in this case also rise to the level of actual fraud under § 523(a)(2)(A). As previously discussed, Webb’s actions show that he intentionally engaged in a scheme to deprive or cheat the Bakers when he obtained the Vessel. For instance, Webb never obtained insurance on the Vessel, despite this clear term in the Draft Letter of Understanding and the Preferred Marine Mortgage.53 In fact, Baker testified that he paid for all insurance premiums on the Vessel. Webb stated in email communications with Baker that he planned to obtain insurance and repay Baker for premiums he covered, but Webb never did.54 At one point, Webb provided Baker with proof of insurance, but Baker later received notice that the insurance was can-celled for non-payment. These actions, along with the conduct discussed earlier, show that Webb intended to commit actual fraud against the Bakers. For all these reasons, the Court finds that the debt is *824excepted from discharge under § 523(a)(2)(A).
The Court, however, declines to grant a default judgment in favor of the Plaintiff under § 523(a)(6). Plaintiff argues that Webb willfully and maliciously injured the Bakers’ property by removing $40,000 in electronics and accessories from the Vessel. Although Plaintiff provided testimony and evidence of the value of these items, such evidence failed to establish that Webb’s actions were done with the specific intent to harm the Bakers or their property. The Court is certainly mindful that Webb’s actions harmed the Bakers’ property, but based on the evidence presented, the Court finds that the Plaintiff has not satisfied its burden to show that Webb’s actions were both willful and malicious for purposes of § 523(a)(2)(A).
V. CONCLUSION
The Court finds that the obligations owing to Plaintiff, as ordered by the U.S. District Court Case No.: 3:11-CV-05122, are non-dischargeable under § 523(a)(2). The Court finds that the damages related to the non-dischargeable debt total $270,124.20, as outlined in Exhibit 18. However, the Court denies the Plaintiff’s request to find that the debt is excepted from discharge under § 523(a)(6). ' The Court will ask the Plaintiff as the prevailing party to prepare the order of default judgment granting in part and denying in part the Plaintiffs request.
This order is SIGNED.
. Chapter 7 Voluntary Petition, Docket No. 1, Case No. 15-22138.
. Id.
. Unless otherwise specified, all subsequent chapter and section references herein are to title 11 of the United States Code.
. Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines, Docket No, 10, Case No. 15-22138.
. Docket No. 1, Adv. No. 15-02119. Unless otherwise specified, all subsequent references to the docket are to the Plaintiff's Adversary Proceeding against Webb, Adv. No, 15-02119.
. Docket Nos, 3, 4,
. Docket No. 5.
. Docket No. 18.
. Docket No. 22.
. Docket No. 24,
. Docket Text Entry dated 05/03/2016.:
. Docket No. 27.
. Docket Text Entry dated 06/07/2016.
. Docket No. 29.
. Docket No. 32,
. Docket No. 34.
. Docket No. 39.
. Docket No. 41.
. Docket No. 42.
. Docket Text Entry dated 10/18/2016.
. Exh. 2.
. Id.
. Exh. 4.
. Id.
. Exh. 20, Webb’s Amended Statement of Financial Affairs filed on June 1, 2015.
. Id.
. Docket No. 1; Exh. 11.
. Id.
. DocketNo. 1.
. Exh. 18.
. See also Exh. 13.
. 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,
. In re Sturgeon, 496 B.R. 215, 222-24 (10th Cir. BAP 2013).
. See id. at 223.
. Id. citing Stevens v. Antonious (In re Antonious), 358 B.R. 172, 182 (Bankr. E.D. Pa. 2006) (citing Rezin v. Barr (In re Barr), 194 B.R. 1009, 1019 (Bankr. N.D. Ill. 1996)).
. Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996).
. Hatfield v. Thompson (In re Thompson), 555 B.R. 1, 10 (10th Cir. BAP 2016).
. Husky Intern. Elec., Inc. v. Ritz, — U.S. —, 136 S.Ct. 1581, 1586, 194 L.Ed.2d 655 (2016).
. In re Thompson, 555 B.R. at 10 (citing Ritz, 136 S.Ct. at 1587).
. Id. at 11 (citing In re Vickery, 488 B.R. 680, 690 (10th Cir. BAP 2013) (quoting Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (6th Cir. BAP 2001))).
. Section 523(a)(6).
. See In re Coates, 519 B.R. 842, 848 (Bankr. D. Utah 2014) (citing Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004)).
. Id. (citing Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)).
. Mitsubishi Motors Credit of Am., Inc. v. Longley (In re Longley), 235 B.R. 651, 657 (10th Cir. BAP 1999) (quoting Restatement (Second) of Torts § 8A (1965)).
. In re Coates, 519 B.R. at 848 (citations omitted).
. In re Moore, 357 F.3d 1125, 1129 (10th Cir. 2004).
. Id. at 1128.
. Fed. R. Bankr. P. 7055(b)(2)(C).
. See Bixler v. Foster, 596 F.3d 751, 755 (10th Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) ("[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusoiy statements, do not suffice.”).
. Exh. 19 at p. 17-18.
. Exh. 19 at p. 10.
. Exh. 17.
.Exh. 1, 4, respectively.
. Exh. 14. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500107/ | *857MEMORANDUM OPINION AND ORDER
Erik P. Kimball, Judge, United States Bankruptcy Court
THIS MATTER came before the Court for evidentiary hearings on July 25, 2016, August 5, 2016, and September 2, 20161 upon the Debtor’s Emergency Motion for Violation of Automatic Stay and Creditor Misconduct Against DKMC, Inc., Dana Klein, Eñe Stanco, Esq. and Scott D. Smiley, Esq. [ECF No. 87] (the “Motion”) filed by Daya Medicals, Inc. (the “Debtor”). In the Motion, the Debtor alleges that Scott D Smiley, Esq., a state court receiver appointed at the request of Eric Stanco, Esq. and Mr. Stanco’s clients, Dana Klein and DKMC, Inc., attempted. to have certain intellectual property, arguably the primary assets of the Debtor’s estate, assigned to Mr. Smiley without this Court’s approval and in violation of the automatic stay imposed by 11 U.S.Q § 362. ECF No. 87. The Debtor further alleges that Mr. Stan-co, on behalf of his clients Dana Klein and DKMC, Inc., sent two emails also in an attempt to have the intellectual property assigned to Mr. Smiley, as receiver, without this Court’s approval and in violation of the automatic stay. Id. The Debtor requests injunctive relief and monetary relief in the form of damages and attorneys’ fees and costs,2 Id.
The Court considered the Motion, the Receiver’s Response to Debtor’s Emergency Motion for Violation of Automatic Stay and Creditor Misconduct and Receiver’s Cross-Motion for Fees [ECF No. 105] and Receiver’s Amended Response to Debtor’s Emergency Motion for Violation of Automatic Stay and Creditor Misconduct and Receiver’s Cross-Motion for Fees [ECF No. 133] (the “Amended Response”) filed by Scott D. Smiley, Esq., the evidence admitted at the hearings on the Motion, and'the presentations of counsel.
SUMMARY OF RULING
As discussed more fully below, the Court concludes that all of the intellectual property at issue in this matter is, and for some time has been, the property of the Debtor. Thus, any attempt to obtain control over such intellectual property after the commencement of this bankruptcy case constitutes a violation of the automatic stay. Even if all that was requested after the petition date was that the Debtor’s principals execute formal assignments of whatever right they might have in any of such intellectual property, that effort, coupled with continued claims that all such intellectual property was not in fact owned by the Debtor, had a negative impact on the Debtor’s property rights and such attempts constitute violations of the automatic stay.
, The two emails by Mr. Stanco, pointed to by the Debtor, are not willful attempts to violate the automatic stay. There is no evidence that Mr. Stanco knew of the Debtor’s bankruptcy case at the time of the first email, and the second email amounts to a legal discussion among counsel with regard to the extent of the automatic stay.
On the other hand, Mr. Smiley’s repeated efforts to obtain assignment of the *858Debtor’s intellectual property to himself, as receiver, even based on a mistaken belief that it was owned by the Debtor’s principals, represented a concerted effort to obtain control of property of the estate without first seeking relief from stay from this Court. Mi*. Smiley knew of the pen-dency of this case, knew that the Debtor claimed ownership in the intellectual property, and nonetheless sought to have the Debtor’s principals execute personal assignments of such intellectual property in the apparent belief that this would provide him, as receiver, with control of those assets. Mr. Smiley should first have brought the issue before this Court, asking this Court to rule whether the intellectual property was part of the estate and, only if this Court determined that the intellectual property was indeed owned by the Debt- or’s principals and thus not protected by the stay, then sought assignments from the individuals. Mr. Smiley’s intentional acts constitute willful violations of the automatic stay under prevailing law.
The Debtor sought an award of damages, representing the cost of delay in the Debtor’s efforts to monetize the intellectual property. However, because this Court has delayed approval of the Debtor’s proposed licensing agreement to the confirmation hearing in this case, even if Mr. Smiley’s actions created friction for the Debtor his actions are not the actual cause of the Debtor’s present inability to finalize its licensing and related arrangements. Nevertheless, the Debtor is entitled to an award of legal fees and costs incurred by the estate in rebuffing Mr. Smiley’s inappropriate efforts to obtain control over the Debtor’s intellectual property prior to filing the Motion, in preparation and filing of the Motion, and in connection with the various hearings on the Motion. The Court will order Mr. Smiley to pay to the estate a sum equal to the reasonable legal fees and expenses incurred by the estate on these matters.
APPLICABLE LAW
Section 362(a)(3) of the Bankruptcy Code provides that “a petition filed under ... this title ... operates as a stay, applicable to all entities, of any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). “[T]he stay applies to attempts to obtain control over tangible and intangible property .... ” Henkel v. Lickman (In re Lickman), 297 B.R. 162, 188 (Bankr. M.D. Fla. 2003) (internal quotation omitted).
By its explicit terms, the automatic stay applies to property of the estate in a bankruptcy case, as determined under section 541(a). But a dispute as to a debt- or’s property rights does not obviate the effect of the automatic stay. To the contrary, where it is unclear whether a debtor in bankruptcy has an interest in property, parties must act with caution. See In re Johnson, 548 B.R. 770, 786-87 (Bankr. S.D. Ohio 2016) (“The purpose of the automatic stay is not to ... ultimately prevent the exercise of the available rights of any party ... [but instead is] to prevent any creditor from becoming a self-determined arbiter of what constitutes property of the estate and what actions are permitted or prohibited by the stay.”). Even where an action does not directly affect property of the estate, it is prohibited by the automatic stay if it has an adverse impact on property of the estate. See id. at 790 (citing Amedisys, Inc. v. Nat’l Century Fin. Enters. (In re Nat’l Century Fin. Enters.), 423 F.3d 567, 578 (6th Cir. Ohio 2005)); In re Prudential Lines, Inc., 928 F.2d 565, 574 (2d Cir. 1991) (“If [the creditor] were permitted to take a worthless stock deduction ... it would have an adverse impact on [the debtor’s] ability to carryforward its [net operating loss]. Accordingly, despite the fact that [the creditor’s] action is not *859directed specifically at [the debtor], it is barred by the automatic stay as an attempt to exercise control over property of the estate.”); Klarchek Family Trust v. Costello (In re Klarchek), 508 B.R. 386, 397 (Bankr. N.D. Ill. 2014) (“[G]iven the potential adverse impact on property of the estate of the action, the action must be stayed pursuant to section 362(a)(3).”). “Section 362(a)(3) ... reaches farther [than other provisions in § 362], encompassing every effort to exercise control over property of the estate” In re Klarchek, 508 B.R. at 396 (internal quotation omitted).
If the Court finds a willful violation of the stay, the violator may be subject to appropriate sanctions, including damages, an award of attorneys fees and costs, and injunctive relief. Jove Eng’g v. IRS, 92 F.3d 1539, 1554, 1559 (11th Cir. 1996). To establish a willful violation of the automatic stay, the movant bears the burden of showing by a preponderance of the evidence that: (1) a bankruptcy petition was filed; (2) the violator received notice of the petition; and (3) the violator’s actions were in willful violation of the automatic stay. See In re Lickman, 297 B.R. at 190 (citing In re Flack, 239 B.R. 155, 163 (Bankr. S.D. Ohio 1999)). A violation is willful if the violator knew of the bankruptcy case and intentionally committed the violative act; it does not matter whether the violator specifically intended to violate the stay. Jove Eng’g, 92 F.3d at 1555; Fleet Mortg. Group v. Kaneb, 196 F.3d 265, 269 (1st Cir. 1999) (“A willful violation does not require a specific intent to violate the automatic stay.”); Foust v. Seal (In re Foust), 2000 WL 33769159, *4, *7-8, 2000 Bankr. LEXIS 1146 at **12, 22-23 (Bankr. S.D. Miss. 2000) (“[A] proper understanding of the Bankruptcy Code or a specific intent to violate the automatic stay is not [required for conduct to be considered willful.]”); In re Xavier’s of Beville, 172 B.R. 667, 671 (Bankr. M.D. Fla. 1994) (“A violation of the automatic stay is willful if the action is done deliberately; no specific intent to violate a court order is necessary.”); In re Lile, 103 B.R. 830, 837 (Bankr. S.D. Tex. 1989) (“Knowledge of the bankruptcy filing has been held to be the legal equivalent of knowledge of the automatic stay.”).
A good faith belief in a right to property is not relevant to the Court’s determination of whether a violation of the stay was willful. Kaneb, 196 F.3d at 268-69 (citing Tsafarojf v. Taylor (In re Taylor), 884 F.2d 478, 483 (9th Cir. 1989)); Pratt v. GMAC (In re Pratt), 462 F.3d 14, 21 (1st Cir. 2006) (“[Kaneb] rejected the proposition that a stay violation ' could not be actionable (viz., ‘willful’) if the creditor had made a good faith mistake[.]”); IRS v. Murphy, 2016 WL 4679713, *8, 2016 U.S. Dist. LEXIS 120401 at *24 (D. Me. 2016) (citing Kaneb); see Gordon v. White (In re Morgenstern), 542 B.R. 650, 660 (Bankr. D.N.H. 2015) (finding a willful violation of the automatic stay when the defendant conceded her actions were intentional yet thought they were permissible); Radcliffe v. Int’l Painters & Allied Trades Indus. Pension Fund (In re Radcliffe), 390 B.R. 881, 892 (N.D. Ind. 2008); In re Flack, 239 B.R. at 162 (“To establish a willful violation, it must be shown that the party knew of the bankruptcy filing and then took some action, without regard to whether the party had specific intent to violate the stay or acted in good faith based upon a mistake of law or a legal dispute regarding its rights.”).
BACKGROUND AND ANALYSIS
On August 7, 2015, as a result of the request of Mr. Stanco and his clients, Dana Klein and DKMC, Inc., the Broward County Circuit Court entered an Order Appointing Receiver (the “Receivership Order”) - over the assets of the Debtor, *860including intellectual property, and also over intellectual property owned by the Debtor’s sole officers and directors, Mr. Justin Daya and Dr. Kantilal Daya (together, the “Principals”). Smiley Exh 1. By its own terms, the Receivership Order did not become effective until August 24, 2015, and provided that “a Receiver will be named by separate order, effective August 24, 2015, oyer the assets of [the Debtor] _” Id. The Receivership Order granted the receiver “the power and duty to take custody and possession of the assets of [the Debtor] .... ” Id. In addition, the Receivership Order provided that “should any party fail or refuse to comply with the terms and requirements of this Order, the Court shall treat such failure or refusal as a direct violation of this Order, subjecting such party to contempt of court proceedings.” Id.
On August 18, 2015, between entry of the Receivership Order and its effective date, the Debtor filed with .this Court a voluntary petition for relief under chapter 11 of .Title 11 of the United States Code. ECF No. 1. On that same day, the Debtor filed a suggestion of bankruptcy in the state court case. Pi’s Exh 18. There was no evidence presented to suggest that the filing of the suggestion of bankruptcy in the state court case resulted in actual notice to Mr. Stanco or Mr. Smiley of the filing of this bankruptcy case.
Five days after the filing of the bankruptcy petition, on August 28, 2015, Mr. Stanco sent an email to the Principals requesting that the Principals assign to Mr. Smiley, apparently in their personal capacity, various intellectual property. Pi’s Exh 16. As the Court- confirms below, all such intellectual property was and remains property of the Debtor. However, in spite of the fifing of a suggestion of bankruptcy in the state court action, there is no evidence that Mr. Stanco had actual knowledge of the Debtor’s bankruptcy case on August 23, 2015.
The following day, August 24, 2015, Mr. Smiley sent a similar email to the Principals informing them of his appointment as receiver by the state court and stating that Mr. Smiley is to “receive the assets of [the Debtor].” Pi’s Exh 17. In his April 24th email, Mr. Smiley did not specifically request assignment of the Debtor’s intellectual property; rather, Mr. Smiley requested to have an in-person meeting with the Principals in order to discuss potential resolution of the state court matter. Id. There is no evidence that Mr. Smiley had actual notice of this bankruptcy case on August 24, 2015.
On August 25, 2015, Michael D. Moccia, Esq., counsel for the Debtor, sent an email to Mr. Smiley specifically referencing the Debtor’s bankruptcy fifing and the effect of the automatic stay, and explaining that the Debtor owns all of the intellectual property covered by the Receivership Order. Mr. Moccia directed Mr. Smiley to a May 28, 2004 corporate resolution by which the Principals assigned all of their interest in the subject intellectual property to the Debtor (the “2004 Assignment”). Pi’s Exh 18. Thus, on August 25, 2015, Mr. Smiley had actual notice of the Debtor’s bankruptcy case as well as notice that the Debtor considered all of the intellectual property addressed in the Receivership Order to be its property and thus property of the estate in this case. Mr. Smiley conceded as much during the hearings on the Motion,
On August 28, 2015, counsel for the Debtor filed with the state court proof of the Debtor’s ownership of all relevant intellectual property, including a copy of the 2004 Assignment and an affidavit of Justin Daya stating that all of the intellectual property subject to the Receivership Order is owned by the Debtor. Pi’s Exh. 19.
*861On October 8, 2015, -Mr. Smiley sent an email to Mr. Stanco with a draft copy of a letter Mr. Smiley intended to send to the Principals, requesting execution of forms of assignment of intellectual property by the Principals personally, and attaching draft assignments with signature. blocks for the Principals ⅛ their individual capacities. Smiley Exh. 3. The draft letter to the Principals did not explicitly seek execution of an assignment agreement by the Debt- or; the email to Mr. Stanco did not include a draft assignment with a signature block for the Debtor. Id.
On February 8, 2016, Mr. Smiley sent a certified letter to the Principals directing them to “execute, notarize, and return to [Mr. Smiley] the attached assignments.” Pi’s Exh 21. The form of letter was substantially the same as the draft Mr. Smiley had provided to Mr. Stanco in his October 8, 2015 email. However, the letter actually sent to the Principals included three separate assignment documents, two-to be executed on behalf of the Principals in their individual capacities, plus a form of agreement to be executed by the Debtor. Id. In his letter, Mr. Smiley warned that failure to comply with the assignment request by February 19, 2016' would result in Mr. Smiley filing a motion to compel with the state court. Id.
On March 8, 2016, Mr. Smiley sent an email to Mr. Moccia again requesting assignment of the intellectual property from the Principals, in their individual' capacities. Pi’s Exh 22. Mr. Smiley again warned of the possible filing of a motion for contempt in state court. Id. Mr. Moccia responded the same day, explaining that any execution of the proposed assignments by the Principals individually would violate the automatic stay. Id. Mr. Moccia warned that requesting such assignments from the Principals, and the filing of a motion for contempt with the state court, would constitute violations of the automatic stay, subjecting Mr. Smiley to sanctions. Id. Specifically, Mr. Moccia stated:
[Y]our communications attempting to get my clients to execute these assignments is a clear violation of the bankruptcy stay and you are subjecting yourself to sanctions in making these communications. While I do not believe that you are intentionally violating the bankruptcy stay, any further attempt to get my clients to sign these assignments will be met with a stay violation motion against you. Additionally, making a motion in state court for judicial execution of the assignments will also be met with a stay violation motion.
Id. On the same date, counsel for the Assistant United States Trustee weighed in on the email chain and informed the parties that “[t]he automatic stay is in effect as of petition date. The receiver needs a court order from bankruptcy court in order to do anything.” Id. The next day, March 9, 2016, Mr, Stanco joined the conversation, arguing that the Principals individually, rather than the Debtor, owned the intellectual property requested to be transferred and, therefore, the automatic stay was not applicable. Id.
On April 8, 2016, Mr. Smiley filed a motion in the state court action seeking to compel , the Principals to execute in favor of Mr. Smiley, as receiver, assignments of the relevant intellectual property. Pi’s Exh. 23. In his Amended Response and at the hearings, Mr. Smiley stated that he intended only to inform the state court of the improper actions of the Principals, individually, and not to seek relief against the Debtor. ECF No. 133. Mr. Smiley admits that “although the first page and half of [his motion to compel] mistakenly appears to include the Debtor in what Receiver refered [sic] to as ‘Defendants,’ the remainder of the [motion to compel] makes clear that it is only the [Principals], *862individually, Receiver was referring to.” Id.
On April 12, 2016, the Debtor filed the present Motion, which initially came before this Court for non-evidentiary hearing on April 28, 2016. The parties agreed that a single day evidentiary hearing was required, and so the Court set the matter for evidentiary hearing on July 25, 2016. Because the parties had not completed their presentations, the Court held subsequent evidentiary hearings on August 5,2016 and September 2, 2016.
The Debtor claims that all intellectual property addressed in the Receivership Order, meaning all intellectual property at issue here, is and has for some time been its property, is property of its bankruptcy estate, and is protected by the automatic stay. The evidence before this Court supports that conclusion. Indeed, there is no credible evidence to the contrary.
The Debtor presented the 2004 Assignment, and the testimony of Justin Daya, in support of their contention that the intellectual property is property of the estate. In relevant part, the 2004 Assignment states:
[The Principals] hereby grant to [the Debtor] full right, use of, and ownership of any and all intellectual property .,. owned, developed, or to be developed by [the Principals], upon the occurrence of any of the following conditions: (1) The intellectual property becomes integral or necessary to the business operations of [the Debtor]; or (2) [The Debtor] in anyway facilitates the development of the intellectual property ....
Id. Justin Daya testified that all intellectual property at issue here is “integral or necessary to the business of [the Debtor].” Indeed, Mr. Daya testified that the intellectual property is the only valuable asset available to the Debtor, that the Debtor’s business is organized around the intellectual property, and that the Debtor is actively pursuing contracts for the licensing and marketing of that intellectual property for the benefit of the estate. Mr. Daya’s testimony also supports the conclusion that the Debtor facilitated the development of the intellectual property, that it was in fact developed for the Debtor. The conditions for effectiveness of the 2004 Assignment were met long prior to the filing of this case. As of the petition date, the Debtor was (and remains) the sole owner of all the subject intellectual property.
Mr. Stanco suggested that the 2004 Assignment was fabricated at some time after its date, potentially in connection with this case. There is no evidence to support this allegation.
The Debtor’s allegations with regard to Mr. Stanco are limited. As conceded during closing argument, the Debtor pointed only to Mr. Stanco’s August 23, 2015 email to the Principals and Mr. Stanco’s participation on March 9, 2016 in email communications with regard to the effect of the automatic stay in this case. On the first of these dates, there is no evidence that Mr. Stanco knew of the Debtor’s bankruptcy case and thus there can be no willful violation of the stay under prevailing law. Mr. Stanco’s participation in the subsequent email conversation on March 9, 2016 amounts to a discussion among the parties with regal'd to the legal impact of the automatic stay in this case. To find that such email communication was a violation of the automatic stay would be tantamount to ruling that no creditor may negotiate with a debtor with regard to the extent of the automatic stay without the discussion itself being a violation of the stay. Based on the evidence admitted, Mr. Stanco did not willfully violate the automatic stay in this case. Similarly, the Debtor alleged no independent actions by Mr. Stanco’s clients, Dana Klein and DKMC, Inc., and so no relief may be accorded against them.
*863In the Motion and at the hearings, .the Debtor alleged that Mr. Smiley violated the automatic stay by sending emails and a certified letter, with forms of assignment to be executed by the Principals and also by the Debtor, by threatening to file a motion for contempt in the state court case, and by actually filing a motion for contempt in the state court, all in an attempt to obtain control over certain intellectual property owned by the Debtor, during and with knowledge of the pendency of the Debtor’s bankruptcy case.
The Debtor argues that any attempt to obtain assignment of the intellectual property from the Debtor itself was an obvious violation of the automatic stay. In his Amended Response and at the September 2. 2016 hearing, Mr. Smiley stated that he did not intend to include with his February 8, 2016 certified letter to the Principals a copy of an assignment with a signature block for the Debtor, but that his assistant had mistakenly included that document when the packet was sent to the Principals. EOF No. 133. Mr. Smiley contends that, after he obtained knowledge of this bankruptcy case, he did not intend to seek formal assignment from the Debtor, but only from the Principals individually. Mr. Smiley contends that he filed the motion to compel with the state court because the Principals failed to assign whatever ownership interest in the relevant intellectual property they might have, as he believed was required by the Receivership Order. Mr. Smiley states that he did not intend to include the Debtor in his motion to compel filed with the state court, and that the use of the term “Defendants” in the first two pages of that motion is limited by the remaining text of the motion which focuses on the Principals.3
The un-rebutted evidence, which the Court finds credible, supports the conclusion that once he had knowledge of the Debtor’s bankruptcy Mr. Smiley did not attempt to obtain an assignment of the intellectual property directly from the Debtor nor did he intend to ask the state court to hold the Debtor in contempt. There is no evidence that Mr. Smiley took any direct action against the Debtor itself that constituted a willful violation of the stay.
On the other hand, Mr. Smiley repeatedly tried to obtain assignments of the intellectual property from the Principals, during and with knowledge of this bankruptcy case, after it had been made clear to Mr. Smiley that the Debtor claimed it was the sole owner of that property. Based on the un-rebutted evidence before the Court, the dispute with regard to the Debtor’s ownership of its intellectual property, coupled with Mr. Smiley’s multiple attempts to obtain assignments of these assets from the Principals, hampered the Debtor’s efforts to enter into agreements necessary for the Debtor to realize the value of the intellectual property for the benefit of its reorganization.4 In any case, assignments of the intellectual property owned by the . Debtor but executed by the Debtor’s Principals obviously would cloud the Debtor’s interest in the intellectual property, requiring the Debtor to obtain *864appropriate legal relief to ensure its ability to do business with its own assets. Accordingly, Mr. Smiley’s attempts to interfere with the Debtor’s intellectual property constitute willful violations of the automatic stay in this case.
Mr. Smiley relies heavily on the language in the Receivership Order stating “the Receiver will have the power and duty to take custody and possession of the assets of [the Principals and the Debtor]” to support his view that it was permissible for him to seek assignments from the Principals. However, once Mr. Smiley was put on notice of the bankruptcy filing here, and the Debtor’s claim that it owned all of the intellectual property, he was under a duty to seek permission from this Court before taking any action with regard to the intellectual property. In re Lile, 103 B.R. at 837 (“Once a party is put on notice of a bankruptcy filing, he is under a duty to seek further information which should reveal the applicability and scope of the automatic stay.”); In re Lickman, 297 B.R. at 192-93 (finding that “the defendants had an affirmative obligation to seek clarification from the bankruptcy court as to the scope of the automatic stay before proceeding with any of the actions that they took outside the bankruptcy court.”).
Having concluded that Mr. Smiley willfully violated the automatic stay, the Court must determine the appropriate sanction, if any. Although Mr. Smiley’s actions hampered the Debtor’s negotiation of agreements necessary for the Debtor to realize the value of its intellectual property in this reorganization case, in the end they were not the actual cause of the delay in the Debtor’s ability to finalize those agreements. This Court’s determination to delay consideration of the Debtor’s proposed licensing arrangement to the confirmation hearing is the real cause for the Debtor’s present inability to finalize and implement its proposed business plan. However, the Debtor has suffered damages in the form of legal fees and expenses incurred in connection with responding to Mr. Smiley’s improper attempts to obtain control over the intellectual property, including work done prior to the filing of the Motion, the preparation of and filing of the Motion, and representation of the Debtor at the hearings on the Motion.
At this Court’s request, on September 16, 2016, Mr. Moccia, counsel for the Debtor, filed an Affidavit of Attorney’s Fees and Costs in Connection with Debtor’s Emergency Motion for Violation of Automatic Stay and Creditor Misconduct Against DKMC, Inc., Dana Klein, Eric Stanco, Esq. and Scott D. Smiley, Esq [ECF No. 87] [ECF No. 136], Mr. Moccia undertook 45.2 hours of legal work in connection with responding to Mr. Smiley’s attempts to obtain control over the intellectual property, the preparation and filing of the Motion, and representation of the Debtor at the hearings thereon. At an hourly rate of $275.00, this equates to $12,430.00 in attorney’s fees. Mr. Moccia also incurred related expenses in the amount of $140.20. The Court finds that Mr. Moccia’s hourly rate is reasonable in light of his experience, skill and reputation; indeed, the rate Mr; Moccia is charging in this case is modest. Mr. Moccia’s time entries indicate appropriate work in connection with this matter and the time he spent, and the expenses for which he seeks reimbursement, were reasonable under the circumstances of the case. Accordingly, Mr. Moccia’s compensable fees and expenses total $12,570.20.
In addition, Jeff Lloyd, Esq., special counsel to the Debtor, prepared to testify and testified in connection with the Mo*865tion. Mr. Lloyd traveled from Gainesville, Florida to West Palm Beach, Florida to do so. Mr. Lloyd spent a total of 3.9 hours preparing for and testifying .before this Court, at an hourly rate of $500.00, for a total of $1,950.00. Based on Mr. Lloyd’s skill and experience, the Court finds Mr. Lloyd’s hourly rate to be reasonable. Mr, Lloyd’s time entries for legal work in this matter indicate appropriate work and the time he spent was reasonable under the circumstances of the case. Mr. Lloyd also spent 8.7 hours traveling to and from the courthouse for his testimony. Mr. Lloyd assigned an hourly rate of $450.00 for that time. The Court deems it appropriate for Mr. Lloyd to charge half his regular hourly rate, or $250:00, for travel time necessitated by the Debtor during which he was not otherwise performing billable legal work. A reasonable fee for Mr. Lloyd’s travel time is $2,175.00. Mr. Lloyd also incurred reasonable travel costs in the amount of $946.62. Accordingly, Mr, Lloyd’s compensable fees and expenses total $5,071.62.
Having found that all of the subject intellectual property is, and for some time has been, property of the Debtor, and not property of the Principals, and in furtherance of the automatic stay in this case, the Court will direct all parties in interest, including without’limitation Messrs. Stanco and Smiley and those acting with or through them, not to attempt to obtain control over any of the subject intellectual property by any means unless the automatic stay in this case is terminated under applicable law or otherwise ordered by this Court.
ORDER
For the foregoing reasons, the Court hereby ORDERS and ADJUDGES:
1. The Motion [ECF No. 87] is GRANTED IN PART to the extent provided herein.
2. Absent- termination of the automatic stay in this case pursuant to applicable law or separate order of this Court, no person or entity, including without limitation Eric Stanco, Esq. or Scott D. Smiley, Esq. or anyone acting with or through them, shall attempt to obtain assignment of or otherwise obtain control over any United States or foreign patents, patent applications, or similar rights, claimed to be owned by the Debtor, Daya Medicals, Inc., in this case.
3. As sanctions for willful violation of the automatic stay in this case, within . fourteen (14) days after entry of this Order, Scott D. Smiley, Ésq. shall pay (a) to The Law Office of Michael D. Moccia, P.A. the sum of $12,570.20, and (b) to Saliwanchik, Lloyd & Ei-senschenk, a Professional Association, the sum of $5,071.62. To the extent counsel or special counsel to the Debt- or have previously received part of such amounts from the Debtor, the excess shall be credited to the Debtor,
4. Mr, Smiley’s request for an award of fees and costs is DENIED.
5. All monetary relief requested against Mr. Stanco and Mr. Stanco’s clients, Dana Klein and DKMC, Inc., is DENIED.
ORDERED in the Southern District of Florida on November 14, 2016,
. This is a matter that the Court typically would rule on orally, at the close of the evi-dentiary hearing, However, in light of the fact that the evidentiary hearing took place over three nonconsecutive days spanning more than a month, necessitated by the Debtor’s extended presentation, the Court was unable to rule without substantial post-hearing time devoted to review of the evidence and argument.
. In the Motion, the Debtor requested punitive damages. The Debtor withdrew this request on the record at the hearing on September 2, 2016.
. Mr. Smiley addressed each of the foregoing issues during closing argument rather than while testifying under oath. However, as these statements were not objected to by the Debt- or, and are supported by the other evidence in this case, the Court considers them here.
. The Debtor need not prove that it suffered actual monetary damages as a result of Mr. Smiley’s actions to meet its burden in showing there was a willful violation of the automatic stay. The question of what sanctions should be ordered, including whether sanctions should include actual damages, is separate from the question of whether there was a willful violation of the stay in the first instance. A discussion regarding sanctions follows below. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500108/ | “MUCH ADO ABOUT NOTHING” (FINDINGS OF FACT AND CONCLUSIONS OF LAW)
A. Jay Cristol, Judge United States Bankruptcy Court
THIS CAUSE was tried before the Court on Thursday, September 29, 2016. This is a case that should never have been brought. For reasons unknown, a panel trustee, with a fine reputation of service for many years, lost her perspective. Like *868Alice in Wonderland, she stepped though a looking glass into a world of fantasy, and saw an estate asset, 3 or 4 shares of corporate stock with a value of zero, nothing, nada, bupkas, as being worth $49,000 and proceeded to pursue the $49,000 against an innocent victim of the Debtor’s fraud.
The purpose of Chapter 7 bankruptcy in the United States is to provide relief to the honest debtor and equitable distribution of the honest debtor’s assets to the honest debtor’s creditors. We must start with identification of the players in this silly game. First, the honest debtor is nowhere to be found. The .Debtor, Ibes Gomez, is a convicted fraudster serving 15 years in prison for a series of. fraudulent acts (Defendants’ Trial Exhibit 24). Next, is Connedx Corporation (“Connedx”), the major vehicle of Gomez’s fraudulent operation with a net value of nothing (considering an overdrawn bank account with a negative balance).
The alleged asset of Connedx was a software program saleable to hospitals for millions of dollars — except for one minor flaw. The program did not exist. It was a figment of the imagination of the dishonest Debtor. Instead, this dishonest Debtor defrauded investors, using their money to pay for his own personal expenses.
The Trustee in Wonderland saw the corporate stock of Connedx as worth $19,000 a share when, in fact, its value was zero.
The victims of the dishonest Debtor’s fraudulent scheme, some unknown, .included an attorney, Joseph. Madalon, who should have known better but, for lack of due diligence, was taken for hundreds of thousands of dollars, and his sister, Defendant Lisa Madalon, who was defrauded of over $73,000.
What did Defendant Madalon get for her $73,000? Three or four shares of stock in Connedx worth zero. Defendant Madal-on stipulated in paragraph 9 of the Pretrial Stipulation (D.E. 82) that she received the stock certificates although the only evidence at trial suggests she did not receive any stock certificates. For purposes of this proceeding, it will be assumed that she has the certificates (which, incidentally, she offered to turn over to the trustee and which turnover the Trustee declined).
Now on to the evidence. There is no dispute that the Connedx checking account at Chase Bank was a one signature account, that signature being Debtor, Ibes Gomez. The evidence shows that Gomez directed Ms. Madalon to wire the $49,000 for the purchase of the [worthless] stock to the account. The email (Defendants’ Trial Exhibit 23) shows the account number for the Connedx checking account at Chase Bank and instructs Ms. Madalon to send payment to Gomez/Connedx.
The money was wired to the account and used by Gomez almost exclusively for his personal benefit, on such purchases as Dunkin Donuts, dog grooming (the corporation did not have a.dog!), vacations, and boat rentals at vacation sites. Thus, even if Ms. Madalon had received stock worth $49,000, which she most certainly did not, Debtor got the benefit of the $49,000 by using the Connedx account as his own personal piggy bank.
The Court, having- heard the testimony of witnesses and argument of counsel, and having examined the record, makes the following findings of fact and conclusions of law.
PROCEDURAL HISTORY OF CASE
This case was commenced on May 30, 2013 with the filing of a voluntary petition pursuant to Chapter 7 of the United States Bankruptcy Code by the Debtor, Ibes Gomes. Plaintiff Maria Yip, as Trustee for the estate of Ibes Gomez, filed the instant adversary action on August 5, 2014 (D.E. 1), pursuant to 11 U.S.C. §§ 541, 542, 548 *869and 550 against Defendants Lisa M. Ma-dalon and Connedx.
The initial adversary Complaint alleged that the Debtor had made several transfers of funds into, a Chase bank account xx0970 (the “Chase Account”) totaling $7,800.00 (the “Series Payments”) (Complaint, ¶ 7). The Complaint further alleged that Lisa Madalon (“Ms. Madalon”) purchased a percentage of the Debtor’s stock interest in Connedx for $49,000.00 (the “Stock Payment”), but that she did not tender that Payment to the Debtor; rather, Ms. Madalon tendered the Stock Payment to the Chase Account, in the name of Connedx instead (Complaint, ¶ 8). The Complaint asserted the following causes of action: Fraudulent Transfer Against Con-nedx Corporation, Fraudulent Transfer Against Connedx Corporation and Lisa M. Madalon, Preferential Transfer Against Connedx Corporation regarding the Series Payments, and Preferential Transfer Against Connedx Corporation regarding the $49,000.00 Stock Payment.
Ms. Madalon and Connedx subsequently filed Answers and Affirmative Defenses to the Complaint (D.E. 14,15),
The Trustee subsequently amended the Complaint to add claims pursuant to 11 U.S.C. § 547 against Connedx (D.E. 65). Ms. Madalon and Connedx reasserted their affirmative defenses in their Answers and Affirmative Defenses to the Amended Complaint (D.E. 70 and 71).
All parties filed Motions for Summary Judgment (D.E. 49, 50 and 51), each of which were subsequently denied by the Court by Orders dated May 9, 2016 (D.E. 73, 74 and 75). This case was thereafter set for trial by Court Order dated June 25, 2016 (D.E. 83).
L FINDINGS OF FACT
1.Lisa. Madalon testified at the trial in this action and the Court found her to be a competent, credible and forthcoming witness.
2. Ms. Madalon was a victim of fraud perpetrated by the Debtor, who is a convicted felon.
3. The Debtor swindled many parties, including Joseph Madalon, Connedx and Lisa Madalon.
4. Debtor was convicted of several counts of grand theft in the first degree, organized fraud/scheme to. defraud ($50,-000 or more) and several counts for worthless checks. He is presently incarcerated and serving a fifteen (15) year sentence (Defendants’ Trial Exhibit 24).
5. The Debtor founded Connedx and used Connedx as an investment opportunity to fraudulently secure substantial investment funds from Joseph Madalon, Lisa Madalon and others.
6. The Debtor used the Chase Account in the name of Connedx as a personal bank account in which he often, almost exclusively, spent Connedx monies for his own personal gain. Until June 11, 2013, Debtor was the sole operator and manager of Con-nedx. '
7. The Debtor fraudulently induced Ms, Madalon into purchasing Connedx stock by representing to her there was a list of hospitals who were allegedly contracting with' Connedx, and he stated the “conservative” value of the estimated revenue from those purported contracts was $1.3 million in-the 1st quarter:
University of Miami — 5 years, approximately $281,000 per year
Mt, Sinai Miami — 3 years, approximately $281,000 per year
Memorial West — 5 years, approximately $258,000 per year
Archbold Hospital — 3 years, approximately $281,000 per year . ,
*8708. The Debtor further represented he was in discussions with the following entities to contract with Connedx at the respective amounts:
University of Illinois Chicago — $338,000 per year
Mt Sinai Chicago — Potential $284,000 per year
Stroger Hospital Chicago — potential $284,000 per year
Rush Medical center Chicago — potential $284,000 per year
University of El Paso Medical — potential $338,000 per year
East Carolina medical center — potential $189,000 per year
Baptist Hospital, 6 hospitals — potential $725,000 per year
Cedars Sinai California — potential $335,000 per year
Catholic Health, 39 hospitals — potential $25,000,000
(Defendants’ Trial Exhibit 23)
9. All of these representations made by the Debtor to Ms. Madalon in the May 17, 2013 email were false, though Ms. Madalon was not aware of their falsity at the time.
10. At the time of the stock purchase, Ms. Madalon was not aware of the Debt- or’s financial standing nor of his penchant for fraudulent criminal activity.
11. The Debtor, through his misrepresentations, obtained Ms. Madalon’s agreement to pay for a slight stock interest in Connedx, to wit, three percent (3%) of Connedx (the “Stock”) for $55,000.00 (Defendants’ Trial Exhibit 18).
12. By an email dated May 20, 2013, Ms. Madalon was directed by the Debtor to wire transfer a portion of the Stock purchase price, in the amount of $49,000.00 (the “Stock Payment”), to the Chase Account in care of the Debtor (Defendants’ Trial Exhibit 23).
13. Ms. Madalon complied with the Debtor’s wire transfer instructions that same day, on May 20,2013.
14. Although the parties stipulated otherwise, Ms. Madalon asserts she never accepted delivery of the Stock and no stock certificates were ever transferred to or received by Ms. Madalon.
15. Ms. Madalon paid the remaining $6,000.00 of the total purchase price of $55,000.00 to the Debtor’s wife.
16. Ms. Madalon was further obligated to purchase an additional share of the worthless Connedx stock from Debtor for $18,333.33 pursuant to a Stock Purchase Agreement between Ms. Madalon and the Debtor dated on or about May 23, 2013 (Defendants’ Trial Exhibit 11).
17. Ms. Madalon thereafter discovered that at the time the Stock Payment was transferred, the representations made to her by the Debtor in his May 17, 2013 email to her were false. None of the hospitals listed therein had committed to do business with Connedx and, in fact, none of the alleged pending hospital contracts were consummated. Additionally, Connedx had no viable software.
18. Ms. Madalon also subsequently discovered that at the time of her Stock Payment, the Debtor had forced Connedx into substantial debt by failing to pay its corporate taxes, the rent for the company’s office space, and numerous other business obligations.
19. Joseph Madalon, Ms. Madalon’s brother who was also a victim of the fraud, lost several hundreds of thousands of dollars. When the fraud began to unravel, Joseph Madalon was still under the impression that Connedx had a valuable asset which could generate significant funds through contracts with hospitals. However, going down the road to nowhere, he had the Debtor relinquish ownership and control of Connedx to him, in the hope of *871salvaging his and his sister’s investment, only to ultimately learn the truth — Con-nedx had no software program, the story was a lie and there were no viable negotiations with any hospitals that could have generated any income to Connedx. Thus, the corporation was left with a value of zero, the same value as its corporate stock, and Joseph Madalon was left to defend Connedx in this case.
20. During- the cross examination of the Trustee at trial, it became evident to the Court that the value of the Stock was zero at the time of the alleged transfer; when the Stock Payment was made, the Stock was worthless.
21. Connedx is also being sued by the Trustee to recover a series of payments made by the Debtor to the Chase Account in the total amount of $7,800 (the “Series Payments”) (Defendants’ Trial Exhibits 1, 2, 8 and 17). The Series Payments were made by checks issued from Chase Bank and funded by a checking account in the Debtor’s name, maintained at Chase Bank (Amended Complaint D.E. 65, ¶ 7).
22, Bank records for the Chase Account have been filed in this ease, including account statements for the periods January 11, 2013 through January 31, 2013, February 1, 2013 through February 28, 2013, March 1, 2013 through March 29, 2013, March 30, 2013 through April 30, 2013, May 1, 2013 through May 31, 2013, June 1, 2013 through June 28, 2013, June 29, 2013 through July 31, 2013 (Defendants’ Trial Exhibit 8).
23. Defendants’ Trial Exhibit 17 contains a summary of the transactions reflected in Defendants’ Trial Exhibit 8, prepared by the office manager for Joseph Madalon, the corporate representative for Connedx. It reflects the following withdrawals made by the Debtor:
Outgoing transfers: $9,850.00
Debit Card Personal: $34,389.62
Check Personal: $14,829.60
Cash withdrawal: $84,522.61
Bank Fees for withdrawals & bad checks: $1,584.00
Automatic Debits: $5,296.99
Total: $150,472.82
24. The amount of credits representing the monies put back into Connedx by the Debtor are broken down as follows:
Barbara Gomez checks: $11,700.00
Cash Deposits: $11,652.73
Incoming transfers: $13,199.00
Total: $36,551.73
25. This summary of the Chase Account transaction history was made after Mr. Madalon and his office manager made a comprehensive review of the bank statements contained in Defendants’ Trial Exhibit 8.
26.Mr. Madalon has sufficient-personal knowledge to determine which transactions were for Defendant’s personal use, *872and which transactions were for Connedx business,
27. The Debtor was the sole signatory to the Chase Account and was the only individual who had access to the Chase Account funds until June 11, 2013.
28. Mr. Madalon’s review of the Chase Account statements contained in Defendants’ Trial Exhibit 8 and the summary of that review contained in Defendants’ Trial Exhibit .17 reveal that the vast majority of transactions were for the Debtor’s personal, non-business related expenses.
29. Mr. Madalon testified that the Debt- or appropriated the entire amount of the $49,000.00 Stock Payment deposited in the Chase Account to his own personal use. The transfer of the Stock Payment funds which form the basis for the Second and Fourth Counts of the Amended Complaint (D.E. 65) resulted in direct benefit to the Debtor.
30. When Mr. Madalon reviewed the Chase Account’s transaction history, the records reflected that the Debtor had spent the entirety of the $49,000.00 Stock Payment and then some for his own personal benefit, and that the Account actually had a negative balance.
31. As demonstrated by Mr. Madalon’s testimony at trial, and supported by Defendants’ Trial Exhibits 1, 2, 8 and 17, the Debtor also spent the entirety of the $7,800 Series Payments and more for his own personal benefit. The transfer of the Series Payments funds which form the basis for the First and Third Counts of the Amended Complaint resulted in direct benefit to the Debtor.
32. On January 15, 2015, Ms. Madalon filed a Proof of Claim in the underlying Chapter 7 case for $73,333,33 on the basis of fraud/fraud in the inducement, which amount represents the subject Payment for $49,000.00, as well as $18,333.33 for the additional Connedx share Ms. Madalon purchased on or about May 23, 2013 (Defendants’ Tidal Exhibit 9).
II. CONCLUSIONS OF LAW i. Burden of Proof
In an adversary action, a trustee has the burden of proving all elements of a fraudulent transfer claim by a preponderance of the evidence. Feltman v. Warmus (In re American Way Serv. Corp.), 229 B.R. 496, 525 (Bankr. S.D. Fla. 1999); see also Ingalls v. SMTC Corp. (In re SMTC Mfg. of Tex.), 421 B.R. 251, 279 (Bankr. W.D. Tex. 2009), It is necessary for a claimant to prove that assets were transferred and to demonstrate their value to sustain an action for fraudulent conveyance. Ingalls v. SMTC Corp., 421 B.R. at 278-279 (emphasis added). To demonstrate that a transfer was constructively fraudulent, a trustee must show that a debtor transferred ah asset without receiving a reasonably equivalent value in return. Ak-ers v. Castillo (In re Juarez), 2008 Bankr. LEXIS 4501 at *8 (Bankr. S.D. Cal. 2008). A trustee has the burden to prove the avoidability of a transfer as a preferential transfer 11 U.S.C. § 547(g).
Defendants “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 (e).” Feltman v. Warmus, 229 B.R. at 525.
ii. Fraudulent Transfer of Stock Payment Price
To prove a cause of action for a fraudulent transfer, a trustee must show a debtor:
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or. after the date that such transfer was made or *873such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation;
11 U.S.C. § 548(a)(1); see also Fla. Stat. § 726.105(1).
For the purposes of this section, “value” is defined as “property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.” 11 U.S.C. § 548(d)(2)(A); see also Fla. Stat. § 726.104(1).
The Stock had no value. Neither the Debtor nor his bankruptcy estate are entitled to anything for an asset that has no value. Transfer of a valueless asset cannot hinder, delay or defraud any creditor of value as it is valueless. Further, it is impossible to receive less than reasonably equivalent value for an asset that has no value,
If a transfer is not supported by reasonably equivalent value, it may be avoided “to protect creditors against the depletion of a bankrupt’s estate.” 8699 Biscayne, LLC v. Indigo Real Estate LLC (In re 8699 Biscayne, LLC), 2012 Bankr. LEXIS 1244 at *13 (Bankr. S.D. Fla. 2012). It is not required that the parties execute a precise “dollar-for-dollar” exchange for reasonably equivalent value to be present. Id. Similarly, a direct benefit need not exist; it is sufficient if the transaction merely conferred indirect benefits. Id. at **13-14. In this matter, the Estate cannot be depleted by transferring an asset with a value of zero.
To determine whether reasonably equivalent value exists, a court will conduct a two-prong analysis “to determine whether a debtor has received reasonably equivalent value in exchange for its transfer of an interest in its property to another.” Id. at **14-15. The first question is whether the debtor received value. Id. at *15. The second question is “whether the value was reasonably equivalent to what the debtor gave up.” Id.
As to whether a debtor received value, a court will determine whether the debtor received “property, or satisfaction or securing of a present or antecedent debt of the debtor,” Id. at *16, citing to 11 U.S.C. § 548(d)(2)(A). Pursuant to Florida Statute § 726.104(3), if the transaction between the debtor and transferee “is intended by them to be contemporaneous and is, in fact, substantially contemporaneous,” the transaction is made for present value. Id. In the instant matter, the Debt- or was only entitled to receive the reasonably equivalent value of the Stock which is zero. However, in this case, the Debtor actually received $49,000.00 by accessing and spending the monies from the Chase Account for personal gain, all for Stock worth zér'o. The Debtor received the $49,000.00 Stock Payment when Ms. Ma-dalon wired that Payment to the Chase Account, as he instructed her to do. The Debtor then spent the entirety of that Payment.
The value received by the Debtor was significantly in excess to what the Debtor gave up, as he was selling Ms. Madalon worthless Stock. At best, the Stock had a value of zero but it could have been assessed to have a negative value as the Debtor incurred substantial debts against the.Chase Account before he relinquished control of it to Mr.. Madalon. Therefore, the Debtor received a value of $49,000.00 at minimum and most likely more in an amount proportionate to the Stock’s negative value.
It would be “fundamentally counter to the statutory purpose of [the Trustee’s] avoidance power” for the transfer of the Stock and Payment to be avoided here. 8699 Biscayne, 2012 Bankr. LEXIS 1244 *874at *17. The Connedx Corporation is defunct and Ms. Madalon would not have purchased the Stock but for the Debtor’s fraudulent misrepresentations. It would run directly counter to the equitable policies of the Bankruptcy Code to effectively compel Ms. Madalon to sustain another loss of $49,000.00 in exchange for valueless stock and bind Ms. Madalon anew to a transaction into which she was duped by a convicted fraudster.
The Court has already determined that the Stock purchased by Ms. Madalon is valueless and that she has received no return on investment of the Stock Payment. To require Ms. Madalon to pay $49,000.00 again for the same valueless Stock, in addition to the $73,333.33 in total she has already paid for Connedx stock (see, Proof of Claim, Defendants’ Trial Exhibit 9) for potential total payments of $122,333.33, would be a gross injustice.
The Trustee did not and cannot meet her burden of proof on her claim against Ms. Madalon. Under a preponderance of the evidence standard, the claims to avoid the transfer of the Stock Payment as against both Ms. Madalon and Connedx fail, as the record is clear that the Debtor received reasonably equivalent value for said payment. See 8699 Biscayne, 2012 Bankr. LEXIS 1244 at *16.
Furthermore, the Debtor personally received the benefit of the Stock Payment, spending the entirety of that $49,000.00 Payment and then some for his own personal benefit. The fact that the Debtor received reasonably equivalent value as a result of the Stock Payment transfer protects the transfer from being avoided as fraudulent. Therefore, the Second Count of the Amended Complaint (D.E. 65) cannot be sustained.
iii. Preferential Transfer of Stock Payment Price
At the time of the alleged transfer of the Debtor’s stock, Ms. Madalon contemporaneously transferred the Stock Payment of $49,000.00 on May 20, 2013, by wire instructions, to the Chase Account, as Debtor told her to do. Because the Debtor was the only signatory to the Chase Account at the time, the Debtor received the Stock Payment and appropriated the full amount to his own personal use, as is shown by the Chase Account bank statements contained in Defendants’ Trial Exhibit 8 and summarized in Defendants’ Trial Exhibit 17. The Trustee is not entitled to avoid a transfer as preferential “(1) to the extent that such transfer was — (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange.” 11 U.S.C. § 547(c)(1). The requirements of § 547(c)(1) are satisfied here because the transfer of the stock for the Stock Payment was a contemporaneous exchange for value, and the Debtor received $49,000.00, a massive amount more than the value of his worthless stock. Therefore, the Trustee’s Fourth Claim for Relief for Preferential Transfer against Connedx based on the Stock Payment cannot be sustained,
iv. Fraudulent Transfer of Series Payments
As previously stated, if a transfer is not supported by reasonably equivalent value, it may be avoided “to protect creditors against the depletion of a bankrupt’s estate.” 8699 Biscayne, 2012 Bankr. LEXIS 1244 at *13. It is not required that the parties execute a precise “dollar-for-dollar” exchange for reasonably equivalent value to be present. Id. Similarly, a direct benefit need not exist; it is sufficient if the transaction merely conferred indirect benefits. Id. at **13-14.
As to whether a debtor received value, a court will determine whether the debtor received “property, or satisfaction or securing of a present or antecedent debt of *875the debtor.” Id. at *16, citing to 11 U.S.C. § 548(d)(2)(A). As provided by Florida Statute § 726.104(3), if the transaction between the debtor and transferee “is intended by them to be contemporaneous and is, in fact, substantially contemporaneous,” the transaction is made for present value. Id.
The evidence admitted at trial proves that Debtor received value as he appropriated the full value of the Series Payments in the amount of $7,800.00 to his own personal use and benefit, as is shown by the Chase Account bank statements contained in Defendants’ Trial Exhibit 8 and summarized in Defendants’ Trial Exhibit 17.
v. Preferential Transfer of Series Payments
Each time that the Debtor wired the Series Payments to the Chase Account, the Debtor was the only signatory to this account. The Debtor received the Series Payments and appropriated the full amount of $7,800.00 to his own personal use, as is shown by the Chase Account bank statements contained in Defendants’ Trial Exhibit 8 and summarized in Defendants’ Trial Exhibit 17. The Trustee is not entitled to avoid a transfer as preferential “(1) to the extent that such transfer was— (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange” 11 U.S.C. § 547(c)(1). The requirements of § 547(c)(1) are satisfied here because the transfers of the Series Payments were contemporaneous exchanges for new value, with the Debtor personally receiving the full benefit of $7,800.00 of new value. Therefore, the Trustee’s Third Claim for Relief for Preferential Transfer against Connedx based on the Series Payments cannot be sustained.
FINAL CONCLUSIONS
The Court has reviewed the Trustee’s Direct Testimony filed herein and concludes it is inaccurate, misleading and full of misstatements. For instance, contrary to paragraphs 20 and 21, Defendants did not benefit at all by the Stock Payment or the Series Payments; the Debtor received the full benefit of the $49,000, the subsequent stock purchase, and the $7,800 Series Payments, and the evidence at trial bears this out. Contrary to paragraph 33, the Debtor received more than the reasonably equivalent value of the worthless stock he sold to Ms. Madalon and further received the full value of the Series Payments which he used for his personal expenses. Debtor duped investors, including Ms. Madalon, into purchasing stock and sending the purchase price to Connedx — which he thereafter siphoned out for personal expenses. The Trustee’s reliance on Debtor’s Schedules and Statement of Financial Affairs to state a claim against the Defendants is misguided, as the Debtor is a thief convicted of defrauding the Defendants.
The Court also found the Trustee to be a poor witness at trial. None of the counts of the Amended Complaint were proven under 11 U.S.C. § 547 or § 548 at trial. Moreover, it is contrary to the equitable policies underlying the Bankruptcy Code .to avoid the transfer of the stock and effectively compel Ms. Madalon to sustain another loss of $49,000.00 in exchange for valueless stock.
The Debtor received more than the value of the worthless stock he transferred to Ms. Madalon. The Debtor was the sole signatory to the Chase Account where the Stock Payment and Series Payments were deposited, and he was the only individual who had access to the Chase Account funds until June 11, 2013. Mr. Madalon’s review of the Chase Account statements *876contained in Defendants’ Trial Exhibit 8 and the summary of that review contained in Defendants’ Trial Exhibit 17 revealed that the majority of transactions were for the Debtor’s personal, non-business related expenses.
The evidence proved the Debtor appropriated the entire amount of the $49,000.00 Stock Payment deposited in the Chase Account to his own personal use. The transfer of the Stock Payment funds, which the Trustee has claimed as the basis for the Second and Fourth Counts of the' Amended Complaint (D.E. 65) resulted in direct benefit to the Debtor.
As demonstrated by Mr. Madalon’s testimony at trial and Defendants’ Trial Exhibits 1, 2, 8 and 17, the Debtor also spent the entirety of the $7,800.00 in Series Payments, and then some, for his own personal benefit. The transfer of the Series Payments funds, which the Trustee has claimed as the basis for the First and Third Counts of the Amended Complaint (D.E. 65) resulted in direct benefit to the Debtor.
Based on the foregoing Findings of Fact and Conclusions of Law, it is
ORDERED AND ADJUDGED as follows:
1. Defendant Lisa M. Madalon is entitled to judgment in her favor as to the Amended Complaint (D.E. 65).
2. Defendant Connedx Corporation is entitled to judgment in its favor as to the Amended Complaint on the Stock Payment and the Series Payments (D.E. 65).
3. Final Judgment will be entered by separate order, in accordance with Federal Rule of Civil Procedure 58.
ORDERED in the Southern District of Florida on November 10, 2016. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500109/ | ORDER
W. Homer Drake, U.S. Bankruptcy Court Judge
Before the Court is a Motion for Reconsideration (hereinafter the “Motion”) filed by Freemon E. Fuller (hereinafter the “Debtor”), acting pro se, on August 15, 2016. The Debtor requests that the Court reconsider its Order and Judgment entered on August 12, 2016, wherein the Court concluded that the debt the Debtor owes to Patriot Fire Protection, Inc. (hereinafter, “Patriot”) is excepted from discharge pursuant to § 523(a)(6) and denied the Debtor a discharge pursuant to § 727(a)(2) and § 727(a)(4).
Background
Patriot initiated this adversary proceeding on December 5, 2014. Patriot holds a claim against the Debtor arising from a judgment of the Superior Court of Henry County (hereinafter the “Superior Court”) holding the Debtor liable for breach of a non-compete agreement he had entered into with Patriot. In the adversary proceeding, Patriot sought to have this debt excepted from discharge as a debt for willful and malicious injury. It also objected to the Debtor’s receipt of a discharge because the Debtor had left information out of his Schedules and had been placing money in his wife’s bank account. The proceeding came on for trial on June 28, 2016.
At the beginning of trial, Patriot submitted, as an exhibit, admissions it had obtained by default. On April 20, 2015 (over a year before the trial), Patriot had served a request for admissions on the Debtor. (Req. for Admissions, Trial Exh. 27, at 7). The Debtor never replied to these admissions, so they were deemed admitted as a matter of law. After considering these admissions and the other evidence presented at trial, the Court concluded that the Debt- or had caused willful and malicious injury to Patriot, had transferred property with the intent to hinder, delay, or defraud creditors, and knowingly and fraudulently made a false oath or account. Consequently, judgment was entered for Patriot on August 2, 2016. (Doc. No. 37).
On August 15, 2016, the Debtor filed the motion currently before the Court. In his motion, the Debtor lists five reasons why the Court should reconsider its prior decision. First, citing the Sixth Amendment to the United States Constitution, the Debtor maintains that he was denied a fair trial because the judge of the Superior Court was a friend of James Woody Johnson, the President and CEO of Patriot,1 and be*879cause the Superior Court entered a directed verdict on damages rather than allow the jury to announce a decision. Second, the Debtor claims that, his counsel provided ineffective assistance by failing to respond to Patriot’s discovery requests and failing to amend the Debtor’s Schedules to disclose omitted information. Third, the Debtor asserts that Patriot withheld the fact that Atlanta Area Extinguisher Services (hereinafter “AAES”), which was a co-defendant in the Superior Court action, had sought to have the Superior Court case reheard because AAES contested the Superior Court’s jurisdiction. Fourth, citing the Whistleblower Protection Acts of 1989, the Debtor asserts that Patriot is only bringing this adversary proceeding because the Debtor was a witness for the State against Patriot in an investigation involving performing work without a license, and because the Debtor had filed a complaint regarding overtime pay. Finally, citing the Civil Rights Act of 1964, the Debtor alleges that Patriot only brought the breach of contract lawsuit against the Debtor because the Debtor is black, and Patriot has not brought actions against white former employees who have also breached the non-compete agreement.2
On August 25, 2016, Patriot responded to the Motion. Patriot argues that the Debtor could have raised these issues in the Superior Court, and that none of them are sufficient to justify amending or altering the Court’s judgment. Patriot also emphasizes that ineffective assistance of counsel is not grounds for reconsideration in a civil case.
Discussion
“The Federal Rules of Civil Procedure do not specifically provide for reconsideration.” Broyles v. Texas, 643 F.Supp.2d 894, 897 (S.D. Tex. 2009). However, the Eleventh Circuit has noted that motions for reconsideration are “almost without exception” treated as motions under Rule 59(e). See Green v. DEA, 606 F.3d 1296, 1299 (11th Cir. 2010); see also Woolner v. LaFevor (In re LeFevor), 2007 WL 7138342, at *1 (Bankr. N.D. Ga. Mar. 2, 2007) (Massey, J.). That rule, which Federal Rule of Bankruptcy Procedure 9023 incorporates, with some exceptions, into Bankruptcy eases, provides that “[a] motion to alter or amend a judgment must be filed no later than 28 days after the entry of-the judgment.” Fed. R. Civ. P. 59(e); see also Fed, R. Baner. P. 9023 (requiring that motions for new trial or to alter or amend a judgment must be filed “no later than 14 days after entry of judgment”). In this Court, motions for reconsideration are required to be filed within fourteen days. BLR 9023-1 (requiring motions for reconsideration to be filed “within 14 days of after entry of the order or judgment”).
Rule 59(e) only provides the time within which a motion to alter or amend a judgment must be filed; it provides no guidelines for the consideration of such a motion. Nevertheless, the courts have stepped in to fill this void. In the Eleventh Circuit, “[t]he only grounds for granting [a Rule 59] motion are newly-discovered evidence or manifest errors of law or fact.” Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1344 (11th Cir. 2010) (alterations in original) (quoting Arthur v. King, 500 F.3d 1335, 1343 (11th Cir. 2007) (per curiam)); accord In re LaFevor, 2007 WL 7138342, at *1. This means that parties must do more than simply “ask the... court to reexamine an unfavorable *880ruling,” id., and a party may not attempt to raise arguments that were available to it before the judgment was entered, but were not advanced. See Kellogg v. Schreiber (In re Kellogg), 197 F.3d 1116, 1120 (11th Cir. 1999). Instead, a party must show “clear and obvious error where the interests of justice demand correction.” Gold Cross EMS, Inc. v. Children’s Hosp. of Ala., 108 F.Supp.3d 1376, 1380 (S.D. Ga. 2015). Whether a party has met this burden is left to the sound discretion of the trial.court. See Jacobs, 626 F.3d at 1343 n.20.
Turning to the Debtor’s motion, the Court finds no reason to disturb its previous Order and Judgment. The Debtor’s allegations of violations of the Sixth Amendment, the Whistleblower Protection Acts, and the Civil Rights Act, as well as his contentions regarding AAES’s appeal of the Superior Court’s judgment, do not raise any newly discovered evidence or suggest that the Court has committed a manifest error of law. Instead, these assertions represent either independent causes of action the Debtor may have against Patriot,3 or collateral attacks on the validity of the Superior Court’s judgment. In either case, they are not grounds for the Court to reconsider its prior decision. See generally Cresap v. Waldorf (In re Waldorf), 206 B.R. 858, 868 (Bankr. E.D. Mich. 1997) (“[The parties] cannot use the bankruptcy court to appeal the state court judgment.”).
The Debtor’s arguments concerning . his attorney’s performance are likewise not grounds for reconsideration. To begin with, “there is no constitutional or statutory right to effective assistance of counsel in a civil case.” Mekdeci ex rel. Mekdeci v. Merrell Nat’l Labs., a Div. of Richardson-Merrell, Inc., 711 F.2d 1510, 1521 (11th Cir. 1983) (quoting Watson v. Moss, 619 F.2d 775, 776 (8th Cir. 1981)). In civil cases, attorneys act as the agents of their clients, and a party cannot “avoid the consequences of the acts or omissions of this freely selected agent.” Link v. Wabash R.R. Co., 370 U.S. 626, 634-35, 82 S.Ct. 1386, 8 L.Ed.2d 734 (1962); accord Shuler v. Ingram & Assocs., 441 Fed.Appx. 712, 719 (11th Cir. 2011) (per curiam) (“[A] litigant is generally bound by all acts and omissions of his attorney.”). Because of this relationship, a party who feels his attorney’s conduct has fallen below an acceptable standard may pursue an action for malpractice, but he cannot seek to alter or amend a court’s judgment. See Link, 370 U.S. at 634 n.10, 82 S.Ct. 1386; Mekdeci, 711 F.2d at 1523.
Here, the Debtor alleges that his attorney provided ineffective representation by not responding to the requests for admission and by not amending the Debtor’s filed schedules. These allegations, as is the case with all allegations of professional malpractice, are serious. Howeyer, asking the Court to reverse its judgment based on these allegations is not the correct avenue for the Debtor to seek relief for any harm caused by his attorney’s conduct. Even if the Debtor’s attorney provided assistance that fell below acceptable professional standards, the Court could not use that failure as a basis to alter its prior judgment. To do so would serve, as the Supreme Court has phrased it, to “visit[ ] the sins” of the Debtor’s attorney on Patriot. See Link, 370 U.S. at 634 n.10, 82 S.Ct. 1386. Therefore, the Court will not reconsider its order based on allegations concerning the Debtor’s attorney’s conduct.
Conclusion
As the Debtor has failed to present sufficient grounds for altering or amending *881the Court’s Order and Judgment of August 2, 2016, the Motion is hereby DENIED.
The Clerk is DIRECTED to servé this Order on the Debtor, Patriot, the Chapter 7 Trustee, and the U.S. Trustee.
IT IS ORDERED.
. The Court assumes that where the Debtor says, "[T]he Plaintiff, then let it be known that he and the judge were good friends,” the Debtor is speaking of Mr. Johnson.
. The remainder of the motion refers to a “stipulation” and the curing of a default. As the present proceeding involves neither a stipulation nor the curing of a default, the Court assumes that these sections are part of some "form motion” the Debtor used as the starting point for his own motion, and will not consider them.
. The Court makes no comment on the validity of the Debtor’s alleged claims, as such a finding is irrelevant to dealing with the Motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500110/ | IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE
ORDER
W. Homer Drake, U.S. Bankruptcy Court Judge
In this adversary proceeding, Patriot Fire Protection, Inc. (hereinafter “Patriot”) contests the dischargeability of a debt owed to it by Freemon E. Fuller (hereinafter the “Debtor”) and objects to the Debt- or’s receipt of a discharge. These matters constitute core proceedings, see 28 U.S.C. § 157(b)(2)(I), (J), over which this Court has subject matter jurisdiction, see 28 U.S.C. §§ 157(a), 1334. This proceeding came on for trial on June 28,2016.
The Debtor’s Request to Withdraw Admissions
Before delving into the findings of fact and conclusions of law regarding the substantive issues of this proceeding, the Court must address an oral Motion to Withdraw Admissions made at the beginning of the trial.
At the outset of the presentation of its case, Patriot moyed to introduce thirty-three exhibits it had prepared for use at the trial. The Debtor made no opposition to the tender of these exhibits, so they were accepted without objection. Once the exhibits had been tendered, Patriot directed the Court’s attention to Trial Exhibit 27, Creditor’s First Request for Admissions to Debtor. The request asked for very condemnatory admissions from the Debtor, including “8. Admit that you purposefully and maliciously directly competed with Patriot Fire, and solicited Patriot Fire’s clients to benefit yourself at the expense of Patriot Fire,” and “9. Admit that you transferred property to your wife with intent to hinder, delay, or defraud creditors.” (Req. for Admissions, Trial Exh. 27, at 5). According to the certificate of service, Patriot had served this request for admissions on the Debtor on April 20, 2015. (Id. at 7). At trial, Patriot asserted that it had never received a response to these requests.1 Patriot argued that the *885Debtor’s failure to respond to the discovery request constituted admissions of the statements contained in it. Relying on these admissions, Patriot moved for judgment as a matter of law. In response, the Debtor, who appeared to have been unaware that any requests for admission had been served, asked that.the Court allow him to withdraw the admissions. The Court took the matter under advisement, and the trial proceeded. Having now had the opportunity to review the law and consider the parties’ arguments, the Court concludes as follows concerning the Debt- or’s request to withdraw his admissions.2
Federal Rule of Civil Procedure 36, incorporated into adversary proceedings in Bankruptcy by Federal Rule of Bankruptcy Procedure 7036, provides that “[a] matter [in a request for admission] is admitted unless, within 30 days after being served, the party to whom the request is directed serves on the requesting party a written answer or objection addressed to the matter and signed by the party or its attorney.” Fed. R. Civ. P. 36(a)(3); see also Fed. R. BanKR. P. 7036. However, the Rule also provides that a court may allow a party to withdraw or amend its admissions. See Fed. R. Civ. P. 36(b), A court may permit the withdrawal or amendment of admissions if two conditions are satisfied: (1) withdrawal or amendment will “promote the presentation of the merits of the action”; and (2) “the court is not persuaded that it would prejudice the requesting party in maintaining or defending on the merits.” Id. A court should limit its analysis to these two conditions only. See Perez v. Miami-Dade Cnty., 297 F.3d 1255, 1265 (11th Cir. 2002); accord Jones v. Tauber & Balser, P.C., 503 B.R. 162, 175 (N.D. Ga. 2013).
The first condition “is satisfied when upholding the admissions would practically eliminate any presentation of the merits of the case.” Perez, 297 F.3d at 1266 (internal quotation marks omitted) (quoting Hadley v. United States, 45 F.3d 1345, 1348 (9th Cir. 1995)). Its purpose is “to encourage resolution of disputes over material facts on the merits, rather than by default.” Whitaker v. Annamalai (In re Hindu Temple and Cmty. Ctr. of Ga.), 2012 WL 10739278, at *3 (Bankr. N.D. Ga. Jan. 6, 2012) (Massey, J.).
The second condition is satisfied when the party who obtained the admission is able to demonstrate that allowing the withdrawal will prejudice its ability to make or defend its case. See Eckell v. Borbidge, 114 B.R. 63, 66 (E.D. Penn. 1990). For example, a party can show prejudice where the withdrawal of the admissions would result in “the sudden need to obtain evidence with respect to the questions previously answered by the admissions.” Jones, 503 B.R. at 175 (quoting Smith v. First Nat’l Bank of Atlanta, 837 F.2d 1575, 1578 (11th Cir. 1988)). In the same vein, “a court is more likely to find prejudice when a party seeks to withdraw its admissions once trial has already begun.” See Perez, 297 F.3d at 1266-67.
In the instant case, Patriot served the request for admissions on the Debtor on April 20, 2015. In order to avoid admitting the statements by default, the Debtor was required to respond by May 20, 2015, which he did not do. Therefore, the statements are admitted. What the Court must *886now decide is whether allowing the Debtor to withdraw his admissions will promote presentation of the case on the merits, and whether allowing withdrawal will prejudice Patriot.
The Court finds that allowing withdrawal of the admissions would promote the presentation of the case on the merits. The statements the Debtor is deemed to have admitted strongly support the conclusion that the debt he owes to Patriot is nondis-chargeable and that he is not entitled to a discharge. Thus, it would encourage a fuller presentation of the evidence if the Debt- or were allowed to withdraw his admissions.
Nevertheless, to allow such a withdrawal at this stage would be highly prejudicial to Patriot. Any response to Patriot’s request was due well over a year before the trial began. Patriot had planned its trial strategy around these admissions, and had included them, albeit with little indication of their importance, in its list of exhibits attached to the Consolidated Pre-Trial Order. (See Doc. No. 31, Exh. 2, at 3). The beginning of trial is simply far too late in the proceeding to request that admissions such as these be withdrawn.3 Therefore, because withdrawing the admissions would be highly prejudicial to Patriot, the Debt- or’s oral Motion to Withdraw Admissions is hereby DENIED.
Nevertheless, the Court notes that it will not treat as established the statements to which the Debtor admitted so far as they constitute conclusions of law or are contrary to the uncontested evidence in the record. See Le v. Krepps (In re Krepps), 476 B.R. 646, 649 (Bankr. S.D. Ga. 2012) (“[T]he matters set forth in the Request for Admission which are not conclusions of law are hereby deemed admitted.”); cf. F.D.I.C. v. Prusia, 18 F.3d 637, 641 (8th Cir. 1994) (allowing amendment of .“‘admitted’ facts contrary to the actual facts”). The Court particularly notes Statement 3 of the Request for Admissions, which states, “Admit that [Patriot] was granted a motion for summary judgment for tortious interference in October, 2013, in which the Superior Court of Henry County.. .determined that you had caused willful and malicious injury to [Patriot].” (Trial Exh. 27, at 4). This was plainly not the holding of the Superior Court, as evidenced by that court’s Final Order and Judgment (see Trial Exh. 33) and this Court’s interpretation of that order (see Order Denying Mot. for Summary Judgment, Doc. No. 19, at 10 (“As to the [Debt- or], therefore, the Superior Court found that the [Debtor] breached the agreement and that the breach resulted in damages, but made no finding as to whether the [Debtor’s] breach of the Agreement was also ‘willful and malicious.’ ”)). Accordingly, Statement 3 will not be deemed established. However, the rest of thé statements admitted shall be deemed established, and the facts contained in those statements shall serve as a supplement to the Court’s Findings of Fact. (See Req. for Admission, Trial Exh. 27, at 3-6).
Findings of Fact
Having concluded that the Debtor cannot withdraw his admissions, and having *887heard the evidence presented at the trial, the Court finds as set forth below.
The Debtor was an employee of Patriot from October 1, 1999 to August 31, 2009. The Debtor was a technician whose job entailed installing and maintaining fire-safety systems. Because Patriot was a small company, the Debtor was also tasked with soliciting new clients.
During'his time with Patriot, the Debtor began performing “side jobs,” in which he would perform the services Patriot provided, but did so without Patriot’s knowledge. Upon learning about these side jobs, Patriot had the Debtor sign a confidentiality and non-compete agreement (hereinafter the “Agreement”) as a condition of continued employment. The Agreement prohibited the Debtor from soliciting business from Patriot’s clients or otherwise competing with Patriot within a fifty-mile radius of Locust Grove, Georgia.
The quality of the Debtor’s work declined after he was made to sign the agreement, so in August of 2009 Patriot terminated the Debtor. Shortly thereafter, the Debtor began working for Atlanta Area Extinguisher Services (hereinafter “AAES”). While working for AAES, the Debtor solicited business and performed tasks for clients he had serviced while working for Patriot, activity that was in violation of the non-compete agreement. James Johnson, the President and Owner of Patriot, estimated that approximately three former clients were contacted by the Debtor every week. This placed a strain on Patriot’s business because its clients required the fire-inspection services Patriot provided only once or twice a year. Because the Debtor was performing these services on former Patriot clients or clients within Patriot’s area, Patriot was losing this business. Patriot sent a cease and desist letter to the Debtor, but he continued to perform services in violation of the Agreement. Finally, Patriot filed a lawsuit in the Superior Court of Henry County (hereinafter the “Superior Court”), asserting a breach of contract claim (for violating the agreement) against the Debtor and a tortious interference with business claim against AAES.
In January of 2010, the Superior Court entered an order enjoining the Debtor from further contact or communications with Patriot’s former clients. The Debtor did not abide by this injunction, and on March 19, 2010, the Superior Court found the Debtor in willful contempt and ordered him to pay Patriot $500;
In January of 2012, the Superior Court entered summary judgment against the Debtor, concluding that he had violated the Agreement.4 Though it initially denied summary judgment as to AAES, the Superior Court entered summary judgment against AAES as well, after Patriot moved for reconsideration. On November 6, 2013, the Superior Court entered an order awarding Patriot $85,709.33 in damages from the Debtor and AAES jointly and severally, as well as $43,084.17 in costs and fees.
The Debtor filed his voluntary petition under Chapter 7 on August 25, 2014.5 Pri- or to filing his petition, the Debtor made multiple cash deposits into his wife’s bank account. (See e.g., Bank Statements from Account of Celestine Fuller, Trial Exh. 21, at 20 (showing a $4,133.63 deposit in April, *8882014)). Additionally, in his Schedules and Statement of Financial Affairs filed with his petition, the Debtor failed to disclose several pieces of information, most notably: (1) a ring, which the Debtor valued at $4,000 (see 2004 Exam of Freemon Fuller, Trial Exh. 12, at 26:8-9); (2) the full extent of his non-employment income prior to filing (see Bank Statements, Trial Exh. 20); (3) multiple bank accounts (see e.g., Bank Statements Trial Exh. 18); (4) his wife’s bank account, where his employment compensation has gone since 2009 (see 2004 Exam of Freemon Fuller, Trial Exh. 12, at 44:5-14); (5) two payments made to creditors from his wife’s account prior to the filing of the petition (see Cancelled Checks, Trial Exh. 22, at 4, 6); and (6) that he had a business known as “All In One Fire Protection” (see 2004 Exam of Freemon Fuller, Trial Exh. 12, at 16:20-17:11).
Conclusions of Law
Patriot asserts three causes of action in this proceeding: (A) the debt arising from the Superior Court’s judgment should be excepted from discharge pursuant to § 523(a)(6); (B) the Debtor’s discharge should be denied pursuant to § 727(a)(2)(A); and (C) the Debtor’s discharge should be denied pursuant to § 727(a)(4). The Court will address each of these-in turn, but first there are a few guiding principles concerning discharge-ability and objections to discharge that it is important to consider.
“A central purpose of the [Bankruptcy] Code is to provide 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.’ ” Grogan v. Garner, 498 U.S. 279, 286, 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)). This “fresh start,” however, is only available “to the honest but unfortunate debtor.” Id. (internal quotation marks omitted); see also E. Diversified Distributors, Inc. v. Matus (In re Matus), 303 B.R. 660, 670 (Bankr. N.D. Ga. 2004) (Mullins, J.) (“Though the Bankruptcy Code provides most debtors with a fresh start, the Code prevents dishonest debtors from improperly using it as a shield.”). Section 523, which “except[s] certain debts from discharge,” and § 727(a), which “may be utilized to deny a discharge to dishonest debtors,” are two of the sections of the Code ensuring that the benefits of a discharge are experienced only by those debtors Congress, and by extension the people of this Republic, have deemed worthy of the privilege. See 11 U.S.C. §§ 523, 727(a).
In applying the exceptions to discharge under § 523 and the grounds for denial of discharge under § 727(a), the courts have supported the fresh start by construing those sections in favor of the debtor. See Moyer v. Geer (In re Geer), 522 B.R. 365, 385 (Bankr. N.D. Ga. 2014) (Hagenau, J.); Williams v. Williams (In re Williams), 2013 WL 6017464, at *6 (Bankr. M.D. Ga. Nov. 12, 2013); In re Matus, 303 B.R, at 671. Furthermore, a creditor or other, plaintiff must initially prove the application of the exception or its objection by a preponderance of the evidence. See Kane v. Stewart Tilghman Fox & Bianchi, P.A. (In re Kane), 755 F.3d 1285, 1293 (11th Cir. 2014); Jennings v. Maxfield (In re Jennings), 533 F,3d 1333, 1339 (11th Cir. 2008); In re Williams, 2013 WL 6017464, at *6. However, once the plaintiff has made this showing, “the debtor has the ultimate burden of persuasion, demonstrating that he is entitled to a discharge despite the evidence presented by the objecting party.” In re Matus, 303 B.R. at 672. With these guiding *889principles in mind, the Court turns to Patriot’s claims.
A. § 523(a)(6) .
Section 523(a)(6) excepts from discharge debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). “The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). This means that the debtor must have desired the injury giving rise to the debt, either subjectively or because there is “no other plausible inference.” Atlanta Contract Glazing, Inc. v. Swofford (In re Swofford), 2008 WL 7842040, at *2 (Bankr. N.D. Ga. Dec. 29, 2008) (Brizendine, J.) (quoting Henderson v. Woolley (In re Woolley), 288 B.R. 294, 302 (Bankr. S.D. Ga. 2001)). If there was a substantial certainty that the debtor’s conduct would cause the injury, that will suffice. See In re Kane, 755 F.3d at 1293. An act is malicious if it is “wrongful and without just cause or excessive.” Id. at 1294.
Here, the debt owed to Patriot as a result of the Superior Court’s judgment is nondischargeable as a debt for willful and malicious injury. Although, as this Court noted, the Superior Court made no finding concerning whether the Debtor acted willfully and maliciously in violating the Agreement, ample evidence was presented to this Court to conclude that he did so. Initially, the admissions establish that the Debtor “purposefully and maliciously competed with [Patriot].” (Req. for Admission, Trial Exh. 27, at 5). But even beyond the admissions, the facts presented at trial establish that the debt is excepted from discharge. First, the Debtor’s conduct was malicious — there was no just cause for him to breach the Agreement, and to do so was wrongful. Second, the Debtor acted with the substantial certainty that his conduct would cause injury to Patriot. The Debtor had worked in the fire-protection industry for nearly ten years before the events at issue here, and therefore would have understood how. precious each client is to a business engaged in that industry, and how poaching clients necessarily caused harm to Patriot in that the client would no longer need Patriot’s services.
Additionally, the Debtor received a cease and desist letter from Patriot before the lawsuit was filed, emphasizing that from that point he was on even greater notice that his actions were likely to harm Patriot. Thus, the Debtor’s actions were done with substantial certainty that they would harm Patriot by reducing Patriot’s client pool.
Faced with all of these indicia that his actions were causing Patriot harm, the Debtor, nevertheless, persisted in violating the agreement. There is no other plausible inference than that the Debtor had a substantial certainty that his conduct would cause injury, and yet he acted anyway. As this conduct was willful and malicious, the resultant debt, represented by the judgment of the Superior Court, is excepted from discharge pursuant to § 523(a)(6).
B. 727(a)(2)(A)
While § 523(a) lists particular debts that are excepted from discharge, § 727 provides scenarios in which a debt- or’s conduct disqualifies him from receiving a discharge at all. Here, Patriot relies on two subsections of § 727-(a)(2)(A) and (a)(4) — as grounds for denying the Debtor his discharge. The Court will address both subsections, and notes that “[a] finding against the [Debtor] under any single subsection. . .is sufficient to deny him a dis*890charge.” Protos v. Silver (In re Protos), 322 Fed.Appx. 930, 932-32 (11th Cir. 2009) (per curiam).
Section 727(a)(2) denies a discharge to debtors who, “with intent to hinder, delay, or defraud a creditor” have transferred “(A) property of the debtor, within one year of the filing of the petition.” 11 U.S.C. § 727(a)(2). The statute’s requirements break down into four elements: there must have been (1) a transfer (2) of property of the debtor, (3) within one year of the filing of the petition, (4) made with fraudulent intent. In re Williams, 2013 WL 6017464, at *9; see also Gebhardt v. McKeever (In re McKeever), 550 B.R. 623, 635 (Bankr. N.D. Ga. 2016) (Hagenau, J.) (“[T]o deny a debtor a discharge under this section, a plaintiff must show the debtor transferred.. .property, within the requisite time period, and had the requisite intent....”).
“Transfer” is broadly defined in the Code to include “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing or parting with — (i) property; or (ii) an interest in property.” In re Mckeever, 550 B.R. at 635 (quoting 11 U.S.C. § 101(54)). Concerning the intent element, actual intent is required, but it may be shown by reference to all of the circumstances. Id. at 636. In evaluating those circumstances, courts are encouraged to consider the traditional “badges of fraud,” including lack of consideration, a close relationship between the debtor and the transferee, and “the existence or cumulative effect of the 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.” Hon. W. HomeR Drake, Jr. & Karen D. Visser, Bankruptcy Practice for the General Practitioner § 11:19 (3rd ed. 2011) (quoting Soza v. Hill (In re Soza), 542 F.3d 1060, 1067 (5th Cir. 2008)).
In the instant case, the evidence shows that the Debtor was depositing his money into his wife’s bank account within a year of the filing of his petition. (See Bank Statements from Account of Celes-tine Fuller, Trial Exh. 21). These deposits were of the Debtor’s property; they constitute transfers within the meaning of the Code; and they were made within one year of the filing of the petition. Furthermore, per Patriot’s unanswered discovery request, the Debtor has admitted to “transferring] property to [his] wife with intent to hinder, delay, or defraud creditors.” (Trial Exh. 27, at 5). Therefore, the Debtor’s discharge will be denied pursuant to § 727(a)(2)(A).
C. § 727(a)(4)
Patriot has also asserted an objection to the Debtor’s discharge under § 727(a)(4). That section prohibits a debtor from receiving a discharge if he has “knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account.” 11 U.S.C. § 727(a)(4). “This provision serves to recognize a basic concept — that ‘the successful functioning of the bankruptcy [process] hinges both upon the [debtor’s] veracity and his willingness to make a full disclosure.’ ” Rainer v. Stump (In re Stump), 1996 Bankr. LEXIS 1920 (Bankr. N.D. Ga. Sept. 30, 1996) (Drake, J.) (first alteration in original) (quoting In re Mascolo, 505 F.2d 274, 278 (1st Cir. 1974)); accord Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984) (“The veracity of the [debtor’s] statements is essential to the successful administration of the Bankruptcy Act.”). When considered in conjunction with the Debtor’s duties to disclose, this provision emphasizes the point that “the discharge is not free, and one of the costs is the debtor’s cooperation, including the accurate and full completion of the schedules and statement of financial affairs.” In *891re Matus, 303 B.R. at 676; see also 11 U.S.C. § 521. With these principles in mind, courts have consistently held that deliberate omissions from the debtor’s schedules constitute “a false oath or account.” See, e.g., In re Matus, 303 B.R. at 676-77 (“[Deliberate omissions from schedules or the statement of financial affairs may also constitute false oaths or accounts.”); Shinhan Bank Am. (Inc.) v. Kim (In re Kim), 2011 WL 5902461, at *5 (Bankr. N.D. Ga. Oct. 27, 2011) (Sacca, J.) (“Fraudulent and material omissions from a debtor’s Schedules and [Statement of Financial Affairs], which are sworn statements, justify denial of discharge under this section, as well.”).
To warrant denial of the debt- or’s discharge, the false oath or account must be “material.” See In re Geer, 522 B.R. at 387 (“[T]he plaintiff must show there was a false oath, that it was material, and that it was made knowingly and fraudulently.”); In re Matus, 303 B.R. at 676 (“The plaintiff bears the burden of proving that the false oath or account was made knowingly and fraudulently about a material matter.”). “Material” in this contéxt has a broad definition: a false statement 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 his property.” In re Chalik, 748 F.2d at 618; accord In re Kim, 2011 WL 5902461, at *6. This broad definition promotes complete disclosure by the debtor, who is not allowed “to decide what is and is not relevant.” See In re Matus, 303 B.R. at 675 (quoting Jensen v. Brooks (In re Brooks), 278 B.R. 563, 566 (Bankr. M.D. Fla. 2002)). Instead, creditors must be allowed “to judge for themselves what will benefit, and what will prejudice, them.” Id. (quoting In re Chalik, 748 F.2d at 618). For this reason, even “false oaths regarding worthless assets may bar the discharge of debts.” See In re Protos, 322 Fed.Appx. at 934; see also In re Chalik, 748 F.2d at 618 (“The recalcitrant debtor may not escape a... denial of discharge by asserting that the admittedly omitted.. .information concerned .a worthless business relationship or holding; such a defense is specious.”); DRAKE & Visser, supra, at § 11:21 (“The fact that the information omitted involved property with no or little value does not mean that the omission of the asset was not material.”).
While the value of a concealed asset does not bear on materiality, it may affect a finding on intent. See In re Williams, 2013 WL 6017464, at *7. This observation is relevant since the intent prong of § 727(a)(4), as was the case in the test under subsection (a)(2), requires actual intent, which may be inferred by reference to all of the circumstances. In re Geer, 522 B.R. at 387-88. In particular, evidence of a series of concealments or false statements strongly supports an inference that the debtor failed to disclose assets or other information with fraudulent intent, rather than as a mere oversight. See In re Protos, 322 Fed.Appx. at 933 (‘While a single, isolated instance of nondisclosure or improper disclosure may not support a finding of fraudulent intent, we find that the repeated nature of non-disclosures made by the [Debtor]... supports the bankruptcy court’s finding of fraudulent intent.”); In re Matus, 303 B.R. at 677-78. While “mistake, inadvertence, or honest reliance oh advice of counsel will not provide a basis to deny a discharge,” there are situations in which “the errors are too numerous to have been inadvertent,” suggesting that the debtor has “a reckless indifference to the truth.” Drake & Visser, supra, at § 11:21.
Finally, the Court notes that a debtor may not redeem himself, and become entitled to a discharge, by later revealing information he should have dis*892closed initially. See In re Stump, 1996 Bankr. LEXIS 1920, at *8-9 (“Furthermore, a debtor’s subsequent efforts to amend will not cleanse the original statements if they were tainted or fraudulent.”).
Here, the Debtor’s discharge will be denied. Thé evidence presented at the trial established multiple omissions from the Debtor’s" Schedules and Statement of Financial Affairs. Among the Debtors omissions were that he had several bank accounts closed within a year of the filing, that he owned a ring that he himself valued at $4,000, that he made two payments to creditors within ninety days of the filing of the petition, and that he had attempted to start a business called “All In One Fire Protection.” Furthermore, the Debtor did not disclose all of his non-employment income. These all fall well within the definition of “material” stated above. While these omissions may have related to assets that proved to be unrecoverable or of no value to the- estate, the Debtor nevertheless should have disclosed them. Though the Debtor asserts that the omissions were inadvertent and that everything was eventually revealed, the Court finds that assertion unworthy of credit. The pattern and extent of the omissions in the Debtor’s filings evidence an intent to obfuscate the Bankruptcy process and hinder creditors. Therefore, the Debtor’s discharge will be denied pursuant to § 727(a)(4).
Conclusion
In accordance with the foregoing, it is hereby ORDERED that the debt owed by the Debtor -to Patriot is excepted from discharge in its entirety; and
IT IS FURTHER ORDERED that the Debtor, Freemon E. Fuller, shall not receive a discharge in his Bankruptcy case, which is Case No. 14-11888-WHD.
Judgment will be entered in accordance with this Order.
The Clerk is DIRECTED to serve this Order on Patriot, the Debtor, their respective counsel, the Chapter 7 Trustee, and the United States Trustee.
IT IS ORDERED.
. Indeed, the record in this case shows that on May 26, 2015, Patriot filed a Motion to Extend -the Discovery Period, requesting a sixty-dáy extension because the Debtor had *885not replied to any of Patriot’s discovery requests. (See Doc. No. 9, at 3-4).
. As the Court is issuing this Order in light of all of the evidence, both contained in the record and presented at the trial, it will make no ruling on Patriot’s Motion for Judgment as a Matter of Law.
. The Court wonders, though, why Patriot has been sitting on these admissions for so long. They were not mentioned in Patriot's Motion for Summary Judgment filed on July 13, 2015. (Doc. No. 13). Nor did Patriot mention its intent to rely on these admissions at the pre-trial conference held on April 27, 2016. Instead, Patriot merely enumerated the admissions as number 29 of 36 in its list of exhibits and referenced them in citations in its Bench Brief filed the night before the trial. (See, e.g., Bench Brief, Doc. No. 35, at 5). In the interest of judicial efficiency, the Court exhorts Patriot, and other parties in similar situations, to refrain from waiting until the last minute to notify the Court that it intends to rely so heavily on admissions obtained by default.
. The judgment of the Superior Court, and the findings of fact therein, are binding on this Court by application of the doctrine of collateral estoppel. (See Order Denying Motion for Summary Judgment, Doc. No. 19, at 9-10).
. Griffin E. Howell, III was appointed as Chapter 7 Trustee. He has submitted his report of no distribution, but the case remains open pending the resolution of this adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500111/ | IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE
ORDER
W. Homer Drake, U.S. Bankruptcy Court Judge
On September 13, 2016, James tí. Baker (hereinafter the “Trustee”), .trustee for the Bankruptcy estate of Kanku Kasongo Ngalula and Melrose Denise Allen-Ngalu-la (hereinafter the “Debtors”), filed two applications to employ Bill Jones of Ann Imes & Associates Realtors as a real estate broker in the Debtors’ case. The two applications concerned two separate parcels of real property located on Alexander Road in Grantville, Georgia. One is a house and seventeen acres located at 540 Alexander Road (hereinafter “540 Alexander Road”). The other consists of twenty-four acres located adjacent to 540 Alexander Road (hereinafter the “24 Acres”). The applications, which were accompanied by Mr. Jones’s declarations and Exclusive Seller Listing Agreements (hereinafter the “Agreements”), sought to employ Mr. Jones to assist in selling these properties for the benefit of the estate.
On September 14,2016, the Court issued orders granting the Trustee’s applications. The Court concluded that it appeared Mr. Jones was a disinterested person and that his employment would be in the best interest of the estate. The orders were, entered subject to objection by the United States Trustee within twenty-one days. No objection has been filed.
However, on September 26, 2016, the Debtors filed two motions to reconsider (one for each of the Court’s orders), and it is these motions that are currently before the Court. The Debtors do not object to the employment of Mr. Jones, but object to the contents of the Agreements attached to the applications. The Debtors argue that the Agreements undervalue the properties, that is, the “list prices” are too low. As a consequence of this undervaluing, the Debtors request that the Court disallow its orders approving Mr. Jones’s employment.
Discussion
Motions to reconsider are governed by Federal Rule of Civil Procedure 59. See Green v. Drug Enforcement Admin., 606 F.3d 1296, 1299 (11th Cir. 2010); see also *894Fed. R. BankR. 9023 (making Rule 59 applicable in Bankruptcy cases). Rule 59, however, merely provides the time limit for filing “a motion to alter or amend a judgment.” See Fed. R. Civ. P. 59(e) (“A motion to alter or amend a judgment must be filed no later than 28 days after the entry of the judgment.”); see also BLR 9023-1 (requiring motions for reconsideration to be filed within fourteen days of the entry of the order or judgment). In the absence of direct instruction from the text of the Rule, the courts have developed their own tests for deciding whether to grant motions to reconsider.
Eleventh Circuit precedent establishes that there are two grounds for granting a motion to reconsider: (1) newly discovered evidence; or (2) manifest errors of law or fact. Hamilton v. Sec’y, Fla. Dept. of Corrections, 793 F.3d 1261, 1266 (11th Cir. 2015) (per curiam); Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1344 (11th Cir. 2010); Kellogg v. Schreiber (In re Kellogg), 197 F.3d 1116, 1119 (11th Cir. 1999). In order to justify altering or amending a judgment pursuant to the second ground, there must be “a showing of a clear and obvious error where the interests of justice demand correction.” Gold Cross EMS, Inc. v. Children’s Hosp. of Ala., 108 F.Supp.3d 1376, 1380 (S.D. Ga. 2015) (internal quotation marks omitted) (quoting McGuire v. Ryland Grp., Inc., 497 F.Supp.2d 1356, 1358 (M.D. Fla. 2007)).
Here, the Debtors have not presented any new evidence that would affect the Court’s decision on the Trustee’s applications, nor have they pointed out any manifest error of law or fact. The employment of professionals in a Bankruptcy case is governed by Rule 2014. See Fed. R. Bankr. P. 2014. This Rule requires only that an application to employ a professional must set out certain information, including the name of the person to be employed, the services to be rendered, the proposed compensation arrangement, and the person’s disinterestedness, which must be proved by a verified statement. See id. It does not require that an application to employ a real estate agent provide the price for which the subject real estate should ultimately be sold.
The Debtors in this case are making their argument at the wrong time. The ultimate disposition of the properties was not before the Court when considering the Trustee’s applications, so the list prices in the Agreements were inconsequential. Indeed, the applications specifically provide that “[t]he real estate broker(s) whom applicant proposes to employ have been informed and understand that no sale may be consummated until after notice and hearing.” All the Court decided in approving the employment of Mr. Jones was the terms of his employment (for instance, his 6% commission on any sale).1 If the Trustee is ultimately, with Mr. Jones’s professional assistance, able to sell the properties, such sales will be subject to the requirements of § 363(b), which allows sales outside of the ordinary course of business only after “notice and a hearing.” See 11 U.S.C. § 363(b). The Debtors, if they have standing to do so, may raise any concerns they have about the sale price or the conduct of the sale at that time.2
*895Conclusion
For the reasons set forth above, the Debtors’ Motions to Reconsider are hereby DENIED.
The Clerk shall serve this Order on the Debtors, the Trustee, and the U.S. Trustee.
IT IS ORDERED.
. Even this term is subject to further consideration if warranted. (See Order, Doc. No. 36, at 1-2 (‘‘[T]he Court may allow compensation different from the compensation provided in the Trustee’s Application if such terms and conditions prove to have been improvident in light of developments anticipatable at the time of the fixing of such terms and conditions,”).
. See Cult Awareness Network, Inc. v. Martino (In re Cult Awareness Network, Inc.), 151 F.3d 605, 607 (7th Cir. 1998) ("To have standing to object to a bankruptcy order, a person must *895have a pecuniary interest in the outcome of the bankruptcy proceedings.... Debtors, particularly Chapter 7 debtors, rarely have such a pecuniary interest because no matter how the estate’s assets are disbursed by the trustee, no assets will revert to the debtor.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500113/ | RULING AND MEMORANDUM OF DECISION ALLOWING REDUCED FEES AND ALLOWING REIMBURSEMENT OF EXPENSES TO BOARDWALK REALTY ASSOCIATES, LLC
Ann M. Nevins, United States Bankruptcy Judge,
District of Connecticut
Before the court is Boardwalk Realty Associates, LLC’s (“Boardwalk”) application pursuant to 11 U.S.C. §§ 543 and 503(b)(3)(E) for allowance of receivership fees and reimbursement of expenses relating to Boardwalk’s prepetition work as a state court-appointed receiver of rents for property owned by the Debtor, Richard Crespo (“Crespo”). For the reasons that follow, the court finds that a portion of the amount sought should be allowed.
I. JURISDICTION, VENUE, AND STANDING
This court has jurisdiction over the motion for turnover and the application for fees and expenses pursuant to 28 U.S.C. §§ 157(b) and 1334(b) and the District Court’s order of referral of 'bankruptcy matters dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), as it pertains directly to the administration of the estate. Venue is proper in this District pursuant to 28 U.S.C. § 1408. Boardwalk has standing to seek allowance of compensation and reimbursement of costs pursuant to 11 U.S.C. § 543.
II. FACTS AND PROCEDURAL HISTORY
Richard Crespo filed a voluntary chapter 13 bankruptcy petition on November 26, 2015 (the “Petition Date”). The deadline for filing proofs of prepetition claims was March 21, 2016 (the “POC Deadline”). On April 8, 2016, Crespo moved for turnover of property of the estate held by Boardwalk (the “Funds”) and an accounting (the “Turnover Motion”). ECF No. 27. On April 19, 2016, Boardwalk filed a response to the Turnover Motion stating that: (1) it was not a creditor and therefore was not bound by the then-passed POC Deadline; and (2) Boardwalk should not be required to turn over the Funds to the Debtor because it was entitled to a fee for its prepetition work which equaled or exceeded the Funds for its receivership work for Crespo’s properties from March 27, 2014 to November 25, 2015 (the “Receivership Period”). ECF No. 29. Boardwalk also filed an application pursuant to 11 U.S.C. § 543 seeking allowance of compensation (the “543 Application”) in the amount of $4,784.00 and reimbursement of costs in the amount of $600.00 related to its services as receiver during the Receivership Period. ECF No. 32.
Following a hearing, the court granted the Turnover Motion, ordered Boardwalk to turn over the Funds to Crespo, ordered Crespo to place the Funds in an escrow account pending further order of the court, *28and scheduled an evidentiary hearing on the 543 Application. ECF No. 41. Boardwalk filed a notice of its compliance with the turnover portion of the order on May 18, 2016, ECF No. 42; see also ECF No. 44.
The parties filed pre-hearing briefs, proposed findings of fact, proposed conclusions of law, and lists of witnesses and exhibits. ECF Nos. 45, 46, 47, 48, 49, 50, 51, 52. Two central issues arose from these filings: (1) whether Boardwalk, as custodian of the Funds, was entitled to payment either as an administrative expense pursuant to 11 U.S.C. § 503(b)(3)(E) or as an unsecured, prepetition creditor (had it timely filed a proof of claim); and, (2) whether Boardwalk’s requested fee was reasonable given any benefit to the estate from Boardwalk’s work as a state-court appointed receiver pursuant to 11 U.S.C. § 543.
In order to resolve these issues, the court summarizes the testimony presented during the evidentiary hearing and the parties’ arguments, reviews the applicable law, and resolves classification of the receivership fees, Boardwalk’s entitlement to fees and costs for money paid directly to MDC by the co-owner, and determines whether the requested fees and costs are reasonable.
1. Hearing Testimony
Craig Yelin, the principal of Boardwalk, testified that Boardwalk had extensive experience as a receiver of' rents appointed by the judges of the Superior Court. ECF No. 56, 00:10:00-00:12:00,1 He testified Boardwalk had been appointed receiver of rents to collect payment due to the Metropolitan District (the “MDC”) for Crespo’s property, known as 1945-1949 Broad Street, Hartford, Connecticut (the “Property”), in a case captioned The Metropolitan District v. Crespo pending in the Superior Court, Judicial District of Hartford, Docket No.CV-14-6049124-S. ECF No. 56, 00:15:00. Yelin testified at length that the judges of the Superior Court regularly placed a significant degree of trust in him. ECF No. 56, 01:40:00-01:56:00.
Yelin testified that as a receiver, his task was typically to collect rent owed by tenants in lieu of their landlord. ECF No. 56, 00:30:00. He then typically—and in the case of the Property here—forwarded that money to the MDC. He testified that rent for the Property was difficult to collect due to the nature and conduct of the tenants and due to unspecified interference from the owners. ECF No. 56, 00:22:50-00:28:00. Yelin noted the Property here is jointly owned by Nancy Maldonado and by Crespo, who was incarcerated during the majority of the Receivership Period. ECF No. 56, 00:26:00.
According to Yelin, Maldonado was unable to provide basic information about the Property to assist with the administration of the receivership, such as the identity of the tenants, the terms of the tenancies, and whether written leases existed. Maldonado also attempted to undermine the receivership by making payments directly to MDC—rather than through Boardwalk— as required by the Superior Court order and Conn. Gen. Stat. § 16-262t (e), and she eventually disappeared. ECF No. 56, 00:26:00; 01:40:45. Yelin testified Boardwalk was never able to collect from a barber shop on the ground floor because the owner would only pay the landlord. ECF No. 56, 00:53:00. A package store, also located on the ground floor, changed ownership several times and Yelin was *29never certain who the proprietor was. ECF No. 56, 00:55:00.
Based on Yelin’s testimony^ Boardwalk’s record keeping is devoid of accountability. Yelin testified that he, or Boardwalk’s employee, Ina Babiyev, would ask the tenants of the Property what their rent was, collect the rent, and then prepare and deliver a receipt to the tenant. ECF No. 56, 00:25:30, 00:56:00. Boardwalk did not keep any record or log of the receipts. Yelin testified that typically and in this case, no records were kept .of the identity of the payor, the method of payment (i.e., cash, money order, check), the date of receipt of a particular rent payment or the date Boardwalk deposited the rent payment in its bank account. ECF No. 56, 00:56:00-00:59:00. The only paper trail or audit trail would be by reference to the receipts issued to tenants, should the tenants have occasion to provide them to a court for some reason. ECF No. 56, 58:00. Based on Yelin’s testimony, Boardwalk record keeping procedures included in this case—and typically—only a running Excel spreadsheet 2 maintained by Yelin with which to respond to a landlord’s or a court’s request for information regarding the identify of a payor, the manner of payment, the date of payment, the date. the rent money was deposited in Boardwalk’s bank account, or the date the payment was turned over to the MDC. According to Yelin, no actual records—other than the Excel spreadsheet edited by Yelin—exist.
Yelin testified he would send a weekly check to each MDC attorney for all amounts collected that week for all receivership accounts managed by that attorney. 59:30-01:01:01, If Babiyev was collecting, as was the case for the Property here, she would leave the money in a drawer in Boardwalk’s office and tell Yelin she had done so via a written tally, text, email, or phone call. ECF No. 56, 00:56:00, 01:38:00, 10:56:00, 2:18:30 (Babiyev testimony). If she did write down how much she collected and from whom, Yelin would not retain a copy of this information. ECF No. 56, 00:56:00-00:59:00. Yelin did not make copies of checks or money orders before depositing them. ECF No. 56, 02:00:00. Yelin did not keep track of cash received other than through a single Excel document. ECF No. 56, 02:00:00.
Yelin would récord the name of the tenant and the amount received in a spreadsheet, which would automatically deduct Boardwalk’s commission. ECF No. 56, 00:49:00, 00:58:00, 00:59:25. Yelin would update the spreadsheet whenever a new tenant moved in by overwriting the old tenant’s name, and would not keep any record of the prior tenant. ECF No. 56, 00:58:00. Yelin testified that Boardwalk does not maintain historical records regarding payments. Instead, Yelin edits the master spreadsheet continuously so there is only, ever, one version of the spreadsheet record. ECF No. 56, 00:58:00,
Yelin testified that Boardwalk’s commission for all receiverships is 21.9%, which Yelin calculated based on the cost to run his business, and the average amount of time he and Babiyev spend on the average receivership. ECF No. 56, 01:01:00-01:05:00; 1:09:00-1:10:00. He testified that this average represents approximately 4 hours of work per month, but in this case the time spent approached 8-10 hours per month. ECF No. 56, 01:07:45; 01:09:45. Boardwalk does not keep time records and Yelin did not provide any other justifica*30tion for his estimation of the hours actually spent or how they might relate to his overhead calculation. ECF No. 56, 01:05:00. Yelin did claim that other receivers charged as much as 35-40%, without providing any evidence aside from his own testimony. ECF No. 56, 01:44:54. Yelin emphasized several times that the Superi- or Court judges are very happy with Boardwalk’s work as receiver, and stated that Boardwalk was always awarded the 21.9% it seeks for its work. ECF No. 56, 01:05:00.
When questioned regarding how he would identify where the money came from and how much he had received, Yelin referenced the receipts he gave to the tenants, his and Babiyev’s memories, and the supposed reliance and trust placed in him by the Superior Court judges. ECF No. 56, 00:56:00-01:00:00; 01:40:00-01:46:00. Yelin stated he does not keep copies of the receipts issued by Boardwalk; there is no log or register of receipts issued. ECF No. 56, 01:57:30-02:02:00. Bizarrely, he also testified that preparing records was the most important part of his job, that fifty percent of his time was spent doing bookkeeping and that deceit was the standard in his business. ECF No. 56, 00:41:10, 01:40:00, 02:02:45. Yelin also testified on cross-examination after being shown confirmation that notice of the bankruptcy was mailed to him on December 2, 2015, that he did believe he had received the notice. ECF No. 56, 1:46:30; Crespo Exhibit 102.
Ina Babiyev, an employee of Boardwalk, testified concerning the difficulties in collecting rent at the Property, and concerning the methodology for collecting. ECF No. 56, 2:08:16. She would collect cash, checks, and money orders, secure them by placing them in a drawer at the office, and notify Yelin that they were there by phone or text message. ECF No. 56, 2:18:30. She testified—in contradiction to Yelin’s testimony that Boardwalk was never paid by the barbershop—that she eventually was able to collect some rent from the barbershop. ECF No. 56, 2:13:45. No payments from the barbershop are listed on the copy of the Excel spreadsheet entered into evidence. Boardwalk’s Exhibit 3.
Finally, Crespo testified that he had at one point owned the package store, but had sold it in September of 2011. ECF No. 56, 2:22:00.
2. Hearing Oral Argument
Following the evidentiary hearing, the court heard oral argument. Boardwalk’s attorney asserted that the court’s expressed reservations about Boardwalk’s bookkeeping practices were a red-herring because no party had contested the amounts actually collected. He maintained that Boardwalk had provided a benefit to the estate by paying down the MDC bill, and that the court should find that fair compensation would be 21.9% of the amount collected.
Crespo’s attorney argued that Boardwalk needed to file a proof of claim as an unsecured creditor, rather than receiving payment as a custodian pursuant to 11 U.S.C. § 503(b)(3)(E).
The court also raised the issue of whether Boardwalk was entitled to payment for the money that Maldonado had paid directly to MDC. Boardwalk argued that it was entitled to payment pursuant to Conn. Gen. Stat. § 16-262t. Following the conclusion of oral argument, the court took the matter under advisement.
III. APPLICABLE LAW
1. Connecticut General Statutes § 16-262t
Connecticut General Statutes § 16-262t provides that upon default of the owner of *31property on bills due, a water company- or municipal water service may petition the Superior Court for appointment of a receiver of rents. Conn. Gen. Stat. § 16-262t (a)(1). Following appointment by the Superior Court, the receiver shall collect all rents or payments for use and occupancy or common expenses. Conn. Gen. Stat. § 16-262t (a)(4). The receiver then allocates the money in the following priority: current utility bills due the petitioner; reasonable fees and costs determined by the court to be due the receiver; reasonable attorney’s fees and costs incurred by the petitioner; and any arrearage found by the court to be due and owing the petitioner. Conn. Gen. Stat. § 16-262t (a) (5). Any owner who interferes with the receivership may be found to be in contempt of court following notice and a hearing. Conn. Gen. Stat. § 16-262t (e).
2. Federal Law
“The standards governing [a] [r]e-■ceiver’s reimbursement are those applicable to bankruptcy custodians.” S.E.C. v. Churchill Sec., Inc., 223 B.R. 415, 417 (S.D.N.Y. 1998). The Bankruptcy Code defines a custodian in pertinent part as a “receiver or trustee of any of the property of the debtor, appointed in a case or proceeding not under this title —” 11 U.S.C. § 101 (11) (A). Turnover of property of the estate held by a custodian is governed by 11 U.S.C. § 543, which provides in pertinent part:
“(a) A' custodian with knowledge of the commencement of a case under this title concerning the debtor may not make any disbursement from, or take any action in the administration of, property of the debtor ... rents ... of such property, or property of the estate, in the possession, custody, or control of such custodian, except such action as is necessary to preserve such property.”
“(b) A custodian shall—
“(1) deliver to the trustee any property of the debtor held by or transferred to such custodian, or ... rents ... of such property, that is in such custodian’s possession, custody,’ or control on the date that such custodian acquires knowledge of the commencement of the case; and
“(2) file an accounting of any property of the debtor, or ... rents ... of such property, that, at any time, came into the possession, custody, or control of such custodian.
“(c) The court, after notice and a hearing, shall—
[[Image here]]
“(2) provide for the payment of reasonable compensation for services rendered and costs and expenses incurred by such custodian .... ”
11 U.S.C. § 543.
A custodian, including a receiver, “is entitled to a first priority bankruptcy preference for reasonable expenses incurred in working with the debtor.” In re San Vicente Med. Partners Ltd., 962 F.2d 1402, 1406 n.2 (9th Cir. 1992) (receiver appointed pursuant to S.E.C. motion prior to chapter 11 filing). Allowance of administrative expenses is governed by 11 U.S.C. § 503, which provides in pertinent part that administrative expenses include:
“(3) the actual, necessary expenses ... incurred by—
[[Image here]]
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian ... (4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subpara-graph (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on *32the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant .... ” 11.U.S.C. §.503.
Regarding determination of the “reasonable compensation” due to Boardwalk, Crespo initially cited to a Connecticut Supreme Court case from the 1950s involving a receivership:
“In the absence of a statute, there is no established rule of thumb for determining the amount of a receiver’s fees. They must be fixed at an amount that will be reasonable and fair compensation for the services rendered. What is a reasonable amount is a question of fact_The burden is upon the applicant to prove their worth.... Certain recognized factors enter into the deter'mination. Consideration should be given to the nature, extent and value of the property administered- The complications and difficulties encountered should be noted.... The responsibilities involved, and assumed by the receiver, and the diligence and thoroughness which he displays are weighty ele- . ments_ The knowledge, experience, labor and skill required of the receiver and devoted by him to the receivership must be taken into account.”
Jacobs v. Ringling Bros-Barnum & Bailey Combined Shows, Inc., 141 Conn. 86, 94-95, 103 A.2d 805 (1954) (citations omitted), cited in ECF No. 27.
Boardwalk criticized this case as dealing with a different statute3 and being somewhat old, but then fails to cite any cases analyzing the question of reasonableness, instead citing to two more recent cases which also dealt with different receivership statutes, Conn. Gen. Stat. §§ 12-163a and 16-262f, and in which the question of reasonableness of fees was not addressed. See Canton v. Cadle Properties of Connecticut, Inc., 316 Conn. 851, 857, 114 A.3d 1191 (2015); Connecticut Nat. Gas Corp. v. Miller, 239 Conn. 313, 315, 684 A.2d 1173 (1996), cited in ECF No. 48. In addition, Boardwalk neglects to discuss a number of more recent bankruptcy cases subsequently cited by Crespo, which allude to considerations similar to those articulated in the Jacobs case.4 Regardless, both parties agree that the court has the discretion to determine the reasonableness of fees. See ECF No. 48,46.
A number of more recent bankruptcy court decisions aptly describe the pertinent.law:
“Receivers are compensated pursuant to § 543(c).... If allowed, the Receiver’s fees and expenses are entitled to be treated as an administrative expense pursuant to § 503(b)(3)(E). It. is clear from the statute that Receivers who are excused from service by the Bankruptcy Court are entitled to fees for pre-petition services.... The only standard provided by § 543(c)(2) is reasonableness. The determination of what is reasonable is a determination of federal, not state, *33law.... The factors for determining reasonableness are similar to those used in considering other attorneys’ fees and include: the time and labor expended by the custodian; the benefit of the custodian’s services to the debtor and the estate; the size and/or complexity of the estate; what the custodian would have received if he or she had been appointed as trustee for the debtor, and the quality of the custodian’s services.... The Receiver may file a claim for his fees pursuant to § 503(b)(3)(E) and Debtor will have the opportunity to object.”
In re Forde, 507 B.R. 509, 521 (Bankr. S.D.N.Y. 2014) (internal citations omitted).
See also, In re 29 Brooklyn Ave., LLC, 548 B.R. 642, 645 (Bankr. E.D.N.Y. 2016) (tracing entitlement of pre-petition state court receiver to administrative priority to Randolph & Randolph v. Scruggs, 190 U.S. 533, [538-39], 23 S.Ct. 710, 47 L.Ed. 1165 (1903)); In re Snergy Properties, Inc., 130 B.R. 700, 703 (Bankr. S.D.N.Y. 1991) (state court mortgage foreclosure receiver is a custodian entitled to compensation as an. administrative expense in bankruptcy); see also, 11 U.S.C. § 330 (3) (nonexclusive list of factors for determining reasonable compensation); Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542, 558, 130 S.Ct. 1662, 176 L.Ed.2d 494 (2010) (reasonableness of attorney’s fees committed to sound discretion of trial judge). Other courts have ruled that “the custodian’s services must provide a benefit to the estate to be entitled to administrative expense priority.” In re 29 Brooklyn Ave., LLC, at 645, citing Szwak v. Earwood (In re Bodenheimer, Jones, Szwak, & Winchell L.L.P.), 592 F.3d 664, 674 (5th Cir. 2009) and cases cited therein.
IV. DISCUSSION
1. Classification of Reasonable Fees and Costs
After analysis of the statutory scheme and case law the court concludes that a receiver is entitled to collect fees as an administrative expense, provided the receiver’s prepetition services provided a benefit to the estate. The specific provisions of 11 U.S.C. § 503(b)(3)(E) control. It is undisputed that here, Boardwalk did provide a benefit to the estate by decreasing the amount due to the MDC by approximately $15,260.60.5 See Exhibit 3. Crespo claims that Boardwalk is not entitled to administrative priority because it did not turn over the Funds immediately upon learning of the bankruptcy, instead waiting to be compelled by court order. Based on the court’s analysis, the failure to turn over funds quickly is not an absolute bar to the collection of administrative expenses, but rather is a consideration for the court in its analysis of the reasonableness of Boardwalk’s fees and costs.
2. Entitlement to Fees and Costs for Money Paid directly to MDC by Co-Owner
Boardwalk calculated its fee as a percentage of all payments to MDC, including those payments made directly by Maldonado. Section 16-262f specifically provides that owners are not to pay the utility directly. In fact, an owner of property subject to a receivership may be held in contempt of court for doing so. This demonstrates a strong legislative intent for money to pass through the receiver. Permitting the owner to bypass payment of attorney’s fees and receiver’s fees by paying the utility company directly would in-*34centivize the owner to ignore the receiver’s authority and the statutory scheme. Moreover, the appointment of the receiver likely motivates the owner to pay delinquent utility bills as quickly as possible. Therefore, in calculating any compensation paid to Boardwalk, the court will take into account the money paid directly to MDC by Maldonado.
3. Determination of Reasonable Fees and Costs
The parties agree that no reasonable fees and costs were determined by the Superior Court, see Conn. Gen. Stat. 16-262t (a)(5); that it falls to this court to make that determination; and, that it was Boardwalk’s practice to deduct its fees from money collected over the course of the receivership, and seek approval for such deductions from the Superior Court after the arrearage was paid and the receivership terminated. Here, the arrearage was never fully paid; the receivership terminated due to the bankruptcy filing, therefore the question of reasonableness falls to this court.
Yelin’s claims that the Superior Court judges approve of Boardwalk’s methods, consider its fee reasonable, and trust Boardwalk and Yelin, are inadmissible hearsay. Moreover, even if admissible, the opinions of Superior Court judges in unrelated matters are not binding on this court.6
The court recognizes that Boardwalk’s task in collecting rent may be a difficult •one, but the court declines to adopt the blanket 21.9% fee calculation urged by Boardwalk. Boardwalk has failed to put in place any system which would provide the integrity and accountability necessary to substantiate what was paid, when, how, or by whom. Basic practices such as keeping a list of who paid Boardwalk, when payment was made, and in what form are not followed. There are no time records kept. Any bona fide dispute as to payment by a tenant—whether raised by the tenant, Boardwalk, the property owner, the MDC, or a court—will be incapable of anything other than speculative adjudication because there is no discernable accounting methodology followed by Boardwalk. That any bona fide dispute resolution would be fruitless was demonstrated at the eviden-tiary hearing when Yelin and Babiyev gave conflicting testimony regarding whether the barber shop had eventually made rent payments.7
Boardwalk’s records lack the consistency, transparency, and integrity expected from a court-appointed receiver. A court-appointed receiver has long been considered a fiduciary, “bound to perform his delegated duties with the high degree of care demanded of a trustee or other similar fiduciary.” Crites, Inc. v. Prudential Ins. Co. of Am., 322 U.S. 408, 414, 64 S.Ct. 1075, 88 L.Ed. 1356 (1944). “[A] receiver is a fiduciary, he undertakes to care for the property and manage it for the creditors, to act with assiduity and with reasonable competence.” In re C.M, Piece Dyeing Co., 89 F.2d 37, 40 (2d Cir. 1937) (Hand, C.J.); see also Kraham v. Lippman, 478 F.3d 502, 504 (2d Cir. 2007) (Sotomayor, C.J.)(classifying receiver as fiduciary). “The requirement to document his account and his services in adequate detail and thus justify the commission he claims is his due is his burden to satisfy _” Gasser v. Infanti Int’l, Inc., 2011 *35WL 2183549, at *24 (E.D.N.Y. June 3, 2011).
Yelin and Boardwalk’s attorney claimed that the absence of a trustworthy accounting system was irrelevant to the court’s consideration of the issue of the reasonableness of Boardwalk’s demand for 21.9% of all payments to the MDC. The court concludes, however, that accounting for the money it collects with reasonable specificity is an essential part of Boardwalk’s fiduciary duty as a court-appointed receiver. Yelin himself testified that half of his time is spent doing bookkeeping. If Boardwalk does not take the time and make the effort to create a system whereby the court, a tenant, or a landlord can verify who paid what, and when, where the money deposited came from and how deposits compare to collections, it is not performing its court-appointed duty adequately.
In addition, the court concludes that a part of the receiver’s job is to know that when a bankruptcy is filed, federal law—11 U.S.C. § 543—compels immediate turnover. Yelin testified that bankruptcies occur in 15% of Boardwalk’s receivership cases. ECF No. 56, 01:53:00. Yelin claimed that in prior cases an MDC attorney had handled the turnover procedures, and in this case an MDC attorney had chosen to do nothing. ECF No. 56, 01:54:30. Advice of counsel is not an excuse for failure to comply with a federal law that should be familiar to an experienced receiver such as Boardwalk. Further, the MDC attorney was not Yelin’s attorney or Boardwalk’s attorney. The court concludes that a reasonably competent receiver would know its duty to immediately turn over receivership collections to a trustee once a bankruptcy is filed.
Based on the foregoing, and taking into account the court’s concerns about the lack of transparency created by Boardwalk’s deliberate choice not to account specifically for time spent, and its deliberate choice to employ no reasonable accounting practices, the court concludes that Boardwalk is entitled to a fee of 5%, rather than of 21.9%, of the total collected. “[T]he [court] should make as close an approximation as it can, bearing heavily if it chooses upon the [receiver], whose inexactitude is of his own making.... The amount may be trivial and unsatisfactory, but there was basis for some allowance-, and it was wrong to refuse any.... It is not fatal that the result will inevitably be speculative, many , important decisions must be such.” Cohan v. Commissioner of Internal Revenue, 39 F.2d 540, 544 (2d Cir.1930) (Hand, C.J.); see also Gasser v. Infanti Int’l, Inc., 2011 WL 2183549, at *24 (E.D.N.Y. June 3, 2011) (quoting Cohan, awarding receiver $5,000 in fees on a quantum meruit basis after receiver requested $19,242.11 in fees on a percentage commission basis). In the present proceeding, the total collected was $21,849.00,8 therefore $1,092.45 in fees should be allowed.
Boardwalk also requested allowance of $600 in expenses, including marshal fees and professional services rendered by Boardwalk’s attorney related to Boardwalk’s eviction action against Broad Package Store. ECF No. 56, 00:54:00, 1:20:00, Exhibit 4. As stated, a receiver is entitled to recover actual, necessary expenses under 11 U.S.C. § 503(b)(3); in addition, a receiver’s attorney is entitled to collect fees from the estate for professional services rendered. 11 U.S.C. § 503 (b) (4). . Exhibit 4. The court concludes that these expenses, $340 for the attorney’s professional services and $260 for marshal fees, were reasonable. Exhibit 4. Therefore, the total allowance of fees and expenses is $1,692.45.
*364. Entitlement to Attorney’s Fees
Boardwalk’s attorney also requested attorney’s fees for his work post-petition regarding the Turnover Motion and the 543 Application, in the total amount of $5,362.50, ECF No. 68. The reasonableness of these fees is not before the court in the present decision.
VII. CONCLUSION
Based on the foregoing, it is hereby
ORDERED, that Crespo pay to Boardwalk $1,692.45 of the Funds on account of the allowed receiver’s fee and costs; and it is further.
ORDERED, that Crespo shall hold the remaining $3,691.55 in a separate, interest bearing account, until further order of this court.
. All timestamps indicáte the hours minutes and seconds (00:00:00) for the .mp3 file publicly available at the referenced ECF No. as played'on VLC Media Player.
. Yelin testified that Boardwalk does not maintain historical copies of the spreadsheet • or any log of payment activity. So, there is no way to verify the information in the final version presented by Boardwalk to the court by referring to the underlying payment records.
. No statutory basis for the receivership is cited in Jacobs v. Ringling Bros-Barnum & Bailey Combined Shows, Inc., 141 Conn. 86, 86, 103 A.2d 805 (1954), but the case involved collection of damages caused by a catastrophic circus fire, so the application of § 16-262t, for water receiverships, was not an issue.
. See In re: Acme Heating & Air Conditioning Supply, Inc., 20 B.R. 129, 131 (Bankr. D.R.I. 1982); In re Gomes, 19 B.R. 9, 11 (Bankr, D.R.I. 1982); In re Marichal-Agosto, Inc., 12 B.R. 891, 893 (Bankr. S.D. N.Y. 1981); In re Cowell/McCormack Joint Venture, 36 B.R. 652 (Bankr. D. Haw. 1984); Matter of North Port Development Co., 36 B.R. 19, 21 (Bankr. E.D. Mo. 1983); In re Gomes, 19 B.R. 9, 11 (Bankr. D. R.I. 1982); Matter of Left Guard of Madison, Inc., 11 B.R. 238 (Bankr. W.D. Wis. 1981).
. This amount is calculated based on Boardwalk’s accounting, adding the lines entitled Judgment—Water, and Judgment—Additional Water Charges, therefore it should not be dispositive of any future questions regarding the amount owed by Crespo to the MDC. See Boardwalk Exhibit 3. The MDC may have subsequently subtracted its own attorney's fees, or the amount listed by Boardwalk may in some other way be inaccurate. '
. It is unknown whether the Superior Court judges who allegedly find Boardwalk’s 21.9% blanket fee to be reasonable have heard any testimony as to Boardwalk’s accounting methods and practices, or lack thereof.
. The absence of reasonable accounting practices—when implementing basic accounting measures would be simple and would cost little—suggests Boardwalk prefers the inability to account for money received.
. This amount includes both the money that Maldonado paid directly to MDC and the Funds that Boardwalk retained. ECF No. 56, 01:40:00; Boardwalk’s Exhibit 3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500115/ | OPINIÓN2
KEVIN J. CAREY, UNITED STATES BRANKRUPTCY JUDGE
Orleans Homebuilders, Inc. and related entities (the “Debtors” or “Orleans”) filed chapter 11 petitions on March 1, 2010. This Court entered an order confirming the Debtors’ Modified Second Amended Joint Plan of Reorganization (the “Plan”) on December 1, 2010, which became effective on February 14,2011.3
Cooks Bridge Condominium is a 332-unit residential condominium community *48developed pre-petition by the Debtors and located in Jackson, New Jersey. In February 2013, Cooks Bridge Condominium Association (the “Association”) filed an action in New Jersey state court against the reorganized debtors and related individuals, among other parties, for alleged construction defects in certain common elements of ■ the condominium that were completed pre-petition.
Before the Court is the Reorganized Debtors’ Motion to Enforce Plan Injunction and Related Provisions and Requesting Award of Sanctions Against Cooks Bridge Condominium Association, Inc. (D.I. 4580) (the “Injunction Motion”), seeking an order from this Court that (i) requires the Association to discontinue prosecution of the state court litigation, and (ii) finding the Association in civil contempt and requiring it to pay sanctions, including, but not limited to, the Reorganized Debtors’ costs and attorneys’ fees incurred in defending against the state court litigation and pursuing the Injunction Motion. The Association filed an objection to the Injunction Motion (the “Association Objection”) (D.I. 4595), and the Reorganized Debtors responded with a reply in further support of the Injunction Motion (the “Reply”) (D.I. 4596). A hearing was held and the Court took the matter under advisement.
For the reasons set forth below, the Injunction Motion will be granted, in part, to enjoin the state court litigation, and deferred as to the request for sanctions.
FACTS
1. The Joint Pre-Trial Memorandum
The parties submitted a Joint Pre-Trial memorandum (D.I. 4611) which includes the following Statement of Uncontested Facts:
a. Orleans at Cooks Bridge, LLC, one the Debtors (the “Debtors” or “Orleans”), was the sponsor and developer of the Cooks Bridge Condominium development, a three hundred and thirty-two (332) unit condominium community located in Jackson, New Jersey. Construction of the fifty-one (51) buildings making up the Cooks Bridge development took place primarily between 2004 and 2008.
b. The development consists of twenty-five (25) “A” style buildings, containing two-story residential units arranged with both common side and rear walls, and twenty-six (26) “B” style buildings, containing two story town house style units. The community also has a pool, pool house, and tennis courts.
c. The buildings are constructed with wood framing on concrete foundation walls with asphalt shingle roofs. Type “A” buildings are clad with vinyl siding and aluminum “break metal” trim; type “B” buildings are clad with a cpm-bination of vinyl siding, manufactured stone veneer (SMV), stucco, and Azek trim.
d. In April 2005, Orleans incorporated the Cooks Bridge Condominium Association, Inc. (the “Association”).4
e. Orleans submitted an application for registration of Cooks Bridge, which included copies of a proposed Public Offering Statement.
f. Orleans began selling units in 2005 and sold the last unit at Cooks Bridge in May 2009.
*49g. As part of the sales process, Orleans provided purchasers with a copy of the Public Offering Statement.5
h. After selling 75% of the total units in or around August 2008, Orleans transitioned control of the Association’s governing board to the unit owners and continued to market the remaining 25% (the “Transition”).
i. The last unit was sold on or about May 29, 2009. The last certificate of occupancy was issued in August 2009.6
j. The Debtors commenced these chapter 11 cases on March 1, 2010 (the “Petition Date”).
k. The Court entered an order (the “Confirmation Order”) confirming the Debtors’ Second Amended Joint Plan of Reorganization (the “Plan”), which was attached as Exhibit 1 thereto, on December 1, 2010 (the “Confirmation Date”).
l. The Plan became effective on February 14, 2011 (the “Effective Date”).
m. On February 25, 2013, the Association filed a complaint against certain of the Reorganized Debtors and certain former employees of the Reorganized Debtors in the Superior Court of New Jersey, Law' Division, Ocean County (the “State Court Action”) alleging, inter alia, negligence and breach of express, implied, and Planned Real Estate Development Full Disclosure Act (“PREDFDA” [or the “Development Act”]) warranties.7
n. On May 9, 2013, Orleans filed an Answer to the Association’s Complaint in the State Court Action, which included an affirmative defense based on the Reorganized Debtors’ bankruptcy discharge.8
o. Orleans defended the Association’s claims in the State Court Action. Counsel for Orleans appeared, on one occasion, at Cooks Bridge to attempt to observe a third-party contractor conduct repair work.9
p. On January 6, 2014, the Association served Orleans with its First Set of Interrogatories and Demand for Production of Documents. Orleans answered the Association’s discovery and produced documents in or around September 2014.10
q. The Association’s operative pleading in the State Court Action was most recently amended on September 5, 2014 (the “Third Amended Complaint”), which asserts five causes of action, all of which are based on various alleged defects to certain common elements at Cooks Bridge, including alleged defects with respect to vinyl siding, stucco, stone veneer, windows and doors, flashings, foundation walls and slabs, decks, and roof and roof structures.11
r. The five causes of action asserted in the Third Amended Complaint are: *50negligence, breach of express warranties, breach of implied warranties, breach of fiduciary duty, and breach of PREDFDA.
s. In March 2015, Orleans produced an expert report prepared by Jonathan P. Dixon & Associates, P.C. (the “Dixon Report”).12
The Pre-Trial Statement also includes a Statement of Facts in Dispute. The crux of the parties’ dispute, however, is based upon certain language in the Plan. The disputed facts are not relevant to resolving this matter, which depends on interpretation of language in the Plan.
2. Allegations in the State Court Complaint
The Association’s State Court Complaint alleges the following:
(i) the debtor Orleans at Cooks Bridge, LLC was the developer (the “Developer”) that created, designed and constructed the Cooks Bridge Condominium development (the “Development”);13
(ii) the Master Deed and the Public Offering Statement (the “POS”) filed by the Developer with the New Jersey Department of Community Affairs provide that the Developer established the Association to, inter alia, own, administer, manage, operate, maintain, repair and replace the common elements at the Development;14
(iii) individual defendants George Ben-nis, Eva Walker and Irene Rosen (the “Individual Defendants”) were the initial Board of Trustees (the “Board”) appointed by the Developer to manage the Association until Transition occurred and the Developer relinquished control of the Board to the unit owners;15
(iv) during the time the Developer controlled the Board, the Developer failed to discover and/or disclose and/or maintain and/or correct various defects and deficiencies in the design and construction of the common elements at the Development;16
(v) After Transition of the Association to the unit owners, the Association became aware of various deficiencies in the design and construction of the common elements at the Development;17
(vi) the Association had engineering and architectural consultants, FWH Associates, P.A. (“FWH”) perform preliminary investigations of the exterior cladding, roofing system, decks, windows and doors, and foundations of the buildings at the Development and the preliminary investigation revealed improper design and construction of the buildings, particularly with respect to vinyl siding, stucco, stone veneer, roofs, decks, concrete work, windows and doors, and other building components.18
Count One of the State Court Complaint (Negligence) alleges that “the Developer owed a duty to exercise reasonable care in designing, constructing, and/or supervising the construction of the Common Elements *51of Cooks Bridge in accordance with all approved plans, applicable manufacturer’s installation specifications, reasonable commercial standards in the industry for residential construction, and all applicable state and local building codes, regulations and ordinances,”19 and “as a direct and proximate result of the ... breaches of the duties of reasonable care owed to the Association by the [Defendants], the Association has suffered, and will continue to suffer, severe, direct and consequential damage to its property.”20
Count Two of the State Court Complaint (Breach of Express Warranties) alleges that “the Developer made certain warranties in the individual Subscription and Purchase Agreements between it and Members of the Association, and in the Public Offering Statement incorporated into those Agreements, that the Common Elements at Cooks Bridge would be free from defects and fit for their intended purpose,”21 and that the Defendants breached those express warranties.
Count Three of the State Court Complaint (Breach of Implied Warranties) alleges that the “Developer impliedly warranted to the Association and the Members that the Common Elements of Cooks Bridge would be free from defects, built in a workmanlike manner and would be reasonably fit for their intended purpose,”22 and the Defendants breached the implied warranties.
Count Four of the State Court Complaint (Breach of Fiduciary Duty) alleges that “[i]n selecting the members of the governing board of the Association, the Developer • implicitly and/or explicitly agreed and undertook to act as a fiduciary and to give the benefit of its best care and judgment on behalf of, and to exercise its power in the interests of, the Association and its Members,”23 and, prior to the Transition, the Developer and the board members “intentionally acted in the best interests of the Developer, rather than in the best interests of the Association.”24
Count Five of the State Court Complaint (Breach of PREDFDA Warranties) alleges, inter alia, that, pursuant to N.J.A.C. 5:26-7.2(b) the Developer warranted that construction of the common elements would be free from defects for a period of two years from the date of completion of each portion of the common areas, and that the Developer would repair or correct any defect in the construction, material or workmanship in the common areas installed by the Developer within a reasonable time after notification of the defect.25
DISCUSSION
The Debtors argue that the Plan’s Discharge and Injunction bars creditors, such as the Association, from “commencing or continuing in any manner” any litigation against the Reorganized Debtors arising from pre-petition claims. Section 9.2 of the Plan states, in part:
[A]ll Holders of Claims ... arising prior to the Effective Date shall be perma*52nently barred and enjoined from asserting against the Debtors, the Estates, the Reorganized Debtors, ..., their succes-. sors, or the Assets, any of the following actions on account of such Claim ...: (a) commencing or continuing in any manner any action or other proceeding on account of such ... Claim .., against ... the property of any of the Reorganized Debtors .,. other than to enforce any right to distribution with respect to such property under the Plan „ 26
[[Image here]]
The Third Circuit’s decision in In re Grossman’s, Inc. instructs that a claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury, which underlies a “right to payment” under the Bankruptcy Code.27 The conduct underlying the Association’s claims occurred prior to the Debtors’ bankruptcy filing on March 1, 2010. The undisputed facts state that the sale of the units at the Development started in 2005 and the last unit sold in May 2009. The Transition of the Association occurred in August 2008. Under the plain language of the discharge injunction, the Association was barred from commencing or continuing any action against the Reorganized Debtors based upon the pre-petition claims.
The Association argues, however, that another provision of the Plan provides that certain agreements relating to the Development survived bankruptcy, thereby allowing the Association’s claims to be pursued post-petition. Section 1.163 of the Plan included the Cooks Bridge Development in the. list of “Revesting Developments.” Article VII of the Plan, entitled Executory Contracts, includes Section 7.14 (the “Revesting Provision”), which provides:
7.14 Agreements Related to the Developments. Unless otherwise specifically rejected or lawfully terminated by the Debtors, all (a) agreements relating to any of the Revesting Developments embodied in development orders, city and/or county ordinances, zoning approvals, permits, and/or other related documents or any other official action of a governmental unit, quasi-govemmen-tal unit, and/or utility granting certain development rights, property interests, and/or entitlements to the Debtors; and (b) those governmental and quasi-governmental approvals, agreements, waivers, permits, licenses, variances, special exceptions, and water and sewer reservations as are necessary, appropriate, beneficial, or required, to permit the continued construction and development of any of the Revesting Developments entered into prior to the Petition Date by any Debtor, shall be (i) treated as Executory Contracts under the Plan and shall be assumed on the Confirmation Date, subject to the occurrence of the Effective Date, pursuant to the provisions of the Bankruptcy Code §§ 365 and 1123 or (ii) otherwise deemed assumed on the Confirmation Date, subject to the occurrence of the Effective Date. Any failure by the Debtor to list any particular agreement or other document referred to in this Plan Section 7.14 on any schedule of Executory Contracts to be assumed under the Plan (either contained in ■ the Disclosure Statement, including, without limitation; Exhibit D thereto, the Plan. Supplement, or otherwise) shall not in any way impair the Debtors’ ability to assume such agreement and/or other document, *53and instead, any and all such agreements and documents shall be deemed assumed (to the extent any such agreements or documents constitute Executo-ry Contracts) and/or otherwise shall remain in full force and effect on and after the Effective Date in accordance with this Plan Section 7.14. Without limiting the generality of the foregoing, all of the Debtors’ rights in or related to any of the Revesting Developments shall revest in the Reorganized Debtors on and subject to the occurrence of the Effective Date, but the Non-Revesting Developments shall not revest in the Reorganized Debtors and all applicable agreements, related thereto shall be deemed rejected or terminated, as applicable, as of, and subject to the occurrence of, the Effective date provided, however, that the Debtors shall be entitled to revise the respective lists of the Revesting Developments and the Non-Revesting Developments at any time up to the occurrence of the Effective Date.28
The Association argues that the Debtors included the Revesting Provision in the Plan to ensure the post-confirmation effectiveness of any agreements of a “governmental nature” that are related to the Revesting Developments. The Association contends that the New Jersey Development Act requires the Developer to issue a Public Offering Statement and, because the Public Offering Statement contains a warranty about construction of the common areas, any claims to recover for common area defects are based on the Debtors’ agreement with a quasi-governmental unit that falls under the plain language of the Revesting Provision.
In response, the Reorganized Debtors argue that the Association is reading the Revesting Provision too broadly. Instead, the Reorganized Debtors insist that the provision covers only a specific and narrowly-circumscribed set of governmental and quasi-governmental rights of the Reorganized Debtors—not the assumption of any continuing liability of the Reorganized Debtors to third parties, such as the Association, who are not parties to an agreement. For an agreement to be assumed under the Revesting Development Provision, the Reorganized Debtors argue that the agreement must: (1) relate to a Re-vesting Development; (2) be embodied in one of the listed types of documents (i.e., development orders, city/county ordinances, zoning approvals, permits, and/or other related documents); (3) constitute an “official action of a governmental unit or quasi-governmental unit, and/or utility;” and (4) grant the Debtors “development rights, property interests, and /or entitlements,”
The Development Act provides that “[n]o developer may offer or dispose of any interest in a planned real estate development, prior to the registration of such development with the agency,” and “[n]o developer may dispose of any lot, parcel, unit or interest in a planned real estate development, unless he: delivers to the purchaser a current public offering statement, on or before the contract date of such disposition.”29 To assist in implementing the Development Act, applicable regulations require the Public Offering Statement to contain specific information, including “a statement explaining the warranty or guarantee given by the developer and the rights and remedies of the pur-*54chaser.”30 The Regulations also require the Developer to provide a warranty for the Development’s common facilities as follows:
(a) The developer of a planned real estate development or retirement community shall warrant the construction of the common facilities for a period of two years from the date of the completion of each of the common facilities;
(b) The developer shall warrant that the common facilities are fit for their intended use;
(c) The developer shall repair or correct any defect in construction, material or workmanship in the common facilities within a reasonable time after notification of the defect.31
The Developer incorporated these warranties into the Public Offering Statement, stating (in pertinent part) that the Developer “further warrants the construction of the Common Elements for a period of two (2) years from- the date of completion of the Common Elements provided the drainage is not altered during the construction of the Units.”32
Relying on the regulations, the Association argues that the Plan’s discharge injunction does not bar it from filing claims post-confirmation to enforce the common area warranty, which—as part of the Public Offering Statement—is deemed assumed by the Plan’s Revesting Provision.
After carefully reviewing the relevant Plan provisions, along with the New Jersey Development Act and regulations, I agree with the Reorganized Debtors that the Association’s reading of the Revesting Provision is too broad. The Revesting Provision applies to agreements (or ordinances, permits or approvals) between the Debtors and governmental or quasi-governmental units (or utilities), that “are necessary, appropriate, beneficial, or required, to permit the continued construction and development of any of the Revest-ing Development....” For example, the Agency issues an order registering the subdivision or community lands after reviewing the statement of record from the Developer, which attaches a number of documents, including the Public Offering Statement.33 The Agency’s order registering the Developer would be the type of agreement that falls within the Revesting Provision. However, the Association’s attempt to drill down and apply the Revest-ing Provision to any agreements contained or mentioned within the agreements or approvals or permits issued by a governmental or quasi-governmental unit invents a byzantine complexity to the Plan provisions. The Revesting Provision cannot be read so broadly to incorporate agreements within agreements that grant rights to non-governmental third parties.
The Reorganized Debtors also argue that the Plan’s Exculpation provision bars the State Court Complaint claims against the Individual Defendants who were appointed by the Debtor to serve as the Association’s initial Board of Trustees.
The Exculpation provision in Section 9.9 of the Plan provides:
*559.9 Exculpation. No Released Party shall have or incur, and each Released Party here is exculpated from any liability (whether arising under contract, tort, or federal or state securities laws, whether known or unknown, foreseen or unforeseen, then existing or hereafter arising, in law, equity or otherwise) to any Person for any pre-Petition Date or posb-Petition Date act or omission taken or not taken (as the case may be), or any other transaction, event, or occurrence in any way in connection with, arising from or relating to the Debtors, these Cases (and the commencement or administration thereof); the Disclosure Statement, the Plan (either prior to Confirmation or approval of same, or as same may be confirmed or otherwise approved by the Bankruptcy Court), or any orders of the Bankruptcy Court related thereto, the Plan Documents or the transaction contemplated thereby, or the formulation, negotiation,, preparation, dissemination, implementation, or administration of any of the foregoing documents; the solicitation of votes in connection with, and the pursuit of, Confirmation of the Plan; the consummation of the Plan; the Effective Date; any contract, instrument, release, or other agreement or document created or entered into in connection with the Plan; any other act taken or omitted to be taken in connection with, or in contemplation of, any of the restructuring or other transaction contemplated by the Plan; and the property to be distributed or otherwise transferred under the Plan; provided, however, that nothing in this Plan Section 9.9 shall exculpate or release any Released Party from its obligations arising under, confidentiality agreements and common-interest agreements; provided, further, however, that nothing in this Plan Section 9.9 shall release any entity from any claims, obligations, rights, causes of action, or liabilities arising out of such entity’s -willful misconduct or fraud. Each Released Party shall be entitled reasonably to rely upon the advice of counsel with respect to its duties and responsibilities under the Plan.
“Released Parties” is defined to include “[collectively, (a) the Debtors, the Reorganized Debtors,... (e) the current and former directors, officers, professionals, agents, and employees of the Debtors and the Reorganized Debtors, solely in their capacities as such ... (i) with respect to each of the foregoing Persons, such Person’s predecessors, successors, and assigns, and current and former directors, officers employees, stockholders, members, subsidiaries, affiliates, principals, agents, advisors, financial advisors, attorneys, accountants, investment bankers, consultants, underwriters, appraisers, representatives, and other professionals, in each case, in their respective capacities as such;....”
In its Objection, the Association does not directly address this argument. I agree with the Debtors that the Individual Defendants are “Released Parties” when acting—at the Debtor’s direction—as the Board of the Association pre-transition. The State Court Claims against the Individual Defendants are barred by the Exculpation provision.
Finally, the Reorganized Debtors argue that sanctions are warranted for the Association’s willful violation of the Plan’s discharge and injunction. I will schedule a further hearing to consider the Reorganized Debtors’ request for sanctions.
CONCLUSION
For the reasons set forth above, I conclude that the claims against the Reorganized Debtors and the Individual Defen*56dants in the State Court Complaint are barred by the Plan’s Discharge and Injunction provision (Section 9.2) and the Exculpation provision (Section 9.9).
An appropriate order follows.
. This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr. P. 7052. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and § 157(a). Bankruptcy Courts have subject matter jurisdiction to interpret and enforce their own orders. In re Insilco Tech., Inc., 351 B.R. 313, 319 (Bankr. D. Del. 2006) citing In re Allegheny Health, Education and Research Foundation, 383 F.3d 169, 175-76 (3d Cir. 2004). Moreover, this is a core matter pursuant to 28 U.S.C. § 157(b)(1) and Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999), which provides that a matter is core if it is one that, by its nature, could arise only in the context of a bankruptcy case. This matter also falls squarely within the confines of post-confirmation “related-to” jurisdiction set forth in In re Resorts Int'l, Inc., 372 F.3d 154, 166-67 (3d Cir. 2004) which determined that the essential inquiry for post-confirmation jurisdiction is "whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction .... Matters that affect the interpretation, implementation, consummation, execution or administration of the confirmed plan will typically have the requisite close nexus.”
. See D.I. 2656 (Order Confirming Plan), and D.I. 2987 (Notice of Effective Date). These bankruptcy cases were originally assigned to and presided over by the Honorable Peter J. Walsh. Upon his retirement, the cases were *48reassigned to me by Order dated December 12, 2014 (D.I. 4559).
. The Certificate of Incorporation for Cooks Bridge Condominium Association, Inc. is attached as Exhibit A to the Association Objection.
. Relevant portions of the Public Offering Statement are attached as Exhibit B to the Association Objection.
. See Declaration of Conditions Report, attached as Exhibit E to the Association Objection.
. The State Court Action Complaint is attached as Exhibit D to the Association Objection. The Development Act is set forth in N.J. Stat. Arm. §§ 45:22A-21 etseq.
. The Reorganized Debtors’ Answer to the State Court Action Complaint is attached as Exhibit G to the Association Objection.
. See Letter dated July 3, 2013 attached as Exhibit H to the Association Objection.
. See Cover Letter dated September 26, 2014, attached as Exhibit I to the Association Objection.
. The Third Amended Complaint is attached as Exhibit B to the Injunction Motion.
. Portions of the Dixon Report are attached as Exhibit J to the Association Objection.
. State Court Complaint, 11 3.
. State Court Complaint, ¶ 11.
. State Court Complaint, ¶ 4.
. State Court Complaint, ¶ 16.
. State Court Complaint, ¶ 17.
.State Court Complaint, ¶ 18-¶ 19. The State Court Complaint provides a detailed description of the alleged deficiencies. The State Court Complaint also includes John Doe Architects 1-25, John Doe Engineers 1-25, John Doe Contractors 1-50; and John Doe Suppliers 1-25. These are fictitious names to represent those architects, engineers, contractors and supplies who provided such services at the Development
. State Court Complaint, ¶ 24.
. State Court Complaint, ¶ 32.
. State Court Complaint, ¶ 34.
. State Court Complaint, ¶ 42.
. State Court Complaint, ¶ 52. See also State Court Complaint, ¶ 54 (citing the New Jersey Condominium Act, N.J.S.A. §§ 46:8B-1 et seq., and the Planned Real Estate Development Full Disclosure Act, N.J.S.A. §§ 45:22A-21 et seq.), and State Court Complaint, ¶ 55 (citing N.J. Admin. Code Tit. 5, §§ 26-8.3(b)).
. State Court Complaint, ¶ 56.
. State Court complaint, ¶ 61.
. Plan, § 9.2.
. Jeld-Wen, Inc. v. Van Brunt (In re Grossman’s, Inc.), 607 F.3d 114, 125 (3d Cir. 2010).
. Plan, § 7.14.
. N.J, Stat. Ann. § 45:22A-26(a)(l) and (2) (punctuation in original). “Agency” is defined as the Division of Housing and Urban Renewal, State Department of Community Affairs. N J. Stat. Ann. § 45:22A-3.
. NJ. Admin. Code §§ 5:26-1.1, 5:26-4.2 (21). The Regulations define “agency” as "the Division of Codes and Standards of the State Department of Community Affairs.” N.J. Admin. Code § 5:26-1.3.
. NJ.A.C. 526-7.2.
. Association Objection, Ex. B at 22.
. N.J. Stat. Ann. §§ 45:22A-6; 45:22A-9.
“Agency” is defined as the Division of Housing and Urban Renéwal, State Department of Community Affairs. NJ. Stat. Ann. § 45:22A-3. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500153/ | MEMORANDUM OPINION AND ORDER
Robert G. Mayer, United States Bankruptcy Judge
THIS CASE was before the court on the chapter 13 trustee’s Motion to Vacate Memorandum Opinion and Order Overruling Trustee’s Objection to the Debtors’ Claim of Exemptions (Docket Entry 43).
The chapter 13 trustee filed his Objection to the Debtors’ Claim of Exemptions on June 10, 2016 (Docket Entry 17), The debtors filed their Answer to Trustee’s Objection to Property Claim'ed as Exempt on June 29, 2016 (Docket Entry 20). After argument by counsel, the court took the matter under advisement. The objection was overruled by the Order entered on September 23, 2016 (Docket Entry 39) for the reasons stated in the accompanying Memorandum Opinion filed the same day (Docket Entry 38). The prior day, September 22, 2016, the trustee filed a document entitled “Withdrawal” in which he requested that the clerk withdraw his objection to debtors’ claim of exemptions (Docket Entry 36).
The trustee now requests that the court vacate its Order overruling his objection to debtors’ claim of exemptions and the court’s Memorandum Opinion. He asserts that when the Order and the Memorandum Opinion were entered “there was no live case in controversy pursuant to Article II, Section 2, Clause 1 of the U.S. Constitution as Trustee’s Objection to Debtors’ Claim of Exemptions was withdrawn on September 22, 2016.” Motion to Vacate at 1. The resolution of the trustee’s motion to vacate depends on the efficacy of his Withdrawal.
The trustee commenced a contested matter when he filed his objection to the debtors’ exemptions. Fed. R.Bankr.P. 4003. Contested matters are governed by Rule 9014 which makes Rule 7041 applicable. Rule 7041 incorporates Fed.R.Civ.P. 41 which concerns dismissal of actions. Rule 41(a)(1)(A) provides how an action may be dismissed without an order of the court. It states:
(A) Without a court order.... [T]he plaintiff may dismiss an action without a court order by filing:
(i) a notice of dismissal before the opposing party serves either an answer or a motion for summary judg- • ment; or
(ii) a stipulation of dismissal signed by all parties who have appeared.
Id. Neither provision is applicable in this case. Subsection (i) is not applicable because the debtor filed an answer to the objection. Subsection (ii) is not applicable because the trustee’s withdrawal was signed only by himself. The withdrawal did not comply with the provisions of Rule 41(a) and was not effective. Consequently, when the court entered the order overruling the trustee’s objection there was a pending case or controversy. Fairchild v. Internal Revenue Service (In re Fairchild), 969 F.2d 866 (10th Cir. 1992).
For the foregoing reasons, it is
ORDERED that the trustee’s Withdrawal (Docket Entry 36) which is treated as a motion to dismiss under Rule 41(a)(1)(A) and his Motion to Vacate Memorandum Opinion and Order Overruling Trustee’s Objection to the Debtors’ Claim of Exemptions (Docket Entry 43) are denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500156/ | MEMORANDUM OPINION
A. Benjamin Goldgar, United States Bankruptcy Judge
Before the court for ruling is the motion of defendant Angelique M. Sharp (“Sharp”) to dismiss the four-count adversary complaint of plaintiff Landmark Credit Union (“Landmark”). The complaint alleges that Sharp fraudulently induced Landmark to make a car loan, never made a payment on the loan, and then hid the car in another state when Landmark tried to recover it. Landmark objects to Sharp’s discharge. Alternatively, Landmark objects to the dischargeability of her debt.
For the following reasons, Sharp’s motion to dismiss the complaint will be denied.
1. Jurisdiction
The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court’s Internal Operating Procedure 15(a). This is a core proceeding. See 28 U.S.C, § 157(b)(2)(I).
2. Background
On a Rule 12(b)(6) motion, all well-pleaded allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the non-movant. Chicago Bldg. Design, P.C. v. Mongolian House, Inc., 770 F.3d 610, 612 (7th Cir. 2014). Exhibits attached to the complaint are also considered on the motion. Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir. 2013); see Fed. R. Civ. P. 10(c) (made applicable by Fed. R. Bankr, P. 7010) (stating that exhibits to a pleading are “part of the pleading for all purposes”).
The complaint and exhibits allege the following facts. On June 15, 2015, Sharp bought a 2016 Dodge Viper from Liberty Auto City, executing a retail installment contract. (Compl. ¶ 4; Ex. A). The sale price was $89,000. (Compl. Ex. A). Sharp made a down payment of $3,000 and financed the rest with a loan from Landmark. (Compl. ¶ 10; Ex. A). To obtain the loan, Sharp filled out a credit application, submitting it to Landmark. (Compl. ¶¶ 6-10).
On the application, Sharp represented that she lived at 409 Lincoln Avenue, In-gleside, Illinois, and had lived there for seven years. (Compl. ¶ 9; Ex. C). She represented that she had neither a rent nor a mortgage payment. (Compl. ¶ 9; Ex. C). As proof of the Lincoln Avenue address, she provided a driver’s license showing it as her home address. (Compl. ¶ 9).
Sharp also represented that she had been employed for eleven years as a manager at Crossroads of Ivanhoe, Inc. (presumably a restaurant or tavern) in Munde-lein, Illinois, and had an annual salary of $175,000. (Compl. ¶¶ 6, 7; Exs. C, D). As proof of her employment and salary, she submitted what purported to be an “earnings statement” from Crossroads showing gross pay of $3,625 for the week of May 18-24, 2015. (Compl. ¶ 8; Ex. D).
*677In reliance on the application, the driver’s license, and the “earnings statement,” Landmark extended credit to Sharp to buy the car. (Compl. ¶¶ 10, 37). Sharp’s monthly payment on the loan was $1,585. (Compl. Ex. A).
Sharp’s representations to Landmark were false. Sharp did not live on Lincoln Avenue in Ingleside; she lived at 4424 N. Christina Avenue in Chicago. (Compl. ¶ 23). Far from having no mortgage or rent payments, she had a $160,000 mortgage on the Christina Avenue property with a $1,620 monthly payment. (Id. ¶ 22). She was not employed as a manager at Crossroads of Ivanhoe but worked there as a server. (Id. ¶ 20). Her salary was not $175,000 but was about $13,000 (her net pay was $10,236). (Id. ¶ 20). In 2014 and 2015, she had earned $14,000 and $13,134, respectively. (Id. ¶ 31).
Sharp knew her representations to Landmark were false—she had to know the truth about her employment, salary, address, and mortgage payment, and she had to know her gross monthly pay of $1,053 (and certainly her net pay of $897) was insufficient to make a $1,585 monthly car payment—and she made the representations with an intent to deceive Landmark into making the loan. (Id. ¶¶ 24, 36). Within days of her purchase of the Dodge Viper, Sharp also bought a 2015 Cadillac Escalade and a 2015 Dodge Ram 2500. (Id. ¶¶ 17, 36). (She already owned a 2013 Ford Edge and a 2013 Yamaha SX190 boat and trailer. (Id. ¶ 17)).
Sharp made no payments to Landmark on the loan (id. ¶ 11), and on July 30 Landmark declared the loan in default (id. ¶ 12). But when Landmark demanded the car’s return, Sharp refused to return it. (Id. ¶¶ 12, 40). Instead, she moved the car to Missouri and hid it there. (Id. ¶¶ 14, 41, 44). Repeated attempts by Landmark to locate the car met with failure until November 2015, when Landmark was at last able to recover the car through information obtained from a third party related to Sharp who said he did not “wish to be a party to [her] criminal scheme.” (Id. ¶¶ 42-43).1
As of March 2016, Sharp owed Landmark $21,677.95 on the contract. (Id. ¶ 16).2
On March 22, 2016, Sharp filed a chapter 7 bankruptcy petition, and Landmark commenced this adversary proceeding. Landmark’s complaint has four counts. Counts I and II are fraud claims. Count I alleges that Sharp owes Landmark a debt nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A). Count II alleges that the debt is nondischargeable under section 523(a)(2)(B), 11 U.S.C. § 523(a)(2)(B). Count III is an objection to Sharp’s discharge under section 727(a)(2)(A), 11 U.S.C. § 727(a)(2)(A). Count IV is a claim for attorney fees under Landmark’s contract with Sharp and under the Illinois Motor Vehicle Act.
Sharp now moves to dismiss the complaint. The motion consists of twelve numbered paragraphs and is not directed to any particular count. (The complaint’s counts are never mentioned.) It appears, however, that Sharp is arguing that Counts I—III should be dismissed under Rule 12(b)(6) Fed. R. Civ. P. 12(b)(6) (made applicable by Fed. R. Bankr. P. 7012(b)), for failure to state a claim, (The claim in Count IV is not discussed). Sharp *678also appears to argue that Counts I and II should be dismissed for failure to plead fraud with particularity under Rule 9(b), Fed. R. Civ. P. 9(b) (made applicable by Fed. R. Bankr. P. 7009), although she never cites the rule.
Landmark opposes the motion.
3. Discussion
Sharp’s motion will be denied. The complaint rather obviously states a claim that Sharp owes Landmark a debt for money obtained through fraudulent misrepresentations. Although Landmark cannot maintain a claim under both section 523(a)(2)(A) and section 523(a)(2)(B) based on the same written misrepresentations, Landmark has a claim under one or the other, and nothing required Landmark to plead legal theories in any event. The fraud claim is also pled with enough particularity to satisfy Rule 9(b). As for Count III, that count plainly states a claim under section 727(a)(3).
a. Counts I and II
Counts I and II state claims. The underlying claim is based on a debt for money obtained through fraud, and that claim is perfectly well pled. The two counts allege inconsistent legal theories, and Landmark will not be able to prevail on both. But since the underlying claim (in the relevant sense of the underlying facts) is sufficient, there is no reason to decide at the pleading stage which legal theory is likely to be successful. Landmark has stated a claim under either section 523(a)(2)(A) or section 523(a)(2)(B), and the claim is pled in enough detail for Rule 9(b) purposes,
i. Rule 12(b)(6)
To survive a Rule 12(b)(6) motion, a complaint need only clear two “easy-to-clear hurdles.” EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must contain enough factual detail to give the defendant fair notice of the claim under Rule 8(a). “[A] formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955,167 L.Ed.2d 929 (2007). Specific facts are unnecessary, Olson v. Champaign County, 784 F.3d 1093, 1098 (7th Cir. 2015), but some facts must support each element of the claim, Ashcroft v. Iqbal, 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Defender Sec. Co. v. First Mercury Ins. Co., 803 F.3d 327, 334 (7th Cir. 2015); Swanson v. Citibank, N.A., 614 F.3d 400, 405 (7th Cir. 2010).
Second, the claim must be plausible—meaning the allegations must raise the plaintiffs right to relief above a “speculative level.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955; see also Kubiak v. City of Chicago, 810 F.3d 476, 480 (7th Cir. 2016). To establish plausibility, a plaintiff need only “include enough details about the subject-matter of the case to present a story that holds together.” Runnion v. Girl Scouts of Greater Chi., 786 F.3d 510, 526 (7th Cir. 2015) (internal quotations omitted). Plausibility “simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence supporting the allegations.” Huri v. Office of the Chief Judge, 804 F.3d 826, 833 (7th Cir. 2015).
ii. The Section 523(a)(2) Theories
The complaint here alleges a single non-dischargeability claim: that Sharp obtained a loan from Landmark to buy a car by knowingly and intentionally making false written representations in her credit application, and a portion of the loan remains unpaid. Although this is a single claim (since a “claim” consists of the “underlying factual events” rather than “the legal theories advanced,” Matrix IV, Inc. v. American Nat. Bank & Trust Co., 649 *679F.3d 539, 548 (7th Cir. 2011)), the claim is alleged in two separate counts: one that invokes section 523(a)(2)(A), another that invokes section 523(a)(2)(B).
Landmark’s two theories bear some similarities to each other, but in fact, they are separate as well as inconsistent. Section 523(a)(2)(A) excepts from discharge debts for (among other things) “money ... obtained by false pretenses, a false representation or actual fraud, other than a statement respecting the debtor’s financial condition.” 11 U.S.C. § 523(a)(2)(A). To establish the exception, the creditor must prove (1) the debtor made a false representation or omission that he either knew was false or made with reckless disregard for its truth, (2) the debtor made the misrepresentation or omission with an intent to deceive or defraud, and (3) the creditor justifiably relied on the misrepresentation or omission. In re Davis, 638 F.3d 549, 553 (7th Cir. 2011); Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010).
Section 523(a)(2)(B), on the other hand, excepts from discharge a debt for (among other things) money obtained by “a statement in writing that is materially false respecting the debtor’s ... financial condition.” 11 U.S.C. § 523(a)(2)(B). To establish this exception, the creditor must prove the debtor made a materially false written statement about his financial condition, the debtor made the false written statement with an intent to deceive, and the creditor reasonably relied on the false statement.” In re Morris, 223 F.3d 548, 552 (7th Cir. 2000); In re McFarland, 84 F.3d 943, 946 (7th Cir. 1996); In re Sheridan, 57 F.3d 627 (7th Cir. 1995).
Both exceptions are based on fraud and have some elements in common, but they are by no means the same. The critical difference for purposes of this decision is that a false written statement of the debtor’s “financial condition” will support an exception to discharge only under section 523(a)(2)(B). Section 523(a)(2)(A) not only does not apply to statements of that kind but specifically excludes them: it applies to statements “other than a statement respecting the debtor’s ... financial condition.” 11 U.S.C. § 523(a)(2)(A). In short, the two exceptions are “mutually exclusive.” Minnesota Dep’t of Empl’t & Econ. Dev. v. Sanderson (In re Sanderson), 509 B.R. 206, 209 (Bankr. W.D. Wis. 2014); Rutili v. O’Neill (In re O’Neill), 468 B.R. 308, 343 (Bankr. N.D. Ill. 2012).3
Landmark’s complaint pleads every other element of a section 523(a)(2) claim, whether the claim is one under (A) or (B). Landmark alleges that Sharp made false written statements in her application for a car loan, statements that were material. See North Shore Community Bank & Trust Co. v. Carlson (In re Carlson), Nos. 08 B 22322, 09 A 231, 2011 WL 666307, at *5 (Bankr. N.D. Ill. Feb. 14, 2011) (discussing materiality). Landmark alleges that Sharp knew the statements were false and made them intending to deceive. See Financial Pac. Leasing, LLC v. Kilaru (In re Kilaru), 552 B.R. 806, 814-15 (Bankr. N.D. Ill. 2016) (discussing intent). Landmark alleges that it relied on the statements and that its rebanee was not only justifiable but also reasonable. See id.. at 812-13 (discussing reasonable reliance).4
*680Whether Landmark’s claim falls under (A) or (B) therefore depends on whether Sharp’s misrepresentations concerned her “financial condition.” Courts are split on the meaning of the phrase, with some taking the narrow view that the statement “must paint a picture about the debtor’s overall financial health,” and others taking the view that any statement conveying “significant information about the debtor’s finances” is enough. Stelmokas, 460 Fed. Appx. at 603. The Seventh Circuit has yet to take a position. See id. at 604. As a rule, bankruptcy courts in this circuit tend to take the narrow view. See id.5
But the current motion offers no occasion to determine whether Landmark’s claim is an (A) claim or a (B) claim. That is because Landmark unquestionably has a claim under (A) or (B). If Sharp’s misrepresentations concerned her financial condition, Landmark’s claim falls under (B). If they did not, the claim falls under (A). Since Landmark has a viable claim either way, determining the precise nature of the claim is a waste of time—at least at the pleading stage. Landmark had no obligation to identify her legal theories and cite Code provisions in any event. Avila v. CitiMortgage, Inc., 801 F.3d 777, 783 (7th Cir. 2015) (noting that “plaintiffs are not required to plead specific legal theories”); Whitaker v. Milwaukee County, 772 F.3d 802, 808 (7th Cir. 2014).
In arguing'for dismissal, Sharp contends the complaint fails to set forth how and why Landmark relied on the information in her credit application. Sharp is mistaken. Landmark alleges that it extended credit to Sharp in reliance on the information, and why it did so is readily evident: the information suggested—falsely—that Sharp had the wherewithal to repay the loan.
Sharp next argues that the complaint fails to cite “any specific fact” demonstrating her intent to deceive. Again, Sharp is mistaken. Wrongful intent for purposes of section 523(a)(2) can be inferred not only from direct evidence (the kind Sharp means) but also “from a false representation which the debtor knows or should know will induce another to make a loan.” Sheridan, 57 F.3d at 633 (internal quotation omitted). Sharp should have realized that Landmark wanted to know about her employment, salary, residence, and financial obligations to determine whether she was a good credit risk.
Sharp next notes that a breaeh of contract will generally not support a claim under section 523(a)(2)(A) because a false promise is generally not a false representation for purposes of that section. Sharp is right. See, e.g., Santiago v. Hernandez (In re Hernandez), 452 B.R. 709, 723 (Bankr. N.D. Ill. 2011). But Landmark’s claim is not based on her mere failure to comply with the contract and so on a false promise. The claim is based on false representations of present fact that caused Landmark to extend credit. See id. (noting that the false representation must “relate to a present or past fact”). The claim is not one for promissory fraud.
*681As her last point, Sharp urges that Landmark has not alleged actual fraud. Sharp is right about that, as well. But Landmark has not alleged actual fraud because its claim is not an actual fraud claim. The claim is based on Sharp’s false representations in her credit application. Section 523(a)(2)(A) describes not one but three separate grounds for nondis-chargeability. One is actual fraud; another is false representation. (The third is false pretenses.) Wachovia Sec., LLC v. Jahelka (In re Jahelka), 442 B.R. 663, 668 (Bankr. N.D. Ill. 2010). A creditor can assert a claim based on any of the three. That Landmark has alleged a false representation claim does not open the claim up to dismissal because Landmark did not allege actual fraud.
Because Landmark has stated a claim under either section 523(a)(2)(A) or section 523(a)(2)(B), and because deciding which legal theory is correct would be pointless at this stage, Sharp’s motion to dismiss Counts I and II for failure to state a claim will be denied.
iii. Rule 9(b)
Nor will those counts be dismissed for failure to plead fraud with sufficient particularity. Landmark has provided enough detail to satisfy Rule 9(b).
Rule 9(b) requires a party to “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). “Particularity means the who, what, when, where, and how: the first paragraph of any newspaper story.” Katz v. Household Int’l, Inc., 91 F.3d 1036, 1040 (7th Cir. 1996) (internal quotation omitted); see also Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 737 (7th Cir. 2014); Anchor-Bank, FSB v. Hofer, 649 F.3d 610, 615 (7th Cir. 2011). How much detail is necessary depends on the facts of the case. Camasta, 761 F.3d at 737; AnchorBank, 649 F.3d at 615.
Landmark’s complaint in this case spells out the who (Sharp); the what (misrepresentations of personal, financial, and employment information); the when (on June 15, 2015); the where (Liberty Auto City in Libertyville, Illinois); and the hów (on the credit application she completed and on an accompanying earnings statement). The information in the complaint is more than enough to satisfy the twin concerns underlying the Rule: to ensure the defendant has notice of the claim and the claim is asserted responsibly, see Mannheim Auto. Fin. Servs. v. Park (In re Park), 314 B.R. 378, 383 (Bankr. N.D. Ill. 2004). If Landmark should have pled something it has not, Sharp fails to say what that something might be.
Because the complaint complies with Rule 9(b), Sharp’s motion to dismiss Counts I and II under Rule 9(b) will be denied.
b. Count III
Just as Counts I and II state claims, Count III states a claim as well. Count III alleges that Sharp moved the car to Missouri and hid it there with an intent to hinder, delay, or defraud Landmark, her creditor. Those allegations state a claim under section 727(a)(2)(A) to deny Sharp’s discharge.
Section 727(a)(2)(A) bars the discharge of a debtor who, “with intent to hinder, delay, or defraud a creditor ... has transferred, removed, destroyed, mutilated, or concealed ... property of the debtor, within one year before the date of the filing of the petition.” 11 U.S.C. § 727(a)(2)(A). To satisfy this exception, two elements must be present within a year of the petition date: “an act (i.e., a transfer or a concealment of property) and an improper intent (i.e., a subjective intent to hinder, delay, or defraud a creditor).” In *682re Kontrick, 295 F.3d 724, 736 (7th Cir. 2002), aff'd sub nom. Kontrick v. Ryan, 540 U.S. 443, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (internal quotation omitted); MWRD Employees’ Credit Union v. Frazier (In re Frazier), 551 B.R. 410, 423 (Bankr. N.D. Ill. 2016); Campbell v. Campbell (In re Campbell), 475 B.R. 622, 633 (Bankr. N.D. Ill. 2012).
Landmark has pled both elements. First, the complaint alleges concealment. It says that after Sharp refused to surrender the car, Landmark made numerous attempts to find it without success. That, Landmark asserts outright, was because Sharp had “concealed the [car] in the State of Missouri.” (Compl. ¶ 41). Landmark adds that it was ultimately able to find the car only through the aid of a third party who “physically guided Landmark’s agents” to the car’s location. (Id. ¶ 43), These allegations describe a classic case of concealment.
Second, the complaint alleges facts suggesting Sharp concealed the car with an intent to hinder, delay or defraud Landmark, her creditor. That inference arises from (a) Sharp’s misrepresentations at the time she bought the car; (b) her failure to make any payments on the loan from Landmark; and most important (c) her refusal to comply with Landmark’s demands to give up the car, together with her decision to move the car to another state and hide it there. These allegations are more than sufficient to suggest an intent to hinder or delay, and perhaps even defraud, Landmark. See Coyle v. Coyle (In re Coyle), 538 B.R. 753, 765-66 (Bankr. C.D. Ill. 2015) (noting that “hindering” simply means impeding or obstructing collection efforts, and “delaying” means postponing those efforts).
Sharp complains that Landmark has not alleged greater detail about Sharp’s refusal to surrender the car, Landmark’s efforts to recover it, or the identity of the mysterious “third party” who gave away the car’s location. True. But Landmark had no obligation to plead that level of detail. See Huri v. Office of the Chief Judge, 804 F.3d 826, 832 (7th Cir. 2015) (noting that “Specific facts are unnecessary”); Olson, 784 F.3d at 1098. As it stands, the complaint alleges enough to give Sharp notice of Landmark’s claim, and the story certainly “holds together.” See Runnion, 786 F.3d at 526.
Because Count III of Landmark’s complaint states a claim under section 727(a)(2)(A), Sharp’s motion to dismiss that count under Rule 12(b)(6) will be denied.
4. Conclusion
For these reasons, the motion of defendant Angelique M. Sharp to dismiss the adversary complaint of plaintiff Landmark Credit Union is denied. A separate scheduling order will be entered.
. Landmark alleges on information and belief that the car was used for "illegal interstate purposes,” (Compl. ¶ IS), Those purposes are not described.
. Landmark calls this a "deficiency balance” (Compl. II16), suggesting the car was sold after Landmark finally located and repossessed it.
. Because section 523(a)(2)(B) is the sole dis-chargeability exception for debts resulting from statements about the debtor's financial condition, and because that section applies only to written statements, debts resulting from false oral statements about a debtor’s financial condition are dischargeable. Stelmokas v. Kodzius, 460 Fed.Appx. 600, 603 (7th Cir. 2012); Sullivan v. Glenn (In re Glenn), 502 B.R. 516, 532 (Bankr. N.D. Ill. 2013).
. These basic elements differ slightly depending on whether the claim is one under section *680523(a)(2)(A) or (B). Section 523(a)(2)(B) is stricter, requiring the representation to have been ‘‘materially false” rather than simply “false” and requiring the creditor’s reliance to have been "reasonable” rather than merely “justifiable.” Landmark’s complaint alleges material falsity and reasonable reliance for purposes of section 523(a)(2)(B). Because it does, the complaint alleges the more relaxed elements of section 523(a)(2)(A).
. The undersigned judge has taken that view. See Broquet v. Zarkhin, Nos. 12 B 38907, 12 A 1955, 2013 WL 5591937, at *7 (Bankr. N.D. Ill. Oct. 10, 2013); Bednarsz v. Brzakala (In re Brzakdla), 305 B.R. 705, 709 (Bankr. N.D. Ill. 2004). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500157/ | MEMORANDUM OPINION
Deborah L. Thorne, United States Bankruptcy Judge
This matter is before the court on the Motion to Dismiss Case for Unreasonable Delay (the “Motion”) filed by the Trustee Marilyn O. Marshall (the “Trustee”) on March 23, 2016 against Iris V. Colon (the “Debtor”). (Dkt. No. 26). In the Motion, the Trustee asks the court to dismiss the Debtor’s bankruptcy case for a series of errors made by the Debtor. The listed failures of the Debtor have been resolved throughout the bankruptcy proceeding except for one—correcting the deductions within the Debtor’s disposable income calculation. The Trustee requests that the court reject the proposed plan of the Debt- or and dismiss the bankruptcy case. (Dkt. No. 50, ¶ 11). The Trustee argues that the Debtor listed a secured debt in her disposable income calculation that is not “reasonably necessary” under 11 U.S.C. § 707(b) (2) (A) (iii) (I) and is, therefore, *684cause for denial of plan confirmation and case dismissal. Next, the Trustee alleges that the Debtor’s listing of a secured debt deduction within her disposable income constitutes a lack of “good faith” under 11 U.S.C. § 1325(a)(3) and is grounds for the Trustee’s sought relief.
For the reasons stated below, the court concludes that “reasonably necessary” is irrelevant to section 707(b)(2)(A)(iii)(I), and the Trustee has failed to establish a lack of good faith by the Debtor under 11 U.S.C. § 1325(a)(3). The Court overrules the Trustee’s Motion.
This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law in uniformity with Fed. R. Bankr. P. 7052. A separate judgment order will be entered pursuant to Fed. R. Bankr. P. 9021.
A.Jurisdiction
The court has subject matter jurisdiction to decide this matter under 28 U.S.C. § 1334(b) and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. A motion to dismiss under section 707(b) is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), CL), & (0).
B.Background & Procedural History
The Debtor is a chapter 13 debtor. (Dkt. No. 1). She has listed a $916.00 monthly mortgage payment for her primary residence and $297.28 monthly payment for a 2006 Canterbury Park Camper (the “Camper”) as secured debt deductions in her disposable income calculation. (Dkt. No. 28, pp. 2 & 5), The Debtor’s income is over the state median. Id. at 8.
The Trustee filed a motion to dismiss listing six reasons in support, (Dkt. No. 26). As stated above, the only remaining issue is that “[t]he debtor(s) have failed to amend the means test to correct improper deductions or to provide requested and required proof thereof.” Id. The Debtor filed a response (Dkt. No. 42), and the Trustee filed a reply, (Dkt. No. 49). The Debtor filed a sur reply. (Dkt. No. 51).
C.Discussion
The crux of the issue is whether the Debtor’s placement of the Camper as- a secured debt deduction under section 707(b)(2)(A)(iii)(I) in her disposable income calculation is reason alone to deny plan confirmation and dismiss the case. Trustee provides two arguments for why the Debt- or’s action warrants denial and dismissal. First, section 707(b)(2)(A)(iii)(I) requires that a debtor list out secured debts that are only “reasonably necessary.” Because the Debtor already has a primary house, the Camper is unnecessary and improperly listed. Second, the Trustee argues that even if there is no “reasonably necessary” standard applied to section 707(b)(2)(A)(iii)(I), the court should deny confirmation and dismiss the case, because Debtor lacked good faith when proposing the chapter 13 plan.1 The court addresses each argument below.
1. Calculation of the Debtor’s Projected Disposable Income
When a chapter 13 debtor is above the median income of their state, section 1325(b)(3) provides that section 707(b)(2) will determine the debtor’s expenses.- Section 707(b)(2)(A)(iii)(I) states that “[t]he debtor’s average monthly payments on account of secured debts shall be calculated as the sum—of the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the filing of the petition[.]” Such secured payments can be deducted from a debtor’s disposable income.
*685Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), many courts subscribe to the notion that a bankruptcy court cannot determine whether an expense is “reasonably necessary” under section 707(b)(2). See Drummond v. Welsh (In re Welsh), 465 B.R. 843, 849-50 (9th Cir. BAP 2012) (concluding that the legislative history confirms that there is no subjective standard attached to section 707(b)(2)); In re Reinstein, 393 B.R. 838 (Bankr. E.D. Wis. 2008); In re Franco, 2008 WL 444679, *1-2, 2008 Bankr. LEXIS 409, *4-0 (Bankr. S.D. Ill. Feb. 12, 2008); In re Sallee, 2007 WL 3407738, *2, 2007 Bankr. LEXIS 4188, *5-6 (Bankr. S.D. Ill. Nov. 15, 2007); and In re Carlton, 362 B.R. 402, 411 (Bankr. C.D. Ill. 2007). See also Eugene R. Wedoff,- Means Testing in the New § 707(b), 79 Am. Bankr. L.J. 231, 274 (2005) (explaining deduction for payments on secured debt is not dependent on whether the property securing the debt is necessary or a luxury).
Rather, the court must determine whether a particular expense is allowed by section 707(b)(2). If an expense is allowed under section 707(b)(2), it meets the new definition of “reasonably necessary” and the court cannot assess whether the expense is “reasonably necessary.” The Seventh Circuit has not specifically ruled on section 707(b) (2) (A) (iii) (I) nor has the Northern District of Illinois. But cf. In re Farrar-Johnson, 353 B.R. 224, 229-233 (Bankr. N.D. Ill. 2006) (Goldgar, J.) (ruling that there is no subjective standard in reference to section 707(b)(2)(A)(ii)(I)).
Some courts, however, find that a subjective test is still appropriate for deductions under section 707(b)(2). In re Owsley, 384 B.R. 739, 748 (Bankr. N.D. Tex. 2008); In re McGillis, 370 B.R. 720, 729-30 (Bankr. W.D. Mich. 2007).
Given that the Northern District of Illinois has ruled in the past that one subsection of section 707(b)(2) has -no subjective test attached to it and the overall .agreement from other bankruptcy courts within the Seventh Circuit, the court will not impose a “reasonably necessary” standard to deductions made under section 707(b)(2)(A)(iii)(I),
In this case, Debtor listed the secured debt of the Camper in her disposable income calculation. The listing is proper under section 707(b)(2)(A)(iii)(I) and does not have to satisfy a “reasonably necessary” standard. As such, the court will not reject the Debtor’s proposed plan or dismiss the Debtor’s case based on the Trustee’s assertion that the Camper is not a “reasonably necessary” expense.
The court will next examine whether the Debtor’s listing of a secured debt is inap-posite to the “good faith” requirement under section 1325(a)(3).
2. “Good Faith” Inquiry of the Proposed Chapter IS Plan
Section 1325(a)(3) requires that a debtor’s plan be proposed in good faith. 11 U.S.C. § 1325(a)(3). While assessing good faith for section 1325 depends on the “totality of the circumstances,” the primary question is whether the debtor is “really trying to pay the creditors to the reasonable limit of [their] ability or [are they] trying to thwart them?” In re Schaitz, 913 F.2d 452, 453-54 (7th Cir. 1990); see In re Rimgale, 669 F.2d 426, 433 (7th Cir. 1982) (“Broadly speaking, the basic inquiry should be whether or not under case circumstances there has been abuse of Chapter 13’s provisions, purpose, or spirit.”).
The Seventh Circuit has ruled that dismissal of a bankruptcy case is a harsh remedy and that a bankruptcy court should be more inclined to reject a plan when confronted with the two options in a *686good faith assessment. In re Love, 957 F.2d 1350,1356 (7th Cir. 1992).
“[0]n request of a party in interest or the; United States Trustee and after notice and a hearing, the court ... may dismiss a case under this chapter ... for cause, including—denial of confirmation of a plan under section 1325 11 U.S.C. § 1307(c)(5). Lack of good faith in proposing a chapter 13 plan is “cause” to dismiss a debtor’s case. Love, 957 F.2d at 1354 (adopting the “good faith” standards in filing for bankruptcy under section 1325(a)(7) and applying them to section 1325(a)(3)).
The trustee has. the burden of proof to challenge the debtor’s good faith in proposing the plan. See id. at 1355. The debtor has the burden to meet all of the requirements of a good faith proposal under section 1325(a). See id. Although it is not clearly laid out in many cases, the burden of proof is by a preponderance of the evidence. See In re Bloomingdale Partners, 155 B.R. 961, 983 (Bankr. N.D. Ill. 1993) (Barliant, J.) (suggesting that “preponderance of the evidence” is the appropriate standard, unless an important individual interest hangs in the balance).
The Seventh Circuit has supplied several factors to consider for a good faith inquiry of a proposed plan: (1) whether the plan states the secured and unsecured debts of the debtor accurately; (2) whether the plan states the expenses of the debtor accurately; (3) whether the.percentage of repayment of unsecured debts is correct; (4) whether inaccuracies in the plan amount to an attempt to mislead the bankruptcy court; and (5) whether the proposed payments indicate a fundamental fairness in dealing with creditors. Rimgale, 669 F.2d at 432-33. Because Rimgale occurred over two decades before the enactment of BAPCPA, its impact is relatively limited but is still somewhat applicable in reference to a good faith inquiry of a proposed chapter 13 plan. In re Shafer, 393 B.R. 655 (Bankr. W.D. Wis. 2008); see In re Neal, 2014 WL 1424941, *10-11, 2014 Bankr. LEXIS 1581, *27-28 (Bankr. N.D. Ill. Apr. 8, 2014) (Schmetterer, J.) (looking towards the accuracy of the debtors’ reported income, purported misleading expenses, and overall fairness).
The court now turns to the Trustee’s objection under good faith. The Trustee argues that the Debtor’s proposed plan that includes the Camper and her primary residence lacks good faith, because she would essentially have two residences. Bankruptcy courts vary widely on how to rule on a non-essential secured debt in regards to good faith of an above-median incomé debtor’s proposed chapter 13 plan. The Trustee relies on cases that ultimately conclude that “good faith” under section 1325(a)(3) can override any deductions made pursuant to section 707(b)(2).2 In re Martin, 373 B.R. 731, 736 (Bankr. D. Utah 2007) (ruling that the inclusion of the debt- or’s luxury boat in their proposed plan was fundamentally inappropriate); In re Hylton, 374 B.R. 579, 586 (Bankr. W.D. Va. 2007) (rejecting a plan in which the debtor listed two vehicles and a recreational boat). Other courts have also utilized a “smell test” to determine if a proposed chapter 13 plan is fair to creditors in regards to a debtor’s secured debt deductions. In re Sandberg, 433 B.R. 837, 845-6 (Bankr. D. Kan. 2010); In re Devilliers, 358 B.R. 849, *687867 (Bankr. E.D. La. 2007); McGillis, 370 B.R. at 750. Branching off of this approach, but with a stronger threshold, some courts will still subject a secured debt expense to a “good faith” inquiry when there is some sort of “manipulation, subterfuge or unfair exploitation of the Code by the Debtor.” In re Williams, 394 B.R. 550, 572 (Bankr. D. Colo. 2008); see In re Briscoe, 374 B.R. 1, 22 (Bankr. D.D.C. 2007).
Another approach is to rule that the listed expenses of a debtor are not subject to the “good faith” inquiry at all. In re Alexander, 344 B.R. 742, 752 (Bankr. E.D.N.C. 2006). Farrar-Johnson ruled (or at the very least, other courts have found the case to rule, Welsh, 465 B.R. at 854) that section 1325(b) creates- a safe harbor in which listing out expenses cannot demonstrate a lack of good faith. Farrar-Johnson, 353 B.R. at 231-233 (“The disposable income a debtor decides to commit to his plan is not the measure of his good faith in proposing the plan.”); see In re Burmeister, 378 B.R. 227, 232 (Bankr. N.D. Ill. 2007) (Goldgar, J.) (“Lack of good faith is not a proper basis for objecting to a miscalculation of disposable income.”).
Finally, a growing trend in bankruptcy courts is to hold that a “good faith” inquiry is still applicable to the Debtor’s disposable income calculation, however, listing a secured debt in compliance with the Bankruptcy Code cannot, on its own, establish a lack of good faith. Welsh, 465 B.R. at 854-55; Franco, 2008 WL 444679, at *1-2, 2008 Bankr. LEXIS 409, at *4-6; Sallee, 2007 WL 3407738, at *2, 2007 Bankr. LEXIS 4188, at *5-6.
Aligning with Farrar-Johnson, the court finds that listing a secured debt pursuant to section 707(b)(2) (A) (iii) (I) is not subject to a “good faith” inquiry. “If the reasonable necessity of a debtor’s expenses is no longer relevant, then plainly the debtor’s ‘good faith’ in claiming them cannot be relevant.” Farrar-Johnson, 353 B.R. at 232. If the Debtor in this case had in fact improperly listed an expense or made a misrepresentation in the calculation, the Trustee should have filed their objection based on failure to comply with section 1325(b). The court, however, finds that the Debtor correctly listed the Camper. Nothing provided by the Trustee establishes a lack of good faith on behalf of the Debtor.3
The court cannot conclude that the Debtor failed to propose a plan in good faith when operating within the parameters of the Bankruptcy Code.4 Because the Trustee failed to establish a lack of good faith in the Debtor proposing the plan, the court overrules the Motion.
Conclusion
A “reasonably necessary” standard is irrelevant to section 707(b)(2)(A)(iii)(I). Because the Trustee failed to meet her bur*688den to establish that the Debtor lacked good faith when proposing their chapter 13 plan, the court overrules the Motion. An Order will be entered.
ORDER
For reasons stated in the Memorandum Opinion, the Trustee’s Motion to Dismiss Case for Unreasonable Delay is OVERRULED and the plan may be confirmed.
. The Trustee does not appear to allege that the Debtor lacked good faith when filing for bankruptcy—a requirement under section 1325(a)(7).
. The Trustee also cites to In re Namie, 395 B.R. 594 (Bankr. D.S.C. 2008) (denying a debtor’s proposed plan that would include a secured deduction that exceeded the debtor’s net income). That case, however, appears to have relied on caselaw that occurred prior to BAPCPA and has since been superseded. In re Wick, 421 B.R. 206, 216 (Bankr. D. Md. 2010).
. Although the court does not believe that the Debtor’s plan produces a peculiar result, the Supreme Court in Ransom acknowledged that the BAPCPA created a mechanical approach to determining a debtor’s expenses and eliminates a case-by-case analysis. Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 78, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) ("In eliminating the pre-BAPCPA case-by-case adjudication of above-median-income debtors’ expenses, on the ground that it leant itself to abuse, Congress chose to tolerate the occasional peculiarity that a brighter-line test produces.’’).
. If the Debtor's disposable income changes ■ (e.g. sells either her primary residence or the Camper) during the pendency of her bankruptcy case, the Trustee can file a motion under section 1329 to have the Debtor's plan modified. By the Debtor selling one of the two assets, her disposable income will increase and allow the court to modify the plan pursuant to section 1329(a)(1). See Germeraad v. Powers, 826 F.3d 962, 971 (7th Cir. 2016). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500158/ | MEMORANDUM OPINION
Deborah L. Thorne, United States Bankruptcy Judge
This matter comes before the court for ruling on the motion of the U.S. Trustee Patrick S. Layng (the “U.S. Trustee”) to dismiss the chapter 7 case of Monica Lowe (the “Debtor”) for abuse under section 707(b)(3) of the Bankruptcy Code. The motion is well-taken. For the reasons set forth herein, the Debtor will be given 14 days to file a motion to convert her case to *689chapter 13. If no motion is filed, the case will be dismissed.
This Memorandum Opinion -constitutes the Court’s findings of fact and conclusions of law in uniformity with Fed. R. Banxr. P. 7052. A separate judgment order will be entered pursuant to Fed. R. Bankr. P. 9021
A.Jurisdiction
The court has subject matter jurisdiction over this case under 28 U.S.C. § 1334(a) and the district court’s Internal Operating Procedure 15(A). A motion to dismiss under section 707(b) is a core proceeding underLow 28 U.S.C. § 157(b)(2)(0).
B.Background & Procedural History
The Debtor, an attorney with the City of Chicago, filed for bankruptcy relief under chapter 7 of the Bankruptcy Code on July 21, 2016. (Dkt. No. 1). She lists one dependent, her 8-year-old son, on her schedules. Id. at 40. The Debtor’s annual gross income is approximately $115,000. Id. at 17. At the time the Debtor’s petition was filed, she owned two properties, a single-family home located at 9122 South Bell Avenue, Chicago, Illinois and a condominium located at 6926 South Cregier Avenue, Unit 3, Chicago, Illinois. Id. at 17-18. The mortgage balance on the condominium exceeded its value, and she elected to surrender it in her plan.1
The Amended Schedule J reflects approximately $5,460 in monthly expenses. (Dkt. No. 1, p. 41). Included in the monthly expenses are $500 in student loan repayments, $180 in tutoring costs' for her son and $1,509 in mortgage payments for the single family home. Id. All other expenses are relatively routine for a two-person family.
Form 122A-2, the means test form, showed that the Debtor passed the means test in section 707(b)(2), and her case did not give rise to a presumption of abuse. (Dkt. No. 4, p. 8). The U.S. Trustee has not contested the means test calculation and has not disputed that there is no presumption of abuse.
The U.S. Trustee filed a motion to dismiss the Debtor’s case under section 707(b)(3) of the Bankruptcy Code. (Dkt. No. 29). The U.S. Trustee argued that two of the Debtor’s expenses were luxury expenses and moreover, that she was in the financial position to pay her creditors. Specifically, the U.S. Trustee alleges the payment for her son’s tutoring and the payment of her nondisehargeable student loans are luxury expenses and therefore abuses under the “totality of the circumstances” found in section 707(b)(3)(B) of the Bankruptcy Code. As such, the U.S. Trustee argues, her case should be dismissed.
In response, the Debtor admits that she has the ability to pay creditors, but her ability to make payments to her creditors is not sufficient grounds to find an abuse under the provision of section 707(b)(3)(B). She contends that under the “totality of the circumstances,” grounds to dismiss do not exist as the U.S. Trustee needs to prove more than just financial ability to pay creditors.
C.Discussion
The U.S. Trustee is correct that this case is an abuse of chapter 7., The expenses that the U.S. Trustee identifies aside, the Debtor has a high income and on a monthly basis has approximately $2,300 available to make payments to her-creditors after deducting for expenses, includ*690ing on-going payments on her student loan and payments for her son’s tutoring.. She has elected to surrender the condominium and eliminate that secured obligation which has left her with more disposable income than she would have otherwise had available prior to filing this case.
Section 707(b)(1) of the Bankruptcy Code permits the dismissal of a chapter 7 debtor’s case if granting the debtor relief “would be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). Under section 707(b)(2), the court must presume abuse if a debtor fails the means test. Under section 707(b)(3), however, a court may dismiss the case of a debtor who passes the means test, or who manages to rebut the presumption of abuse under section 707(b)(2), if the debtor filed .the peti-. tion in bad faith or if “the totality of the circumstances ... of the debtor’s financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3)(A), (B); Ross-Tousey v. Neary (In re Ross-Tousey), 549 F.3d 1148, 1161-62 (7th Cir. 2008).
“Totality of the circumstances,” a phrase that appeared in section 707(b) even before BAPCPA’s 2005 revision of the Bankruptcy Code, is not defined, and the Seventh Circuit has never addressed it in the context of chapter 7. See In re Smith 286 F.3d 461, 466 (7th Cir. 2002) (stating that the Seventh Circuit has provided several factors to consider for “totality of the circumstances” in chapter 13 cases, In re Rimgale, 669 F.2d 426, 432 (7th Cir. 1982)); hut see In re Neal, 2014 WL 1424941, *7, 2014 Bankr. LEXIS 1581, *17-18 (Bankr. N.D. Ill. Apr. 8, 2014) (Schmetterer, J.) (explaining that some factors in Rimgale have since been “supplanted” by amendments to the Bankruptcy Code).
The post-BAPCPA structure of the statute, however, gives some guidance to its meaning. Section 707(b)(2) creates an objective test under which some cases are presumed abusive. Section 707(b)(3) permits dismissal even if a debtor passes the objective test, setting up a contrasting “totality of the circumstances” test that requires a more subjective, holistic assessment of the debtor and their circumstances. In re Watts, 557 B.R. 640, 646 (Bankr. N.D. Ill. 2016) (Schmetterer, J.); In re Bacardi, No. 09 B 25757, 2010 WL 54760, at *3 (Bankr. N.D. Ill. Jan. 6, 2010) (Goldgar, J.); In re Sullivan, 370 B.R. 314, 319 (Bankr. D. Mont. 2007) (describing section 707(b)(3) as “subjective”); see also In re Haar, 373 B.R. 493, 499 (Bankr. N.D. Ohio 2007) (calling section 707(b)(3) an “equitable test” as opposed to the “rigid, mechanical formula” in section 707(b)(2)).
In addition, the separate requirement in section 707(b)(3)(A) that the court dismiss a case when the petition was filed in “bad faith” indicates that a case can be dismissed for abuse under the “totality of the circumstances” test in (B) based solely on ability to pay and without, for example, proof of misconduct on the debtor’s part. Watts, 557 B.R. at 646; In re Deutscher, 419 B.R. 42, 45 (Bankr. N.D. Ill. 2009) (Barbosa, J.); In re Perelman, 419 B.R. 168, (Bankr. E.D.N.Y. 2009).2
*691Before BAPCPA, the courts of appeals in six circuits had interpreted “totality of circumstances” by adopting open-ended, multi-factor tests. See Costello v, Bodenstein, No. 01 C 9696, 2002 WL 1821663, at *3 (N.D. lb. Aug. 7, 2002) (citing cases). Except for the Fourth Circuit in In re Green, 934 F.2d 568 (4th Cir. 1991), these courts agreed that the primary factor in determining what the pre-BAPCPA version of the statute called “substantial abuse” (rather than merely “abuse”) was the debtor’s ability to repay his debts. See Costello, 2002 WL 1821663, at *4. These courts of appeals also concluded that an ability to repay debts standing alone could be sufficient to warrant dismissal, although other factors might be relevant. Id.
Other relevant factors include whether the debtor has' a stable source of future income, whether their expenses can be reduced significantly without depriving her of adequate food, clothing, shelter and other necessities, whether the debtor incurred cash advances and made consumer purchases far in excess of her ability to pay, whether the debtor’s schedules reasonably and accurately reflect her true financial situation or whether the case was filed because of sudden illness or calamity, disability or unemployment. 11 U.S.C. § 707 (b)(3)(B); Bacardi, 2010 WL 54760, *3. As such, the “totality of the circumstances” analysis is fact-intensive and performed on an individual case basis. In re Krohn, 886 F.2d 123, 127 (6th Cir. 1989): In re Stewart, 175 F.3d 796, 809 (10th Cir. 1999).
In this case, the Debtor has the ability to pay creditors even with the tutor and student loan repayments the U.S. Trustee argues are excessive. The Debtor has elected to surrender the condominium and now, as a result, has significantly more funds available on a monthly basis to pay creditors than she did when her petition was filed. The amended schedule J reveals that the Debtor has $2,312.77 available on a monthly basis after payment of all schedule I expenses. (Dkt. No. 40, p. 3).
The Debtor lists general unsecured claims on Schedule E/F in the amount of $10,897. (Dkt. No. 27, p. 15). In addition, she lists a student loan balance of $106⅝605. Id. No evidence has been presented that the student loan is in default. The court regards it as an on-going obligation that the Debtor can pay just as she would pay other obligations that come due postpetition. The Debtor could easily fund a chapter 13 plan while remaining current on her ongoing nondischargeable student loan obligations and pay for her son’s tutoring.3 Moreover, the Debtor does not appear to owe any deficiency on her single-family home, so over the life of a chapter 13 plan she should be able to repay her general unsecured debts with ease. The excess monthly income of $2,312.77 is sufficient to pay back her general unsecured claims in five months. If she proposed a 36-month plan, she would be able to pay her general unsecured debt 100% for approximately $300 per month plus the chapter 13 trustee commission with substantial funds left over. 11 U.S.C. § 1325(b)(4)(B).
The Debtor has sufficient funds to pay her creditors. The court is not making a finding as to whether the student loan repayment or the tutoring payment are luxuries. It need not; as under the “totality of the circumstances”—that the Debtor has sufficient monthly income to pay her creditors—is enough to find abuse. She *692has surrendered her condominium and is no longer obligated to pay the expense disclosed on her means test related to the condominium. Money she saves because she is surrendering property is relevant in determining her ability to pay creditors for purposes of section 707(b)(3).4 See In re Demesones, 406 B.R. 711, 714 (Bankr. E.D. Va. 2008) (“A debtor’s intent to surrender property ... affects the debtor’s anticipated future expenses and is a factor in the totality of the circumstances.”); In re Dowleyne, 400 B.R. 840, 847 (Bankr. M.D. Fla. 2008) (“The Debtors’ expense claims for mortgage and utilities payments for the surrendered house are not allowable deductions.”); In re Maya, 374 B.R. 750, 754 (Bankr. S.D. Cal. 2007); In re Masella, 373 B.R. 514, 519 (Bankr. N.D. Ohio 2007).
It is an abuse of chapter 7 for the Debt- or—a relatively high-income individual making $115,000 per year—who could easily repay her unsecured creditors with her excess income to receive a discharge in chapter 7.
Conclusion
The Debtor will be given 14 days to file a motion to convert this case to a case under chapter 13, If no motion is filed in that time, the motion of the U.S. Trustee to dismiss this ease under section 707(b)(3) for abuse will be granted. A separate order will be entered consistent with this opinion.
ORDER
The Debtor, Monica L, Lowe, will be given 14 days to file a motion to convert this case to a case under chapter 13. If no motion is filed in that time, the motion of the U.S. Trustee to dismiss this ease under section 707(b)(3) for abuse will be granted.
. A motion to modify the stay on the condominium was granted on December 20, 2016. (Dkt. No. 42).
. Some courts have held otherwise, see, e.g., In re Nockerts, 357 B.R. 497, 506-08 (Bankr. E.D. Wis, 2006) (holding that "more than the ability to fund a chapter 13 plan” must be shown to dismiss a case under section 707(b)(3)(B)), but these courts are a minority, see, e.g. In re Boule, 415 B.R. 1, 5 (Bankr. D. Mass. 2009) (declining to follow Nockerts); see also In re Jensen, 407 B.R. 378, 383 (Bankr. C.D. Cal. 2009) (same, and noting that “the majority of courts and commentators” disagree with Nockerts); In re Parada, 391 B.R. 492, 498 (Bankr. S.D. Fla. 2008) (same).
. The Debtor has not explained why tutoring for her son is necessary but for the sake of the discussion herein, the court will consider it a necessary expense. In the event this case is converted to a chapter 13, the Debtor should be prepared to explain why she believes this is necessary for her son.
. Although the U.S. Trustee did not raise this issue in their pleadings, the court can dismiss a chapter 7 case sua sponte. 11 U.S.C. s 707(b)(1) ("on its own motion”); In re Gordon, 2011 Bankr. LEXIS 3848, at *16 (Bankr. D. Colo. Mar. 25, 2011). Further, section 707(b)(3) provides that when a court is determining abuse under paragraph (1), "the court shall consider the totality of the circumstance.” 11 U.S.C. § 707(b)(3)(B). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500160/ | OPINION
Thomas L. Perkins, United States Bankruptcy Judge
This matter is before the Court on the motion of the defendant, Michael W. Smith, to dismiss the First Amended Complaint filed by the plaintiff, A. Clay Cox, as Chapter 7 Trustee for the estate of Central Illinois Energy Cooperative (Co.-op).
A. Factual and Procedural Background
As alleged in the First Amended Complaint, the Co-op was created by a group of farmers in 2001 as an association formed under the Illinois Agricultural Cooperative Act (ACA), 805 ILCS 815/1 et seq., with a stated corporate purpose to construct and operate an ethanol facility to process its members’ corn into ethanol and other byproducts and to purchase and otherwise deal in the corn produced by its members. By definition, an agricultural cooperative association is a form of nonprofit corporation. 805 ILCS 315/2. Smith was one of the Co-op’s incorporators, was a director from its inception until December, 2007, and served as its president and general manager.
In 2004, the Co-op’s principals formed two additional entities, Central Illinois Energy, LLC (Opeo) and Central Illinois Holding Company, LLC (Holdco), as Delaware limited liability companies. Thereafter, Opeo undertook responsibility for constructing the ethanol plant, while the Coop undertook responsibility for constructing a grain handling facility adjacent to the ethanol plant property, which grain handling facility was necessary to supply corn to the plant to be processed into ethanol and related byproducts. Opeo entered into an agreement with Lurgi, Inc, to design and construct the ethanol plant. The Co-op entered into an agreement with Nostaw, Inc. to construct the grain handling facility. Smith was named general manager of both Opeo and Holdco. The Co-op owned the majority interest in Holdco, which was the sole member of Opeo. Both the ethanol plant side of the project and the grain handling facility side, which had separate sources of financing, experienced financial difficulties that led to the collapse of the entire project before it became operational. Opeo filed a voluntary bankruptcy petition on December 18, 2007. An involuntary bankruptcy petition was filed against the Co-op on May 1, 2009.
The First Amended Complaint includes seven counts. Each count focuses on a separate transaction or series of transactions engaged in by Smith resulting in a quantified loss allegedly suffered by the Co-op and/or its creditors. The total damages alleged in the seven counts is $4,567,914.
' The same general theory of liability against Smith is alleged in each count, that the transactions engaged in by Smith were in violation of his fiduciary duties of loyalty, good faith and due care that flowed from his status as the Co-op’s general .manager and a member of its board of *705directors. It is alleged in the First Amended Complaint that Smith owed those duties to both the Co-op and its creditors. This is a significant departure from the initial complaint which alleged only that the duties were owed to the creditors of the Co-op once the Co-op became insolvent or entered the zone of insolvency. The First Amended Complaint further alleges that Smith owed the same fiduciary duties to Opeo and Holdco and was thus burdened with a conflict of interest such that Smith and the other shared directors “operated the Co-op in a manner that was contrary to its best interests or those of its creditors and conferred benefits on Opeo and Holdco that they would not have received had Smith and the shared directors been fully independent.”
The initial Complaint, filed on April 19, 2011, alleged a single-count cause of action ¿gainst Smith for breach of fiduciary duties owed to creditors, focusing on certain payments made by the Co-op for the benefit of Opeo and Holdco, and on the sale of the Co-op’s assets in June, 2007, to Green Lion Bio-fuels, LLC (Green Lion). The initial complaint was eight pages long. The First Amended Complaint, thirty-seven pages long, was filed on May 18, 2016, following the substantial completion of discovery. While the filing of an amended complaint relatively late in this proceeding has given Smith the opportunity to raise issues of Illinois law relating to the fiduciary duties owed by directors and officers of an agricultural cooperative association as grounds for dismissal, these issues would have been necessary to address before trial in any event and will continue to be developed and refined as this litigation proceeds.
B. Analysis
1. General Principles of Law
The purpose of a Fed. R. Civ. P. 12(b)(6) motion to dismiss is to test the sufficiency of the complaint, not to decide the merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). When ruling on a motion to dismiss, the court must accept all well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in the plaintiffs favor. Park v. Indiana University School of Dentistry, 692 F.3d 828, 830 (7th Cir. 2012). Dismissal is proper only when the complaint lacks either a cognizable legal theory or fails to allege sufficient facts under a cognizable theory. Bielskis v. Louisville Ladders, Inc., 2007 WL 2088583 (N.D. Ill.)(citing Graehling v. Village of Lombard, 58 F.3d 295, 297 (7th Cir. 1995)).
Fed. R. Civ. P. 8, providing that the statement of a claim for relief shall be “short and plain,” does not require detailed factual allegations, “but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The complaint must contain enough facts to state a claim for relief that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007). The Seventh Circuit Court of Appeals has interpreted the Supreme Court to be saying only that at some point the factual detail in a complaint may be so sketchy that the complaint does not provide the type of notice of the claim to which the defendant is entitled under Rule 8. Airborne Beepers & Video, Inc. v. AT & T Mobility, LLC, 499 F.3d 663, 667 (7th Cir. 2007).
In his motion to dismiss, Smith asserts both alternative grounds for dismissal, that the complaint fails to allege a cognizable legal theory and that it is factually deficient. The general theory of liability asserted in all seven counts is well-*706established in Illinois, that directors and officers of a corporation occupy a fiduciary relation toward it. Shlensky v. South Parkway Building Corp., 19 Ill.2d 268, 278,166 N.E.2d 793 (1960). They are effectively charged with being trustees of the corporation’s business and property for the benefit of the shareholders. Dixmoor Golf Club, Inc. v. Evans, 325 Ill. 612, 616, 156 N.E. 785 (1927). The fiduciary duties include duties of loyalty and good faith. Patient Care Services, S.C. v. Segal, 32 Ill.App.3d 1021, 1029, 337 N.E.2d 471 (Ill.App. 1 Dist. 1975); Maercker Point Villas Condominium Ass’n v. Szymski, 275 Ill.App.3d 481, 484, 211 Ill.Dec. 809, 655 N.E.2d 1192 (Ill. App. 2 Dist. 1995). In addition to their fiduciary duties of loyalty and good faith owed to the corporation and its shareholders, directors must exercise in the management of corporate affairs the degree of care that prudent persons, prompted by self-interest, would exercise in the management of their own affairs. Stamp v. Touche Ross & Co., 263 Ill. App.3d 1010, 1015, 201 Ill.Dec. 184, 636 N.E.2d 616 (Ill. App. 1st Dist. 1993).
A cause of action against a director or officer for damages suffered by a corporation caused by a breach of a fiduciary duty is typically brought as a shareholder derivative action. A derivative action is brought by a nominal plaintiff on behalf of a corporation to seek relief for injuries done to the corporation. Caulfield v. Packer Group, Inc., 2016 IL App (1st) 151558, 404 Ill.Dec. 525, 56 N.E.3d 509, 517; Hale v. Chu, 614 F.3d 741, n.l (7th Cir. 2010). Once the corporation enters bankruptcy, however, any claims for injury to the debtor from actionable wrongs committed by the debtor’s officers and directors become property of the estate and the right to bring a derivative action asserting such claims vests exclusively in the trustee. Seidel v. Byron, 405 B.R. 277, 287-88 (N.D.Ill. 2009); In re Thinks, Inc., 529 B.R. 147, 187 (Bankr. W.D.Tex. 2015); In re RNI Wind Down Corp., 348 B.R. 286, 293 (Bankr. D. Del. 2006). A trustee has no standing, however, to bring a claim that is personal to a single creditor for damages suffered solely by that creditor. Fisher v. Apostolou, 155 F.3d 876, 879-80 (7th Cir. 1998).
2. Special Circumstances Duties to Creditors
It is a long-standing principle of Illinois common law that when a corporation becomes insolvent, the directors occupy a fiduciary relation towards the corporation’s creditors, so that assets may not be disposed of for less than fair value and if the directors are themselves creditors, they cannot receive any advantage or preference in the payment of their claims at the expense of other creditors. Atwater v. American Exchange National Bank, 152 Ill. 605, 613, 38 N.E. 1017 (1893). The fiduciary duties owed to creditors upon insolvency are referred tó as “special circumstances!’ fiduciary duties. Workforce Solutions v. Urban Services of America, Inc., 2012 IL App (1st) 111410, 364 Ill.Dec. 778, 977 N.E.2d 267, 284.
In his motion to dismiss, Smith contends that the special circumstances duties owed to creditors upon insolvency have never been imposed by any Illinois court upon an officer or director of an agricultural cooperative association, so that a cause of action premised upon a violation of those duties is not cognizable under Illinois law. He argues that the special circumstances duties have only been imposed with respect to for-profit corporations, never to nonprofit corporations, and that an agricultural cooperative association is more akin to a nonprofit corporation. Pointing out that, by statute, agricultural cooperative associations are shielded from *707any provision of law that conflicts with any provision of the ACA, Smith argues that the special circumstances duties conflict with that Act. Smith also argues that the special circumstances duties should not apply to agricultural cooperative associations as a matter of policy, given the remedial purpose of the statute to assist small farmers in order to protect the nation’s food supply as well as the extraordinary power granted to such associations to borrow money without limitation as to amount as provided by section 6(b) of the ACA. Smith argues that the power to incur an unlimited amount of debt implies that an agricultural cooperative association may operate at all times without consideration of the interests of its creditors, even when its liabilities exceed its assets.
In response, the Trustee, while acknowledging that the special circumstances fiduciary duties have never been extended to a cooperative association’s officers and directors by an Illinois court, argues that agricultural cooperative associations are more akin to for-profit corporations. He points out that section 31(a) of the ACA expressly provides that the “provisions of the general corporation laws of this State, relating to corporations for pecuniary profit, and all powers and rights thereunder shall apply to the associations organized hereunder, except where those provisions are in conflict with or inconsistent with the express provisions of this Act.” 805 ILCS 315/31(a). The Trustee contends that the Illinois Supreme Court would most likely apply the same special circumstances fiduciary duties that apply to the officers and directors of a for-profit corporation, to the officers and directors of a nonprofit agricultural cooperative association. The parties correctly recognize that when a federal court is confronted with a question of state law that the state’s highest court has not resolved, the federal court must predict how the state’s highest court would decide the issue, and decide it the same way. MindGames, Inc. v. Western Publishing Co. Inc., 218 F.3d 652, 655-56 (7th Cir. 2000).
To the extent that the parties may be assuming that officers and directors of Illinois nonprofit corporations do not owe the same fiduciary duties as officers and directors of for-profit corporations, they are incorrect as the same duties are owed without respect to the nonprofit status of the entity. Kelley v. Astor Investors, Inc., 123 Ill.App.3d 593, 597, 78 Ill.Dec. 877, 462 N.E.2d 996 (Ill.App.2d Dist. 1984); Mile-O-Mo Fishing Club, Inc. v. Noble, 62 Ill.App.2d 50, 57, 210 N.E.2d 12 (Ill. App. 5th Dist. 1965). The Illinois General Not For Profit Corporation Act of 1986 provides that directors and officers are subject to common law duties and responsibilities. 805 ILCS 105/108.85. Further, this Court is aware of no statutory provision or court opinion that indicates that the special circumstances fiduciary duties that apply to officers and directors of an Illinois for-profit corporation upon insolvency, would not apply equally to officers and directors of any Illinois nonprofit corporation upon insolvency. So the fact that agricultural cooperative associations are statutorily designated as nonprofit corporations is immaterial to the issue of whether special circumstances duties apply to officers and directors of such associations.
As correctly noted by the Trustee, Smith is not disputing that officers and directors of an agricultural cooperative association owe fiduciary duties to the association and its members. Smith only disputes that the Co-op’s insolvency triggered additional or shifting duties running in favor of the Co-op’s creditors. But the First Amended Complaint’s theory of liability is premised on the general allegation that *708Smith owed duties both to the Co-op and its creditors, a significant difference from the one-sided theory alleged in the initial complaint. It follows that even if Smith did not owe, as a matter of law, any duties to creditors, the complaint nevertheless states a plausible cause of action based on an alleged breach of his duties to the Coop, which duties Smith does not dispute. It should be emphasized that Smith makes no argument that the insolvency of the Co-op operated to eliminate any and all fiduciary duties. Smith’s position is only that the insolvency of the Co-op as an agricultural cooperative association does not, as a matter of law, trigger shifting or additional duties owed to creditors.
The trust fund analogy used to support the special circumstances duties to creditors upon insolvency, as articulated in early Illinois Supreme Court decisions that proscribe self-dealing by corporate directors, is framed as a general rule, not limited in application to certain kinds of business organizations. See Beach v. Miller, 130 Ill. 162, 22 N.E. 464 (1889); Roseboom v. Warner, 132 Ill. 81, 23 N.E. 339 (1890). The burden is on Smith to articulate a valid reason why the Illinois Supreme Court, if the issue came before it today, would carve out an exception for agricultural cooperative associations.
The common law fiduciary duties imposed on corporate directors arose from the recognition that directors are trustees of the corporation’s business and its property and are chai-ged with administering the corporate affairs for the common benefit of the shareholders and with exercising them best care, skill and judgment solely in the interest of the corporation and not for their own personal gain. Shlensky, 19 Ill.2d at 278,166 N.E.2d 793. The duties flow to the shareholders during solvency, rather than to creditors, because solvency affords collectibility to creditors, with the shareholders having the residual claim to the corporation’s equity value. In re Ben Franklin Retail Stores, Inc., 225 B.R. 646, 652-53 (Bankr. N.D. Ill. 1998) (applying Delaware law). The economic rationale for the “insolvency exception” is that the value of creditor contract claims against an insolvent corporation may be affected by the decisions of the managers, and since at that point the shareholder interest has no value, it is the creditors who occupy the position of residual owners. Id.
This is not to say, of course, that insolvency triggers a duty to liquidate or that the creditors become the sole or even the predominant constituency. As pointed out in Ben Franklin, insolvency does not shift the fiduciary duties solely to creditors. Rather, the directors still have an obligation to the community of interests, of which creditors are one part, to exercise judgment in an informed, good faith effort to maximize the corporation’s long-term wealth creating capacity. Ben Franklin, 225 B.R. at 654-55. Insolvency does not trigger a mandatory duty to liquidate the assets for the benefit of unsecured creditors; rather, the officers and directors may continue to pursue other avenues in a good faith attempt to regain solvency. In re RSL COM PRIMECALL, Inc., 2003 WL 22989669, *8 (Bankr. S.D.N.Y.).
This Court sees no reason why the full panoply of common law duties and rules that apply to for-profit and other nonprofit corporations should not, as a general matter, apply equally to agricultural cooperative associations, including the special circumstances duties that occur upon insolvency. Requiring officers and directors to consider the impact on creditors of a particular transaction or course of action when the entity is insolvent, is a normative rule tied to their position of authority, *709unrelated to the organizational nature of the entity on whose behalf they act. In addition, in this particular instance, the Co-op’s purpose was to construct and operate an ethanol production facility, a business model far-removed from the egalitarian purposes behind the ACA when it was conceived and adopted in the 1920’s. Contrary to Smith’s arguments, there is no justification for treating creditors of a business enterprise such as an ethanol production facility, less favorably, simply because an agricultural cooperative association wag involved in the project.
Moreover, the concept that insolvency triggers a “shift” in favor of creditors is now recognized by Delaware courts as primarily dealing with creditor standing to bring a derivative action, and does not give rise to new duties unique to creditors. “The fiduciary duties that creditors gain derivative standing to enforce are not special duties to creditors, but rather the fiduciary duties that directors owe to the corporation to maximize its value for the benefit of all residual claimants.” Quadrant Structured Products Co., Ltd. v. Vertin, 102 A.3d 155, 176 (Del. Ch.2014) (citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007)). Viewed in this light, it is apparent that the “special circumstances duties” owed upon insolvency are hardly different from the ordinary fiduciary duties owed during solvency. This is yet another reason why the Illinois Supreme Court would apply the same duties in the same way to all types of organizations, including agricultural cooperative associations.
Returning to Smith’s specific arguments, he focuses upon the ACA’s grant of power to agricultural cooperative associations to borrow money “without limitation as to amount of corporate indebtedness or liability,” 805 ILCS 31576(b), whereas the Illinois Business Corporations Act (BCA) empowers for-profit corporations to borrow, 805 ILCS 673.10(h), but, as he points out, the power is not expressly “without limitation as to amount.” This is a difference without a distinction. None of the statutory grants of borrowing power for Illinois for-profit corporations, nonprofit corporations and limited liability companies, contain any limitation or ceiling on the amount that may be borrowed. Each of these entities, like an agricultural cooperative association, has the power to borrow itself into insolvency if it can find a willing lender. Smith’s contention that the power to borrow granted to these other entities is somehow limited, based on the different language used in the ACA, a proposition for which Smith cites no case law, is not correct. His argument is based on a false premise and is readily rejected.
Smith also relies upon section 22 of the ACA which provides that “any provisions of law which are in conflict with this Act shall be construed as not applying to the associations herein provided for,” 805 ILCS 315/22, and section 31 of the ACA which provides that the provisions of the general corporation laws apply to agricultural cooperative associations “except where those provisions are in conflict with or inconsistent with the express provisions of this Act.” 805 ILCS 316731(a). Smith contends that the special circumstances fiduciary duties conflict with the policy, purposes and provisions of the ACA, the Coop’s nonprofit designation and the policy promoting the sale of farm products. He argues that the statutory provision empowering the associations to incur debt “without limitation” cannot be reconciled with extending the fiduciary duties to creditors..
These conflicts that Smith conjures are imaginary. As discussed above, the authority to borrow “without limita*710tion” gives an agricultural cooperative association no greater borrowing authority than other types of organizations. Neither is it reasonable to assume that the provision reflects a legislative intent to encourage such associations to borrow their way into insolvency so as to better fulfill their mission. Nor may it reasonably be construed as some sort of backhanded indication of an intent to insulate officers and directors from liability to creditors for breach of a fiduciary duty, while retaining the liability as to the association itself. (Why is it good policy to encourage management not to consider the interest of creditors during periods of insolvency?) Moreover, insolvency by itself would not impose strict liability upon the managers, as Smith seems to suggest. Liability follows only upon proof of breach of one of the duties resulting in a provable financial loss.1
This Court has little difficulty predicting that the Illinois Supreme Court is likely to hold that directors and officers of an agricultural cooperative association owe the same fiduciary duties to creditors upon insolvency that they owe to the association at all times without regard to solvency.
3. ACA Section 6(d)
Counts I through V of the First Amended Complaint each include the allegation that Smith’s conduct was in violation of section 6(d) of the ACA, which accords each association the power “[t]o make loans or advances to members' or stockholders and/or to their members or stockholders or to their producer patrons .805 ILCS 315/6(d). Those five counts allege transactions caused, directed or approved by Smith, whereby the Co-op’s funds were used to pay obligations owed by Holdco and Opeo, neither of which was a member, stockholder or producer patron within the scope of section 6(d), so that Smith’s actions were in violation of that provision.
Smith contends that the Trustee’s reliance upon section 6(d) is directly contradicted by section 6(i) of the ACA, which provides that agricultural cooperative associations, in addition to the specific powers listed in sections 6(a)—(h), have the power “to do each and everything necessary, suitable or proper for the accomplishment of any one of the purposes, or the attainment of any one or more of the. subjects herein enumerated, or conducive to or expedient for the interest or benefit of the association, and to contract accordingly ....” 805 ILCS 315/6(i). Smith argues that section 6(d) is properly construed as permissive rather than restrictive. He also argues that even if the Co-op advanced its funds on behalf of Opeo or Holdco, those financial decisions by themselves do not rise to the level of a fiduciary breach.
In response, the Trustee contends that section 6(d) is restrictive rather than permissive. He further contends that even if section 6(d) is permissive, the advances to Holdco and Opeo violated section 6(j) of the ACA, which prohibits agricultural cooperative associations from dealing in products, handling machinery, equipment or supplies, or performing services “for and on behalf of non-members to an amount greater in value” than it deals in, handles or performs for its members. 805 *711ILCS 315/6(j). The Trustee also alleges that a violation of a statute can be the kind of “special circumstance” that causes officers and directors to owe a company’s creditors fiduciary duties.
In reply, Smith asserts that the funds advanced by the Co-op for the benefit of Opeo and Holdco were in furtherance of the Co-op’s organizational purpose—to construct and operate an ethanol distillery that would purchase corn grown by the Co-op’s members and, as such, could not have been wrongful. Smith also contends that section 6(j) does not apply to the advancement of funds for the benefit of Holdco or Opeo. He also disputes the Trustee’s contention that, in addition to insolvency, violation of a statute is a special circumstance that triggers the extension of fiduciary obligations to creditors.
Counts I through V of the First Amended Complaint each allege the same theory of relief, seeking to impose personal liability on Smith for using Co-op funds to pay obligations of Holdco and Opeo. The theory of liability is for breach of the fiduciary duties of loyalty, good faith and due care owed by Smith to the Co-op and its creditors. Each count adequately identifies the particulars of the challenged transfers, including the exact amount of alleged damages. Each count contains the allegation that the Co-op was insolvent at the time the challenged transfers were made, which means that the special circumstances duty to creditors has been adequately pleaded, irrespective of whether the alleged violation of section 6(d) is an additional “special circumstance.”
Without considering the reference to section 6(d) of the ACA, each of Counts I through V alleges a recognized cause of action supported by sufficient factual allegations so as to meet the plausibility standard of Iqbal and Twombly. But has the Trustee tainted an otherwise properly pleaded cause of action by adding a reference to section 6(d) in each of the five counts? Has he pleaded himself out of court? Smith thinks so, but the Court disagrees.
Smith treats the additional allegation of section 6(d) as superseding the underlying cause of action, as if the Trustee’s theory of relief switched to one of strict liability for violating a statutory prohibition, so that if it could be established that the statute did not apply or was not violated then the entire claim would fail. Smith misreads the First Amended Complaint. Nowhere does the Trustee allege that section 6(d) creates a private right of action. Neither does he make that argument in response to Smith’s motion to dismiss. It is readily apparent that section 6(d) does not meet the requirements for implication of a private right of action. See Abbasi v. Paraskevoulakos, 187 Ill.2d 386, 391-96, 240 Ill.Dec. 700, 718 N.E.2d 181 (1999).
With good reason, the First Amended Complaint does not allege that Smith’s violation of section 6(d) gives rise to strict liability or amounts to negligence per se. In Illinois, only statutes designed to protect human life or property place higher burdens on violators so that a violation of such a statute is prima facie evidence of negligence. But a violation even of a safety statute does not constitute negligence per se. Id. at 394-95, 240 Ill.Dec. 700, 718 N.E.2d 181; Magna Trust Co. v. Illinois Cent. Ry. Co., 313 Ill.App.3d 375, 383, 245 Ill.Dec. 715, 728 N.E.2d 797 (Ill. App. 5 Dist. 2000). Under general principles of corporate law, where an act is expressly prohibited by a statute but liability for a violation is not expressly imposed on the officers or directors, the doing of the act does not make the officers or directors personally liable merely because the act is a violation of the statute. 3 Fletcher Cyc. *712Corp. sec. 1024. The Trustee’s assertion in his responsive memorandum of law that if it can be proved that Smith acted in violation of section 6(d), “that violation of a statute is a breach of Smith’s fiduciary-duties to the Co-op’s creditors,” is not correct, since the statute does not impose personal liability on the directors or officers.
So to what effect is the Trustee’s allegation in the First Amended Complaint of a violation of section 6(d)? As noted above, section 31 of the ACA makes all the non-conflicting provisions of the BCA applicable to agricultural cooperative associations. As provided by section 3.15 of the BCA, the fact that a corporation took an act that was beyond its powers may be asserted in a proceeding by the corporation, even if acting through a trustee, “against the officers or directors of the corporation for exceeding their authority.” 805 ILCS 5/3.15(b). Since Illinois courts hold that the violation of a statute, absent an expression of strict liability, is, at most, only evidence of negligence, the Trustee’s allegation of a violation by Smith of section 6(d) will be treated as akin to pleading evidence of a breach of a fiduciary duty. Since Counts I through V, even without the allegation of section 6(d), state a recognized and plausible cause of action, the reference to section 6(d) in those counts is in effect surplusage. Its inclusion in Counts I through V does not change or detract from the cause of action for breach of fiduciary duties, and it certainly does not render an otherwise properly pleaded claim dismissible. The Trustee has not pleaded himself out of court.2
It follows that the parties’ arguments about the apparent conflict between ACA sections 6(d) and 6(i), and the applicability of section 6(j), are premature. It is unnecessary to address those arguments in order to resolve the motion to dismiss. What role, if any, those provisions might play in determining whether Smith breached a fiduciary duty will be addressed in future proceedings.
4. ACA Section 15.8(a)
The next basis for dismissal asserted by Smith relates to section 15.8(a) of the ACA which provides immunity to directors from liability for damages resulting from the exercise of judgment or discretion, unless (1) the director is compensated more than $5,000 per year as a director, or (2) the act or omission involved willful or wanton conduct. 805 ILCS 315/15.8. Smith points out that the First Amended Complaint fails to identify whether the challenged conduct of Smith was done in his capacity as a director or as general manager of the Co-op. Recognizing that section 15.8(a) provides immunity only to directors, Smith contends that to the extent the Trustee’s claims relate to Smith’s conduct as a director, the First Amended Complaint fails to plead facts sufficient to negate the statutory immunity provided to directors.
In response, the Trustee, while acknowledging the issue raised by Smith’s dual status, asserts that Counts I through V and VII are directed to his conduct only as general manager, not as a director of the Co-op. As to Count VI, the Trustee states that the allegations concerning the sale of the Co-op’s assets to Green Lion demonstrate Smith was acting as the manager *713and not as a director, but also demonstrate that Smith was acting “outside his authority” as a director when he “personally sanctioned the sale of the Co-op’s grain handling facility to Green Lion.” The Trustee then proceeds to argue the merits of section 15.8, contending that Smith’s conduct is willful and wanton within the meaning of section 15.8(b).
Neither party considers that the statutory immunity accorded directors is an affirmative defense, which it undoubtedly is. Under Illinois law, affirmative defenses include any statute that prevents an otherwise valid claim from being recovered upon. 735 ILCS 5/2-613(d). A statutory immunity from suit or liability is an affirmative defense that must be pleaded and proved by the party seeking its protection. Sandholm v. Kuecker, 2012 IL 111443, ¶ 54, 356 Ill.Dec. 733, 962 N.E.2d 418.
In federal court, complaints need not anticipate defenses and attempt to defeat or plead around them. Complaints need not contain any information about defenses and may not be dismissed for that omission. Xechem, Inc. v. Bristol-Myers Squibb Co., 372 F.3d 899, 901 (7th Cir. 2004). Only in the unusual circumstance where a plaintiff pleads itself out of court, by admitting all the elements of an absolute defense, may a complaint that otherwise states a claim be dismissed, and even then only upon a motion for judgment on the pleadings under Fed. R. Civ. P. 12(c), not upon a motion to dismiss under Rule 12(b)(6). Richards v. Mitcheff, 696 F.3d 635 (7th Cir. 2012).
So Smith’s contention that the First Amended Complaint should be dismissed because it fails to negate the statutory immunity accorded to directors is without merit. It is not necessary at this time to address the merits of the arguments made by the parties concerning section 15.8(a) and (b) of the ACA. Moreover, in light of the Trustee’s characterization of his claims against Smith as being directed against Smith’s conduct as general manager, the Trustee may be willing to stipulate that he seeks no relief against Smith as a director, which would take section 15.8 off the table. If the Trustee is not willing to make that stipulation, it will remain an issue of fact to be proved at trial whether Smith was acting as a director or as general manager at any particular point in time with respect to each challenged transaction.
5. A General Allegation of Insolvency is Permissible
The final basis for dismissal asserted by Smith, directed only at Count I, relates to the timing of the Co-op’s alleged insolvency. Smith asserts that Count I alleges a breach of the special circumstances fiduciary duties owed to creditors upon insolvency, that the date of insolvency used by the Trustee is March 1, 2007, and that the advances made by the Co-op in Count I pre-date March 1, 2007, so that Count I fails to state a plausible claim given that the challenged transactions occurred before the special circumstances duty could have arisen.
Smith’s argument falters for two reasons. First, he ignores the duality of the theory of relief, as pleaded. The cause of action stated in each of the seven counts is the same: breach of fiduciary duties “owed to the Co-op and its creditors.” The duties of loyalty, good faith and due care exist at all times without regard to the entity’s solvency. The only change caused by insolvency is that the directors and officers must then take into account the interest of creditors as an additional constituency when making decisions and taking actions for and on behalf of the organization. Caulfield, 2016 IL App (1st) 151558, ¶ 42, 404 Ill.Dec. 525, 56 N.E.3d 509; Quadrant, 102 A.3d at 171-76. If, in *714fact, the transactions that are the subject of Count I occurred when the Co-op was solvent, then Smith was not obligated to consider the effect on the Co-op’s creditors, but he still owed the same duties of loyalty, good faith and due care to the Coop and its members. Count I adequately alleges a breach of those duties whether the Co-op was solvent or insolvent. Smith apparently, and incorrectly, assumes that a claim for a pre-insolvency breach is a distinct cause of action, separate from one for a post-insolvency breach.
All of,the elements of a claim for a pre-insolvency breach of the fiduciary duties are included within a claim for a post-insolvency breach, with the difference being the addition of the allegation of insolvency, which does not change the nature of the claim itself. For purposes of Fed. R. Civ. P. 12(b)(6), it is thus permissible for a plaintiff to include in a single count, combined allegations for breach of the fiduciary duties during periods of solvency and/or insolvency. Moreover, in light of the difficulty of establishing exactly when insolvency occurred, which is usually a matter of expert opinion, it would make no sense at the pleading stage to require a plaintiff to separate the alternatives based upon a supposition about the timing of the entity’s insolvency. The First Amended Complaint puts Smith on notice that the Trustee is asserting a breach of the fiduciary duties for pre-insolvency and post-insolvency conduct. That is all that is required at this stage.
Second, nowhere in the First Amended Complaint does the Trustee allege any particular date that the Co-op became insolvent. To the contrary, he alleges generally that the Co-op was insolvent at the time of each challenged transfer. The March 1, 2007 date of insolvency is the opinion of an expert accountant retained by the Trustee. That opinion, however, has never been adjudicated to be correct and has never been used by the Trustee in this adversary proceeding. It is not the law of the case and judicial estoppel does not apply. Thus, the Trustee, who has not even asserted that opinion in this adversary proceeding, is not bound by it. Smith’s reliance on the accountant’s opinion, at this stage of the proceeding, is misplaced. Moreover, to the extent it becomes relevant, the date or dates of the Co-op’s insolvency is an issue of fact not subject to determination upon a Rule 12(b)(6) motion. The Trustee’s general allegation of insolvency is sufficient at this stage.
C. Conclusion
Each of the seven counts states a claim against Smith for breach of fiduciary duties, duties owed at all times to the Coop and upon insolvency to the Co-op’s creditors as well. If a breach is proved, the Trustee has standing to recover damages that he can prove were caused by the breach and suffered by the Co-op itself and/or by the Co-op’s creditors. What effect, if any, the interest of creditors had or should have had on Smith’s decisions and actions post-insolvency remains to be determined at later stages of this proceeding. Smith’s motion to dismiss the First Amended Complaint will be denied and he will be given 21 days to answer.
This Opinion constitutes this Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion entered this day, IT IS HEREBY ORDERED that the motion to dismiss the First Amended Complaint filed by A. Clay Cox, Chapter 7 Trustee for the estate of *715Central Illinois Energy Cooperative, Debt- or, should be and hereby is DENIED.
IT IS FURTHER ORDERED that the Defendant, Michael W. Smith, shall file an Answer within 21 days.
. Exactly how and to what extent the interests of the various creditors were to be taken into account by Smith as the Co-op’s general manager remains to be decided in future proceedings. Case law indicates that the fiduciary duties even during insolvency are primarily directed at prohibiting preferential and fraudulent transfers and self-dealing by the managers. Prime Leasing, Inc. v. Kendig, 332 Ill.App.3d 300, 315, 265 Ill.Dec. 722, 773 N.E.2d 84 (Ill.App. 1 Dist. 2002); In re Joseph Walker & Company, Inc., 522 B.R. 165 (Bankr. D.S.C. 2014); In re Security Asset Capital Corp., 396 B.R. 35 (Bankr. D. Minn. 2008).
. Even if the Trustee included the reference to ACA section 6(d) in the First Amended Complaint with the belief that proof of a violation of that section would impose strict liability upon Smith, that mistaken belief is not grounds for dismissal so long as the allegations otherwise plausibly state a viable cause of action. A motion to dismiss tests the sufficiency of the complaint’s allegations, without regard to the plaintiffs perceptions about how he intends to argue his case as the litigation proceeds. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500161/ | OPINION
Mary P. Gorman, United States Chief Bankruptcy Judge
Before the Court are complaints to determine the dischargeability of debts in two separate adversary proceedings brought by AmeriCash Loans, LLC (“Am-eriCash”), against unrelated debtors, David C. Marquardt and Carlos K. Jones. AmeriCash claims that the loans made to Mr. Marquardt and Mr. Jones (together “Debtors”) before their bankruptcy filings should be excepted from each of their discharges because of misrepresentations made by each Debtor in obtaining the loans. Because AmeriCash failed to meet its burden of proof as to either Debtor, judgment will be entered against it and in favor of the Debtors in each proceeding.
I. Factual and Procedural Background
Because the same legal issues were raised in each of these proceedings, they have been consolidated for purposes of this Opinion. Each proceeding, however, arises from a distinct bankruptcy case and involves an independent set of facts.
A. David C. Marquardt
David Marquardt signed and filed his voluntary Chapter 7 petition on December 31, 2015. According to his Statement of Financial Affairs (“SOFA”) filed with his bankruptcy petition, Mr. Marquardt paid his bankruptcy attorney $1038 on June 26, 2015. In amended schedules, Mr. Mar-quardt listed an unsecured debt owed to AmeriCash in the amount of $1200 for what he reported was an October 2015 installment loan.
AmeriCash filed a Complaint Objecting to the Dischargeability of Indebtedness asserting that the debt owed to it by Mr. Marquardt was obtained by fraud and was therefore nondischargeable. Specifically, AmeriCash alleged that on November 14, 2015, Mr. Marquardt applied for and entered into a consumer loan agreement (“Agreement”) in the amount of $1200, which was paid out to Mr. Marquardt on December 7, 2015. AmeriCash claimed that by entering into the Agreement, Mr. Mar-quardt represented that he intended to repay the loan. AmeriCash further claimed that it justifiably relied on Mr. Mar-quardt’s representation and incurred damages when Mr. Marquardt failed to make any payment on the loan prior to filing bankruptcy. Attached to the complaint was the purported Agreement dated December 4,2015, containing the typewritten name of “David Marquardt” in the signature line.
Mr. Marquardt did not respond to the complaint and AmeriCash moved for an entry of default and default judgment, which was followed by its Amended Motion for Default Judgment, Entry of Default Order and Entry of Default Judgment Order (“Default Motion”). At a hearing on the Default Motion, the Court informed AmeriCash that it would not rubberstamp *718a default judgment, explaining that it had a duty to independently review the sufficiency of the evidence in support of the complaint. Noting that the only alleged misrepresentation AmeriCash claimed it relied on was Mr. Marquardt’s promise to repay the loan, the Court set an evidentia-ry hearing for August 9,2016.
Less than a week before the scheduled evidentiary hearing, AmeriCash filed an Amended Complaint Objecting to the Dis-chargeability of Indebtedness (“Marquardt Amended Complaint”), again alleging that by entering into the Agreement, Mr. Mar-quardt represented that he would repay the loan. The Amended Complaint also asserted that Mr. Marquardt made a false representation to AmeriCash regarding his intention to file bankruptcy, which AmeriCash claims made the debt nondis-chargeable under § 528(a)(2)(A). In an additional count, the Amended Complaint alleged that the debt was presumed to be nondischargeable under § 523(a)(2)(C)(II) because the loan was a cash advance aggregating more than $750 that was an extension of consumer credit under an open end credit plan obtained on or within 70 days before the order for relief under the Code.1 Attached to the Amended Complaint was a copy of the Agreement.
At the August 9th hearing, counsel for AmeriCash informed the Court that he was not prepared to put on evidence, stating instead that the Amended Complaint and attached documents spoke for themselves. The Court reminded counsel that it would not rubberstamp a default judgment and that he would need to present evidence to support AmeriCash’s allegations, including evidence of how AmeriCash justifiably relied on any representations made by Mr. Marquardt. The Court also questioned whether AmeriCash could proceed on its new claim made pursuant to § 523(a)(2)(C), as debts on payday loans are not included in the definition of an “open end credit plan” that would be entitled to a presumption under the subsection. AmeriCash was given an opportunity to brief the issue and all matters were reset for evidentiary hearing on October 11, 2016.
AmeriCash subsequently filed its Memorandum of Law in Support of Plaintiffs Motion for Default Judgment, conceding that the debt in question did not meet the statutory definition of an extension of credit under an open end credit plan as is required by § 523(a)(2)(C). AmeriCash maintained,’ however, that the elements of § 523(a)(2)(A) were met, arguing that Mr. Marquardt misrepresented his intention to file bankruptcy in applying for and entering into the Agreement.
At the October 11th evidentiary hearing on the Default Motion and Amended Complaint, AmeriCash offered testimony from Brenda Ferguson, AmeriCash’s branch manager in Springfield, Illinois. Ms. Ferguson testified that she is familiar with the application procedures for potential Ameri-Cash customers, and that as part of that process, such customers are required to make certain representations to Ameri-Cash, including whether they have filed or intend to file for bankruptcy protection. Information regarding whether an applicant has filed bankruptcy is confirmed by a *719search of the public records. Ms. Ferguson further testified that she had access to the customer files maintained by AmeriCash and she identified the Agreement related to Mr. Marquardt’s loan. She testified that, when a loan is made, the terms and conditions are reviewed with the borrower and that she had no reason to believe that the required procedures were not followed with respect to Mr. Marquardt. One term of the Agreement is a representation that the borrower has no intention of filing a bankruptcy petition.
Although she stated that she has access to AmeriCash files, Ms. Ferguson did not testify that she had reviewed Mr. Mar-quardt’s customer file or that she had personal knowledge of the circumstances of his loan application and approval. To the contrary, she admitted that her testimony was limited to what is normally done in the application process and not based on any knowledge whatsoever of what actually occurred in Mr. Marquardt’s case.
Ms. Ferguson was asked by the Court whether she had a copy of the Agreement with Mr. Marquardt’s actual signature on it. In response, she stated that he had applied online and that a customer service representative would have called Mr. Mar-quardt as part of the loan process and read the terms of the Agreement to him. AmeriCash’s attorney asserted that under Illinois law, electronic signatures are valid. When asked for any evidence that Mr. Marquardt had, in fact, signed the Agreement electronically, however, he produced no further documents or testimony.
At the close of testimony, the Agreement was admitted into evidence. Ameri-Cash’s attorney stated that he would rely on his previously filed memorandum of law and submitted no closing argument. Mr. Marquardt was present in the courtroom during the hearing but did not participate in the hearing.
B. Carlos K. Jones
Carlos K Jones and Tanika M. McCool filed their voluntary Chapter 7 petition on February 10,2016. According to the SOFA filed with their petition, Mr. Jones and Ms. McCool had paid their bankruptcy attorney $365 within one year before filing for bankruptcy, although the date of the payment was not indicated. They also listed an unsecured nonpriority debt owed to Amer-iCash in the amount of $720, which was described as a payday loan. Their schedules do not indicate when the debt was incurred.
AmeriCash filed a Complaint Objecting to the Dischargeability of Indebtedness against Mr. Jones (“Jones Complaint”). In the Jones Complaint, AmeriCash alleged that the debt owed to it by Mr. Jones was obtained by fraud and was therefore non-dischargeable under § 523(a)(2)(A) and (C). Specifically, AmeriCash alleged that, on December 21, 2015, Mr. Jones applied for and entered into a consumer loan agreement (“Agreement”) in the amount of $2500, representing to AmeriCash that he intended and was able to repay the loan. AmeriCash further claimed that it justifiably relied on Mr. Jones’ representations and incurred damages when Mr. Jones failed to make any payment on the loan prior to filing for bankruptcy. In addition to claiming that the debt was nondis-chargeable under § 523(a)(2)(A), Ameri-Cash also asserted that the debt was presumptively nondischargeable under § 523(a)(2)(C)(II) because it was a cash advance aggregating more than $750 that was an extension of consumer credit under an open end credit plan obtained on or within 70 days before the order for relief under the Code.2 Mr. Jones did not respond to the Complaint.
*720At an August 9, 2016 status hearing, the Court expressed the same concerns raised in the Marquardt proceeding about Ameri-Cash’s status as a payday lender and whether it would be able to proceed on a cause of action under § 523(a)(2)(C). The Court questioned whether a payday loan could be an “open end credit plan” as required to raise the presumption Ameri-Cash was relying on and provided Ameri-Cash’s attorney with citation to case law suggesting that the presumption could not apply to the loans. AmeriCash’s attorney responded by stating that a Chicago bankruptcy judge had recommended pleading the applicability of the presumption to its loan transactions because the allegations of misrepresentation it was making, based solely on a failure to pay, were otherwise insufficient to prevail. AmeriCash was given an opportunity to brief the issues and the matter was reset for evidentiary hearing on October 11, 2016.
AmeriCash subsequently filed its Memorandum of Law in Support of Plaintiffs Complaint Objecting to the Dischargeability of Indebtedness, conceding that the debt did not meet the statutory definition of an extension of credit under an open end credit plan that would entitle it to a presumption of nondischargeability under § 523(a)(2)(C). Still wishing to proceed under § 523(a)(2)(A), however, AmeriCash argued in its brief that Mr. Jones misrepresented his intention to file for bankruptcy protection in obtaining the loan. Attached to the memorandum were Mr. Jones’ January 12, 2016 credit counseling certificate, the portion of Mr. Jones’ SOFA indicating the prepetition payment to his bankruptcy attorney, and a copy of the purported Agreement dated December 21, 2015, containing the typewritten name of “earlos jones,” on the signature line. The Agreement included a representation that the borrower did not intend to file bankruptcy.
At the October 11th evidentiary hearing on the Jones Complaint, AmeriCash offered the testimony of Springfield branch manager Brenda Ferguson. As in the Mar-quardt proceeding, Ms. Ferguson testified that she was familiar with the application process for AmeriCash customers. She stated that when an application is received, AmeriCash runs a public records search to determine whether the applicant has filed a bankruptcy petition. In addition, Ms. Ferguson testified that when a customer applies for a loan online, they must check a box indicating that they do not intend to file for and do not have a pending bankruptcy. According to Ms. Ferguson, Amer-iCash relies on these representations. She stated that when a customer applies for a loan online, a representative of AmeriCash will follow-up with the customer by telephone and go over the loan terms with them. Ms. Ferguson testified that she has access to the files maintained for Ameri-Cash customers. She did not, however, testify that she had reviewed the customer file of Mr. Jones, and conceded that she had no personal knowledge as to the transaction between AmeriCash and Mr. Jones.
At the conclusion of the hearing, the Agreement was admitted into evidence but no other documents authenticating the electronic signature of Mr. Jones were presented. Although Ms. Ferguson testified that Mr. Jones would have checked boxes during the loan application process to make the representations AmeriCash allegedly relied on, no documents with any boxes to check were presented. Again, Am-eriCash’s attorney relied on his memorandum of law previously filed and offered no closing argument. Mr. Jones was not present at the hearing.
II. Jurisdiction
This Court has jurisdiction over the issues before it pursuant to 28 U.S.C. *721§ 1334. All bankruptcy cases and proceedings filed in the Central District of Illinois have been referred to the bankruptcy judges. CDIL-Bankr. LR 4.1; see 28 U.S.C. § 157(a). The determination of the dischargeability of a particular debt is a core proceeding. 28 U.S.C. § 157(b)(2)(I). These matters arise from the Debtors’ bankruptcies themselves and from the provisions of the Bankruptcy Code, and may therefore be constitutionally decided by a bankruptcy judge. See Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
III. Legal Analysis
A. Default Judgment Standards
The entry of default judgments is governed by Federal Rule of Civil Procedure 55, as made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7055. See Fed. R. Civ. P. 55; Fed. R. Bankr. P. 7055. A movant is not entitled to a default judgment as a matter-of right, even though a debtor is in default for failing to answer or otherwise respond to a complaint. AT & T Universal Card Servs. v. Sziel (In re Sziel), 206 B.R. 490, 493 (Bankr. N.D. Ill. 1997) (citing Wells Fargo Bank v. Beltran (In re Beltran), 182 B.R. 820, 823 (9th Cir. BAP 1995)); see also New Austin Roosevelt Currency Exch. v. Sanchez (In re Sanchez), 277 B.R. 904, 907 (Bankr. N.D. Ill. 2002) (citing Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001)). The granting of a default judgment lies within the sound discretion of the court. Merrill Lynch Mortg. Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir. 1990) (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1322 (7th Cir. 1983)).
This Court has previously discussed the entry of default judgments in the context of adversary proceedings in bankruptcy. See First Bankers Trust Co. v. Dade (In re Dade), 2012 WL 1556510, at *1 (Bankr. C.D. Ill. May 1, 2012). In Dade, the Court explained that in “bankruptcy, where a debtor has a presumptive right to a discharge, default motions should not be granted unless the movant demonstrates that its debt is nondischargeable as a matter of law.” Id. at *4 (citing Sanchez, 277 B.R. at 907 (citing Valley Oak Credit Union v. Villegas (In re Villegas), 132 B.R. 742, 746 (9th Cir. BAP 1991) (court must determine whether a plaintiff is entitled to judgment); Lovell v. McArthur (In re McArthur), 258 B.R. 741, 746 (Bankr. W.D. Ark. 2001) (noting that bankruptcy courts have taken a conservative approach and sometimes refrain from granting default judgment motions which deprive debtors of discharge)); Attorneys’ Title Ins. Fund, Inc. v. Zecevic (In re Zecevic), 344 B.R. 572, 576 (Bankr. N.D. Ill. 2006)). The policy underlying these decisions is to minimize the risk that lenders may coerce settlements or obtain default judgments against unrepresented and cash poor consumers, regardless of the merits of the complaint. See Sziel, 206 B.R. at 492; Mercantile Bank v. Canovas, 237 B.R. 423, 427 (Bankr. N.D. Ill. 1998). It is for that reason that the Court will enter judgment only if the evidence submitted establishes a prima facie case for nondischargeability. See Dade, 2012 WL 1556510, at *4; Canovas, 237 B.R. at 427.
As AmeriCash must establish a prima facie case for nondischargeability regardless of whether it seeks a default judgment or a judgment on the merits, the Default Motion in the Marquardt proceeding will be discussed with the Marquardt Amended Complaint and the Jones Complaint.
B. Nondischargeability Under § 523(a)(2)
AmeriCash has alleged that the debts owed to it by the Debtors are nondis-ehargeable on a mix of legal theories under *722§ 523(a)(2). Section 523(a)(2) provides in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
IÜ ‡ ‡ Üi
(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;
⅜ ⅜ ⅜ ‡
(C)(i) for purposes of subparagraph (A)- $ ⅜ ⅜ ⅜
(II) cash advances aggregating more than $925 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under- this title, are presumed to be nondischargeable; and
(ii) for purposes of this subpara-graph—
(I) the terms ‘consumer’, ‘credit’, and ‘open end credit plan’ have the same meanings as in section 103 of the Truth in Lending Act[.]
11 U.S.C. § 523(a)(2)(A), (C).
A party seeking to establish an exception to the discharge of a debt generally bears the burden of proving each element of the claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Exceptions to discharge are construed strictly against a creditor and liberally in favor of a debtor. Ojeda v. Goldberg, 599 F.3d 712, 718 (7th Cir. 2010); Goldberg Sec., Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992).
i. Presumption of ■ Nondischargeability— § 523(a)(2)(C)(i) (II).
As a preliminary matter, it is necessary to address AmeriCash’s asserted claim of presumed nondischargeability under § 523(a)(2)(C)(i)(II), which it now concedes is not applicable to either Debtor. In order for the presumption of nondis-chargeability to apply to a debt under § 523(a)(2)(A), not only must the debt arise from a cash advance aggregating more than $925 within 70 days before the case filing, it must also be an extension of consumer credit under an open end credit plan as that term is defined in section 103 of the Truth in Lending Act (“TILA”). 11 U.S.C. § 523(a)(2)(C)(i)(II), (ii)(I). TILA’s definition of an “open end credit plan” does not specifically refer to payday loans. Truth in Lending Act, Pub. L. No. 90-321, § 103, 82 Stat. 147 (codified as amended at 15 U.S.C. § 1602). Sections 1637 and 1638 of TILA, however, differentiate between open end credit plans and transactions other than.under an open end credit plan. See 15 U.S.C. §§ 1637-38. Section 1637 deals with open end consumer credit plans, while § 1638 encompasses all other consumer loans, including payday loans. See 15 U.S.C. §§ 1637-38; Brown v. Payday Check Advance, Inc., 202 F.3d 987, 991 (7th Cir. 2000). Open end consumer credit loans generally involve revolving credit lines such as credit cards. Brown, 202 F.3d at 991. Payday loans have fixed payment dates and thus are closed end transactions. See 815 ILCS 122/1-10; 815 ILCS 122/2-5(c). Payday loans are not open end credit plans as defined by TILA and are not entitled to any presumption of nondis-chargeability under § 523(a)(2)(C).
At the August 9th hearings held in both proceedings, the Court expressed concerns about AmeriCash’s asserted claims, including whether they were entitled to a pre*723sumption, of fraud under § 523(a)(2)(C). When asked for authority for treating the payday loans as open end credit plans, AmeriCash’s attorney’s only justification for the pleading was the alleged gratuitous advice of a Chicago bankruptcy judge. And despite the fact that the Agreements clearly provide that they are subject to the Illinois Payday Loan Reform Act, contain other disclosures required by both the Payday Loan Reform Act and § 1638 of TILA, and are unquestionably subject to both laws, AmeriCash’s attorney asserted that the loans in question were not payday loans because they were not given in exchange for a post-dated check. Only after being given an opportunity to research the issue and being required to submit a brief did AmeriCash concede that the loans were not open end credit plans under TILA and therefore not entitled to a presumption of nondischargeability under § 523(a)(2)(C).
Federal Rule of Bankruptcy Procedure 9011, provides that by presenting any pleading, motion, or other paper-to the court, an attorney certifies that “to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances[,] ... the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing, existing law or for establishing new law[.]” Fed. R. Bankr. P. 9011(b)(2). Very little research was required to confirm that loans subject to the Payday Loan Reform Act do not qualify as open end credit plans that would be entitled to the presumption created by § 523(a)(2)(C). The Court does not believe that AmeriCash’s attorney did any research prior to asserting the claims under § 523(a)(2)(C) in these proceedings and counsel’s comments at the August 9th hearings tend to justify that belief.
AmeriCash and its counsel are admonished that strict adherence to Rule 9011 is required. The debts for which AmeriCash seeks a determination of nondischargeability clearly do not fall within the presumption under § 523(a)(2)(C), and AmeriCash was never justified in pleading that the presumption applied.
ii Nondischargeability under 523(a)(2)(A).
In order to prevail on its § 523(a)(2)(A) claim, AmeriCash must prove that: (1) the Debtor made a false representation or omission which the Debtor either knew was false or which the Debtor made with reckless disregard for the truth; (2) the Debtor intended to deceive or defraud; and (3) AmeriCash justifiably relied on the false representation. See 11 U.S.C. § 523(a)(2)(A); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); Ojeda, 599 F.3d at 716-17.
As a starting point, it must be determined whether Mr. Jones or Mr. Mar-quardt even made the misrepresentations alleged by AmeriCash. In each proceeding, AmeriCash offered as evidence a copy of an Agreement containing a signature of an AmeriCash employee and the typewritten name of the Debtor. Under the Illinois Payday Loan Reform Act, all payday loan agreements must be in writing and signed by both parties. 815 ILCS 122/2-35(h). Each Agreement recites that it is subject to the Illinois Payday Loan Reform Act and therefore the Agreements are only enforceable if they were signed by both parties.
Because neither Agreement contained an actual signature of one of the Debtors, AmeriCash’s attorney asserted that electronic signatures are valid under Illinois law. That is true if, in fact, a document has been electronically signed. Under the Illinois Electronic Commerce Act, “[w]here a *724rule of law requires a signature, or provides for certain consequences if a document is not signed, an electronic signature satisfies that rule of law.” 5 ILCS 175/5— 120(a). And generally, “nothing in the application of the rules of evidence shall apply so as to deny the admissibility of an electronic record or electronic signature into evidence: ■ (1) on the sole ground that it is an electronic record or electronic signature; or (2) on the grounds that it is not in its original form or is not an original.” 6 ILCS 175/5-130(a).
Although neither Mr. Jones nor Mr. Marquardt responded to the allegations against them and have not challenged the admissibility of the Agreements, Am-eriCash is still required to lay a foundation for their authenticity, despite their admission at trial.3 See Fed. R. Evid. 901; see also Pearson v. United Debt Holdings, LLC, 123 F.Supp.3d 1070, 1073-74 (N.D. Ill. 2015) (failure to properly authenticate evidence is sufficient to preclude the court from considering it, even if the evidence would have been admissible but for the failure to authenticate (citing Estate of Brown v. Thomas, 771 F.3d 1001, 1005-06 (7th Cir. 2014)). “An electronic signature may be proved in any manner, including by showing that a procedure existed by which a party must of necessity have executed a symbol or security procedure for the purpose of verifying that an electronic record is that of such party in order to proceed further with a transaction.” 5 ILCS 175/5-120(b). This can be done through the testimony of a witness with knowledge. See Fed. R. Evid. 901,
AmeriCash called a single witness in each proceeding—Brenda Ferguson. Ms. Ferguson testified generally about the application process for obtaining loans. However, she provided no testimony, and AmeriCash offered no other evidence, of how electronic signatures are executed, verified, or maintained. Ms. Ferguson admitted that she did not personally review the applications or Agreements with either Debtor. And while she did state that she had access to customer files and records, she provided no testimony that she had reviewed or was familiar with the Debtors’ specific case files or records maintained by AmeriCash. Put simply, Ms. Ferguson’s testimony was unhelpful in determining whether the Debtors signed the Agreements and whether, in doing so, they made the alleged misrepresentations. She had no knowledge of whether either Debtor signed the Agreements and, apparently, she made no effort to find out what Ameri-Cash’s records might show about their signatures before she testified. In the absence of any evidence that either Debtor signed an Agreement, no finding can be made that either Debtor made the specific representations contained in the Agreements.
Of course, AmeriCash could have offered proof that the alleged misrepresentations were made by the Debtors through oral statements made on the phone or through the online loan application process. But AmeriCash failed to call any witnesses with actual knowledge of the application process for either Debtor and did not com*725pel either Debtor to attend the hearing to testify. Having offered no proof that the Debtors actually made the alleged misrepresentations, AmeriCash cannot prevail.
There are other problems with Ameri-Cash’s case. For example, even if there had been some proof that either Debtor had actually represented that he was not intending to file bankruptcy, such representations are generally not given much weight in proceedings such as these. In fact, courts in this circuit have held that a representation of having no intention to file bankruptcy is entitled to no weight in establishing the dischargeability of a debt. See I Need Cash, Inc. v. Powell (In re Powell), 2011 WL 5101753, at *4 (Bankr. C.D. Ill. Oct. 27, 2011) (Perkins, J.); In re Sasse, 438 B.R. 631 (Bankr. W.D. Wis. 2010). This is so because, regardless of its truth or falsity or the debtor’s intent, “it is tantamount to a prepetition waiver of the right to a discharge in bankruptcy.” Powell, 2011 WL 5101753, at *4; see also ■ Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th Cir. 1987) (it is against policy for a debtor to contract away the right to a discharge in bankruptcy).
Likewise, a promise to pay in the future is generally not the type of representation that can support a claim for nondischargeability. For purposes of determining dischargeability under § 523(a)(2)(A), a debtor’s representation must relate to a past or existing fact. Dade, 2012 WL 1556510, at *5 (citations omitted); Powell, 2011 WL 5101753, at *4. Ordinarily, a representation may not be based upon a failure to perform or an agreement to do or not do something in the future. Powell, 2011 WL 5101753, at *4. “Only where the debtor never intended to perform at the time he made the promise will the misstatement of intention constitute a fraudulent misrepresentation.” Id. (citations omitted).
AmeriCash contends that the Debtors misrepresented their intention to repay their loans in accordance with the terms of the Agreements. But “[a] broken promise to pay a debt does not, without more, render the debt nondischargeable.” Powell,. 2011 WL 5101753, at *5 (citation omitted). Rather, AmeriCash “must establish that at the time the loan was obtained there existed no intent on the part of the [D]ebtor to repay the debt.” Id. An intent to deceive may be established through direct evidence or inference. In re Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). The existence of fraud may be inferred if the totality of the circumstances presents a picture of deceptive conduct by the debtor that indicates he intended to deceive or cheat the creditor. Cripe v. Mathis (In re Mathis), 360 B.R. 662, 666 (Bankr. C.D. Ill. 2006); Shelby Shore Drugs, Inc. v. Sielschott (In re Sielschott), 332 B.R. 570, 572 (Bankr. C.D. Ill. 2005) (Lessen, J.).
AmeriCash’s allegations are essentially based on timing. In both cases, AmeriCash contends that the Debtors incurred the debt within the month or two preceding bankruptcy, which it suggests is indicative of the Debtors’ intent not to repay their loans. The only evidence it offered in either proceeding, however, was the testimony of Brenda Ferguson—which provided no insight into the Debtors’ subjective intent—and a copy of the Agreement, which, as discussed above, was not authenticated and will not be considered on the issue of misrepresentation. AmeriCash might have called the Debtors as witnesses or presented other evidence about the Debtors’ financial conditions from which the Court could have inferred fraudulent intent. But AmeriCash chose not to do discovery in either case and to present nothing more than it did. What was presented was wholly inadequate to establish fraud or misrep*726resentation and accordingly, AmeriCash cannot prevail.
Without an actionable misrepresentation, the issue of justifiable reliance by AmeriCash need not be reached. But for the sake of completeness, a brief discussion is merited. The standard for showing justifiable reliance is less demanding than that of reasonable reliance. Ojeda, 599 F.3d’ at 717. The Supreme Court has described justifiable reliance as requiring only that the creditor not “blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Field, 516 U.S. at 71, 116 S.Ct. 437 (internal quotation marks omitted). In other words, “a creditor has no duty to investigate unless the falsity of the representation would have been readily apparent.” Ojeda, 599 F.3d at 717 (citng Field, 516 U.S. at 70-71,116 S.Ct. 437). Whether a creditor justifiably relied on a debtor’s representation “is determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff.” Id. (citing Field, 516 U.S. at 71-72, 116 S.Ct. 437).
' AmeriCash is a payday lender, and payday lenders are in the business of providing loans to the insolvent. Such companies charge interest rates upwards of 400%, presumably based on the high-risk nature of the transactions. They make these loans based on little more than proof of income, and not on the strength of a credit report or financial statement. Payday lenders, like AmeriCash, are almost never justified in relying on a debtor’s assurances of repayment. See EZ Loans of Shawnee, Inc. v. Hodges (In re Hodges), 407 B.R. 415, 419 (Bankr. D. Kan. 2009). Ms. Ferguson testified that AmeriCash relies on the representations made by applicants when giving out a loan. But she did not explain how or, more importantly, why it is that Ameri-Cash relies on such representations. So, even were the Court to accept that the Debtors knowingly made false representations to AmeriCash with the intent to- deceive it, there is no evidence of reliance— let alone justifiable reliance—beyond Ms. Ferguson’s bald assertions.
IV. Conclusion
Because AmeriCash has failed to establish a prima facie case under § 523(a)(2) as to either Debtor, it is not entitled to recover on its Default Motion or on the merits of its claims in either proceeding.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
. The citation to the Code provision Ameri-Cash attempts to invoke is actually § 523(a)(2)(C)(i)(II). Moreover, AmeriCash cites the $750 figure that was applicable to cases commenced following the enactment of the BAPCPA in 2005. The dollar amounts set forth in § 523(a)(2)(C), however, are subject to regular adjustment pursuant to § 104, with $925 being the applicable amount at the time the Debtor filed his Chapter 7 petition. See Revision of Certain Dollar Amounts in the Bankruptcy Code, 81 Fed. Reg. 8748-01 (Feb. 22, 2016).
. See footnote 1 supra.
. In a bench trial, the "judge has the flexibility to provisionally admit testimony or evidence and then discount or disregard it if upon reflection it is entitled to little weight or should not have been admitted at all.” Bone Care Int'l, LLC v. Pentech Pharmaceuticals, Inc., 2010 WL 3894444, at *1 (N.D, Ill. Sept. 30, 2010) (citations omitted); see also Smith-Kline Beecham Corp. v. Apotex, Corp., 247 F.Supp.2d 1011, 1042 (N.D. Ill. 2003) (Posner, J.) ("In a bench trial it is an acceptable alternative to admit evidence of borderline admissibility and give it the (slight) weight to which it is entitled”), vacated upon rehearing en banc and affd on other grounds, 403 F.3d 1331 (Fed. Cir. 2005). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500162/ | FEDERMAN, Chief Judge
Debtor Michael Harris appeals from the Bankruptcy Court’s1 Order granting summary judgment in favor of the United States Department of Labor and declaring the Debtor’s debt to it nondischargeable pursuant to 11 U.S.C. § 523(a)(4). For the reasons that follow, we AFFIRM.
INTRODUCTION
The Department of Labor obtained a pre-bankruptcy judgment against the Debtor in the United States District Court, which found that, under ERISA, the Debtor breached his fiduciary duty when the company of which he was CEO failed to' remit funds withheld from its employees’ paychecks for their health insurance plan. The DOL sought to have that judgment debt declared nondischargeable as a debt for defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4). In granting summary judgment in favor of the DOL on its nondis-chargeability action, the Bankruptcy Court was required to determine that the Debtor committed defalcation, while acting in a fiduciary capacity, within the meaning of § 523(a)(4) of the Bankruptcy Code. As will be shown, that holding required the Bankruptcy Court to conclude: (1) that the health insurance premiums withheld from employee wages were held in trust by the employer until they were paid into the health plan (in other words, that there was a trust res); (2) that the Debtor himself was a fiduciary of that trust within the meaning of § 523(a)(4); and (3) that the Debtor’s decision not to remit withheld wages to the health plan constituted defalcation within the meaning of that statute.
STANDARD OF REVIEW / SUMMARY JUDGMENT / COLLATERAL ESTOPPEL
The BAP reviews de novo the bankruptcy court’s grant of summary judgment.2 Summary judgment is appropriate “only when all the evidence presented demonstrates that ‘there is no genuine issue as to any material fact and the mov*730ing party is entitled to judgment as a matter of law.’ ”3
The Bankruptcy Court here gave collateral estoppel effect to certain of the District Court’s factual findings in the ERISA case.
The binding effect of a former adjudication, often generically termed res judi-cata, can take one of two forms. Claim preclusion (traditionally termed res judi-cata or “merger and bar”) bars relitigation of the same claim between parties or them privies where a final judgment has been rendered upon the merits by a court of competent jurisdiction. Issue preclusion (or “collateral estoppel”) applies to legal or factual issues actually and necessarily determined, with such a determination becoming conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.4
Collateral estoppel bars relitigation of a factual issue if the following requirements are met: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment.5 The party seeking to apply collateral estoppel has the burden of proving that all four elements are present.6 “Collateral estoppel may only be applied if the party against whom the earlier decision is being asserted had a ‘full and fair’ opportunity to litigate the issue in the prior adjudication.”7
With regard to the thrée above-mentioned conclusions required for summary judgment under § 523(a)(4), we hold that the Bankruptcy Court did not err in giving collateral estoppel effect to the District Court’s findings that the funds withheld from the employees’ paychecks constituted a trust res and that ERISA imposed fiduciary duties upon the Debtor as to those funds. We further hold that the Bankruptcy Court did not err in concluding that the Debtor’s ERISA fiduciary duties satisfied § 523(a)(4)’s definition of a fiduciary. Finally, we hold that the undisputed facts support the conclusion that the Debtor committed defalcation while acting in that fiduciary capacity under § 523(a)(4).
THE UNDISPUTED FACTS
The parties filed an agreed statement of undisputed facts which were based largely on (were nearly identical to) the District Court’s findings in the ERISA case. As relevant here:
Faribault Woolen Mills Company was a blanket manufacturing company established in 1865. The Debtor became its CEO, President, and Board Chairman in 2001. He owned 0.3% or less of Faribault’s outstanding stock and had common stock options.
Faribault sponsored, and was the Plan Administrator for, a Health Plan to provide health insurance for its employees. The Health Plan contracted with Health-Partners Health Insurance Company to provide the healthcare benefits for the plan participants. The participants (em*731ployees) paid 100% of the premiums via payroll deductions. Faribault withheld the premiums from the paychecks and sent monthly payments to HealthPartners on the first of each month to provide coverage for that month. Faribault did not create a separate account to hold the deductions; rather, it held them in its general operating account from which other corporate expenses were paid.
Gary Glienke, Faribault’s Vice President of Human Resources, was responsible for receiving and rectifying the bills from HealthPartners for the health insurance premiums. He would then send the bills to Carla Craig, the Accounts Payable Administrator at Faribault. From January 2008 through April 1, 2009, the Debtor; Gleinke; and Faribault’s CFO, Carmen Dorr, all had signatory authority on the general operating account, payroll account, and other Faribault accounts,
Faribault’s payments to HealthPartners were untimely ten times in 2008, including two bounced checks, but the company was able to obtain extensions of time for payment, so coverage was not terminated. However, on January 27, 2009, Faribault issued a check, signed by the Debtor, to HealthPartners for $22,593.02 to pay the premiums owed for January 2009. That check also bounced.
In a letter dated February 28, 2009, HealthPartners informed Glienke that the January check had bounced and that it intended to cancel the Health Plan if Fari-bault did not pay in full. HealthPartners also sent letters to the Plan participants, informing them that Faribault had failed to remit the January premium payment. Since the Debtor was a Plan participant, he received that letter.
Meanwhile, on February 27 (the day before the bounced-check letters were sent), Faribault issued another check signed by the Debtor to HealthPartners for $19,466.91 to pay the February premium. HealthPartners returned that check to Faribault, along with a notice that Health-Partners would now only accept wire payments due to the prior bounced checks.
On March 26, the Debtor personally asked HealthPartners for an extension to pay the January and February premiums. HealthPartners denied that request and demanded full payment of the January and February premiums by March 31. It is undisputed that the total available to Fari-bault for payment to HealthPartners between March 26 and 31 was in excess of $70,000,8 but Faribault paid other expenses instead. It is also undisputed that, from that $70,000, the Debtor directed that Far-ibault make a March 30 payment of $4,000 to his American Express account, and a March 31 payment of $21,531.48 on his home equity line of credit.9
While this was happening, the Faribault Board, on March 27, 2009, voted to retain a turnaround consultant. Harris lost control of the company’s finances sometime after March 2009, and resigned as CEO in May 2009. The company was later liquidated.10
HealthPartners canceled the policy on April 1, 2009, retroactive to January 31, 2009, due to non-payment of the premiums. Faribault never remitted $55,040.61 it had withheld from the employees’ paychecks for insurance premiums from January 9 to March 20, 2009. Forty-two em*732ployees (and some of their families) were affected by the Plan’s cancelation.
On December 19, 2012, the Secretary of the Department of Labor filed a lawsuit against the Debtor, alleging he violated ERISA by failing to remit the' $55,040.61 in withheld healthcare premiums to HealthPartners. Specifically, the Secretary alleged that, by failing to remit the withheld premiums, the Debtor breached his fiduciary duty of loyalty to Faribault’s employees and their Health Plan in violation of ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A). Following a three-day bench trial, on November 9, 2015, the District Court for the District of Minnesota entered judgment in favor of the DOL in the total amount of $67,839.60 (which included pre-judgment interest), concluding that the Debtor violated his fiduciary duty of loyalty under ERISA by diverting the employee contributions to pay for corporate expenses and his own home equity loan.
The Debtor filed a Chapter 7 bankruptcy case on November 23, 2015. The DOL filed an unsecured claim for $67,839.60 based on the judgment. It also filed this nondischargeability action ' under § 523(a)(4). After both parties filed motions for summary judgment, the Bankruptcy Court granted the DOL’s motion for summary judgment at a hearing held on July 19, 2016,
NONDISCHARGEABILITY UNDER 11 U.S.C. § 523(a)(4)
Section 523(a)(4) excepts from an individual debtor’s discharge any debt “for fraud or defalcation while acting in a fiduciary capacity.”11 The exception to discharge under § 523(a)(4) is construed narrowly against the creditor opposing discharge.12
“The fiduciary relationship must be one arising from an express or technical trust, and, thus, the fiduciary relationship required under section 523(a)(4) is more narrowly defined than that under the general common law.”13 Although often created by contract, a trust relationship satisfying § 523(a)(4) can be created by statute,14 such as ERISA. However:
It is not enough [ ] that a statute purports to create a trust: A [statute] cannot magically transform ordinary agents, contractors, or sellers into fiduciaries by the simple incantation of the terms “trust” or “fiduciary.” Rather, to meet the requirements of § 523(a)(4) a statutory trust must (1) include a definable res and (2) impose “trust-like” duties.15
In addition, the debtor must be a trustee “before the wrong and without reference thereto.”16
Thus, as stated by the Bankruptcy Court, summary judgment in this ease turned on three questions: (1) was there a trust res?; (2) did the Debtor (as opposed to just the Faribault corporation) have fiduciary responsibilities with respect to that trust?; and (3) did the Debtor commit defalcation in directing that Faribault pay expenses other than the past due premi-*733urns in the last week of March 2009? We treat each question in turn.
Were Funds Withheld from Employee Wages Held in Trust?
In its ERISA judgment, the District Court found that the $55,000 in employee health insurance benefit premiums that were withheld from the paychecks were “plan assets” and that they became so as of the date on which the employees’ wages were paid (i.e., the date on which the employees’ contributions were withheld).17 There is no genuine issue of material fact as to the amounts withheld from wages and not paid over to the fund. The issue on this point is whether a trust was created in those “plan assets,” sufficient that fiduciary duties can be imposed under § 523(a)(4).
The Debtor relies primarily on In re Long18 and Hunter v. Philpott19 in support of his position that he was not a fiduciary under § 523(a)(4). In Long, the Eighth Circuit held that § 523(a)(4) only applies to trustees of express trusts, in the “strict and narrow sense,” and that corporate officers should not automatically be impressed with the corporation’s fiduciary responsibilities. Instead, the Eighth Circuit said, “[i]t is the substance of the transaction, rather than the labels assigned by the parties, which determines whether there is a fiduciary relationship for bankruptcy purposes.20
Hunter v. Philpott was a § 523(a)(4) case in which the debtor was an officer of a corporation which was contractually obligated to make payments to funds on behalf of employees, and thus found to have fiduciary obligations under ERISA. In that case, despite being a fiduciary under ERISA, the Eighth Circuit held that the officer could not be held liable as a fiduciary under the “strict and narrow” sense required under § 523(a)(4).21 The Eighth Circuit instructed courts to first “look specifically at the property that is alleged to have been defalcated to determine whether [the debtor-officer] was legally obligated to hold that specific property for the benefit of the Funds.”22 In other words, although the Eighth Circuit did not expressly say so in Hunter, the implication is that if there is no specific property—-no res—then there can be no § 523(a)(4) fiduciary duties imposed on the officer. In part because neither the corporation nor the debtor-officer in Hunter had a legal obligation to hold the employer contributions for the benefit of the plan (or employees), the debtor-officer was held not to have, fiduciary duties under § 523(a)(4).
Critically, Hunter v. Philpott did not involve funds that had been withheld from employee wages; rather, that case involved corporate contractual obligations to make the payments for the employees’ benefit.- Therefore, while the officer in Hunter v. Philpott may have been liable as a fiduciary under ERISA, he was not liable under § 523(a)(4).
Here, in contrast, Faribault had withheld the Health Plan premiums from the employees’ paychecks, and the District Court held that those premiums became “plan assets” as of the dates on which the employees’ paychecks were cut. In other *734words, in contrast to Hunter v. Philpott— where the corporation simply failed in its obligation to pay a bill for the benefit of employees—Faribault was holding funds that actually belonged to someone else— hence, the trust res—and it had a duty to use the employees’ money to make the premium payments. Consistent with this premise, there is a clear division in the bankruptcy cases as to whether a trust res is created, depending on whether the funds to be contributed have been withheld from employee wages, or are simply a debt of the company.23 Unlike Hunter, this case fits squarely with those cases holding that a trust is created when the employer withholds wages for payments to a plan providing benefits to employees. Therefore, in contrast to Hunter, a trust res was created here.
Was the Debtor a Fiduciary under § 523(a)(4)?
As stated above, funds withheld from an employee’s wages are held in trust by the employer, and ERISA imposes fiduciary obligations as to such a trust upon anyone 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.24 In contrast to § 523(a)(4)’s “strict and narrow” construction, under ERISA, the term “fiduciary” is to be broadly construed.25
The District Court here found that, under ERISA, the Debtor exercised authori*735ty or control respecting the management or disposition of the Health Plan premiums withheld from Faribault’s employees’ paychecks. The District Court said the question of fiduciary status does not hinge on whether an individual is intimately involved in—and exercises authority or control over—every financial matter within a company; rather, the relevant inquiry under ERISA is whether the individual “exercises any authority or control respecting management or disposition of [plan] assets.”26 The Debtor did, the Court held, exercise such authority and control. Therefore, the Debtor was found to be an ERISA fiduciary from at least January 1, 2009 to March 81, 2009. The question here is whether that statutory fiduciary status, imposed by ERISA, is sufficient to impose fiduciary duties on the Debtor for purposes of § 523(a)(4).
As stated, the Debtor, the CFO, and the Vice President of Human Resources all had signing authority on Faribault’s checking accounts. However, the Debtor concedes that, as CEO, he had the ultimate authority as to which bills to pay.27 The District Court found that the Debtor “was personally involved—and exercised his authority—in the decision not to remit employee withholdings to the Health Plan,”28 and that he “instead us[ed] those assets to pay corporate creditors and personal expenses.”29 And, the District Court found that the Debtor’s authority existed throughout the period in which funds withheld from wages were not remitted to HealthPartners.30 Because the issue of the Debtor’s authority and control over the employee withholdings during the relevant timeframe is (1) the same as that involved in the ERISA action; (2) was actually litigated; (3) was determined by a valid and final judgment; and (4) was essential to the prior judgment, collateral estoppel applies to those findings.31
Thus, the DOL established that, in the last week of March 2009, it was the Debtor who chose to pay other bills, rather than the premiums necessary to maintain health insurance coverage for the employees. The Debtor was the person who had ultimate responsibility to determine which bills would be paid out of the company’s scarce resources, and he exercised that authority to his own benefit. We conclude that the Bankruptcy Court properly held that the Debtor had fiduciary responsibilities with respect to funds that had been withheld from wages for payment to HealthPart-ners.
Did the Debtor Commit Defalcation as to the Health Plan Funds?
“Defalcation is defined as the misappropriation of trust funds or money held, in any fiduciary capacity; [and the] failure to properly account for such funds.”32 As the Debtor points out, and the DOL acknowledges, the Supreme Court held in Bullock v. BankChampaign NA,33 that defalcation under § 523(a)(4) requires a showing of intentional wrong.'
*736[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violate a fiduciary duty. That risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.34
As stated, while reckless conduct may be sufficient, it must be “reckless conduct of the kind that the criminal law treats as the equivalent.”35
As the DOL suggests, the District Court held that the Debtor breached his ERISA fiduciary duty when he “decided] not to remit the employee withholdings to HealthPartners,” and “instead us[ed] those assets to pay corporate creditors and personal expenses.” However, the District Court did not make any findings with regard to the standard of intent under § 528(a)(4). We therefore turn to the undisputed facts.
There is no dispute that the Debtor was informed in early March that the expected financing had fallen through. It is further undisputed that, by at least March 26, 2009, the Debtor knew that the January and February premium payments had not been made and. that HealthPartners had demanded full payment before March 31 or the Plan would be canceled. Indeed, on March 26, the Debtor personally requested an extension of the March 31 deadline to pay HealthPartners, and was rejected. Also, it is undisputed that between March 26 and March 31, over $70,000 was either transferred to other Faribault accounts or was used to pay creditors and expenses other than HealthPartners. Moreover, it is undisputed that the Debtor directed Dorr to pay his own home equity line of credit and other expenses instead of HealthPart-ners between March 26 and March 31.
The Bankruptcy Court held that such acts constitute an intentional misappropriation of trust funds, or at the least, a misappropriation of trust funds undertaken with conscious disregard to the substantial and justifiable risk that doing so would result in a breach of fiduciary duty of loyalty. The Court found that simply paying HealthPartners instead of other corporate expenses would have fulfilled that duty.36 In other words, the Debtor committed defalcation as that term is used in § 523(a)(4) when he knowingly failed to remit employee contributions to Health-Partners and instead knowingly used those funds to pay for other corporate expenses.
Raso v. Fahey (In re Fahey)37 is a post-Bullock case with facts similar to the ones *737here. There, the court concluded that the debtor had committed defalcation when he violated his duty of loyalty to an ERISA plan, explaining:
The Debtor does not dispute that he was aware of his obligations to the Funds, but nonetheless failed to remit the assets. Instead, the undisputed facts indicate that the Debtor prioritized the payment of corporate expenses that were beneficial to him ... over his obligations to the Funds. In so doing, he violated the duty of loyalty to the beneficiaries of the Funds ... [and] committed a defalcation within the meaning of 11 U.S.C. § 523(a)(4).38
The Debtor points out that' until late March, he did not know that the January and- February premiums had not been paid. He also points out that he personally borrowed over $900,000 from his home equity line of credit, apparently in an attempt to keep Faribault afloat. He also chose not to seek reimbursement of .over $31,000 in expenses at the end. And, he took only one paycheck in the first quarter of 2009. Furthermore, he was working hard at the end trying to find investors and, financing and, indeed, until early March, he believed he had obtained $12.5 million in financing, which would have fully paid all the premiums. The Debtor asserts that, as in In re Pottebaum,39 which held that there was no defalcation, he was only trying to keep the company afloat so everyone could get paid.
But the Debtor misses the issue, which is his state of mind between March 26 and March 31, when he chose not to pay approximately $55,000 to maintain the employees’ health insurance, despite having more than $70,000 available during that time. By then, the Debtor had been advised that the financing had fallen through and that HealthPartners would not grant Faribault an extension on payment. There is no genuine issue as to these facts.
Debtor also argues that there were not sufficient funds to pay the premium in full, so he chose to pay other bills instead. DOL responds by saying that, even if there were less than $55,000 available as' of March 26, whatever funds were there were being held in trust for the employees, and therefore should have either been used to pay the premiums due or returned to the employees. Between March 26 and 31, the Debtor knew that more than $55,000 of the funds in Faribault’s operating accounts were withheld from employee wages and did not belong to the company—yet, the Debtor chose to use those funds to pay personal and corporate expenses.
On a summary judgment motion, the burden on the moving party “is only to demonstrate, ie„ to point out ... , that the record does not disclose a genuine dispute on a material fact.”40 The non-moving party then must set forth specific facts showing a genuine issue of material fact for trial.41 “A fact is material if it might affect the outcome of the suit, and a *738dispute is genuine if the evidence is such that it could lead a reasonable jury to return a verdict for either party.”42 “A court considering a motion for summary judgment must view the facts in the light most favorable to the non-moving party and give that party the benefit of all reasonable inferences that may be drawn from those facts.”43 The bankruptcy court is not to weigh evidence and make credibility determinations, or to attempt to determine the truth of the matter, but is, rather, solely to determine whether there is a genuine issue of fact for trial.44 “Conclu-sional allegations and denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic argumentation do not adequately substitute for specific facts showing a genuine issue for trial.”45
The Bankruptcy Court held that the Debtor acted with “conscious disregard to a substantial and unjustifiable risk that his conduct [in not using the $70,000 to either pay the premiums or repay the employees] would violate a fiduciary duty.” Based on the undisputed facts, and based on the Debtor’s failure to offer a justifiable reason for his decision not to use the remain- . ing funds for the benefit of the employees for whom they were held in trust, the Bankruptcy Court properly concluded that there was no genuine issue of material fact as to his intent, and that DOL was entitled to judgment as a matter of law.
. The Honorable Michael E. Ridgway, United States Bankruptcy Judge for the District of Minnesota.
. Burk v. Beene, 948 F.2d 489, 492 (8th Cir. 1991); Jafarpour v. Shahrokhi (In re Shahrokhi), 266 B.R. 702, 706 (8th Cir. BAP 2001).
. In re Shahrokhi, 266 B.R. at 706 (citations omitted).
. In re Anderberg-Lund Printing Co., 109 F.3d 1343, 1346 (8th Cir. 1997) (citations and internal quotation marks omitted).
. Id.
. Id. (citation omitted).
. Statement of Uncontested Facts ¶ 56.
. Id. Faribault made another payment for the Debtor's benefit on March 27, in the amount of $1,500, but the Statement of Uncontested Facts does not expressly state that the Debtor personally directed that payment be made. Id.
.Id. at ¶¶ 44 and 49.
. 11 U.S.C. § 523(a)(4).
. In re Thompson, 686 F.3d 940, 944 (8th Cir. 2012).
. In re Shahrokhi, 266 B.R. at 707 (citing Tudor Oaks L.P. v. Cochrane (In re Cochrane), 124 F.3d 978, 984 (8th Cir. 1997), cert denied, 522 U.S; 1112, 118 S.Ct. 1044, 140 L.Ed.2d 109 (1998); Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875, 878 (8th Cir. 1985)).
. In re Nail, 680 F.3d 1036, 1039-40 (8th Cir. 2012).
. Id. (citation omitted).
. Id. at 1041 (citation omitted).
. Citing 29 C.F.R, § 2510.3-102(a)(l); Trs. of the Graphic Commc’ns Int'l Union Upper Midwest Local 1M Health & Welfare Plan v. Bjorkedal, 516 F.3d 719, 733 (8th Cir. 2008).
. 774 F.2d 875 (8th Cir. 1985).
. 373 F,3d 873 (8th Cir. 2004).
. In re Long, 774 F.2d at 878-89. .
. Hunter v. Philpott, 373 F.3d at 876.
. In re Pottebaum, 2013 WL 5592368 (Bankr. N.D. Iowa Oct. 9, 2013) (quoting Hunter v, Philpott, 373 F.3d at 875).
.Compare, In re Luna, 406 F.3d 1192, 1208 (10th Cir. 2005) (stating that the court was not inclined to hold that officers of a company with an ERISA-covered fund automatically become fiduciaries under the Bankruptcy Code); In re Hatpin, 370 B.R. 45, 50 (N.D. N.Y. 2007) (holding that the debtor did not bear fiduciary responsibilities with regard to unpaid employer contributions); In re Popovich, 359 B.R. 799, 806 (Bankr. D. Colo. 2006) (finding failure to make employer contributions was a breach of contract, but not a breach of fiduciary duty); In re Tsikouris, 340 B.R. 604, 617 (Bankr. N.D. Ind, 2006) (the promise to pay an employer's component of plan contributions creates just another debt); In re Engleman, 271 B.R. 3.66, 370 (Bankr. W.D. Mo. 2001) (no fiduciary duty as to employer obligations to contribute), with Chao v. Gott (In re Gott), 387 B.R. 17 (Bankr. S.D. Iowa 2008) (discussing the distinction between employer contributions and a failure to properly apply employee contributions or invest employee assets); Eavenson v, Ramey, 243 B.R. 160, 166 (N.D. Ga. 1999) (finding the debtor used employee contributions as general funds); Chao v. Johnson (In re Johnson), 2007 WL 646376, at *5 (S.D. Tex. Feb. 26, 2007) (finding the debtor permitted employee contributions to be commingled with corporate accounts); In re O’Quinn, 374 B.R. 171, 175 (Bankr. M.D. N.C. 2007) (finding debtor failed to apply amounts deducted from an employee’s paycheck toward ERISA plan insurance premiums); In re Weston, 307 B.R. 340, 343 (Bankr. D. N.H. 2004) (finding debt- or failed to adequately fund health plan with employee contributions); In re Gunter, 304 B.R. 458, 462 (Bankr. D. Colo. 2003) (amounts withheld from employee wages for pension funds were a res subject to fiduciary obligations); In re Coleman, 231 B.R. 393, 396 (Bankr. S.D. Ga. 1999) (fiduciary duty exists as to funds withheld from employee wages).
. 29 U.S.C. § 1002(21)(A) states, specifically;
(21)(A) Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent (i) he 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, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105(c)(1)(B) of this title,
. Consol. Beef Indus., Inc. v. N.Y. Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991).
. Findings of Fact, Conclusions of Law, and Order for Judgment, Case No. 12-CV-3136, attached as Exhibit 3 to Defendant's Notice of Hearing and Motion for Summary Judgment, ECF No. 11 at 25 (emphasis in original).
. See Appellant’s Brief at 4.
. Findings of Fact, Conclusions of Law, and Order for Judgment at 24.
. Mat27.
. Id. at 24.
. See Johnson v. Miera (In re Miera), 926 F.2d 741, 743 (8th Cir. 1991).
. In re Cochrane, 124 F.3d 978, 984 (8th Cir. 1997).
. — U.S. —, 133 S.Ct. 1754, 1759, 185 L.Ed.2d 922 (2013).
. 133 S.Ct. at 1759-60 (emphasis in original; citations omitted).
. 133 S.Ct. at 1759.
. See Stoughton Lumber Co. v. Sveum, 787 F.3d 1174, 1177 (7th Cir. 2015) (defining "gross recklessness” under Bullock as "knowing that there is a risk of serious harm and that it can be averted at reasonable cost, yet failing to act on that knowledge”).
.494 B.R. 16 (Bankr. D. Mass. 2013).
.- Id. at 21-22.
. 2013 WL 5592368 (Bankr. N.D. Iowa Oct. 9, 2013).
. City of Mt. Pleasant, Iowa v. Assoc. Elec. Cooperative, Inc., 838 F.2d 268, 273 (8th Cir. 1988) (internal quote marks, brackets, and citation omitted).
. Dico, Inc. v. Amoco Oil Co., 340 F.3d 525, 529 (8th Cir. 2003). See also Brunsting v. Lutsen Mountains Corp., 601 F.3d 813, 820 (8th Cir. 2010) (holding that the non-movant may not rest upon mere allegations of denials *738in its pleadings, but must set forth sufficient admissible evidence to create a genuine issue of material fact in order to avoid summary judgment).
.U.S. Bank Nat’l Assoc. v. U.S. Rent a Car, Inc., 2011 WL 3648225 at *3 (D. Minn. Aug. 17, 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
. Id. (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 578, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
. Williams v. Marlar (In re Marlar), 252 B.R. 743, 750 (8th Cir. BAP 2000) (citations omitted).
. Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500163/ | *745ORDER ON OPPORTUNITY FINANCE DEFENDANTS’ MOTION FOR DISMISSAL & REMAINING UNIQUE ISSUES
KATHLEEN H. SANBERG CHIEF UNITED STATES BANKRUPTCY JUDGE
This adversary proceeding is part of the Chapter 11 cases of Petters Company, Inc., and related entities. The history of these cases is well documented and, for the sake of brevity, will not be repeated here.1 The Opportunity Finance defendants,2 as well as WestLB3 and the Minneapolis Foundation, filed Motions to Dismiss containing numerous bases for dismissal.4 Many of those arguments have already been addressed by the Court.5 Most of the remaining bases for dismissal have been referred to as “Unique Issues”6 because they present questions unique to the particular parties in this adversary proceeding.7 This decision addresses all remaining bases for dismissal asserted by the Defendants.
Oral argument was presented on November 18, 2015, and the matters were taken under advisement.8 James A. Lo-doen, Adam C. Ballinger, and Mark D. Larsen appeared for Trustee Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC (collectively the “Plaintiff”). Joseph G. Petrosinelli and John R. McDonald appeared for the Opportunity Finance defendants. David E. Runck appeared on behalf of the Official Committee of Unsecured Creditors. Eric R. Sherman, Thomas Kelly, and Darryn Beckstrom appeared for defendant WestLB.
This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157(b)(1) & 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 *746U.S.C. § 157(b)(2)(H). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
This adversary proceeding and the main bankruptcy cases were reassigned when Chief Judge Gregory F. Kishel retired on May 31, 2016. The undersigned hereby certifies familiarity with the record and. determines that this matter may be addressed without prejudice to the parties in accordance with Fed. R. Civ. P. 63, as incorporated by Fed. R. Bankr. P. 9028.
Introduction
The Defendants filed their original Motions to Dismiss in March 2011.9 The original motions shared arguments in common with motions filed in other clawback adversaries. The Court addressed these common arguments in a series of memoranda decisions issued in the summer of 2013.10 In addition to those common issues, the parties in this adversary identified a number of issues unique to this adversary as grounds for dismissal.11
Both the Plaintiff and the Defendants filed their Statement of Unique Issues for adversary proceeding 10-4301 in May 2012.12 After the Plaintiff amended the complaint in response to the Common Issues rulings,13 the Minnesota Supreme Court issued its ruling in Finn v. Alliance Bank (“Finn”).14 The Plaintiff then filed a Third Amended Complaint (“Complaint”).15
The Court issued decisions on the impact of substantive consolidation and the effect of the Finn decision in May of 2016. Only the remaining unique issues need to be addressed. These unique issues are really 12(b)(6) arguments that the Plaintiff has failed to state a claim for relief.16
Discussion
I. Standing
In this case, the Plaintiff seeks to avoid transfers made by debtor-entities under 11 U.S.C. §§ 544(b) and 548, as well as recover other transfers as preferences under § 547. Section 544(b) empowers a trustee to step into the shoes of an actual unsecured creditor and utilize whatever state or nonbankruptey federal law remedies that particular creditor may have.17 Thus, to have standing under § 544(b), the Plaintiff is required to plead the existence of a creditor that would have standing to pursue fraudulent transfer claims under state law.18 Most of the Defendants’ F.R.C.P 12(b)(6) arguments center around the question of whether the Plaintiff has adequately pleaded his standing to prosecute an action against the Defendants. The rest concern the substance of the Plaintiffs allegations. The Court finds that the Plaintiff has sufficiently pleaded his standing to pursue claims under §§ 544(b) and 547, but not under §' 550.
*747The standing issues in this adversary are unique to the Defendants due to the corporate structure through which they engaged with Petters and his enterprise. The Defendants allege that they only dealt with PC Funding and SPF Funding, which were special purpose entities (“SPEs”). These two SPEs in particular were set up to be bankruptcy remote.19 What makes the SPEs bankruptcy remote is that they were corporate entities separate from PCI and they had no other creditors. By being removed from PCI, the Defendants were supposedly insulated from any failure of PCI.20 Also, since the SPEs would not have any other creditors, if the SPEs themselves were to fail and end up in bankruptcy, the Defendants would be insulated from fraudulent transfer liability since no other creditors could furnish a trustee with standing under § 544(b).21 Additionally, if there were no other creditors then, in theory, avoiding any transfer under §§ 547 or 548 would not benefit of the estate since the Defendants would be the sole creditor of the estate to whom the benefit would inure.22 Therefore, a trustee would not have standing under any Bankruptcy Code provision to pursue fraudulent transfer remedies.
In response to this corporate structure, the Plaintiff has propounded a number of legal theories that would give him standing to pursue claims. First, the Plaintiff argued that substantive consolidation provided him a creditor that would provide standing under § 544(b) by expanding creditor liability from PCI to the SPEs.23 The Court disagreed and held that substantive consolidation only consolidates the bankruptcy estates and does not reach back beyond the petition date to alter the debtor-creditor relationship between any parties under state law.24
a. PC Funding/SPF Funding have their own creditors that provide standing under § 5^(b)
The Plaintiff argues that PC Funding and SPF Funding have creditors other than the Defendants.25 The original complaint contained the allegation that “[a]t all times material hereto, there was and is at least one or more creditors who held and who hold unsecured claims against the Debtors that were, and are, allowable under the Bankruptcy Code § 502.”26 The Court ruled this was insufficient and the Plaintiff was directed to identify a creditor by name that would provide him with standing under § 544(b).27 In the Third Amended Complaint, the Plaintiff identified Interlachen Harriet Investments Limited (“Interla-*748chen”) as an unsecured creditor of both PC Funding and SPF Funding.28
In 2011, the Defendants argued that the Plaintiffs allegations that the SPEs had other creditors were conclusory recitations of the element of the cause of action.29 The Defendants further argued that the Plaintiffs conclusory assertion that Interlachen has a tort claim against each of Petters’ entities is unsupported by the allegations in the Complaint.30 The Third Amended Complaint does not resolve these deficiencies.
To properly plead standing under § 544(b), a plaintiff must allege facts that support a plausible inference that the creditor has an allowable claim against the debtor as of the petition date.31 The creditor’s claim must have allowed the creditor to avoid a transfer under nonbankruptcy law, in this case Minn. Stat. § 518.41 et. seq.32 (“MUFTA”). The allegations in'the Third Amended Complaint that Interla-chen filed a proof of claim against every Petters entity and that they have an allowed claim against the “PCI Debtors,”33 does not plausibly establish Interlachen could have avoided transfers made by the SPEs under Minnesota law.
First, the proof of claim does not establish the bases of the claims against the SPEs.34 This allegation does not plausibly allege that Interlachen had an allowable claim against either of the SPEs. The fact allegations in the Complaint detail how Interlachen lent to PCI and not to the SPEs.35 Absent from these allegations is an allegation that Interlachen had any lending or contractual relationship with the SPEs. At most, then, the Court could infer Interlachen may have a tort claim against the SPEs.36 But the fact allegations are not sufficient to allow the Court to draw this inference and the proof of claim does not supplement this theory.37 The Complaint contains an allegation that Interlachen’s claim is allowed against the *749“PCI Debtors.” The phrase “PCI Debtors” is defined as the substantively consolidated bankruptcy eases of most of the Petters’ entities. The fact that the claim was allowed against the consolidated estate says nothing about Interlachen’s non-bankruptcy claim for standing purposes.38 The Court cannot infer from the Complaint, or the proof of claim, that Interlachen would have an enforceable claim, tort or otherwise, under Minnesota state law.
Unless the Plaintiff pleads allegations that Interlachen has or may have a tort claim against the SPEs, the nature of that claim, and how the claim arose, no inference can be drawn that such a tort claim is allowable. Without those fact allegations and that inference, the Plaintiff has not established a plausible narrative for standing under § 544(b) for the tort creditor theory. The Court notes that if the Complaint did establish a plausible basis for a tort claim, it still would not resolve the standing issue for Counts 8,13, 19, and 23 which sound in Minn. Stat. § 513.45.
Under Minn. Stat. § 513.45, for a trustee to step into the shoes of a creditor, the creditor’s claim against the debtor must have arisen before the transfer to be avoided was made.39 According to the Complaint, Interlachen did not exist as an entity until February 2008 and did not lend to PCI until April 2008. However, the transfers that the Plaintiff now seeks to avoid were made as early as 1998 and as late as September 2008.40 The attachments to the Complaint, charting out the numerous transfers various Petters entities made to the Defendants, shows that some transfers were made after April 2008, but many were made prior to April 2008.41 Since Interlachen did not lend to PCI until April 2008, Interlachen cannot provide the Plaintiff with standing for pre-April 2008 transfers. Accordingly, Interlachen does not provide the Plaintiff with standing to prosecute Counts 8,13,19, and 23.
b. The Plaintiff has sufficiently pleaded his standing to pursue § 54J/.(b) claims under the insider reverse veil piercing doctrine
The Plaintiff asserts that he may “reverse pierce the corporate veil” between PCI and the SPEs to treat them as “one entity for all purposes stated herein and with respect to all causes of action pleaded herein...” and thereby has standing under § 544(b).42 Reverse veil piercing takes many forms and the Plaintiff did not specify on which form he relies. The Court will therefore review the forms of veil piercing in order to best characterize the Plaintiffs theory in order to determine its applicability.
Each form of veil piercing is essentially a disregard of corporate separateness.43 Whether to pierce a corporate veil is an issue governed by state law.44 Disregard of a corporate entity is an equitable remedy “generally ... not available, absent fraud.”45
*750The first and most common variety of corporate veil piercing is the vertical veil pierce.46 In a vertical pierce, a court pierces a limited liability entity’s veil to hold the entity’s principal liable for the entity’s obligations.47 Liability therefore extends from the limited liability entity to the entity’s principal.
In a reverse veil pierce,' either a corporate insider or a person with a claim against a corporate insider has the insider and the corporate entity treated as alter egos for' some purpose.48 There are therefore two distinct forms of reverse veil piercing, each characterized by whether, the party seeking to pierce a limited liability entity’s corporate veil is outside or inside the limited liability entity.
In an insider reverse veil pierce, a limited liability entity’s insider seeks to pierce the corporate veil so that the insider may use the entity’s claims against third parties.49 ,50 In Roepke, the Minnesota Supreme Court framed insider reverse veil piercing as a situation in which “we are not faced with a creditor attempting to pierce the corporate veil to reach an insider; instead we must consider an insider (or someone claiming through him) attempting to pierce the corporate veil from within the corporation. In this case the pierce is advocated so that the corporate shareholder and the corporate entity shall be considered one and the same.”51
In an outsider reverse veil pierce, a limited liability entity’s creditor seeks to hold the entity liable for the insider’s obligation.52 An outsider reverse veil piercing claim originates from outside the limited liability entity, with liability extending from the entity to the entity’s insider.
Finally, there is horizontal veil piercing, in which a limited liability entity is considered to be the alter ego of another limited liability entity with the same owner.53 In this situation, a creditor with a claim against one of the limited liability entities seeks to disregard corporate separateness between the entities to reach assets belonging to both.
Based on the facts alleged here, insider reverse veil piercing is the appropriate characterization for the Plaintiffs requested relief. The Court must next determine whether insider reverse veil piercing is an appropriate remedy under applicable law.
i. Insider Reverse Veil Piercing under Delaware and Minnesota Law.
PCI and PC Funding are Delaware corporations, while SPF Funding is a Minnesota corporation. Whether insider reverse veil piercing is an appropriate remedy under the facts of this case is an issué of first impression under Minnesota and Delaware law.
*751In the Eighth Circuit, the issue of whether to pierce a corporate veil is a legal determination governed by state law.54 When interpreting a state’s laws, federal courts are bound by decisions of that state’s highest court.55 When there is no state court precedent for the federal court to rely on, the federal court must predict how the state high court would rule.56 In doing so, the federal court should look' to intermediate state court precedent as persuasive authority.57 Thus, this Court’s task is to determine whether the high courts of Minnesota58 and Delaware59 would permit insider reverse veil piercing on the facts presented here.
Courts have found insider reverse veil piercing is an appropriate basis for relief for the same policy reasons that justify a “traditional” veil piercing claim.60 Like traditional veil piercing cases, equity is the overwhelming factor in determining whether insider reverse piercing is appropriate.61 Conversely, if injustice is not corrected by permitting reverse piercing, then it should not be allowed.62
1. The Delaware Supreme Court would allow insider reverse veil piercing ■ in an appropriate case.
The foregoing considerations align with the policy reasons articulated by Delaware courts in allowing vertical veil piercings. That said, disregarding corporate separateness is a remedy Delaware courts do not take lightly.63 While there is no case in which the Delaware Supreme Court has specifically permitted insider reverse veil piercing, there are many examples of veil piercing in Delaware case law.64 There is no'reason to believe the *752Delaware Supreme Court would not permit insider reverse veil piercing in an appropriate context as the Delaware Supreme Court stated in Adams v. Clearance Corp. that disregarding the corporate form “can always be done if necessary to prevent fraud or chicanery,.... ”65 In Sky Cable, LLC v. Coley, “the Court of Chancery of Delaware suggested ... that a reverse-pierce claim ‘might have prevailed’ had the claim been properly presented and supported.”66 Further, there are other Delaware cases indicating that insider reverse veil piercing may be available in certain circumstances.67
Permitting insider reverse veil piercing would serve the same policy goals which justify traditional corporate veil piercing. Delaware is a chartering jurisdiction, and therefore has strong policy reasons to prevent Delaware corporations from being used as vehicles for fraud.68 Indeed, “Delaware’s legitimacy as a chartering jurisdiction depends on it.”69 Lower courts permit piercing the corporate veil as a remedy for fraudulent use of the corporate form: “[veil piercing] may be done only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or where equitable consideration among members of the corporation require it, are involved.”70 In order to pierce the corporate veil under Delaware law, the corporate structure must cause “fraud or similar injustice. Effectively, the corporation must be a sham and exist for no other purpose than as a vehicle for fraud.”71 Here, the allegations of fraud are sufficiently pleaded. This Court therefore concludes that the Delaware Supreme Court would allow insider reverse veil piercing in order to remedy the type of Ponzi scheme alleged in this case.
2. The Minnesota Supreme Court would permit insider reverse veil piercing on the facts of this case.
Minnesota courts have allowed *753traditional veil piercing in many cases72 and insider reverse veil piercing in certain cases.73 As in Delaware, piercing the corporate veil is a remedy used “to avoid injustice or fundamental unfairness.”74 The same policy considerations applicable in Delaware also support an application of insider reverse veil piercing in Minnesota. In Matchan v. Phoenix Land Inv. Co., the Minnesota Supreme Court stated that: “[w]here a corporation has been organized and used as an instrument of fraud.. .courts will go as far as necessary in disregarding the corporation and its doings in order to accomplish justice. Such a corporation is a mere parasitic growth, a mass of fungus, which will be lopped off clean whenever necessary to sound results.”75 Declining to disregard corporate separateness between the SPEs and PCI would only serve to further Petters’ fraud. Therefore, this Court finds that the Minnesota Supreme Court would allow insider reverse veil piercing under the facts pleaded asserting fraud under Petters’ Ponzi scheme.
ii. The Plaintiff has adequately pleaded that insider reverse veil piercing as an appropriate remedy
In order to “state a ‘veil-piercing claim,’ the plaintiff must plead facts supporting an inference that the corporation, through its alter-ego, has created a sham entity designed to defraud investors and creditors.”76 Whether to pierce the corporate veil is primarily a question of fact.77 In determining whether it is appropriate to pierce a corporate veil, courts also examine “factors which reveal how the corporation operates and the particular defendant’s relationship to that operation.”78 These factors include whether the corporation was adequately capitalized for the corporate undertaking, whether the corporation was solvent, whether the dominant shareholder siphoned corporate funds, whether the corporation simply functioned as a facade for the dominant shareholder, and whether corporate formalities were observed, including whether dividends were paid, corporate records kept, and whether officers and directors functioned properly.79 In Minnesota, courts also consider whether innocent creditors are impacted by the reverse veil pierce along with other policy goals.80
The Court finds that the Complaint includes sufficient factual allegations to support the Plaintiffs request to pierce the corporate veil between PCI and the SPEs under the factors just stated. First, in its pleading of the Ponzi scheme, the Plaintiff has adequately alleged that the *754SPEs were not adequately capitalized, that the SPEs were insolvent, that PCI siphoned the SPEs funds, and that corporate formalities were not observed. The Plaintiff has plausibly alleged that PCI used the SPEs as a facade for PCI and that PCI and the SPEs were alter egos,81 how PCI and the SPEs participated in Petters’ fraud, and the damage caused by the fraud.
Next, the Plaintiff has alleged that PCI was the sole shareholder of both PC Funding and SPF Funding,82 which if proven, eliminates the possibility of any harm to innocent shareholders. The impact on creditors which would result from piercing the corporate veil between PCI and the SPEs does not on its face outweigh the other equitable considerations implicated by the alleged facts. The Plaintiff has sufficiently asserted the Defendants’ lack of innocence in the Complaint.83 If proven, the Plaintiff may be able to pursue a “subversion” basis of insider reverse veil piercing cases.84 The Complaint details that there were no legitimate underlying transactions to support the lending relationship between any Petters entity and the Defendants.85 Thus, the defendants’ expectations in lending to Petters were damaged at the point they parted with funds, because Pet-ters was running a Ponzi scheme and not the business he represented. As such there was no true separateness between PCI and the SPEs.86 Piercing the corporate veil does not damage creditor expectations.87 It would be unreasonable and illogical to hold that Opportunity Finance’s expectations of separateness would be the same irrespective of fraud. In sum, the Plaintiff has adequately pleaded facts that if proven would support an application of insider reverse veil piercing.
c. PCI made transfers directly to the Defendants
The last theory of standing proffered by the Plaintiff is that some transfers subject to avoidance were made by PCI directly to the Defendants and not to the SPEs. Based on this theory, one of PCI’s many creditors could provide the Plaintiff with standing under § 544(b) to bring claims on behalf of the PCI estate. The Plaintiff has adequately alleged the *755existence of such a creditor.88 The Plaintiff has also adequately alleged that PCI made transfers directly to the Defendants as Exhibit K to the Complaint contains a list of transfers allegedly made by PCI to International Investment Opportunity.89 Additionally, Exhibits N and 0 identify at least 13 transfers from PCI to either the Sabes Family Foundation or the Minneapolis Foundation, the dates those transfers were made, the amounts, and the underlying documents giving rise to the debts.90
The transfers included in Exhibits L and M cover transfers made by PC Funding to Opportunity Finance and its principals.91 The heading of that paragraph suggests that some of the transfers were made .by PCI, but the exhibit provides no detail on which transfers were made by PC Funding and which were made by PCI. This deficiency can be cured by amendment so dismissal with prejudice is not warranted.92 The list of transfers in the exhibits is not intended to be exhaustive.93 In the event the Plaintiff seeks to avoid additional transfers made directly by PCI the Plaintiff must tie those transfer back to PCI, consistent with this Court’s ruling in Common Issues II Ruling # 7A.94
d. The Plaintiff has not adequately stated a claim under § 550
The Complaint contains the allegation that “to the extent that [the Defendants are not an initial transferees of the SPE,] they are immediate or mediate transferees of the initial transferees.... ”95 In order to establish that the Defendants are liable under § 550, the Plaintiff must plausibly allege that the initial transfer from PCI fi^th.e SPEs is avoidable. Because the Plaintiff pleaded that the initial transfer is avoidable under an actual fraud theory, the Plaintiff must satisfy the heightened pleading standards of F.R.C.P. 9(b). The Complaint identifies the who— PCI to the SPEs,96 but the Complaint fails to establish what was transferred (whose money, how much), when it was transferred, how it was transferred, or why it was transferred (aside from furthering the fraud). The Plaintiff has therefore failed to sufficiently allege that the initial transfer from PCI to the SPEs is avoidable.
In terms of sufficiently pleading the subsequent transfers from the SPEs to the Opportunity Finance defendants, the Plaintiff has met his burden. He has largely followed the same formula previously approved by the Court in Common Issues II Ruling # 7A.97
*756
e. The Trustee has standing under § 547
The Defendants have also argued that the Complaint should be dismissed because the Plaintiff does not have standing under § 547.98 The theory is that a trustee can only avoid a transfer if avoiding the transfer benefits one of the debt- or’s actual creditors. By the Defendants’ logic, any avoidance of a transfer made to them would circle back and only benefit them since they are the only creditors of the SPEs. However, the plain language of § 550 permits a trustee to recover property or its value for the benefit of the estate. A creditor and the estate are not one and the same.99 For that reason, the Defendants’ argument fails. Secondarily, the Court has granted substantive consolidation of the respective Petters entities’ estates, which treats them all as a singular estate.100 Thus, any avoidance for the benefit of the SPE estates is for the benefit of the consolidated estate and many creditors’ claims will be satisfied out of that estate. This argument for dismissal has no merit.
II. Substantive Allegations
The remaining arguments for dismissal focus on the substantive allegations contained in the Complaint. The Defendants argue that the Complaint contains a number of deficiencies, which are discussed next.
a. Transferring fully encumbered property to satisfy the claim of a creditor, holding a lien on that property is not an avoidable transfer
To state a claim for avoidance under MUFTA, a plaintiff must allege that the debtor transferred an asset.101 Asset is defined as property of the debtor, excluding property that is subject to a valid lien.102 The Defendants argue that the Plaintiff has failed to state a claim to avoid fraudulent transfers made by the SPEs since the Complaint alleges the SPEs granted Opportunity Finance a lien on all of the SPEs’ assets.103 The Defendants point to these liens to support their argument that no property transferred by the SPEs qualifies as an asset under MUF-TA.104 For this argument to have any merit, the Defendants’ liens must be valid.
In Counts 1 and 2 of the Third Amended Complaint, the Plaintiff has added claims to avoid the incurrence of the debt obligation between the SPEs and Opportunity Finance as a fraudulent transfer.105 If the Plaintiff is successful on these claims, then he can overcome the definitional hurdle in Minn. Stat. § 518.41(2). The Defendants counter by asserting that avoidability and enforceability are not the same, which is correct. That an obligation is avoidable does not mean it is unenforceable.106 But the Plaintiffs claim for avoid-*757anee of the obligation incurred under Counts 1 and 2 is based on actual fraud. As the Court explained in the Effect of Finn decision, avoiding a transfer made in the course of a rolling Ponzi scheme as actually fraudulent necessarily implicates a finding that the debt obligation was not honestly incurred.107 If a debt is not honestly incurred then it would not be enforceable as a matter of policy under Minnesota law.108 If the obligation and liens are not enforceable then any transfer made in satisfaction of them would be an asset of the debtor, and would be included in § 513.41(2).
The Plaintiff does not have to prove the liens were invalid at this stage of the litigation in order to except the transferred assets from the definitional exclusion in MUFTA. The Plaintiff need only plausibly allege a claim to avoid the debt obligation and associated lien. Whether the claim is ultimately successful will be determined later. A complaint does not fail merely because the viability of one claim is predicated on the success of another.109 If the Plaintiff has properly pleaded the avoidance of the obligation, then he has properly stated a claim for Counts 1 and 2, as discussed below.
b. The Plaintiff has properly stated a claim under § 5⅛8
The Defendants make the same argument about lien avoidability and enforceability for the claims arising under § 548. The outcome is the same as it is for the § 544(b) claims. Unlike MUFTA, the Bankruptcy Code provides no statutory carve-out excepting property subject to a lien from the definition of debtor property. Instead, “[t]he nature and extent of a debt- or’s interest in property are determined by state law.”110 Thus the outcome on this issue under the Bankruptcy Code is the same as it is under MUFTA and. the Plaintiff has properly stated a claim under § 548,111
c. Pleading the avoidance of the obligation in Counts i & 2
The Defendants argue for dismissal of Counts 1 and 2 in the Third Amended Complaint for failure to state a claim.112 These two counts are for avoidance of the debt obligation the SPEs incurred by issuing promissory notes to Opportunity Fi*758nance as part of the Ponzi scheme.113 Count 1 arises under § 548 of the Bankruptcy Code and Count 2 arises under § 544(b) and MUFTA. Since both of these counts are based on actual fraud they are subject to the heightened pleading requirements of F.R.C.P. 9(b) and the “newspaper elements.”114
The Plaintiff has met his pleading burden for Counts 1 and 2 based on the rulings made in Common Issues II Ruling #7A.115 There the Court held that the Plaintiffs template of describing the scheme (how the particular defendant interfaced with the scheme, the number of note transactions, the interest rates, the total amount of the transfers, and the amount of false profits received) was sufficient to identify the transfers.116 Further, the Court explained “[tjhe details of the tie-back [into particular note transactions] are a subject for the discovery process.”117
This ruling is not altered by Finn v. Alliance Bank.118 The Defendants here, much like the Edgewater defendants in Common Issues II, advocate a standard whereby a plaintiff must plead all elements of the cause of action for each and every note transaction—over 700 of them—based on the “transfer-by-transfer” comment in the Finn decision. Aside from the redundancy this would cause, this kind of pleading is not necessary for actual fraud claims. The Court in Finn stated that the inquiry under a constructive fraud claim is a transfer-by-transfer analysis, since the plaintiff is required to plead a series of attendant circumstances (value, insolvency, etc.) that must exist at the time of every transfer in order to be actionable.119 This same logic is not applicable to actual fraud claims where the only attendant circumstance is the fraudulent intent of the trans-feror. A plaintiff is not required to copy and paste the allegations regarding fraud or the badges of fraud for over 700 note transfers when they all took place under the same (or highly similar) set of fraudulent circumstances.120
Though Counts 1 and 2 seek to avoid the incursion of the note debt, as opposed to repayment .on the note, the same logic from Common Issues II Ruling # 7A applies. In the Third Amended Complaint the Plaintiff has followed the same template described in the earlier decision.121 In addition to meeting the # 7A requirements the Plaintiff has also included a schedule of the note obligations to be avoided in Exhibit G for PC Funding and Exhibit H for SPF Funding.122
The fraudulent intent element required under each of these Counts has been adequately pleaded. Under Count 1, the Plaintiff can avail himself of the Ponzi scheme presumption for claims arising under the Bankruptcy Code, which will be addressed in detail below. As for the Count 2 claim arising under MUFTA, the Court has already addressed adequate pleading of the *759fraudulent intent element in Finn v. Alliance Bank.123 It is sufficient for a plaintiff to make fact averments supporting fraudulent intent and allege that the same set of circumstances applied to the remainder of the transfers. At trial, the Plaintiff will be required to prove that intent to defraud existed as to each transfer. Accordingly, the Plaintiff will be granted leave to amend the Complaint to comply with the rulings made in this order and in this Court’s May 31, 2016, order.124
d. Dismissal for failure to plead reasonably equivalent value
The Court thoroughly addressed the dispute over reasonably equivalent value under MUFTA, both as a matter of law and as a matter of pleading, in the Effect of Finn decision.125 The only remaining disputes concerning reasonably equivalent value are those arising under § 548. As with the MUFTA claims, the Defendants present two arguments for dismissal: first, the Plaintiff cannot allege that the transfers made by the SPEs lacked reasonably equivalent value due to the presence of a debt and security instrument.126 Second, if the Plaintiff is able to overcome this hurdle, he has not sufficiently alleged lack of reasonably equivalent value to state a claim under F.R.C.P. 8.127
The parties disagree on whether Minnesota law or federal law governs the question of value exchanged. The disagreement is irrelevant since the outcome under either legal standard is the same.
The matter of reasonably equivalent value in these clawback cases has been split into two component parts: principal, on the one hand, and interest or false profits, on the other. In Common Issues III the Court ruled that transfers made in repayment of the interest component of a debt within the context of the Petters scheme were not per se reasonably equivalent value under Scholes v. Lehmann128 and that the Plaintiff could proceed with his constructive fraud claims.129 The ruling on reasonably equivalent value in the Effect of Finn decision does not differ in its outcome.130 There the Court explained “Finn itself does not bar the Plaintiff here from maintaining suit in avoidance on the grounds of constructive fraud; it cannot be said that reasonably equivalent value matched to a Debtor’s transfer, as a matter of law.... There is still a viable theory for an equitable override that denies value to the interest component of repayment on debt owing by the perpetrator of a Ponzi scheme, incurred in transactions in the main sequential operation of the scheme, in an action for avoidance under MUF-TA.”131 The only impact the Finn decision had on the original rulings is the availability of the Ponzi scheme presumption to get from the start point to the end point. In the Effect of Finn decision, the Court explained that instead of relying on the existence of the scheme, the Plaintiff had to *760plead the two-stage rolling fraud in order to implicate the rationale from Scholes v. Lehmann, which formed the basis of the decision in Common Issues III. Thus, under both federal and state law the Plaintiff is not barred from pleading that the transfers for interest were for less than reasonably equivalent value.
The Plaintiff also seeks to recover principal under a constructive fraud theory.132 Citing Scholes v. Lehmann, the Plaintiff argues that only innocent investors would be entitled to a restitution claim in an amount equivalent to principal invested.133 According to the Plaintiff the Complaint has sufficiently alleged that the Defendants lacked good faith and therefore would not be entitled to a restitution claim.134 If the Defendants would not be entitled to a restitution claim, then repayment of principal, later recast as restitution, is not reasonably equivalent value as a matter of law and the Plaintiff could pursue his constructive fraud claims to avoid the principal component of the transfers. The Defendants do not challenge this position for its reasoning, only in how it was pleaded.135 The Court finds that the pleading for the theory is valid under § 548 and is consistent with the Court’s previous rulings.136 Further, the Plaintiff has brought two claims to avoid the incur-rence of the debt in the first instance. If the Plaintiff is successful on those claims then any repayment on those debts does not fall into the per se category of transfers for reasonably equivalent value.137 Under either theory the Plaintiff can pursue constructive fraud claims for the avoidance of repayment of investment principal.
e. The availability of the Ponzi scheme presumption as a pleading device
The availability of the Ponzi scheme presumption is one of the most significant issues in this adversary proceeding. The Defendants argued that it was not available under MUFTA or the Bankruptcy Code as a method of pleading fraudulent intent, insolvency, or lack of reasonably equivalent value.138 The Defendants’ position is that the Complaint has failed to state a claim since the Plaintiff improperly relied on the presumption to allege required elements for a number of his claims. The Court has addressed this argument as it pertains to the § 544(b) and MUFTA claims in the Effect of Finn decision.139 The Court now addresses the role the Ponzi scheme presumption plays in pleading the Plaintiffs § 548 claims.
The Ponzi scheme presumption is generally defined as an evidentiary device, a substitute for other proof of some fact.140 A presumption works on an if-then basis: if a party can prove a scheme existed then the fact finder can presume the secondary fact *761must have been true as well.141 The presumption does not apply at the pleading stage, however, because a plaintiff is not required to prove anything at the pleading stage.142 A plaintiff is only required to make fact allegations that must be taken as true on a motion to dismiss.143
In order to survive a motion to dismiss, a plaintiff must allege facts, that plausibly demonstrate entitlement to the relief requested. The standard under Twombly “simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence” to support the allegations.144 The act of describing a Ponzi scheme in a complaint, its existence and methodology, will frequently cover all the elements of the cause of action.145 The complaint must set forth facts to establish (1) the existence of the fraudulent scheme, and (2) that the transfer in question was part of that scheme.146 In describing the scheme, the plaintiff must show that thé scheme was fraudulent, that the purveyor never had enough capital on hand to satisfy the outstanding debt due to the nature of the operation, and that the scheme never received any “value” from its creditors because the debts were never enforceable and repayment of the debt only served to perpetuate the scheme. This Court reiterates the requirements it set forth in the Effect of Finn decision. Here, the Plaintiff has sufficiently pleaded these facts, satisfying those requirements.147
The element of fraudulent intent poses a unique question in this particular case and will be addressed separately. The ruling here is limited to the pleading requirements. Determining the viability of the presumption as an evidentiary device for proving facts at trial is premature.
f. The Plaintiff has sufficiently pleaded that the SPEs transferred funds with fraudulent intent
The next basis for dismissal presented by the Defendants is that, as a matter of law, the SPEs could not have formed the requisite fraudulent intent to support the Plaintiffs actual fraud claims.
Under Minn. Stat. § 513.44(a)(1) a transfer is avoidable as to a creditor if the transfer was made with the intent to hinder, delay or defraud any creditor of the debtor, whether or not the creditor’s claim arose before or after the transfer was made. A “creditor” is defined as a “person that has a claim.”148 “Claim” is defined as “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”149 Based on the plain language of the statute, if a debtor has the intent to defraud some future creditor that later gained a right to *762payment, even if that right is disputed, then the statute’s requirements are satisfied. Here, the Plaintiff has alleged that Interlachen had a claim against the SPEs (which can be amended). Further, the Plaintiff has alleged creditor liability between PCI and the SPEs through the insider reverse veil pierce theory. The Plaintiff has sufficiently pleaded these theories to have standing to pursue claims under MUFTA.
The Defendants assert that the language in 11 U.S.C. § 548(a)(1)(A) is ‘'substantially the same” to the language in MUFTA.150 This Court disagrees. There are significant differences in the language between the two statutes. A claim for actual fraud under § 548(a)(1)(A) allows a trustee to avoid any transfer made with the actual intent to hinder, delay, or defraud any entity to which the debtor was or became indebted. First, unlike MUFTA, the § 548 language does not require the existence of a creditor at the time of the transfer in order to avoid the transfer.151 Second, the plain language of the statute does not require that the debtor intended to defraud a creditor but instead “any entity to which the debtor was or became indebted.”152 Again, this means that even if there is no creditor at the time of a transfer that a trustee seeks to avoid, the trustee is not barred from pursuing the claim. A trustee needs to allege that when the transfer was made, the debtor had the intent to defraud a party to whom the debtor owed or would later owe a debt. Here, the Plaintiff has alleged that SPF Funding153 owed debts to Opportunity Finance, the Sabes Family Foundation, and the Minneapolis Foundation.154 The Plaintiff has also alleged that SPF Funding made transfers for the sole purpose of perpetuating the fraudulent scheme.155 Thus, for example, when SPF • Funding made a transfer to the Sabes Family Foundation and SPF Funding owed Opportunity Finance on an existing note, or Opportunity Finance entered into a new note transaction, Opportunity Finance would qualify as “any entity to which the debtor was or later became indebted.” It is plausible that the SPEs had the fraudulent intent at the time the transfers were made to meet the requirements of§ 548(a)(1)(A).156
The Court previously addressed the Defendant’s arguments that a debtor cannot defraud creditors by repaying an antecedent debt. The Finn v. Alliance Bank decision does not abrogate those rulings under *763the Bankruptcy Code and the Plaintiff has adequately pleaded avoidance of those obligations.157 Further, to the extent the Defendants continue to maintain that the Plaintiff has not adequately pleaded fraudulent intent; those arguments are not persuasive as determined in the Court’s Common Issues II Ruling # 7C. The Complaint here is sufficiently similar to the Court’s rulings in Common Issues II Ruling # 7C that the Plaintiff has adequately pleaded badges of fraud.158
g. Dismissal of lien avoidance claims
Count 24 of the Complaint is a claim asserted against all Defendants for lien avoidance under 11 U.S.C. § 506(d).159 The Plaintiff originally agreed to dismiss this claim but then reasserted it in the Third Amended Complaint.160 The Defendants argue that the Plaintiffs claim must be dismissed because a lien cannot be avoided if no proof of claim has been filed and they have not filed a proof of claim.161 There is a split of authority over whether a proof of claim must be filed before a lien can be avoided under this provision.162 The Court does not need to address that split in authority now. In order to plead that a lien is void under § 506(d), a plaintiff163 must allege that the creditor’s claim against the debtor, which the lien secures, is not an allowed secured claim and has not been disallowed for specifically enumerated reasons.164
165 That has not been done here. The Complaint contains no allegations regarding whether any of the Defendants’ claims have been allowed or disallowed, or the reasons, if any, for the disallowance. The allegations contained in Count 24 are conclusory. Therefore, the Plaintiff has failed to allege facts supporting an essential element of the claim and Count 24 must be dismissed for failure to state a claim.
g. Unjust enrichment
The Court adopts the reasoning in Common Issues III Ruling # 12 for dismissing the unjust enrichment claims in *764the Third Amended Complaint.166 The unjust enrichment claim still fails as a matter of law. If the claims giving the Plaintiff standing to pursue avoidance of transfers made directly by the SPEs fail, then the Plaintiff, as trustee of those estates, would be without an adequate remedy. However, the unjust enrichment claim would not inure to the estate, but to the creditors of the estate—the parties affected by the lack of an adequate remedy. Since the Plaintiff does not have standing to pursue general claims of creditors (as discussed above) and only property of the estate, he would not be permitted to pursue the unjust enrichment claim in this case. Thus, the claim for unjust enrichment must be dismissed.
III. West LB Defendants’ Unique Issues
WestLB filed its own Motion to Dismiss in this adversary proceeding.167 The Court addressed many of the issues raised in WestLB’s motion in the Common Issues order and in other rulings, To the extent that WestLB’s liability was affected by Opportunity Finance’s Motion to Dismiss, WestLB filed joinders to the briefing on the other Unique Issues. The rulings previously made on those Unique Issues also apply to WestLB’s Motion and the litigation against them going forward.
WestLB, however, filed its own statement of Unique Issues. One of those issues remains unaddressed.168
169 The parties identified the issue as:
Whether the Trustee has failed to meet his burden of pleading claims against WestLB, pursuant to Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), with particular respect to (a) the allegation that WestLB is an initial or subsequent transferee of certain transfers, and (b) to the extent the Trustee is relying upon PCI for standing, any initial transfers made to PC Funding or SPF Funding that were subsequently transferred to WestLB.170
. a. WestLB as initial transferee
There are no fact allegations in the Complaint that any Petters entity made a transfer directly to WestLB. Rather, the Complaint details the senior lending relationship WestLB had with Opportunity Finance, whereby WestLB provided investment funds to Opportunity Finance and Opportunity Finance then used those funds to invest with the Petters entities. Thus, any liability to WestLB rested solely with Opportunity Finance which cuts against an inference that a Petters entity made transfers directly to WestLB. There are not enough fact averments in the Complaint for the Court to determine whether it is plausible that WestLB was an initial transferee of any Petters debtor. Thus, all claims brought by the Plaintiff against WestLB as an initial transferee are dismissed.
b. WestLB as subsequent transferee
The claims against WestLB as a subsequent transferee turn on the sufficiency of *765the pleading for avoidance of the initial transfers. Because recovery under § 550 is not a claim based on fraud, any claim for recovery under that statute is subject to the pleading standards of F.R.C.P. 8. rather than F.R.C.P. 9171 Because the Plaintiff has followed the previously approved template, the Complaint plausibly establishes transfers were made by Opportunity Finance to WestLB after Opportunity Finance received transfers from the SPEs.172
In the Complaint the Plaintiff alleges that WestLB funded some transactions between Opportunity Finance and the SPEs. 173 The Complaint details when WestLB lent money, how much was lent, what the money was for, and that WestLB communicated directly with Petters in the course of its relationship with Opportunity Finance.174 The Complaint alleges that WestLB invested in Opportunity Finance with the expectation that Opportunity Finance would then invest with Petters. Pet-ters would repay Opportunity Finance, and Opportunity Finance would in turn repay WestLB. All of these allegations allow the Court to infer that the formulaic recitation that WestLB was a subsequent transferee is plausible on its face.
The only question remaining is whether avoidance of the initial transfers has been adequately pleaded. This has largely been addressed in this decision. The Plaintiffs claims under § 548 against Opportunity Finance as initial transferee are adequately pleaded. The Plaintiffs claims under § 544(b) and MUFTA against Opportunity Finance as initial transferee have not been adequately pleaded for the reasons stated herein. If the Plaintiff remedies those deficiencies with respect to the initial transfers then the deficiencies will be cured with respect to subsequent transferees.
The Plaintiff did not adequately plead the avoidance claims on behalf of the PCI estate. As the Court noted earlier, the Plaintiff must amend the Complaint and supplement his pleading on the avoidance of the claims from PCI to the SPEs as initial transferees.175
As currently constituted, the Plaintiffs claims against WestLB as subsequent transferee under § 548 from the perspective of the SPEs are adequate. The remaining claims are dismissed without prejudice.
IV. Amendment of the Third Amended Complaint
.At oral argument a request was made to amend the Complaint in this proceeding.176 Here there can be no doubt that justice requires leave to amend. The parties have long waited for resolution of these issues and in the interim the legal principles governing the Complaint have shifted. Despite the passage of time, the Plaintiffs should have an opportunity to amend their pleadings consistent with those changes and with this decision. In *766the interest of judicial economy, the Court will not require the Plaintiff to make a motion to amend.
Conclusion
The Defendants’ Motions to Dismiss are granted in part and denied in part consistent with the rulings set forth herein, as well as in this Court’s May 19, 2016, and May 31, 2016, orders.177,
ORDER
IT IS THEREFORE ORDERED:
1.The Motions to Dismiss brought by the Defendants in Adv. No. 10-4301 are granted as follows:
a. All of the Plaintiffs claims for avoidance under 11 U.S.C. § 544(b) on behalf of the estates of PC Funding and SPF Funding predicated on the existence of a tort creditor are dismissed without prejudice.
b. All of the Plaintiffs claims for avoidance on behalf of the estate of PCI against all of the Defendants for transfers identified in Exhibits L and M to the Third Amended Complaint are dismissed without prejudice.
c. All of the Plaintiffs claims for recovery under 11 U.S.C. § 550 on behalf of the estate of PCI against all of the Defendants are dismissed without prejudice.
d. All of the Plaintiffs claims for recovery against WestLB under 11 U.S.C.§ 550 on behalf of the estates of PC Funding and SPF Funding predicated on avoidance of the initial transfer under 11 U.S.C. § 544(b) and MUFTA are dismissed without prejudice.
2. Count 24 for lien avoidance under 11 U.S.C. § 506(d) is dismissed without prejudice.
3. Count 25 for Unjust Enrichment is dismissed with prejudice for the reasons stated in In re Petters Co., Inc., 499 B.R. 342 (Bankr. D. Minn. 2013).
4. All of the Plaintiffs claims for avoidance under 11 U.S.C. § 544(b) on behalf of the estates of PC Funding and SPF Funding predicated on the use of substantive consolidation for standing are dismissed with prejudice in accordance with In re Petters Co., Inc., 550 B.R. 438 (Bankr. D. Minn. 2016).
5. All of the Plaintiffs clafins for avoidance under 11 U.S.C. § 544(b) are dismissed without prejudice for the reasons stated in In re Petters Co., Inc., 550 B.R. 457 (Bankr. D. Minn. 2016).“
6. The Motions to Dismiss brought by the Defendants in Adv. No. 10-4301 are denied in all other respects.
7. Pursuant to Fed. R. Civ. P. 15(a)(2), the Plaintiff is granted leave to amend the Complaint in accordance with this decision and the orders issued by Judge Kishel after the Motions to Dismiss were filed but prior to June 1, 2016, arising out of the general clawback litigation in the Pet-ters related adversary proceedings.'
8. The Plaintiff shall schedule a status conference to discuss the schedule for amendment and answer to be held within 75 days of the date of this order.
. See In re Petters Co., Inc., 550 B.R. 438, 440-442 (Bankr. D. Minn. 2016).
. “Opportunity Finance defendants” denotes, as a group, Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Opportunity Finance Securitization III, LLC; International Investment Opportunities, LLC; Sabes Family Foundation; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; and Steven Sabes (collectively "Defendants”).
. Defendant West Landesbank AG will be referred to as "WestLB.”
. See Adv. 10-4301, Dkt. Nos. 34; 44; 35.
. In re Petters Co., Inc., 494 B.R. 413 (Bankr. D. Minn. 2013) ("Common Issues I”); In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013), as amended (Aug, 30, 2013) ("Common Issues II”); In re Petters Co., Inc., 499 B.R. 342 (Bankr. D. Minn. 2013) ("Common Issues III”); In re Petters Co., Inc., 532 B.R. 100 (Bankr. D. Minn. 2015) ("Charitable Defendants”); In re Petters Co., Inc., 550 B.R. 438 (Bankr. D. Minn. 2016) ("SubCon Standing”); In re Petters Co., Inc., 550 B.R. 457 (Bankr. D. Minn. 2016) (The Effect of Finn Decision).
. Adv. No. 10-4301, Dkt. No. 61.
. The Minneapolis Foundation did not file a statement of Unique Issues and has not raised any additional “unique” bases for dismissal, except its status as a charitable organization, which the Court has already addressed. In re Petters, Co., Inc., 532 B.R. 100. Nonetheless, the Minneapolis Foundation filed joinders to the Opportunity Finance briefs and the rulings made herein are applicable to its joinder.
. Also on for hearing that day was argument on the effect of the Finn v. Alliance Bank decision on Plaintiff’s fraudulent transfer claims. Additionally, DZ Bank presented argument on its Motion under Fed. R. Civ. P. 12(c). See Dkt. No. 122. This Court addresses that motion in a separate decision.
. Any references to docket numbers refers to the entry as docketed in adversary proceeding 10-4301.
. See In re Petters Co., Inc., 495 B.R. 887, 892 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013) (Common Issues fn. 3).
. See Dkt. No. ól .
. See Dkt, Nos. 63, 65.
. See Dkt. No. 83.
. Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015).
. See Dkt. No. 149.
. The Defendants incorporate their previous arguments as against the current iteration of the complaint. Dkt. No. 152 pg. 7.
. In re Walter, 462 B.R. 698, 704 (Bankr. N.D. Iowa 2011).
. 11 U.S.C. § 544(b); see also In re Marlar, 252 B.R. 743, 754 (8th Cir. BAP 2000), aff'd, 267 F.3d 749 (8th Cir.2001).
. In re Petters Co., Inc., 506 B.R. 784, 802 (Bankr. D. Minn. 2013).
. Id.
. Id. at fn. 21. This assumes that all of the Opportunity Finance defendants were "net winners” and were paid in full before the petition date. The interaction between the SPEs and the Defendants was not solely limited to promissory note transactions with Opportunity Finance, LLC. For example, the Complaint alleges Opportunity Finance, the Sabes Family Foundation, and the Minneapolis Foundation invested with SPF Funding. See ¶¶ 104-107. If any one of these entities was owed any amount of money as a creditor at the time of a transfer to another entity, then theoretically they could provide standing to avoid transfers to the others, regardless of their relatedness.
. See Dkt. No. 41, p. 25.
. See generally SubCon Standing infra.
. Id.
. See Dkt. No. 45, pg. 3.
. See e.g., Dkt. No. 1 ¶ 141 pg. 40.
. See Common Issues II Ruling # 6A at 900-01.
. See Dkt. No. 149 ¶ 78 pg. 20.
. See Dkt. No. 41, pg, 41; Dkt, No. 49 pg. 11.
. Dkt. No. 49.
. See Common Issues-II Ruling # 6A infra at fn. 3.
. Now the Uniform Voidable Transactions Act. See Minn. Stat. § 513,51.
. The phrase is defined as the "substantively consolidated bankruptcy cases and bankruptcy estates of PCI, PC Funding, LLC (“PC Funding"), Thousand Lakes, LLC (“Thousand Lakes”), SPF Funding, LLC (“SPF Funding"), PL Ltd., Inc. (“PL Ltd.”), Edge One, LLC (“Edge One”), MGC Finance, Inc. (“MGC Finance”), PAC Funding, LLC (“PAC Funding”) and Palm Beach Finance Holdings, Inc. (“Palm Beach”).” Dkt. No. 149 pg. 22 fn. 1.
. The proof of claim filed in the SPEs’ bankruptcy cases refers to the proof of claim filed in the main case, 08-45257. See P.O.C. 31-1 in Case No. 08-45328; P.O.C, 27-1 in Case No. 08-45326, In this duplicate claim, Inter-lachen does not explicitly assert a tort claim against either SPE. Instead Interlachen states they are seeking claims against all Petters affiliates for the reasons set forth in the proofs of claim filed against PCI and PGW. In those proofs of claim, Interlachen attaches the complaint filed against PCI in the district court. See POC 83-1 in Case. No.' 08-45257. That attached complaint does not make any allegations against either of the SPEs and does not clarify the nature of any claim, to the extent one exists, against the SPEs.
. Dkt, No. 149 ¶ 79(a)(2) pg. 28.
. To the extent the Plaintiff would have this same tort theory apply to any other creditor named in the Complaint, the pleading is similarly deficient and must be remedied if pursued.
. This theory is never stated in the Complaint, it only appeared through briefing. See Dkt. No, 103, The word “tort" appears nowhere in the 126-page Complaint.
. See e.g., SubCon Standing at 447-48.
. Minn, Stat. § 513.45(a).
. Dkt. No. 149 ¶ 79(a)(2)(A)-(D),
. Id.
. Dkt, No. 149 ¶ 101 pg. 54.
. Erickson-Hellekson-Vye Co. v. A. Wells Co., 217 Minn. 361, 15 N.W.2d 162, 173 (1944); see also Roepke v. W. Nat'l Mut. Ins. Co., 302 N.W.2d 350, 352 (1981).
. In re Stoebnerv. Lingenfelter, 115 F.3d 576, 579 (8th Cir. 1997).
. G.G.C. Co. v. First Nat’l Bank of St. Paul, 287 N.W.2d 378, 384 (Minn. 1979).
. Sometimes referred to as traditional veil piercing.
. Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn. 1979).
. See Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33 (1990).
. In re Phillips, 139 P.3d 639, 644-645 (Colo. 2006); citing Crespi, 16 J.Corp.L. 33, 34 (1990).
. Insider reverse veil piercing may be used for other purposes inapplicable here,
. Roepke v. W. Nat. Mut. Ins. Co., 302 N.W.2d 350, 352 (Minn. 1981).
. See e.g., Acree v. McMahan, 276 Ga. 880, 585 S.E.2d 873, 874 (2003).
. Walkovszky v. Carlton, 18 N.Y.2d 414, 416, 276 N.Y.S.2d 585, 223 N.E.2d 6 (1966).
. Stoebner v. Lingenfelter, 115 F.3d 576, 579 (8th Cir. 1997).
. Minn. Supply Co. v. Raymond Corp., 472 F.3d 524, 534 (8th Cir. 2006).
. See Progressive N. Ins. Co. v. McDonough, 608 F.3d 388, 390 (8th Cir. 2010); Minnesota Supply Co. v. Raymond Corp., 472 F.3d 524, 534 (8th Cir. 2006); Cont’l Cas. Co. v. Advance Terrazzo & Tile Co., 462 F.3d 1002, 1007 (8th Cir. 2006).
. Progressive N. Ins. Co. v. McDonough, 608 F.3d 388, 390 (8th Cir. 2010).
. See United States v. Eleven Million Seventy-One Thousand and Eighty-Eight Dollars and Sixty-Four Cents ($11,071,188.64) in United States Currency, More or Less, Seized from LaOstriches & Sons, Inc., 825 F.3d 365, 372 (8th Cir. 2016) (implying that insider reverse veil piercing is not prohibited in the Eighth Circuit).
. Though a Delaware court has never decided whether insider reverse veil piercing is appropriate under Delaware law, some courts have held that Delaware courts would allow insider reverse veil piercing in appropriate circumstances. See Sky Cable, LLC v. Coley, 2016 WL 3926492, at *13, *18 (W.D. Va. July 18, 2016); see also Crystallex International Corp. v. Petroleos de Venezuela, S.A.; PDV Holding, Inc.; and CITGO Holding, Inc., — F.Supp.3d —, 2016 WL 5724777 (D. Del. Sept. 30, 2016).
. C.F. Trust, Inc. v. First Flight L.P., 266 Va. 3, 580 S.E.2d 806, 811 (2003); see also State v. Easton, 169 Misc.2d 282, 647 N.Y.S.2d 904, 909 (Sup. Ct. 1995).
. See e.g., Cargill, Inc. v. Hedge, 375 N.W.2d 477, 479 (Minn. 1985).
. Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999).
. Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1183 (Del. Ch. 1999).
. Adams v. Clearance Corp., 121 A.2d 302, 308 (Del. 1956); See also Maloney-Refaie v. Bridge at Sch., Inc., 958 A.2d 871, 881 (Del. Ch. 2008); In re Sunstates Corp. S’holder Litig., 788 A.2d 530, 534 (Del. Ch. 2001); Outokumpu Eng’g Enterprises, Inc. v. Kvaerner EnviroPower, Inc., 685 A.2d 724, 729 (Del. Super. 1996); Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003); Mobil Oil Corp. v. Linear Films, Inc., 718 F.Supp. 260, 269 (D. Del. 1989).
. Adams v. Clearance Corp., 121 A.2d 302, 308 (Del. 1956) (emphasis added).
. Sky Cable, LLC v. Coley, No. 5:11CV00048, 2016 WL 3926492, at *13 (W.D. Va. My 18, 2016); citing Cancan Development, LLC v. Manno, No. CV 6429-VCL, 2015 WL 3400789, at *22 (Del. Ch. Mar. 30, 2015), aff'd, 132 A.3d 750 (Del. 2016).
. One case implicitly acknowledged that insider reverse veil piercing may be a permissible remedy: ''[a] creditor of the parent corporation may not, in the absence of fraud, disregard the separate existence of a subsidiary corporation and look directly to specific assets of a subsidiary for satisfaction of his claim against the parent.” Buechner v. Farbenfabriken Bayer Aktiengesellschaft, 38 Del. Ch. 490, 154 A.2d 684, 687 (1959); see also IM2 Merch. & Mfg., Inc. v. Tirex Corp., 2000. WL 1664168, at *4 FN 11 (Del. Ch. Nov. 2, 2000); Abbey v. Skokos, 2006 WL 2987006, at *2 (Del. Ch. Oct. 10, 2006); MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *12 FN 90 (Del. Ch. Dec. 30, 2010); Cancan Dev., LLC v. Manno, 2015 WL 3400789, at *22 (Del. Ch. May 27, 2015), aff'd, 132 A.3d 750 (Del. 2016); Delaware Acceptance Corp. v. Estate of Metzner, 2016 WL 632893, at *2 (Del. Ch. Feb. 17, 2016); Spring Real Estate, LLC v. Echo/RT Holdings, LLC, 2016 WL 769586, at *3 (Del. Ch. Feb. 18, 2016). The parties also relied heavily on the Southern District of Texas ASARCO decision, which supports an application of insider reverse veil piercing. ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 325 (S.D. Tex, 2008).
. Hamilton Partners, L.P. v. Englard, 11 A.3d 1180, 1213 (Del. Ch. 2010).
. Hamilton Partners, 11 A.3d at 1213 (Del. Ch. 2010).
. Pauley Petroleum Inc. v. Cont’l Oil Co., 239 A.2d 629, 633 (Del. Ch. 1968).
. Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1183-84 (Del. Ch. 1999).
. See Equity Trust Co. Custodian ex rel. Eisenmenger IRA v. Cole, 766 N.W.2d 334, 339 (Minn. Ct. App. 2009).
. The facts of those cases are distinguishable from the facts of this case. Roepke v. W. Nat. Mut. Ins. Co., 302 N.W.2d 350 (Minn. 1981); Cargill, Inc. v. Hedge, 375 N.W.2d 477 (Minn. 1985); State Bank in Eden Valley v. Euerle Farms, Inc., 441 N.W.2d 121 (Minn. Ct. App. 1989).
. Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997).
. Matchan v. Phoenix Land Inv. Co., 159 Minn. 132, 138, 198 N.W. 417, 420 (1924).
. Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003).
. Chao v. Occupational Safety & Health Review Comm’n, 401 F.3d 355, 365 (5th Cir. 2005).
. Maloney-Refaie v. Bridge at Sch., Inc., 958 A.2d 871, 881 (Del. Ch. 2008).
. Maloney-Refaie, 958 A.2d at 881.
. See Cargill, Inc. v. Hedge, 375 N.W.2d 477, 479 (Minn. 1985).
. ¶¶ 82-102.
. And that Petters was the sole shareholder of PCI. Dkt. No. 149, pg. 2, ¶ 2.
. Dkt. No. 149, ¶ 114.
.The allegations that Opportunity Finance knew of the fraud and lent anyway are akin to the usury cases where as a technical matter the corporate form does not break any laws but the purpose behind the corporate form does. This land of arrangement would serve no other purpose than to subvert fraud laws, especially in light of admissions made on behalf of Opportunity Finance. See In re Petters Co., Inc., 550 B.R. 438, 446 FN.16 (Bankr. D. Minn. 2016).
. Dkt. No. 149, ¶¶ 53-71, 89, 117.
. See In re Petters Co., Inc., 506 B.R. 784, 789 (Bankr. D. Minn. 2013).
. Regardless of the Defendants’ statements that they relied on corporate separateness under Delaware law [Dkt. No. 41, pg. 29], there can be no legitimate expectation of separateness when fraud is involved. It is well established under Delaware case law that the corporate veil is vulnerable to fraud. See e.g., Adtile Techs. Inc. v. Perion Network Ltd., 192 F.Supp.3d 515, 522, 2016 WL 3475335, at *3 (D. Del. June 24, 2016); Maloney-Refaie v. Bridge at Sch., Inc., 958 A.2d 871, 881 (Del. Ch. 2008); Marnavi S.p.A. v. Keehan, 900 F.Supp.2d 377, 392 (D. Del. 2012); Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992).
. Dkt. No. 149, ¶ 78, 79.
. See Dkt. No. 149, ¶ 116, pg. 65; see also Exhibit K Dkt. No. 149-2, pg. 33.
. Dkt. No. 149-3, pg, 31-36.
. See Dkt. No. 149, ¶ 117, pg. 65; Dkt. No. 149-3, pg. 1-30,
. U.S. ex rel. Gaudineer & Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001).
.See Dkt. No. 149, ¶ 11.7.
. In re Petters Co., Inc., 495 B.R. 887, 906 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013).
. See Dkt.' No. 149, ¶ 147.
. Freitas v. Wells Fargo Home Mtg., Inc., 703 F.3d 436, 439 (8th Cir.2013); quoting Summerhill v. Terminix, Inc., 637 F.3d 877, 880 (8th Cir. 2011) (requiring the newspaper elements).
. In re Petters Co., Inc., 495 B.R. 887, 892 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013).
. Dkt. No. 41, pg. 25-26.
. See In re DLC, Ltd., 295 B.R. 593, 607 (8th Cir. BAP 2003), aff'd sub nom. Stalnaker v. DLC, Ltd., 376 F.3d 819 (8th Cir. 2004); see also 11 U.S.C. § 101(10).
. Bky Case No. 08-45257 Dkt, No. 2098,
. Minn. Stat. § 513.41(16).
. See Minn. Stat. § 513.41(2) (emphasis added).
. See Dkt. No. 149,11 56.
. Dkt. No. 161, pg. 20-21.
. Dkt. No. 149, pg. 69-71.
. See In re Sheldahl, Inc., 298 B.R. 874, 876 (Bankr. D. Minn. 2003) (discussing avoid-ability under 11 U.S.C. § 545 versus enforceability under state law),
. In re Petters Co., 550 B.R. 457, 468 (Bankr. D. Minn. 2016).
. Isles Wellness, Inc. v. Progressive N. Ins. Co., 725 N.W.2d 90, 92-93 (Minn. 2006) (“[w]e examine each contract to determine whether the illegality has so tainted the transaction that enforcing the contract would be contrary to public policy. As a general rule, ‘a contract is not void as against public policy unless it is injurious to the interests of the public or contravenes some established interest of society,.' ”) (citations omitted).
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007) (“a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely’ ”).
. In re Mehlhaff, 491 B.R. 898, 900 (8th Cir. BAP 2013); citing Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
. See also, In re Drenckhahn, 77 B.R. 697, 705 (Bankr. D. Minn. 1987) (stating a debtor does not transfer his own property for purposes of § 727(a)(2)(A) if that property is subject to a valid and enforceable lien).
. The Defendants note, following the Court’s directive, that they only addressed the sufficiency of Count 2. Dkt. No. 161, pg. 19 FN 10. However both Counts 1 and 2 are treated here such that they impact the plausibility of other counts in the Complaint.
. As well as the Security Agreements and all other promissory note transactions. ¶ 134.
. Freitas v. Wells Fargo Home Mtg., Inc., 703 F.3d 436, 439 (8th Cir.2013).
. In re Petters Co., 495 B.R. 887, 905-06 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013).
. Id.
. Id.
. Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015).
. Finn, 860 N.W.2d at 647 (Minn. 2015).
. The Defendants conceded as much at oral argument. Dkt. No. 166 pg. 150-53.
. See Dkt. No. 149 ¶¶117-129.
. See Dkt. No. 149-2.
. Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015).
. In re Petters Co., Inc., 550 B.R. 457 (Bankr. D. Minn. 2016).
. In re Petters Co. Inc., 550 B.R. 457, 482 (Bankr. D. Minn. 2016).
. Dkt. No. 152, pg. 11.
. Dkt. No. 152, pg. 13.
. Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995).
. Ruling # 9, In re Petters Co., Inc., 499 B.R. 342, 359 (Bankr. D. Minn. 2013).
. Ruling # 4, In re Petters Co., Inc., 550 B.R. 457, 482 (Bankr. D. Minn. 2016).
. Id. at 480.
. Dkt. No. 158, pg. 22,
. Id.
. Dkt. No. 149, ¶ 114-115, pg. 58-64.
. Dkt. No. 161, pg. 15.
. See generally In re Petters Co., Inc., 499 B.R. 342, at 374-375 (Bankr. D. Minn. 2013).
. The Defendants cite In re Kendall, 440 B.R. 526, 532 (8th Cir. BAP 2010) for the proposition that "[t]he mere fact that a contract is void, unenforceable, or illegal does not require a finding that there was no reasonably equivalent value given for purposes of § 548(a)(1)(B)." This decision demonstrates that ultimately value will be a question of fact for the Court to decide later.
. Dkt. No. 161, pg. 12.
. In re Petters Co., 550 B.R. at 465 (2016),
. Finn v. Alliance Bank, 860 N.W.2d 638, 646 (Minn. 2015).
. In re Polaroid Corp., 472 B.R. 22, 35 (Bankr. D. Minn. 2012).
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 561, 127 S.Ct. 1955, 1968, 167 L.Ed.2d 929 (2007).
. Id.
. Bell Atl. Corp., 550 U.S. at 556, 127 S.Ct. 1955 (2007).
. Logically, if the description of the scheme did not encapsulate the elements of fraudulent transfer claims then it likely was not a Ponzi scheme as it is understood to be. In re Polaroid Corp., 472 B.R. 22, 33 (Bankr. D. Minn. 2012).
. In re Polaroid Corp., 472 B.R. at 53.
. In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013).
. Minn. Stat. § 513.41(4).
. Minn. Stat. § 513.41(3),
. Dkt. No. 41, pg. 37.
. See Minn. Stat. § 513.44. ("[a] transfer made or obligation incurred by a debtor is voidable as to a creditor.... ”) (emphasis added).
. This is significant because Congress could have used the word "creditors” in this statute and did not. This should be interpreted as deliberate. United States v. Ahlers, 305 F.3d 54, 59 (1st Cir. 2002) (noting "It is accepted lore that when Congress uses certain words in one part of a statute, but omits them in another, an inquiring court should presume that this differential draftsmanship was deliberate.”) To deny a debtor their discharge under 11 U.S.C. § 727(a)(2) the debtor must have made a transfer "with intent to hinder, delay, or defraud a creditor....” Hence this difference should be given significance.
.The complaint also alleges PC Funding lent to the Opportunity Finance defendants, which include six different corporate entities.
. Dkt. No. 149, ¶ 109-110, pg. 56-57.
. Dkt. No. 149, ¶ 85, pg. 50.
. This is another issue that is likely moot since the requirements to plead under MUF-TA are more demanding than the requirements under the Bankruptcy Code. If the Plaintiff is able to meet the pleading requirements under MUFTA with the Interlachen claim and the inside reverse pierce theory, he necessarily satisfies the less demanding here.
. Finn v. Alliance Bank, 860 N.W.2d 638, 647 (Minn. 2015).
. In re Petters Co., Inc., 495 B.R. 887, 892 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013).
. Dkt. No. 149, pg. 109,
. Dkt. No. 45 pg. 2 n. 1.
. Dkt. No. 41, pg. 42.
. See Collier on Bankruptcy ¶ 506.06[4][a]4-506, p. 506^141 (16th ed. 2016).P 506.06.
. See Fed. R. Bankr. P. 7001(2).
. 11 U.S.C. § 506(d).
. The existence of this predicate fact is often determined after a proof of claim is filed, which is part of the basis for the "minority position.” See In re Painter, 84 B.R. 59, 62 (Bankr. W.D. Va. 1988). However, a claim can be disallowed for many reasons not stated in § 506(d). See e.g., In re Enron Corp., 379 B.R. 425, 429 (S.D.N.Y. 2007) (where the debtor filed an action to disallow the creditor’s claim for failure to repay avoidable transfers). At some point however the issues regarding the debt which the lien secures must be addressed in order to get a declaratory judgment of void status of the lien under 506(d); Brace v. State Farm Mut. Auto. Ins. Co., 33 B.R. 91, 94 (Bankr. S.D. Ohio 1983) (permitting an adversary proceeding to determine the status of the lien under § 506(a)). If the Plaintiff is seeking only a declaratory judgment that the lien is void as a general proposition in accordance with Fed. R. Bankr. P. 7001 (and not specifically under § 506(d)), which is suggested by the verbiage of the Complaint, then the Complaint is also deficient. However, the claim here will not be dismissed with prejudice since the deficiencies with the Complaint could be remedied upon amendment.
. In re Petters Co., Inc., 499 B.R. 342, at 374-375 (Bankr. D. Minn. 2013).
. Dkt No. 44.
. Dkt. No. 64,
. At the hearing on these motions counsel represented to the Court that the parties had reached a settlement and consequently counsel for WestLB provided no oral argument. Dkt. No. 166, pg. 199-200. That settlement never came before the Court; so this issue remains unresolved.
.Dkt. No. 64.
. See Common Issues II Ruling # 7D. 495 B.R. at 917.
. See Common Issues II Ruling # 7A. 495 B.R. at 906.
. Dkt. No. 149 ¶ 21.
. Dkt. No. 149 ¶ 115 g, h.
. Any liability for WestLB as subsequent transferee would be based on a series of avoidances. First the Plaintiff must avoid the transfers from PCI to the SPEs, the claim for which must be amended for the reasons stated earlier in this decision. Then the Plaintiff must avoid the transfers from the SPEs to Opportunity Finance, which also must be amended for reasons just noted. Then the Plaintiff must avoid the transfers from Opportunity Finance to WestLB, the claim for which has been adequately pleaded as just noted.
.Dkt. No. 166, pg. 199.
. In re Petters Co., Inc., 550 B.R. 438 (Bankr. D. Minn. 2016) and In re Petters Co., Inc., 550 B.R. 457 (Bankr. D. Minn. 2016). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500164/ | ORDER
Joseph G. Rosania, Jr., United States Bankruptcy Judge
This case presents this Court with its first occasion to weigh in on the recent trend of lenders objecting to discharge at the conclusion of a Chapter 13 case because a debtor has failed to make post-petition mortgage payments. After a status conference, the Court asked the parties to brief the issue so it may consider the most recent decisions from other divisions of this Court in rendering its decision. The parties have submitted their briefs, and being advised, the Court is ready to rule.
I. Procedural Background
The Debtor filed for relief under Chapter 13 on December 2,2010, and her Chapter 13 Plan was confirmed on September 13, 2011. The Plan provided for payments to be made directly to the Chapter 13 Trustee (“Trustee”) over a period of 60 months, and contained the following language in Section IV B:1
Claims set forth below are secured only by an interest in real property that is the debtor’s principal residence located at 25083 E. 5th Ave., Aurora, Colorado 80018. Defaults shall be cured and regular payments shall be made.
The Plan payments included the cure' of a $1,401 pre-prepetition default to Debtor’s *784mortgage company (“Chase”). Under Sec-tion V, “Other Provisions,” the Plan provided that payments would be made directly to Chase on its secured'claim. In that section, the amount of the monthly payment to Chase was listed as $1,968.41.
Debtor’s mortgage debt to Chase was assigned to Carrington Mortgage Services (“Carrington”) in April 2014. Trustee issued a Notice of Final Cure Mortgage Payment pursuant to Fed. R. Bankr. 3002-1(f) on March 21, 2016 (docket # 144), indicating Debtor had paid the entire pre-petition default on her mortgage through the Plan. Carrington filed its response to the Notice of Final Cure, asserting Debtor still owed $29,055.97 in post-petition payments. In the response, Carrington also noted “[t]he Debtor is in the process of completing a Loan Modification. If the Loan Modification process is completed and approved the Debtors will then be current with mortgage payments.” (docket entry dated April 11,2016).
A month later, the Trustee filed a motion to dismiss under 11 U.S.C. § 13072 for failure to comply with provisions of the Plan, contending:
If Carrington Mortgage Services, LLC’s assertion is correct, Debtor is in material default with respect to a term of her confirmed plan. The regular mortgage payments listed on Schedule J presumes Debtor will make payments directly to the mortgage company. If Debtor made a conscious decision not to pay the mortgage, those budgeted funds should have been paid to the Trustee for distribution to unsecured creditors. Colorado Bankruptcy Courts have ruled on this issue.
Debtor filed a response, indicating she had entered into a loan modification with Carrington, and that as of July 2016, she had made all required payments and “a modified loan is in underwriting.” Further, Debtor stated “Carrington agrees that, once modified, [Debtor] will be current with her mortgage and there will be no default.” (Docket # 151).
On September 27, 2016, Debtor filed her Certification to Obtain Discharge under § 1328 indicating she had completed all payments and obligations required by her Chapter 13 Plan. Thé Court set a hearing on the Trustee’s Motion to Dismiss, Debt- or’s Response, and Debtor’s Certification to Obtain Discharge. After the hearing, held on October 6, 2016, the Court ordered the parties to submit briefing on whether Debtor had made all payments under the Plan and was entitled to discharge.
II. Discussion
In her brief, Debtor recognizes other divisions of this Court have ruled that post-petition mortgage payments are considered “payments under the plan” when determining whether a debtor is qualified for discharge under § 1328(a).3 Debtor, however, argues that none of the cases prohibit a debtor from reaching out to an “outside-the-plan” creditor to change payments to prevent default.
In this case, Debtor explains that in 2015, her income dropped to about half what it had been when her Chapter 13 Plan was confirmed. She approached Car-rington about modifying her home loan so that she could stay current on payments with a reduced income, and Carrington agreed. Consistent with her instructions from Carrington, Debtor did not make *785mortgage payments for several months, and then resumed payments during a trial period.
The Trustee concedes “a loan modification may cure deficiencies in post-petition mortgage payments under some circumstances.” Trustee, however, cites In re Strimbu, 10-19146-MER (March 31, 2016), where the Court held that a loan modification itself does not necessarily mitigate a material default. Trustee contends that, because Debtor did not take steps to address the default until month 60 of her plan, and did not complete the mortgage modification until month 70, Debtor’s case should be dismissed without a discharge.
In their briefs, the parties cite eight cases from other divisions of this Court, which this Court has thoroughly reviewed.
1. In re Daggs, No. 10-16518 HRT (Bankr. D. Colo. January 6,2014). In this case, the Court held that a debt- or who completed all the payments her plan required her to make to the trustee, but who did not make all of the payments the plan required her to make directly to the mortgagee, had not completed “all payments under the plan,” as required for debtor to obtain discharge under § 1328(a). Debtor had missed nine post-petition payments, totaling $11,768. The Court held debtor was not entitled to discharge, and her case was subject to conversion or dismissal under § 1307(c)(6). The Court considered whether dismissal or conversion would be in the best interests of creditors, and granted debtor’s request to convert to Chapter 7.
2. In re Furuiye, No. 10-15854 SBB (Bankr. D. Colo. April 7, 2014). The debtors had missed 29 payments with a delinquency of over $50,000. Judge Brooks followed the reasoning set forth in Daggs and reached the same result, granting the debtors’ request to convert to Chapter 7.
3. In re Gonzales, 532 B.R. 828 (Bankr. D. Colo. 2015). Here, the discharge had been entered on the trustee’s statement of completion with request for discharge. The Court cited Daggs and cases from other jurisdic- ■ tions and held debtors had not completed all payments under the plan as required by § 1328(a), because they still owed their lender $49,377 in post-petition payments. Thus, the Court vacated the discharge.
4. In re Formaneck, 534 B.R. 29 (Bankr. D. Colo. 2015), The debtors failed to make mortgage payments over a 30-month period, in a total amount of over $100,000. In this case, the Court considered that debtors had not disclosed or even addressed how they had been spending their income allocated for mortgage payments over the latter half of the plan. Debtors had not requested conversion, and the Court dismissed their case without a discharge.
5. In re Cherry, No.10-25318 TBM (Bankr. D. Colo. January 19, 2016). At the time the notice of final cure was filed, debtors had made most of their post-petition mortgage payments, and had only missed one $365 payment during the plan. The Court agreed with the reasoning of Gonzales, and determined that “at present,” discharge could not enter. However, Judge McNamara stated he was “loathe” to deny the debtors a discharge based on the failure to make a single payment to one secured creditor. Therefore, the Court gave debtors 30 days to file a new certification to obtain discharge con*786firming that all payments had been made.
6. In re Hoyt-Kieckhaben, No. 11-13705 EEB (February 23, 2016). In this case, during the life of the plan, debtor’s income declined, and she tried to modify her mortgage, but did not succeed. The. debtor ultimately failed to make 24 payments to her mortgage lender totaling $49,000. Judge Brown observed:
So far only one circuit court has directly addressed the question of whether Direct Payments are “payments under the plan.” In In re Foster, 670 F.2d 478 (5th Cir.1982),4 the Fifth Circuit held that, when a chapter 13 plan provides for Direct Payments to a creditor, those payments are nevertheless payments “under the plan.” This court and other lower courts have reached this conclusion based on a straightforward reading of the Code’s language. Payments are deemed payments “under the plan,” if they are made pursuant to the provisions or terms of a plan, or are “dealt with” by a plan. See, e.g., In re Perez, 339 B.R. 385, 390 n. 4 (Bankr.S.D.Tex. 2006); In re Kessler, 2015 WL 4726794 (Bankr.N.D.Tex. June 9, 2015); In re Hankins, 62 B.R. 831, 835 (Bankr.W.D.Va.1986); In re Russell, 458 B.R. 731, 739 (Bankr.E.D.Va.2010).
In re Hoyt-Kieckhaben, 546 B.R. 868, 871 (Bankr. D. Colo. 2016).
Judge Brown noted the debtor had cited no authority to the contrary, and determined she had not made all payments under the plan and was not entitled to discharge under § 1328(a). Because the debtor had requested conversion, Judge Brown granted that motion.
7. In re Strimbu, 10-19146 MER (March 31, 2016). Debtors failed to make post-petition mortgage payments for 57 months and the amount due was $163,361. Debtors admitted they failed to make payments, but argued they had applied to and were accepted into a mortgage mitigation program in May 2015. The Court rejected that argument, noting debtors had failed to explain why they took no action earlier in the case, and why payments were not made when debtor found a new job early in the case. The Court denied discharge and dismissed the case.
Most recently, in In re Payer, No. 10-33656 HRT, 2016 WL 5390116 (Bkrtcy. D.Colo. May 5, 2016), the Court initially denied debtors’ discharge because they had failed to make eight post-petition payments, “leaving over $10,000 that the debtors had committed to use for making ongoing mortgage payments unaccounted for.” (Docket # 76, case 10-33656). While debtors argued they were in the process of obtaining a loan modification, the Court observed it would be at least three months before the modification was approved. Importantly, however, Judge Tallman noted as follows:
The result reached by the Court in this case does not mean that a debtor has no ability, following the end of the plan, to make up missed mortgage payments or to pay post-petition fees. Rule 3002.1(h) sets up a process by which a bankruptcy court, after the debtor has completed all payments to the chapter 13 trustee, may determine the amount necessary to cure *787the mortgage debt. The very fact that, upon a timely Rule 3002.1(h) motion, the court must make that determination strongly suggests that the court must also permit a reasonable time period to effect that judicially determined cure. Any other interpretation would relegate a court’s determination under Rule 3002.1(h) to a determination of whether or not the mortgage debt was cured during the plan term.
Nevertheless, the Court reasoned it was not likely debtors could cure a $10,000 deficiency within a reasonable time, and gave the debtors 30 days to file a motion to convert to chapter 7, failing which the case would be dismissed.
Instead, the debtors filed a motion to reconsider the order, indicating they were “devastated” by the Court’s ruling, because they had actually continued to make payments to the lender while applying for the loan modification, and were only behind by three mortgage payments. Further, debtors stated:
The debtors have the ability to become current in payments due under the plan within the next seven days. The debtors have this ability because they were told by the mortgage holder not to make the April and May 2016 payments. The debtors have the ability to make up the last payment ($1,372.08).
On reconsideration, Judge Tallman vacated the prior order and entered debtors’ discharge, finding “the debtors have fully complied with the terms of their confirmed plan.” (Docket # 89, case # 10-33656).
After thoroughly reviewing these cases, the Court determines the instant case is most like the situations presented in Cherry and Payer. Here, on October 24, 2016, Carrington filed a “Supplemental Statement in Response to Notice of Final Cure Payment” stating: “Debtors’ Loan Modification has been finalized. Creditor agrees that the Debtor is otherwise current on all payments consistent with § 1322(b)(5).” (Claims register, POC # 21, doc filed October 24, 2016).
As in the Cherry and Payer cases, it would be inequitable to deny discharge in this unique situation. Unlike the debtors in the Strimbu case, Debtor regularly paid her mortgage for four years of her plan, and then acted promptly to modify the mortgage as soon as her income dropped. Even if this Court believed that Debtor’s temporary inability to make payments to Carrington as they worked out a modification was a default, it was not material under 11 U.S.C. § 1307(c)(6). See, e.g., In re Sanchez, 2016 WL 6127507 (Bankr. S.D. Fla. October 20, 2016) (holding a failure to timely turn over tax returns was a default, but not a material default). Any default was technical and temporary, and has since been cured to the lender’s satisfaction.
The Court also agrees with Debtor that the provisions of 11 U.S.C. §§ 1322 and 1325 permit “preferred treatment” for some creditors. In re Binder, 224 B.R. 483, 490 (Bankr.D.Colo. 1998). Specifically, for a creditor holding “long-term debt secured only by a lien against the debtor’s residence” the debtor is allowed to “cure ar-rearages over a reasonable period of time” so long as they keep current with regard to other obligations. Id.
Further, “although sections 1322 and 1325 prohibit a debtor and a bankruptcy court from knowingly ... extending a plan that extends beyond five years ... these sections of the Bankruptcy Code do not mandate dismissal of a bankruptcy case if a debtor needs a reasonable period of time to cure an unanticipated arrearage incurred during the sixty-month period.” In re Handy, 557 B.R. 625, 628 (Bankr. *788N.D. Ill. 2016) (citing Shovlin v. Klaas, 539 B.R. 465 (W. D. Pa. 2015).
For the foregoing reasons, it is
ORDERED that the Trustee’s Motion to Dismiss is DENIED. The Clerk shall enter the Debtor’s discharge and close the case.
. This section is entitled "Classification and ' Treatment of Claims: Class 2-Defaults."
.. The Trastee does not cite a subsection of sec. 1307 in his motion.
. That section provides: as soon as practicable after completion by the debtor of all payments under the plan ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this tide.... 11 U.S.C. § 1328(a).
, The Fifth Circuit recently followed Foster in the case of In re Kessler, 655 Fed.Appx. 242 (5th Cir. 2016). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500165/ | MEMORANDUM DECISION
William T, Thurman, U.S. Bankruptcy Judge
The matter before the Court is the Debtors’ Motion to Avoid Judicial Lien *789Impairing Homestead Exemption pursuant to 11 U.S.C. § 522(f)1 (the “Motion”).2 The Chapter 13 Trustee, Lon Jenkins, (the “Trustee”) does not dispute that the Debtors may avoid the prepetition lien but has objected to the Motion relying on § 349(b)(1)(B) and claiming that lien avoidance is not effective until the Debtors complete their chapter 13 plan and receive a discharge. The Trustee contends that § 349(b)(1)(B) is intended to protect creditors by avoiding the scenario where a lien is avoided, the property is sold without the lien attached, and the case is thereafter dismissed without a discharge. In the aforementioned situation, the Trustee argues, that without the protections of § 349(b)(1)(B) there would be no way to reattach the lien, and the lienholder would be out of luck and converted to a general unsecured creditor. In addition, the Trustee argues that if the liens are avoided under § 522(f) without the protections of § 349(b)(1)(B), a buyer who purchases .the property runs the risk of the liens reattaching to the property when a chapter 13 case is dismissed. The Trustee also argues, in the alternative, that § 105(a) gives this Court authority to condition, lien avoidance under § 522(f) in a chapter 13 ease. The lienholder, Cyprus Credit Union (“Cyprus”), did not object to the Motion and the Debtors argue that the Trustee lacks standing to object to the Motion.
This matter raises two issues: (1) whether the Trustee has standing to object to the Motion; and (2) whether lien avoidance under § 522(f) is effective immediately or limited under § 349(b)(1)(B) so that it is effective only upon completion of a plan and discharge in a chapter 13 case.
The Court heard Oral argument on the Motion on August 26, 2016' and thereafter took the matter under advisement. David M. Cook appeared on behalf of the Debtors, and Ryan Cadwallader appeared on behalf of the Trustee. The Court has carefully reviewed and considered the parties’ arguments and submissions and has conducted its own independent research of the relevant case law. The Court issues the following Memorandum Decision, which constitutes the Court’s findings of fact and conclusions of law under Federal Rule of Civil Procedure 52, made applicable to this proceeding by Rule 9014 and 7052.3
As set forth herein, the Court finds that the Trustee has standing to the object to the Motion, and the Court determines that lien avoidance under § 522(f) is effective immediately to recognize the homestead exemption rights of the Debtors for chapter 13 plan consummation purposes. Upon completion of the plan, the judicial lien impairing the homestead exemption may be avoided in its entirety. Thus, the Court grants the Motion.
I. JURISDICTION, VENUE, AND NOTICE
The Court has jurisdiction over the parties and subject matter of this contested matter under 28 U.S.C. § 1334. The matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (O). Venue is appropriately laid in the District of Utah under *79028 U.S.C. § 1409(a). The parties do not object to venue or jurisdiction and notice is found to be adequate.
II. FACTS AND BACKGROUND
The pertinent facts, drawn from the parties’ pleadings, the exhibits to the pleadings, and the Court’s docket, are few and undisputed:
1. The Debtors commenced this chapter 13 case by filing a voluntary bankrupt cy petition on January 5,2016.4
2. The Debtors’ Chapter 13 Plan was confirmed on April 6, 2016.5
3. The confirmed plan did not list any liens to be avoided under § 522(f).6
4. On or about February 29, 2012, Cyprus obtained a judgment against the Debtors in the State of Utah Third District Court in the original amount of $16,784.76.7
5. The Debtors seek to avoid Cyprus’s non-consensual prepetition judgment hen recorded on March 23, 2012 against their real property located at 3915 South 4400 West, West Valley City, UT 84120 (the “Property”) under § 522(f).
III. DISCUSSION
A. Standing of Chapter 13 Trustee
The Debtors argue that the Trustee lacks standing to object to the Motion because § 1302 does not explicitly provide. the Trustee with standing to object to the avoidance of a judicial lien impairing a homestead exemption. The Trustee contends that his standing to object to the Motion is found pursuant to § 1302(b), which provides:
The trustee shall—
(1) perform the duties specified in sections 704(a)(2), 704(a)(3), 704(a)(4), 704(a)(5), 704(a)(6), 704(a)(7), and 704(a)(9) of this title;
(2) appear and be heard at any hearing that concerns—
(A) the value of property subject to • a lien ....
The Court agrees with the Trustee and finds that the Trustee’s standing to object to the Motion is proper pursuant to § 1302(b).8
In addition to the Trustee’s wide range of powers, the Trustee is a fiduciary; he owes fiduciary duties—to both the debtor and creditors.9 As stated herein, Cyprus filed an unsecured proof of claim in the amount of $15,698.45. Allowed unsecured claims have received a pro-rata distribution under the plan of $0.00. However, the Debtors’ plan proposed to return the greater of $2,000.00 or the minimum 36-month plan base on allowed non-priority unsecured claims. Consequently, the Trustee believes there may be value that can be distributed to unsecured claimants under *791the confirmed plan and thus the Trustee has an affirmative duty to ensure that they are properly paid.10 Accordingly, the Court determines that the Trustee has standing to object to the Motion.
B. Avoidance of Judicial Lien Impairing Homestead Exemption
Pursuant to 11 U.S.C. § 522(f)(1), a debtor may avoid a judicial lien to the extent it impairs an exemption to which the debtor is entitled. In turn, § 522(f)(2)(A) provides:
[A] lien shall be considered to impair an exemption to the extent that the sum of—
(i) the lien;
(ii) all other liens on the property; and
(iii)the amount of the exemption that the debtor could claim if there were no liens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any liens.
The parties agree that the Debtors are entitled to a $60,000.00 homestead exemption in the Property;11 JP Morgan Chase Bank, N.A holds a first mortgage in amount of $324,580105; Cyprus holds a judicial lien in the amount of $16,784.76; and the Débtors’ interest in the Property is valued at $196,900.00. The parties do not dispute that the Debtors may avoid the pre-petition lien impairing the homestead exemption according to the following formula set forth in' § 522(f)(2)(A):12
[[Image here]]
The Court finds that the Debtors have met all of § 522(f)(2)(A)’s requirements. Cyprus’s judicial lien impairs the Debtors’ homestead exemption, and therefore the judicial lien should be avoided. The question presented to this Court is whether avoidance of the judicial lien is effective immediately or limited under § 349(b)(1)(B) and only effective upon completion of a plan and discharge in a chapter 13 case.
1. Trustee’s Argument
The Trustee argues that § 349(b)(1)(B) allows a bankruptcy court to limit the effects of lien avoidance in chapter 13 cases because the plain language of § 349(b)(1)(B) conditions transfers avoided *792under § 522(f). He contends that § 349(b)(1)(B) gives a bankruptcy court the power to limit the effects of lien avoidance because of the potential harm creditors face if the chapter 13 case is dismissed before completion of the plan. The Trustee also argues that this Court, in the alternative,, should rely on its equitable powers pursuant to § 105(a) to condition lien avoidance under § 522(f) in a chapter 13 case.13
2. Debtors’Argument
The Debtors’ primary argument is that the plain language of § 522(f) allows immediate avoidance; case law does not support the Trustee’s position; and using § 349(b)(1)(B) to rewrite § 522(f) to include a proposition it does not contain is impermissible.
3. Lien Avoidance Effective Immediately for Plan Consummation
When a case is dismissed, an order avoiding a judicial lien under § 522(f) is essentially vacated, because the dismissal reinstates “any transfer avoided under section 522 ... ,”14 The basic purpose of § 349(b) is to protect creditors by reinstating their liens upon dismissal of a case. Congress’ intent upon dismissal is “to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.”15 Although the essential purpose of § 349(b) is to .protect creditors, the statute does not provide creditors with absolute protection. For example, if the Debtors sell the encumbered property to a third party, the reinstatement and protection provided under § 349(b) becomes meaningless.16
The Trustee requests that this Court extend the underlying purpose of § 349(b) to limit the effects of lien avoidance in chapter 13.17 However, the plain language of § 522(f) does not state that failure to receive a discharge at the completion of a chapter 13 plan reinstates any transfer avoided under § 522(f), and nothing in the Code suggests that avoidance of a lien under § 522(f) is not immediate.18 In *793addition, although bankruptcy courts are granted certain equitable powers pursuant to § 105(a), the Supreme Court made clear in Law v. Siegel that “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confínes of the Bankruptcy Code.”19 Law v. Siegel goes on to state, “§ 522 does not give courts discretion to grant or withhold exemptions based on whatever considerations they deem appropriate.”20 ‘“[T]he court may not refuse to honor the [§ 522] exemption absent a valid statutory basis for doing so,’ nor may it add exceptions not found in the statute.”21
Taking these positions into account, the Court determines that it would not be inconsistent to allow and recognize the homestead exemption rights of the Debtors immediately for chapter 13 plan purposes. In so doing, the Debtors may treat the otherwise secured claim of Cyprus as unsecured for treatment in the plan. However, the Court is reluctant to extend the unsecured status of Cyprus’s lien for all purposes unless and until the Debtors complete the plan.22 The Court believes this two-step approach of removing the judgment lien is consistent with Law v. Siegel and gives deference to the statutory scheme enacted by Congress in § 349(b).
IY. CONCLUSION
Accordingly, the Motion should be granted and the lien impairing the Debtors’ homestead exemption may be avoided' immediately for plan consummation only. At such time the Debtors complete the plan, the lien should be completely avoided. In the event of a dismissal of this case, prior to completion of the plan, § 349(b)(1)(B) reinstates any transfer avoided under § 522(f). The Court will enter a separate order consistent with this Memorandum Decision that grants the Motion.
This order is SIGNED.
. All future references to "Section” or "§” shall refer to Title 11, United States Code and all references to “Rule” shall refer to the Federal Rules of Bankruptcy Procedure, unless expressly stated otherwise.
. Case No. 16-20042, Docket No, 32, Motion to Avoid Judicial Lien Impairing Homestead Exemption. All future references to the Docket will be to Case No. 16-20042, unless expressly stated otherwise.
.Any of the findings of fact herein are also deemed to be conclusions of law, and any conclusions of law herein are also deemed to be findings of fact, and they shall be equally binding as both,
. Docket No. 1, Chapter 13 Voluntary Petition.
. Docket No. 38, Order Confirming Debtors’ Chapter 13 Plan.
. Docket No. 2, Debtors’ Chapter 13 Plan at ¶ 6(g).
. Cyprus filed an unsecured proof of claim in the amount of $15,698.45 on March 29, 2016. See Case No. 16-20042, Proof of Claim No. 9-1.
. See Tower Loan of Miss., Inc. v. Maddox (Matter of Maddox), 15 F.3d 1347 (5th Cir. 1994) (holding that the Chapter 13 trustee had standing to avoid liens as impairing exemptions to prevent inequitable distribution of payments caused by debtor’s failure to avoid lien as impairing exemption).
.See Andrews v. Loheit (In re Andrews), 49 F.3d 1404, 1407 (9th Cir. 1995) (“When we examine § 1302 closely, we discern that Congress has given the chapter 13 trustee a broad array of powers and duties.”) (citing Matter of Maddox, 15 F.3d at 1355 ).
. See generally Overbaugh v. Household Bank, N.A. (In re Overbaugh), 559 F.3d 125, 129-30 (2d Cir. 2009) (stating that the primary purpose of the Chapter 13 Trustee is to serve the interest of all creditors).
. See Utah Code Ann. § 78B-5-503(2)(b)(ii) (2016).
.See Zeigler v. Cozad (In re Cozad), 208 B.R. 495, 497 (10th Cir. BAP 1997). XCyprus’s lien would be avoided in its entirely under the In re Cozad calculation or the methods set forth in In re Miller, 299 F.3d 183, 186 (3rd Cir. 2002); In re Lehman, 205 F.3d 1255, 1257 (11th Cir. 2000) and Nelson v. Scala, 192 F.3d 32, 34-35 (1st Cir. 1999).
. The Trustee urges this Court to follow its line of reasoning in In re Woolsey, 438 B.R. 432 (Bankr. D. Utah 2010), aff'd, 696 F.3d 1266 (10th Cir. 2012) wherein this Court extended the lien avoidance under limits of § 349(b)(1)(B) to § 506(d) with the assistance of § 105(a) and held that "a mortgage lien should not be allowed to be avoided unless a debtor has completely finished the plan and received a discharge. Upon such completion, an order avoiding the lien could be entered.” Id. at 437. The Court agrees with the Trustee, Woolsey is still good law and its line of reasoning applies herein.
. 11 U.S.C. § 349(b)(1)(B).
. H.R.Rep No. 595, 95th Cong., 1st Sess. 338 (1977); S.Rep No. 989, 95th Cong., 2d Sess. 48-49 (1978).
. See In re Stroud, 219 B.R. 388, 389 (Bankr. M.D.N.C. 1997).
. In addition to Woolsey, the Trustee primarily relies on three cases: In re Prince, 236 B.R. 746 (Bankr. N.D. Okla. 1999) (preventing entry of judicial lien avoidance in the records until discharge “in order to ensure that the operation of § 349(b)(1)(B) is not impaired”); In re Harris, 482 B.R. 899 (Bankr. N.D. Ill. 2012) (same); and In re Stroud, 219 B.R. at 390 (same and concluding that “[l]ien avoidance must be conditioned upon Debtor’s completion of the Chapter 13 Plan and granting of the discharge in order to ensure that creditors’ interests are protected” (citation omitted)).
. See In re Mulder, No. 810-74217-reg., 2010 WL 4286174, at *3 (Bankr. E.D.N.Y. Oct. 26, 2010) ("This Court finds no support in the Code to use Section 349 as a basis on which to condition Section 522(f) lien avoidance upon entry of a discharge. This position inappropriately assumes that failure to' receive a discharge goes hand in hand with dismissal of a case.”); see also In re Ferrante, No. 09-13098, 2009 WL 2971306 (Bankr. D.N.J. Sept. 10, 2009) (holding that in light of *793the statutory framework created by the Code, § 522(f) lien avoidance cannot be made subject to any subsequent event).
. Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 1194, 188 L.Ed.2d 146 (2014) (internal quotations and citations omitted).
. Id. at 1196.
. In re Grant, No. 16-6062, 658 Fed.Appx. 411, 414, 2016 WL 5210793, at *3 (10th Cir. Sept. 20, 2016) (quoting Law v. Siegel, 134 S.Ct. at 1196).
.There is too much at risk for the unsuspecting refinancing creditor or purchaser if the Debtors avoid the judgment lien completely, then the case is dismissed and then the Debtors either sell or refinance. According to § 349, the lien reattaches upon dismissal. A new lending creditor or even buyer would then be faced with such lien, This was the concern of this Court in Woolsey and the concern continues with this decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500166/ | ORDER GRANTING DEFENDANT’S MOTION TO DISMISS
Erik P. Kimball, Judge, United States Bankruptcy Court
THIS MATTER came before the Court upon Bank Leumi’s Motion to Dismiss Amended Complaint (the “Motion to Dismiss”) [ECF No. 18] filed by Bank Leumi, USA (the “Defendant”), and the response and reply related thereto [ECF . Nos. 40 and 32].
This is an action in which the chapter 7 trustee seeks to avoid several payments by a corporate debtor to its commercial lender, including regular payments under and payoff of the loan, allegedly made with actual intent to hinder, delay or defraud creditors. The debtor operated a legitimate business. The debtor obtained term and revolving financing from a commercial lender. The debtor misled that lender in order to maintain its financing, repeatedly misrepresenting the value of its current assets. The debtor made regular payments on the financing according to its terms. When the original financing was about to mature, the debtor obtained replacement financing from another commercial bank. The loan officer previously employed by the original lender was then employed by *797the replacement lender. The debtor also misled the new lender as to the value of its current assets, thereby avoiding a default on the replacement loan for some time. Eventually the debtor defaulted on its financing. The debtor filed a bankruptcy petition. The debtor’s principal and others were convicted of bank fraud. Now the debtor’s trustee in bankruptcy seeks to avoid several regular payments made by the debtor on its financing with the initial lender and the payoff of that loan from proceeds of the replacement financing. The trustee argues that these payments were made with actual intent to defraud creditors. The trustee argues that the fraud in question was the debtor’s bank fraud. The trustee also argues that the debtor’s unsecured creditors were harmed by the perpetuation of the debtor’s business. The trustee hints in his amended complaint that the initial lender somehow participated in the debtor’s fraudulent misrepresentation of its financial condition to the replacement lender, but there is not a single concrete allegation to support that theory. In the end, there is nothing in the amended complaint to tie the alleged fraud to the transfers the trustee seeks to avoid, other than the bare fact that the debtor was able to maintain its apparently legitimate business for a while longer as a result of the payments and refinancing. The allegations in the amended complaint are not sufficient to support any of the relief requested. The amended complaint will be dismissed. Although the trustee sought leave to amend, a second time, in its original response to the Motion to Dismiss, that response was superseded, the operative response did not seek leave to amend, and so there is no specific request to further amend the amended complaint. In any casé, the trustee’s request to amend in his original response does not include any suggestion as to how the amended complaint could be further amended to address the concerns raised in the Motion to Dismiss and the request was procedurally improper. For these reasons, the amended complaint will be dismissed with prejudice.
Michael Bakst, as Chapter 7 Trustee (the “Plaintiff’) of the bankruptcy estate of D.I.T., Inc. (the “Debtor”), sues the Defendant to avoid and recover alleged fraudulent transfers the Debtor made to the Defendant under the actual intent provisions of 11 U.S.C. § 548(a)(1)(A), and under the actual intent provisions of the laws of Florida (Fla. Stat. § 726.105(l)(a)) and New York (N.Y. Debt. & Cred. Law § 276) as incorporated by 11 U.S.C. § 544. The last count of the amended complaint seeks recovery of the avoided transfers pursuant to 11 U.S.C. § 550.
On December 20, 2012, the Debtor used $5,127,163.22 borrowed from Bank Hapoal-im B.M. to satisfy in full the Debtor’s obligations to the Defendant. Prior to that, during the four-year period, before the filing of this case, the Debtor made regular payments to the Defendant on the Defendant’s outstanding loan. The Plaintiff argues that those regular payments by the Debtor to the Defendant and the payment in full of the loan constitute intentional fraudulent transfers avoidable in this case, and that the Plaintiff is entitled to a money judgment against the Defendant in the aggregate amount transferred.
Because this is a motion to dismiss, the Court accepts as true the allegations in the amended complaint [ECF No. 14]. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,- 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The Debtor was a wholesaler of beauty products. Emanuel L. Cohen and his wife, Sally Sue Cohen, owned, operated, and otherwise controlled the Debtor. From the beginning of 2005 until March 2014, the *798Debtor, through Mr. Cohen and others, conceived and engaged in a fraudulent scheme to falsify its accounts receivable and to conceal the existence of loans that the Debtor owed to undisclosed third parties. During this time, the Debtor incurred substantial debts and liabilities which ultimately led to the collapse of its business and discovery of the fraud. The Debtor induced.the Defendant and, later, Bank Hapoalim B.M., to extend millions of dollars of revolving credit and term loans to the Debtor, thereby committing bank fraud.
Several parties assisted Mr. Cohen in perpetrating his fraudulent scheme, including CPA Marc Wieselthier and the accounting firm of Curdo, Wieselthier & Cohen, CPA’s, P.C., f/k/a Garfield, Seltzer, Curcio & Wieselthier, CPA’s, P.C.; Thomas Thompson, a salesman for the Debtor; and Jay Sosonko, the Debtor’s chief financial officer. Mr. Sosonko admitted that the Debtor, with the knowledge and assistance of the others, “cooked the books” of the Debtor by creating false invoices and accounts receivable. The Plaintiff does not specifically allege that the Defendant, or its lending officer, participated in this fraud or even had actual knowledge of it.
The banking relationship between the Debtor and the Defendant began in 2001. Scott Morello, Executive Vice President of the Defendant, was the Debtor’s assigned loan officer. Mr. Morello enjoyed a longstanding personal friendship with Mr. Cohen.
From at least 2006 until December 2012, the Debtor had the benefit of a $4.5 million revolving credit facility (the “Revolver”) and a $700,000 term loan (the “Term Loan” and, together with the Revolver, the “Bank Leumi Loan Facility”), each provided by the Defendant. Mr. Cohen personally guaranteed the Bank Leumi Loan Facility. The Revolver was secured by certain of the Debtor’s assets, including its accounts receivable and inventory. The Debt- or was required to certify to the Defendant certain financial information on a monthly basis and was required to provide to the Defendant annual and semi-annual financial statements. The Debtor falsified the information it provided to the Defendant. While the Plaintiff alleges that Mr. Morel-lo suggested that the Debtor could obtain additional financing through affiliates of the Debtor formed for that purpose, thereby apparently evading limitations in the Bank Leumi Loan Facility, there is no allegation that Mr. Morello knew the Debt- or was misrepresenting its financial condition to the Defendant.
Around mid-2012, Mr. Morello left Bank Leumi and became employed by Bank Ha-poalim. In September 2012, Mr. Cohen caused the Debtor to submit a loan application to Bank Hapoalim. Mr. Cohen has testified that Mr. Morello “brought [him] to Bank Hapoalim.” While that loan application was pending, the Defendant contacted the Debtor and requested a renewal of its promissory notes. The Plaintiff alleges that the Bank Leumi Loan Facility was either in or about to be declared in default, or, alternatively, was approaching maturity, and that it was becoming clear to the Defendant that the Debtor would not be able to meet its obligations and/or satisfy the loans when they became due. There is no specific allegation to support the Plaintiffs suggestion that the Defendant expected the Debtor to default or to be unable to renew or refinance the Bank Leumi Loan Facility. Indeed, this statement is inconsistent with the fact that the Defendant sought a renewal of its financing with the Debtor at the same time the Debtor was arranging replacement financing with Bank Hapoalim.
On December 12, 2012, Bank Hapoalim, with Mr. Morello acting as the Debtor’s *799loan officer, agreed to extend the Debtor a $4.5 million secured line of credit (the “BH Line of Credit”) together with a $700,000 term loan (the “BH Term Loan” and, together with the BH Line of Credit, the “Bank Hapoalim Loan Facility”). Bank Hapoalim issued to the Debtor a commitment letter, dated December 12, 2012, in connection with the Bank Hapoalim Loan Facility. That, commitment letter provided that the BH Term Loan was to be used to pay off the Term Loan held by the Defendant. The commitment letter also provided that the BH Line of Credit was an “uncommitted line of credit” which “shall be utilized by [Debtor] for general working capital purposes.” Mr. Cohen also guaranteed the Bank Hapoalim Loan Facility.
The Bank Hapoalim Loan Facility closed on December 20, 2012. At that time, the BH Line of Credit and the BH Term Loan were funded and deposited into an account (the “DIT Account”) maintained by the Debtor at Bank Hapoalim. The DIT Account was an operating account for the Debtor into which other funds were deposited and commingled for business use. That same day, the Debtor paid off the Bank Leumi Loan Facility, in full, via a single wire transfer from the DIT Account in the amount of $5,127,163.22 (the “Bank Leumi Payoff’). The Plaintiff alleges that, including the Bank Leumi Payoff and regular payments on the Bank Leumi Loan Facility, the Debtor made fraudulent transfers to the Defendant in the aggregate amount of at least $13,342,870.30.
In the Motion to Dismiss the Defendant presents five arguments in favor of dismissal of the amended complaint. The Court agrees with the Defendant that the amended complaint fails to allege sufficient facts to state a claim for relief based in actual fraud. The Court first addresses the other four arguments presented in the Motion to Dismiss.
With regard to the Bank Leumi Payoff, the Defendant argues that the transfer did' not diminish the assets of the Debtor and so there can be no fraudulent transfer as a matter of law. The Debtor obtained new loans from Bank Hapoalim and used those loans to pay in full its obligations to the Defendant. After the Bank Leumi Payoff, the Debtor had the same debt obligations secured by the same collateral. Bank Ha-poalim-merely replaced the Defendant.
The Court agrees with the analysis of Judge Paul G. Hyman, Jr. in Development Specialists, Inc. v. Hamilton Bank, N.A. (In re Model Imperial, Inc.), 250 B.R. 776, 793-94 (Bankr. S.D. Fla. 2000). Payment of a pre-existing debt may constitute a fraudulent transfer. The plain text of both section 548(a)(1) and the relevant state laws makes clear that the inquiry is whether the Debtor intended to hinder, delay, or defraud its present or future creditors when it paid the Defendant, not whether the Debtor’s creditors were actually harmed because the transfer diminished assets later included in the Debtor’s bankruptcy estate. Id. at 793. Other provisions of the relevant statutes, e.g., section 548(c), provide affirmative defenses that focus on whether the Defendant received a transfer “for value.” Id. at 794. Whether an alleged fraudulent transfer was payment on a pre-existing debt is just one factor that may be used to rebut a possible finding of actual intent to hinder, delay, or defraud. Lack of diminution of 'assets of the estate does not, as a matter of law, negate a fraudulent transfer claim and the Motion to Dismiss cannot be granted on that basis.
Next, the Defendant argues that funds used to make the Bank Leumi Payoff were not property of the Debtor under the “earmarking” doctrine. Typically argued in preference actions, “[u]nder the earmarking doctrine, which is a court fash*800ioned doctrine, a third party makes a loan to a debtor so that the debtor is able to satisfy the claim of a designated creditor.” Bank of Am., N.A. v. Mukamai (In re Egidi), 571 F.3d 1156, 1162 (11th Cir. 2009) (citing Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d 1351, 1356 (5th Cir. 1986)). In such a case, “the proceeds do not become part of the debtor’s assets, and no preference is created.” Id. This is because the “assets from the third party were never in the control of the debtor and therefore payment of these assets to a creditor in no way diminishes the debtor’s estate.” Id. One iteration of the earmarking doctrine requires the following: (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. McCuskey v. The Nat’l Bank of Waterloo (In re Bohlen Enters., Ltd.), 859 F.2d 561, 566 (8th Cir. 1988).
The Eleventh Circuit has not expressly applied the earmarking doctrine, even in preference- actions. In re Egidi, 571 F.3d at 1162. However, courts in the Eleventh Circuit have analyzed the concept of “property of the debtor,” sometimes in the fraudulent transfer context, by looking to a debtor’s control of the property transferred. Dillworth v. Ginn (In re Ginn La St. Lucie, LLLP), No. 10-2976-PGH, 2011 Bankr. LEXIS 3705, at *20-*30 (Bankr. S.D. Fla. Apr. 18, 2011) (reviewing cases and examining the control test).
The Defendant argues that the BH Line of Credit was used to satisfy the Defendant’s Revolver, and that the BH Term Loan was used to satisfy the Defendant’s Term Loan. But there is no allegation that the Debtor was in any way bound to use the proceeds of the BH Line of Credit to pay the Defendant’s Revolver. Indeed, it appears that the BH Line of Credit was “uncommitted” and to be used “for general working capital purposes.” While the amended complaint mentions a provision of Bank Hapoalim’s commitment letter requiring the Debtor to use the proceeds from the BH Term Loan to satisfy the Defendant’s Term Loan, there is no allegation that the commitment letter remained a binding contract after the closing of the Bank Hapoalim Loan Facility (which would be unusual). It is not obvious from the face of the amended complaint that the Debtor lacked control of the funds used to make the Bank Leumi Payoff, and so the Motion to Dismiss cannot be granted on that basis.
The Defendant argues that Counts. II and III of the amended complaint must be dismissed because the Plaintiff fails to plead in an adequate manner the existence of an unsecured creditor with standing to avoid the subject transfers. Counts II and III are brought pursuant to the Plaintiffs avoidance powers under section 544(b) and require a so-called triggering creditor. In the amended complaint, the Plaintiff identifies by name several creditors with allowable unsecured claims who could have sought avoidance of the transfers to Bank Leumi. There is no need for the Plaintiff to allege the amounts of those unsecured claims, the specific date when they arose, or any other matter. The allegations in the amended complaint relating to the existence of triggering creditors are sufficient. The Motion to Dismiss cannot be granted on that basis.
The Defendant argues that it has the benefit of the defense established in 11 U.S.C. § 546(e) and so the Plaintiff may not pursue its claims under section 544 in *801Counts II and III.1 Among other things, section 546(e) provides that, except where a trustee proceeds under the actual fraud provision of section 548(a)(1)(A), a trustee may not avoid a transfer that is a settlement payment made by or to (or for the benefit of) a financial institution.2 The Defendant argues that the Bank Leumi Payoff was a “settlement payment” covered by section 546(e) and so the Defendant has a complete defense against any claim other than those brought under section 548(a)(1)(A).
The central question for the Court is whether the Bank Leumi Payoff was a settlement payment. “ ‘[Settlement payment’ means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.” 11 U.S.C. § 741(8) (emphasis added). Each of the items addressed in the definition of “settlement payment” involves a “security”. The term “security” is defined to include a “note.” 11 U.S.C. § 101(49)(A)(i). The Defendant argues that its Revolver and Term Loan were each evidenced by a promissory note, the Bank Leumi Payoff functioned to redeem the notes, and so the Bank Leumi Payoff was a settlement payment.
There is no binding case law interpreting the terms “settlement payment” and “securities contract” in the context of the Bankruptcy Code. But the definition of the term “security” contained in the Bankruptcy Code is essentially identical to the definition used in the Securities Acts. It is appropriate for the Court to consider precedent in connection with application of the Securities Acts to determine whether the Bank Leumi Payoff constituted a settlement payment. See Thompson v. Hornyak (In re Hornyak), Nos. 08-09048, 10-09002, 2010 WL 2044469, at *3, 2010 Bankr. LEXIS 1419, at *7-8 (Bankr. N.D. Ga. Apr. 1, 2010) (looking to Supreme Court precedent in the securities context to determine whether a note was a security for purposes of 11 U.S.C. § 523(a)(19)).
In Reves v. Ernst & Young, the United States Supreme Court established a test to determine when a note is a security within the meaning of the Securities Acts, because “the phrase ‘any note’ should not be interpreted to mean literally ‘any note,’ but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts.” 494 U.S. 56, 63, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). The Supreme Court concluded that certain types of notes that are not considered securities include a note delivered in consumer financing, a note secured by a mortgage on a home, a short-term note secured by a lien on a small business or some of its assets, a note evidencing a character loan to a bank customer, a short-term note secured by an assignment of accounts receivable, a note which simply formalizes an open-account debt incurred in the ordinary course of business, and a note evidencing a loan by a commercial bank for current operations. Id. at 65, 110 S.Ct. 945 (citations omitted); see also Banco Español de Credito v. Sec. Pac. Nat’l Bank, 973 F.2d 51, 54 (2d Cir. 1992) (“It is well-settled that certificates evidencing *802loans by commercial banks to their customers for use in the customers’ current operations are not securities.”)
The Bank Leumi Payoff represented payment on a commercial loan used for business operations. Under the Reves analysis, the related notes were not securities. Thus, the Bank Leumi Payoff was not a settlement payment and was not made in connection with a securities contract. Section 546(e) does not apply and the Motion to Dismiss cannot be granted on that basis.
Finally, the Defendant argues that the amended complaint lacks specific allegations to support the claim that the transfers at issue were made with actual intent to hinder, delay or defraud creditors. The Defendant argues that the Plaintiff fails to plead any badges of fraud, that the case does not involve a Ponzi scheme and the so-called Ponzi scheme presumption does not apply, and that allegations that the Defendant overlooked certain alleged “red flags” are simply red herrings. In response, the Plaintiff argues that there are allegations throughout the amended complaint that the Debtor made the transfers to the Defendant in furtherance of a fraudulent scheme and as part of an effort to hinder, delay, or defraud its creditors.
Because actual intent to defraud is difficult to prove, courts look to the totality of the circumstances and badges of fraud surrounding the allegedly fraudulent transfers. In re Model Imperial, Inc., 250 B.R. at 790-91. The traditional badges of fraud include: (1) the transfer was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer was not disclosed or was concealed; (4) before the transfer was made the debtor had been sued or threatened with suit; (5) the transfer was of substantially all of 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; (9) the debtor was insolvent or became insolvent shortly after the transfer was made; (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. Id. at 791.
The Defendant was not an insider of the Debtor. The Debtor did not retain control of the funds paid to the Defendant after the payment. The transfers were not concealed. It is not alleged that the Debtor had been sued or threatened with suit prior to the transfers and, even so, this badge of fraud is aimed at transfers where assets are moved away from the debtor’s control so as to conceal them from creditors. The transfers did not constitute all or substantially all of the Debtor’s assets. The Debtor did not abscond. The Debtor did not remove or conceal assets except to the extent it concealed its actual financial condition, apparently also from the Defendant in this case. The Debtor received exactly equal value for the transfers as it was satisfying its contractual obligations to the Defendant. While it is suggested that the Debtor would have otherwise been unable to pay off the Bank Leumi Loan Facility, there are no specific allegations that would support the conclusion that the Debtor was insolvent at the time of any of the transfers or was made insolvent thereby. The Bank Leumi Payoff followed immediately after the closing of the Bank Hapoalim Loan Facility, but this timing does not assist in the fraud analysis as the transfer merely resulted in one secured lender replacing another with the exact same deal. There was no multiparty transfer through a lender to an insider. Even the most liberal application of the traditional badges *803of fraud would not support the relief requested in this ease.
In cases where the debtor perpetrated a Ponzi or similar scheme, some courts have relied on the so-called Ponzi scheme presumption to find actual intent to hinder, delay, or defraud creditors. Any transfer made in furtherance of such a scheme is deemed to have been made with actual fraudulent intent. Welt v. Publix Super Markets, Inc. (In re Phoenix Diversified Inv. Corp.), No. 08-15917-EPK, 2011 WL 2182881, at *3 (Bankr. S.D. Fla. June 2, 2011). Schemes implicating this presumption typically involve obtaining funds from a series of investors over a period of time, and using funds obtained from later investors to pay “investment returns” to earlier investors, thereby perpetuating the scheme. United States v. Rothstein (In re Rothstein, Rosenfeldt, Adler, P.A.), 717 F.3d 1205, 1207 n.5 (11th Cir. 2013). In such cases, the sole or a significant purpose of the debtor is to perpetrate the fraudulent scheme. Here, the Debtor operated a legitimate business. The fact that the Debtor defrauded two lenders in succession does not make that fraud a Ponzi scheme. The Ponzi scheme presumption does not apply in this case.
In order to prosecute a claim based on actual intent to hinder, delay, or defraud a creditor, the Plaintiff must show that the alleged fraudulent intent is related to the transfers sought to be avoided. Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 56-57 (2d Cir. 2005). The most common example is when a debtor transfers assets to an insider, for no consideration, when the debtor is involved in significant litigation or is being pursued by creditors, for the obvious purpose of placing the assets beyond the reach of creditors. In such a case, the transfer achieves the debtor’s fraudulent end.
The transfers addressed in the amended complaint were regular payments on the Debtor’s commercial debt obligations, and the eventual payment in full of those obligations, in each case according to their terms. The Plaintiff alleges that the Debt- or, through Mr. Cohen and others, misrepresented the true financial condition of the Debtor so as to obtain extensions of credit, including from the Defendant itself. The Plaintiff states that regular payments on the Bank Leumi Loan Facility and the Bank Leumi Payoff were somehow in furtherance of the Debtor’s bank fraud scheme. But the Debtor’s business was not bank fraud. The Debtor was a wholesaler of beauty products. The most the Plaintiff can say is that if the Debtor failed to remain current on the Defendant’s loan, and did not obtain replacement financing from somewhere, the Debtor would have been unable to pay off -the Defendant and the Debtor’s legitimate business would have failed earlier than it did. Taking all of the allegations in the amended complaint as proven, the Court would conclude only that the Debtor remained current on its commercial financing, and obtained replacement financing, for the purpose of continuing its legitimate business operation and not for the purpose of perpetuating bank fraud. Put another way, the bank fraud was incidental to the Debtor’s operations, not the purpose of the Debtor’s operations, and the transfers in question were not undertaken with the aim of defrauding the banks.
The Court might reach a different conclusion if it was alleged that the Defendant had assisted in defrauding Bank Hapoalim. For example, if the Defendant had learned of the fact that the Debtor had repeatedly misstated its financial condition, threatened to place the Bank Leumi Loan Facility in default and accelerate it, and then assisted the Debtor in misrepresenting the *804status of the Bank Leumi Loan Facility in order to permit the Debtor to obtaining financing from Bank Hapoalim so that the Defendant could be paid off. The amended complaint hints at these kinds of facts, stating that the same person was the lending officer at both banks, that the Defendant no longer wished to have a lending relationship with the Debtor, and that other circumstances existed that the Plaintiff suggests were red flags for the Defendant, but there is no concrete allegation that would lead the Court to believe any such conspiracy existed. Even if the Defendant had become suspicious of the Debtor, mere suspicion does not amount to participation in a fraudulent scheme.
Lastly, the Plaintiff suggests that the Debtor’s unsecured creditors were harmed by the continuation of the Debtor’s business. Other than a vague reference to “third party lenders” who have filed claims, there is no concrete allegation of fact to support this statement. The Plaintiff does not allege even in a general way that the Debtor made the subject transfers with the intent to harm its unsecured creditors. Indeed, there is nothing in the amended complaint, even if all its allegations are proven, that would lead the Court to conclude that the Debtor made contractual payments to the Defendant in order to defraud its unsecured creditors generally.
Hints and innuendo are not sufficient to support any necessary component of a claim, particularly a claim based in actual fraud. The allegations in the amended complaint do not adequately allege actual intent to hinder, delay, or defraud creditors with respect to the transfers at issue. See In re Sharp Int’l Corp., 403 F.3d at 56-57; B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474 (7th Cir. 2005). The amended complaint is due to be dismissed.
In its original response to the Motion to Dismiss, the Plaintiff requested leave to further amend the amended complaint [ECF Nos. 30 and 31]. That response was replaced by an amended response pursuant to an order of this Court [ECF No. 37]. The amended response [ECF No. 40] does not request the right to further amend the amended complaint. Even if the Court considers the Plaintiffs original response, the request to further amend provides no detail as to how the Plaintiff would further amend the amended complaint to address the concerns raised in the Motion to Dismiss, and the request is procedurally improper. Long v. Satz, 181 F.3d 1275, 1279-80 (11th Cir. 1999) (per curiam); Posner v. Essex Ins. Co., 178 F.3d 1209, 1222 (11th Cir. 1999) (per curiam) (a request for leave to amend “imbedded within an opposition memorandum” is not “raised properly”; neither did the memorandum set forth new factual allegations that would cure the reason for dismissal). The Plaintiff is represented by counsel. The Court is not required to grant leave to amend sua sponte. Wagner v. Daewoo Heavy Indus. Am. Corp., 314 F.3d 541, 542 (11th Cir. 2002) (en banc).
Accordingly, it is ORDERED AND ADJUDGED that the Motion to Dismiss [ECF No. 18] is granted and the amended complaint [ECF No. 14] is dismissed with prejudice.
. The defense provided by section 546(e) precludes pursuit of certain avoidance actions but does not apply to actions under section 548(a)(1)(A). While Count I of the amended complaint is based in section 548(a)(1)(A), Counts' II and III rely on section 544 and applicable state law. If applicable, the section 546(e) defense would prohibit pursuit of the claims presented in Counts II and III.
. There is no doubt that the Defendant is a financial institution. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500169/ | MEMORANDUM DECISION AND ORDER DENYING MOTION TO CONVERT TO CHAPTER 13
Mark Houle, United States Bankruptcy Judge
I. PROCEDURAL BACKGROUND
On February 28, 2013, Michael & Mari-car Santos (“Debtors”) fíled a Chapter 7 voluntary petition. On June 17, 2013, Debtors received a standard discharge. The Chapter 7 case, however, remained open. The Trustee’s Final Report was approved on December 11, 2013, and his Order of Distribution was approved on December 19, 2013.
On November 20, 2015, the Court granted the Trustee’s application to employ the law offices of Wesley Avery (“Avery”) as general bankruptcy counsel. On December 30, 2015, the Court granted the application to employ Neiman Realty as real estate broker. On April 14, 2016, over the Debtors’ objection, the Court granted the Trustee’s motion for turnover relating to real property located at 5689 Andover Way, Chino Hill, CA 91709 (“Chino Hills property”). The court issued .findings of fact and conclusions of law supporting its order granting the motion (Docket No. 57). Debtors appealed the turnover over to the Bankruptcy Appellate Panel, but their appeal was dismissed on June 14, 2016. Trustee filed another motion for turnover on September 27, 2016; the order granting the motion was entered on November 3, 2016.
On October 4, 2016, Debtors filed a motion to convert them case from Chapter 7 to 13. A hearing on the manner was held on November 9, 2016. The hearing was continued to allow for additional briefing on the issue whether, and in what circumstances, a Chapter 7 case could be converted to a Chapter 13 post-discharge. At the December 7, 2016 continued hearing, the matter was continued to allow for a reply by Debtors. Debtors filed their reply on December 14, 2016.
II. EVIDENTIARY OBJECTIONS
On December 14, 2016, Trustee filed an evidentiary objection to certain content that was included in Debtors’ reply of the *827same day. Specifically, Trustee objected to footnote 1 and exhibit B of Debtors’ reply as: (1) outside the scope of reply; ,(2) evidence of settlement negotiations; (3) irrelevant; (4) in violation of Local Bankruptcy Rule 9013—1(c) (3) (A); (5) inadmissible hearsay; and (6) lacking authentication. The Court will sustain Trustee’s evidentiary objections in their entirety, because the objected to matter is outside the permitted scope of the reply and is irrelevant to. this motion.
III. FACTUAL BACKGROUND
On Debtors’ voluntary petition, the Chino Hills property is identified as having a value of $360,000. Debtors claimed a $100,000 exemption in the Chino Hills property and identified two secured claims against the property, one in the amount of $254,110.03, and the other-in the amount of $38,611.15. After the Court approved the Trustee’s Final Report on December 19, 2013, Trustee determined that the Chino Hills property had not been abandoned, that it remained property of the estate, and had increased in value to $500,000. Trustee determined that the equity in the Chino Hills property was sufficient to justify administration.
On September 27, 2016, Trustee filed his second motion for turnover, noting that Debtors had, up to that point, failed to comply with the Court’s original order dated April 14, 2016. Faced with Trustee’s second motion for turnover, and settlement discussions having fallen through, in an effort to shield their real property from Trustee’s sale efforts, Debtors filed their motion seeking to convert to Chapter 13.
IV. DISCUSSION
A. Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper under 28 U.S.C. § 1409(a).
B. Conversion from Chapter 7 to Chapter 13 Post-Discharge
The preliminary question before the Court is whether, and under what circumstances, a Debtor can convert their Chapter 7 case to a Chapter 13 post-discharge. No binding law has been identified with respect to this issue. It appears, however, that historically the majority of courts have not afforded a debtor the absolute right to convert a case to Chapter 13 after a discharge has been obtained. See, e.g., In re Starling, 359 B.R. 901, 907-09 (Bankr. N.D. Ill. 2007) (conversion only authorized after vacation of discharge); In re Hauswirth, 242 B.R. 95, 96 (Bankr. N.D. Ga. 1999) (“The other courts which have considered that question have all reached the tacit conclusion that a debtor may not convert from Chapter 7 to Chapter 13 and retain the Chapter . 7 discharge.”); In re Lesniak, 208 B.R. 902, 907 (Bankr. N.D. Ill. 1997) (no conversion allowed after discharge).
The applicable statute, 11 U.S.C. § 706(a) (2005), states:
(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.
Prior to 2007, some courts had interpreted § 706(a) as affording a debtor an absolute, one-time right to conversion. See, e.g., In re Gibbons, 280 B.R. 833, 834 (Bankr. N.D. Ohio 2002) (“The majority view, espoused by the Debtors, holds that the section should be read literally to allow each eligible debtor one absolute right to convert upon request so long as the case has not been converted before.”) (collecting cases); *828In re Widdicombe, 269 B.R. 803, 806-07 (Bankr. W.D. Ark. 2001) (“The majority view is that denying conversion from chapter 7 to chapter 13 is against the clear wording of the statute. Courts following this view have held that a debtor who has not previously converted has an absolute right to convert under § 706(a).”) (collecting cases).
In 2007, the Supreme Court decided Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). Marrama noted two exceptions to a debtor’s right to conversion:
There are at least two possible reasons why Marrama may not qualify as such a debtor, one arising under § 109(e) of the Code, and the other turning on the construction of the word “cause” in § 1307(c). The former provision imposes a limit on the amount of indebtedness that an individual may have in order to qualify for Chapter 13 relief. More pertinently, the latter provision, § 1307(c), provides that a Chapter 13 proceeding may be either dismissed or converted to a Chapter 7 proceeding “for cause” and includes a nonexclusive list of 10 causes justifying that relief.... In practical effect, a ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tan-. tamount to a ruling that the individual does not qualify as a debtor under Chapter 13. That individual, in other words, is not a member of the class of “honest but unfortunate debtor[s]” that the bankruptcy laws were enacted to protect. The text of § 706(d) therefore provides adequate authority for the denial of his motion to convert.
Id. at 373-74 (citation omitted). Marrama explicitly identified two provisions, §§ 109(e) and 1307(c), which determine whether a debtor qualifies to convert from Chapter 7 to Chapter 13. Violation of either provision results in a finding that the debtor is ineligible to be a debtor under Chapter 13, and, therefore, is ineligible for conversion to Chapter 13.
The first provision, 11 U.S.C. § 109(e) (2010), states:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $394,725 and noneontingent, liquidated, secured debts of less than $1,184,200, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $394,725 and noncontingent, liquidated, secured debts of less than $1,184,200 may be a debtor under chapter 13 of this title.
The issue with § 109(e) is whether it requires that a debtor owe any debt. Because a debtor’s personal liability is extinguished by a Chapter 7 discharge, it is possible that there would not be any claims that would be subject to a Chapter 13 reorganization plan. “Because the creditors that had their claims discharged in the Chapter 7 no longer have any right to receive payment under a Chapter 13 plan or the right to objection to confirmation, the debtor ‘no longer has any meaningful debts to repay pursuant to a Chapter 13 plan.’” In re Starling, 359 B.R. at 911 (quoting In re Marcakis, 254 B.R. 77, 82 (Bankr. E.D.N.Y. 2000)). While Starling questions whether an individual qualifies to be a debtor under Chapter 13 if they have no “meaningful debts to repay,” § 109(e) is not dispositive here. 11 U.S.C. § 348(d) provides that post-petition, pre-conversion debts are to be included in a *829converted case and, therefore, a debtor may incur new debts that could potentially be addressed in the converted case. It is unclear whether Debtors, in this case, have incurred new debts since the filing of the petition. Nevertheless, the Court need not determine whether an individual with no meaningful debts is ineligible to be a Chapter 13 debtor, because the matter can be resolved through an interpretation of Marrama’s second eligibility provision, § 1307(c).
Debtors contend that Marrama provides a “very narrow” exception to their “absolute” right of conversion. While Marrama is noted for establishing the bad faith exception to conversion, it is important to note that Marrama’s holding was that conversion could be denied when grounds existed to “re-convert” or dismiss the case under 11 U.S.C. § 1307(c) (2010). See Marrama, 549 U.S. at 375, 127 S.Ct. 1105 (“On the contrary, the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate ‘to prevent an abuse of process’ described in § 105(a) of the Code, is surely adequate to authorize an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.”). Therefore, Marrama concluded that an individual whose potential Chapter 13 case was subject to dismissal or conversion under § 1307(c) was not entitled to a right to convert. See id. at 373-74, 127 S.Ct. 1105. 11 U.S.C, § 1307(c) (2010) provides:
(c) Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including ...
Because § 1307(c) provides for conversion or dismissal “for cause”, it follows that the Court has the authority to deny conversion “for cause.”
“For cause” is an expansive standard and many different findings could lead to a dismissal for cause. See, e.g., Marrama, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (abuse of process); In re Molitor, 76 F.3d 218 (8th Cir. 1996) (“unfair manipulation of Code”); Matter of Love, 957 F.2d 1350, 1357 (7th Cir. 1992) (fairness to creditors). “A judge should ask whether the debtor ‘misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner.’ ” In re Eisen, 14 F.3d 469, 470 (9th Cir. 1994) (quoting In re Goeb, 675 F.2d 1386, 1390 (9th Cir. 1982); see also In re Leavitt, 171 F.3d 1219, 1224 (9th Cir. 1999) (listing factors that should be considered).
In considering whether there are grounds for conversion “for cause,” (such as manipulation of Bankruptcy Code or abuse of process), the Court notes that two similar, and allowed, tactics have a fundamentally different impact on administra-’ tion of the bankruptcy estate. Those situations are when a debtor files sequential bankruptcies (i.e. the filing of a Chapter 13 upon the closing of the Chapter 7 case), and when the Debtor attempts to file simultaneous bankruptcies (the filing of a Chapter 13 case while a Chapter 7 case is pending). The former is pemissible and is commonly referred to as a Chapter 20 case. See, e.g., In re Metz, 67 B.R. 462, 465 (9th Cir. BAP 1986). The latter appears to be permissible in the Ninth Circuit upon a finding that the later filing occurred in *830good faith. See In re Blendheim, 803 F.3d 477, 500 (9th Cir. 2015).
The key distinction between those approaches, and the approach proposed here, is the effect the filing will have on the administration of the bankruptcy estate. In a Chapter 20, the Chapter 7 estate is fully administered prior to the filing of a Chapter 13 petition. Both the originally filed Chapter 7, and the later filed Chapter 13, are administered fully in accordance with the Code. Since the Code does not impose a waiting period for re-filing bankruptcy, there typically is no legal or equitable impediment to the maintenance of a Chapter 20 bankruptcy.
Blendheim, the primary case relied upon by Debtors in their reply, is also distinguishable from the instant situation. In Blendheim, the question was whether the Debtors could simultaneously maintain Chapter 7 and Chapter 13 proceedings. Blendheim, noting a circuit split on the issue, determined that there was no absolute prohibition on maintaining simultaneous bankruptcy cases; instead, Blen-dheim adopted a good-faith requirement. 803 F.3d at 500 (“We also agree with the Eleventh Circuit that the fact-sensitive good faith inquiry, in which courts may examine an individual debtor’s purpose in filing for Chapter 13 relief and take into account the unique circumstances of each case, is a better tool for sorting out which cases may proceed than the blunt instrument of a flat prohibition.”).
Likewise, there is no absolute prohibition on converting, a case from Chapter 7 to Chapter 13 post-discharge, but pre-closing; rather there is a § 1307(c) “for cause” review. In this case, as opposed to Blendheim, allowing Debtors’ proposed conversion would relieve Debtors of burdens (allowing the bankruptcy estate to be fully administered) tied to benefits (the bankruptcy discharge) that they have already received. To extend the Chapter 20 practice and the Blendheim holding to allow for conversion in this situation would be to create a loophole that could lead to abuse of the bankruptcy system. See, e.g., In re Lesniak, 208 B.R. 902, 906 (Bankr. N.D. Ill. 1997) (“[T]he Court finds that it would be an abuse of process to permit the Debtors to convert to Chapter 13 at this stage of their Chapter 7 case.”). If “a debtor converts to Chapter 13 after the Chapter 7 discharge, but before the estate property is liquidated, he has received all of the benefits of Chapter 7 without any of the burdens, because he regains his nonexempt property, and his debts have all been discharged.” In re Rigales, 290 B.R. 401, 407 (Bankr. D.N.M. 2003). Bankruptcy relief involves a “quid pro quo.” See In re Jeffrey, 176 B.R. 4, 6 (Bankr. D. Mass. 1994).
While Blendheim did not discuss what administrative consequences its holding caused1, assuming that the maintenance of simultaneous bankruptcy cases allows for *831full administration of both cases, Blen-dheim does not violate the bankruptcy quid pro quo. Rather than precluding the trustee’s administration of the bankruptcy estate, the maintenance of simultaneous bankruptcies appears to result in an additional trustee administering separate assets. Continuing administration of both cases would not necessarily be unfair to creditors, or result in a manipulation or abuse of the Bankruptcy Code. Here, however, Debtors are proposing to cease administration of their Chapter 7 case after receiving a discharge. Therefore, the case is fundamentally different because the Chapter 7 case is not fully administered, and, therefore, there is no benefit to the estate in exchange for the Debtors’ discharge.2
While Debtors have repeatedly argued that there has been no bad faith conduct in this case, obtaining a discharge and then prohibiting the Trustee from administering the case is unfair to creditors, and is a manipulation and abuse of the Bankruptcy Code. Therefore, cause would exist to convert the case under § 1307(c). Cause does not require “fraudulent intent” or any bad conduct by Debtors. Leavitt, 171 F.3d at 1224. It is unclear what circumstances would permit conversion of a Chapter 7 case to a Chapter 13 prior to case closing, but the Court need not address that question because those circumstances have not been presented by Debtors here. See David Guess, Exposing the Convert’s Loophole: Postdischarge Conversion as an Abuse of the Bankruptcy Process, 2005 ANN. Surv. of Bankr. Law 19 (2005) (strongly questioning whether there is a good faith reason to convert to Chapter 13 post-discharge).
The Court agrees with the reasoning presented by the Starling and Lesniak courts and finds that cause would exist to convert or dismiss a Chapter 13 case that was converted to Chapter 13 post-discharge, prior to closing, when administration of the Chapter 7 estate was still occurring. Specifically, Debtors’ proposed conversion, as noted by Starling and Les-niak, would result in an abuse of process. Because Marrama allows the Court to deny conversion “for cause” under § 1307(c), the Debtors are ineligible to be debtors under Chapter 13 at this time.
C. Post Discharge Waiver (or Revocation) of Discharge
Additionally, Debtors stated that they are willing to waive their discharge as a condition of conversion. 11 U.S.C. §' 727(a)(10) (2005) states:
(a) The court shall grant the debtor a discharge, unless—
(10) the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter.
Here, Debtors have not provided a written waiver of discharge for the Court’s approval. Even if Debtors had presented a written waiver of discharge, the statutory language “... shall grant the debtor a discharge, unless ...” makes clear that the waiver must occur prior to the granting of the discharge. See In re Aubry, 2015 WL 5735204 at *1 (Bankr. C.D. Cal. 2015) (“Having considered Debtor’s so-called Waiver,’ the court now rules and disapproves the so-called Waiver,’ holding that *832it is legally ineffective since it is untimely under 11 U.S.C. § 727(a)(10), having been made after the bankruptcy discharge has been entered.); see also In re Bailey, 220 B.R. 706, 710 (Bankr. M.D. Ga. 1998). The cases cited by Debtors in support of a post-discharge waiver of discharge do not support the contention that a discharge can be waived after it is granted; none of the cases deal with § 727(a)(10) or waiver of a discharge, but, instead, deal with other provisions and procedural mechanisms that Debtors have not utilized.
Y. CONCLUSION
Marrama allows a court to deny conversion from Chapter 7 to Chapter 13 “for cause”. Because the bankruptcy process constitutes a quid pro quo, obtaining benefits for the fulfillment of responsibilities, Debtors’ attempt to retain the benefits of the bankruptcy process, without fulfilling their corresponding duties, constitutes an unfair manipulation of the Bankruptcy. Code. While there may be circumstances in which post-discharge conversion should be allowed, Debtors have not provided a factual basis sufficient to overcome the conclusion that it would constitute an abuse of process to allow Debtors to retain their discharge, but preclude full administration of the Chapter 7 bankruptcy estate by the Trustee. Moreover, Debtors have not requested to vacate or revoke the discharge, and thus the Court does not address such issue. For those reasons, and as set forth above, Debtors’ motion is DENIED.
. Case law would suggest that the original bankruptcy estate would remain intact, and that the second filing would comprise new debts and assets. See, e.g. In re Heath, 2007 WL 7532278 (9th Cir. BAP 2007). In In re Heath, ten months after the debtors obtained a discharge, the trustee informed the debtors he intended to sell their residence. Three months later the debtors commenced a Chapter 13 case, while their Chapter 7 proceeding was still open. The Court remarked: “The Property remained an asset of the chapter 7 estate when Appellants filed their Chapter 13 petition.” Id. at *4. This is so because the bankruptcy estate consists of a debtor’s legal and equitable interests. See 11 U.S.C. § 541(a)(1). While those interests are still held by the previous bankruptcy estate they are not technically interests of the debtor, and, therefore, would not become interests of the second estate upon the commencement of the second case. See also id. at n. 9 (discussing single estate rule and collecting cases).
. The Court notes that Debtors are aware of Blendheim and if Debtors believe that this case and the Blendheim case are analytically the same, which they argue, Debtors could employ the tactic utilized in Blendheim to file a simultaneous Chapter 13 case. The fact Debtors have not done so is an indication that the motive for conversion is to preclude Chapter 7 administration (which would still occur if the Blendheim approach were utilized), rather than a good-faith attempt to reorganize in a Chapter 13 proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500170/ | MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT
Robert J. Faris, United States Bankruptcy Judge
Cuzco Development U.S.A, LLC (“Cuzco”) has filed a motion for summary judgment that presents the question whether a chapter 11 debtor in possession may avoid a lease that was not filed in the Land Court. The lessee, JCCHO Hawaii, LLC (“JCCHO”), acknowledges that the lease was not filed, but claims that a notice of pendency of action filed by a mortgagee in a foreclosure action protects its interest. For the reasons that follow, I will grant Cuzco’s motion.
I. FACTS
Cuzco’s primary asset is a 3.5 acre commercial property located at 805-919 Keeaumoku Street, Honolulu, Hawaii (“Keeaumoku Property”). The Keeaumoku Property is improved with low-rise buildings that are leased to' commercial tenants.
JCCHO claims an interest in the Keeau-moku Property by virtue of a master lease, which Cuzco allegedly signed on June 27, 2015, and the agent for JCCHO allegedly signed a month later on July 27, 2015. The master lease had an initial term of about four and a half years, beginning August 1, 2015, and ending Dec. 31, 2019.
Cuzco disputes the validity of the master lease on non-bankruptcy grounds. JCCHO, in turn, claims that the master lease is valid and that Cuzco defrauded JCCHO. According to JCCHO, it believed Cuzco would record the short form lease but it *834did not; Cuzco did not tell JCCHO that there was. a dispute going on in Korea about control of Cuzco; and Cuzco wrongfully excluded JCCHO from certain pre-bankruptcy state court proceedings. Cuzco denies JCCHO’s allegations..
Most but not all of the parcels comprising the Keeaumoku Property are registered in the Land Court; a small portion of the total area is not. The master lease is not noted on the Land Court transfer certificate of title (“TCT”) for the Land Court parcels, even though it has a term of more than one year.1
On January 21, 2016, East West Bank, the holder of the first mortgage on the Keeaumoku Property, filed a foreclosure action against Cuzco and other parties claiming an interest in the property, including JCCHO. East West Bank filed a notice of pendency of action (“NOPA”) on January 27, 2016, with the Land Court. A ■month later, JCCHO filed an answer and cross-claim in the foreclosure case, demanding (among other things) specific performance of the master lease and a declaration that the master lease “is valid, binding and enforceable.”2 JCCHO did not file its own NOPA.
II.PROCEDURAL BACKGROUND
Cuzco filed for chapter 11 relief on June 20, 2016.
Cuzco commenced this adversary proceeding on July 15, 2016, to avoid the master lease of JCCHO. Cuzco claims that, as a hypothetical bona fide purchaser of the Keeaumoku Property under 11 U.S.C. § 544(a)(3), it is entitled to avoid the master lease as to the Land Court parcels because the master lease is not noted on the TCT. The complaint does not seek to avoid the master lease on the non-Land Court parcel or to invalidate the master lease under non-bankruptcy grounds.
On August 17, 2016, JCCHO filed an ■ answer and a counterclaim for unjust enrichment, breach of contract, breach of good faith and fair dealing, and tortious interference with business.
Cuzco seeks summary judgment on the complaint, but not on the counterclaim.
III. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.3 The moving party has the initial burden of “identifying the portions of the materials on file that it believes show an absence of a genuine issue of material fact.”4 If the moving party meets its burden, then the opposing party may not defeat a motion for summary judgment in the absence of any significant probative evidence tending to support its legal theory.5 In a motion for summary judgment, the court must view the facts in the light most favorable to the non-moving party.6
IV. DISCUSSION
Cuzco relies on one of the “strong arm” provisions of the Bankruptcy Code:
*835The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by-
[[Image here]]
CS) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists [and has perfected such transfer].7
In a chapter 11 case, the debtor in possession has the same powers as a trustee.8 Therefore, the debtor in possession has the rights and powers of a bona fide purchaser of real property. The debtor in possession can then avoid any lien or conveyance that a hypothetical buyer on the petition date could avoid.9 The debtor in possession’s rights and powers as a bona fide purchaser of real property are fixed by the law of the state governing the property in question.10 In this case, Hawaii law applies to determine whether the debt- or can avoid the unfiled master lease of Land Court property.
Under Hawaii state law, “[e]very applicant receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of registered land who takes a certificate of title for value and in good faith, hold the same free from all encumbrances except those noted on the certificate.”11 The Land Court statute creates a “pure race” recording regime. A bona fide purchaser of registered land takes the property free of all encumbrances that are not noted on the TCT, even if the purchaser has actual or constructive knowledge of them.12
JCCHO alleges that Cuzco committed fraud in various ways in connection with the master lease. Fraud can defeat certain parties’ rights under the Land Court statute: “every subsequent purchaser of registered land who takes a certificate of title for value, except in cases of fraud to which he is a party, is entitled ... to hold the same free from all encumbrances except those noted on the certificate and the statutory encumbrances enumerated.”13 But even if it were true that Cuzco defrauded JCCHO, that conduct is not attributable to Cuzco as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a)(3).14
JCCHO argues that East West Bank’s NOPA, which was noted on the TCT, was sufficient to bind a bona fide purchaser to the judgment in the foreclosure case, including a potential judgment in favor of JCCHO.
Haw. Rev. Stat. § 501-151 permits the filing of a NOPA relating to Land Court property:
*836No writ of entry, action for partition, or any action affecting the title to real property or the use and occupancy thereof or the buildings thereon, and no judgment, nor any appeal or other proceeding to vacate or reverse any judgment, shall have any effect upon registered land as against persons other than the parties thereto, unless a full memorandum thereof, containing also a reference to the number of the certificate of title of the land affected is filed or recorded and registered. ... Notice of the pendency of an action in a United States District Court, as well as a court of the State of Hawaii, may be recorded. ...
Haw. Rev. Stat. § 634-51also relates to NOPAs:
In any action concerning real property or affecting the title or the right of possession of real property, the plaintiff, at the time of filing the complaint, and any other party at the time of filing a pleading in which affirmative relief is claimed, or at any time afterwards, may record in the bureau of conveyances a notice of the pendency of the action, containing the names or designations of the parties, as set out in the summons or pleading, the object of the action or claim for affirmative relief, and a description of the property affected thereby. From and after the time of recording the notice, a person who becomes a purchaser or encumbrancer of the property affected shall be deemed to have constructive notice of the pendency of the action and be bound by any judgment entered therein if the person claims through a party to the action; provided that in the case of registered land, section 501-151, sections 501-241 to 501-248, and part II of chapter 501 shall govern.
This section authorizes the recording of a notice of the pendency of an action in a United States District Court, as well as a state court.
Section 634-51 partly applies to Land Court property despite the proviso at the end of the first paragraph.15 Section 501-151 provides that a pending action does not affect registered land unless a “full memorandum” thereof is filed in the Land Court (thus overruling the common law doctrine of Us pendens in the case of registered land). That section does not, however, say what happens if a “full memorandum” is filed in the Land Court. Section 634-51 provides the answer to that question. In other words, section 634-51 supplements, and is not entirely displaced by, section 501-151.
The specific question before me is whether a purchaser would take the Keeaumoku Property subject to JCCHO’s master lease, even though the master lease was not filed in the Land Court, because East West Bank filed in the Land Court a NOPA relating to its foreclosure action and JCCHO filed claims in that action for enforcement of the master lease. Neither the statutory language nor the reported Hawaii decisions answer this question. The parties have not cited any other authority that provides a conclusive answer.
I predict that the courts of Hawaii would hold that East West Bank’s NOPA does not protect JCCHO’s claims under the un-filed master lease.
An overliteral reading of the applicable statutes could suggest that JCCHO can piggyback on East West Bank’s NOPA. Sections 634-51 and 501-151 provide that, if a notice of pendency of action is filed, a purchaser of the affected land “shall be deemed to have constructive notice of the *837pendency of the action and be bound by any judgment entered therein if the person claims through a party to the action [emphasis added] , ,,,”16 Thus, JCCHO argues that, if a notice of pendency of action is filed in the Land Court, a purchaser is bound by any judgment in that suit, including a judgment on claims brought by or against a party who did not file the notice.
This interpretation is inconsistent, however, with the Hawaii courts’ view that, because a recorded notice of pendency of action puts enormous “financial pressure on the property owner,”17 the applicable statutes must be narrowly construed.
The Hawaii courts have looked to California’s lis pendens statutes for guidance when interpreting Hawaii’s statutes.18 The California appellate courts hold that, if the cross-action is “of the same nature as the complaint,” the crossclaimant need not file its own NOPA, but if the cross-claimant “files a cross-complaint, seeking affirmative relief and a new cause of action, he must file a new lis pendens and cannot rely on the earlier lis pendens filed by plaintiff.”19
In this case, JCCHO filed a cross-claim and counterclaim in East West Bank’s foreclosure case in which JCCHO sought affirmative relief (specific performance of the master lease and a declaration that the master lease “is valid, binding and enforceable”) and new causes of action (breach of contract, breach of good faith and fair dealing, tortious interference with prospective economic advantage, and unjust enrichment). In these circumstances, JCCHO was not entitled to rely on East West Bank’s NOPA. JCCHO could have filed its own NOPA. Its failure to do so means that Cuzco, as a hypothetical bona fide purchaser of the Keeaumoku Property, is entitled to avoid JCCHO’s claims to the property.
Therefore, Cuzco’s motion is GRANTED.
SO ORDERED.
. Haw. Rev. Stat. § 501-121.
. Dkt. No. 27-16 at 21.
. Fed. R. Civ. P. 56(c).
. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
. Commodity Futures Trading Comm’n v. Savage, 611 F.2d 270, 282 (9th Cir. 1979).
. State Farm Fire & Cas. Co. v. Martin, 872 F.2d 319, 320 (9th Cir. 1989).
; 11 U.S.C. § 544(a)(3).
. 11 U.S.C. § 1107(a).
. In re Weisman, 5 F.3d 417 (9th Cir. 1993).
. In re Harvey, 222 B.R. 888, 893 (9th Cir. BAP 1998).
. Haw. Rev. Stat. § 501-82.
. Knaefler v. Mack, 680 F.2d 671, 678 (9th Cir. 1982).
. Application of Bishop Trust Co., 35 Haw. 816, 825 (1941) (emphasis added).
. JCCHO requests a continuance so it can conduct discovery concerning its fraud allegations against Cuzco. Because that fraud, even if proven, could not affect the outcome of this motion, I will deny the request.
. Sections 501-241 to 501-248 and part II of chapter 501 do not apply to this case because they govern the "deregistration” of property.
. See also Theo. H. Davies & Co. v. Long & Melone Escrow, Ltd., 876 F.Supp. 230, 234 (D. Haw. 1995) (“Under the statute, parties obtaining an interest in property that is subject to an action properly recorded in the Land Court have constructive notice of the claims being asserted before the. Land Court and will be bound by the outcome of that suit.")
. S. Utsunomiya Enters., Inc. v. Moomuku Country Club, 75 Haw. 480, 512, 866 P.2d 951 (1994).
. Id. at 505, 866 P.2d 951 n.10.
. Fremont Indem. Co. v. Du Alba, 187 Cal. App.3d 474, 478, 231 Cal.Rptr. 683, 685 (1986); Orekar v. Lager, 122 Cal.App. 370, 372-73, 10 P.2d 178 (1932). See also 4 Miller & Starr, California Real Estate 4th § 10.51 (Sept. 2016) ("When the cause of action is the same in both the complaint and the cross-complaint, and a judgment is rendered on the cross-complaint, the plaintiff’s lis pendens constitutes notice to subsequent parties of the allegation in the defendant’s cross-complaint, and the judgment on the cross-complaint has priority over interests acquired after the lis pendens is recorded. ... However, when the causes of action in the complaint and cross-complaint are different, a third party does not have notice of the claim in a cross-complaint merely from the lis pendens recorded by the plaintiff. When the resolution of the allegations of the complaint does not establish the claim or interest of the defendant, the plaintiff’s lis pendens does not put a third party on notice of the separate claim of the defendant/cross-complainant.”); 3 Within, Cal. Proc, 5th Actions § 388 (2008) ("Where the defendant sets up an entirely different cause of action by cross-complaint, the notice recorded by the plaintiff does not protect thé defendant; the latter should record his or her own lis pendens.”) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500171/ | AMENDED
MEMORANDUM OPINION
RANDALL L. DUNN, U.S. Bankruptcy Judge
On November 22, 2016,1 held the confirmation hearing (“Confirmation Hearing”) with respect to the First Amended Plan of Reorganization (Docket No. 155) (“Plan”) proposed by the duly appointed chapter 111 trustee Amy Mitchell (“Trustee”) for the debtor-in-possession' Data Systems, Inc. (“DSI”). At the Hearing, I heard the testimony of Richard Kreitzberg (“Mr. Kreitzberg”), the Trustee, and special counsel Robert J. McGaughey (“Special Counsel”) in support of confirmation of the Plan and the testimony of William F. Holdner (“Mr. Holdner”) in opposition to confirmation. In addition, I heard argument from the Trustee’s counsel, counsel for the United States Trustee, and Mr. Holdner.
In deciding the confirmation issues raised in this case, I have considered carefully the testimony presented at the Confirmation Hearing, the admitted exhibits (Trustee’s Exhibit 1 with Exhibits A through E attached; and Mr. Holdner’s Exhibits A and B), and the arguments presented at the Hearing. I also have taken judicial notice of the docket and documents filed in DSI’s main chapter 11 case, Case No. 16-30477-rldll, for the purpose of confirming and ascertaining facts not reasonably in dispute. Federal Rule of Evidence 201; In re Butts, 350 B.R. 12,14 n.l (Bankr. E.D. Pa. 2006). In addition, I have reviewed relevant legal authorities, both as cited to me by the parties and discovered through my own research.
In light of that consideration and review, this Memorandum Opinion sets forth the court’s findings of fact and conclusions of law under Civil Rule 52(a), applicable in this contested matter under Rules 7052 and 9014. I will enter an order confirming the Plan for the following reasons.
I. FACTUAL BACKGROUND2
1) DSI early history, operations and assets
DSI was formed as an Oregon corporation, and for a number of years, it operated to provide computer and related services to businesses. DSI stock previously was publicly traded on the NASDAQ, and it has approximately 300 shareholders. However, it ultimately was delisted, and the company went private. Mr. Holdner and Jane Baum (“Ms. Baum”) served as DSI’s directors and as its president and secretary, respectively. Mr. Holdner has held these positions for over 50 years, and Ms. Baum, for over 20 years. DSI has operated since 1993 with less than the *840minimum four directors required by its bylaws, and, for many years, no shareholders meetings were noticed or held. Of the approximately 599,900 outstanding shares of DSI common stock, Ms. Baum holds 149,-362 shares (approximately 24%); Mr. Holdner holds 135,100 shares (approximately 22%); and Mr. Kreitzberg holds 238,555 shares (approximately 39%). The balance of approximately 15% of DSI’s outstanding stock is held in small lots by the remaining several hundred shareholders. There is no public market for DSI common stock.
In 1973, DSI built a two-story office complex on Sandy Boulevard in Portland (“Main Office”). DSI used the Main Office to store, manage and operate very large mainframe computers and maintained additional space for expansion. However, in 1993, IBM stopped supporting and servicing mainframe computers like the ones owned and operated by DSI. Consequently, according to Mr. Holdner, he and DSI recognized that DSI would need to change its focus in order to survive. Under the direction of Mr. Holdner and Ms. Baum, DSI was repurposed to become a property management company, relying on increasing value of its real estate and its potential for regular income through commercial leasing.
DSI’s commercial tenants include Mr. Holdner and Ms. Baum’s accounting firm (“Accounting Firm”), which occupies 2,400 square feet in the Main Office, half of which is devoted to storage for DSI rent-free, with the other half rented to the Accounting Firm at the same rent charged' since 1986. DSI collects some rents from other month-to-month tenants, but much of the Main Office is unoccupied. Based on her business judgment in light of the potential costs and disputes involved, the Trustee has not increased the Accounting Firm’s rent to reflect a market rate or taken other steps to address the Accounting Firm’s lease pending this court’s consideration of confirmation of the Plan.
DSI’s value is in its real estate holdings, including the Main Office and five smaller properties, which all are located within two blocks of the Main Office property. In its schedules, DSI valued all of its real estate holdings at a total of $7,500,000, with $5,000,000 value allocated to the Main Office. See Docket No. 59. Liens totaling only approximately $270,000 encumber DSPs real property assets. See id.
2) Prepetition litigation
In March 2015, after learning that Mr. Holdner had signed a purchase and sale agreement for the Main Office property, the proceeds of which Mr. Holdner intended to distribute as dividends, Mr. Kreitz-berg filed a derivative lawsuit on behalf of DSI in Multnomah County Circuit Court, case no. 15CV07240 (“State Court Litigation”). In the State Court Litigation,. Mr. Kreitzberg alleged that Mr. Holdner did not have shareholder authorization to sell substantially all of DSI’s assets or to liquidate DSI. He also alleged that Mr. Hold-ner and Ms. Baum had breached their fiduciary duties to DSI, had engaged in self-dealing, and had mismanaged DSI through conflict of interest transactions. Through the State Court Litigation, Mr. Kreitzberg sought to remove Mr. Holdner and Ms. Baum as DSI directors and requested damages. The court in the State Court Litigation entered a preliminary injunction preventing Mr. Holdner and Ms. Baum from selling any property of DSI without first taking certain required actions. On the eve of a hearing before the state court to deliver its decision on Mr. Kreitzberg’s request for further injunctive relief, DSI filed its chapter 11 petition, effectively staying the State Court Litiga*841tion. The stay of § 362(a) remains in place as to the State Court Litigation.
Meanwhile, in January 2016, DSI, at the direction of Mr. Holdner, filed a lawsuit against Mr. Kreitzberg and his affiliate, RAK Investments, LLC, in the United States District Court for the District of Oregon, case no. 16-ev-00110-SI (“District Court Litigation”). In the District Court Litigation, DSI, through Mr. Holdner, alleged that Mr. Kreitzberg wrongfully and fraudulently attempted to gain control over DSI by making a tender offer to purchase shares of DSI’s common stock for $7.00 per share. DSI’s prayer for relief in the District Court Litigation does not include a claim for damages. See Exhibit 1, Exhibit C attached. I denied without prejudice Mr. Kreitzberg’s motion for relief from stay to allow the District Court Litigation to proceed by order entered on April 25, 2016 (Docket No. 76), and no subsequent order has been entered to allow the District Court Litigation to move forward.
At the time of DSI’s bankruptcy filing, it had cash and deposits totaling $4,043.32, an amount clearly inadequate to fund defense of the State Court Litigation or prosecution of the District Court Litigation.
3) DSI’s bankruptcy filing and relevant postpetition events
DSI filed its petition for protection under chapter 11 on February 11, 2016. See Docket No. 1. Shortly thereafter, Mr. Kreitzberg filed a motion to dismiss (“Motion to Dismiss”) DSI’s chapter 11 case or, in the alternative, to appoint a chapter 11 trustee to manage DSI in chapter 11 on the grounds that 1) DSI’s chapter 11 case was filed without proper authorization; 2) the case was filed for an improper purpose; and 3) DSI was being “grossly mismanaged.” See Docket No. 17. DSI opposed the Motion to Dismiss. See Docket No. 30. Following an evidentiary hearing on April 25, 2016, the court denied the Motion to Dismiss but ordered the United States Trustee to appoint a chapter 11 trustee for reasons stated orally on the record. See Docket Nos. 75, 76 and 78. Ms. Mitchell was appointed as the Trustee effective May 4, 2016. See Docket Nos. 79 and 80.
In the meantime, DSI had filed a motion to approve a sale of the Main Office property (“Sale Motion”) for $5,000,000, net of broker’s commission, free and clear of liens. See Docket No. 64. The terms of sale included a downpayment of $1,000,000, interest at 5%, and a balloon payment at the end of five . years of approximately $4,000,000, See id. at 3. Following her appointment, the Trustee withdrew the Sale Motion. See Docket No. 88. Mr. Holdner subsequently filed a motion (“Holdner Sale Motion”) seeking approval of a sale of the Main Office property on essentially the same terms as the Sale Motion. See Docket No. 95. The Trustee and Mr. Kreitzberg objected to the Holdner Sale Motion. See Docket Nos. 106 and 107. In her objection, the Trustee advised that in her business judgment, the proposed sale of the Main Office property would not be in the best interests of DSI’s estate. Following a hearing, the court denied the Holdner Sale Motion by order entered on June 21, 2016. See Docket Nos. 117 and 119. That order was not appealed.
Following a period where the Trustee explored options for settling the disputes among the feuding DSI shareholders, the Trustee concluded that she needed to proceed to propose a reorganization plan for DSI. Accordingly, the Trustee filed a proposed disclosure statement and a proposed plan of reorganization on August 5 and 8, 2016, respectively. See Docket Nos. 132 and 133. On August 9, 2016, the Trustee filed objections to the claims filed by Mr. *842Holdner and Mr. Kreitzberg. See Docket Nos. 134 and 135. Mr. Holdner objected to the Trustee’s proposed disclosure statement, and shareholder Gary Maffei joined in Mr. Holdner’s objections. See Docket Nos. 143 and 151. The Trustee filed the Plan and a First Amended Disclosure Statement on September 30, 2016. See Docket Nos. 155 and 156. The Trustee further filed a response to the objections to the proposed disclosure statement filed by Mr. Holdner and Mr. Maffei (“Trustee Disclosure Statement Response”). See Docket No. 159. Following the duly noticed disclosure statement hearing, the court approved the Disclosure Statement, modified as discussed at the hearing, and the Confirmation Hearing was scheduled. See Docket Nos. 160 and 164.
The Plan upon which DSI creditors and shareholders voted, includes the following main provisions: 1) The allowed claims of general unsecured creditors (Class 1) will be paid in full, without interest, no later than 60 days after the effective date of the Plan. Because the general unsecured creditors receive no interest on their allowed claims under the Plan, their claims are treated as impaired for voting purposes. 2) The claims of DSI insiders, Mr. Holdner and Mr. Kreitzberg (Class 2), will be paid in full plus interest in their allowed amounts as soon as reasonably practicable after the effective date of the Plan, and the allowed amounts of their claims are determined. The insider Class 2 claims are not treated as impaired under the Plan. 3) Administrative expenses, secured property tax claims (Class 3) and the secured claim of Bank of the West (Class 4) will be paid in full in their allowed amounts, plus allowed interest, as soon as reasonably practicable after the effective date of the Plan, and the allowed amounts are determined. All are unimpaired under the Plan. 4) Shareholders (Class 5) are given a choice under the Plan: They can retain their equity interests in the reorganized DSI, or they can sell their shares for $7.00 per share. The Plan will be funded by a sale of approximately 160,000-170,000 shares of DSI treasury stock to Mr. Kreitzberg at $7.00 per share to allow for payment of Plan obligations and to recapitalize DSI. However, the Plan provides a mechanism whereby interested parties, including Mr. Holdner and Ms. Baum and any other DSI shareholder, can overbid Mr. Kreitzberg and substitute for him to fund the Plan. In the event of a successful overbid, the purchase price to be received by selling DSI shareholders would be increased accordingly.
In Plan balloting, all voting members of Class 1 voted in favor or the Plan. In Class 5, 92% of voting class members (23 of 25) voted in favor of the Plan, but the Plan was not accepted by the class because less than two-thirds of the voting shares (62%) voted in favor of the Plan. See Docket No. 191 and § 1126(d).
Mr. Holdner filed an Objection to Any Proposed Cramdown in an Amended Plan of Reorganization (“Objection”) (Docket No. 183), making a number of assertions but arguing primarily that the Plan could not be confirmed because 1) it discriminates among DSI shareholders by diluting their equity interests in favor of Mr. Kreitzberg; 2) the Plan is too speculative and is not feasible; 3) the Plan is not proposed in good faith; and 4) the Plan cannot be confirmed because it is a “tax avoidance scheme,” unlawful “under Chapter 5 of SECURITIES EXCHANGE ACT OF 1933.” The Trustee responded to the Objection in her Memorandum in Support of Confirmation (“Confirmation Memorandum”) (Docket No. 196).
Mr. Holdner further filed a renewal of his objections to the Disclosure Statement (“Renewal”) (Docket No. 181). The Trustee *843responded to the Renewal in the Confirmation Memorandum and in a separate response (“Response”) (Docket No. 193), relying in part on the previously filed Trustee Disclosure Statement Response but further arguing that since the court had approved the Disclosure Statement in a final order that was not appealed, the arguments raised in the Renewal were moot.
II.JURISDICTION
This court has jurisdiction over the matters to be decided at the Confirmation Hearing under 28 U.S.C. §§ 1334 and 157(b)(2)(L). Confirmation of a plan in chapter 11 specifically is within the core jurisdiction of bankruptcy courts.
III.CONFIRMATION STANDARDS
The requirements for confirmation of a reorganization plan in chapter 11 are set forth in § 1129 of the Bankruptcy Code. The court has an affirmative duty to make sure that all requirements for confirmation under § 1129 have been met. Liberty Nat’l Enterprises v. Ambanc La Mesa Ltd. Partnership (In re Ambanc La Mesa Ltd. Partnership), 115 F.3d 650, 653 (9th Cir. 1997). The court must confirm a plan if the plan proponent proves by a preponderance of the evidence that all applicable requirements of § 1129(a) have been met. Id. However, if the only confirmation standard that has not been met is the § 1129(a)(8) requirement that, with respect to each class of claims or equity interests, “(A) such class has accepted the plan; or (B) such class is not impaired under the plan,” the court further must determine that the plan satisfies the standards for “cramdown” under § 1129(b), i.e., 'the plan “does not discriminate unfairly” 'against and is “fair and equitable” with respect to each impaired class that has not accepted the plan.
IV.THE EVIDENCE PRESENTED
In advance of the Confirmation Hearing, counsel for the Trustee submitted the Confirmation Memorandum, supported by the declaration of the Trustee. See Docket No. 196 and Exhibit 1 with attached Exhibits A through E. In addition, the Trustee testified at the Confirmation Hearing to address each of the applicable confirmation requirements under § 1129 as follows:.
She testified that the Plan, including its provisions for classification of creditor claims and shareholder equity interests, and she, as Plan proponent, complied with all applicable provisions of the Bankruptcy Code. §§ 1129(a)(1) and (2).
She testified that the Plan was proposed in good faith and not by any means proscribed by law. § 1129(a)(3).
She testified that any payments to be made under the Plan for administrative expenses in connection with the case would be subject to court review for reasonableness. § 1129(a)(4).
She testified that she would serve as plan agent for DSI postconfirmation and would notice a shareholders meeting for election of a new Board of Directors, consistent with the requirements of DSI’s bylaws. § 1129(a)(5).
She testified that the sole impaired class of creditors under the Plan (general unsecured creditor Class 1) had voted to accept the Plan, and the shareholder class (Class 5) that had not voted to accept the Plan by the requisite amount would receive more under the Plan ($7.00 per share to selling shareholders) than in a chapter 7 liquidation based on her analysis, as set forth in Exhibit A to the Disclosure Statement. See Exhibit 1, at 2. § 1129(a)(7).
She testified that all classes of creditors either were unimpaired or had voted to accept the Plan. The single shareholder *844class, Class 5, did not vote to accept the Plan. §§ 1126(d) and 1129(a)(l)(8). Accordingly, to confirm the Plan would require the Trustee to satisfy the requirements for “cramdown” under § 1129(b).
She testified that all administrative claims would be paid in full as soon as reasonably possible after the effective date of the Plan and any necessary court approvals. § 1129(a)(9).
She testified that the noninsider class of general unsecured claims (Class 1) had accepted that Plan. § 1129(a)(10).
She testified that she was satisfied that the Plan is feasible. In particular, she testified that she had reviewed Mr. Kreitz-berg’s recent Charles Schwab investment account statements and was comfortable that he had readily available assets to fund implementation of the Plan. In his testimony, Mr. Kreitzberg likewise testified that he had assets available to fund the Plan obligations. § 1129(a)(ll).
She testified that all United States Trustee fees had been paid to date and would continue to be paid through the effective date. § 1129(a)(12).
§§ 1129(a)(6), (13), (14), (15) and (16) do not apply.
In her declaration in support of confirmation, the Trustee declared that based on her own investigation, corroborated by advice of counsel, the Plan did not present any securities law problems. See Exhibit 1, at 2.
As to the requirements for “cramdown,” she testified that all creditors would be paid in full under the Plan, and shareholders would have the option of selling their shares of DSI common stock for an above-market price or retain their DSI shares. § 1129(b).
Since DSI went private and was delisted from the NASDAQ, there is no recognized “market” for DSI common stock. In such circumstances, outside of the Plan, such stock might be sold in private placement transactions, but determining the price could be problematic. Section 1145 of the Bankruptcy Code provides an exemption from the registration requirements of the Securities Act of 1933 (“Securities Act”) and state securities law for “certain securities issued, distributed and sold during chapter 11 cases or under plans of reorganization.” See § 1145 and 8 Collier on Bankruptcy ¶ 1145.01[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Under § 1129(d), the Securities and Exchange Commission (“SEC”) has standing to object to confirmation of a chapter 11 plan “if the principal purpose of the plan is-the avoidance of taxes or the avoidance of the application of section 5 [registration requirements] of the Securities Act .... ” Counsel for the Trustee advised at the outset of the Confirmation Hearing that the SEC was provided with copies of the Plan and Disclosure Statement and notified of the date of the Confirmation Hearing as part of the general notice process for the Confirmation Hearing. I note that the SEC has not appeared in this case, did not file an objection to confirmation of the Plan and did not appear at the Confirmation Hearing. Special Counsel testified that he had reviewed the Plan and Disclosure Statement and the notices with respect to the Plan and Confirmation Hearing, and he did not perceive any securities law problems. Specifically, he did not perceive the Plan as presenting any problems with respect to securities law registration requirements.
Mr. Holdner testified in opposition to confirmation, reiterating a number of claims he has asserted consistently in this case: First, he argued from his demonstrative Exhibit B that the $7.00 offering price per share of DSI common stock included in the Plan is too low, as by closing *845a sale of the Main Office property now for $5,000,000, payable $1,000,000 down, with 5% interest on the deferred balance of $4,000,000, and a balloon payment at the end of 5 years, the “projected value per share” would be $9.55. In light of Mr. Holdner’s professional experience as a CPA since 1968, I find it both surprising and disingenuous that in his calculations to arrive at his $9.55 per share value, he deducts nothing for payment of DSI’s liabilities, including his personal claim for $1,518,262.81 (Claim No. 10 on the claims register); he does not discount to present value the $4,000,000 deferred portion of the proceeds from his projected $5,000,000 sale of the Main Office property; and he does not discount for the risk of nonpayment of the deferred balance of the Main Office sale proceeds. The Trustee testified that she rejected Mr. Holdner’s $9.55 per share valuation as not realistic because it did not incorporate a deduction for any of DSI’s liabilities. I ultimately conclude that Mr. Holdner’s $9.55 per share projected valuation for the DSI common stock is not credible, particularly considering its failure to incorporate any deduction for DSI liabilities, either existing or ongoing.
Mr. Holdner further testified that he did not consider the Plan fair to shareholders in that it only offered them $7.00 per share, consistent with a tender offer Mr. Kreitzberg made earlier to the sharehold-. ers that Mr. Holdner views as fraudulent. See Exhibit A. Mr. Holdner asserts that the Plan is the embodiment of a scheme to allow Mr. Kreitzberg to avoid paying taxes on dividends that otherwise would be distributed from Main Office property sale proceeds. The Plan would allow Mr. Kreitzberg to obtain control of DSI and dilute the ownership interests of shareholders who elect to retain their shares.
In addition, Mr, Holdner asserted that the Trustee had done an inadequate job of investigating Mr. Kreitzberg’s ability to fund the recapitalization of DSI mandated by the Plan and had not provided adequate evidence that the Plan was feasible.
Following the testimony of witnesses and confirmation from Trustee’s counsel and Mr. Holdner that they had no additional witnesses to call, I closed the record.
During oral argument, Trustee’s counsel argued that the Trustee had met her burden of proof to establish all of the confirmation requirements under § 1129, and the Plan should be confirmed, relying on the Confirmation Memorandum; Exhibit 1 and the attached Exhibits A through E; and the testimony of the Trustee and Mr. Kreitzberg. Counsel for the UST advised that she was appearing to confirm that amendments to the Plan being proposed by the Trustee to allay the UST’s concerns about the treatment of potential elaims against the Trustee and her professionals were satisfactory to the UST and appeared consistent with Bankruptcy Code requirements.
I asked Mr. Holdner during his argument to identify the particular provisions of § 1129 that he felt the Trustee did not meet her burden of proof to satisfy. In response, Mr. Holdner deflected the question and returned to his arguments that the Plan was speculative and not feasible; that the Plan violated tax law because its principal purpose was tax avoidance, and the Plan violated federal securities laws; the Plan was not fair to DSI shareholders; and the value that shareholders would receive under the Plan was too low. He further asserted that a main basis for his opposition to confirmation was the inadequacies of the Disclosure Statement. Following argument, I took the matter under advisement.
V. DISCUSSION
1) Compliance with law and good faith
The Trustee testified, -without objection, that the Plan and she, as the Plan *846proponent, complied with all applicable provisions of the Bankruptcy Code. Mr. Holdner objects, alleging violations of securities and tax laws. In her Declaration in support of confirmation, the Trustee declared that based on her own investigation and advice of Special Counsel, she was “not aware of any securities-related issues with the Plan.” Exhibit 1, at 2. Special Counsel likewise testified that he did not perceive any securities law problems. In light of that evidence and the exemption from registration provided for in § 1145, I am unpersuaded by Mr. Holdner’s lay opinions that the Plan violates the registration provisions of the Securities Act and the securities fraud provisions of SEC Rule 10b-5. •
I understand Mr. Holdner’s argument that confirmation of the Plan may further the purpose of Mr. Kreitzberg to avoid paying taxes on DSI dividends at ordinary income tax rates, but I do not agree that avoidance of taxes is the Plan’s primary purpose. The Trustee proposed a plan that will pay all creditor claims in full in the short term and will provide a market for sale of the DSI share holdings of minority shareholders, a market that does not exist currently. The Trustee presented evidence that the $7.00 per share offering price for DSI stock under the Plan provides a premium over what shareholders could expect to receive in a liquidation—possibly a substantial premium. The evidence submitted through Mr. Holdner’s Exhibit B does not present a credible alternative. The Plan provides means to recapitalize DSI with working capital in addition to amounts required to fund the payments of creditor claims and stock buyouts. It further provides a mechanism for resolving the contentious corporate governance issues that have plagued DSI in recent times. Accordingly, I conclude that the Trustee has met her burden of proof to establish that the Plan and the Trustee, as Plan proponent, have complied with applicable law.
“[F]or purposes of determining good faith under section 1129(a)(3) ... the important point of inquiry is the plan itself and whether such plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.” In re Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984). I find that the Plan will achieve such results, and I conclude in the totality of the circumstances that the Plan was proposed in good faith.
2) Feasibility
The Trustee testified that she had examined Mr. Kreitzberg’s recent Charles Schwab investment account statements and was comfortable that he could fund the capital investments required by the Plan. Mr. Kreitzberg corroborated her assessment in his testimony. Mr. Holdner argued that the Trustee’s investigation of Mr. Kreitzberg’s finances was inadequate, making the Plan too speculative to be confirmed. However, Mr. Holdner provided no evidence to support his assertions.
Under Ninth Circuit law, the “feasibility” standard in § 1129(a)(ll) is very forgiving. “In this circuit, all a debtor need demonstrate is that the plan ‘has a reasonable probability of success.’ ” Wells Fargo Bank, N.A. v. Loop 76, LLC et al. (In re Loop 76, LLC), 465 B.R. 525, 544 (9th Cir. BAP 2012), quoting Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1364 (9th Cir. 1986). “[A] relatively low threshold of proof will satisfy § 1129(a)(ll) so long as adequate evidence supports a finding of feasibility.” In re Loop 76, LLC, 465 B.R. at 544, citing Computer Task Group, Inc. v. Brotby (In re Brotby), 303 B.R. 177, 191 (9th Cir. BAP 2003). I find that the Trustee submitted adequate evidence to support Plan feasibility, and I conclude that the feasibility *847confirmation requirement in § 1129(a)(ll) is satisfied.
3)Cramdown
As noted above, the Plan provides current DSI shareholders with two options: They can retain their shares of common stock in the reorganized DSI or they can sell their DSI stock for a purchase price not less than $7.00 per share. Although the Plan specifically provides for an overbid option for any interested parties, including Mr. Holdner and Ms. Baum (see particularly § 7.2 of the Plan), the Plan at the outset relies on Mr. Kreitzberg to fund Plan obligations, including shareholder buyouts, through purchasing 160,-000-170,000 shares of DSI treasury stock for $7.00 per share. Mr. Holdner objects that the Plan is unfair to shareholders because it will allow Mr. Kreitzberg to obtain control of DSI and dilute the share ownership interests of shareholders who elect to retain their stock in DSI.
I find that the Plan does not’ discriminate unfairly among the DSI shareholders: They have the option to retain their shares or sell them for $7.00 a share, giving them a market for their shares at a premium over liquidation value. Those shareholders who retain their DSI shares will have their ownership interests diluted through the recapitalization of the company, and I find nothing inequitable about that: the injection of funds through implementation of the Plan will allow DSI to pay its creditors and administrative expense claimants, to pay selling shareholders for their shares, and to retain working capital to fund operations going forward. In these circumstances, I conclude that the Trustee has met her burden of proof to establish that the Plan is fair and equitable and, again, is not unfairly discriminatory in its treatment of the DSI shareholders. The requirements for cramdown have been met.
4) Other § 1129 requirements
The Trustee submitted evidence that the requirements of §§ 1129(a)(4), (5), (7), (9), (10) and (12) are satisfied, and Mr. Hold-ner has raised no discernible or effective arguments to the contrary. As noted above, the requirements of §§ 1129(a)(6), (13), (14), (15) and (16) do not apply. Accordingly, I conclude that the confirmation requirements of § 1129 have been satisfied.
5) Renewal of objections to the Disclosure Statement
Mr. Holdner filed the Renewal of his objections as to the adequacy of the Disclosure Statement in advance of the Confirmation Hearing, and in his argument at the Confirmation Hearing, he referenced the objections stated in the Renewal as a principal basis for denying confirmation of the Plan. As previously noted, in her Response to the Renewal, the Trustee argued that since my order approving the Disclosure Statement was not appealed, the objections stated in the Renewal were moot.
Under the Federal Rules of Bankruptcy Procedure, an order approving a disclosure statement is recognized as an immediately appealable .final order. See, e.g., Rule 8002(d)(2)(E) and the Advisory Committee notes to Rule 8002. However, the Ninth Circuit, relying on Fifth Circuit authority, Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1154-56 (5th Cir. 1988), has held that alleged inadequacies in a disclosure statement can be raised at confirmation because “the inadequacy of disclosure can only injure a [party in interest] if the plan is eventually confirmed.” Everett v. Perez (In re Perez), 30 F.3d 1209, 1216-17 (9th Cir. 1994). Accordingly, I have considered Mr. Holdner’s objections to the Disclosure Statement stated in the Renewal but not *848previously addressed in this Memorandum Opinion, including the following:
a) “[T]he Trustee fails to disclose the immediate pending sale of [the Main Office property] to Portland Fashion Institute, LLC and immediate availability of funds.” Although Mr. Holdner clearly wishes it were otherwise, as stated in the Trustee Disclosure. Statement Response, there is no pending sale of the Main Office property. I denied the Holdner Sale Motion by order entered on June 21, 2016. That order was not appealed, and no further motion to approve a sale of the Main Office property has been filed. In any event, as noted by the Trustee, the proposed sale of the Main Office property was described in Section III.C. of the Disclosure Statement.
b) “[T]he Trustee fails to disclose the potential claim for. damages against [Mr.] Kreitzberg in the federal lawsuit that would benefit the [DSI] estate.” DSI’s prayer for relief in the Complaint in the District Court Litigation does not assert a claim for damages. See Exhibit 1, Exhibit C attached. I perceive no error in the failure of the. Disclosure Statement to include a description of Mr. Holdner’s unsupported contentions that damages might be asserted (let alone collected) in claims to be added in thé District Court Litigation beyond what already is includéd in Section II.B. of the Disclosure Statement.
c) “[T]he Trustee fails to disclose a filing of a lis pendens by [Mr. Kreitzberg] that was later determined to be invalid.” Mr. Holdner fails to explain what relevance such disclosure would have to consideration of the Plan by interested parties, and I do not perceive any relevance.
d) “The Trustee has stated in the draft plan of reorganization that if [Mr.] Hold-ner and [Ms.] Baum refuse to sell their shares they will be sued, an act of extortion.” The Plan says no such thing.
The Renewal goes on at length to state a further litany of allegations as to defects in the Disclosure Statement and Plan that are similarly materially inaccurate, irrelevant or both. Ultimately, I conclude that I did not err in approving the Disclosure Statement as containing adequate information to allow interested parties to make an informed decision on acceptance or rejection of the Plan, and I will overrule Mr. Holdner’s confirmation objections based on alleged inadequate information in the Disclosure Statement.
VI. CONCLUSION
For the foregoing reasons, I conclude that the Trustee has met her burden of proof with respect to all applicable standards for confirmation of the Plan, and I will enter an order confirming the Plan. Counsel for the Trustee should submit for signature an order confirming the Plan, completed and substantially in the form attached to the Confirmation Memorandum, with attached appendices, within the next week.
. Unless otherwise indicated, all chapter and section references are to the federal Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure are referred to as "Civil Rules.”
. The background information set forth herein comes primarily from the Trustee's Second Amended Disclosure Statement (Docket No. 161) ("Disclosure Statement”), approved by order (Docket No. 164) entered on October 6, 2016. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500172/ | Memorandum and Opinion Discharging Non-Stafford Portion of Navient Solutions, Inc. Student Loans
Janice Miller Karlin, United States Chief Bankruptcy Judge
This adversary proceeding is before the Court on Plaintiff/Debtor Paula Maxine Edwards’ complaint to discharge a portion of the student loans she owes Navient Solutions, Inc. (Navient) under 11 U.S.C. § 523(a)(8).1 That statute generally states that educational loans are excepted from a Chapter 7 discharge unless the debt imposes “an undue hardship on the debtor and the debtor’s dependents.”
The Court conducted a trial and is now prepared to rule. Because the Court finds that Debtor has carried her burden to show repayment of the loans would create an undue hardship on her and her family, as required by § 523(a)(8), the Court grants judgment to Debtor, discharging the non-Stafford portion of the loans she owes Navient.
1. Background and Findings of Fact
Debtor filed her Chapter 7 bankruptcy petition in October 2015, and received her discharge in March 2016. At the time of filing, she had no secured debt, but scheduled nearly $188,000 of unsecured debt. Of this total, she claims about $151,000 in student loans. Prior to the trial on the claim against Navient, the Court granted summary judgment to the U.S. Department of Education (“DoEd”) on Debtor’s § 523(a)(8) claim against it, deciding for several reasons that the almost $72,000 of Debtor’s student loans owed to the DoEd were not dischargeable. One of the key reasons for this finding was. that DoEd offers a repayment plan (with a debt forgiveness component). The plan requires very small monthly payments, based on income, and Debtor agreed she could make the small payments.2
Debtor admitted at trial that she has very recently been accepted into an income based repayment program for those loans, and understands her monthly payment will be .somewhere between $20 and $115; the precise amount has not been determined. *852The DoEd represented to the Court in its summary judgment motion—unopposed on this point—that Debtor would likely need to only pay approximately $21 a month so long as her current income and household size remained constant. The payment would increase, after the annually required certification, if her income increases or her expenses decrease as a result of a reduction of family size or for any other reason.3
Debtor is a thirty six year old single mother of two daughters who are fifteen and six years old. Neither Debtor nor her children suffer from any physical or mental disability or illness. She receives some child support from the father of her older child when he is working (about $200 a month), but receives none from the father of her younger child and does not expect to receive any. In an attempt to maximize her income, she has supplied information to child support collection personnel to aide in collecting support from him, but her efforts have been unsuccessful.
At the time she filed her bankruptcy, Debtor was driving a twelve year old car and had no car payment. Recently, however, the struts and transmission went out on that car and she needed to replace it. She apparently did not have the money for a down payment, as her parents both cosigned the note and loaned her the $1500 down payment required to purchase the used 2013 Nissan Altima. The car cost $14,700, and her monthly payments are $237.
In addition to now having a car payment, her car insurance increased; she testified it went from $53 per month to $119 per month.4 Because she had not predicted this increase in her vehicle insurance, Debtor tried to lower her monthly car payment by dropping the extended warranty she purchased with the car. When she learned it would not lower her payments (instead merely shortening the length of her loan), she did not pursue that option.
Debtor is in her fourth year as an elementary school teacher. She incurred her student loans while pursuing a bachelor’s degree in education from Newman University. She chose Newman University, a private college, despite its higher cost of attendance, because it offered a program with evening classes that allowed her to complete her degree while working full time so she could support her (then only) child. She used her student loans for tuition, books, and to pay living expenses not paid with her earnings as a paraprofessional. She did not study abroad or take any classes unnecessary to her degree.
Debtor’s annual salary is $35,300 for work performed during all but approximately 2 months a year. The income and expense schedules she filed with her petition indicate that she nets $2699.77 in income each month (consisting of $2085.69 net salary, $183 child support, and $431.08 in amortized tax refunds5) and $2698.33 in *853expenses, leaving a net balance of $1.44. Her expenses include $500 a month for rent, $170 a month for cable, cell phones, and internet, $950 a month for food and housekeeping supplies for her household of three, and $150 a month for entertainment.
Regarding her food and housekeeping budget, Debtor testified that she and her daughters used to eat out two to three times a week, depending on her older child’s sports schedule. But she has already had to reduce this expense due to the added car and insurance expenses, and due to increased gas and maintenance expenses she now incurs due to her daughter borrowing her grandfather’s old pickup truck since recently reaching driving age.
Regarding her entertainment budget, Debtor testified that she takes only one vacation a year—an annual vacation to Branson with her extended family, which has been a family tradition since her childhood. Although her parents pay for all lodging and food, she estimates her expenses are approximately $500 to $700 for tickets to a show and an amusement park. This appears to be the only real luxury for this family.
Another exhibit admitted at trial showed that she actually has higher expenses in some categories than she included on her expense schedule. The largest discrepancy (besides those related to the car purchase) is for medical/dental expenses. She estimated $0 for medical/dental on Schedule J, but Exhibit 4 showed she had actually spent $2,106 for health related expenses in 2015 (in addition to the cost of health insurance). That would equal approximately $175/month in expenses for which she budgeted zero. This appears a reasonable expense for a family of this size (while the $30/month cost of health insurance reflected on Schedule J appears quite low).
Prior to filing her bankruptcy petition, Debtor’s wages were being garnished (or threatened by garnishment) by two creditors, including the DoEd6 and Discover Bank, and two other creditors had recently taken judgment against her—Asset Acceptance LLC, Bank of America, and Capital One Bank. Those garnishments stopped upon filing of her bankruptcy, and Debt- or’s monthly income and expenses are now fairly stable, at least while collection on her student loans remains at bay.
As noted above, Debtor testified to some changes to her income and expenses since filing. First, her annual salary increased by $200, due to the lock-step pay scale for teachers in her district.7 But as previously noted, her expenses have increased far more than her salary; her expenses as of November 2016 are as much as $450 a month higher than she reflected on Schedule J when she filed bankruptcy a year earlier (at least $20 to DoEd, $237 car payment, $19 increased car insurance, and $175 in uninsured medical expenses).
Debtor also testified extensively about the dim prospects for future income increases in her profession, due to no fault of her own. Unless she returns to school for graduate classes (an expense her budget *854shows no ability to fund), her salary is capped by her school district’s pay scale at $35,700 per year, only $400 more than she’s making now. Debtor has considered moving to a school with a higher pay scale, but she credibly testified that even if she could find a higher paying position elsewhere, it was not feasible at this point in her life and would not likely net more after additional expenses. She and her extended family live in the same town and they help her with childcare and transportation. She has the same school breaks/holidays as her children by teaching in the same school district where her daughters attend school, which helps to minimize childcare costs for those school breaks. In addition, she is able to secure affordable housing in her small town (paying only $500,a month for a small three bedroom home) while keeping transportation expenses low because of her minimal commute.
Debtor is working in the very field in which she obtained her degree, and she is unaware of any realistic way to increase her income. Although she does not work during the eight to nine week summer break from teaching, she credibly testified that for now, childcare costs would be offset against the limited income she could earn during the summer, assuming she could consistently find a job. She has taught summer school in the past and testified she may do so in the future.
Debtor’s exhibits show Debtor’s lengthy loan history. She took out her first student loans in 2001 and 2002. She then borrowed significant amounts each year between 2004 and 2008. Debtor ultimately consolidated her federal student loans in 2012. In addition to the approximately $72,000 non-dischargeable debt ■ she owes the DoEd, Debtor owes $56,640.15 to Navient for “tuition answer loans,” and $8,354.93 to Na-vient for Stafford loans.8 Debtor testified she is not seeking discharge of the Stafford loans held by Navient, as the school where she works is a “Title 1” school and she understands that after a certain number of years teaching at a Title 1 school, those loans will eventually be forgiven. This is yet another reason Debtor has elected to remain in the Wellington School District and at her particular school.
The exhibits also show that Debtor attempted to make some payment arrangement with Performant Recovery on her DoEd loans in June 2015. She also included as exhibits several examples of handwritten notes from telephone calls referencing “Navient,” “Fed. Default,” or “Loan Rehabilitation.” But these handwritten notes are undated, and it is unclear how extensive were her attempts to make payment arrangements and on which loans. Debtor freely admits her confusion as to who she owes on which student loans, or who owns or services which loans—a complaint this Court frequently hears.
The exhibits do show that since Debtor’s tuition answer loans from Navient were initially disbursed in December 2007 and January 2008, Debtor made one payment of $365.05 in April 2009, and then made $150 payments in July, August, and September 2010. No other payments have been made on these Navient tuition answer loans, and Debtor presented no additional evidence that she made any payment or attempted to negotiate a repayment arrangement for the last six years. Her only other effort to repay student loans due Navient was her decision to teach at a *855Title 1 school and to remain there until her Stafford loans can be forgiven.
Based on the exhibits provided by Debt- or, if Debtor were to remain on the “Standard Billing” payment method with the “Full Principal and Interest” payment plan, her monthly payment on the Navient tuition answer loans would equal $314.75. This figure may be dated, however, as the interest rate on these loans is 9.75%, and the exhibit containing those amounts appear to be from 2015. While no witness explained the terms “Standard Billing” or “Full Principal and Interest,” some elementary math shows that the repayment term is 15 years ($30,005 -r $166.69 = 180 months/15 years, and $26,653.62 -t- $148.06 = 180 months/15 years). In addition, no evidence was presented that any alternate repayment plans are available , to Debtor on these private student loans as was the case with the DoEd loans.9
Debtor testified that in addition to paying the small amount she expects to pay to DoEd under its repayment plan, she would likely be able to pay $50 a month toward her Navient loans, but not as much as $100 a month. She testified that she does not believe she can ever repay the total amount owed to Navient.
11. Conclusions of Law
An adversary proceeding to determine the dischargeability of particular debts is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter jurisdiction.10
Although a Chapter 7 discharge is generally designed to be a relatively quick method of discharging debts and providing debtors a fresh start, there are certain debts that Congress decided would not be dischargeable. Under § 523(a)(8), a Chapter 7 discharge does not discharge debts for educational loans11 “unless excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor’s dependents.” The Bankruptcy Code does not define the phrase “undue hardship.”
The Tenth Circuit, however, has adopted the three-part Brunner test for analyzing whether a debtor has shown that his or her student loan debt should be discharged because it would cause undue hardship.12 Under this test, the debtor bears the burden of proving, by a preponderance of the evidence: that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of liv-*856mg for herself or her dependents if forced to repay the loans; that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and that the debtor has made good faith efforts to repay the loans.13
If the court finds the debtor has failed to prove any of the three Brunner elements, the inquiry ends and the student loan is not dischargeable.14 Importantly, and as noted by the Tenth Circuit Bankruptcy Appellate Panel in Alderete v. Educ. Credit Mgmt. Corp.,15 the Tenth Circuit “makes it clear that it disdains ‘overly restrictive’ interpretations of this test, and concludes that it should be applied to further the Bankruptcy Code’s goal of providing a ‘fresh start’ to the honest but unfortunate debtor.”16 In addition, regarding nondischargeability proceedings generally, “exceptions to discharge are narrowly construed, and because of the fresh start objectives of bankruptcy, doubt as to the meaning and breadth of a statutory exception is to be resolved in the debtor’s favor.”17
A. Debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans.
This Court has had prior occasion to apply the Brunner test. In Buck-land v. Educational Credit Management Corp. (In re Buckland),18 the Court assessed whether the debtor carried his burden to show that his student loans should be discharged because they would cause undue hardship. Regarding the first prong of the Brunner test, the Court stated:
The first prong of the Brunner test requires Debtor to demonstrate more than simply tight finances. The Court requires more than temporary financial adversity, but typically stops short of utter hopelessness. A minimal standard of living includes what is minimally necessary to see that the needs of the debt- or and [his] dependents are met for care, including food, shelter, clothing, and medical treatment. Further, a court should also be hesitant to impose a spartan life on family members who do not personally owe the underlying student loan, particularly when those family members are children.19
Debtor’s evidence on the first prong of the Brunner test is convincing. Debtor’s realistic budget demonstrates it is difficult for her to cover her reasonable living expenses now, without making any payment to Navient. Her monthly income of $2699.77 relies on amortizing her anticipated tax refund, which has been in the $5,000 range the last two years (likely due to the earned income credits20 that Debtor receives as the single parent of two minors). This Court is well aware that refunds vary year to year and low income *857families often use them to catch up on bills that have become delinquent since the last tax refund was received, or to deal with unexpected expenses that often arise with children, vehicles, or healthcare.
Because Debtor’s expenses have increased since filing due to her need to purchase a reasonable replacement vehicle (and her omission of other expenses in her budget), it is difficult to see on paper how Debtor is presently covering those higher expenses even with no payment on her student loans. Although Schedule J showed a $1.44 monthly balance after expenses, as noted above, Debtor’s realistic expenses are now as much as $450 a month higher. Debtor testified one way she is trying to handle these additional expenses is by reducing her food budget (including eating out), which was admittedly high when she filed bankruptcy.
Ultimately, the Court finds Debtor cannot meet basic food, shelter, transportation, clothing, and medical treatment needs of herself and her two children if she has to pay any amount to Navient now. Even if Debtor stopped spending the $500 to $700 she has spent in the past on her annual family vacation, and totally eliminated her entertainment budget, she would still be unable able to make the Navient student loan payment.
Debtor also apparently has nothing saved for an emergency, and no line item in her budget for even minimal savings she might need in the event of any blip in her health or her children’s health, or for any other emergency that might arise. She even had to borrow $1,500 from her parents to buy a used replacement car—a necessity, and apparently could not obtain the loan without their co-signature. As a result of all these facts, Debtor has met her burden to show that, given her current income and expenses, she cannot maintain a minimal standard of living while repaying her student loans to Navient.
B. Additional circumstances exist indicating Debtor’s state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
Regarding the second prong of the Brunner test, this Court in Buckland stated:
The second prong of the Brunner test, which requires that additional circumstances exist indicating that the Debtor will be unable to repay the loans while maintaining a minimal standard of living for a significant portion of the repayment period, properly recognizes that a student loan is viewed as a mortgage on the debtor’s future. However, the debtor need not show a certainty of hopelessness. Instead, the Court must take a realistic look into the debtor’s circumstances and the debtor’s ability to provide for adequate shelter, nutrition, health care, and the like.21
When it adopted the Brunner test, the Tenth Circuit explained the reasoning behind this second prong. “The reason for this requirement is simple: A recent graduate’s salary might be so low that it is difficult to pay the loans now, but it is clear that his salary will increase in the future and therefore his loans should not be discharged.”22 First, regarding Debt- or’s income, as noted above, because of her chosen profession and its low pay scale, it *858is highly unlikely Debtor’s salary will increase significantly in the future, if at all, since she does not have the resources to return to school. And' even if she did, her school district’s pay scale only minimally rewards those efforts.
Second, the Navient loan documents suggest the repayment period on the Na-vient loans is 15 years. What does Debtor’s future hold, on the expense side, over the next 15 years? While it is likely her 15 year old will leave her care at some point in the next several years, the $200 child support that she has received, off and on, for this child will also likely terminate— perhaps only 3 years from.now when she turns 18. In addition, Debtor will be unable to claim the older daughter as a dependent on her tax return at some point, reducing the tax refund on which she now relies to try to meet expenses. Many of Debtor’s expenses are fixed, regardless of family size, such as her car expenses. So it is completely uncertain whether Debtor’s expenses will be reduced significantly enough to the point where she can start repaying this loan once her older child is no longer dependent on her.23
Her younger daughter is only 6, meaning Debtor will likely support that child for the entire duration of these loans—at least for the vast majority of the repayment period. Because the Court has found Debt- or has no ability to realistically pay anything to Navient now, because it also has found Debtor’s income is not likely to increase, and because there is no prospect for reducing her expenses until her older daughter leaves the home, this would leave Debtor paying almost nothing on these loans for several years.
In addition to the reasons given above for this Court’s conclusion that Debtor’s state of affairs is likely to persist for a significant portion of the repayment period of the student loans, if we assume the best case scenario for Navient—that this is one of those rare cases where a mother would have no need or desire to continue providing any support the moment her child turns 18 (three years from now)—we know Debtor would then owe at least $56,600 at 9.75% interest (and likely several thousand more due to interest accruals). Assuming the 15-year repayment period reflected in the trial exhibits, she would only have 12 years to repay the loan. Simple math would show that she would need to pay $668 a month to retire $56,600 at 9.75% interest over the remaining years of the loan repayment period.24 Again, this as*859sumes no interest would accrue on that $56,600 during the 3 years she cannot realistically make payments, which is assuredly not the case. Even if Debtor could pay $50 a month on the student loans, as she thought might be possible, and devote the $500 to $700 she spends each year on her family vacation, these payments would not even retire the interest accruing on these loans. She will thus owe much more in 3 years than she owes today, with essentially the same salary but without the child support or income tax credit for her older daughter.
This Court’s experience, coupled with a review of Debtor’s expenses, does not reflect that a reduction of one child would result in a net savings anywhere close to the (at least) $668 a month payment that would then likely be required on the Na-vient loans. But far more important, the Court knows from the evidence received in the DoED portion of the case that Debt- or’s repayment obligation to DoEd (on the $72,000 nondischarged loan) will increase under the REPAYE program over the next 20 years if her expenses decrease. Similarly, in the even more unlikely event that her income increases, again, Debtor’s monthly payment to DoEd under the RE-PAYE program will likewise increase. And while there is no evidence how much her DoEd payment would increase, there is no reason to expect Debtor will have excess disposable income for a significant portion of the repayment period on the Navient loans. Accordingly, the Court finds Debtor has carried her burden to show that her state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
C. Debtor made good faith efforts to repay the loans given her limited income.
Regarding the third prong of the Brunner test, the Court in Buckland stated:
The third prong of the Brunner test requires the Court to determine if the debtor has made a good faith effort to repay the loan as measured by his or her efforts to obtain employment, maximize income and minimize expenses. The inquiry into a debtor’s good faith should focus on questions surrounding the legitimacy of the basis for seeking a discharge. A finding of good faith is not precluded by a debtor’s failure to make a payment. Undue hardship encompasses a notion that a debtor may not willfully or negligently cause his own default, but rather his condition must result from factors beyond his control.25
In other words, the inquiry for the third prong is not necessarily limited to the amount or number of payments a debtor has made, but instead, to an analysis whether the debtor has made a good faith attempt to repay the loan by maximizing income and minimizing expenses.26
Admittedly, Debtor has not made any payments on the Navient loans in the last 6 years—coincidentally the age of her youngest daughter and thus the number of years she has been supporting her second child without help. Her only payments were in 2009 and 2010. Admittedly, she elected not to use significant tax refunds to *860make a payment, even a minimal amount. And while there are some exhibits showing she made some efforts to contact Navient, she did not supplement those exhibits with much testimony.
But this Court has previously held that a finding of good faith is not precluded by a debtor’s failure to make payments,27 and that rationale applies here, too. Debtor did demonstrate to the Court’s satisfaction that she was really unable to make anything but a de minimis payment, if at all, on her student loans during the last six years. In addition to these very substantial student loans owed to Navient and DoEd, she listed $37,000 in other debt when she filed this bankruptcy, and was facing garnishments from at least two creditors and judgments from two others. And while it would be better for her case had she paid even $10 a month from her tax refunds, in light of her life situation—attempting to raise two children on her own with very little child support, and with 'a small income even given her teaching degree—her minimal efforts should qualify under the totality of her circumstances. There was no evidence she willfully or negligently caused her own default, and the Court does not believe she did.
This Court’s finding on this third element is also buttressed by Debtor’s decision to work in a Title 1 school. Debtor testified one reason she remains at her school is that the Stafford component of the Navient student loans (which she does not seek to discharge herein) will be forgiven at some point. While making monetary payments would have been very difficult for this Debtor in light of her financial situation, she is effectively helping retire a part of her student loans by teaching at this school. So she is not trying to simply wipe her hands clean of all her student loan obligations. Her decision to remain at a Title 1 school should count for something, and this Court finds that this fact helps her meet the requirement that she made good faith efforts, in light of her financial circumstances, to repay the loans she owes Navient.
While it is true that Debtor spent $500-$700 a year during her extended family’s long-standing family vacation, the Court does not find that this expenditure alone should disqualify Debtor from discharging over $56,000 in student loans. As the Tenth Circuit has noted, “the good-faith requirement ‘should not be used as a means for courts to impose their own values on a debtor’s life choices.’ ”28 And as this Court has previously held, a court should be “hesitant to impose a spartan life on family members who do not personally owe the underlying student loan, particularly when those family members are children,”29 As this was the only evidence of any “excess,” and because it is not much of one, the Court elects not to punish Debtor’s two children because she made the choice to incur so much debt for an education that would likely not provide remuneration sufficient to repay the debt.
' As this Court noted in Junghans v. William D, Ford Federal Direct Loan Program (In re Junghans),30 this Debtor also has little hope for increased income, through no fault of her own. She has consistently held a job since she obtained her teaching degree, and she has made reason*861able efforts to maximize income and minimize expenses. This Court has already found her $72,000 in DoEd student loans are nondischargeable, meaning she will likely have no disposable income with which to pay these Navient loans during the repayment period of those loans. In other words, her failure to make more payments stems only from fact that she has found herself in a severe financial situation, not because of any attempt to evade payment. •
III. Conclusion
The Court found Debtor to be an honest and hardworking individual who appears to be doing her best to provide for her family—not a debtor attempting to abuse the bankruptcy system. Because the Tenth Circuit disdains “overly restrictive” interpretations of the Brunner test, because the test should be applied to further the Bankruptcy Code’s goal of providing a ‘fresh start’ to the honest but unfortunate debtor, and because exceptions to discharge are to be narrowly construed, the Court finds under these facts that the statutory exception must be resolved in Debtor’s favor. Debtor’s § 523(a)(8) claim again Defendant Navient is granted, and the two tuition answer loans owed to Na-vient are discharged.
It is so Ordered.
. All future references to title 11 will be to code section only.
. See Doc. 58 in this Adversary Proceeding, Order Granting Summary Judgment to Department of Education.
.Id. at pp.4-5 ("The REPAYE plan was instituted in December 2015 and is the most flexible repayment plan available under the Direct Loan Program. Payments under REPAYE are generally ten percent of discretionary income, and after twenty years of repayment at this rate, the remaining balance on undergraduate loans is forgiven under the plan.” "Under the REPAYE plan, therefore, Debtor’s repayment amount would be adjusted annually, based on her then income and family size.”)
. Debtor’s Schedule J at flling showed vehicle insurance of $90 per month, so the increase is only $19 higher than budgeted, assuming this is the only vehicle Debtor insures.
. This estimate is based on the fact Debtor received tax refunds of $5173 and $5179 for tax years 2014-2015, which averaged equals approximately $5176, or about $431 a month if amortized over 12 months. Debtor testified that she uses her tax refunds throughout the year, after receipt, to pay expenses as they *853arise. She has never used her refund to make payments on her student loans.
. Exhibit 6 showed that DoEd was preparing to garnish 15% of Debtor’s disposable pay every pay period. Kansas law allows even a higher rate. See K.S.A. § 60-2310 (Kansas wage garnishment statute, which allows garnishment of 25% of aggregate disposable income). If those creditors pursued those garnishments, 15% of Debtor’s $2,699 disposable income would equal $404 per month and 25% would be $674 per month.
. Despite testifying at length about the lockstep salary schedule her school uses, the Court remained confused about why she was not earning $35,700 instead of $35,300 due to her 4 years of service.
. The parties stipulated that all Debtor’s loans with Navient total $65,837.53. The totals shown in the exhibits, however, do not match that amount ($56,640.15 + $,8354.93 in Stab ford loans = $64,995.08). The Court cannot explain the discrepancy in the total numbers, but because the differential is small, the exact balance is immaterial to the analysis.
. "Private student loans are funded by banks, not the government, and banks are not required to offer the same alternatives to struggling borrowers as federal loan servicers. Unlike federal student loans, private student loans generally do not offer repayment plans contingent on a borrower’s income, meaning that private student loan debtors facing even a temporary hardship are often unable to negotiate affordable repayment plans with their lenders.” Anne E. Wells, Replacing Undue Hardship with Good Faith: An Alternative Proposal for Discharging Student Loans in Bankruptcy, 33 Cal. Bankr. J. 313, 324 (2016) (internal citations omitted).
. 28 U.S.C. § 157(b)(1) and § 1334(b).
. Specifically, educational loans are:
(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; 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^]
There is no dispute that the Navient loans fall within this definition.
. Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir. 2004).
. Id. at 1309-10.
. Mat 1307.
. Alderete v. Educ. Credit Mgmt. Corp., 308 B.R. 495 (10th Cir. BAP 2004) (internal quotation omitted).
. Id. at 503.
. DSC Nat'l Properties, LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th Cir. BAP 2012) (internal quotations and alterations omitted).
. 424 B.R. 883 (Bankr. D. Kan. 2010).
. Id. at 889 (internal quotation marks and citations omitted).
. Kan. Stat. Ann. § 79-32,205 (Kansas earned income tax credit).
. Buckland, 424 B.R. at 889-90 (internal quotation marks and citations omitted).
. In re Alderete, 412 F.3d 1200, 1205 (10th Cir.2005). See also Polleys, 356 F.3d at 1306 (noting that “Section 523(a)(8) was designed to remove the temptation of recent graduates to use the bankruptcy system as a low-cost method of unencumbering future earnings.”)
. See Innes v. State of Kansas (In re Innes), 284 B.R. 496 (D. Kan. 2002) (agreeing with bankruptcy court, which "rejected the defendants' argument that once a debtors' child turns eighteen years of age then a court may no longer consider any of the expenses associated with that child in determining undue hardship. The bankruptcy court questioned any assumption that a child immediately becomes self-supporting upon turning eighteen. Taking a practical viewpoint, the bankruptcy court observed, as have other courts, that many undergraduate college students are still dependent on their parents.”). But see Alderete, 412 F.3d at 1205 (affirming finding of the bankruptcy court that as debtors “children reach the age of majority, [debtors] will have less strain on their family budget,” but not addressing debtors’ fixed expenses that will not change when their children reach the age of majority).
. The Court here merely consulted amortization tables. See O’Toole v. Northrop Grumman Corp., 499 F.3d 1218, 1225 (10th Cir. 2007) (discussing Federal Rules of Evidence 201(b)’s standards for judicial notice and stating ”[i]t is not uncommon for courts to take judicial notice of factual information found on the world wide web). Also, the Court believes it just as likely that Debtor would try to support her daughter through college, given how long it took her to get through college and given the financial situation she now faces due in part to taking out large student loans to get her degree. If one assumes Debtor would support her daughter even through age 21, or 6 years from now, that would leave 9 *859years of the 15-year repayment period, requiring $789/month to Navient on the $56,600 balance (and that assumes no interest would accrue during those 6 years). Alternatively, if she somehow got another 15-year repayment period, she’d have much more than $56,600 to repay, still at 9.75% interest.
. Buckland, 424 B.R. at 889-90 (internal quotation marks and citations omitted).
. Volleys, 356 F.3d at 1309.
.Also see Innes, 284 B.R. 496 at 506 (holding that because a debtor’s conduct is evaluated “in the broader context of his total financial picture,” a finding of good faith is not precluded by the debtor's failure to make a payment).
. Alderete, 412 F.3d at 1206 (quoting Polleys, 356 F.3d at 1310).
. Buckland, 424 B.R. at 889.
. No. 01-41733, 2003 WL 23807971 (Bankr. D. Kan. May 13, 2003). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500173/ | ORDER DETERMINING APPLICABLE STATUTE OF LIMITATIONS TO CLAIM AND RESCHEDULING HEARING
Janice D. Loyd, U.S. Bankruptcy Judge
This matter is before the Court on. Debtors’ Objection to Proof of Claim of Alleged Priority Secured Creditor Tambra Lynn Kimball (“Objection”) [Doc. 27] and the Response to Objection of Creditor Tambra Lynn Kimball (“Tambra”) (“Response”) [Doc. 29]. The basis of Debtor’s Objection is that the claim for back child support of Tambra, Debtor Robert B Kim-ball’s (“Robert”) ex-wife, is barred by the statute of limitations. In her Response, Tambra asserts that the statute of limitations was extended by Robert’s voluntary payment of his child support obligation after the expiration of the statute of limitations. By its Order Continuing Hearing on Debtors Objection to Proof of Claim the court directed the parties to submit briefs on the issue of the statute of limitations under the child support order in the Decree of Divorce issued by the State of Utah. [Doc. 37]. Debtor, Robert, timely submitted his Brief on the Identified Subject of Tolling of Statute of Limitations of Child Support as Ordered by State of Utah (“Debtor’s Brief) [Doc. 39]. The creditor, Tambra, failed to file a brief as directed by the Court. Despite Tambra’s failure to submit a brief, this Court must consider the case on the merits. “Courts are not required to grant a request for relief simply because the request is unopposed.” In re Millspaugh, 302 B.R. 90, 93 (Bankr. D. Idaho 2003); In re Franklin, 210 B.R. 560, 562 (Bankr. N.D. Ill. 1997); Nunez v. Nunez (In re Nunez), 196 B.R. 150, 156-57 (9th Cir. BAP 1996) (the BAP observing that “[t]he granting of an uncontested motion is not an empty exercise but requires that the Court find merit to the motion.”).
This Court has jurisdiction over this contested matter of the Debtor’s objection to the creditor’s claim pursuant to 28 U.S.C. §§ 157(a)(1), 157(b)(2)(B) and 1334 and Rules 3007 and 9014 of the Fed. R. Bankr. P.
Background
The essential facts do not appear to be in dispute. Robert and Tambra were divorced pursuant to a Decree of Divorce entered in the Second District Court for Weber County, State of Utah on September 30, 1996, in the case styled, “Tambra Alexander-Kimball, Plaintiff v. Robert B. Kimball, Defendant, Civ. No. 964902306DA”. [Doc. 39-1], They had one child together bom on May 23,1993. [Doc. 39]. Pursuant to the Divorce Decree, Tam-bra was granted custody of the child, and Robert was to pay child support in the amount of $165.00 per month plus $25.00 each month for the child’s medical expenses until the child reached eighteen years of age or until she graduated from high school. [Doc. 39-1]. This amount was never amended or modified. [Doc. 39 ¶ 2].
Over the years Robert made various child support payments, but there is apparently no dispute that he did not make *864all the monthly payments required. Tam-bra has filed a Proof of Claim for a priority domestic relations obligation for child support arrearages in the amount of $28,685.00. [Claim # 3-1]. This amount is apparently based upon an Affidavit executed by Tambra that as of the spring of 2015 Robert owed that much child support ar-rearage. [Doc. 39 ¶ 3]. In Robert’s Brief he takes issue with this amount on the basis that under Utah law the statute of limitations for the collection of child support is the longer of four years from the date the child reaches majority or eight years from the entry of a sum certain by a tribunal. Since the child attained majority and graduated from high school in May 2011, child support terminated at that time and Robert would only have been obligated for payments accruing prior to that date.
Robert contends that Tambra cannot enforce child support arrearages any earlier than eight years prior to the filing of the bankruptcy petition, or June 2008, through the child’s attainment of majority in May 2011. For that three year time period, the total child support and medical expenses would, according to Robert, have been $6,840.00. [Doc. 39 ¶ 16]. Robert claims that in the eight years prior to the filing of the bankruptcy petition (since June, 2008) he has paid Tambra child support in the amount of $3,030.00. Thus, he asserts that the total amount which he owes her pursuant to her Proof of Claim is $3,810.00. [Doc. 39 ¶ 18].
While Tambra did not file a brief on the statute of limitations question requested by the Court, in her Response to Robert’s Objection to Proof of Claim she agreed with Robert that the applicable statute of limitations was eight years under 78b Utah Code § 5-202 [6]:
(a)A child support order or a sum certain judgment for past due support may be enforced:
(i) within four years after the date the youngest child reaches majority; or
(ii) eight years from the date of entry of the sum certain judgment entered by a tribunal.
(b) The longer period of duration shall apply in every order.
(c) A sum certain judgment may be renewed to extend the duration.
In agreeing that the statute of limitations of Utah applies, neither party raises the unsettled and potentially determinative choice-of-law issue presented here. As this Court sees it, the key question is whether this Court should apply the choice-of law rules of the forum state (Oklahoma) in which it sits or the choice-of-law rules of Utah where the child support order was entered and where Tambra and the child reside.
Applicable Law
It is well established that when a federal court sits in diversity, it must look to the forum state’s choice of law rules to determine the controlling substantive law. Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945); Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Garcia v. International Elevator Co, Inc., 358 F.3d 777 (10th Cir. 2004); New York Life Insurance, Co. v. K N Energy, Inc., 80 F.3d 405, 409 (10th Cir. 1996). On the other hand, when it comes to an issue of procedural law, the general rule is that the law of the forum state applies. Sun Oil Co. v. Wortman, 486 U.S. 717, 108 S.Ct. 2117, 100 L.Ed.2d 743 (1988) (holding that the Constitution does not bar application of the forum state’s statute of limitations to claims governed by the substantive law of a different state). Statutes of limitation are generally regarded as procedural, and thus many federal courts *865hold that the applicable statute limitations is that of the forum. The Dow Chemical Corp. v. Weevil-Cide Co., Inc., 897 F.2d 481, 483-84 (10th Cir. 1990) (“A federal court hearing a diversity action applies the statute of limitations which would be applied by a court of the forum state.”). In Thornton v. T & W Tire, L.P., 410 F.Supp.2d 1098, 1101 (W.D. Okla. 2008) the court stated:
“[W]hen the question is which state’s limitations period applies, choice of law principles hold that it is ordinarily the limitations period of the forum state which applies rather than the limitations period in the state with the most significant contacts.”
For choice of law purposes, Oklahoma regards a statute of limitations as procedural and applies the law of the forum. Trinity Broadcasting Corp. v. Leeco Oil Co., 1984 OK 80, 692 P.2d 1364; Western Natural Gas Co. v. Cities Service Gas Co., 507 P.2d 1236 (Okla. 1972); Masquat v. Daimler-Chrysler Corp., 2008 OK 67, 195 P.3d 48.
Here, in contrast to a federal court sitting in diversity jurisdiction, we are. dealing with a bankruptcy court exercising federal question jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(B). The U.S. Supreme Court has never extended its holding in Klaxon applying the choice-of-law rules of the forum state in diversity cases to cases involving bankruptcy courts. Courts are divided on the issue of whether bankruptcy courts should apply the choice-of-law rules of the forum state or those of federal common law. The Second, Third, Fourth and Eighth Circuits have held that a bankruptcy court should apply the choice-of-law rules of the forum state in which it sits. In re Teleglobe Communications, 493 F.3d 345, 358 (3rd Cir. 2007); In re Payless Cashway, 203 F.3d 1081, 1084 (8th Cir. 2000); In re Gaston & Snow, 243 F.3d 599, 601-02 (2nd Cir. 2001); In re Merritt Dredging Co., Inc., 839 F.2d 203, 206 (4th Cir. 1988) (noting that “the argument for applying the Klaxon rule to state law questions arising in bankruptcy cases is compelling.”).
On the other hand, the Seventh, Ninth and Tenth Circuits have held that the choice of law or rules of the forum state generally are irrelevant in answering choice of law questions in federal question cases. Berger v. AXA Network LLC, 469 F.3d 804, 810 (7th Cir. 2006); Liberty Tool & Mfg. v. Vortex Fishing Systems, Inc. (In re Vortex Fishing Systems, Inc.), 277 F.3d 1057, 1069 (9th Cir. 2002); Lindsay v. Beneficial Reinsurance Co. (In re Lindsey), 59 F.3d 942, 948 (9th Cir. 1995) (“In federal question cases with exclusive jurisdiction in federal court, such as bankruptcy, the court should apply federal, not forum state, choice of law rules.”); Sterba v. PNC Bank (In re Sterba) 516 B.R. 579 (9th Cir. BAP 2014).
The Tenth Circuit has held that where jurisdiction is not based on diversity of citizenship, federal common law choice-of-law rules apply. Federal common law follows the approach outlined in the Restatement (Second) of Conflict of Laws. In Held v. Manufacturers Hanover Leasing Corp., 912 F.2d 1197, 1202-03 (10th Cir. 1990), the Tenth Circuit adopted the statute of limitations choice-of-law provision of the Restatement (Second) of Conflict of Laws § 142 stating:
“Instead, we adopt § 142 of the Restatement as the means of determining which state’s statute of limitation applies when a federal statute that is the basis of a claim does not specify the appropriate limitation. Section 142 provides:
Whether a claim will be maintained against the defense of the statute of limitations is determined under the principles stated in § 6. In general, unless the exceptional circumstances *866of the case make such a result unreasonable:
(1) The forum will apply its own statute of limitations barring the claim.
(2) The forum will apply its own statute limitations permitting the claim unless:
(a) maintenance of the claim would serve no substantial interest of the forum; and
(b) the claim would be barred under the statute of limitations of a state having a more significant relationship to the parties and the occurrence.
Restatement (Second) of Conflict of Laws (Supp.1988).”
In other words, the Restatement takes the position that statute of limitations choice of law questions should be decided in the same way as choice of law questions generally, abandoning its earlier position that statutes of limitation should be treated as procedural for choice of law purposes and governed by the law of the forum.1 Hamilton v. Cunningham, 880 F.Supp. 1407, 1413 (D.Colo. 1995); Lindsay v. Beneficial Reinsurance Co. (In re Lindsey), 59 F.3d 942, 948 (9th Cir. 1995) (“In federal cases with exclusive jurisdiction in federal court, such as bankruptcy, the court should apply federal, not forum state, choice of law rules.”). Thus, the first paragraph of § 142 provides the question of whether a claim will be maintained against the defense of the statute of limitations “is determined under the principles stated in § 6” i.e., the local law of the state with the most significant relationship to the limitations issue will govern. If the maintenance of a claim would serve no substantial interest of the forum and the claim would be barred by the statute limitations of a State with a more significant relationship to the parties or the occurrence, courts may decline to apply a forum’s statute of limitations pertaining to the claim and instead apply the other state’s statute barring it. Restatement (Second) § 142(2).
If the Court were to apply the criteria of Restatement § 142, it would appear that Utah has the most “significant relationship to the parties and the occurrence” so as to apply the Utah statute of limitations. The Decree of Divorce providing for the child support was entered in Utah, and the child and the m other still reside in Utah.2
This is one instance, however, in which federal common law under the criteria of the Restatement should not determine which state’s statute of limitations applies. To resolve interstate issues involving enforcement of child support obligations, in 1994 Congress enacted the Full Faith and Credit Child Support Orders Act (FFCCSOA), 28 U.S.C.A. § 1738B, Credit Child Support Orders Act (FFCCSOA), 28 U.S.C.A. § 1738B,3 which *867provides for specific rules as to the applicable choice of law in child support matters, including the applicable choice of law for the statute of limitations. Section 1738B(h) providing as follows:
(h) Choice of law.
(1) In general.—In a proceeding to establish, modify, or enforce a child support order, the forum State’s law shall apply except as provided in paragraphs (2) and (3).
(2) Law of State of issuance of order.—In interpreting a child support order including the duration of current payments and other obligations of support, a court shall apply the law of the State court that issued the order.
(3) Period of limitation.—In an action to enforce arrears under a child support order, a court shall apply the statute of limitation of the forum State or the State of the court that issued the order, whichever statute provides the longer period of limitation. (Emphasis added.).
In addition to the FFCCSOA, the applicable statute of limitations is also addressed in the Uniform Interstate Family. Support Act (“UIFSA”) adopted by both Utah and Oklahoma which provides that, “[I]n a proceeding for arrears under a registered support order, the statute of limitations of this state or of the issuing state or foreign country, whichever is longer, applies.” 43 O.S. § 601-604(B); 78b-14~604(2).4 The applicability of 28 U.S.C.A. § 1738B is not restricted to orders under the UIFSA but applies to all child support orders. Thus, regardless of whether the Utah child support order is registered in Oklahoma with the Department of Human Services under the UIFSA, the choice of law statute of limitations is the state with the longer statute of limitations.
Oklahoma clearly provides for the longer statute of limitations in child support actions than does Utah. In fact, in Oklahoma there is no statute of limitations for collection of child support arrearages, 12 O.S. § 95(10) providing, “Court-ordered child support is owed until it is it is paid in full and it is not subject to a statute of limitations.”
In her Response to Robert’s Objection that her claim is barred by the statute limitations of Utah, Tambra asserts that Robert’s 2015-2016 voluntary payments coupled with his acknowledgment of his obligation towards his past due child support revived the statute of limitations.5 The issue of whether Robert’s part payment and acknowledgment of his child support obligation extended or renewed the *868statute of limitations, however, is moot by virtue of this Court’s determination that the applicable statute of limitations for the enforcement of collection of child support is governed by 12 O.S. § 95(10) which places no limitations for the enforcement of child support. Thus, the statute limitations will never expire, and the question of Robert’s partial payment or acknowledgment of his obligation regarding the statute of limitation issue is irrelevant.
For the reasons set forth above, the Court finds that any claim of Tambra Lynn Kimball is not barred by the applicable statute of limitations. This does not mean, however, that her Proof of Claim is allowed as filed. “A proof of claim is deemed allowed unless a party in interest objects” under 11 U.S.C. § 502(a) and constitutes “prima facie evidence of the validity and amount of the claim” pursuant to Fed. R. Bankr. P. 3001(f).” Lundell v. Anchor Construction Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000). The filing of an objection to claim “creates a dispute which is a contested matter” under Fed. R. Bankr. P. 9014. The objecting party bears the initial burden of controverting a proof of claim and must “come forward with sufficient evidence and show facts tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves.” Id. To rebut a claim’s presumption of validity, the objecting party must produce “sufficient evidence to negate one or more of the sworn facts in the proof of claim,” in which case “the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence.” Id. The ultimate burden of persuasion lies with the claimant at all times. Wright v. Holm (In re Holm), 931 F.2d 620, 623 (9th Cir. 1991).
Robert, by objecting to Tambra’s claim, has placed at issue the proper amount of the claim for which he may be liable by virtue of both the termination of his obligation upon the child reaching majority and credits for payments which he has made. The determination of the amount of any claim to be allowed to Tambra Lynn Campbell is currently set for evidentiary hearing on December 20,2016 at 9:30 A.M. With the entry of this order, it is anticipated that the parties will need additional time in which to “crunch numbers” to arrive at the correct figure that is owed Tambra for child support arrearage. Accordingly, this evidentiary hearing will be rescheduled for January 24, 2017, at 2:00 p.m. Further, as neither party has filed a witness and exhibit list, the Court hereby directs the parties to file their witness and exhibit lists no later than 5:00 P.M. (CST), January 4, 2017, and to exchange exhibits no later than 5:00 P.M. (CST), January 17, 2017, pursuant to Local Rule 9014-1 and 9017-1(0).
.Prior to the 1988 amendments, the Restatement (Second) of Conflict of Laws § 142 provided:
"(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision barring the statute of limitations of another state.
(2) An action will be maintained if it is not barred by the statute of limitations of the forum, even though would be barred by the statute of limitations of another state, except as stated in § 143.”
. At the same time, Oklahoma has an interest, recognized by the adoption of the Uniform Interstate Family Support Act, 43 O.S. §§ 601-100 et seq., to see that child support obligations created outside the State of Oklahoma can be enforced in this state.
. The express policy of the FFCCSOA is "to establish national standards under which the courts of the various States shall determine their jurisdiction to issue a child support order and the effect to be given by each State to *867child support orders issued by the courts of other States.” Pub. L. No. 103-383, § 2(b).
. Both Utah and Oklahoma repealed their respective versions of the previous Uniform Reciprocal Enforcement of Support Act (“URESA”) and replaced it with the Uniform Interstate Family Support Act ("UIFSA”) January 1 and September 1, 1994, respectively.
. Interestingly, the law of Utah and Oklahoma differ as to the effect of a voluntary payment or acknowledgment of a debt as reviving or extending the statute of limitations. Utah Code § 78b-2-113 entitled "Effect of payment, acknowledgment, promise to pay” has been interpreted as not extending the limitations period if the promise, part payment or acknowledgment occurs after the applicable statute limitations has run. State Bank of Southern Utah v. Troy Hygro Systems, Inc., 894 P.2d 1270 (Utah 1995). By comparison, Oklahoma law provides a voluntary payment or acknowledgment of the debt made after the expiration of the original statute of limitations does permit the commencement anew of the statute of limitations. 12 O.S. 101; Keota Mills & Elevator v. Gamble, 2010 OK 12, 243 P.3d 1156; Central National Bank and Trust Co. V. Stettnisch, 1987 OK CIV APP 9, 821 P.2d 1066. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500174/ | JOINTLY ADMINISTERED
FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION ON ALLEGED DEBTORS’ MOTIONS TO DISMISS INVOLUNTARY PETITIONS (DOCS. *87021 & 15-30923: DOC. 27)1
Karen K. Specie, United States Bankruptcy Judge
THIS CASE is before the Court on Chapter 7 Involuntary Petitions filed by SE Property Holdings, LLC (“SEPH”) against Alleged Debtors, Peter H. Bos, Jr. (“Bos”) and Legendary Holding, Inc. (“LHI”) (collectively the “Alleged Debtors”). Alleged Debtors argue that the petitions should be dismissed because SEPH is the sole petitioning creditor, each Alleged Debtor has twelve or more qualifying creditors, and each is generally paying his and its debts as they become due. -In’ the alternative, Alleged Debtors argue that this Court should abstain from these involuntary cases because they involve, inter alia, a two party dispute between them on the one hand and SEPH on the other.
The evidentiary hearing lasted several days and spanned more than two months. In rendering this decision the Court has reviewed the parties’ motions, briefs' and memoranda; has considered multiple ore tenue motions by Alleged Debtors; and has taken and considered testimony of numerous witnesses. The Court has also reviewed significant portions of the more than 15,000 pages of exhibits admitted in evidence. Upon the totality of the circumstances, having fully considered all of the arguments and evidence, and for the reasons set forth below the Court has determined that it should abstain and dismiss these cases pursuant to 11 U.S.C. § 305(a).
Background
Alleged Debtors
Bos is an individual. Since 1976 he and companies he has owned, operated or otherwise been affiliated with have developed, built, leased and managed hundreds of millions of dollars’ worth of projects comprising over a million square feet of retail, lodging, residential, restaurant,, resort facilities, hotels, drug rehabilitation facilities, marine and mixed-use space along thé Emerald Coast of Florida. Bos is the sole owner and president of LHI. LHI is a holding company. It owns a 1% general partner stake and a 47% limited partner stake in Legendary . Group, Ltd. Legendary Group, Ltd., in turn, owns many companies that operate a variety of different businesses.
Bos and LHI’s affiliates and subsidiaries, together the “Legendary group,” own and operate some of the most well-known properties in the North Gulf Coast of Florida: Sandestin Golf and Beach Resort, Destín Commons Shopping Center, Regatta Commons Office Park, HarborWalk Village, Emerald Grande, Legendary Marine, Legendary Yacht Club, and Regatta Bay Golf and Yacht Club. The Legendary group employs over 500 people in Okaloosa County, Florida.
Alleged Debtors assert that those employees’ jobs are in jeopardy because of SEPH’s filing of the involuntary petitions. They also claim that the Legendary group of “Companies” is an important part of the Emerald Coast community of Florida, and that the Companies were economically healthy and meeting their obligations as agreed as of the filing of the involuntary petitions.
Bos, Wendy Parker, and Pete Knowles are the corporate officers of LHI. In addition to being the COO of LHI,- Pete Knowles is Vice-President of a number of the Legendary group entities. Bos is a sophisticated businessman who regularly relies on a team of attorneys, accountants *871and others. Bos and his team have made extensive use of corporations, limited liability companies, and various other operating entities. Bos and Pete Knowles testified that this form of doing business—use of single purpose entities to conduct different businesses—is common among real estate developers.
Alleged Debtors were affected significantly by the economic downturn, called by some the “great recession,” that began in 2007-08. In recent years they had been unable to service, curtail, or pay off many loans so they sought and obtained, from all of their lenders but SEPH, workout agreements, loan restructures and forbearance agreements. According to Bos, as of the date SEPH filed the involuntary petitions Alleged Debtors had made peace with thirteen out of fourteen lenders holding $258 million out of a total of $270 million in debt on 27 separate loans; the only creditor that Alleged Debtors have been unable to come to terms with is SEPH.
SEPH’s Claim
SEPH’s claim originated in 2006 with a loan made by Vision Bank to 213B Development Co., Inc. (“213B”), one of Bos’s companies and a member of the Legendary group. Bos and LHI each executed guaranty agreements in favor of Vision Bank. In 2009, after 213B defaulted on this loan and Bos and LHI failed to perform on their guarantees, SEPH filed suit against them in state court.2 Bos, LHI and 213B responded with multiple affirmative defenses and a counterclaim. At some point apparently Bos and LHI apparently decided to fight SEPH to the death rather than pay its claim. The parties have been unable, or unwilling, to settle.3 After more than four years of extensive and costly litigation, in October of 2014 the case finally went to a three- day bench trial, resulting in a ruling for SEPH and against Bos, LHI and 213B on all matters. The economic result of this legal battle rendered Alleged Debtors liable to SEPH on a final judgment that more than doubled the amount of SEPH’s original claim.4 To date, neither Bos nor LHI has made any post-judgment payment to SEPH.
SEPH’s Filing of the Involuntary Petitions
The spark that ignited SEPH’s filing of these involuntary petitions was its post-judgment discovery that Alleged Debtors had granted stipulated “charging orders” to two friendly insider creditors: SSI Des-' tin LYC 1, LLC (“SSI Destín”) and RB GOLF, LLC (“RB Golf’). These charging orders, entered within 90 days of SEPH’s filing of the petitions, gave SSI Destín and RB Golf first priority liens on Alleged Debtors’ ownership and membership interests in most, if not all, of the Legendary group entities.5 Because Bos owns 100% of *872the stock in LHI, and LHI in turn owns 48% of the Legendary group, the charging orders in favor of SSI Destín resulted, in effect, in SSI Destin’s judgment claim being secured by all of Bos and LHI’s valuable assets, to the detriment of SEPH.6
SEPH’s Pre-petition Collection Efforts
SEPH’s claim is partly secured by a mortgage on a vacant tract of land in Okaloosa County, Florida, owned by 213B. SEPH’s final judgment was in part for foreclosure of the mortgage. As of the date it filed these Petitions, SEPH had not requested a foreclosure sale date. The evidence of the value of this parcel was from SEPH’s expert appraiser, who testified that the value of this land as of the filing the involuntary petitions was $2.9 million.7
SEPH recorded a certified copy of its final judgment in the Official Records of Okaloosa, Escambia, Walton and Bay Counties, Florida, and filed a Judgment Lien Certificate (“JLC”) with the Florida Department of State. By virtue of an uncontested charging order, SEPH’s judgment claim became secured by a lien on LHI’s interest in Lorna Properties, LLC.8 Although Alleged Debtors argue that SEPH’s recording of the final judgment and JLC rendered SEPH’s claim secured by “several liens on real and personal property,” the evidence reveals that the opposite is likely true. The only real property that Bos has a direct ownership interest in is his exempt homestead to which SEPH’s judgment did not attach. The only personal property that either Bos or LHI have disclosed ownership of is comprised of their membership and stock interests in the Legendary group entities. By the time SEPH recorded its judgment and JLC, all of these assets were fully encumbered by the charging orders entered in favor of SSI Destín and RB Golf. The record is devoid of evidence that LHI owns any real property to which SEPH’s judgment lien could have attached.
SEPH garnished a bank account owned by Bos and his wife. Bos filed a Claim of Exemption for this account on the basis that he and his wife owned it as tenants by the entireties. SEPH did npt challenge this exemption so the Writ of Garnishment was dissolved.
Procedural History of the Involuntary Petitions
SEPH filed the involuntary petitions on September 4, 2015. Before filing their motions to dismiss, Bos and LHI filed emergency motions to require SEPH to post an indemnity bond pursuant to 11 U.S.C. § 303(e). The Court held the initial hearing on those motions over two days, on October 1 and 5, 2015.9 With consent of the *873parties, the Court considered the Alleged Debtors’ later-filed motions to dismiss, along with their ore terms denials of SEPH’s allegations, as answers to the petitions.
Initially, Bos filed a list of 39 alleged qualifying creditors. He then filed an amended list that contained 41 creditors and a second amended list that contained 37 creditors.10 LHI initially filed a list of 22 alleged qualifying creditors. It then filed an amended list of 23 creditors, and a second amended list of 25 creditors.
SEPH has had a reasonable opportunity to seek other creditors to join in the Petition pursuant to 11 U.S.C. § 303(c), but none have.
The issues on these contested petitions were tried on November 18-20, 2015 and January 12-13 and 15, 2016. The hearing on Alleged Debtors’ bond motions was continued indefinitely, pending this ruling.
Alleged Debtors’ Rule 15(b) Motion to Amend the Pleadings
At the conclusion of the evidence Alleged Debtors moved to amend their pleadings under Fed. R. Civ. P. 15(b). First, they requested that their lists of creditors be amended to include, as separate creditors, all entities on the real property tax bills from the Okaloosa County Tax Collector.11 Secondly, they requested their pleadings to be amended to include a denial that SEPH is a qualifying creditor. The Court is granting this motion; these issues are discussed below.12
Alleged Debtors’ Rule 52(c) Motions— Whether SEPH is a Creditor Qualified to file These Involuntary Petitions.
Bos and LHI also moved for judgment on partial findings under Fed. R. Civ. P. 52(c), arguing that SEPH failed to meet its burden to prove that it qualifies as a petitioning creditor.13 In support of this motion Alleged Debtors argue that SEPH’s recorded final judgment and JLC prove that it has a lien on all of their real and personal property in ■ Florida; that because SEPH did not offer evidence of what real and personal property its liens attached to, or the value of any such property, SEPH failed to meet its burden of proof,14 The logic of this argument is flawed and the factual basis for this argument is not supported by the evidence. The motion for judgment on partial findings will be denied.
A petitioning creditor must hold a non-contingent, undisputed claim that aggre*874gates at least $15,325 more than the value of any lien on property of the debtor securing such claim.15 The $15,325 threshold can only be composed of either the under-secured portion of a secured creditor’s claim or a totally unsecured claim.16 Alleged Debtors correctly argue that a petitioning creditor has the burden to prove that it is qualified under 11 U.S.C. § 303(b)(1).17 SEPH met this burden: it proved by a preponderance of the evidence that it holds an unsecured claim significantly in excess of the current statutory threshold of $15,325.18 Alleged Debtors cite authority to the effect that SEPH has the burden of proving that all statutory requirements of Section 303 have been met.19 But there is a dearth of authority, and Alleged Debtors cite none, that discusses what happens when a petitioning creditor meets its initial burden of proof, as has SEPH, and the alleged debtor argues that collateral securing the petitioning creditor’s claim has a value such that the under-secured portion of the claim is less than $15,325.
The legal issue most analogous in involuntary cases is which party has the burden of proof on whether a petitioning creditor’s claim is subject to a bona fide dispute under 11 U.S.C. § 303(b)(1). Consistent with the majority of cases on that issue, the Court finds that once SEPH met its initial burden to prove that it holds a qualifying claim, the burden shifted to Alleged Debtors to prove otherwise.
Courts in at least two Circuits and the Northern District of Florida have adopted a burden shifting approach for determining whether a petitioning creditor’s claim is subject to a bona fide dispute.20 In In re Rimell,21 two alleged debtors argued that the petitioning creditors—banks—held claims subject to a bona fide dispute. Alleged debtors asserted that the banks orally agreed, upon one debtor’s request, to modify the terms of the loans underlying the banks’ claims. In determining whether the claims were subject to a bona fide dispute, the Eighth Circuit held that the petitioning creditor must establish a prima facie case that no bona fide dispute exists. Then, the burden shifts to the debtor to prove the existence of a bona fide dispute. The bankruptcy court noted that the parties did not dispute the amounts due, the genuineness of the loan documents, or the effect of their terms. The bankruptcy court also concluded that there was no oral agreement to modify the loans. The Eighth Circuit found no clear error and sustained the bankruptcy court’s ruling.
In adopting the burden-shifting framework, the Rimell court relied on Bartmann v. Maverick Tube Corp.22 In Bartmann, the 10th Circuit held that the *875bankruptcy court erred as a matter of law in finding that a post-petition payment to one petitioning creditor proved that there was no bona fide, dispute as to that creditor’s claim.23 The Tenth Circuit voiced concern that without a burden-shifting framework a debtor could defeat an involuntary petition by merely asserting that a bona fide dispute exists, which is what Alleged Debtors are attempting here by merely asserting that SEPH’s judgment is secured by a lien on real and personal property.
In In re Speer,24 the alleged debtor argued that the involuntary petition should be dismissed because (1) the petitioning creditors’ claims were subject to a bona fide dispute or contingent as to liability; (2) she was generally paying her debts as they came due; (3) the involuntary petition was filed in bad faith; and (4) the court should dismiss or suspend the proceedings under the abstention statute. The court first addressed whether the petitioning creditors’ claims were contingent as to liability or the subject of a bona fide dispute. Relying on Second Circuit precedent the Speer, court set forth a burden-shifting framework for proving whether a petitioning creditor’s claim is subject to a bona fide dispute. Recognizing that a debt is subject to a bona fide dispute if there is an objective basis for either a factual or legal dispute as to its validity, that court held that the petitioning creditor must establish a prima facie case that no bona fide dispute exists; then, the burden shifts to the alleged debtor to prove the existence of a dispute.25 Applying this ruling to the facts before it, the Speer court held that all three petitioning creditors held qualifying claims.
'Applying the burden shifting approach here, once SEPH met its burden to prove a prima facie case that it holds a qualifying claim, the burden shifted to Alleged Debtors to prove their allegations to the contrary. Alleged Debtors did not meet their burden. They failed to prove that SEPH’s claim is fully secured, or that the amount of its under-secured claim is less than the statutory threshold for filing an involuntary petition. SEPH is qualified to be the petitioning creditor.
This ruling is entirely consistent with that in Farmers & Merchants State Bank v. Turner.26 In Turner, three creditors filed an involuntary petition. A confirmed Chapter 11 plan in a prior case involving the parties contained language conveying assets (real property and stock) to creditors, including the petitioning creditors, one of which was a bank holding a judgment.27 The confirmed plan established the value of real property to be conveyed at $1.1 million; this property was conveyed to the bank. In the involuntary case, all parties were aware of the provisions of the *876confirmed plan. The petitioning bank judgment creditor never put forward an undisputed amount of its claim;28 rather, it claimed standing to proceed as a petitioning creditor -based on the face amount of its judgment without giving a credit for the property it was to receive under the confirmed plan.29 This Court held that the judgment creditor bank had made a prima facie case showing that it held a qualified claim that had been reduced to a final judgment, and was not subject to a bona fide dispute as to liability.30 This Court then shifted the burden to the alleged debtor, who put on evidence that the judgment was either partially or fully satisfied by the property conveyed pursuant to the plan. This Court ultimately held that there was a bona fide dispute as to the amount of the petitioning creditor’s claim because it could not tell from the evidence whether the claim had been fully satisfied.31 The district court affirmed.32
SEPH has never disputed that property owned by 213B secures its claim in part. It introduced expert testimony that the value of that property as of the petition date was $2.9 million. At that point, SEPH had met its burden to prove that it held a qualifying claim: the amount of its under-secured judgment claim was still approximately $12 million.33 The burden then shifted to Alleged Debtors to prove their allegations that SEPH’s judgment lien had attached to other property the value of which was sufficient to reduce its under-secured claim to below the statutory threshold.
The difference between the facts here and those in Turner is that here, the Alleged Debtors argue that non-contractual events—SEPH’s recording of its final judgment and JLC—rendered SEPH’s claim completely secured, or its under-secured claim below the statutory threshold of $15,325. This is where the Alleged Debtors’ legal arguments and proof failed. Alleged Debtors proved, and SEPH does not deny, that SEPH recorded certified copies of its final judgment in several Florida counties. Under Florida law the recorded judgment could only attach to real property owned by Bos and LHI. The evidence shows that neither Bos nor LHI own any real property to which SEPH’s judgment could have attached. By Alleged Debtors’ own admission, LHI is a holding company; its only assets consist of membership interests and stock in separate companies. It owns no real property. Bos’s only interest in real property is the homestead that he owns jointly with his wife. Because this is Constitutional homestead, and because SEPH does not have a judgment against Bos’s wife, SEPH’s judgment cannot have attached to this property. So, although Alleged Debtors proved that SEPH recorded its judgment, they failed to prove that this recording caused the judgment to attach to any real property.
Similarly, Alleged Debtors proved, and SEPH did not deny, that SEPH recorded a JLC. Under Florida law, a JLC gives a judgment creditor a lien on all personal property subject to execution, other than fixtures, money, negotiable instruments, *877and mortgages, owned by debtor anywhere in the state.34 Stock in corporations is subject to execution but not membership or other interests in LLCs, for which a judgment creditor must obtain a charging order.35 SEPH did not execute on any stock owned by either Bos or LHI pre-petition, nor did it obtain a charging order on either of Alleged Debtors’ interests in any valuable entities in the Legendary group.36 Alleged Debtors did not introduce evidence that either of them owns any personal property to which SEPH’s JLC lien attached. LHI, as a holding company, owns nothing but membership and other interests in separate entities that it had already encumbered by granting charging orders to SSI Destín. Alleged Debtors produced not a scintilla of evidence that Bos, individually, owns any personal property.37 Alleged Debtors, having failed to prove that SEPH’s judgment attached to any real or personal property, did not overcome SEPH’s prima facie showing that the value of its under-secured claim was $12 million.
Numerosity-Do Alleged Debtors have fewer than twelve qualifying creditors?
Having determined that SEPH is qualified to be a petitioning creditor, the next question is numerosity: whether Alleged Debtors have twelve or more “qualifying creditors,” Bos and LHI have consistently maintained that each of them has twelve or more qualifying creditors. SEPH concedes that each Alleged Debtor has twelve or more creditors, but disputes that either has twelve or more “qualifying” creditors. The numerosity requirement of the Bankruptcy Code is set forth in 11 U.S.C. § 303(b), which provides:
An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such non-contingent, undisputed claims aggregate at least $15,325 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $15,325 of such claims
[[Image here]]
If the alleged debtor avers the existence of twelve or more creditors, it must file a list of all claimed creditors.38 Because both Bos and LHI have done so, the Court must analyze each of listed creditor separately in light of the evidence presented.
*878Guaranty Claims
In general, some guaranty obligations are contingent and some are noncontin-gent. Section 303(b) excludes holders of contingent claims from the numerosity count. Bos and LHI concede that two of their creditors with guaranty claims, Premier American Bank and Marlin Business Bank, should not be counted because their claims are contingent. Bos lists eight additional creditors with guaranty claims; LHI lists, five such creditors.
The Bankruptcy Code does not define “contingent.” Courts have defined contingent as where “an alleged debtor’s legal duty to pay does not come into existence until triggered by the occurrence of an extrinsic event and such extrinsic event or occurrence was one that.was reasonably contemplated by the parties at the time the event giving rise to the claim occurred.” 39 The bankruptcy court in In re All Media Properties, Inc.40 described a guaranty as the “classic” example of a contingent liability, provided a thorough discussion of contingent claims, and gave examples of noncontingent claims:
[I]n the case of the classic contingent liability of a guarantor of a promissory note executed by a third party, both the creditor and guarantor knew there would be liability only if the principal maker defaulted. No obligation arises until such default. In the case of a tort claim for negligence, the parties at the time of the alleged negligent act would be presumed to have contemplated that the alleged tortfeasor would be liable only if it were so established by a competent tribunal. Such a tort claim is contingent as to liability until a final judgment is entered fixing the rights of the parties. On the other hand, in the ordinary debt arising from, for example, a sale of merchandise, the parties to the transaction would not at that time view the obligation as contingent. Subsequent events might lead to a dispute as to liability because of, for example, defective merchandise, but that would merely serve to render the debt a disputed one but would not make it a contingent one. A legal obligation arose at the time of the sale, although the obligation can possibly be avoided. Such a claim is disputed, but it is not contingent_ Likewise, an unmatured obligation is not contingent as to liability. The obligation to pay existed from the outset; no outside event is necessary to bring the obligation into existence, but rather the obligation may be extinguished by payment. This does not render such a debt “contingent as to liability”, but renders it only “unmatured”.41
Whether a guaranty is absolute or conditional, “the happening of some future event” is necessary to trigger liability.42 That “future event” may be as simple as a borrower’s failure to pay or a demand for payment on the guarantor.43 In order to *879determine whether a guaranty obligation is or is not contingent we look to the written guaranty and the facts surrounding each guaranty claim. In this case, doing so leads to the conclusion that the remainder of the creditors holding guaranty claims listed by Bos and LHI should not count for numer-osity.
Guarantees containing “ipso facto” clauses
An ipso facto clause (the Latin phrase meaning “by the fact itself’) is commonly a provision that makes the bankruptcy or insolvency of one contracting party a trigger for the other party to terminate the contract. Certain creditors listed by both Alleged Debtors hold claims based on guarantees containing ipso facto clauses. .Alleged Debtors argue that these guaranty creditors should count for numerosity because the filing of the involuntary petitions was an event of default that triggered their liability on those guarantees. They cite no authority that supports this argument.44 In fact, their argument actually supports the opposite conclusion because it recognizes the logic that a default cannot precede the filing because it is conditioned on the filing.45
In order to determine which creditors qualify, a court must determine the status of that creditor’s claim at the time of filing the petition. Section 308(b) makes no distinction between creditors whose claims are based on guarantees containing ipso facto clauses and those whose claims are not. It is illogical to read Section 303(b) the way the Alleged Debtors urge: that is, to examine the status of a creditor’s claim after the filing of the petition and determine, based on that status, that the creditor should count for numerosity even though its claim would not have .counted before the petition was filed. Such a reading ignores the very language and essence of the statute.
Contingent Guaranty Claims that Do Not Count for Numerosity
1. Wells Fargo
Bos and LHI listed Wells Fargo as a creditor holding a $31,945.65 claim based on guarantees. The Wells Fargo guarantees provide, in pertinent part: “If a Default occurs, the Guaranteed Obligations shall be due immediately and payable without notice_” Mr. Knowles testified that he is not aware of any demand on LHI to pay this obligation and that the borrower was current on payments. Bos testified that he has no knowledge of any demand on him by Wells Fargo. As to both Bos and LHI, Wells Fargo will not count for numerosity because its claim was contingent at the time of the petitions.
2. American Bank of Texas
Bos listed American Bank of Texas as a creditor holding a claim for $12,316,635.00 based on a personal guaranty.46 Alleged *880Debtors maintain that because this guaranty provides that-Bos is “hable for the Guaranteed Debt as a primary obligor,” Bos’s contingent guaranty liability was transformed into, in essence, liability on a note. Neither the guaranty itself nor the evidence support this. Other language in this guaranty conflicts with such a reading. The guaranty consistently refers to Bos as “Guarantor” and LYC Destín, LLC as the “Borrower;” it states that the “Borrower” has signed a note and is indebted on a loan; it provides that “Lender is not willing to make the Loan ... to Borrower unless Guarantor [Bos] unconditionally guaranty [sic.] payment... ;” it defines the “Guaranteed Debt” as being all sums due from the “Borrower”; and in paragraph 1.5 states that if any of the Guaranteed Debt is not paid, then upon demand by Lender, Bos as guarantor shall pay.47 The evidence shows that the Borrower was current at the time of the petition, no default had occurred and this lender had made no demand on Bos under this guaranty. American Bank of Texas’s guaranty claim against Bos was contingent as of the date the involuntary petitions were filed. American Bank of Texas does not count for numerosity.
3. First Florida Bank
Bos listed First Florida Bank as a creditor with a claim for $709,366.03; he described this claim as:
Peter H. Bos, Jr.’s four guaranties, guaranteeing four underlying loans of Destín Custom Home Builders, Inc. and Destín Parcel 160 LLC, making Peter H. Bos, Jr. immediately liable, without notice or demand, for the accelerated loan amounts upon the commencement of bankruptcy proceedings against him.
Bos concedes that the guaranteed loans were current, and no default had occurred, prior to the filing of the petitions. Bos testified that he has not received any demand for payment. In spite of these unre-futed facts, Bos argues that First Florida Bank’s guaranty claim was noncontingent upon the date of the involuntary petition because he waived notice of default and demand, and 2) the guarantees state that liability will be triggered by the filing of a bankruptcy petition. This argument simply doesn’t hold water. First Florida Bank shall not count for numerosity because its claim was contingent at the time of the petition.
4. Pacific Western Bank
Bos and LHI listed Pacific Western Bank as holding a claim of $50,505,476.40 based on guarantees. As they do with the American Bank of Texas guaranty, Alleged Debtors focus on language that denominates the guarantors as “primary obligors” and argue that this language transforms their “guaranty” liabilities into, in essence, those of co-makers. Alleged Debtors ignore other language in these guarantees that specifies that liability is triggered on demand.48 There was no demand. In fact, *881no default had occurred at the time of the petition, and Bos testified that the Pacific Western Bank loan remains current. Pacific Western Bank holds a contingent guaranty claim and shall not count for numer-osity.
5.Beach Community Bank
Bos listed Beach Community Bank as holding a claim for $932,914.97 based on two guarantees. Both guarantees provide: “[i]f the borrower doesn’t pay these debts, you will have to.,. [and] [y]ou may have to pay up to the full amount of the debts if the borrower does not pay.” The borrowers were current on their obligations to Beach Community Bank and no default had occurred prior to the filing of the petitions. Bos testified that he has not been called upon to pay under these guarantees. Bos argues that the guaranty claim of Beach Community Bank should count for numerosity because the guarantees contain ipso facto clauses. But, the Beach Community Bank guarantees contain no such language. The only ipso facto language is contained in the two Commercial Loan Agreements to which the guarantees relate, neither of which was signed by Bos. Both of those documents provide that the “Borrower” will be in default if it “petitions for protection under any bankruptcy, insolvency or debtor relief laws, or is the subject of such a petition or aetion and fails to have the petition or action dismissed within a reasonable period of time — ” Under this language, the Borrower is not in default because no petition was filed by or against it. Beach Community Bank will not count for numerosity under Section 303 because its claim was contingent as of the petition date.
6.Ameritas Life Insurance Corp.
Bos listed Ameritas Life Insurance Corp. as a creditor with a guaranty claim of $1,945,061.05, which he described on his second amended list of creditors as:
Peter H. Bos, Jr.’s Guarantee Agreement, relating to the Promissory Note made by Airport Road Storage, Ltd., making him liable, as if he had contracted for payment of the Note rather than Airport Road Storage, Ltd.
Bos cites no language in this guaranty that supports his description of this claim. Rather, this guaranty limits Bos’s liability to obligations such as misapplication of rents or profits, damages as a result of fraud or misrepresentation by the obligor, liability under any environmental indemnity agreement, misapplication of a security deposit and advances for insurance and real property taxes. SEPH’s filing of these involuntary petitions did not trigger a default under the ipso facto clause in the Ameritas documents. Paragraph (c) of the default section states that a default includes: “[t]he adjudication of Maker or any guarantor as a bankrupt or insolvent ... and the entry of an order approving a petition seeking reorganization.”49 Neither of these events has occurred.
The Ameritas obligation was current and no default had occurred at the time SEPH filed the petitions. Ameritas had made no demand on Bos under this guaranty. Under these facts, Ameritas Life Insurance Corp. does not count for numerosity.
7.Community Bank North Mississippi
Bos and LHI listed Community Bank North Mississippi (“Community Bank”) as a creditor holding a claim for $7,809,321.00 based on several guarantees. Each guaran*882ty states, in pertinent part, that “Guarantor will make any payments to Lender or its order, on demand .... ” Bos testified that there was no default on the underlying notes and that he has not been called upon to pay on his guarantees. Mr. Knowles testified that the borrowers were current on the underlying obligation to Community Bank. While there was evidence that the Community Bank loans matured before SEPH filed the involuntary petitions, the guarantees explicitly require a demand, and there has been no demand.50 Because its claim was contingent as of the filing of these petitions, Community Bank will not count for numerosity.
8. First Capital Bank
Bos and LHI listed First Capital Bank as a creditor holding a claim for $107,541.86 based on guarantees of a loan secured by an airplane hangar. They claim that these guarantees made them liable as though they were the primary obligors. But, the evidence shows that in July of 2015 the borrower and First Capital Bank agreed that a short sale of the hangar plus a payment of $50,000 would constitute full satisfaction of the underlying loan. Assuming any guaranty liability survived these transactions, which appears not to be the case, it was, at best, contingent at the time the petitions were filed. So, First Capital Bank will not count for numerosity because its claim was either paid in full or contingent at the time of the petitions.
Insiders
Section 101(31) defines “insider” to include:
(A) If the debtor is an individual—
(i) relative of the debtor or of a general partner of the debtor;
(ii) partnership in which the debtor is a general partner;
(iii) general partner of the debtor; or
(iv) corporation of which the debtor is a director, officer, or person in control;
(B) if the debtor is a corporation—
(i) director of the debtor;
(ii) officer of the debtor
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner;
(v) general partner of the debtor; or
(vi) relative of a general partner, director, officer, or person in control of the debtor;
[[Image here]]
(E) affiliate, or insider of an affiliate as if such affiliate were the debtor ....51
The definition of “insider” in Section 101(31) “is intended to be illustrative rather than exhaustive.”52
The Eleventh Circuit in In re Florida Fund of Coral Gables, Ltd. applied a two-factor test for insider status first articulated by the Fifth Circuit: “(1) the closeness of the relationship between the transferee and the debtor; arid (2) whether the transactions between the transferee and the debtor were conducted at arm’s length.”53 In determining whether a party constitutes an insider the Eleventh Circuit has *883also looked to Collier on Bankruptcy (“Collier”): “An insider generally is an entity whose close relationship with the debtor subjects any transaction made between the debtor and such entity to heavy scrutiny.”54
In In re Lee the bankruptcy court used the same two factors in determining that certain creditors were not' insiders.55 There, a single creditor filed an involuntary Chapter 7 against an individual (Mr. Lee). In opposing the involuntary, Mr. Lee listed several creditors who were stockholders in, and apparently directors of, a company he owned. The court held that this alone would not make them “insiders” because they did not have close relationships with the alleged debtor.56
Ruling that a debtor’s girlfriend was an insider for the purpose of avoiding an alleged preference, in In re Mclver this Court focused on the legislative history of the Code57 and adopted a standard that the Ninth Circuit B.A.P. has used: “insider status may be based on a professional or business relationship with the debtor ... where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties.”58
By excluding parties with close relationships to alleged debtors as insiders, Congress recognized that certain categories of creditors are unlikely to join in an involuntary petition against the debtor.59
SEPH argues that four creditors are “non-statutory” insiders that should not count as qualified creditors within the meaning of 11 U.S.C. § 303(b)(2). Two of the four, Kirschner & Legler, P.A. and SSI Destín LYC 1, LLC (SSI Destín), are listed by both Bos and LHI. Phillip Vlahos Builders, LLC (PVB) is only listed as a creditor of Bos; Wharfside-Legendary, LLC (Wharfside) is only listed as a creditor of LHI.
Kirschner & Legler, P.A.
Kirschner & Legler, P.A. (“K & L”) is a law firm. Bos and LHI claim K & L as a creditor based on an invoice for legal services, SEPH presented proof of the closeness of the relationship between K & L, Bos and LHI sufficient upon which to rule that K & L is a non-statutory insider.
*884Attorney Mitch Legler, a K & L shareholder, has been a friend and advisor to Bos and corporate counsel for many of Bos’s companies for approximately 35 years. Mr. Legler is Bos’s personal attorney as well as LHI’s corporate counsel. Both Kirschner and Legler (the “K” and “L” in K & L) own an indirect interest in the Bos and LHI affiliates through their part ownership of Wharfside-Legendary, LLC (“Wharfside”).60 LHI owes about $11 million to Wharfside. Wharfside and LHI are owners of Legendary Group, Ltd. Legendary Group, Ltd. owns 100% of Legendary, LLC. Legendary, LLC, another of the Bos & LHI entities, paid K & L’s claim post-petition.
The policy behind excluding certain types of creditors supports a ruling that K & L is an insider. It is patently obvious that even had its claim not been paid post-petition, K & L would never join SEPH as a petitioning creditor because of its close and long-term relationship with both Alleged Debtors.61
SSI Destín
SSI Destín is also a non-statutory insider because of its close relationship with Alleged Debtors.62
SSI Destín holds a judgment in the amount of $13,832,767.12 against Bos and LHI.63 Alleged Debtors stipulated to entry of this- judgment. SSI Destín is owned by Goldstead Properties, Ltd., which in turn is owned and controlled by Tim Horgan, who resides in the UK. Tim Horgan has been a personal friend and business associate of Bos for twenty years. SSI Destín did not loan money to Alleged Debtors. Rather, it purchased its claim from BB & T in August 2011 after BB & T had sued Bos and LHI. No evidence was presented to show or explain what caused SSI Destín to purchase BB & T’s claim. After Bos and LHI stipulated to the final judgment in favor of SSI Destín in November 2011,64 nothing happened with this judgment during the next three years, during which SSI Destín made no attempt to collect this judgment from Bos or LHI.65
The only activity on SSI Destin’s claim came months after SEPH obtained its judgment against Alleged Debtors in November 2014, when Alleged Debtors stipulated to charging orders in favor of SSI Destín.66 The charging orders gave SSI Destín a first priority lien on Bos’s shares in LHI and LHI’s interests in companies, including Legendary Group, Ltd, comprising the only valuable assets it owns.
*885Where there is a close relationship between the alleged debtors and a creditor, the facts require “closer scrutiny.”67 It appears clear that the timing of these “friendly” charging orders was not a coincidence. These charging orders caused SSI Destín, through Tim Horgan, a close personal friend of Bos, to displace SEPH as Bos and LHI’s most powerful and secured creditor.
Tim Horgan, the ultimate owner and manager of SSI Destín, is closely connected to Bos in other ways. Bos owns an entity by the name of PBTB, LLC.68 Hor-gan and PBTB, LLC own THPB, LLC, of which Bos is the managing member.69 Bos is an authorized representative of Hor-gan’s company, THAH, LLC. As of March 25, 2015, Tim Horgan co-owned an entity named EG1306, LLC with Destín Coastal, LLC, which is owned by Teresa Bos, Bos’s wife.
Bos and LHI helped continue SSI Des-tin’s corporate existence, even though SSI Destín is one of their largest creditors. Wendy Parker is Bos’s personal secretary and LHI’s corporate secretary. Ms. Parker signed the 2015 Annual Report of SSI Destín as “Secretary” and certified under oath that she was a “managing member or manager” of that entity, even though she testified at trial that she has never been either.70 Ms. Parker filed and signed SSI Destin’s 2015 Annual Report as a- courtesy to SSI Destín (and presumably Tim. Hor-gan) at the request of LHI’s Vice President, Pete Knowles. Bos testified that SSI Destín has an interest in the long-term success of LHI and does not want to burden the company by demanding short-term payments.71
Bos and LHI argue that the debt owed to SSI 'Destín is the result of an arms’ length transaction because it is documented by hundreds of pages of loan documentation. While the SSI Destín claim may have originated as an arms’ length transaction with BB & T, it did not remain arms’ length after Mr. Horgan caused SSI Destín to purchase the claim. In applying the test articulated in Collier,72 SSI Destín is without question an entity whose close relationship with Alleged Debtors subjects any transactions made between them to heavy scrutiny. Under the totality of the circumstances, SSI Destín is an insider, and so does not count toward numerosity for purposes of Section 303 for either Bos or LHI.
Wharfside-Legendary, LLC
LHI listed Wharfside-Legendary, LLC CWharfside”) as a creditor with a claim in the amount of $11,460,483.76. Alleged *886Debtors argue that'Wharfside’s claim is an arms’ length transaction. As with SSI Des-tín, they point to “hundreds of pages” of loan documents that support Wharfside’s claim. But, as with SSI Destín, the fact that Wharfside’s claim may have originated as arms’ length does not prove that it stayed that way. In fact, the evidence proves the opposite. The Wharfside claim originated in 2005 as part of a $26 million loan made to Bos entities by iSTAR Financial, Inc. guaranteed by LHI and Bos.73 Wharfside took an assignment of the claim on May 1, 2009. SEPH filed its law suit against Bos and LHI in 2009. Mitch Le-gler, shareholder in K & L and Bos’s lawyer for 35 years, owns 90% of Wharf-side. Legler’s law partner, Kirschner, owns the other 10% of Wharfside. The other two co-owners of Legendary Group, Ltd. are LHI and Coastal Holdings, LLC, a company owned by Mr. and Mrs. Bos.
An agreement between Alleged Debtors and Wharfside in June 30, 2013, states that neither Bos nor LHI had made any payments to Wharfside since 2009. Because Legler and Kirschner own Wharfside, and due to their close relationship with Bos and LHI, it is patently obvious that Wharfside has no interest in joining these involuntary petitions or taking other action adverse to Alleged Debtors. Mr. Legler testified that although neither Bos nor LHI are making payments on the Wharf-side loan, there is a plan for them to do so when they become healthy enough.
In applying the tests set forth in Collier and In re Mclver, the evidence is more than sufficient to show that Wharfside is a non-statutory insider of LHI. To rule that Wharfside is anything other than a non-statutory insider would be contrary to the purpose of the exclusion language of § 303(b)(2).
Phillip Vlahos Builders, LLC
Bos lists Phillip Vlahos Builders, LLC (PVB) as a creditor with a claim in the amount of $2,285 represented by an invoice for renovations to and work on a prefabricated garage at Bos’s home. PVB is a non-statutory insider because of Phillip Vlahos’ business and family ties. Phillip Vlahos is the son-in-law of Pete Knowles,74 owns and is the managing member of PVB, and is president of Destín Custom Home Builders, LLC (DCHB). Bos is the CEO of DCHB.
Alleged Debtors assert that the documentation of PVB’s claim by a contract and an invoice proves its claim to be an arms-length transaction. But, one of the purposes of Section 303(b)(2) is to prevent counting creditors who have no reason or incentive to join an involuntary petition. PVB is such a creditor and so will not count for numerosity.
“Small” and “Small and Recurring” Creditors
Counsel for the parties worked hard and did an excellent job presenting the details of and facts behind each creditor listed by Bos and LHI, including those that fall into the “small” or “small and recurring” categories. For that reason, and although a ruling on this issue is unnecessary, the Court will address the current law as it *887relates to these types of creditors in relation to involuntary bankruptcy.
By statute, certain “holders” of claims are expressly excluded as qualifying creditors: employees, insiders, and recipients of voidable transfers.75 In this Circuit, begin-' ning with a case decided by the Fifth Circuit Court of Appeals in 1971, Denham v. Shellman Grain Elevator, Inc., creditors with small claims due and paid monthly have also been excluded.76 In Denham, the petitioning creditor obtained a judgment against the alleged debtor. Just before the judgment was entered, the alleged debtor recorded a warranty deed that transferred all of his assets, with the exception t of three automobiles, to another. Until the involuntary petition was filed, the alleged debtor routinely paid his business and personal bills on the tenth of each month following the month for which the bill was incurred. As of the date of the involuntary petition the alleged debtor had eighteen creditors holding claims aggregating only $467.13.77 Seventeen of these creditors held very small claims based on consumer debts the alleged debtor normally paid monthly; the judgment creditor held the only substantial, non-recurring claim. After the judgment creditor filed the involuntary petition the debtor stopped paying his bills every 30 days. Construing § 59(b) of the Bankruptcy Act, the precursor to the- present-day Section 303,78 the Fifth Circuit held that the alleged debtor in Denham had engaged in an artifice or scheme to avoid the letter and spirit of the law: he had conveyed all of his property to prefer another creditor and then attempted to avoid an involuntary petition by purchasing small items and having them charged on monthly accounts. Based on these facts, the court in Denham held that Congress did not intend to allow recurring bills, such as utility bills, to defeat the use of an involuntary petition, even in the absence of such an artifice or scheme.79
Contrary to Denham and its progeny, courts in the Seventh, Eighth, and Ninth Circuits, include creditors holding small and recurring or de minimis claims as qualifying creditors under § 303(b) on the basis that nothing in the Bankruptcy Code specifically authorizes such creditors to be excluded.80 Because Denham is still binding precedent in the Eleventh Circuit, the Court is required to exclude creditors with small and recurring claims from the nu-merosity requirement of Section 303.81
*888In cases within the Eleventh Circuit, including those decided before the current Section 303. was enacted, courts agree that Denham, requires claims that are both small and recurring to be excluded from numerosity.82 In In re Atwood, in discussing Denham the district court emphasized that an exception for small, recurring claims was not drafted by Congress.83 But the Atwood court still felt bound to follow Denham so it remanded the case to the bankruptcy court to determine if certain debts were both small and recurring.84 In In re Smith, citing to Denham, the bankruptcy court for the Middle District of Florida excluded “insignificant debts which are customarily paid on a regular basis.”85 In a second case named In re Smith, the bankruptcy court for the Northern District of Georgia followed Denham and held that recurring claims for pest control services, cable and telephone services did not count for numerosity.86 Citing Denham in dicta, the bankruptcy court in In re Crain stated that small, recurring debts were not to be counted in determining if there are twelve creditors for purposes of an involuntary petition.87
In a much more recent case in the Eleventh Circuit, Isbell v. DM Records, Inc., a Florida district court discussed the arguments in favor of not applying Denham but nevertheless followed Denham as circuit precedent.88 That court counted claims of nine music publishers, finding them contingent, irregular, and non-recurring.89 In In re Stewart, a case oft-cited by SEPH for a variety of reasons, the Denham rule was at issue; but because the court had already disqualified the small and recur*889ring debts on the basis that the debtors had paid them post-petition, it never reached whether those debts should be disqualified purely on the basis of-being de minimis or small and recurring.90
Alleged Debtors urge this Court not to follow Denham, citing In re Beacon Reef Ltd. P’ship., which they say, “disagreefd] with Denham.”91 But the court in Beacon Reef did not cite to or expressly disavow Denham. Rather, that court was not persuaded to disregard a small claim as de minimis, and was not willing to hold that claims of accountants and attorneys should not count for numerosity.92
Alleged Debtors also urge this Court to question the viability of Denham because it was decided on two provisions of the old Bankruptcy Act; one (§ 56(c)) has no counterpart in today’s Code and the other (§ 59) was superseded by the Code.93 They also argue what courts in other circuits have held: that there is no exclusion for any “small and recurring” creditors in the Code, so one should not be imposed by judicial fiat. These arguments are not without merit. But, Denham remains binding precedent in this Circuit. Further, no Denham ruling is necessary in this case because none of the creditors that SEPH argues should be excluded hold “small and recurring” claims so they all count for numerosity under Section 303.94
Taxing Authorities
In order to count for numerosity as to an involuntary petition a creditor must be a holder of a claim against a person.95 On his second amended list of creditors, Bos listed a $17,991.87 claim of the Okaloosa County Tax Collector (“Tax Collector”) for real property taxes assessed on his homestead. As a result of granting Alleged Debtors’ Rule 15(b) motion to amend their pleadings, supra, a total of six taxing authorities, including the Tax Collector, listed on the property tax notice are now under consideration as separate creditors, as though listed separately on Bos’s creditor list.96 All of these authorities hold claims for ad valorem taxes or assessments.
In Florida, there is no personal liability for ad valorem taxes or the other assessments listed on the property tax notice.97 The Tax Collector and each other entity listed on the property tax notice holds an in rem claim only. For that reason, neither *890the Tax Collector nor the other five authorities on the property tax notice constitute “a holder of a claim against such person [Bos]” as required by § 303(b), so none count for numerosity under Section 303.98
Alleged Debtors cite no Florida law in support of counting the Tax Collector and other entities listed on the tax notice as separate creditors for purposes of numer-osity. They cite a Texas case, In re Smith, in which the bankruptcy court counted the taxing authorities based on Texas law.99 Under Florida law, like in Texas, each taxing authority is a separate legal entity authorized to levy ad valorem taxes.100 So each may have a separate claim. But, just having a claim is not enough. Although the Smith court specified that a claim must represent a right to payment,101 it did not focus on the fact that for purposes of numerosity a claim must be against a person.102 Ultimately, the court in In re Smith did not count the taxing authorities’ claims for two reasons: 1) the alleged debtor did not list them; and 2) they were contingent when the involuntary petition was filed, stating in part:
Under Texas law, it is not the property taxes that become due and owing on January 1st of each year. Rather, it is á lien that attaches on January 1st of each year “to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property, whether or not the taxes are imposed in the year the lien attaches.” ... While this gives rise to a claim in bankruptcy because as [sic] a right to payment, the liquidated amount due for tax payments for a particular year generally are not assessed against the taxpayer until approximately October 1 of that year.103
Similarly, in Florida it is not the property taxes that become.due and owing on January 1st of each year; rather, the real property is assessed on January 1 of each year and a lien attaches to the property on that date.104 Florida property taxes are due and payable on November 1 of each year.105 SEPH filed the petitions on September 4, 2015. Like the tax claims in Smith, the claims held by the entities on the tax bill, including the Tax Collector, remained contingent as of the petition date.106 So, none of the entities listed on the real property tax bill count for numer-*891osity.107
Fully Secured Creditors
SEPH argues that two of B os’s creditors should not be counted because their claims are fully secured: the Tax Collector and Charter Bank.108 Both of these creditors are excluded from numerosity for other reasons, so it is unnecessary to address them here.
Creditors that Received Posb-Petition Payments
Section 303(b)(2) excludes from numer-osity a transferee of a post-petition transfer that is “voidable” under 11 U.S.C. § 549.109 Section 549 provides:
[T]he trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or (B) that is not authorized under this title or by the court.
11 U.S.C. § 549(a).110 SEPH argues that certain creditors of Bos and LHI received post-petition payments voidable under Section 549, and so should be excluded for purposes of numerosity under Section 303(b)(2). In order to reach a ruling, it is necessary to ascertain which, if any, post-petition payments may be voidable.
Creditors that received payments from the TBE account.
Creditors that received post-petition payments from the TBE account will not count for numerosity.111
The following creditors received post-petition payments from the tenants by the entirety (“TBE”) bank account owned by Bos and his wife: Charter Bank, First Florida Bank Visa, American Express (Centurion Bank), Lowe’s (Synchrony Bank), Destín Cleaners, Archiscapes, Coastline Tree Service, The Perfectionists Complete Lawn & Landscape, LLC, Dr. Jos Bakker, Home Team Pest Defense, and Capital One Bank (USA), N.A. It is undisputed that these payments .were made as permitted under § 303(f).112 Alleged Debtors assert that because the TBE account is exempt under Florida law Bos’s interest in that account is not property of the estate; and for that reason, post-petition payments from that account are not voidable under § 549. This argument is unpersuasive.
The filing of a bankruptcy petition, including an involuntary petition, creates an estate.113 Upon creation of the estate, “all legal or equitable interests of the debtor in property” become property *892of the estate, including “[proceeds, product, offspring, rents, or profits of or from property of the estate, — ”114 “The scope of § 541(a)(1) is broad, and includes property of all types, tangible and intangible, as well as causes of action.”115 So the first question becomes whether Bos had a legal or equitable interest in the TBE account upon the filing of the involuntary petition. The answer to this question is yes. “[A]ll. legal or equitable interests” includes “the debtor’s interest in property held as a tenancy by the entireties.”116 The next question is whether, if the TBE account is exempt entireties property, means that Bos’s interest in that account did not become property of the estate. The answer to this question is no. The fact that an asset may be exempt does not preclude the debtor’s interest in that asset from becoming § 541 property of the estate. “ ‘[Exclusion’ and ‘exemption’ do not mean the same thing. Property that is excluded from the bankruptcy estate never comes into the estate at all, by operation of law, while exempt property is estate property at all times but is protected from the reach of creditors and administration through the estate if the debtor exercises the statutory option.”117 Section 541(b) lists what property is not property of the estate; exempt property is not included on the list.118
Alleged Debtors assert that because none of the creditors that received post-petition payments from the TBE account had judgments against or liens on that account, and none held claims against Mr. and Mrs. Bos, then ultimately Bos’s claim of exemption as to the TBE account would prevail. This might be true.119 But, it does not support the Alleged Debtors’ conclusion that the creditors who received payments from the TBE account count for numerosity. Exemptions are provided for in Section 522 of the Code, which provides, in pertinent part, that an individual “may exempt from property of the estate” certain property.120 Property of the estate is determined on the filing of the petition; exemptions are determined after the order for relief, and only after they are claimed by the debtor.121 In an involuntary case, the determination of which creditors count is based on the facts as they existed as of the date of the petition. The test under Section 303(b)(2) is whether a creditor is a transferee of a transfer that is “voidable” under Section 549. Because Bos’s interest in the TBE account is property of the *893estate, and because the exempt status of this account has not yet been claimed or determined, transfers from that account are “voidable” under § 549.122
Even had Bos not owned an interest in the TBE account, the payments out of that account could be voidable under § 549. In In re Smith, post-petition payments to creditors out of the debtor’s wife’s account were held voidable because the money in that account came from an offshore trust owned by the alleged debtor.123 Here, the TBE account is the only bank account in which Bos has an interest. At least part of the money in the TBE account came from Bos’s social security income. If nothing else, common sense dictates that payments from this account to Bos’s creditors could be avoided under § 549.124
Post-petition payments made to creditors from entities that are closely related to Bos and LHI.
Certain Bos creditors received post-petition payments from entities closely related to Bos; Bloom, Sugarman, Everett, LLP and Lisa Jo Spencer, P.A. received post-petition payments from Legendary Group, Ltd.; Matthews & Jones, LLP received a post-petition payment from Regatta Bay Investors, Ltd.; and Regions Bank received a post-petition payment from Lorna Properties, LLC, a wholly owned subsidiary of Legendary Group, Ltd.125 Ten LHI creditors received post-petition payments from closely related entities; seven of those creditors were paid by Legendary Group, Ltd. or Legendary, LLC.126 Because there was no credible evidence that *894the other three were creditors of LHI they will not be addressed in this section.127
As was held in In re Stewart, business interests held as of the date of the petition are property of the estate and any income from those interests are proceeds of property of the estate.128 Neither Bos nor LHI reported having any source of business income other than the Legendary group entities.129
Alleged Debtors tried to prove that payments made by the Legendary group entities were from “earmarked loans.” An earmarked loan is a loan that a third party makes to a debtor specifically to enable that debtor to satisfy the claim of a designated creditor.130 The proceeds of an earmarked loan never become part of the debtor’s assets, and therefore no preference is created.131 The rule is the same regardless of whether the proceeds of the loan are transferred directly by the lender to the debtor’s creditor or are paid to the debtor with the understanding that they will be paid to the creditor in satisfaction of the debtor’s claim, so long as the proceeds are clearly “earmarked.”132
Alleged Debtors’ evidence that certain post-petition payments were “earmarked” fell quite short. Bos testified first. During his testimony Bos never once mentioned the existence of “earmarking” or “earmarked loans.” Pete Knowles testified after Bos. He testified that the payments made by the Legendary group entities to LHI’s creditors were the result of earmarked loans, but admitted there is nothing in writing that supports this testimony.133 Mr. Knowles’ use of the term “earmark” and “earmarked’ during the second part of the trial seemed forced or contrived; especially in light of the fact that neither he nor Bos had made any prior mention of these terms during their testimony. The Court finds the testimony that these payments were from “earmarked” loans not credible.134
As SEPH points out, the earmarking defense is not available if the debtor controls the application of the “loan.”135 Here, even if one believes that these payments constituted “earmarked loans” from the beginning, it is clear that Alleged Debtors *895were in control of, either directly or indirectly, post-petition payments made by Legendary Group, Ltd. and Legendary, LLC. Bos is the president of LHI. LHI is the general partner of Legendary Group, Ltd., which in turn is the manager of Legendary, LLC. LHI’s closeness to Legendary Group, Ltd. and Legendary, LLC is undeniable. Mr. Knowles testified that he takes direction from Bos. Wendy Parker testified that she takes direction from Mr. Knowles. While Mr. Knowles’ testimony that each entity within the Legendary group pays bills as directed by its own manager may be true in some respects, it does not negate the obvious control over all entities that is held by Bos. For this reason, the exception to the earmarking doctrine would apply; these post-petition payments would be voidable under § 549.136
Creditors that Did Not Hold a Claim on the Date of the Petition
SEPH argues that four of Bos’s creditors and three of LHI’s creditors did not hold claims on the date of the petition and should be excluded from numerosity.137
TNT Metal Buildings, Inc.
Bos lists TNT Metal Buildings, Inc. (“TNT”) as a creditor holding a claim for what he described as the remaining balance due under a contract for the installation of a garage door. The entity on the documents “evidencing” this claim is named T-N-T Carports, Inc., not TNT Metal Buildings, Inc. Regardless, the “Terms and Conditions” of the contract states that Bos “agrees to pay the Price ... in full at the time of installation.” It also provides that the seller reserves the right to cancel the contract at any time before installation. Bos testified that as of the date of the petition the installation was not complete. Under the terms of the contract, even if TNT, as listed, is the creditor its claim was contingent at the time SEPH filed the involuntary petition.
Emerald Coast Association of Realtors
Bos listed Emerald Coast Association of Realtors as a creditor holding a claim for $547 for “member dues.” The evidence in support of this “claim” comprised of an invoice for 2015 dues dated July 22, 2014 and a document entitled “Member Dues Order” which is undated. Although .the latter document reflects a “balance due” of $547, when compared to the invoice for 2015 dues it appears obvious that the Member Dues Order is not an invoice. The 2015 dues invoice is labeled “ECAR 2015 Renewal;” it contains the date it was printed, an invoice number, an invoice date and a due date for payment; as well as a legend advising members when the dues are payable and relating other payment information. The “Member Dues Order” contains none of this. It is not proof that Emerald Coast Association of Realtors had a claim as of the date of the petition. In fact, there is no evidencé that Bos has (or had as of the petition date) any obligation to renew his membership. If he doesn’t, then he will simply lose the benefits of *896being a member. Emerald Coast Associa-_ tion of Realtors will not count towards numerosity.
Frazer, Greene, Upchurch & Baker, LLC
Bos and LHI listed the law firm of Frazer, Greene, Upchurch, & Baker, LLC (“Frazer”) as a creditor holding a claim for $575 for legal services stemming from the SEPH law suit. The Frazer invoice is dated August 31, 2015, is addressed to both Bos and LHI, and shows “balance last bill” as $575. The invoice also reflects an adjustment that reduced the amount due to zero. Based on the weight of the evidence Frazer did not hold a claim on the date of the petition.
Capital One Bank (USA), N.A. (account ending in 7353)
LHI listed Capital One Bank (USA), N.A. (“Capital One”) as a creditor holding a claim for $8,055.15. Capital One’s statement for the billing period ending on August 28, 2015, addressed to both Bos and LHI, shows a credit balance of $2,359.10. Bos testified that the credit balance was due to Capital One’s error and that he really owed money to Capital One. This testimony was insufficient to overcome the documentary evidence that proved that Capital One did not hold a claim on the petition date.
Additional Creditors that Did Not Hold Claims on the Petition Date
Three additional creditors listed by LHI, Destín Ice House, Inc., Retail Information Systems and Pro Tech Mechanical Services, Inc., did not hold claims on the petition date and should be excluded from the numerosity count.138
Destín Ice House, Inc.
LHI lists Destín Ice House, Inc. (“Des-tín Ice”) as a creditor holding a claim for $945.44 on account of “invoices for seafood products ordered by LHI for use at Emerald Grand.” Although Mr. Knowles testified that this is LHI’s debt, the documents do not support this testimony.139 The Des-tín Ice invoice was addressed to “Legendary;” the goods were shipped to “Emerald Grand.” “Legendary” is not synonymous with LHI. One entity in the Legendary group has a name similar to “Emerald Grand” and two others have names that include “Emerald.”140 The evidence is insufficient to prove that Destín Ice held (or holds) a claim against LHI.
Retail Information Systems
LHI lists Retail Information Systems (“Retail”) as holding a claim for $467. The Retail invoice is addressed to “Legendary Retail.” Mr. Knowles testified that Legendary Retail is no longer in existence, and that LHI owes the obligation. The Court does not find the latter testimony persuasive. The evidence does not support LHI’s contention that Retail Information Systems had a claim against it on the date of the petition.
Pro Tech Mechanical Services, Inc.
LHI lists Pro Tech Mechanical Services, Inc. (“Pro Tech”) as holding a claim for $539.54. The Pro Tech invoice is addressed to “Harborwalk Marina Legendary,” not to *897LHI.141 It was paid post-petition by Destín Marina Services, LLC. “Harborwalk Marina Legendary” is not synonymous with LHI. One of the Legendary group entities is Harborwalk, LLC. Multiple entities under the Legendary umbrella have the word “Legendary” attached to their names. The evidence did not prove that Pro Tech held a claim against LHI as of the petition date.142
Generally not Paying Debts as They Become Due
Under 11 U.S.C. 303(h)(1) a court shall order relief only if an alleged debtor is generally not paying his or its debts as they come due.143 “The courts apply a flexible totality of the circumstances test in determining whether a debtor is ‘generally not paying’ his debts, which focuses on the number of unpaid claims, the amount of the claims, the materiality of nonpayment, and the overall conduct of the debtor’s financial affairs.”144 There is no exact formula for determining whether an alleged debtor is generally not paying its debts; this.test is subject to considerable flexibility and judicial discretion.145 At least one court has held that where an alleged debt- or has failed to pay even’ one debt that makes up a substantial portion of its overall liability, a court may find that it is generally not paying its debts when they become due.146
The $15,005,558.00 that Bos and LHI owe SEPH on account of its final judgment represents the vast majority of the qualifying claims against Alleged Debtors as of the petition date. Under the ease law, that fact is sufficient upon which to rule that Alleged Debtors are generally not paying their debts as they come due. On the other hand, except for guaranty claims that were contingent upon. the petition date, the evidence shows that Bos and LHI are generally paying all of their creditors other than SEPH. Throughout this case Alleged Debtors have maintained that they have made peace with all of their other creditors. In his affidavit in support of the motions to dismiss Bos stated: “As of the date that SEPH filed the Petition, I was current on all of my payments to all of my creditors except for SEPH. The only creditor that I am not paying as agreed is SEPH.”147 It is for this reason, among others, that abstention is the best remedy here.
Abstention
Courts have applied different factors in deciding whether or not to abstain from involuntary cases pursuant to § 305 of the bankruptcy code. As always, it is important to start with the statute itself. Section 305(a)(1) provides: “The court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at *898any time if the interests of creditors and the debtor would be better served by such dismissal or suspension.”148 Collier states, as to Chapter 305:
[S]ome courts have limited the application of § 305(a)(1) to involuntary bankruptcy cases and devised the following three-part test for abstention:
1) the petition was filed by a few disgruntled creditors and most creditors oppose the bankruptcy proceeding;
2) there is an out-of-court restructuring in progress; and
3) the debtor’s interests are furthered by dismissal.149
Alleged Debtors argue that this Court is “compelled” to abstain because this is essentially a two-party dispute that would not benefit the creditor body as a whole. They argue that SEPH has adequate remedies- in state court150 and should not be enabled to use this Court as a “collection agency.”151 SEPH counters that abstention would impair its remedies by depriving it of the use of Section 547 of the Bankruptcy Code to set aside the friendly charging orders granted to SSI Destín. When the petitioner’s sole basis for the petition is possible preferential transfers, the court must examine whether the avoidance would benefit the creditor body as a whole, and weigh that benefit against the damage caused to the alleged debtor.152
While both parties have good arguments, it is undeniable that this case is, at its heart, a two-party dispute. The Court does not agree with Alleged Debtors that it is “compelled” to abstain, but the facts suggest that dismissal under the abstention statute is the best remedy' for all concerned; especially when applying the test suggested in Collier. Under that test, we see that SEPH is the only petitioning creditor and that no creditors.appeared in opposition to the involuntary petitions. We also see that Alleged Debtors do not have an out-of-court restructuring with SEPH in progress, but that they have been successful arranging out-of-court restructuring of all of their other significant debts. Unquestionably the interests of Alleged Debtors would be furthered by dismissal. Many, if not all, of the entities and subsidiaries under the Legendary umbrella are still operating successful businesses and employ more than 500 people. Bos testified that his and LHI’s ability to obtain or renew credit has been materially impacted by the filing. Bos may lose a new and potentially extremely profitable business opportunity as a result of these petitions. Bos has consistently maintained that put*899ting him and LHI into a Chapter 7, and keeping them there, could be economically catastrophic.153
SEPH’s interests will likely not be better served by dismissal. But the interests of the petitioning creditor are not included in the three-part test set forth in Collier. And even if SEPH successfully sets the SSI Destín charging orders aside as fraudulent transfers under Florida’s UFTA,154 there is no evidence that any member of the creditor body other than SEPH would benefit.
Some courts consider abstention in a single-creditor involuntary to be an “extraordinary remedy” to be used sparingly.155 Other courts have abstained from involuntary cases and voiced no hesitation that they might be invoking an “extraordinary remedy.”156 This dichotomy creates an atmosphere that permits courts great leeway in determining whether or not to abstain with regard to involuntary petitions; especially those that involve, essentially, a two-party dispute. For instance, in In re Rookery Bay, Ltd., a judgment creditor filed an involuntary petition in a single asset case.157 All other creditors had agreed to defer collection of their debts. Upon the alleged debtor’s motion for abstention under § 305(a)(1), the bankruptcy court suspended further proceedings in the involuntary until the two-party dispute was resolved in state court.158
In In re Axl Industries, Inc.,159 the district court acknowledged that bankruptcy courts generally grant motions to abstain in two-party disputes where the petitioner can obtain adequate relief in a non-bankruptcy forum. That court considered the motivation of the petitioning creditor, the significance of the alleged debtor’s estate, and whether the alleged debtor had engaged in preferential transfers of a signifi*900cant portion of its assets.160 The Axl court recognized that by'affirming the bankruptcy court’s abstention the petitioning creditor would have to pursue an avoidance action in state court under Florida’s UFTA161 and would lose the benefit of a potential preference action under Section 547 of the Bankruptcy Code, Nonetheless, based on the facts before it the Axl court affirmed the bankruptcy court’s abstention.162
In In re Mountain Dairies, the bankruptcy court ruled that it was compelled to abstain pursuant to § 305 because the dispute was a two-party dispute for which the petitioning creditor had adequate remedies in state court.163 That court articulated a set of factors that several courts have since used to determine whether the interests of creditors and the debtor would be better served by dismissal or suspension under the abstention provisions in Section 305:
1) economy and efficiency of administration;
2) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court;
3) whether federal proceedings are necessary to reach a just and equitable solution;
4) whether there is an alternative means of achieving an equitable distribution of assets;
5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case;
6) whether a non-federal insolvency has proceeded so far that it would be costly and time consuming to start afresh with the federal bankruptcy process; and
7) the purpose for which bankruptcy jurisdiction has been sought.164
Like the three-part test set forth in Collier, the seven factors in Mountain Dairies suggest that abstention here is the best result.
Factor 1: Economy and efficiency of administration points towards abstention. Although liquidation of Bos and LHI’s assets might prove valuable, there is no evidence that liquidation would be more beneficial to the general creditor body than allowing the businesses to continue operating. Chapter 11 would be an alternative to Chapter 7, making a liquidation far from certain. Additional litigation over these issues could, and under the facts here likely would, prove extremely costly, not only to these parties but to the entire creditor *901body.165 On the other hand, proceedings supplemental. brought by SEPH in state court should be less costly and, based on the evidence, would be more beneficial to Bos, LHI and creditors other than SEPH.
Factor 2: Another forum is available to protect the interests of SEPH and another action is already pending in state court. SEPH’s interests may be better served in this court with the availability of Section 547 of the Code but it is not a certainty that SEPH would prevail in a preference action.166 Further, as in Axl, because the transfers (charging orders) granted by Bos and LHI to SSI Destín were to an insider, see supra, SEPH will have its opportunity to prove the other elements necessary under Florida’s Uniform Fraudulent Transfer Act.167
Factor 3: Federal proceedings are not necessary to reach a just and equitable solution. SEPH admits that it filed these involuntary petitions in order to collect what Alleged Debtors owe and to preserve potential § 547 claims; it will still be able to pursue collection in state court. While federal proceedings could be advantageous to SEPH, it does not appear that such proceedings are “necessary.”
Factor 4: This factor, which is whether there is an alternative means of achieving an equitable distribution of assets, does not apply here. SEPH is not seeking, nor does there appear to be a need for, equitable distribution of assets.
Factor 5: Alleged Debtors and all of their creditors other than SEPH have worked out less expensive out-of-court arrangements that better serve all interests except those of SEPH. Because the interests of other creditors have been met, this factor carries little, if any, weight.
Factor 6: This “insolvency” has not proceeded so far that it would be costly and time consuming to start afresh without the federal bankruptcy process.
Factor 7: The purpose for which bankruptcy jurisdiction has been sought. Bos and LHI. assert that SEPH filed these petitions in bad faith as a litigation and collection tactic. SEPH admits that it sought bankruptcy jurisdiction to get paid, but argues that it had no alternative to preserve rights under § 547 in light of the friendly charging orders the Alleged Debtors granted to SSI Destín. Both sides are in part correct, rendering this factor essentially neutral.
The seven factors enunciated in In re Mountain Dairies weigh in favor of abstention. The reported cases in which courts have struggled with whether or not to abstain are fact specific. The facts here show that this case involves a classic two-*902party dispute that can be dealt with outside of bankruptcy.
Conclusion
Part of this Court’s job is to balance the equities; especially in cases like this where the facts and law do not require a clear, specific outcome. Here, SEPH wants to be paid and Alleged Debtors do not want to pay SEPH. After encumbering their assets in favor of SSI Destín, an insider, in an obvious attempt to remove their various businesses from SEPH’s reach, Alleged Debtors cry foul by accusing SEPH of using these petitions merely as a collection tactic, saying SEPH went too far by filing these involuntary petitions, and demanding that SEPH be ordered to pay them millions of dollars in damages. But, Alleged Debtors’ own actions put SEPH between the proverbial rock and hard place: either file involuntary petitions to preserve § 547 remedies and face a possible award of attorneys’ fees and other damages; or not file the petitions and lose the § 547 remedies forever. Was SEPH’s filing of these petitions risky? You bet. Was SEPH emboldened by its victory in the Stewart case? Undoubtedly. But, SEPH’s choice to file the involuntary petitions, under these facts, does not shock the conscience.
In addition to abstaining the Court will deny Alleged Debtors’ claims for damages and motions to require SEPH to post a bond. Each side has suffered enough. Alleged Debtors have had to endure being in these cases through the date of this ruling with their financing and normal businesses disrupted. SEPH has still not been paid on its judgment. Both sides have paid and incurred an undoubtedly enormous amount of attorneys’ fees.
Abstention puts both parties almost back to where they want to be. Abstention allows Bos and LHI out of bankruptcy, sends SEPH back to state court for collection of its judgment, and does not throw Alleged Debtors’ businesses, and thereby the other creditors, “under the bus.” Neither side is punished, nor is either rewarded, for its actions prior to or during these involuntary cases.
For the reasons stated, the Alleged Debtors’ requests for the Court to abstain pursuant to 11 U.S.C. § 305 will be granted. The Court will enter a separate order consistent with this Memorandum Opinion.
Appendix to Ruling
Rule: Apply Denham to exclude small, recurring claims less than the $275 amount used in In re Smith, 123 B.R. 423 (Bankr. M.D. Fla. 1990) (Paskay, J.) and In re CorrLine Int’l, LLC, 516 B.R. 106 (Bankr. S.D. Tex. 2014).
*903[[Image here]]
[[Image here]]
*904[[Image here]]
[[Image here]]
. The two cases have been jointly administered as Case No. 15-30922 since November 13, 2015 (15-30923: Doc. 147.)
. Bos, LHI and 213B stipulated to the execution and delivery of the loan documents and guarantees, and SEPH proved its status as successor by merger to Vision Bank and its standing to sue Bos and LHI to the satisfaction of the state court.
. The parties twice failed to settle through mediation, even after SEPH filed the involuntary petitions.
. Bos and LHI originally owed SEPH just under $7 million. By the end of the trial and subsequent hearing on attorneys’ fees, Bos and LHI owed SEPH $15,005,538.11 on two final judgments that include more than $700,000 in attorneys’ fees and costs and 18% default interest.
.The charging order(s) issued in favor of RB Golf were vacated after SEPH filed the involuntary petitions because of Alleged Debtors’ "discovery” that the debt to RB Golf had been satisfied long ago. RB Golf is an entity friendly to Alleged Debtors, but because it does not hold a claim it will not be discussed further in this ruling.
. In his Affidavits in opposition to the involuntary petitions, Bos testified: “I collateral-ized or sold substantially all of my personal assets during the Companies' credit crunch and debt restructuring in the Great Recession. First and second liens exist on my real property, [and referring to the RB Golf and SSI . Destín charging orders,] charging orders exist on my limited liability company membership interests, and my corporate shares have been attached."
. The Court allowed this evidence in over objection of Alleged Debtors. Alleged Debtors reserved the right to challenge this valuation if the value of this parcel became an' issue later in these cases.
. This charging order was entered in an Alabama state court as part of SEPH’s proceedings supplementary. Alleged Debtors presented no evidence of the value of Lorna Properties, LLC. The fact that Bos and LHI did not contest this charging order leads to the conclusion that they felt Lorna Properties, LLC had little or no value. Otherwise, based on the parties' litigious history, it is safe to assume that Alleged Debtors would have fought this charging order with vigor.
. The parties filed and the Court heard various other motions that are not material to this ruling and which will not be addressed here.
. Bos moved for leave to file a third amended list adding three additional creditors after the close of the second discovery period and eight days before the continued hearing. That motion was denied.
. Those entities include: Okaloosa County, School RLE, School CAP IMP/DISC, Destín, Water MGMT (the first portion of this entity’s name is not visible on the exhibit), and Destín FD.
. Alleged Debtors did not include any taxing authority other than Okaloosa County Tax Collector on any of their creditor lists. SEPH did not present testimony or evidence on this issue at trial because the matter had not been raised. Because ultimately this is a legal, and not a factual issue, SEPH will suffer no harm by the Court’s granting of this motion,
. Fed. R. Bankr. P, 7052 (incorporating Fed. R. Civ. P. 52).
. SEPH’s response is that Alleged Debtors waived this argument by not raising it in their answer or motion to dismiss. SEPH points out that it presented evidence that: 1) its claim exceeds $15 million; 2) the real property that secures the underlying debt is worth only $2.9 million;, and 3) Alleged Debtors admitted in their Affidavits that all of their assets were subject to superior liens, charging orders, and attachments as of the date these involuntary petitions were filed, making SEPH's claim a third lien on those assets.
. 11 U.S.C. § 303(b)(1) and (2),
. 2 Collier on Bankruptcy ¶303.12[2], at p. 303-38, 39 (16th ed. 2015).
. See In re DSC, Ltd., 486 F.3d 940, 944 (6th Cir. 2007).
. 11 U.S.C. § 303(b)(1). The parties stipulated that as of the date it filed the involuntary petitions SEPH held unsatisfied judgments totaling in excess of $15 million.
. In re Palace Oriental Rugs, Inc., 193 B.R. 126, 128 (Bankr. D. Conn. 1996) (“Petitioning creditors bear the ultimate burden of proving that all statutory requirements of Bankruptcy Code Section 303 have been met. 2 Collier on Bankruptcy ¶303.15[7], at p. 303-80 (15th ed. 1995).”).
. In re Rimell, 946 F.2d 1363 (8th Cir. 1991); Bartmann v. Maverick Tube Corp., 853 F.2d 1540 (10th Cir. 1988); Farmers & Merchants State Bank v. Turner, 518 B.R. 642 (N.D. Fla. 2014).
. 946 F.2d 1363.
. 853 F.2d 1540.
. The Circuit Court in Bartmann also held that the bankruptcy court erred when it determined that a guaranty did not apply to post-guaranty transactions, and did not extend to the successors or assigns of the original beneficiary of the guarantee. Id. at 1546.
. 522 B.R. 1 (Bankr. D. Conn. 2014).
. Id. at 6. The Speer court relied on In re BDC 56 LLC, 330 F.3d 111 (2d Cir. 2003) to adopt the burden shifting framework. In re BDC 56 LLC also declared that the elements of § 303 of the bankruptcy code are jurisdictional; that part of the decision was abrogated in In re Zarnel, 619 F.3d 156 (2d Cir. 2010).
. 518 B.R. 642 (N.D. Fla. 2014).
. The alleged debtors proved that two of the three petitioning creditors’ claims had been satisfied in full with the property conveyed under the confirmed plan. The remaining claim held by the judgment creditor bank was the subject of the remainder of this Court’s decision and the appeal. Id. at 647.
. Id. at 650.
. Id. at 651.
. Id. at 647.
. Id.
. The District Court held that regardless of any burden shifting, the judgment creditor in Turner had not met its statutory requirement of proceeding on a noncontingent, undisputed claim, citing to 11 U.S.C. § 303(b). Id.
.The parties stipulated that SEPH's claim, being based on a final judgment from which no appeal was taken, is not subject to a bona fide dispute as to validity or amount.
. § 55.202(c)(2) & § 56.061 Fla. Stat. (2015).
. § 56.061 & § 605.0503 Fla. Stat. (2015).
. As noted previously, Alleged Debtors consented to issuance of a charging order in favor of SEPH on Lorna Properties, LLC. No party put on evidence of the value of that entity.
. Bos drives a Mercedes and a BMW owned and paid for by Legendary entities. Bos’ yacht and fishing vessel are also owned and paid for by different Legendary entities, The Record is devoid of evidence as to any other tangible personal property owned by Bos.
. Fed. R. Bankr. P. 1003(b).
. In re Whittaker, 177 B.R. 360 (Bankr. N.D. Fla. 1994); In re Rosenberg, 414 B.R. 826, 844 (Bankr. S.D. Fla. 2009). See also 2 Collier on Bankruptcy ¶ 303.1Ó[1], atp. 303-26 (16th ed. 2015) ("[A] claim that is contingent as to liability is one as to which the debtor’s obligation to pay does not come into being until the happening of some future event, and that event was within the contemplation of the parties at the time their relationship originated.”)
. 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980).
. 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980) aff'd, 646 F.2d 193 (5th Cir. 1981) (the opinion's discussion of contingent claims has been cited at least 91 times by courts all across the country).
. 2 Collier on Bankruptcy ¶303.10[1], at p. 303-26 (16th ed. 2015).
. See, e.g., In re Stewart, No. 14-03177, 2015 WL 1282971, at *3 (Bankr. S.D. Ala. Mar. 18, 2015) (noting that "no demand” had been made on the guarantees); Rosenberg, 414 *879B.R. at 844 (Bankr. S.D. Fla. 2009) (noting that a demand for payment must be made before liability matures under the guaranty).
. The case they cite, In re Leibinger-Roberts, Inc., 105 B.R. 208 (Bankr. E.D.N.Y. 1989) supports only the proposition that a guaranty is not an executory contract.
. Alleged Debtors argue that their liability under these guarantees was triggered under the ipso■ facto clauses "at the same time the Petition was filed.” But, they also assert that "[t]o the extent a default did not already exist, [SEPH’s] filing of the involuntary petition caused an immediate default—triggering Alleged Debtors’ obligation to pay—under the guarantees.” The latter assertion recognizes that if the filing of the petition "triggered” the default, then the petition necessarily had to come first. '
.Bos listed this obligation as contingent on his personal financial statement delivered to Pacific Western Bank within just a few months before SEPH filed the involuntary petitions.
. Bos has also made the argument that his liability under the guaranty was no longer contingent after the petition was filed. As discussed, supra, the Court the key is the nature of the liability at the time of the filing of the petition, not immediately after the petition.
. “If all or any part of the Guaranteed Obligations shall not be punctually paid when due, whether at demand, maturity, acceleration or otherwise, each Guarantor shall, within five (5) days after demand ... pay ... the amount due on the Guaranteed Obligations to Agent ...." Like the American Bank of Texas guaranty, this guaranty is called a "Payment Guaranty.” It states that the lender “is not willing to make the Loan ... to Borrower unless each Guarantor unconditionally guarantees payment and performance ... ,” making it clear that Pacific Western Bank makes a distinction between the primary obligor on the loan and the guarantors, despite the language on which the Alleged Debtors rely.
. (Emphasis added). This paragraph further provides, in pertinent part: ''[T]he filing by Maker or any guarantor of a petition ... ; or the admission in writing by Maker or any guarantor of its inability to pay its debts as they become due .... ”
. The only notice given to Alleged Debtors on behalf of Community Bank was dated September 9, 2015, five days after the petitions were filed. Each of the Community Bank loans was renewed post-petition.
. "Affiliate” is defined in § 101(2).
. In re Florida Fund of Coral Gables, Ltd., 144 Fed.Appx. 72, 75 (11th Cir. 2005) (quoting In re Holloway, 955 F.2d 1008 (5th Cir. 1992)) (dealing with insiders as transferees under § 547).
. Id, (quoting In re Holloway, 955 F.2d 1008, 1011 (5th Cir. 1992)).
. Id. (citing 2 Lawrence P. King, et. al. Collier on Bankruptcy It 101.31, at 101-99 (Revised 15th ed. 1996)), Although In re Florida Fund of Coral Gables originated as an involuntary bankruptcy, the Eleventh Circuit analyzed the term "insider” in the context of avoidable preferences; it did not specifically address what a non-statutory insider is in the context of § 303(b)(2).
. In re Lee, 247 B.R. 311, 313 (Bankr. M.D. Fla. 2000).
. Id.
. In re McIver, 177 B.R. 366, 368 (Bankr. N.D. Fla. 1995) ("An insider is one who has a sufficiently close relationship with a debtor that his conduct is made subject to closer scrutiny other than those dealing at arms-length with the debtor.” (citing Loftis v. Minar (In re Montanino), 15 B.R. 307 (Bankr. D.N.J. 1981) (citing S. Rep. No. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5785, 5810))).
. Friedman v. Sheila Plotsky Bros., Inc. (In re Friedman), 126 B.R. 63, 70 (9th Cir. BAP 1991), overruled on other grounds, Zachary v. Cal. Bank & Trust, 811 F.3d 1191 (9th Cir. 2016). See also 2 Collier on Bankruptcy ¶ 101.31, at p. 101-140 (16th ed. 2015).
. In re DemirCo Group, 343 B.R. 898, 902 (Bankr. C.D. Ill. 2006) ("these are creditors whose financial or other relationship with the debtor would make them unlikely to join in an involuntary petition against the debtor.”) (citing 1 Robert E. Ginsberg & Robert D. Martin, Ginsberg & Martin on Bankruptcy § 2.03[C] (4th ed. 1996, Supp. 2006)).
. Kirschner owns 10% of Wharfside Legendary and Legler owns 90%.
. Even if the Court did not find K & L to be an insider of the Alleged Debtors, it would still be excluded from the numerosity count because it received a post-petition payment from Legendary, LLC—an affiliate of Alleged Debtors.
. SEPH argues, and it appears likely, that SSI Destín could be deemed a statutory insider under the Bankruptcy Code and Florida Law. 11 U.S.C. § 101(31); § 726.102, Fla. Stat. (2016). Because the Court finds that SSI Destín is a non-statutory insider, it is unnecessary to analyze here its possible statutory insider status.
. This judgment is also against a related entity, Emerald LTA-1, Inc.
. Bos signed the consent to final judgment in his individual capacity, and as president of both LHI and Emerald LTA-1, LLC.
. The information on Alleged Debtors’ creditor lists reported this claim as "being paid” in accordance with terms of a Forbearance Note, but this was refuted by the evidence at trial. Bos has never made a payment to SSI Destín; LHI has made payments in the past but the last one was made in October of 2014.
. The first charging order was entered on June 9, 2015. The second charging order was entered on July 1, 2015.
. S. Rep. No, 95-989 (1978), reprinted in 1978 U.S, Code Cong. & Admin, News 5787, 5810; 2 Collier on Bankruptcy ¶ 101.31 at 101-140 (16th ed. 2015).
. "PB” stands for Peter Bos and “TB”' stands for Theresa Bos, his wife.
. Presumably, THPB stands for Tim Horgan and Peter Bos. SEPH correctly points out that THPB is an insider of Tim Horgan; it is also an insider of Bos because of his status as its manager and because of Tim Horgan's affiliation as one of its owners. An insider of' an insider of the debtor is an insider of the debtor. In re Parks, 503 B.R. 820, 835 (Bankr. W.D. Wash. 2013) (holding that one-year preference period was applicable because individual was an insider of an insider as to the debtor). Horgan is an insider of Bos.
. That certification, which is part of the official form promulgated by the Florida Department of State, further provides that Ms. Parker is "or the receiver or trustee empowered to execute this report as required by Chapter 605, Florida Statutes." •
. See In re Smith, 415 B.R. 222, 233 (Bankr. N.D. Tex. 2009).
. 2 Collier on Bankruptcy ¶ 101.31, at p. 101-40 (16th ed. 2015).
. It is unclear why Bos did not list Wharf-side as a creditor. The most recent agreement pertaining to the Wharfside claim, executed by Bos, LHI and Wharfside effective on June 30, 2013, lists Bos as a Guarantor and recites that he and LHI "at all times have had personal liability on” the note "with a current outstanding principal balance as of this date, including accrued and unpaid interest, of $16,779,294.19 ...."
. Pete Knowles is the Vice President of LHI and general business manager of all of the Legendary group; he works directly under and reports directly to Bos.
. 11 U.S.C. § 303(b)(2).
. 444 F.2d 1376 (5th Cir. 1971). Denham is controlling in the Eleventh Circuit because it was decided prior to October 1, 1981. Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981).
. Seven debts were less than $10; six debts were less than $25; and only one claim exceeded $100.
. When Denham was decided, § 56(c) of the Bankruptcy Act stated that claims of under $50 should not be counted in computing the number of creditors voting or present at creditors' meetings, although those claims counted towards computing the amount of claims.
. Denham, 444 F.2d at 1379.
. In re Rassi, 701 F.2d 627 (7th Cir. 1983) (including creditors with small, recurring claims for the purpose of determining the number of required petitioning creditors and refusing to engraft the Denham rule into § 303); In re Okamoto, 491 F.2d 496 (9th Cir. 1974) (declaring that Denham “ignored unambiguous” direction from Congress); Theis v. Luther, 151 F.2d 397 (8th Cir. 1945).
. Denham, 444 F.2d at 1379. The Court voiced concern that an alleged debtor could concoct a scheme to make it impossible for creditors to file an involuntary petition. Such a scheme would involve purchasing small items on monthly account so that a debtor would always have more than twelve creditors. The creditors with these accounts would feel secure in having their bills paid promptly and would not risk losing a good customer by *888joining an involuntary petition. The Fifth Circuit emphasized the concern that recurring bills such as utility bills would allow a debtor to escape an otherwise meritorious involuntary petition.
. Sipple v. Atwood (In re Atwood), 124 B.R. 402 (S.D. Ga. 1991); In re Smith, 243 B.R. 169 (Bankr. N.D. Ga. 1999); In re Crain, 194 B.R. 663 (Bankr. S.D. Ala. 1996); In re Atwood, No. 88-41165, 1992 WL 12004559 (Bankr. S.D. Ga. May 14, 1992); In re Atwood, No. 88-41165, 1992 WL 12679066 (Bankr. S.D. Ga. Feb. 7, 1992) (one of three separate opinions cited here); In re Smith, 123 B.R. 423 (Bankr. M.D. Fla. 1990).
. 124 B.R. 402, 406 (S.D. Ga. 1991).
. Id. On remand, the bankruptcy court in Atwood determined that the following debts were non-recurring and should count toward numerosity;
(1) a $264.83 debt to the gas company was for the purchase of a gas tank and not ongoing utility service;
(2) $1.11 owed to a bank, though small, was to cover an overdraft and was not recurring;
(3) an $18 debt to an animal hospital was for one-time treatment of an injured dog and not a recurring claim; 84
(4) a $17.25 debt to a library was for an isolated purchase of a book;
(5) $35.02 owed to a hospital was for a onetime medical test;
(6) a debt of $375 for engine repair; and
(7) $529 due for consulting work.
In re Atwood, 1992 WL 12004559, at *2. It found other debts to be small and recurring, and therefore excluded from those qualified to file an involuntary petition: utility bills, the cable bill, a monthly bill for pest control services, and recurring newspaper and magazine bills. In re Atwood, 1992 WL 12679066, at *7.
. 123 B.R. 423, 425 (Bankr. M.D. Fla. 1990),
. 243 B.R. 169, 187 (Bankr. N.D. Ga. 1999).
. 194 B.R. 663, 667 n.4 (Bankr. S.D. Ala. 1996) (The court had already disqualified the debtors’ small and recurring creditors that had received post-petition payments, so the small and recurring debts exception was not an issue.).
. 529 B.R. 793, 798 (S.D. Fla. 2015).
. Id. at 799. Each publisher had a claim for royalties due when (and if) the alleged debtor sold or licensed a song. One publisher had not received any royalty payments in 2009.
. In re Stewart, No. 14-03177, 2015 WL 1282971, at *7 (Bankr. S.D. Ala. Mar. 18, 2015), The Stewart court mentioned in passing Denham as standing for not counting de minimis debts and the Florida opinion in In re Smith as authority for not counting "small recurring debts,”
. In re Beacon Reef Ltd. P’ship, 43 B.R. 644 (Bankr. S.D. Fla. 1984).
. Id. at 646.
. In re Elsa Designs, Ltd., 155 B.R. 859, 865 (Bankr. S.D.N.Y. 1993) (“Section 56c, however, has no counterpart under the Code and Rule 2007 of the Federal Rules of Bankruptcy Procedure has deleted the provision in its forerunner, Bankruptcy Rule 207, which prohibited a holder of a claim less than $100 from voting at a creditors’ meeting.”); In re Reid, 107 B.R. 79, 82 (Bankr. E.D. Va. 1989).
. Attached as an Appendix to this opinion is a chart showing the creditors SEPH sought to exclude as "small” or “small and recurring” and the reasons each will not be excluded.
. 11 U.S.C. § 303(b).
. Those taxing authorities include: Okaloosa County, School RLE, School CAP IMP/DISC, Destín, Water MGMT (the first portion of this authority is not visible on the exhibit), and Destín FD.
. In re Ratliffs Estate, 137 Fla. 229, 188 So. 128, 133 (1939).
. 11U.S.C. § 303(b)(1).
. In re Smith, 415 B.R. 222 (Bankr. N.D. Tex. 2009).
. Art. VII, § 9(a) Fla. Const, states: ‘‘Counties, school districts, and municipalities shall, and special districts may, be authorized by law to levy ad valorem taxes and may be authorized by general law to levy other taxes, for their respective purposes, except ad valo-rem taxes on intangible personal property and taxes prohibited by this constitution.”
. 11 U.S.C. § 101(5).
. 11 U.S.C. § 303(b)(1) & (2).
. In re Smith, 415 B.R. 222, 237 (Bankr. N.D. Tex. 2009) (citing In re Midland Indus. Service Corp., 35 F.3d 164, 166 (5th Cir. 1994) (statutory citations omitted)). "Until that time, the liability is contingent.” Id. at 237-38.(cit-ing In re Anchor Glass Container Corp., 375 B.R. 683, 687 (Bankr. M.D. Fla. 2007) (claim may be contingent because due date for the tax payment had not passed as of the petition date or unliquidated because the taxing authority has not yet set tax rates)).
. §§ 192.042, 192.053, & 197.122 Fla. Stat. (2015).
. § 197.333 Fla. Stat. (2015).
. In re Anchor Glass Container Corp., 375 B.R. 683, 687 (Bankr. M.D. Fla. 2007) (tax claim "may be contingent, for example, because' the due date for the tax payment had not passed as of the petition date” (citing In re Wang Zi Cashmere Products, Inc., 202 B.R. 228, 230 (Bankr. D. Md. 1996))).
. In re Smith, at 237-38.
. Charter Bank’s claim is in personam as well as in rem, so an analysis of its status as a fully secured creditor would be different from the analysis of the Tax Collector’s claim.
. 11 U.S.C. § 303(b)(2).
. 11 U.S.C. § 549(b) and (c) exclude from the operation of § 549(a) certain types of transfers not applicable here.
. .The Court makes no determination that this account is exempt, even though Bos claims it is exempt as being owned by him and his wife as tenants by the entireties.
. See 11 U.S.C. § 549(a). Section 303(f) provides that, except pursuant to a contrary order of the court, prior to the entry of an order for relief in the case (or during the "gap period” between the filing of the petition and the entry of an order for relief), "any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced.” 11 U.S.C. § 303(f).
. See 11 U.S.C. § 541(a).
. 11 U.S.C. § 541(a)(1), (6).
. In re Meehan, 102 F.3d 1209, 1210 (11th Cir. 1997) (citing United States v. Whiting Pools, Inc., 462 U.S, 198, 205 & n.9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)).
. In re McRae, 308 B.R. 572, 575 (N.D. Fla. 2003).
. In re Houck, 181 B.R. 187, 193 n.16 (Bankr. E.D. Pa. 1995) (citing 11 U.S.C. § 522) (emphasis added).
. 11 U.S.C. § 541(b).
. The fact that Bos successfully claimed the TBE account as exempt under Florida law when SEPH garnished the account does not establish the account as exempt in bankruptcy; especially against an attack on that exemption by a Chapter 7 bankruptcy trustee.
. 11 U.S.C. § 522(b)(1).
, While the time for claiming exemptions in a voluntary case begins to run upon the filing of the petition, in an involuntary case, the time period does not begin until an order for relief is entered. See Fed. R. Bankr, P. 4003(a) ("A debtor shall list the property claimed as exempt under § 522 of the Code on the schedule of assets required to be filed by Rule 1007.”); Fed. R. Bankr. P. 1007(c) ("In an involuntary case, the schedules, statements, and other documents required by subdivision (b)(1) shall be filed by the debtor "within 14 days after the entry of the order for relief.") (emphasis added).
. In re Stewart, No. 14-03177, 2015 WL 1282971, at *6 (Bankr. S.D. Ala. Mar. 18, 2015):
Some courts do not count prepetition creditors whose debts are paid during the gap period—the period between the filing of the involuntary petition and the entry of an order for relief—if the debt is paid with property of the estate since such payments would constitute voidable transfers. See In re CorrLine International, LLC, 516 B.R. 106 (Bankr.S.D.Tex,2014); In re Atwood, 124 B.R. 402 (S.D.Ga.1991); In reRoselli, 2013 WL 828304 (Bankr.W.D.N.C.2013).
[[Image here]]
Because these payments would constitute voidable transfers, the Court will not count the prepetition creditors who were paid during the gap period. This result makes sense. The gap period is commonly used by a petitioning creditor to solicit other petitioning creditors. Paying off other creditors during this period defeats any incentive they might have to join the petition. In fact, it gives such creditors something to lose—a voidable transfer—should the bankruptcy proceed,
. 415 B.R. at 234.
. See, e.g., In re Lawrence, 251 B.R. 630, 640 (S.D. Fla. 2000), aff’d, 279 F.3d 1294 (11th Cir. 2002) (recognizing a court’s duty to exercise common sense).
. Some creditors received postpetition transfers from an account owned by Mr, Bos's wife, Terri Bos: Charter Bank, American Express Centurion Bank, Lowe's, Destín Cleaners, and The Perfectionists Complete Lawn Care. Because these same creditors also received postpetition payments from the TBE account and so do not count for numerosity, supra, it is unnecessary to discuss them again. SEPH pointed out that other creditors received post-petition payments from entities closely related to Bos. In light of this discussion and the entirety of the opinion, it is not necessary to address those other creditors.
. LHI’s creditors that were paid post-petition by Legendary Group, Ltd.: Bloom, Sug-arman, Everett, LLP; Lisa Jo Spencer, P.A.; Beach Community Bank; and Genworth Life & Annuity Insurance. Creditors that were paid post-petition by Legendary, LLC: CRS Insurance Group, LLC; Allied Insurance; and First Insurance Funding Corp. The Court notes that other LHI creditors received post-petition payments from entities closely related to it, but it is not necessary to address those creditors.
. See infra, discussion of creditors listed that had no claims against LHI.
. 2015 WL 1282971 at *7.
. LHI is a holding company that has no income of its own. Bos testified that he also receives Social Security income. The evidence also shows that the Legendary group entities pay for his vehicles, realtor association dues, business expenses on his credit cards, yacht, and vessel, at minimum.
. 2 Collier on Bankruptcy ¶ 547.03[2][a], at p. 547-21 (16th ed. 2015).
. Id.
. Id, The earmarking doctrine has been recognized by courts as a defense to a § 547 avoidance action. See Campbell v. Hanover Ins. Co. (In re ESA Envtl. Specialists, Inc.), 709 F.3d 388, 396 (4th Cir. 2013); In re Barefoot Cottages Dev. Co., LLC, No. 09-50089, 2009 WL 2842735 (Bankr. N.D. Fla. 2009). It also has been applied as a defense to a § 549 avoidance action. See In re Westchester Tank Fabricators, Ltd., 207 B.R. 391, 397 (Bankr. E.D.N.Y. 1997),
. Although Mr. Knowles testified to the existence of some book entries of "earmarked” loans, no documents in evidence reflect these entries, and there is no evidence that such entries were made pre-petition other than this testimony.
. The reason the terms "earmarked” or “earmark loans” were repeated numerous times during Mr, Knowles’ testimony became evident during closing argument when, for the first time, Alleged Debtors' counsel argued case law that used the term' "earmarked.”
. 2 Collier on Bankruptcy ¶ 547.03[2][a], at p. 547-22, 23 (16th ed. 2015).
. Policy concerns also support this ruling. Paying creditors post-petition defeats any incentive those creditors may have to join an involuntary petition because if an order for relief is entered, these post-petition payments are subject to being avoided under § 549.
. The four Bos creditors are: TNT Metal Buildings, Inc.; Emerald Coast Association of Realtors; Frazer, Greene, Upchurch & Baker, LLC; and First Capital Bank. The three LHI creditors are: Frazer, Greene, Upchurch & Baker, LLC; First Capital Bank; and Capital One Bank (USA), N.A. Bos and LHI listed First Capital Bank as a pre-petition creditor holding a claim for $107;514.86. Having already ruled that First Capital Bank does not count for numerosity because its claims were either paid in full or contingent at the time of the petitions, supra, it is unnecessary to analyze this creditor any further.
.The Court has rejected SEPH’s argument that these three creditors should be excluded for holding de minimis claims. Because these creditors did not hold claims as of the petition date it is unnecessary to address whether they should be excluded on the basis that they received post-petition transfers of property of the estate.
. The Court finds Mr. Knowles’ testimony as to this creditor to be self-serving on behalf of Alleged Debtors and not credible.
. That entity is Emerald Grande Investors, LLC. There are also entities named Emerald LTA-1, LLC and Emerald LTA-2, LLC.
. LHI stated in its second amended list of creditors that "the invoice was sent and billed to Harborwalk Marina and Legendary.”
. As to all three creditors discussed in this section, since LHI is a holding company and the Legendary group entities actually operate the businesses, it is difficult to conceive of LHI being liable for these claims.
. 11 U.S.C. § 303(h)(1) ("unless such debts are the subject of a bona fide dispute as to liability or amount.”).
. In re Atl. Portfolio Analytics & Mgmt., Inc., 380 B.R. 266, 274 (Bankr. M.D. Fla. 2007).
. See, e.g., In re F.R.P. Indus., Inc., 73 B.R. 309, 312 (Bankr. N.D. Fla. 1987) (citing 2 Collier on Bankruptcy ¶ 303.12 (15th ed.); In re B.D. Int’l Discount Corp., 701 F.2d 1071, 1075 (2nd Cir. 1983)).
. See In re Fallon Luminous Products Corp., No. 09-35581, 2010 WL 330222 at *2 (Bankr. E.D. Tenn. Jan. 20, 2010).
. Bos signed a similar affidavit for LHI.
. 11 USC § 305(a)(1).
. 2 Collier on Bankruptcy 11305.02[2][a], at p. 305-7 (16th ed. 2015).
. See In re Mt. Dairies, Inc., 372 B.R. 623, 634-35 (Bankr. S.D.N.Y. 2007).
. See id. (citing In re Century Tile and Marble, Inc., 152 B.R. 688, 689 (Bankr. S.D. Fla. 1993),
. 335 B.R. 221, 226 (Bankr. S.D.Fla. 2005). The In re E.S. Prof. Servs., Inc. court stated:
Here, despite the petitioning creditor’s vague assertion of possible preferential transfers, there seems to be very little benefit to creditors as a whole from the entry of an order for relief. Again, it is the Court’s obligation to balance the very real prospect of devastating economic harm to the alleged debtor against the interests of the creditor body as a whole. In this regard, it is important to note that the petitioning creditor already has a forum available to it—namely, the state court lawsuit it filed against the debtor.
That court went on to recognize that at least one court has "specifically rejected the idea that the mere possibility of preferential transfers was sufficient to invoke the ‘drastic remedy’ of involuntary bankruptcy proceedings,” citing In re Gills Creek Parkway Assocs., L.P., 194 B.R. 59, 64 (Bankr. D.S.C. 1995).
. If the Court were to enter an order for relief on these involuntary petitions, thus putting Alleged Debtors into a Chapter 7, Bos and LHI could (and likely would) immediately move to convert to Chapter 11. So, granting these involuntary petitions would not necessarily result in the grim picture that Bos attempts to paint.
. § 726 Fla. Stat. (2015). Although this Court has ruled SSI Destín is an insider, it has not reached the Alleged Debtors’ arguments that they were not insolvent when the SSI Destín charging orders were issued, and were not rendered insolvent by those charging orders. A review of the Affidavits that Bos and LHI filed at the commencement of this case, however, seems to show precisely that.
. In re Manchester Heights Associates, 140 B.R. 521, 522-23 (Bankr. W.D. Mo. 1992) (“This power of abstention is not reviewable by the courts of appeal. The power of abstention is, therefore, an extraordinary power which is to be used only in extraordinary circumstances.”) (citing to several other bankruptcy court opinions from Minnesota, New York, and New Mexico).
. In re Axl Industries, Inc., 127 B.R. 482 (S.D. Fla. 1991); In re R.V. Seating, Inc., 8 B.R. 663 (Bankr. S.D. Fla. 1981); In re Mountain Dairies, Inc., 372 B.R. 623 (Bankr. S.D.N.Y. 2007); In re Gills Creek Parkway Associates, L.P., 194 B.R. 59 (Bankr. D.S.C. 1995).
. 190 B.R. 949 (Bankr. M.D. Fla. 1995). (The alleged debtor had appealed the judgment in state court and the appeal remained pending.)
. 190 B.R. 949 (Bankr. M.D. Fla. 1995). Section 305 permits a court to suspend proceedings like the Court did in Rookery Bay. Id. Suspension of these proceedings would preserve the 547 preference period while permitting the parties to litigate in state court under Florida’s UFTA (See § 726.105 & § 726.106 Fla. Stat. (2015)). Suspension would also signal to Bos and LHI that this Court "gets” what is really going on here. But, based on the evidence it is clear that suspension would have significant negative impact on Alleged Debtors.
. 127 B.R. 482, 484-85 (S.D. Fla. 1991).
. Id.
. § 726,106 Fla. Stat. (2015).
. In re Axl, 127 B.R. at 485 (recognizing that the Florida UFTA contains an additional requirement that an insider transferee must have had reasonable cause to believe that the debtor was insolvent, the court affirmed the bankruptcy court's abstention. The alleged debtor had made the transfers to its parent company, making it easier to prove that the insider transferee parent had reasonable cause to believe that its subsidiary, the debtor, was insolvent.) In Axl, the court considered whether the creditor could obtain "adequate” relief in state a non-bankruptcy forum, or as the court in In re R.V. Seating put it—whether the petitioning creditor can show it would not obtain as much relief as the Bankruptcy Code provided by proceedings supplementary to its state court judgment, Id. at 484-85; In re R.V. Seating, Inc., 8 B.R. 663, 665 (Bankr. S.D. Fla. 1981).
. In re Mountain Dairies, Inc., 372 B.R. 623 (Bankr. S.D.N.Y. 2007).
. See In re 801 South Wells Street, L.P., 192 B.R. 718, 723 (Bankr. N.D. Ill. 1996).
.Based on the long and acrimonious litigation history between these parties, if this Court were to grant relief and put Alleged Debtors into Chapter 7, the proverbial race would be on: undoubtedly Alleged Debtors would immediately move to convert their cases to Chapter 11, That, in turn, would virtually guarantee SEPH seeking appointment of a Chapter 11 trustee or examiner. Regardless, the parties would litigate over whether the friendly charging orders granted by Alleged Debtors to SSI Destín are preferential or fraudulent. There may be no end to the issues these parties could find to litigate here.
. ' Alleged Debtors maintain that they were not insolvent at the time of the transfers, or rendered insolvent as a result of the transfers.
. Regardless of whether SEPH and Alleged Debtors litigate over the transfers to SSI Des-tín, there will still be an issue of whether Alleged Debtors were insolvent at the time of the transfers, or rendered insolvent as a result of the transfers. § 726.106 Fla. Stat. (2015) and 11 U.S.C. § 547, | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500175/ | ORDER DENYING DEFENDANT’S MOTION TO DISMISS COUNT II
Karen S. Jennemann, United States Bankruptcy Judge
Defendant, Lecessee Construction Services, LLC, seeks dismissal of Count II *907asserted by the Plaintiff/ Reorganized Debtor, Carbide Industries, to foreclose a perfected claim of lien against a surety bond. Defendant’s Motion to Dismiss Count II is denied.
In this adversary proceeding, Carbide Industries alleges that Lecessee Construction Services owes it money for work performed under a contract between the parties. Carbide recorded a “Sworn Statement and Notice of Intention to Hold Mechanic’s Lien of Carbide Industries, LLC” on the basis of this contract in Hamilton County, Indiana.1 The following facts are undisputed:
• November 22, 2013: Carbide’s Mechanic’s Lien was recorded.2
• May 1, 2014: Lecessee caused the mechanic’s lien to be transferred to a surety bond.3
• August 28, 2014: Carbide filed its Chapter 11 petition.4
• June 29, 2015: The effective date of Carbide’s Final Chapter 11 Confirmed Plan.5
• November 20, 2015: This Adversary Proceeding was filed.6
The relevant Count II seeks to foreclose upon this surety bond.7 Plaintiff, Carbide, contends that they substantially performed all statutory provisions under Indiana’s mechanic’s lien law and demands judgment enforcing the mechanic’s lien against the Surety Bond and attorneys’ fees and costs.8 Defendant, Lecessee, filed a Motion to Dismiss Count II arguing the claim is untimely.
Lecessee makes two primary arguments for dismissal: (1) the extension of time of Bankruptcy Code § 108 does not apply to “post-confirmation” debtors; and (2) under Indiana Code (the “IC”) 32-28-3-6, Carbide had to foreclose on its mechanic’s lien within one year of its creation—November 22, 2014.9 Carbide responds that (1) the extension of time of the Bankruptcy Code § 108 applies to a reorganized Chapter 11 debtor when the debtor was formerly a debtor-in-possession; and (2) Carbide met the requirements under IC 32-28-3-6 because a surety bond can be a credit and it is unknown if the credit expired.10
Rule 12(b)(6) provides that before an answer is filed a defendant may seek dismissal of a complaint if the complaint fails to state a claim.11 Disposition of a motion to dismiss under Rule 12(b)(6) focuses only upon the allegations in the complaint and whether those allegations state a claim for relief. “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”12 For a complaint to survive a motion to dismiss, it *908must contain sufficient factual matter to “state a claim to relief that is plausible on its face.”13 Facial plausibility is present “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”14 Likewise, a 12(b)(6) dismissal “is appropriate ‘if it is apparent from the face of the complaint that the> claim is time-barred.’ ”15 In reviewing a motion to dismiss, courts must accept the allegations in the complaint as true and construe them in the light most favorable to the plaintiff.16
Lecessee first argues that, although Bankruptcy Code § 108(a) extends deadlines giving a debtor-in-possession or a trustee an additional two years to sue,17 the section does not apply to post-confirmation debtors, like Carbide, unless the confirmed plan specifically reserves prose-chtion for the benefit of the estate.18 The purpose § 108(a) is to “benefit the creditors of the bankrupt debtor, rather than a mere debtor itself.”19
Here, the effective date of Carbide’s confirmed plan was June 29, 2015. This adversary proceeding was filed on November 20, 2015, when Carbide no longer was a debtor-in-possession. Carbide’s Confirmed Plan of Reorganization did not provide that recoveries from any adversary proceedings would fund the estate post-confirmation.20 The Confirmed Plan states the opposite—“all property shall re-vest in the Debtor on the Effective Date.”21 When Carbide filed this adversary proceeding, it was no longer a debtor-in-possession acting for the benefit of the entire estate and its creditors,22 but rather a reorganized debtor who is acting in its own interests. Carbide cannot rely on § 108(a) for an extension of time to file this adversary proceeding.
Indiana law,' however, still may allow Carbide to prosecute Count II with no extension. Under IC 32-28-3-6, a “complaint must be filed not later than one (1) year after; (1) the ... notice of intention to hold a lien was recorded ... or (2) subject to subsection (c), the expiration of *909the credit, if credit was given.”23 So, although this adversary proceeding was filed more than one year after Carbide’s lien was created, enforcement rights may survive. The lien was transferred to a surety bond, which may act as an unexpired credit under the statute and permit the continued prosecution of Carbide’s claim against Lecessee.
Mechanic’s lien statutes in Indiana are strictly construed in the creation and existence of such lien; however, "provisions [in the statute] relating to enforcement should be liberally construed” to give the statute effect.24 Doubts as to the enforceability of a properly created lien are resolved in favor of a lienholder, such as Carbide.
Lecessee asks this court to take a narrow interpretation of the word “credit, if credit was given” by relying on a different portion of Indiana’s Code.25 Defendant also argues that an ‘undertaking’ is a ‘surety bond’,26 when in fact the terms are not - synonymous. Under the statute, an undertaking requires a surely in “bond, cash, or letter of credit;” wherein, the surety requires more than the original legal obligation.27
Lecessee’s argument ignores the statutory construction requirement that I must liberally construe for the enforcement of an already perfected mechanics lien. “The best evidence of legislative intent is the language of the statute itself, and all words must be given their plain and ordinary meaning unless otherwise indicated by statute.”28 Defendant’s strict interpretation of the term ‘credit’ was taken from another part of the code, used in a limited context involving residential homes. The term ‘credit’ is not defined in the statute.29 The term’s use would eliminate all ‘credits’ for a mechanics lien, unless the lien was ‘on credit’ for a single or double family dwelling.30
In granting a 12(b)(6) motion, this court must construe the facts in the light most favorable . to the plaintiff. Because Indiana’s mechanic’s lien statute must be *910liberally construed to give the statute effect and in favor of the lienholder, and the statute does not define the term ‘credit’ or when a credit expires, the Court declines to impose the restrictive definition urged by the Defendant, Count II states a claim upon which relief can be granted and is not time barred, at least at this stage of this litigation.
Accordingly, it is
ORDERED:
1. Defendant’s Motion to Dismiss (Doc. No. 47) is DENIED.
2. Defendant shall answer the Amended Complaint by December 2,2016.
3. A pretrial conference is scheduled for 2:00 p.m. on December 15, 2016.
ORDERED.
. Doc. No. 41-4, p. 2.
. Doc. No. 41.-4, p. 6.
. Doc. No. 41-5.
. Main Case 6:14-bk-09894-KSJ, Carbide Industries, LLC, Doc. No. 1.
. Doc. No. 16-1, p. 7.
. Doc. No. 1.
. Doc. No. 41, p. 4.
. See generally Doc. No. 41, p. 5.
. Doc. No. 47, p. 4-12.
. Doc. No. 53, p. 3-7.
. Fed. R. Civ. P. 12(b)(6).
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (internal citations omitted).
. Ashcroft v. Iqbal, 556 U.S. 662, 677-78, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 570, 127 S.Ct. 1955) (internal quotation marks omitted).
. Id.
. Gonsalvez v. Celebrity Cruises Inc., 750 F.3d 1195, 1197 (11th Cir. 2013) (quoting La Grasta v. First Union Sec. Inc., 358 F.3d 840, 845 (11th Cir. 2004)).
. Brophy v. Jiangbo Pharm., Inc., 781 F.3d 1296, 1301 (11th Cir. 2015) (quoting Piedmont Office Realty Trust, Inc. v. XL Speciality Ins. Co., 769 F.3d 1291, 1293 (11th Cir. 2014) (quoting Hill v. White, 321 F.3d 1334, 1335 (11th Cir. 2003))).
. Roberts v. C.I.R., 175 F.3d 889, 897 (11th Cir. 1999); Also see 11 U.S.C § 1107 (2012); Matter of Roberson, 53 B.R. 37, 39 (Bankr. M.D. Fla. 1985).
. Nat'l Envtl. Waste Corp. v. Stephens, Berg & Lasaster (In re Nat'l Envtl. Waste Corp.), 200 F.3d 1266, 1268 (9th Cir. 2000).
. Id. at 419.
. Carbide's Amended Disclosure Statement does provide: "such assets include claims of-litigation against third parties, which is speculative." Main Case Doc, No 106, p. 5. Carbide's Confirmation Affidavit states that they "will fund the plan .., from a collection of outstanding accounts receivable.” Main Case Doc. No. 131, p. 2.
. Doc. No. 105, p. 12.
. Natco Industries, Inc. v. Federal Ins. Co., 69 B.R. 418, 419 (S.D.N.Y. 1987). See U.S. Am. Bank v. CI.T. Const. Inc. of Texas, 944 F.2d 253, 260 (5th Cir. 1991) ("Post-confirmation debtors are not entitled to the tolling provisions of section 108(a) because their interests diverge from those of the creditors in the estate.”).
. Ind, Code. § 32-28-3-6 (2016) (emphasis added).
. Deluxe Sheet Metal, Inc. v. Plymouth Plastics, Inc., 555 N.E.2d 1296, 1298 (1990); accord Midwest Biohazard Servs., LLC v. Rodgers, 893 N.E.2d 1074, 1077 (2008); Haimbaugh Landscaping, Inc. v. Jegen, 653 N.E.2d 95, 99 (Ind. Ct. App. 1995).
. Defendant asks the Court to interpret ‘credit’ in IC § 32-28-3-6 by using IC § 32-28-3-1, entitled Mechanic’s liens; persons to whom available; effect of contract provisions; credit transactions; restrictions. ‘Credit’ would equate to someone who purchased material, labor, or machinery "on credit” for an “owner occupied single or double family dwelling,...” Ind. Code. § 32-28-3-=6, Sec. 1, at (hMi).
. Ind. Code. § 32-28-3-11.
. Bailey v. Holliday, 806 N.E.2d 6, 10 (Ind. Ct. App. 2004) ("The surety needs to cover any judgement, including the amount of the lien, costs, and attorney’s fees.”).
. Bailey, 806 N.E.2d at 10.
. Given the plain and ordinary meaning of the word ‘credit’, a credit is more synonymous with surety, and thus whether a credit expired under IC may be applicable. Compare Credit, Black’s Law Dictionary (10th ed. 2014) (the faith in one’s ability to pay debts, or the time that a seller gives a buyer to make payment), with Surety, Black’s Law Dictionary (10th ed. 2014) (“someone who is primarily liable for paying another’s debt”), and Performance Bond, Black’s Law Dictionary (10th ed. 2014) ("a bond given by a surety to ensure the timely performance of contract”).
. See generally John Wendt & Sons v. Edward C. Levy Co., 685 N.E.2d 183, 188 (Ind. Ct. App. 1997) (where the dispute was over labor and cranes for a 10-yard dredge and a conveyor system). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500176/ | ORDER APPROVING FIRST INTERIM APPLICATION FOR ATTORNEY’S FEES AND EXPENSES OF SHRAIBERG, FERRARA, LANDAU & PAGE, P.A.
Erik P. Kimball, Judge, United States Bankruptcy Court
This matter came before the Court for hearing on October 19, 2016 upon the Summary of First Interim Application for Compensation and Reimbursement of Expenses of Shraiberg, Ferrara, Landau & Page, PA. as Bankruptcy Counsel for the Debtor [ECF No. 159] and the Debtor’s Response to Objection to First Interim Application for Compensation and Reimbursement of Expenses of Shraiberg, Fer-rara, Landau & Page, P.A as General Bankruptcy Counsel for the Debtor [ECF No. 176] (collectively, and as supplemented by ECF No. 182, referenced below, the “First Interim Fee Application”) filed by counsel for Tuscany Energy, LLC (the “Debtor”), Shraiberg, Ferrara, Landau & Page, P.A. (the “Firm”), and the Objection to First Interim Application for Compensation and Reimbursement of Expenses of Shraiberg, Ferrara, Landau & Page, P.A. as General Bankruptcy Counsel for the Debtor [ECF No. 172] (as supplemented by ECF No. 181, referenced below, the “Objection”) filed by Armstrong Bank, an Oklahoma Banking Corporation (“Armstrong Bank”).
*912After the hearing, at the Court’s request, the parties submitted the Reply to Debtor’s Response to Objection to First Interim Fee Application for Compensation and Reimbursement of Expenses of Shraiberg, Ferrara, Landau & Page, PA. as General Bankruptcy Counsel for the Debtor [ECF No. 181] and the Debtor’s Supplemental Response to Objection to First Interim Application for Compensation and Reimbursement of Expenses of Shraiberg, Ferrara, Landau & Page, P.A. as General Bankruptcy Counsel for the Debtor [ECF No. 182],
The Firm seeks an interim award of fees and expenses for services rendered to the Debtor and its bankruptcy estate, and to apply a pre-petition retainer currently held in the Firm’s trust account. Armstrong Bank does not object to the amount of the requested fees and expenses. However, Armstrong Bank argues that any approved compensation should not be paid from the pre-petition retainer on the grounds that the retainer constitutes Armstrong Bank’s cash collateral and Armstrong Bank’s interest in such cash collateral is superior to any claim of the Firm.
More than 5,000 new chapter 11 cases were filed last year. There are 565 pending chapter 11 cases in this district alone. In nearly every one of those cases, counsel to the debtor-in-possession receives prior to filing the petition a retainer for services to be rendered during the case. It is the rare chapter 11 case without at least one significant secured creditor. Particularly in commercial cases, such as this one, there is often at least one secured creditor that claims a security interest in all of the debtor’s assets, including the debtor’s deposit accounts and cash. When the debtor-to-be pays a retainer to its bankruptcy counsel, those funds typically come from a bank account that is subject to a security interest. Indeed, although not true here, it is often the case that the secured creditor is also the bank. Why, then, is it so difficult to find a reported decision where a secured creditor objected to the use of a pre-petition retainer for payment of approved fees and expenses of the debtor’s counsel on the grounds that the retainer is the secured creditor’s cash collateral? The answer is that, except in extremely unusual circumstances, the secured creditor retains no interest at all in funds paid to debtor’s counsel as a pre-petition retainer. U.C.C, Article 9, section 9-332, uniformly enacted in the states, provides that a transferee of money, or funds from a deposit account, takes free of any security interest “unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” E.g., Florida Statutes § 679.332. Requesting a pre-petition retainer for services to be rendered in a chapter 11 case, alone, surely does not constitute collusion as contemplated in the statute. It is not surprising, then, that nearly no secured creditor challenges the use of a pre-petition retainer to pay approved fees and expenses of the debtor’s counsel and that there are nearly no reported decisions on the issue.
In this case, Armstrong Bank does not even suggest that the Firm colluded with the Debtor to violate the rights of Armstrong Bank. Armstrong Bank has no interest in the pre-petition retainer held by the Firm. There is no cash collateral interest that might be entitled to adequate protection. Armstrong Bank’s objection should be overruled and the Firm is entitled to apply the retainer in payment of fees and expenses approved by the Court.
In this case, even if Florida Statutes § 679.332 did not answer the question, the Firm has a security interest in the pre-petition retainer senior to any security interest Armstrong Bank might claim. The Debtor and the Firm executed an engage*913ment agreement that serves as a security agreement. All of the other requirements for attachment of that security interest are satisfied. The Firm’s security interest in the pre-petition retainer is perfected by possession. Absent the effect of Florida Statutes § 679.332, Armstrong Bank might claim to have a security interest in the pre-petition retainer as proceeds of a deposit account subject to its security interest. But because Armstrong Bank never perfected its security interest in the deposit account that was the source of the retainer, the perfected security interest held by the Firm would be senior to any interest Armstrong Bank might claim.
For the reasons set out more fully below, the Court will overrule the Objection of Armstrong Bank, approve in full the interim application of the Firm, and authorize the use of the pre-petition retainer for payment of 80% of approved interim fees (consistent with the Court’s usual practice) and 100% of approved interim expenses.
FACTS
The Debtor is indebted to Armstrong Bank by virtue of two notes in the original principal amount of $5,000,000.00 each.1 To secure the notes, the Debtor granted Armstrong Bank a security interest in substantially all of the Debtor’s real and personal property, including cash, accounts, deposit accounts, and, proceeds.2 The security agreement between Armstrong Bank and the Debtor provides, in relevant part: “[Debtor] hereby grants to [Armstrong Bank] a security interest in all Debtor’s demand, time, savings, passbook or similar accounts maintained at [Armstrong] Bank, and at any other bank or financial institution[.]” In an effort to perfect its security interest in the Debtor’s personal property, Armstrong Bank filed financing statements in accordance with the Uniform Commercial Code as enacted in the State of Florida.3
On January 11, 2016 (the “Petition Date”), the Debtor filed a voluntary petition under Chapter 11 of Title 11 of the United States Code.
Prior to the Petition Date, on November 2, 2015, the Debtor transferred to the Firm, and the Firm took possession of, $150,000.00 for pre-petition services and as a pre-petition retainer to secure the Firm’s promise to represent the Debtor in the above-captioned bankruptcy case. Such funds came from an account in the name of the Debtor at SunTrust Bank. Also prior to the Petition Date, on November 16, 2015, the Debtor transferred to the Firm, and the Firm took possession of, an additional $50,000.00 retainer for the same purposes. Again, such funds came from the Debtor’s account at SunTrust Bank. Thus, as of November 16, 2015, the Firm held $200,000.00 from the Debtor as a pre-petition retainer (the “Pre-Petition Retainer”). None of these monies were transferred from any account at Armstrong Bank. None of these monies were transferred from any account subject to an agreement providing Armstrong Bank with control over such account. Armstrong Bank was not the customer of SunTrust Bank with *914regard to the account in question. The Pre-Petition Retainer was memorialized in a November 6, 2015 engagement letter between the Firm and the Debtor. From the Pre-Petition Retainer, the sum of $10,000.00 was paid to the Firm prior to the filing of the petition for pre-petition services, resulting in $190,000.00 remaining as of the Petition Date.4 The above-described transactions were disclosed at the beginning of this case in the Debtor’s application to employ the Firm. EOF No. 5.
In the First Interim Fee Application, the Firm seeks an interim award of fees in the amount of $140,202.50, and an interim award of expenses in the amount of $13,683.73, for a total interim award of $153,886.23. It is customary for the Court to permit payment of 80% of approved fees and 100% of approved expenses in connection with interim applications such as this, and the Firm requests payment accordingly. The Firm seeks to apply the Pre-Petition Retainer to pay fees and expenses authorized by the Court.
Armstrong Bank does not object to the reasonableness of the fees requested. Armstrong Bank objects only to the use of the Pre-Petition Retainer to pay whatever fees and expenses may be approved by the Court. Armstrong Bank claims that it holds a perfected, first priority security interest' in all of the Debtor’s property and, as such, the Pre-Petition Retainer constitutes cash collateral that cannot be used, absent consent, without adequate protection. Armstrong Bank claims the Debtor has no unencumbered assets with which it can offer adequate protection. Accordingly, Armstrong Bank argues that the Debtor may not use the Pre-Petition Retainer to pay the Firm’s attorney’s fees and expenses.
The Firm responds that it is a non-collusive transferee of the funds representing the Pre-Petition Retainer and that, under Florida Statutes § 679.332, Armstrong Bank has no interest in the Pre-Petition Retainer that may constitute cash collateral. The Firm also argues that it has a perfected security interest in the Pre-Petition Retainer, to secure payment of the Firm’s fees and expenses, superior to that of any party including Armstrong Bank.
ANALYSIS
Once counsel is authorized to represent a debtor-in-possession in a chapter 11 case, sections5 330 and 331 govern the award of fees and expenses to such counsel. Specifically, section 330(a)(1) permits the Court to award counsel reasonable compensation for actual and necessary services rendered and reimbursement for actual and necessary expenses. Pursuant to section 331, the Court may approve and order the interim disbursement of attorney’s fees and expenses that are otherwise allowable under section 330. Section 331 was drafted to permit the Court to award compensation to counsel during the case rather than force counsel to wait until the end of a case to receive any compensation. In re Zukoski, 237 B.R. 194, 197 (Bankr. M.D. Fla. 1998). Counsel must file an application setting out the details of the services rendered and the amount requested, and must disclose the source of any compensation paid or promised to be paid.
Counsel to the debtor-in-possession in a chapter 11 case typically receives *915a retainer prior to filing the petition, to ensure the payment of fees and expenses to be incurred in the case. Id. (citing 3 Collier on Bankruptcy, P 328.02[l][b] at 328-6 (15th ed. 1997); In re McDonald Bros. Constr., Inc., 114 B.R. 989, 999 (Bankr. N.D. Ill. 1990)). The retainer remains property of the client until the attorney uses the retainer to pay fees and expenses. Id. Upon the filing of a bankruptcy petition, the pre-petition retainer becomes property of the bankruptcy estate under section 541, and any unearned portion of the retainer must be returned. Id.' (citing eleven cases in support). Any pre-petition retainer is subject to court review under sections 330 and 331.
Debtor-in-possession counsel who obtains a pre-petition retainer to ensure payment of fees and expenses in a chapter 11 case (or a post-petition retainer authorized by court order) becomes a secured creditor, secured by a possessory security interest in money. In re Outdoor RV & Marine, LLC, 2011 Bankr. LEXIS 1698 at **20-25 (Bankr. S.C. 2011); In re Advanced Imaging Techs., Inc., 306 B.R. 677, 680-81 (Bankr. W.D. Wash. 2003); In re Burnside Steel Foundry Co., 90 B.R. 942, 944 (Bankr. N.D. Ill. 1988).
Florida Statutes § 679.2031 provides, in relevant part, as follows:
(1) A security interest attaches to collateral ■ when it becomes enforceable against the debtor with respect to the collateral ....
(2) [A] security interest is enforceable against the debtor and third parties with respect to the collateral only if:
(a) Value has been given;
(b) The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
(c) One of the following conditions is met:
1. The debtor has authenticated a security agreement that provides a description of the collateral ... [or]
2. The collateral ... is in the possession of the secured party under s. 679.3131 pursuant to the debtor’s security agreement!.]
Under Florida Statutes § 679.3131(1), a secured party may perfect its security interest in money by possession.
The Firm holds a valid, enforceable security interest in the Pre-Petition Retainer. First, value was given by the Firm as the Firm promised to represent the Debtor in this bankruptcy case. Second, at the time the Debtor paid the Pre-Petition Retainer to the Firm the Debtor owned the funds in its SunTrust Bank account, the source of the Pre-Petition Retainer. Third, the Firm and the Debtor entered into an engagement agreement that specifically addresses the retainer and its use for payment of fees and expenses in this case. Also, the Firm is, and has been since November 16, 2015, in possession of the Pre-Petition Retainer by virtue of holding the Pre-Petition Retainer in the Firm’s trust account. All of the requirements for attachment of a security interest under Florida Statutes § 679.2031 are met. The Firm’s security interest in the Pre-Petition Retainer is perfected by possession.6
*916Armstrong Bank has no interest whatsoever in the Pre-Petition Retainer. Florida Statutes § 679.332(2) provides: “A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Armstrong Bank does not even suggest that the Firm was involved in collusion. Thus, upon payment of the Pre-Petition Retainer to the Firm, Armstrong Bank lost entirely its security interest in such funds. Because Armstrong Bank has no interest in the Pre-Petition Retainer, the Pre-Petition Retainer is not cash collateral. See 11 U.S.C. § 363(a) (non-debtor party must have an interest in the cash, deposit account, or other cash equivalent). The Debtor need not obtain Armstrong Bank’s consent to use of the Pre-Petition Retainer. See 11 U.S.C. § 363(c)(2)(A). The Firm is free to apply the Pre-Petition Retainer in payment of fees and expenses approved by this Court.
Even if Armstrong Bank could somehow claim a continuing security interest in the Pre-Petition Retainer, that interest would be junior to the perfected security interest held by the Firm. While the Debtor had granted to Armstrong Bank a security interest in all of the Debt- or’s bank accounts, including the SunTrust Bank account which was the source of the Pre-Petition Retainer, Armstrong Bank never perfected its security interest in the SunTrust Bank Account. A security interest in a deposit account may only be perfected by control over that deposit account. See Florida Statutes §§ 679.3121(2)(a) and 679.3141. In order to obtain control over a deposit account for purposes of perfection, (a) the secured creditor must be the bank at which the account is maintained, (b) there must be a control agreement among the secured creditor, the bank, and the debtor, requiring the bank to comply with the secured creditor’s instructions, or (c) the secured creditor must be the bank’s customer with regard to the account. Florida Statutes § 679.1041. The account that was the source of the Pre-Petition Retainer was not at Armstrong Bank. There was no control agreement. Armstrong Bank was not the customer of SunTrust Bank on the subject account. Accordingly, Armstrong Bank did not have a perfected security interest in the Debtor’s SunTrust Bank account. Likewise, Armstrong Bank did not have a perfected security interest in the cash transferred from the SunTrust Bank account to the Firm, which became the Pre-Petition Retainer. See Florida Statutes § 679.3151(3). As of the Petition Date, the Firm had a perfected security interest in the Pre-Petition Retainer. Because Armstrong Bank’s security interest in the Pre-Petition Retainer, if any, is unperfected, that security interest would be junior to the perfected security interest of the Firm. Florida Statutes § 679.322(l)(b). The Firm has a first priority perfected security interest in the Pre-Petition Retainer, superior to any interest Armstrong Bank may claim therein.
Armstrong Bank relies on In re Shivshankar Partnership LLC for the proposition that a retainer that constitutes a secured creditor’s cash collateral may be used to pay fees and expenses of the debt- or’s counsel only if the debtor provides adequate protection to the secured creditor. 517 B.R. 812, 824-26 (Bankr. E.D. Tenn. 2014). The court in Shivshankar did not address whether the retainer in question was in fact cash collateral; this fact appears not to have been disputed. In the present case, Armstrong Bank does not *917have a cash collateral interest in the Pre-Petition Retainer. Even if it did, that interest would be junior to the perfected security interest held by the Firm,
The Court has reviewed in detail the First Interim Fee Application presented by the Firm. The Court finds that the time expended by the Firm was, in each instance, appropriate for the task at hand and reasonable under the circumstances of the case. The Court is familiar with the experience, skill, and reputation of each of the individual lawyers who performed services for the Firm in this case. The Court finds that the hourly rates charged by the Firm are reasonable and appropriate hourly rates in light of the skill and experience of the individual lawyers and are consistent with prevailing rates in this district. In sum, the legal fees and expenses requested by the Firm are reasonable and appropriate for the work undertaken in this case and should be approved.
For the foregoing reasons, the Court ORDERS as follows:
1. The First Interim Fee Application [ECF No. 159] is APPROVED to the extent provided herein.
2. Shraiberg, Ferrara, Landau & Page, P.A. is awarded interim fees in the amount of $140,202.50 and interim expenses in the amount of $13,683.73. Shraiberg, Ferrara, Landau & Page, P.A. may apply the Pre-Petition Retainer in payment of 80%, or $112,162.00, of the fees awarded and in payment of 100%, or $13,683.73, of expenses awarded, for a total of $125,845.73, with the remainder subject to payment following consideration of the firm’s final fee application,
3. All fees and expenses awarded on an interim basis shall be subject to review at the time of a final fee application and possible return to the estate for any excessive fees paid pursuant to 11.U.S.C. § 330.
4.The Objection [ECF Nos. 172 and 181] is OVERRULED.
ORDERED in the Southern District of Florida on December 30,2016.
. Benefit Bank was the original lender on both loans. In April 2015, Armstrong Bank bought virtually all of the assets of Benefit Bank, including the two loans made to the Debtor.
. The Debtor's Schedule D: Creditors Who Have Claims Secured by Property [ECF No. 38] lists the claim of Armstrong Bank as undisputed and secured by a "blanket lien on Debt- or’s assets.”
. Because the Debtor is a Florida corporation, Florida law governs the perfection of security interests. Florida Statutes § 679.3011,
. The Firm also received $1,717.00 to cover the cost of the Chapter 11 filing fee. That amount was in fact used to pay the Chapter 11 filing fee.
. Unless otherwise indicated, the term “section” or “sections” refers to the given section or sections of the United States Bankruptcy Code, 11 U.S.C. §§ 101 etseq.
. For a more complete analysis of several issues presented here, the Court points the parties to In re Outdoor RV & Marine, LLC, 2011 Bankr. LEXIS 1698. In that case, the court considered whether fees and expenses incurred by counsel to the debtor-in-possession in a chapter 11 case, for which counsel held a pre-petition retainer, constituted a secured or an unsecured claim in the case after it had been converted to chapter 7. If the court determined that counsel’s fees were not secured by the retainer, then they would be subordinated to the chapter 7 administrative expenses. Relying on Article 9 as enacted in *916South Carolina, which is substantially identical to Article 9 as enacted in Florida, the court ruled that counsel had a perfected security interest in their pre-petition retainer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500177/ | ORDER ON PLAINTIFF’S MOTIONS FOR DEFAULT JUDGMENT AND MOTION TO DISMISS PLAINTIFF’S AMENDED COMPLAINT
Paul Baisier, U.S. Bankruptcy Court Judge
Before the Court are several matters as follows:
1. Motion for Default Judgment filed on October 18, 2016 by Plaintiff-Debtor named above, who is pro se (the “Debtor”), against Defendant Enclave@Lakewood Estates, HOA, et al. (“Enclave”) (Docket No. 9) and Motion for Default Judgment against Defendant Ocwen Loan Servicing, et al. (“Ocwen”) (Docket No. 10) (collectively, the “Motion”), regarding the allegations in the Debt- or’s Complaint to the Courts disputing the debt of Ocwen Mortgage Servicer and Endave@Lakewood Estates HOA filed on September 16, 2016 (Docket No. 1) (the “Complaint”), as amended on September 20, 2016 (Docket No. 8) (the “Amended Complaint”). Defendant Ocwen filed a Response to Plaintiffs Motion for Default Judgment on November 1, 2016 (Docket No. 14) (the “Response”) contesting the requested relief.1 In turn, the Debt- • or filed a Response to Defendant Ocwen’s Response to Plaintiffs Motion for Default Judgment on November 30, 2016 (Docket No. 19) (the “Debtor’s Response to Ocwen”).
2. Motion ' to Dismiss Plaintiffs Amended Complaint filed by Defendant Ocwen on . October 17, 2016 (Docket No. 8) (the “Motion to Dismiss”). The Debtor filed a reply titled as an Answer on November 1, 2016 (Docket No. 15) (the “Debtor’s Reply”). Ocwen filed a Reply Brief in Support of its Motion to Dismiss on November 16, 2016 (Docket No. 18) (the “Reply Brief in Support”). The Debtor thereafter filed a Memorandum in Support To Reply To The Response of Ocwen To Dismiss Default Judgment on December 2, 2016 (Docket No. 21) (the “Debtor’s Memorandum in Support”).
For the following reasons, the Debtor’s Motions will be denied and the Motion to Dismiss filed by Ocwen will be granted.
In the Motions, the Debtor asserts that each Defendant has failed to file a timely answer or defensive pleading within thirty (30) days of service of the summons and complaint, and that she is, therefore, entitled to judgment on the pleadings as a matter of law. Ocwen responds that it timely filed the Motion to Dismiss, and further notes that the Debtor has not yet obtained an entry of default as a necessary precondition to obtaining a judgment by default.2 In addition, Ocwen argues that the Debtor has not properly served it with *921the summons and copy of the complaint, nor has the Debtor adequately furnished proof of such service on the record.
As revealed by the docket, the Debtor filed the Complaint on September 16, 2016 and the Amended Complaint on September 20, 2016. The Clerk issued a summons on September 16, 2016. After entry of a notice of deficiency, the Debtor filed two certificates of service (Docket Nos. 6 & 7), each bearing a separate FedEx tracking number, stating that service was made on September 22, 2016. Other than checking the box for an “Insured Depository Institution” on both forms, no identifying information was provided in these certificates regarding the intended recipients. As noted above, Ocwen’s response to the Complaint in the form of its Motion to Dismiss was filed on October 17,2016.
Under Rule 7004(a)(1) of the Federal Rules of Bankruptcy Procedure, which incorporates Rule 4 (l) of the Federal Rules of Civil Procedure, proof of service must be made by affidavit or certificate of service setting forth in detail not only the manner of service, a description of what documents were served, and on what date service was made, but must also name the persons or entities who were the designated recipients and at what address they were served. See also BLR 7006-1 (N.D.Ga.); In re Taylor, 2007 Bankr. LEXIS 1568 (Bankr. N.D.Ga. Mar. 7, 2007). The Debtor’s filed certificates fail to identify any specific person, entity, or corporate officer as the receiving party and where the documents were actually delivered. Absent certification of such information, the Debtor has not provided proper evidence of perfected service on either Ocwen or Enclave as defendants in this adversary proceeding.3 Entry of default judgment as requested by the Debtor, therefore, is not appropriate. See Darden Rests., Inc. v. Wilson-Hall, 2012 U.S. Dist. LEXIS 151795 *7, 2012 WL 5287031 *3 (N.D.Ga. Oct. 22, 2012); see also Fed. R.Civ.P. 55(a) & (b), applicable herein by Fed.R.Bankr.P. 7055.
In addition, Fed.R.Bankr.P. 7012(a) provides that when a complaint is duly served, an answer shall be served within 30 days following issuance of the summons. Under Rule 15(a)(3), Fed.R.Civ. P., applicable herein by and through Fed. R.Bankr.P. 7015, a response to an amended pleading “must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.” Here, the Court finds that Ocwen has timely responded to the Complaint since it served its Motion to Dismiss within thirty days after issuance of the summons, and the Motion as to Ocwen is also denied for this reason.4
*922Next, with respect to the Motion to Dismiss, Ocwen seeks a dismissal of the Complaint on grounds that it does not contain sufficient facts to state a plausible claim for relief against it in accordance with Fed.R,Civ.P. 12(b)(6), applicable herein by Fed.R.Bankr.P. 7012(b), Ocwen’s arguments also include that: (1) personal jurisdiction is lacking due to failure of proper service (see Fed.R.Civ.P. 12(b)(2) & (5), applicable herein by Fed.R.Bankr.P, 7012);5 (2) Ocwen is not named in the Amended Complaint, which supersedes the Complaint, and thus is no longer a party;6 and, (3) the claims asserted by the Debtor are, in any event, barred by res judicata.7
Under Rule 12(b)(6), a dismissal should be granted if a complaint fails “to state a claim upon which relief can be granted.” This Rule is read in conjunction with Rule 8(a), which requires that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” See Fed.R.Civ.P. 8(a)(2), and Fed.R.Bankr.P. 7008. Under this standard, “to survive a motion to dismiss, a complaint must now contain factual allegations that are ‘enough to raise a right to relief above the speculative level.’ ”8 In considering a motion to dismiss, the Court limits its inquiry to the legal feasibility of the complaint and whether it contains facts and not just labels or conclu-sory statements. In addition, under Rule 9(b), fraud must be pled with particularity and even though intent may be alleged generally, facts regarding the time, place, and content of any alleged misrepresentations should be presented. United States v. Baxter Intern., Inc., 345 F.3d 866, 883 (11th Cir. 2003); Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1370-71 (11th Cir. 1997).
Ocwen states that it is the current servicer of a certain mortgage loan obtained by the Debtor in 2008 from Lend America. The subject loan is secured by residential real property located at 440 Milton Drive, Covington, Georgia 30016, *923and according to Ocwen the underlying security deed was properly assigned to GMAC Mortgage, LLC in October of 2010 and recorded on October 14, 2011. The Debtor defaulted on the loan in 2009 and the loan servicer initiated foreclosure. Ocwen cites this Adversary Proceeding as part of the Debtor’s ongoing attempt to avoid her contractual obligations under her loan documents and security deed as she has filed several law suits challenging foreclosure, each of which has been dismissed.9 Ocwen asserts that the Complaint herein contains baseless, nonsensical allegations and constitutes a “shotgun pleading” averring a jumble of irrelevant factual claims and legal conclusions. Further, Ocwen contends the Debtor’s allegations improperly place the burden on Ocwen to sift through the numerous pages of her pleadings, consisting of assertions, recitations, and accusations along with copies of various collected documentation, to ascertain what they mean, how they are related, and what specific wrongdoing the Debtor is alleging Ocwen committed that entitles the Debtor to relief. Without such basis or clarity, Ocwen states it is unable to prepare a proper response.
In the Complaint, it appears that the Debtor is disputing Ocwen’s status as her lender, describing it instead as a “debt collector,” and insists Ocwen cannot foreclose on the subject property because it does not hold a valid lien. Further, the Debtor alleges Ocwen and others harmed her through its “negligent, fraudulent and unlawful conduct concerning a residential mortgage loan transaction and impending foreclosure action.” Amended Complaint, ¶ 1, p. 20 (Docket No. 3). In the Debtor’s Reply to the Motion to Dismiss, the Debt- or offers only general denials to Ocwen’s assertions. The Debtor also sets forth additional allegations of Ocwen’s fraudulent efforts to “jeopardize the interest” she claims in the subject property through its foreclosure and by submitting title documents to the FHA stating that “all liens were cleared.”10
*924Based upon a review of the pleadings filed in this matter and the cited authority, and construing the allegations most favorably to the Debtor, the Court finds that the Complaint does not provide fair notice regarding the essence of her claim against Ocwen and the factual and legal basis that supports it consistent with Fed.R.Civ.P. 8(a)(2). Similarly, under Fed.R.Civ.P. 12(b)(6), as pled the Debtor’s allegations assert conclusions and are not sufficient on their face “to raise a right to relief above the speculative level” of possibility, and show that her claim is plausible as presented. See Twombly, supra, 550 U.S. at 555, 570, 127 S.Ct. 1955, cited in Ashcroft, supra, 556 U.S. at 678, 129 S.Ct. 1937. Moreover, as discussed above, allegations of fraud must comply with the stricter pleading requirements of Fed.R.Civ.P. 9(b), both of which the Complaint and Amended Complaint fail to do with respect to Ocwen. See In re Farmery, 2014 Bankr. LEXIS 2865, 2014 WL 2986630 (Bankr. N.D.Ga. April 11, 2014).
In addition, upon review of the district court cases cited by Ocwen, it appears that other courts have been confronted with and dismissed claims by the Debtor similar to the claims that the Debt- or has asserted here.11 As stated by Ocwen, this proceeding is the fourth law suit initiated by the Debtor with respect to a foreclosure on the subject property in connection with her residential mortgage. In fact, as Ocwen notes, it appears that the Debtor has even included portions of her dismissed complaint from Lafayette v. Wells Fargo Bank, Case No. 1:15-CV-01223-TWT in her Amended Complaint, as those pages bear the ease number stamp from that action across the top margin.
Under the doctrine of res judi-cata, the filing of claims that either were raised or could have been raised in prior litigation may be barred to protect a party’s adversaries from the burden and expense of defending multiple suits on the same claims. In accordance with case precedent in this circuit, a claim will be barred based on prior litigation when: (1) a final judgment has been entered on the merits of the claim;12 (2) the court rendering the decision had competent jurisdiction; (3) the parties in both suits, or those in privity with them, are the same; and (4) the cause of action in both cases is the same. Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235, 1238 (11th Cir. 1999). Here, the Court concludes that each of these elements is satisfied, and that this doctrine applies to bar assertion of the Debtor’s allegations herein.13 A review of the prior litigation *925reveals, to the extent such allegations are comprehensible, that any bases for challenging foreclosure proceedings regarding the subject property by the Debtor have been asserted before, or could have been asserted, and have been dismissed by final orders. The district court has determined such allegations are not sufficient to state any claim upon which relief can be granted and, absent grounds to do so, they may not be reasserted and relitigated in these proceedings.14
Accordingly, based upon the above discussion, it is
ORDERED that the Debtor’s Motions be, and the same hereby are, DENIED and a judgment by default will not be entered against either Ocwen or Enclave.15 It is further
ORDERED that the Motion to Dismiss of Ocwen be, and the same hereby is, GRANTED, and the Complaint, including any and all claims as may be asserted against Ocwen in this Adversary Proceeding, is DISMISSED as against Defendant Ocwen.
The Clerk is directed to serve a copy of this Order upon the Plaintiff-Debtor, counsel for Defendant Ocwen, Defendant Enclave, the Chapter 13 Trustee, and the United States Trustee.
IT IS ORDERED.
. Defendant Enclave has not responded to the Motion against it. Ocwen states that the Debt- or has incorrectly named it in the Complaint, and that its proper name is Ocwen Loan Servicing, LLC.
. Moreover, as discussed below in connection with the Motion to Dismiss, consideration of a default judgment would involve examination of the legal sufficiency of the Debtor’s allegations, which Ocwen contends are not plausible on their face.
. Although proof of service does not affect the validity of service, a party must still furnish such proof in the proper format. In the Debt- or’s Response to Ocwen, the Debtor also argues that because Ocwen and Lend America, the entity from whom the Debtor originally obtained the mortgage loan, are sufficiently related, service upon the latter constitutes service on the former. (The Debtor filed an Amendment to Complaint seeking to add Lend America on November 30, 2016 (Docket No. 20), and filed a Certificate of Service stating that a summons and complaint were served on Lend America Mortgage on December 2, 2016 (Docket No. 23)). Even if Ocwen and Lend America have a business relationship, there is no evidence in the record establishing that they are the same entity for purposes of service, or that they are not in fact distinct corporations.
. As stated above, the summons was issued on September 16, 2016. The thirty-day period to file an answer or responsive pleading ended on October 16, 2016. Since this day was a Sunday, however, under the rules that period is extended to the next day of October 17, 2016—the date on which Ocwen served its Motion to Dismiss. See Fed.R.Bankr.P, 9006(a)(1)(C). If the Debtor served a copy of *922the Amended Complaint on September 22, 2016, fourteen days later would be October 6, 2016 under F.R.C.P. 15(a)(3); thus, the later date of October 17 controls. In addition, the argument asserted in the Debtor's Memorandum in Support that Ocwen’s motion to dismiss is not a sufficiently responsive defensive pleading because it must file an answer is without merit. As stated in Rule 12(b), applicable through F.R.B.P. 7012(b), a party may assert certain defenses by motion that is filed prior to the filing of the answer or responsive pleading. See also F.R.B.P. 7012(a).
. Ocwen’s argument regarding insufficient service of process is addressed above. Based on this finding, the Court concludes that the Debtor has not yet adequately established a basis for personal jurisdiction over Ocwen herein,
. Reviewing the Amended Complaint filed on September 20, 2016, the Court acknowledges that it could be construed as naming only Enclave as a party defendant. On closer examination, however, this pleading contains an assortment of various causes of actions and allegations, some apparently having been cut and pasted from other documents. On page 20 of 64, this document appears to contain an Amended Complaint naming Ocwen and other lending institutions. See Docket No. 3.
. In the Reply Brief in Support, Ocwen also urges dismissal based on the entry of an Order dismissing the underlying Chapter 13 case on November 7, 2016 (Main Case Docket No. 29). As acknowledged by Ocwen, however, the Court maintains discretion in retaining subject matter jurisdiction over this Adversary Proceeding.
. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007), quoted in Berry v. Budget Rent A Car Systems, Inc., 497 F.Supp.2d 1361, 1364 (S.D.Fla. 2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009); American Dental Ass’n v. Cigna Corp., 605 F.3d 1283, 1290 (11th Cir. 2010).
. See Final Report and Recommendation (Doc, 2) and Order (Doc. 6), Cathryn Lafayette v. Wells Fargo Bank, N.A., et al., Case No. 1:15-CV-01223-TWT-GGB (N.D.Ga. June 22, 2015) (dismissed as frivolous, for failure to state a claim, and based on res judicata) (copy attached as Exhibit "C” to the Motion to Dismiss herein); see also Complaint for Emergency Injunctive and Declaratory Relief and To Stay Foreclosure Sale (Doc. 1), Cathryn Lafayette v. GMAC/Ally Financial, et al., Case No. 1:12-CV-01865-TWT (dismissed as frivolous); Complaint for Quiet Title to Real Property (Doc. 1), Cathryn Lafayette v. GMAC Mortgage, LLC, Ocwen Loan Servicing, LLC, and McCurdy & Candler, LLC, Case No. 1:13-CV-3987-TWT (dismissed on Rule 12(b)(6) motions).
. In its Reply Brief in Support herein, Ocwen argues that the Debtor improperly attempts to raise new allegations and amend the Complaint through the Debtor’s Reply to its Motion to Dismiss regarding its alleged filing of fraudulent and forged assignments along with certain alleged representations by the Federal Housing Administration concerning the foreclosure. See Luster v. Investors One Corp., 2016 WL 5339353, at *, 2016 U.S.Dist. LEXIS 137892, at *28 (N.D.Ga. Jan. 15, 2016), Report and Recommendation Adopted by, Dismissed by, In Part, Dismissed Without Prejudice by, In Part, Sanctions Disallowed by, Luster v. Investors One Corp., 2016 U.S.Dist. LEXIS 137887, 2016 WL 5339735 (N.D.Ga. Feb. 4, 2016). Among other things, the Debtor alleges that Ocwen submitted a "fraudulent title to FHA.” The Debtor further alleges that the FHA Director informed Ocwen it did not hold a valid lien, FHA would not foreclose, and it was "giving the house” to the Debtor. See Debtor’s Reply, Docket No. 15. The Debtor filed a Proof of Service of Subpoena on the HUD/FHA Director on November 7, 2016 regarding the production of documents. Docket No. 17. The Court observes that the Debtor did cite the FHA in the Complaint. Ocwen further contends these new allegations must be dismissed on grounds including that the Debtor fails to allege claims of fraud against it with sufficient particularity as required under F.R.C.P. 9(b), *924applicable herein through F.R.B.P. 7009. Even if allowed, the Court does not believe that these new allegations are set forth with sufficient detail to provide a right to relief.
.Although this Court may be limited in taking judicial notice of the factual findings of another court, it may take judicial notice of the entry of an order addressing same for purposes of recognizing the "judicial act” it represents. Here, this principle means that the Court may take judicial notice of the allegations asserted by the Debtor in other federal courts, such as cited by Ocwen, and their similarity to those made in the present proceeding, and the fact that these allegations were dismissed upon review by those courts. Judicial notice is especially appropriate as the Debtor was a direct participant in those proceedings. See generally United States v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994); see also Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1279-80 (11th Cir. 1999); and see Federal Rule of Evidence 201(b), applicable herein by and through Fed.R.Bankr.P. 9017.
. A dismissal for failure to state a claim may operate as an adjudication on the merits for purposes of res judicata. See Lobo v. Celebrity Cruises, Inc., 704 F.3d 882, 893 (11th Cir. 2013), citing Hall v. Tower Land & Inv. Co., 512 F.2d 481, 483 (5th Cir. 1975).
. Though Ocwen is a named party in only one of the three prior suits, privity connotes a *925relationship that is close enough that a prior judgment should bind or protect a nonparty. In this matter, Ocwen may be considered as succeeding to the interest of Debtor's prior loan servicer in the same property rights in relation to the Debtor and her loan obligation. See generally Hart v. Yamaha-Parts Distributors, Inc., 787 F.2d 1468, 1472 (11th Cir. 1986). In the district court suit where Ocwen is named directly, the Debtor sought cancellation of the security deed and to quiet tide. In addition, the Debtor alleged breach of contract and fraudulent recording of deed and sought declaratory and injunctive relief along with money damages. In granting motions to dismiss, the district court found that the Debt- or’s allegations were "largely incomprehensible,” Order of Feb, 20, 2014, Lafayette v. GMAC Mortgage, LLC, Ocwen Loan Servicing, LLC, and McCurdy & Candler, LLC, 1:13-CV-3987-TWT.
. Although Ocwen challenges the allegations contained in the Debtor's Reply, it is worth noting that in the Reply the Debtor contends as part of its alleged fraudulent activity, Ocwen overlooked other liens on the property as the Debtor declares she is the "FIRST LIEN HOLDER POSITION.” (Docket No. 15). This claim seems to have been made in the Complaint (at p. 29 (Docket No, 1)), and, in turn, appears to be based on an asserted Federal Common Law Lien of the Debtor filed with the Clerk of the Newton County Superior Court, Copies of this same document are also attached to the Amended Complaint herein as well as the Debtor’s complaint in Lafayette v. Wells Fargo Bank, Case No, 1:15-CV-01223-TWT-GGB and the Amended Complaint in Lafayette v. GMAC Mortgage, LLC, Ocwen Loan Servicing, LLC, and McCurdy & Candler, LLC, L13-CV-3987-TWT, both of which actions were dismissed by the district court. This observation is important because it shows that the identical claim the Debtor makes here has been asserted in prior litigation.
Similarly, Ocwen challenges the Debtor’s standing to contest any purported assignments of the security deed under Georgia law as the district court has previously ruled against the Debtor on her argument that she has standing to avoid the foreclosure because the original lender was paid. To the extent those assertions are made here, this Court also finds the Debtor lacks standing to challenge a foreclosure by Ocwen on the basis of the assignment of the security deed, See also Ames v. JP Morgan Chase Bank, N.A., 298 Ga. 732, 783 S,E.2d 614 (2016).
. Although Enclave has not responded to the Debtor’s Motion, the Court finds that the Debtor’s Motion does not assert sufficient grounds for the entry of relief as sought by the Debtor against Enclave. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500178/ | MEMORANDUM OF DECISION AND ORDER ON OBJECTION OF HSBC BANK USA, N.A. TO CONFIRMATION OF FIRST AMENDED PLAN
Melvin S. Hoffman, U.S. Bankruptcy Judge
HSBC Bank USA, N.A. has objected to my confirming the First Amended Chapter 13 Plan dated February 24, 2016, of Penny and Jason Sperry, the debtors in this case. HSBC maintains that the plan, which requires HSBC to send the Sperrys monthly mortgage loan statements consistent with the plan’s treatment of its claim, is uncon-firmable.
The facts necessary to decide this contested matter are not in dispute. In September 2004, the Sperrys purchased a single family home in Gloucester, Massachusetts; and to help pay for it borrowed funds inreturn for which they executed a thirty-year note secured by a mortgage on the property. HSBC is the current holder of the mortgage. When the Sper-rys filed their voluntary petition under chapter 13 of the Bankruptcy . Code commencing this case on November 25, 2015, they were behind on their payments to HSBC to the tune of $11,416.99.
The Sperrys have proposed a so-called “cure and maintain” chapter 13 plan. The plan requires them to pay their pre-bankruptcy arrearage to HSBC in 60 monthly payments through the chapter 13 *3trustee (cure), while at the same time making their current monthly mortgage payments directly to HSBC (maintain).1 The Sperrys’ plan uses the official local form chapter 13 plan adopted in this district. See Massachusetts Local Bankruptcy Rule (MLBR) Appendix 1 Rule 13-4(a) and Official Local Form 3. In section VI entitled Other Provisions, the plan provides:
The Debtors intend to continue to make regular monthly payments to HSBC Mortgage Service Center on account of its mortgage. Accordingly, HSBC Mortgage Service Center shall send the Debtors monthly mortgage statements consistent with its prepetition practice. Sending such statements shall not be considered by the debtors to be a violation of the automatic stay.2
At issue is whether this provision (the “monthly statement requirement”) renders the plan unconfirmable.
The Sperrys assert that nothing prohibits their plan from requiring HSBC to send monthly statements and indeed those statements will help ensure that they stay on track with their post-petition mortgage payments. HSBC presents several reasons why the plan may not be confirmed. It first protests that it cannot send monthly statements reflecting post-petition account information “[d]ue to logistical limitations.” HSBC says that while it is working on developing a system, it currently cannot give the Sperrys the information required by the plan and that the statements it could produce would be “confusing”. Ironically, HSBC offers as an alternative that “the debtors can call HSBC at any time to determine the amount they owe post-petition, and the post-petition date they are due for[sic].” HSBC also argues -that federal regulations exempt it from sending such statements to borrowers during the pendency of their bankruptcy cases, that sending such statements would likely violate the automatic stay, that the requirement to send monthly statements is an impermissible modification of its claim and that the addition of a monthly statement requirement is not a proper use of this district’s form chapter 13 plan.
To resolve this dispute, I begin by canvassing the relevant statutory guidelines and rules, as well as apt cases and commentaries. Bankruptcy Code § 1322(a) enumerates the provisions that all chapter 13 plans must contain while § 1322(b) lists those which are optional; the final option being § 1322(b)(ll) which permits plans to include “any other appropriate provision not inconsistent with” the Bankruptcy Code.3 Section 1322(b)(2) permits a debtor *4to “modify the rights of holders of secured claims, other than a claim [such as HSBC’s] secured only by a security interest in real property that is the debtor’s principal residence. ...” (emphasis added). Section 1322(b)(5) creates an exception of sorts to § 1322(b)(2)’s anti-modification provision by permitting a debtor to cure pre-petition monetary defaults while maintaining ongoing post-petition payments even for a non-modifiable home mortgage. The Sperrys have proposed such a cure and maintain plan.
In 2011, the Federal Rules of Bankruptcy Procedure were amended to add Rule 3002.1, which, as the Advisory Committee Note states, was intended to “aid in the implementation of § 1322(b)(5).” Subpart (b) of the rule provides that:
[t]he holder of the claim [secured by the debtor’s principal residence and treated by the plan pursuant to § 1322(b)(5) ] shall file and serve on the debtor, debt- or’s counsel, and the trustee a notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment, no later than 21 days before a payment in the new amount is due.
Thus, if a mortgagee complies with Rule 3002.1(b), a chapter 13 debtor will receive advance notice of any change to his periodic mortgage payment enabling him to adjust his post-petition payments accordingly.
*5Many bankruptcy courts have adopted local rules and form chapter 13 plans for use in their districts. In Massachusetts, MLBR Appendix 1 Rule 13-4 requires all chapter 13 plans to “conform to MLBR Official Local Form 3, with such alterations as may be appropriate to suit the circumstances.” The Massachusetts form plan includes a section entitled “other provisions” in which debtors may add terms not contained elsewhere on the form. Form plans promote ease and efficiency for debtors’ attorneys in preparing plans and for creditors and courts in reviewing them. Standardization helps reduce the costs of chapter 13 relief. In re Solitro, 382 B.R. 150, 152 (Bankr.D.Mass.2008). As a result, courts have held that “non-standard” or additional plan terms should be kept to a minimum and when they are needed, debtors should identify the special circumstances necessitating the inclusion of such non-standard terms. Id. at 153; In re Rose, GG 14-04308-JTG, 2015 WL 151221, at *3 (Bankr. W.D. Mich. Jan. 12, 2015). Plan provisions that merely recite what is already required by the Bankruptcy Code or Rules are generally not permitted. Rose, 2015 WL 151221, at *3; Solitro, 382 B.R. at 153.
On February 14, 2013, the Consumer Financial Protection Bureau (“CFPB”), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 12 U.S.C. § 5491(a), promulgated mortgage servicing rules amending both Regulation Z, 12 C.F.R. § 1026.1 et seq., under the Truth in Lending Act, 15 U.S.C. § 1601 et seq. (TILA), and Regulation X, 12 C.F.R. § 1024 et seq., under the Real Estate Settlement and Procedures Act, 12 U.S.C. § 2601 et seq., (RESPA). The 2013 amendments to Regulation Z required mortgagees or their servicers to send borrowers periodic mortgage statements throughout the life of a loan even if the loan was in foreclosure or the borrower in bankruptcy. Those mortgage statements were to include the “(1) payment amount due; (2) payment due date; (3) amount of and date that any late fee will be imposed; (4) other fees and charges imposed; (5) transaction activity; (6) application of past payments; (7) information regarding partial payments; (8) contact information; (9) account information (outstanding principal balance, interest rate, date of rate changes, prepayment penalties); and (10) homeownership counselor information. 12 C.F.R. § 1026.41(d).” Laura M. Greco & Lauren E. Campisi, Understanding CFPB’s Final Mortgage Servicing Rules and Their Impact on Foreclosures and Bankruptcies, 131 Banking L.J. 165 (2014).
The CFPB received comments from mortgagees and their servicers complaining that sending statements to borrowers in bankruptcy could create confusion and raising concerns as to how the statement requirements would apply in light of TILA, RESPA, the Fair Debt Collection Practice Act and the Bankruptcy Code. See Amendments to the 2013 Mortgage Rules, 78 Fed. Reg. 62993-01, 2013 WL 5723225 (Oct. 23, 2013). Consequently, effective January 10, 2014, the CFPB amended Regulation Z to exempt servicers from the periodic statement requirement while their borrowers were in bankruptcy. See Consumer Financial Protection Bureau, Cfpb Provides Guidanoe on Mortgage Servicing Rules (2013), http://www..consumerfinance.gov/about-us/ newsroom/cfpb-provides-guidance-on-mortgage-servicing-rules, last visited November 4, 2016. As amended, 12 C.F.R. § 1026.41(e)(5) now exempts servicers from sending the periodic statements described in 12 C.F.R. § 1226.41(d) if the borrower is in bankruptcy. It is this exemption upon which HSBC relies as one of *6the bases for its objection to confirmation of the Sperrys’ plan.4
Courts have permitted plan provisions requiring mortgagees to render periodic accountings to their chapter 13 debt- or-borrowers. In re Herrera, 422 B.R. 698 (9th Cir. BAP 2010), aff'd sub nom. In re Monroy, 650 F.3d 1300 (9th Cir. 2011). “[B]urdening mortgagees with procedural obligations over the life of the plan does not, per se, violate § 1322(b)(2)’s anti-modification provision and is permissible and even desirable.” In re Collins, 07-30454, 2007 WL 2116416, at *10-11 (Bankr. E.D. Tenn. July 19, 2007). As the court observed in In re Payne: “Unnoticed post-petition charges can derail a debtor’s Chapter 13 plan and keep a successful debtor from achieving the ultimate bankruptcy goal—a fresh start. Debtors must be advised when post-petition charges are being assessed against their account so they can fulfill their expectation of addressing their debt in bankruptcy and emerge with their secured debt current ...” In re Payne, 387 B.R. 614, 631-32 (Bankr. D. Kan. 2008) (footnotes omitted).
The United States Court of Appeals for the First Circuit, implicitly recognized the appropriateness of a monthly statement requirement in cure and maintain chapter 13 plans in Ameriquest Mortgage Co. v. Nosek, 544 F.3d 34 (1st Cir. 2008). After a thorough discussion of the contours of § 1322(b)(5) and the terms of the chapter 13 plan at issue, which contained no provision requiring the mortgage lender to bill or account during the life of the plan, the First Circuit concluded that the appropriate manner to protect chapter 13 debtors’ § 1322(b)(5) cure rights thereby mitigating the threat of plan defaults was for bankruptcy courts to require “an amendment to. the Plan specifying the accounting practices necessary to eliminate that threat.” Nosek, 544 F.3d at 48.
And as noted in the definitive treatise on chapter 13:
For many good reasons, it is often desirable to quite specifically address the management of home mortgage claims in the Chapter 13 plan. For example, a plan provision to cure default and maintain payments on a home mortgage under § 1325(b)(5) requires several components: an arrearage amount; an arrearage payment; a total débt amount; an ongoing monthly payment; and, sometimes, an escrow adjustment. Plans often time-shift the commencement of ongoing payments, requiring explanation of the start dates for various payments and details for calculation of each part of the payment stream. During the years of a Chapter 13 case, home mortgages often adjust by contract with respect to interest rate, monthly payment, fees, expenses, escrow amounts and the like. To stay current and accurate during the years of a Chapter 13 plan, there has to be a constant flow of information among the mortgage holder or servicer, the trustee and the debtor.
Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, J^th Ed. § 118.2 ¶ 2, Sec. Rev. May 19, 2011, http://www.ch 13online.com/Subscriber/Chapter_13_ Bankruptcy_4th_Lundin_Brown.aspx (footnotes omitted).
As the authors of Lundin, supra, have observed, debtors’ attorneys have developed “best practices” to help ensure that *7chapter 13 debtors who successfully complete their multi-year plans are not blindsided when their mortgagees notify them that significant fees and other charges assessed during the years of plan performance are owing at the conclusion of the plan (what the authors call an “invisible default”). Lundin at § 118.2. Those best practices call for plan provisions requiring mortgagees to provide chapter 13 borrowers with monthly statements and periodic accountings of fees and charges. Id.
Based on the weight of the extant legal authority, I conclude that a chapter 13 plan’s requirement that a lender send periodic mortgage loan statements to the debt- or does not render the plan unconfirmable. The Bankruptcy Code certainly doesn’t prohibit it and arguably permits it under § 1322(b)(ll). HSBC’s argument that a monthly statement requirement is an impermissible modification in violation of § 1322(b)(2), is unpersuasive, particularly when examined against the backdrop of Rule 3002.1 which imposes a host of reporting requirements on mortgage lenders. Besides, § 1322(b)(2) prohibits the modification of the “rights” of holders of home mortgage claims. Requiring such holders to send monthly statements is not a right but an obligation, and one that is inextricably bound to a debtor’s ability to cure mortgage defaults, one of the primary objectives of chapter 13. And even if the obligation could somehow be stretched to qualify as a right, its ministerial or procedural nature would exclude it from qualifying as the kind of right the statute is intended to protect from modification. As the authors of Collier on Bankruptcy state, the anti-modification provisions of § 1322(b)(2) do not “preclude a chapter 13 plan from imposing procedural or accounting requirements on a mortgage holder in order to effectuate the cure of a default under the plan.” Alan N. Resnick & Henry J. Sommer, 8 Collier on Bankruptcy ¶ 1322.06[a] at 1322-25 (16th ed. 2015). See also Nosek, 544 F.3d at 48; Herrera, 422 B.R. at 721; Payne, 387 B.R. at 631-32; Collins, 2007 WL 2116416, at *10-11.5
Contrary to HSBC’s suggestion, such statements do not violate the automatic stay. In Massachusetts, MLBR 4001-3 grants secured creditors relief from the automatic stay, to the extent necessary, in order to send debtors written correspondence “consisting of statements, payment coupons” and the like. Further, the fact that a monthly statement requirement is not verbalized in this district’s plan does not prohibit the inclusion of such a provision. Section VI of the Massachusetts form plan is specifically designated for the insertion of additional plan provisions.
As for HSBC’s protest that a monthly statement requirement presents a logistical challenge, I find that the burden to HSBC in overcoming such a challenge is outweighed by the harm to the Sperrys that is likely to occur if monthly statements are not provided to them. It is for this reason that inclusion in our local form plan of an additional provision containing a monthly statement requirement is appropriate.
Finally, the Sperry’s plan does not violate 12 C.F.R. 1026(e)(5) by requiring HSBC to send them periodic statements. The regulation excuses HSBC from sending monthly statements during a pending bankruptcy case; it does not prohibit the bank from doing so. The three cases on which HSBC relies for its interpretation of the CFPB regulation, In re Rose, GG 14-*804308-JTG et al., 2015 WL 151221 (Bankr. W.D. Mich. Jan. 12, 2015); In re Jackson, 446 B.R. 608 (Bankr. N.D. Ga. 2011); and In re Solitro, 382 B.R. 150 (Bankr. D. Mass. 2008), do not support HSBC. Bose did not deal with the mortgagee’s sending of periodic statements but with plan provisions (such as a grant of standing to the debtors to pursue causes of action available under chapter 5 of the Bankruptcy-Code, the method for applying pre-and post-petition mortgage payments and the limitation on notice by mail) that were duplicative of and in some instances inconsistent with provisions of the Bankruptcy Code and the local form in use in the Western District of Michigan. Solitro, cited by the Rose court, and Jackson were both decided prior to the adoption of Fed. R. Bank. P. 3002.1 but the proposed plans in each case contained terms that went well beyond what can fairly be characterized as procedural requirements only. In Solitro, the court refused to confirm a plan that proposed to strike arbitration and alternative dispute resolution clauses from any contracts with the debtor. Jackson addressed requirements to give the debtors notice of changes to mortgage payments, the imposition of additional charges and a provision requiring the mortgagee to provide an annual escrow statement upon request but also included a provision that if the debtor paid the cure amount per the plan or the lender’s proof of claim and timely made all post-petition payments, then the lender’s right to recover any other prepetition amount due was extinguished.
In this case, the Sperrys propose only one additional term in their plan, namely that they continue to receive the same type of periodic payment statements that they received prior to the filing of their bankruptcy case. This term is not so onerous that it modifies HSBC’s substantive rights. It does not impose any obligations on HSBC that it did not have before the Sperrys commenced their case.
For the foregoing reasons, the objection of HSBC to confirmation of the debtors’ first amended plan is OVERRULED.
. In this district, debtors are permitted to tender post-petition payments directly to their secured creditors,
. The Sperrys include a similar provision in their plan with respect to Chase Auto Finances' secured claim. Chase has not objected to confirmation. Nevertheless, I have an independent obligation to review all plans and deny confirmation of any containing impermissible provisions, Flynn v. Bankowski (In re Flynn), 402 B.R. 437, 442 (1st Cir. BAP 2009). Thus my ruling on HSBC’s objection will apply to Chase.
. § 1322(a) and (b) provide:
(a) The plan—
(1) shall provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan;
(2)'shall provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim;
(3) if the plan classifies claims, shall provide the same treatment for each claim within a particular class; and
(4) notwithstanding any other provision of this section, may provide for less than full payment of all amounts owed for a *4claim entitled to priority under section 507(a)(1)(B) only if the plan provides that all of the debtor's projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
(b) Subject to subsections (a) and (c) of this section, the plan may—
(1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
(3) provide for the curing or waiving of any default;
(4) provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;
(6) provide for the payment of all or any part of any claim allowed under section 1305 of this title;
(7) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section;
(8) provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debt- or;
(9) provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity;
(10) provide for the payment of interest accruing after the date of the filing of the petition on unsecured claims that are nondischargeable under section 1328(a), except that such interest may be paid only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims; and
(11) include any other appropriate provision not inconsistent with this tide.
. The CFPB has issued for comment a draft amendment to take effect in April 2017, that will reinstate the requirement that borrowers in bankruptcy receive periodic statements unless one of several enumerated exceptions (none of which would be applicable in this case) applies.
. HSBC does not argue and 1 do not find that the adoption of Rule 3002.1 altered a chapter 13 debtor’s ability to include a plan provision requiring the lender to send periodic mortgage statements. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500179/ | DECISION AND ORDER AUTHORIZING DEBTORS’ RETENTION OF COUNSEL
Alan S. Trust, United States Bankruptcy Judge
Issue presented and summary of ruling
In this contentious series of real estate cases, the secured lender has objected to Debtors’ retention of counsel. While the pleadings concerning retention have meandered into substantive issues affecting the cases overall, the narrow question presented is whether Debtors’ proposed counsel is not disinterested for purposes of the Bankruptcy Code1 because a partner at that law firm is first cousins with the majority owners of the equity in these Debtors. Because New York law does not render first cousins as within the third degree of consanguinity, and because no adverse interest has been demonstrated, Debtors will be allowed to retain the counsel they have chosen.
Background
In or about 2004, an entity known as CDC Properties I, LLC (“CDC”) entered into two loan agreements (the “Loans”) with Merrill Lynch Mortgage Lending, Inc. (the “Original Lender”), and secured those Loans with liens against eleven properties located in the State of Washington (the “Original Collateral”) pursuant to duly recorded deeds of trust (the “Deeds of Trust”). On or about September 30, 2005, the Original Lender assigned the Loans to Wells Fargo Bank N.A., as Trustee for the Registered Holders of Merrill Lynch Mortgage Trust 2005-MCP1 Commercial Mortgage Pass-Through Certificates, Series 2005-MCP1 (“Wells Fargo”) and U.S. Bank, N.A., as Successor-Trustee to LaSalle Bank N.A., as Trustee for the benefit of the Certificate Holders of Commercial Mortgage Pass-Through Certificates, Series MCCMT 2004-C2D (“U.S. Bank” and together with Wells Fargo, “Lenders”).
CDC defaulted under the Loans, and on February 10, 2011, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the Western District *10of Washington (the “CDC Bankruptcy Court”), and assigned Case No. 11-41010 (the “CDC Bankruptcy Case”). On November 22, 2011, the CDC Bankruptcy Court confirmed CDC’s Plan of Reorganization (the “CDC Plan”), under which, inter alia, the Loans and Deeds of Trust remained in effect pursuant to their terms but with new monthly payment amounts and a new maturity date of October 17, 2017. The CDC Bankruptcy Case was closed on or about February 15,2012.
CDC defaulted under its Plan obligations. On March 11, 2016, Lenders commenced nonjudicial foreclosure proceedings against the nine commercial properties that remained from the Original Collateral (the “Properties”). In May 2016, Lenders filed a Petition to Appoint Custodial Receiver in Washington state court to, among other things, obtain the appointment of a receiver over the Properties. On May 19, 2016, the state court entered its Order Appointing Custodial Receiver, pursuant to which JSH Properties, Inc. was appointed receiver over the Properties.
On or about July 1, 2016, Lenders served and subsequently recorded Notices of Trustee’s Sales with respect to the Properties (the “Notices of Sale”), pursuant to which non-judicial foreclosure sales of the Properties were scheduled for October 21, 2016.
On or about September 23, 2016, CDC, without Lenders’ consent, transferred all of the Properties by Quitclaim Deeds (the “Transfers”) to four different, newly created entities located in four different states other than Washington (New York, Florida, Virginia, and Delaware), as tenants in common. These four entities are: Olympia Office LLC (“Olympia”); Sea-hawk Portfolio LLC; Mariners Portfolio LLC; and'WA Portfolio LLC (collectively, the “Acquirers”). While each Acquirer, alone, received fractional interests in the Properties, collectively, they obtained 100% ownership of the Properties. At the time of the Transfers, the outstanding balance owed on the Loans exceeded $33 million.
On or about October 18, 2016, MLMT 2005-MCP1 Washington Office Properties, LLC succeeded to Lenders’ rights under the Loans and the Deeds of Trust (“Note-holder”).
On October 20, 2016, Olympia filed a voluntary petition under chapter 11 before the United States Bankruptcy Court for the Eastern District of New York (the “Court”). The petition was signed by the Long Island, New York law firm of LaMo-nica Herbst & Maniscalco, LLP as counsel (“LHM”).
On November 16, 2016, Olympia filed an application seeking authority to retain LHM as its attorney (the “Employment Application”).2 [dkt item 17] Included with the Employment Application was an affidavit of Jordan Pilevsky, a partner at LHM, in which he testified:
As noted in the Debtor’s statement of financial affairs, a cousin of mine is an equity member of an entity that owns the Debtor. Based upon the foregoing, LH & M does not believe that it is conflicted from representing the Debtor as its general counsel.
On November 21, 2016, the Court held a temporary restraining order hearing (the “TRO Hearing”) in an adversary proceeding filed by Olympia (adv. 16-08167-ast), which concerned post-petition actions taken by Noteholder to reopen the CDC Bankruptcy Case and, in effect, invalidate *11the Transfers to the Acquirers. Given the level of activity in this case as of the TRO Hearing, the Court raised the issue of Debtor’s pending retention request. The representative of the Office of the United States Trustee (the “UST”) stated that he had reviewed the Employment Application and had no objection; however, Noteholder stated it wished to further review the application and obtain additional information.
On November 23, 2016, Noteholder filed a limited objection to the Employment Application. [dkt item 22]
While the Employment Application and other issues were pending, on November 28, 2016, the remaining Acquirers (Sea-hawk Portfolio, Mariners Portfolio, and WA Portfolio) each filed chapter 11 cases with this Court (collectively with Olympia, “Debtors”). These four related cases have been administratively consolidated, and all Debtors have filed applications seeking to retain LHM as counsel.
On December 1, 2016, LHM filed a Response to Noteholder’s limited objection, [dkt item 35]
On December 7, 2016, the Court held a hearing on, inter alia, the Employment Application, at which the UST stated that perhaps further disclosures were appropriate. Thus, the Court set a protocol for further disclosures to be filed by LHM by December 14, 2016, and any supplemental objections to be filed by December 21, 2016.
On December 14, 2016, Jordan Pilevsky filed a Supplemental Declaration in support of the Employment Application, which disclosed his familial relationship to two equity owners, [dkt item 60]
On December 20, 2016, Noteholder filed a Supplemental Objection to the Employment Application (“Supplemental Objection”). [dkt item 72]
The Employment Application and the disclosures made in connection therewith demonstrate that, whether directly or indirectly, the individual equity holders of Debtors consist of Scott Switzer, Conrad Switzer, Kazu Yamaguchi, Michael Pilev-sky and Seth Pilevsky. Michael and Seth Pilevsky are brothers and collectively control, directly or indirectly, 90% of the equity ownership in each of Debtors (the “Investors Pilevsky"), and are first cousins to LHM partner Jordan Pilevsky (“Lawyer Pilevsky”).
Analysis
Bankruptcy Code § 327(a) requires that a debtor seeking to retain an attorney must satisfy a two-prong test: (i) the attorney must not hold or represent an interest adverse to the bankruptcy estate; and (ii) the attorney must be a disinterested person. In re Angelika Films 57th, Inc., 227 B.R. 29, 37 (Bankr. S.D.N.Y. 1998), aff'd, 246 B.R. 176 (S.D.N.Y. 2000). A professional person is disinterested if he, inter alia, “does not have an interest materially adverse to the interest of the estate or- of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.” 11 U.S.C. § 101(14)(C). Courts determine whether an adverse interest exists on a case-by-case basis, examining the specific facts in a case. Bank Brussels Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, 623 (2d Cir. 1999); In re Project Orange Assoc., LLC, 431 B.R. 363, 370 (Bankr. S.D.N.Y. 2010); Angelika Films 57th, 227 B.R. at 39.
Rule 2014(a) of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) requires that an application for employment of an attorney “be accompanied by a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, any *12other party in interest. ...” FED. R. BANKR. P. 2014(a). Rule 2014-l(b) of the Local Bankruptcy Rules for the Eastern District of New York (the “Local Rules”) requires that in addition to the requirements set forth in Bankruptcy Rule 2014(a), the application for employment of an attorney shall include “a verified statement of the person to be employed stating that such person does not hold or represent an interest adverse to the estate except as specifically disclosed therein, and where employment is sought pursuant to Bankruptcy Code § 327(a), that the professional is disinterested.”
Noteholder asserts two objections: (1) that LHM is not disinterested as defined under the Bankruptcy Code and Bankruptcy Rules because Lawyer Pilevsky is a relative of Investors Pilevsky; and (2) LHM is not disinterested because it holds or represents an adverse interest due to Lawyer Pilevsky’s familial relationship with Investors Pilevsky. Each of these objections is overruled.
Disinterestedness
The sole issue on disinterestedness turns on the familial relationship of Lawyer Pilevsky to Investors Pilevsky. Relevant here, Bankruptcy Code § 101(14)(A) defines the term “disinterested person” as a person that “is not a creditor, an equity security holder, or an insider.” Bankruptcy Code § 101(31)(B)(vi) defines the term “insider” of a corporation to include a “relative of a general partner, director, officer, or person in control of the debtor.” Bankruptcy Code § 101(45) defines the term “relative” to mean “an individual related by affinity or • consanguinity within the third degree as determined by common law[] ....”
Although the Bankruptcy Code defines .the term “relative”, it does not define the term “common law” as it is used in § 101(45) or in any other section of the Bankruptcy Code. See Gold v. Rubin (In re Harvey Goldman & Co.), 2011 WL 3734912, *9, 2011 Bankr. LEXIS 3149, at *26 (Bankr. E.D. Mich. Aug., 24, 2011). The meaning of this phrase is important here because Noteholder argues that under the common law Lawyer Pilevsky is within three degrees of consanguinity to Investors Pilevsky, and is therefore Investors Pilevsky’s relative and therefore an insider and therefore not disinterested and therefore may not be retained. On the other hand, LHM argues that under common law, Lawyer Pilevsky is within four degrees of consanguinity to Investors Pi-levsky and therefore is not their relative. Thus, to resolve the parties’ dispute, the Court must first consider what the phrase “common law” means under Bankruptcy Code § 101(45).
Noteholder essentially asserts that “common law” means the canon law method of determining degrees of consanguinity, that is, the codification of church theology into canonical or legal language. Marianne Perciaccante, The Courts and Canon Law, 6 Cornell J.L. & Pub. Pol’y 171 (1996) (citations omitted). Although Noteholder’s initial objection did not cite to any authority to support this assertion, in their Supplemental Objection, they ultimately rely solely on In re Gray, 355 B.R. 777 (Bankr. W.D. Mo. 2006). In response, LHM relies on In re Harvey Goldman & Co., for the proposition that the operative “common law” is the law of the state in which the debtor’s bankruptcy case was filed. 2011 WL 3734912, at *9, 2011 Bankr. LEXIS 3149, at *26.
There are relatively few bankruptcy court opinions that address the meaning of the phrase “common law” under Bankruptcy Code § 101(45). In Gray, in the context of a preference action, the court determined that a first cousin once removed is within three degrees of consanguinity to *13the debtor, and thus a relative under § 101(45), an insider pursuant to § 101(31)(A), and therefore subject to the one year look back period under § 547(b)(4)(B). In reaching its determination, the court in Gray looked toward Missouri law and explained that Missouri uses two methods of reckoning degrees of consanguinity—canon law and civil law:
Under the canon law the number of generations is counted from the common ancestor down to the farthest of the two descendants whose degree of relationship is to be ascertained. Under the civil law the count ascends by generations from either of the two relatives to the common ancestor and thence down the collateral line to the other.
Gray, at 779 (citing State v. Thomas, 351 Mo. 804, 174 S.W.2d 337, 340 (1943)).3 The Gray court’s decision to use canon law or civil law was outcome determinative—if debtor’s first cousin once removed would be considered a relative, then he would be subject to a preference attack for transfers made more than 90 days pre-petition under § 547(b)(4)(B). In determining which law to apply, the court reviewed Missouri intestate distribution and juror disqualification laws. Although the Gray court noted that Missouri had two conflicting approaches to count degrees of consanguinity, it stated “the question is, which of the two approaches better conforms with the purpose of § 547, which is to equalize the distribution scheme among similarly situated creditors.” In re Gray, at 781 (citing In re Libby Intern., Inc., 247 B.R. 463, 470 (8th Cir. BAP 2000)). After noting that preference laws should be expansively construed, the Gray court ultimately decided to apply the canon law which rendered the related transferee an insider.
Further, in reaching its decision to use the canon law, the Gray court disagreed with another Missouri bankruptcy court that had applied the civil law to count degrees of consanguinity in the context of a preference action to determine that a first cousin of an equity holder of the debtor was not an insider and not subject to § 547(b)(4)(B). Dewoskin v. Brady (In re Hydraulic Indus. Prods. Co.), 101 B.R. 107, 109 (Bankr. E.D. Mo. 1989) (“First cousins are not within the third degree and are not within the definition of ‘relative’ in the Bankruptcy law”). In Dewoskin, the court stated “It is not inconsistent with the scheme of the Bankruptcy Code to determine that ‘common law* refers to the body of applicable state law in effect at the time of the action which is the subject of [the] proceeding.” 101 B.R. at 108. Although Gray and Dewoskin came to different conclusions on whether to use the canon law or the civil law to compute degrees of consanguinity, both cases looked to Missouri law, the state in which the case was pending. See also Mo. Ann. Stat. § 474.010(d) (West) (relatives who are neither ancestors nor descendants of the decedent, may not inherit unless they are related to the decedent at least as closely as the ninth degree, the degree of kinship being computed according to the rules of the civil law). Missoun has no identified nexus with the Loans or Properties at issue here, nor does Noteholder assert that Missouri law governs the issue before this Court.
*14This Court views this as a matter of statutory construction, without resort to policy implications, and starts with the pronouncement of the United States Supreme Court that “[e]xcept in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state.” Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). Thus, this Court looks to New York state law as the source of the common law to be applied in strictly applying Bankruptcy Code § 101(45). Neither side here cited Judge Grossman’s decision in In re Gamaldi, 2009 WL 961417 (Bankr. E.D.N.Y. 2009), which strictly applied the insider definition of § 101(31)(B)(vi) to an estranged step relationship (“The last legal issue for the Court to decide is whether at the time of the $90,000.00 Transfer Rita Gamaldi was an insider of Susanna Gamaldi. Rita Gam-aldi asserts that she was not an insider at the time of the $90,000 Transfer because Susanna Gamaldi and George Gamaldi were estranged at that time, although they were still husband and wife.... As of the date of the $90,000 Transfer, Rita Gamaldi was still the stepmother-in-law of Susanna Gamaldi, despite the strained relationship between the Debtors. Therefore, Rita Gamaldi was a relative by affinity of Susanna Gamaldi due to the marriage between Susanna and George Gamaldi.”). See also Stevenson v. Sensing (In re Herbison), 1998 WL 35324197 (Bankr. W.D. Tenn. March 24, 1998) (applying the common law of the state in which the bankruptcy case was pending to determine how to count degrees of consanguinity in a preference action).
Noteholder has not asserted that New York law counts degrees of consanguinity using the canon law. LHM asserts that New York applies the civil law method of computation of degrees of consanguinity, which “is to count from one person up to the common ancestor and down to the other[; o]f course the person from whom the count begins is not counted and he in whom it ends is,” citing Woodbury v. Schroeder, 116 Misc. 673, 676, 191 N.Y.S. 513 (N.Y. Mun. Ct. 1921) (internal citations omitted), under which “first cousins are relatives to the fourth degree of consanguinity.” See also In re Estate of von Knapitsch, 296 A.D.2d 144, 148, 746 N.Y.S.2d 694 (App. Div. 2002) (“such persons are related to the decedent in the fourth degree of consanguinity [i.e. first cousins] .... ”).
Noteholder essentially argues that the Court should not look to the cases cited by LHM for guidance because those cases address consanguinity in the context of distribution of estates in New York. However, the relevant New York statutes and case law this Court has reviewed supports the conclusion that New York law applies civil law to compute degrees of consanguinity. See, e.g. N.Y. C.P.L.R. 4110 (McKinney 2016), (any relative within six degrees of consanguinity or affinity to a party is automatically disqualified from jury service); see Blaine v. Int’l Bus. Machines Corp., 91 A.D.3d 1175, 1176, 937 N.Y.S.2d 405 (N.Y. App. Div. 2012) (“[W]e acknowledge that some jurors or parties may not know all of their distant relatives within the sixth degree of consanguinity or affinity—such as their great-great-grandnephews.”); N.Y. Crim. Proc. Law § 270.20 (McKinney 2016) (a party may object to a prospective juror on the ground that the juror is “related within the sixth degree by consanguinity or affinity to the defendant.”); People v. Clark, 16 N.Y.S. 473, 474 (Gen. Term 1891) (interpreting predecessor Code of Criminal Procedure § 377 promulgated by the New York State Legislature in 1881, stated “[t]he mode of computation of degrees used by the civilians, not by the canonists, is to count from *15one person up to the common ancestor and down to the other.”); N.Y. Comp. Codes R. & Regs. tit. 18, § 415.1(h)(l)(iii) (New York Regulations of the Department of Social Services, governing the authorization and payment of publicly funded child care services, defines “relatives within the third degree of consanguinity of the parents) or step-parent(s) of the child include: the grandparents of the child; ... and the first cousins of the child, including the spouses of the first cousins.”; thus under § 415.1(h)(l)(iii) when one counts degrees of consanguinity starting from the child, a first cousin of the child would be related to the child within the fourth degree); N.Y. Judiciary Law § 14 (McKinney) (“[a] judge shall not sit as such in, or take any part in the decision of, an action ... if he is related by consanguinity or affinity to any party to the controversy within the sixth degree. The degree shall be ascertained by ascending from the judge to the common ancestor, descending to the party, counting a degree for each person in both lines, including the judge and party, and excluding the common ancestor.”).
From this Courtis review of various methods of counting consanguinity under New York civil law, the outcome is the same here as each method both counts steps that ascend and descend the familial line. Thus, under New York law, first cousins are further removed than the third degree of consanguinity. Therefore, the Investors Pilevsky are not insiders of Lawyer Pilevsky or of LHM, and LHM is disinterested under Bankruptcy Code § 101(14)(A).
Adverse Interest
Noteholder also contends that LHM is not disinterested under Bankruptcy Code § 101(14)(C) because Investors Pilevsky and Lawyer Pilevsky’s familial relationship render LHM as holding or representing an adverse interest. However, Lawyer Pilevsky and LHM do not hold or represent an interest adverse to the bankruptcy estates or creditors. Noteholder incorrectly conflates the fact of the familial relationship with holding an adverse interest. LHM does not represent Investors Pilevsky in this or any other matter disclosed to this Court; while LHM does represent another entity in a case in the Southern District of New York bankruptcy court in which Investors Pilevsky are also equity owners, they do not represent the equity holders in that case. Based on disclosures made to the Court, Lawyer Pilev-sky does not himself hold or own any equity interest in any of these Debtors. Lawyer Pilevsky did not disclose any pre-petition representation by him or LHM of the equity holders in the prepetition formation of these Debtors or in the acquisition of the Properties, therefore the Court determines Lawyer Pilevsky and LHM did not do so. While LHM must take instructions on behalf of Debtors from someone, and while Lawyer Pilevsky has been the primary attorney for Debtors in these cases, the fact that the person giving LHM instructions may also be an equity owner who is also a first cousin to Lawyer Pilev-sky does not in and of itself create an adverse interest, and no other basis for an adverse interest has been demonstrated.
Thus, LHM is disinterested and does not hold or represent an interest adverse to the bankruptcy estates.
Therefore, it is hereby
ORDERED, that the Employment Application is approved; and, it is further
ORDERED, that ten (10) business days prior to any increases in LHM’s rates for any individual employed by LHM and retained by Debtors pursuant to Court Order, LHM shall file a supplemental affidavit with this Court setting forth the basis for the requested rate increase pursuant to *16Bankruptcy Code § 330(a)(8)(F); parties in interest, including the UST, retain all rights to object to or otherwise respond to any rate increase on any and all grounds, including, but not limited to, the reasonableness standard under Bankruptcy Code § 330; supplemental affidavits are not required for rate increases effective on or after the date Debtors submit Debtors’ Final Report to the UST; and, it is further
ORDERED, that no compensation or reimbursement of expenses shall be paid to LHM for professional services rendered to Debtors, except upon proper application and by further order of this Court following a hearing on notice pursuant to Bankruptcy Code §§ 330 and 331, the Bankruptcy Rules, and the Local Rules.
. 11 U.S.C. §§ 101 etseq.
. Various skirmishes occurred between the filing of the Olympia case and the time Olympia filed the Employment Application, which do not bear upon the retention issues.
. At the time State v. Thomas was decided, Missouri had two juror qualification statutes, one for civil and one for criminal proceedings. The Supreme Court of Missouri in State v. Thomas determined that under the criminal statute, the degrees of consanguinity should be reckoned under civil law and under the civil law statute degrees of consanguinity should be reckoned under canon law. See Sommers v. Wood, 895 S.W.2d 622, 623 (Mo. Ct. App. 1995). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500181/ | GUERRIERI, CLAYMAN, BARTOS & PARCELLI, P.C.,
Counsel for the Associ-
ation of Professional Flight Attendants, 1900 M Street, N.W., Washington, D.C, 20036, By: Robert S. dayman, Esq.
*23MOONEY, GREEN, SAINDON, MURPHY & WELCH, Counsel for the Transport Workers Union of America, AFL-CIO, 1920 L Street, N.W, Suite 400, Washington, D.C. 20036, By: Richard S. Edelman, Esq.
VEDDER PRICE P.C„ Counsel for Bank of America, N.A., Merrill Lynch Credit Products, LLC and Global Principal Finance Company, LLC, 1633 Broadway, 47th Floor, New York, New York 10019, By: Michael J. Edelman, Esq., -and- 222 N. LaSalle St., Ste. 2600, Chicago, Illinois 60601, By: Douglas J. Lipke, Esq., Jonathan E. Aberman, Esq.
MEMORANDUM OF DECISION
SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE
Before the Court are two motions seeking to enforce certain terms of the Fourth Amended Joint Chapter 11 Plan [ECF No. 10367] (the “Plan”) of the above-captioned debtors and reorganized debtors (collectively, the “Debtors”). The motions were filed by (i) the Allied Phots Association, the Association of Professional Flight Attendants, the Transport Workers Union of America, AFL-CIO (collectively, the “Unions”) [ECF No. 12666], and (ii) the Bank of America, N.A., Merrill Lynch Credit Products, LLC and Global Principal Finance Company, LLC (collectively, “BAML,” and together with the Unions, the “Movants”) [ECF No. 12676]. The Movants are claimants in these bankruptcy cases who argue that they are entitled to additional distributions under the Plan—so called true-up payments—beyond the payments they already received in the form of stock in the reorganized Debtors. The true-up payments are necessary, the Mov-ants argue, for them to receive the same number of shares of stock as other claimants who were paid earlier but did not bear the cost of certain subsequent tax payments. The estate made these tax payments from money held in reserve to be paid to creditors. The Debtors assert that the Movants are misinterpreting the terms of the Plan and that the Movants have been paid in full based on the value of the stock that the Movants have already received. Based on the language of the Plan and for the reasons set forth below, the Movants’ motions are granted.
BACKGROUND
In November 2011, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. In June 2013, the Debtors filed their Disclosure Statement for Debtors’ Second Amended Joint Chapter 11 Plan (the “Disclosure Statement”) [ECF No. 8691], which was approved by this Court. [ECF No. 8614]. The Debtors subsequently established a procedure for creating a reserve to pay claims that were disputed at the time of Plan confirmation but that might later become allowed claims. See Order Establishing Maximum Amount of Disputed Claims to be Utilized for Determining Disputed Claims Reserve Under Debtors’ Second Amended Joint Chapter 11 Plan and Approving Certain Procedures in Connection with Disputed Claims Reserve (the “Disputed Claims Order”) [ECF No. 9560]. In October 2013, the Court entered an order confirming the Plan (the “Confirmation Order”) [ECF No. 10367-1]. The Plan became effective on December 9,2013 (the “Effective Date”). See Notice of (I) Entry of Order Confirming Plan and (II) Occurrence of Effective Date [ECF No. 11402].1
*24Before addressing the Plan’s treatment of claims, it is important to define a few terms. The Plan refers generally to unsecured claims, with limited exceptions, as the “Single-Dip General Unsecured Claims.” Plan § 1.206.2 For purposes of these motions, however, it is important to understand the distinction among such claims. There are claims that have been allowed for payment (“Allowed Claims”) and claims where payment is subject to disallowance (“Disputed Claims”). Moreover, not all claims were allowed at the same time. Some claims were allowed as of the Effective Date (“Effective Date Allowed Claims”), while other claims became allowed later (“Post-Effective Date Allowed Claims”).'
The Movants here are' all entitled to payment under the Plan as unsecured creditors whose claims have been allowed. BAML is the holder of twelve Post-Effective Date Allowed Claims,3 while the Unions are entitled to an allocation of the recovery for Posh-Effective Date Allowed Claims pursuant to the terms of the Plan.4
A. Plan Distribution Scheme
Claimholders under the Plan do not receive the certainty of a fixed dollar recovery but rather are paid in shares of stock in the reorganized entity. See Disclosure Statement § I.C.3 (discussing distribution mechanics). Stated a slightly different way, the currency for payment of claims is shares of stock. Seeking to avoid disputes and litigation over valuation issues, the Debtors choose to use the market to set the recovery for claimants. As the Debtors have explained, “[a] central thesis of the Plan was a mechanism to distribute shares of New Common Stock among the stakeholders based on market factors rather than a designated value assigned to the shares.” Debtors’ Reply to the Response of (I) Bank of America, NA., Merrill Lynch Credit Products, LLC and Global Principal Finance Company and (II) Commonwealth of Puerto Rico to Debtors’ Motion for Entry of Order Authorizing Release of Excess Reserve Funds Held in Disputed Claims Reserve ¶ 4 (the “Debtors’ Reply to Post-Effective Claimholders”) [ECF No. 12524]. Indeed, the Disclosure Statement specifically warned that “[Notwithstanding compliance by the Debtors or the Reorganized Debtors, as applicable, with their obligations under the Plan, there can be no assurance that an active trading market for the New Common Stock will develop or as to the prices at which the New Common Stock will trade.” Disclosure Statement § IV.E.3.
The mechanism for determining the exact number of shares to be received by *25claimants under the Plan is complex. Claims allowed as of the Effective Date received “New Mandatorily Convertible Preferred Stock,”5 which was subsequently converted to common stock on the 30th, 60th, 90th, and 120th days after the Effective Date (the “Mandatory Conversion Dates”).6 See Disclosure Statement § I.C.3. The number of shares distributed to Allowed Claims during this 120-day period was determined through formulas that awarded the shares based on the stock price on each Mandatory Conversion Date. See Disclosure Statement § I.C.3; Plan §§ 4.3, 4.4, 4.5, 4.10, 4.11, 4.12, 4.17, 7.3(b); Exh. B to Plan. These formulas did not distinguish between claims allowed on the Effective Date of the Plan and those allowed after the Effective Date. See Plan §§ 1.9, 7.3(b). The idea appears to have been to survey the value of the stock over this 120-day period so as to arrive at the most appropriate- value in shares that would constitute full payment to unsecured creditors.7 All parties agree that, during the 120-day period covering the Mandatory Conversion Dates, thq formulas resulted in Effective Date Allowed Claims receiving 30.7553 shares of New Common Stock for each $1,000 of Allowed Claims.8 Important for purposes of these motions, the Plan specifically provided that after the 120th day following the Effective Date, there-would be no further modification to this ratio for later allowed claims. See Plan § 4.11; see also Exh. B to Plan at § 5.1(iv) (“For the avoidance of doubt, following the 120th day following the Plan Effective Date, Holders shall have no rights under the Seríes A Preferred Stock other than the right to receive the shares of Common Stock into which their shares of Series A Preferred Stock were converted pursuant to any Mandatory Conversion or Optional Conversion hereunder and the right that a holder of shares of Common Stock would have corresponding thereto.”); Debtors’ Omnibus Response ¶ 9 (“Since the Mandar tory Conversion Date, the same distribution rate of 30.7553 shares of New Common Stock for each $1,000 of Allowed *26Claims (including applicable accrued interest) has applied to each distribution from the Disputed Claims Reserve .... ”).
Additionally, the Plan provided that the Debtors’ old equity holders would receive an initial distribution on the Effective Date of 3.5% of the New Common Stock, with the right to receive additional shares on the Mandatory Conversion Dates allocated pursuant to the same formula used for Allowed Claims. See Disclosure Statement § I.C.3; Plan §§ 4.5 (discussing recovery for Class 5 - AMR Equity Interests); 1.131 (defining Initial Old Equity Allocation), 1.148 (defining Market-Based Old Equity Allocation).
B. Subsequent Distributions Under the Plan
In addition to the initial distributions on the Effective Date, the Plan contemplates two other types of distributions to holders of Allowed Claims: (1) distribution upon the allowance of a Disputed Claim, and (2) distribution of excess shares held in reserve by the estate.
1. Distributions Upon Allowance of Disputed Claims
On the Effective Date, the Debtors established a reserve for the payment of Disputed Claims that would subsequently become Allowed Claims (the “Disputed Claims Reserve”). Shares are held in the Disputed Claims Reserve until they are paid to a claimholder when a Disputed Claim is allowed. Section 7.5(a) of the Plan governs the distribution of shares from the Disputed Claims Reserve to Post-Effective Date Allowed Claims at the time of their allowance. It provides, in part, that “[a]ll distributions made under this Section 7.5 on account of Allowed Claims shall be made ... as if such Allowed Claims had been Allowed Claims on the dates distributions were previously made to holders of Allowed Claims in the applicable Class, but shall be made net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve.”9
The Disputed Claims Reserve was formed as a “disputed ownership fund” under Treasury Regulation § 1.468B-9. See Plan § 7.3(d). While no tax liability accrued when assets were placed into the Disputed Claims Reserve, distributions from the Disputed Claims Reserve are treated as a taxable exchange by the IRS. See Disclosure Statement § VLB.5; Treas. Reg. § 1.468B-9(c)(4). Because the value of the American stock has increased since the time it was placed in the Disputed Claims Reserve, a distribution from the Disputed Claims Reserve now results in a taxable gain. See IRC § 1001(a); Treas. *27Reg. § 1.468B-9(c)(4). Accordingly, these are taxes attributable to the Disputed Claims Reserve itself. See Disclosure Statement § VI.B.5 (“The Disputed Claims Reserve will be a separate taxable entity for U.S. federal income tax purposes subject to a separate entity-level tax at the maximum rate applicable to trusts and estates, and all distributions from the Disputed Claims Reserve will be taxable to such reserve as if sold at fair market value.”).10
The Plan was drafted with the understanding that the Debtors’ estate needed to pay taxes that might accrue, but there was no guarantee that sufficient shares would exist in the Disputed Claims Reserve to pay such taxes after distributions to claimants. Section 7.5(a) therefore provides that distributions made from the Disputed Claims Reserve to Post-Effective Date Allowed Claims would “be made net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve.” Plan § 7.5(a). The reduction in distributions to pay the Disputed Claims Reserve’s tax liabilities has resulted in Postr-Effec-tive Date Allowed Claims receiving up to 9.7% fewer shares than the shares received by Effective Date Allowed Claims in the first 120 days. More specifically, the Movants appear to have received somewhere between 27.526 shares and 28.4351 shares per $1,000 of Allowed Claims, rather than the 30.7553 shares paid on Effective Date Allowed Claims.11
2. Distribution of Excess Shares from the Disputed Claims Reserve
Section 7.4 of the Plan provides for “true-up” payments when there are more shares in the Disputed Claims Reserve than are needed to satisfy the remaining Disputed Claims. As the amount of Post-Effective Date Allowed Claims becomes known, the Plan provides that “true-up” payments will be made from the excess shares to holders of allowed claims and interests, through either “Interim True-Up” distributions or a “Final True-Up” distribution when the ease is ready to be closed. See Plan §§ 7.4(a), (b). The “Final True-Up” provision states:
On the Final Distribution Date, or as soon thereafter as reasonably practicable, all shares of New Common Stock remaining in the Disputed Claims Reserve (after making all distributions pursuant to Section 7.5(a) hereof on account of Disputed Single-Dip General Unsecured Claims that have become Allowed *28Single-Dip General Unsecured Claims prior to such date), shall be distributed on account of the American Labor Allocation, the Market-Based Old Equity Allocation, and to holders of Allowed Single-Dip General Unsecured Claims, as applicable, based upon how such shares of New Common Stock would have been distributed on the Initial Distribution Date and each Mandatory Conversion Date if on the Effective Date the aggregate amount of all Allowed Single-Dip General Unsecured Claims were in the amount of such Claims on the Final Distribution Date and there were no Disputed Single-Dip General Unsecured Claims on the Effective Date.
Plan § 7.4(b).
The Debtors initially assumed that the maximum allowed Single-Dip General Unsecured Claims would total $3.2 billion, based on approximately $2.44 billion of claims allowed by the Effective Date and $755 million as the estimated maximum of disputed claims that would be allowed Post-Effective Date. See Disputed Claims Order at 3. The Plan therefore set aside $755 million in stock in the Disputed Claims Reserve to cover the estimated maximum of Post-Effective Date Allowed Claims. But because certain Disputed Claims were disallowed, there will be more shares in the Disputed Claims Reserve than necessary to pay the actual Post-Effective Date Allowed Claims. Thus, there is money available for true-up payments.12
As holders of Post-Effective Date Allowed Claims, the Movants have received distributions that had been reduced by the taxes accrued by the Disputed Claims Reserve. The Movants argue that they should receive true-up payments under Section 7.4 of the Plan to make their recovery in shares of stock equal to that of the holders of Effective Date Allowed Claims, who received more shares of stock because there was no reduction to pay taxes. The Debtors disagree, arguing that the Movants have already received full value for their claims because the value of the shares increased after the Effective Date Allowed Claims were paid. The Debtors contend, therefore, that the excess funds in the Disputed Claims reserve should be passed on to the Debtors’ old equity holders, a more junior class.
DISCUSSION
A. The Applicable Legal Standards
“When interpreting a confirmed plan, the principles of contract law apply.” MF Glob. Holdings Ltd v. Pricewaterhou-seCoopers LLP, 43 F.Supp.3d 309, 313 (S.D.N.Y. 2014) (quoting In re Dynegy Inc., 486 B.R. 585, 590 (Bankr. S.D.N.Y. 2013)). “For purposes of interpretation, ‘all documents which were confirmed together to form the contract’ are added to the [p]lan itself.” In re WorldCom, Inc., 352 B.R. 369, 377 (Bankr. S.D.N.Y. 2006) (quoting Goldin Assocs., L.L.C. v. Donaldson, Luflcin & Jenrette Sec. Corp., 2004 WL 1119652, at *3, 2004 U.S. Dist. LEXIS 9153, at *14 (S.D.N.Y May 20, 2004)). Thus, a debtor’s plan and disclosure statement “should be read together to ascertain the meaning of [p]lan provisions.” In re WorldCom, 352 B.R. at 377 (citing Goldin, 2004 WL 1119652, at *3-4, 2004 U.S. Dist. LEXIS 9153, at *14-17).
Under New York law, “when parties set down their agreement in a *29clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing[,]” unless the contract is ambiguous.13 W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990). A contract provision is ambiguous if it is “susceptible to more than one reasonable interpretation.” Brad H. v. City of N.Y., 17 N.Y.3d 180, 186, 928 N.Y.S.2d 221, 951 N.E.2d 743 (2011). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts .... It is well settled that extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Giancontieri, 77 N.Y.2d at 162-63, 565 N.Y.S.2d 440, 566 N.E.2d 639 (internal citations and quotations omitted). Furthermore, contractual provisions “are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 25 N.Y.3d 675, 680, 16 N.Y.S.3d 21, 37 N.E.3d 78 (2015).
“A contract should be read as a whole to ensure that undue emphasis is not placed upon particular words and phrases. ... Courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Comed-me v. Portville Cent. Sch. Dist., 12 N.Y.3d 286, 293, 879 N.Y.S.2d 806, 907 N.E.2d 684 (2009) (internal citations omitted). “[S]pe-cific clauses of a contract are to be read consistently with the overall manifest purpose of the parties’ agreement. Contracts are also to be interpreted to avoid inconsistencies and to give meaning to all of its terms.” Barrow v. Lawrence United Corp., 146 A.D.2d 15, 538 N.Y.S.2d 363, 365 (1989) (internal citations omitted).
B. The Movants Correctly Interpret Payment under the Plan as Share-Based, Not Value-Based
In analyzing whether the Movants are entitled to receive a “true-up” distribution, both sides agree that the relevant provision is Section 7.4(b) of the Plan, which covers the final “true-up” distribution.14 While it is clear that the true-up provision is designed to provide an additional payment to a claimant if necessary to ensure an appropriate recovery, the parties have a markedly different interpretation of how Section 7.4(b) works.
The Movants believe they are entitled to a true-up under Section 7.4(b) to reimburse them to the extent that the payment on their claims in stock was reduced to pay their share of the Disputed Claims Reserve’s taxes. The Movants rely on the statement in Section 7.4(b) that excess shares in the final true-up “shall be distributed on account of the American Labor Allocation, the MarkeWBased Old Equity Allocation, and to holders of Allowed Single-Dip General Unsecured Claims, as applicable, based upon how such shares of New Common Stock would have been dis*30tributed on the Initial Distribution Date and each Mandatory Conversion Date _” Plan § 7.4(b) (emphasis added). Thus, the final true-up harkens back to how a claim would have been paid if it was allowed on the Effective Date. On the Initial Distribution Date and the Mandatory Conversion Dates, Effective Date Allowed Claims received 30.7553 shares per $1,000. But for the Post-Effective Date Allowed Claims that were paid later, the Movants received fewer shares per $1,000—any-where from 27.525 shares to 28.4351 shares—because they had to first pay their pro rata shares of the taxes paid on the Disputed Claims Reserve. If the Movants' claims had been allowed on the Effective Date—and shares had been distributed to them on the Initial Distribution Date and each Mandatory Conversion Date—the Movants would have received a distribution of 30.7553 shares per $1,000. Viewing Section 7.4 as part of a share-based plan, the Movants see the “based upon” language as a reference to the way claims were paid in shares. Thus, if the true-up for Posh-Effective Date Allowed Claims is “based upon how such shares of New Common Stock would have been distributed on the Initial Distribution Date and each Mandatory Conversion Date[,]” the Mov-ants argue that such true-up distribution must bring Post-Effective Date Allowed Claims up to the 30.7553 shares paid to claims allowed on the Effective Date. Plan § 7.4(b).
By contrast, the Debtors take a value-based approach to Section 7.4. They assert that Section 7.4 provides a true-up distribution to holders of Allowed Claims only if the holders of Allowed Claims received less than 100% of the value of them claims. See Hr’g Tr. 88:8-23, Feb. 23, 2016; see also Hr’g Tr. 92:8-14, Feb. 23, 2016 (Debtors’ counsel) (“If, on that distribution date, the value had been less than 100 cents, I have to go back and do a recalculation as I close up the [Disputed Claims Reserve]. And I do that calculation based on what my claims pool has finally been defined to be. And I look at the share price that’s distributed at that point in time, and I distribute them a number of shares until they’ve received full value.”). The Debtors view Section 7.4 aS referring to the treatment provisions of the Plan, which set forth a formula to determine the allocation of stock to be distributed. See Hr’g Tr. 89:24-94:3, Feb. 23, 2016. The Debtors interpret this language to anchor the payment of the Movants’ claims to the monetary value of the distribution received by the Single-Dip General Unsecured Claims on the Effective Date, rather than the number of shares paid to those claimants. The Debtors believe that no true-up distribution is required here because these Mov-ants already received full value given the subsequent increase in the share price after the Effective Date. See id. As the Movants received value that was equal to at least 100% of their claims, the Debtors contend that the excess shares remaining in the Disputed Claims Reserve should be given instead to equity holders. The Debtors also argue that the taxes paid by the Disputed Claims Reserve were properly withheld from the distribution to the Mov-ants, who nonetheless received full value.
The Court finds the Movants’ view to be the better interpretation of Section 7.4(b). As the Debtors have previously conceded, the “central thesis of the Plan was a mechanism to distribute shares of New Common Stock among the stakeholders based on market factors rather than a designated value assigned to the shares.” Debtors’ Reply to Posb-Effective Claimholders ¶4. The Plan is share-based as it provides for recovery to holders of Post-Effective Date Allowed Claims in the form of a set number of shares per $1,000 of claims. The Plan provides a complex methodology *31based on the market over time to determine the appropriate number of shares per $1,000 of claims. Importantly, the formulas used to determine the distribution of shares applies to Allowed Claims generally, and do not distinguish between claims allowed on the Effective Date of the Plan and those allowed later. See Plan §§ 1.9, 7.3(b). Moreover, there is no provision to adjust the determination on the amount of shares to be paid per $1,000 of claims once that determination has been made. Against this back-drop, excess shares “shall be distributed [in the final true-up] ... based upon how such shares of New Common Stock would have been distributed on the Initial Distribution Date and each Mandatory Conversion Date.” Plan § 7.4(b). There is no dispute that no taxes were deducted from these earlier distributions. There is nothing in Section 7.4 or elsewhere in the Plan that specifically supports the Debtors’ contention that “[Section 7.4 of the Plan operates to provide an additional distribution to holders of Allowed Claims on the Final Distribution Date only if, on the Mandatory Conversion Date, holders of Allowed Claims received value that was equal to less than one hundred percent (100%) of their underlying claims.”- Debtors’ Omnibus Response ¶ 22.
The Debtors complain that the Movants’ interpretation gives the Movants an improper windfall. More specifically, the Debtors argue that the Movants’ position overcompensates holders of Post-Effective Date Allowed Claims because they would receive more in dollar value than the holders of Effective Date Allowed Claims.15 But this argument misreads the Plan as a whole. The Plan passes both the risk and the reward relating to share price onto the creditors, rather than promising any defined monetary value for recovery. Creditors holding disputed claims were at a higher level of risk because they would be paid later in the distribution process. If the share price decreased during this time, these creditors were still tied to the agreed ratio of 30.7553 shares for each $1,000 of Allowed Claims. Thus, the Movants and similarly situated creditors took on the risk of a lower stock valuation. The benefit of this bargain is that these creditors were entitled to the appreciation in the value of their stock. Of course, Allowed Claims on the Effective Date that were paid earlier in these bankruptcy cases also got the benefit of any appreciation in the value of the stock they received, assuming that they decided to hold onto the stock. It is just that this appreciation took place outside of the mechanism of the Plan.
The Plan’s elegant balance of risk and reward does not work under the Debtors’ value-based interpretation. Imagine a circumstance where the stock price dropped significantly after the payment of Allowed Claims on the Effective Date but before the Movants were paid. Given the same number' of shares of stock, the Mov-ants would recover far less in value for their claims. But even if the Movants subsequently sought a true-up payment in this scenario, there was no guarantee in the Plan that sufficient funds would exist in the Claims Reserve for these Movants to receive the same value as other unsecured creditors paid earlier in the case, much *32less full value on their claims.16 Under this scenario, the Debtors’ value-based interpretation of the Plan would not have provided equal value to claimants in the same class. The Debtors’ position thus would saddle the Movants and similarly situated creditors with the risk of a drop in share value, while at the same time depriving them of any reward from appreciation in share value.17
*33The Debtors contend that their value-based interpretation is built into Section 7.4 through the operation of Section 7.5. The Debtors argue that the netting of taxes in Section 7.5 acts to ensure that Post-Effective Date Allowed Claims do not recover more than the dollar value of their claim because if there is a gain in the share price, the gain tax will be deducted from the distribution. See Hr’g Tr. 96:12-97:1, Feb. 23, 2016. The Debtors assert that the reason those claimants have deductions to pay tax on the gain is because those claimants were getting more in value than if they had received a distribution in the first 120 days of the case. Id. at 97:3-6. But this argument does not hold up. It does not logically follow that the mechanics of Section 7.5, which relates to initial distributions to Post-Effective Date Claims, would inform Section 7.4, which relates to subsequent true-up payments. Indeed, the netting of taxes in Section 7.5 takes place before Section 7.4 ever becomes a factor in distributions. There is no language in Section 7.4 referencing the netting of taxes because at the time of true-up payments, a determination has already been made that there are excess shares available for distribution.
By contrast to the Debtors’ strained interpretation, the Movants’ position is more consistent with the overall operation of the Plan and the Bankruptcy Code. Under the Movants’ interpretation, the Court must examine only whether the Movants and similar claimants received the recovery— as defined in shares—to which they are entitled under the Plan. The true-up provisions in Section 7.4 clearly reference the distribution of shares based on how they would have hypothetically been distributed in the defined 120-day period. Nothing in the plain language of Section 7.4 places a limitation on true-up distributions based on stock appreciation or the current market value of the stock.
By receiving the same number of shares, the Movants’ interpretation of the Plan is also consistent with the principle of equal treatment of claims within a class under the Bankruptcy Code. The Bankruptcy Code explicitly 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). While disparate treatment within a class is permitted if the holder of a claim or interest agrees to less favorable treatment, a plan in such circumstances must explicitly provide that particular creditors are being treated in this manner so as to put such creditors on notice. See, e.g., Forklift LP Corp. v. iSSC, Inc. (In re Forklift LP Corp.), 363 B.R. 388, 398 (Bankr. D. Del. 2007) (“[I]t would be unfair to deprive creditors of their statutory rights to full payment under the Bankruptcy Code, where plan provisions do not explicitly take those rights away. If a plan explicitly puts a creditor on notice that it is in danger of losing its rights and the creditor fails to act to protect its rights, then rigid application of the plan seems justified. However, where it is more difficult or impossible for the creditor to realize that the Plan threatens its statutory rights, it is inequitable to punish the creditor for failing to object.”); Terex Corp. v, Metro. Life Ins. Co. (In re Terex Corp.), 984 F.2d 170, 175 (6th Cir. 1993) (“[T]he plan itself could have been more specific by explicitly excluding ‘post-petition interest,’ rather than simply stating that secured claims would be paid in full— 100%. Under these facts we fault the debt- or any ambiguity, not the creditor. The crucial point is that the plan was confirmed by the court. It is the debtor’s obligation when seeking the court’s confirmation to specify as accurately as possible the *34amounts which it intends to pay the creditors.”)- The Movants’ interpretation ensures that all unsecured creditors receive the same number of shares, avoiding the disparate treatment of creditors in the same class. By contrast, the Debtors’ interpretation runs afoul of these concerns because the Plan does not clearly put these later allowed claimants on notice that they could ultimately receive fewer shares of stock.18
The Plan does not support the Debtors’ value-based interpretation for another reason: it does not include provisions to ensure an equitable distribution of value to all unsecured creditors. If the Plan is value-based—rather than share-based—it would presumably provide for a recalculation of the number of shares for claims allowed after the Effective Date, given the fluctuating nature of the stock price. And consistent with the Bankruptcy Code’s requirement of equal treatment for claims in the same class, the Plan would presumably ensure equal treatment—meaning the value of the shares under the Debtors’ interpretation—for all unsecured creditors regardless of when they were paid. But there is no evidence that that the Plan is designed to accomplish this. The Debtors rely on the provisions about the calculation of the share value within 120 days of the Effective Date. See Hr’g Tr. 78:1-79:19, Feb. 23, 2016. But these provisions say nothing about how the number of shares would be calculated for claimants being paid later or when such a recalculation would occur; at best, they merely reflect the deduction of taxes. See Hr’g Tr. 86:7-24, Feb. 23, 2016. The Plan provisions on the calculation of the share value within 120 days of the Effective Date are complex and extensive provisions; one would imagine that a mechanism for any later recalculation of the share value would be similarly complex and would set forth the subsequent recalculation methodology with specificity, But there are no such provisions in the Plan. The true-up provision of Section 7.4 as constituted does not perform that function. It merely looks back to how the number of shares were initially calculated. And cru’cially, the Debtors have identified no provision in the Plan that would guar*35antee that there would be enough money to pay Post-Effective Date Allowed Claims like the Movants the same value as was received by Allowed Claims on the Effective Date. Indeed, the Movants represent that the share price has decreased after peaking at a high of 56.20 a share in January 2015. See Unions’ Motion to Enforce Order Confirming Plan at 8 [ECF No, 12666]. Such continuing fluctuations in value highlight the need for the Plan to provide a reliable method to pay out equal value in shares to claimants if, in fact, it is a value-based plan.
The Debtors argue that their value-based interpretation is captured in a provision of the Disclosure Statement which sets out how the distribution mechanics worked,19 and in a press release issued by the Debtors on April 8,2014, which provided that through application of the formula “[allowed claims will receive 30.7553 shares, subject to reduction for expenses of the Disputed Claims Reserve, including tax liabilities, for each $1,000 of allowed claims.” Exh. A to Debtors’ Reply to Post-Effective Claimholders [ECF No. 12524].20 It is true that the formulas used were meant to capture the concept of full value in the initial distribution. But that doesn’t change the result here given that recovery for claimants was then ultimately frozen *36by the terms of the Plan at 30.7553 shares per $1,000 of claims and the Plan mechanism provides that creditors are to be paid in shares of stock. See Plan § 4.11; see also Exh. B to Plan at § 5.1(iv) (“For the avoidance of doubt, following the 120th day following the Plan Effective Date, Holders shall have no rights under the Series A Preferred Stock other than the right to receive the shares of Common Stock into which their shares of Series A Preferred Stock were converted pursuant to any Mandatory Conversion or Optional Conversion hereunder and the right that a holder of shares of Common Stock would have corresponding thereto.”); Debtors’ Omnibus Response ¶ 9 (“Since the Mandatory Conversion Date, the same distribution rate of 30.7553 shares of New Common Stock for each $1,000 of Allowed Claims (including applicable accrued interest) has applied to each distribution from the Disputed Claims Reserve — ”).
To continue trying to readjust recoveries based on value would require the recalculation of this formula for later distributions, and no party contends that such continued recalculations here would have been feasible. See Hr’g Tr. 109:9-110:12, Feb. 23, 2016. Moreover, there is no evidence that the Plan requires that the estate go back and reinject value into the calculation for recovery after the stoek price was set at 30.7553 shares per $1,000 of claims. Such a position is inconsistent with the repeated warnings to creditors that “[notwithstanding compliance by the Debtors or the Reorganized Debtors, as applicable, with their obligations under the Plan, there can be no assurance that an active trading market for the New Common Stock will develop or as to the prices at which the New Common Stock will trade.” Disclosure Statement § IV.E.3.
The Debtors point out that nowhere in the Plan or Disclosure Statement does it provide for a true-up for shares that Were sold to pay gains taxes, and assert that the Movants and similarly situated creditors would be unfairly reimbursed for taxes on their gains. But the Court finds this unpersuasive. The Plan makes clear that these taxes are an obligation of the Disputed Claims Reserve, not of the individuals recovering the distribution. See Plan § 7.3(b) (“net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve”); Plan § 7.3(e) (“The Disbursing Agent shall be responsible for payment, out of the assets of the Disputed Claims Reserve, of any taxes imposed on the Disputed Claims Reserve or its assets. ... [Ajssets of the Disputed Claims Reserve may be sold to pay such taxes.”); Plan § 7.5(a) (“All distributions made under this Section 7.5 on account of Allowed Claims shall be made together with any dividends, payments, or other distributions made on account of, as well as any obligations arising from, the distributed property, then held in the Disputed Claims Reserve as if such Allowed Claims had been Allowed Claims on the dates distributions were previously made to holders of Allowed Claims in the applicable Class, but shall be made net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve.”)-, Plan § 7.7 (“In the event that dividend distributions have been made with respect to the New Common Stock distributable to a holder of a Disputed Claim that later becomes Allowed, such holder shall be entitled to receive such previously distributed dividends without any interest thereon (net of allocable expenses of the Disputed Claims Reserve, including taxes).”). With the taxes seen as an obligation of the Disputed Claims Reserve—and not of claimants like the Mov-ants—the deduction of taxes is simply a mechanism to pay the taxes up front to *37ensure that funds are available to pay-estate taxes, rather than a reallocation of value in the Plan. The true-up provision thus provides for a reimbursement of this expense of the estate to those claimants who initially bore that burden.21
This result is consistent with fundamental bankruptcy principles. As the Movants stress, the Debtors’ interpretation results in the excess shares being distributed to the Debtors’ old equity holders, which have already received over $9.5 billion worth of shares in the reorganized entity.22 That result would raise a concern about absolute priority: namely, that a senior class of unsecured creditors would have to shoulder by themselves the administrative costs of the Disputed Claims Reserve’s taxes while some of the benefits of that Claim Reserve would be passed along to the junior class of old equity security holders. Under bankruptcy priority principles, estate administrative expenses are paid “off the top” and the balance of the proceeds of the estate are then distributed in accordance with the priority scheme. See 11 U.S.C. § 503(b)(1)(A) (administrative expenses are “the actual, necessary costs and expenses of preserving the estate.”); Collier on Bankruptcy ¶ 503.01 (noting that “preserving the estate is in the interest and for the benefit of every creditor,” and that preserving the estate “should not be interpreted narrowly.”); see also 11 U.S.C. § 507(a) (listing order of priorities with administrative expenses paid before claims); cf. Dish Network Corp. v. DBSD N. Am., Inc. (In re DBSD N. Am., Inc.), 634 F.3d 79, 94-95 (2d Cir. 2011) (discussing principle of absolute priority).
C. The Tax Provisions of the Disputed Claim Reserve Do Not Support the Debtors’ Value-Based Approach
The Debtors argue that the Plan explicitly required that distributions from *38the Disputed Claim Reserve be made net of taxes and, therefore, the Movants cannot complain about their payments being reduced by these tax payments. See e.g. Plan §§ 7.3(b), 7.3(e), 7.5(a), 7.7. But there are two problems with this interpretation.
First, the Debtors’ interpretation of the Plan essentially treats the Post-Effective Date Allowed Claims to be paid in full by “deeming” that these claimants have received as part of the payment of their claims the amounts American deducted for the payment of taxes. But as the Movants correctly note, there is nothing in the Plan that specifically “deems” the payment of taxes on the Disputed Claims Reserve to constitute part of the payout to any claimants. See Plan §§ 7.5(a), 7.4. This contrasts starkly with other parts of the Plan where such “deeming” language does exist. For example, Section 5.5(a) of the Plan authorizes the reduction of distributions for amounts owed for an employee’s own taxes, but it provides that “[a]ny Cash or property withheld pursuant to this paragraph shall be deemed to have been distributed to and received by the applicable recipient for all purposes of the Plan.” Plan § 5.5(a). Under the principle of contract construction expression unius est exclusion alterius, the presence of “deeming” language in one part of the Plan— Section 5.5—strongly suggests that the parties intended to exclude such “deeming” language from other parts of the Plan (Section 7.5(a)).23 See RG Steel, LLC v. Severstal US Holdings, LLC, 2014 U.S. Dist. LEXIS 5860, at *30-31 (S.D.N.Y. Jan. 16, 2014) (citing In re New York City Asbestos Litig., 41 A.D.3d 299, 838 N.Y.S.2d 76, 80 (App. Div. 1st Dep’t 2007); VKK Corp, v. Nat’l Football League, 244 F.3d 114, 130-31 (2d Cir. 2001)); see also Asbestos Settlement Trust v. City of New York (In re Celotex Corp.), 487 F.3d 1320, 1334 (11th Cir. 2007) (applying expression unius est exclusion alterius to plan documents).
The Debtors assert that the doctrine of expression unius est exclusion alterius is inapplicable here because the plain language of the Plan makes it clear that distributions from the Disputed Claims Reserve would be made net of taxes. They rely on several sections of the Plan for this argument. This includes Section 7.3(b), which provides that the Debtors set aside enough shares in the Disputed Claims Reserve to ensure that Disputed Claims that are subsequently allowed will receive the same recovery as if the claim had been allowed as of the Effective Date, but net of expenses, including taxes.24 They also rely *39on Section 7.3(e), which similarly provides that the Disbursing Agent is authorized to sell assets from the Disputed Claims Reserve to satisfy tax liabilities.25 And finally, they cite Section 7.5(a), which provides for distributions after allowance, and states that distributions from the Disputed Claims Reserve will be paid net of expenses, including taxes.26
But all these provisions simply allow for and carry out the deduction of taxes from the stock distributions to Post-Effective Date Claims, a step needed to insure that the Disputed Tax Reserve would have adequate funds to pay its tax obligations. No party disputes that distributions before the true-up are net of expenses such as taxes. But as explained above, the Plan’s terms reflect that these taxes are borne by the Disputed Claims Reserve absent deeming language, not the holders of Post-Effective Date Allowed Claims. None of the provisions cited by the Debtors address the true-up mechanism of Section 7.4 or direct the manner in which that reconciliation should be conducted. Section 7.4 does not contain any language relating to the netting of expenses, including taxes. The Court Cannot read into the sections relied upon by the Debtors an unexpressed intent to limit the Plan’s true-up provision that does not appear in the text. “Courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing,” Comedme, 12 N.Y.3d at 293, 879 N.Y.S.2d 806, 907 N,E.2d 684 (internal *40citations and quotations omitted).27
The second problem with Debtors’ deemed tax argument is inconsistency. A contract is “to be interpreted to avoid inconsistencies and to give meaning to all of its terms.” Barrow, 538 N.Y.S.2d at 365 (internal citations omitted). When read in the manner advocated by the Movants, the provisions of the Plan do not come into conflict. Sections 7.3, 7.5, and 7.7 of the Plan provide for the deduction of taxes from the distributions to Post-Effective Date Allowed Claims to ensure that enough value was available to pay those taxes. The netting of taxes was necessary at the time that these distributions were made because not all Disputed Claims had been fully adjudicated and the estate was not yet certain that there would be enough shares left for the payment of taxes. To the extent that value is left in the Disputed Claims Reserve, however, Section 7.4 then provides the mechanism for its distribution to the Posh-Effective Date Allowed Claims, It is unnecessary for Section 7.4 to reference the netting of taxes because at the time of true-up payments, a determination has already been made that there are excess shares available for distribution.
But if the provisions are read as advocated by the Debtors, an issue arises that cannot be resolved under the Plan as currently drafted. Under the Debtors’ interpretation, there would be no way to distribute excess reserve funds in the Disputed Claims Reserve that were created by the over-withholding of taxes from distributions to Posh-Effective Date Allowed Claims.28 As a general matter, such over-withholding might occur because the amount withheld from distribution is based on an estimate of the taxes owed but the actual tax due depends on the exact price of the shares when distributed.29 The Debtors concede that “the Movants are correct that [Sjection 7.4 would not operate to refund such amounts .... ” Debtors’ Omnibus Response ¶ 26. The Debtors shrug off this problem by stating that the Court need not rule on the issue at this time, and that they will talk to the parties and fashion a solution to reimburse them for *41any allocable portion of a loss that offsets a gain. See id.; see also Hr’g Tr. 103:1-7, Feb. 23, 2016. But “specific clauses of a contrae^ are to be read consistently with the overall manifest purpose of the' parties’ agreement; Contracts are also to be interpreted to avoid inconsistencies and to give meaning to all of its terms.” Barrow, 538 N.Y.S.2d at 365 (internal citations omitted). To read the Plan provisions so narrowly that a solution must be created in such circumstances would create an unreasonable result, when the Movants’ interpretation provides a result that does not raise such an inconsistency. See Westmoreland Coal Co. v. Entech, Inc., 100 N.Y.2d 352, 358, 763 N.Y.S.2d 525, 794 N.E.2d 667 (2003) (“A written contract [should] be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose. The meaning of a writing may be distorted where undue force is given to single words or phrases.”) (internal citations and quotations omitted).
CONCLUSION
For the reasons set forth above, the Motion is granted. The Movants are directed to settle an order on three days’ notice. The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon counsel to the Debtors.
. These same issues were previously raised by the Movants when they objected to the Debtors’ request to release excess reserve funds. [ECF Nos. 12491, 12510, 12516]. At that time, *24the Court determined the issue was not yet ripe for adjudication. See Hr’g Tr. 111:10— 112:13, Apr. 15, 2015 [ECF No. 12552], The parties rely on certain statements made in the pleadings previously filed with the Court on that request and the Court does likewise.
. The Plan also refers to "Double-Dip General Unsecured Claims,” which are not relevant for purposes of this decision. See Plan § 1.100.
. The claims of BAML were initially disputed by the Debtors, but were allowed subsequent to the Effective Date pursuant to two separate Settlement Agreements with the Debtors, dated September 19, 2014, and December 16, 2014, respectively. See Limited Objection to Motion for Entry of Order Authorizing Release of Excess Reserve Funds Held in Disputed Claims Reserve ¶ 1 [ECF No. 12510]; BAML Motion to Implement and Enforce True-Up Provisions of Debtors’ Confirmed Chapter 11 Plan of Reorganization ¶ 7 [ECF No. 12676].
.Under the Plan, the Unions are entitled to receive a percentage of the stock distributions made on account of the Post-Effective Date Allowed Claims. See BAML Motion to Enforce Order Confirming Plan of Reorganization at 1; see also Plan §§ 1.21, 4.12.
. Capitalized terms not defined herein shall have the meaning ascribed to them in the Plan.
. The Plan defines "Mandatory Conversion Date” as "with respect to the New Mandatorily Convertible Preferred Stock, each of the thirtieth (30th), sixtieth (60th), ninetieth (90th), and one hundred twentieth (120th) days following the Effective Date.” Plan § 1.146.
. More specifically, on the last Mandatory Conversion Date—April 8, 2014—the Debtors
determined the distribution rate that would yield the Single-Dip Full Recovery Amount (i.e., the distribution rate whereby holders of Allowed Single-Dip General Unsecured Claims would receive value equal to at least one hundred percent (100%) of their underlying claims, including applicable accrued interest), The distribution rate established, on the Mandatory Conversion Date that provided a full recovery was 30.7553 shares of New Common Stock for each $1,000 of Allowed Claims (including applicable accrued interest).
Debtors’ Omnibus Response lo (I) Allied Pilots Association, Association of Professional Flight Attendants, and Transport Workers Union of America, AFL-CIO’s Motion to Enforce Order Confirming Plan of Reorganization and (II) Bank of America, NA., Merrill Lynch Credit Productions, LLC, and Global Principal Finance Company, LLC’s (A) Motion to Implement and Enforce True-Up Provisions of Debtors’ Confirmed Chapter 11 Plan of Reorganization and (B) loinder to Allied Pilots Association, Association of Professional Flight Attendants, and Transport Workers Union of America, AFL-CIO’s Motion to Enforce Order Confirming Plan of Reorganization ¶ 8 (the "Debtors’ Omnibus Response”) [ECF No. 12683],
.See Unions’ Motion to Enforce Order Confirming Plan at 7 [ECF No. 12666]; BAML Motion to Enforce Order Confirming Plan of Reorganization ¶ 4; Debtors’ Omnibus Response ¶ 8.
. Section 7.5(a) of the Plan provides in full that:
To the extent that a Disputed Single-Dip General Unsecured Claim becomes an Allowed Claim after the Effective Date, the Disbursing Agent shall, subsequent to the Final Mandatory Conversion Date, distribute to the holder thereof the distribution, if any, of the shares of New Common Stock to which such holder is entitled hereunder out of the Disputed Claims Reserve, All distributions made under this Section 7.5 on account of Allowed Claims shall be made together with any dividends, payments, or other distributions made on account of, as well as any obligations arising from, the distributed property, then held in the Disputed Claims Reserve as if such Allowed Claims had been Allowed Claims on the dates distributions were previously made to holders of Allowed Claims in the applicable Class, but shall be made net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve. No interest shall be paid with respect to any Disputed Single-Dip General Unsecured Claim that becomes an Allowed Claim after the Effective Date.
Plan § 7.5(a).
. The Movants assert that creditors that received a distribution from the Disputed Claims Reserve also accrue their own personal tax liabilities. Specifically, because creditors receive shares from the Disputed Claims Reserve at the fair market value of the assets at the time they are distributed, a creditor who receives appreciated stock would have received a payment exceeding his debt and would therefore owe his own tax on that appreciation. See Treas. Reg. § 1.468B-9(f); IRC §§ 1001(a), 1271(a).
. The Unions assert that Post-Effective Date Allowed Claims received approximately 28.4351 shares per $1,000, whereas Effective Date Allowed Claims received 30.7553 shares of New Common Stock for each $1,000 of Allowed Claims. See Unions’ Motion to Enforce Order Confirming Plan at 11. BAML as.serts that it received 27.525 shares for each $1,000 of claims. See BAML Motion to Implement and Enforce True-up Provisions of Debtors’ Confirmed Chapter 11 Plan of Reorganization ¶ 8; see also Debtors’ Omnibus Response ¶ 9 ("[T¡o date, the share price of the New Common Stock at each distribution date has been higher than the cost basis of the shares distributed for a subsequently Allowed Claim or the American Labor Allocation. Thus, distributions to holders of subsequently Allowed Claims have been subject to reduction for tax liabilities incurred by the Disputed Claims Reserve in accordance with the Plan and as described in the Disclosure Statement_”).
. The parties specifically cite to the Second Circuit’s affirmance of the District Court’s decision upholding this Court’s rejection of the $632 million claim of the Supplement B Pilot Beneficiaries. See Supplement B Pilot Beneficiaries v. AMR Corp. (In re AMR Corp.), 622 Fed.Appx. 64 (2d Cir. 2015).
. The Plan is governed by New York law, and the Court therefore refers to New York principles of contract law in its interpretation of the Plan. See Plan § 12.12.
. The parties’ pleadings argued about how to construe the interim true-up provision in Section 7.4(a) of the Plan. At oral argument, however, the parties agreed that the Court did not need to address the interim true-up because the final'true-up provision of Section 7.4(b) would ultimately control what true-up, if any, is appropriate and, therefore, the final true-up encompasses all the issues that the Court needs to decide. See Hr’g Tr. 121:24-122:24, Feb. 23, 2016 [ECF No. 12702],
. The Debtors maintain that ‘‘[t]he resulting deduction for Gains Taxes is because the price per share of New Common Stock was lower on the Effective Date than it has been for each subsequent Distribution Date. ... Thus, while holders of Allowed Claims on the Effective Date may have received a greater number of shares by the Mandatory Conversion Date, they actually received a lower recovery amount than holders of subsequently Allowed Claims.” Debtors’ Omnibus Response ¶ 25.
. It is important to evaluate the terms of the Plan at the time it was confirmed. At that time, the parties did not know that there ultimately would be excess funds available for distribution in the Disputed Claims Reserve. Thus, the Court does not consider the existence of these excess funds now when interpreting the Plan. See Maxwell Macmillan Realization Liquidating Trust v. Aboff (In re Macmillan, Inc.), 204 B.R. 378, 401 (Bankr. S.D.N.Y. 1997) ("The objective in any question of the interpretation of a written contract, of course, is to determine ... the intention of the parties as derived from the language employed. That intent should be viewed from the time the parties executed and entered into the contract, not from hindsight.”) (internal citations and quotations omitted); cf Lehman Bros. Holdings Inc. v. JPMorgan Chase Bank, N.A. (In re Lehman Bros. Holdings Inc.), 541 B.R. 551, 567 (S.D.N.Y. 2015) ("Although one could argue in hindsight that notice of several months or a year would have been preferable for an entity with Lehman’s exposure, it is not the notice that Lehman bargained for, and the Court is not in a position to enhance Lehman’s contractual rights after the fact.”); In re House Nursery, Ltd., 2016 WL 519626, at *4, *7 (Bankr. E.D. Tex. Feb. 9, 2016) (noting in the Chapter 11 context that "[bankruptcy plans are interpreted in accordance with the general rules of contract interpretation” and stating that "[tjhough it is now apparent that, with the benefit of hindsight, the Bank is not pleased with the deal it made because the results it expected from the negotiated marketing scheme have not materialized, the Bank cannot simply isolate chosen words now from the context from which they arose and thereby achieve a different result from that contemplated by the parties at the time of the confirmation of the plan.”) (internal citations and quotations omitted); In re Ness, 1990 WL 1239805, at *4 (Bankr. D.N.D. Jan. 5, 1990) ("The fact that the deficiency was not contemplated by the Debtors or CCC at the time of confirmation has no effect on the result. ... A bankruptcy court must give effect to the terms and legitimate expectations of the parties when interpreting a confirmed plan, A plain reading of the Debtors’ plan makes it reasonable to conclude that CCC expected their entire claim to be unimpaired. ... Once a plan has been confirmed, neither a debtor nor a creditor can assert rights which are inconsistent with its terms.”) (internal citations and quotations omitted); Hauck v. State, 2 Misc.3d 770, 773-774, 774 N.Y.S.2d 255 (N.Y. Ct. Cl. 2003) ("Courts may not rewrite an agreement between parties and a court should not, under the guise of interpretation, make a new contract for the parties. Courts will not set aside a stipulation merely because in 'hindsight' a party decides that the terms of the stipulation were ‘improvident.’ ”) (internal citations and quotations omitted).
. The Disclosure Statement confirms the risk and reward facing claimants. When discussing the recovery to equity holders pursuant to a settlement in the Plan, the Disclosure Statement recognized the uncertainty as to recovery:
THE PLAN PROVIDES DISTRIBUTIONS BASED ON THE 9019 SETTLEMENT AS DESCRIBED ABOVE. DEPENDING ON THE TRADING PRICE OF THE NEW COMMON STOCK UTILIZED IN THE FORMULAS TO DETERMINE DISTRIBUTIONS TO HOLDERS OF CLAIMS AND HOLDERS OF AMR EQUITY INTERESTS UNDER THE PLAN, SUCH DISTRIBUTIONS MAY NOT BE IN STRICT COMPLIANCE WITH THE ABSOLUTE PRIORITY . RULE UNDER CERTAIN SCENARIOS.
Disclosure Statement, at 15-16 (capitalized text in original). The Disclosure Statement also recognized the potential upside as well:
AS A RESULT, IN CERTAIN POTENTIAL SCENARIOS CERTAIN GENERAL UNSECURED CREDITORS MAY BE ALLOCATED ADDITIONAL SHARES IN EXCESS OF THE NUMBER OF SHARES REQUIRED FOR SUCH CREDITORS TO ACHIEVE PAR-PLUS-ACCRUED RECOVERIES.
Id. at 17 (capitalized text in original).
. The Court's conclusion today is also consistent with In re Mesa Air Group, Inc., 2011 WL 320466, 2011 Bankr. LEXIS 3855 (Bankr. S.D.N.Y. Jan. 20, 2011). While not cited by the parties, the Mesa case explains that "the 'same treatment standard of [S]ection 1123(a)(4) does not [necessarily] require that all claimants within a class receive the same amount of money. ,,, Further, courts have recognized that the key inquiry under [Section] 1123(a)(4) is not whether all of the claimants in a class obtain the same thing, but whether they have the same opportunity.” Id. at *7, 2011 Bankr. LEXIS 3855, at *19 (internal citations and quotations omitted). In the Mesa case, it was argued that creditors who were U.S. citizens were receiving' less than equal treatment because non-U.S. creditors were receiving warrants for 110% of the shares of new common stock that was issued to U.S. citizens. The court found that rather than indicating unequal treatment, the premium ensured equality of treatment under Section 1123(a)(4) because testimony showed that "the premium was necessary to equate the value between the New Common Stock and the New Warrants based on how the two securities would trade on the open market.” Id. at *8, 2011 Bankr. LEXIS 3855, at *22. The court noted that "[t]he inquiry under [S]ection 1123(a)(4) is not whether U.S. Citizens and Non-U.S. Citizens receive the same amount of money, but whether U.S. Citizens and Non-U.S. Citizens are given the same opportunity.” Id. at *8, 2011 Bankr. LEXIS 3855, at *21 (internal citations and quotations omitted). The concern identified in Mesa is easily distinguishable from the case at hand. Mesa deals with two different types of financial instruments, whereas the parties here are both paid in shares. Indeed, the Plan here is consistent with Mesa when viewed as providing claimants with an opportunity to receive the same number of shares of stock but would not be consistent with Mesa if viewed as providing claimants recovery as measured by monetary value.
. Specifically, the Debtors cite to page 12 of the Disclosure Statement, which provides:
As set forth in the Plan, the amount of additional shares of New Common Stock that will be issued on the Mandatory Conversion Dates to holders of Allowed AMR Other General Unsecured Claims, Allowed American Other General Unsecured Claims, Allowed Eagle General Unsecured Claim, and Allowed AMR Equity Interests is determined by the [volume weighted average price] of the New Common Stock on the Mandatory Conversion Dates. Specifically, the amount of additional shares of New Common Stock distributable to the holders of Allowed Equity Interests depends on whether the price of the New Common Stock as of the relevant Mandatory Conversion Date exceeds the value which would imply that the New Common Stock distributable to holders of Allowed General Unsecured Claims is sufficient to effectively pay such Claims in full (i.e., par plus accrued interest thereon, at the nonde-fault contract rate or federal judgment rate (as appropriate) from the Commencement Date through the Effective Date, including interest on overdue interest), and including certain additional value to address the market volatility and liquidity concerns during the 120-day period -following the Effective Date, as discussed more fully below. For illustration purposes only, a table reflecting various potential recovery estimates based upon numerous assumptions and a range of prices for the New Common Stock is annexed hereto as Exhibit "B,”
Disclosure Statement § I.C.3 (emphasis added).
The Debtors then reference the chart attached as Exhibit B to the Disclosure Statement, which is an illustrative allocation of equity based on various stock price assumptions. The Debtors assert that this shows “[t]he thesis of the plan was during that first 120 days after the effective date, market prices of the new common stock were going to drive what [creditor] recoveries were. And that would be based on the trading prices of that stock, as measured on those dates. And the bar threshold was value in full to effectively pay such claims in full.” Hr’g Tr. 79:14-19, Feb. 23, 2016.
. The Court notes that the press release is of probative value only to the extent that it is supported by the language of the Plan. It is not part of the contract entered into by the parties. "For purposes of interpretation, ‘all documents which were confirmed together to form the contract' are added to the [p]lan itself,” In re WorldCom, Inc., 352 B.R. at 377 (quoting Goldin Assocs., 2004 WL 111965, at *3, 22004 U.S, Dist. LEXIS 9153, at *14). Therefore the normal rules regarding extrinsic evidence apply. Furthermore, even if the Court had found the Plan to be ambiguous, the press release would only be one piece of a body of extrinsic evidence that might need to be considered regarding interpretation of these terms in the Plan.
. Indeed, the Movants correctly note that creditors will have their own tax consequences upon receipt of shares from the Disputed Claims Reserve. Specifically, creditors receive the shares at the fair market value of the assets at the time they are distributed. See Treas. Reg. § 1.468B-9(f); IRC § 1001(a). A payment made to a creditor with appreciated stock will exceed that creditor’s debt and the creditor will therefore owe taxes on that appreciation. See IRC § 1001(a); IRC § 1271(a). Union members will receive this appreciation as additional ordinary income, which the Movants’ represent will be taxed at the worker's marginal tax rate. See Unions’ Motion to Enforce Order Confirming Plan at 12 (citing IRC § 61(a);. United States v. Gilmore, 372 U.S. 39, 83 S.Ct. 623, 9 L.Ed.2d 570 (1963); Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 66 S.Ct. 637, 90 L.Ed. 718 (1946); He-melt v. United States, 122 F.3d 204 (4th Cir. 1997)). .
. The Unions calculate this amount based on old equity having received 0.744 shares of New Common Stock for each share of old equity. See American Airlines Distribution, Distribution Information/Forms, Effective Date, Day 30, 60, 90 and 120 Mandatory Conversion Date Press Releases, http;// amrcaseinfo.com/distribution.php. The Unions note that there were a total of 394.2 million shares of Old Equity, which would result in old equity having received 293.2848 million shares. See American Airlines Group Inc., Form 8-K (Dec. 9, 2013), http://www, sec.gov/Archives/edgar/data/4515/00011 9312513466914M640288d8k.htm. The Unions state that this represents approximately 53.88% of the 544,361,824 shares available to American as a result of the merger. See News Release, American Airlines, American Airlines Group Equity Distribution Update: Share Determination Date Results (Dec. 2, 2013), http://phx.corporate-ir.net/phoenix.zhtml?c= 1 17098&p=irol-newsArticle&TD= 1881 249&highlight=. The Unions state that at 30.7553 shares per $1,000, each share has an approximate value of $32.51; at $32.51 per share, the 293.2848 shares received by old equity have a value of over $9.5 billion. The Unions postulate that at the $35.29 per share closing price prevalent on day 120, April 10, 2014, old equity would have a value of $10.35 billion.
. Relatedly, the Disclosure Statement reflects that the payment of taxes for distributions under Section 7.5(a) is permissive rather than mandatory. See Disclosure Statement § VLB.5 ("[A] portion of the shares may be sold to pay any taxes expected to be incurred by the Disputed Claims Reserve on the release of the shares and the distribution to the holder of the subsequently allowed Claim will be reduced as a result.”) (emphasis added). This permissive language is inconsistent with the Debtors' characterization of such tax with-holdings as a deemed distribution to these claimants.
. Notably, the amount reserved is based on the number of the shares, rather than their actual value. Section 7.3(b) provides:
There shall be withheld from the New Man-datorily Convertible Preferred Stock and the New Common Stock to be distributed to holders of Allowed Single-Dip General Unsecured Claims (i) the number of such shares that would be distributable with respect to any Disputed Single-Dip General Unsecured Claims had such Disputed Claims been Allowed on the Effective Date and (ii) such additional shares necessary to assure that, if all such Disputed Claims become Allowed Claims in full, sufficient shares are available to satisfy the American Labor Allocation (the "Disputed Claims Reserve”), together with all earnings thereon (net of any expenses relating thereto, including any taxes imposed thereon or otherwise *39payable by the Disputed Claims Reserve). The Disbursing Agent shall hold in the Disputed Claims Reserve all dividends, payments, and other distributions made on account of, as well as any obligations arising from, property held in the Disputed Claims Reserve, to the extent that such property continues to be so held at the time such distributions are made or such obligations arise, and such dividends, payments, or other distributions shall be held for the benefit of holders of Disputed Claims against any of the Debtors whose Claims are subsequently Allowed and for the benefit of other parties entitled thereto hereunder. ...
Plan § 7.3(b) (emphasis added).
. Section 7.3(e) provides:
The Disbursing Agent shall be responsible for payment, out of the assets of the Disputed Claims Reserve, of any taxes imposed on the Disputed Claims Reserve or its assets. In the event, and to the extent, any Cash in the Disputed Claims Reserve is insufficient to pay the portion of any such taxes attributable to the taxable income arising from the assets of the Disputed Claims Reserve (including any income that may arise upon the distribution of the assets in the Disputed Claims Reserve), assets of the Disputed Claims Reserve may be sold to pay such taxes.
Plan § 7.3(e) (emphasis added).
. Section 7.5(a) provides:
To the extent that a Disputed Single-Dip General Unsecured Claim becomes an Allowed Claim after the Effective Date, the Disbursing Agent shall, subsequent to the Final Mandatory Conversion Date, distribute to the holder thereof the distribution, if any, of the shares of New Common Stock to which such holder is entitled hereunder out of the Disputed Claims Reserve. All distributions made under this Section 7.5 on account of Allowed Claims shall be made together with any dividends, payments, or other distributions made on account of, as well as any obligations arising from, the distributed property, then held in the Disputed Claims Reserve as if such Allowed Claims had been Allowed Claims on the dates distributions were previously made to holders of Allowed Claims in the applicable Class, but shall be made net of any expenses relating thereto, including any taxes imposed thereon or otherwise payable by the Disputed Claims Reserve,
Plan § 7.5(a) (emphasis added); see also Disclosure Statement §§ IV.G.5 (distributions made from the Disputed Claims Reserve after allowance are net of taxes), VLB.5 (illustrative example of how taxes will be paid).
. The Debtors also rely on Section 7.7. But that provision relates to the dividends and interest, and also does not purport to affect how the true-up of Section 7.4 works. See Plan § 7.7 ("In the event that dividend distributions have been made with respect to the New Common Stock distributable to a holder of a Disputed Claim that later becomes Allowed, such holder shall be entitled to receive such previously distributed dividends without any interest thereon (net of allocable expenses of the Disputed Claims Reserve, including taxes).").
. The Movants argue that if Section 7.4 is inapplicable when Effective Date Allowed Claims are paid in full, then there would be no way to true-up payments after distributions were made under Section 7.5(a). The Movants note that the amounts held back under Section 7.5 are only estimates of taxes and the actual taxes on the stock cannot be determined until after a distribution has occurred because the Disputed Claims Reserve's taxes would depend on the value of the shares at the moment of distribution. But American would have already done the distribution by the time it ascertained how much tax the Reserve owes. Any prior estimate would not equal the exact amount of tax liability.
.Over-withholding might also occur where stock depreciation reduced the taxes owed by the Disputed Claims Reserve or resulted in a tax refund under IRS carryback rules because the stock dropped below the base price and distributions generated losses that reduced the Reserve’s taxes. The Movants argue that under American’s interpretation, the estate would keep all amounts withheld under Section 7.5(a) and because there would be no distributions to Post-Effective Date Allowed Claims, there would be no opportunity for true-up payments relating to overwithholding of taxes or subsequent tax credits. See Unions’ Motion to Enforce Order Confirming Plan at 25-26. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500182/ | MEMORANDUM OPINION AND ORDER HOLDING THE BERMUDA INSURERS IN CONTEMPT
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the Order to Show Cause Why Allied World Assurance Company Ltd., Iron-Starr Excess Agency *43Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited Should Not be Held in Contempt (the “Second Order to Show Cause,” ECF Doc. #41) for violating the Memorandum Opinion and Temporary Restraining Order (the “TRO Opinion” or the “TRO,” ECF Doc. # 35) (see MF Global Holdings Lt. v. Allied World Assurance Co. Ltd. (In re MF Global Holdings Ltd.), 561 B.R. 608, 2016 WL 7388546 (Bankr. S.D.N.Y. Dec. 21, 2016)) issued by this Court on December 21, 2016. The TRO enjoined Allied World Assurance Company Ltd., Iron-Starr Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited (together, the “Bermuda Insurers”) from taking any action to enforce certain injunctive orders issued by a Bermuda court. Following this Court’s issuance of the TRO Opinion, the Bermuda Insurers submitted pleadings to the Supreme Court of Bermuda, Civil Jurisdiction (Commercial Court) (the “Bermuda Court”), and appeared before the Bermuda Court at a hearing on December 22, 2016, seeking relief tantamount to the enforcement of the injunctive orders.
In response to the Second Order to Show Cause, the Bermuda Insurers filed The Bermuda Insurers’ Memorandum of Law in Opposition to Order to Show Cause Dated December 29, 2016 (the “Bermuda Insurers’ Brief,” ECF Doc. #[—], submitted to the Court under seal on January 3, 2017). In support of their brief, the Bermuda Insurers also filed a number of exhibits under seal. MF Global Holdings, Ltd. (“MFGH”), as Plan Administrator, and MF Global Assigned Assets LLC (“MFGAA” and together with MFGH, the “Plaintiffs”) filed the Memorandum of Law on the Bermuda Defendants’ Continued Violation of this Court’s Bar Order (the “Plaintiffs’ Brief,” ECF Doc. # [—], submitted to the Court under seal on December 28, 2016). The Court granted the request to file these briefs and exhibits under seal, except to the extent that the Court references or cites to these documents in its Opinions or Orders.
Because the Bermuda Insurers took actions clearly prohibited by the TRO, the Court will hold the Bermuda Insurers in contempt for violating an order of this Court.
I. BACKGROUND
A. The Bar Order in the Global Settlement
On August 10, 2016, this Court entered an order approving a global settlement in these chapter 11 cases (the “Global Settlement,” D.I. 2282).1 The Global Settlement included a bar order (the “Bar Order”) which provides in relevant part:
3. To the extent not previously authorized by this Court, the plan injunction (“Plan Injunction”) as to the Debtors and their respective property established pursuant to paragraph 75 in the Order Confirming Amended and Restated Joint Plan of Liquidation entered by this Court on April 5, 2013, . to the extent applicable, shall be modified solely to the extent necessary, and without further order of the Bankruptcy Court, to authorize any and all actions reasonably necessary to consummate the Global Settlement, • including without limitation, any payments under certain insurance policies required under the Settlement .... Furthermore, any person or entity that is not a Party to the Settlement Agreement is permanently barred, enjoined, and restrained from commencing, prosecuting, or asserting any claims arising out of payments made *44under certain insurance policies in accordance with the Settlement Agreement or any other agreement referenced therein or associated therewith.
[[Image here]]
7. Upon entry of this Order, any person or entity that is not a Party to the Settlement Agreement, including any Dissenting Insurer, is permanently barred, enjoined, and restrained from contesting or disputing the Reasonableness of Settlement, or commencing, prosecuting, or asserting any claims, including, without limitation, claims for contribution, indemnity, or comparative fault (however denominated an on whatsoever theory), arising out of or related to the MF Global Actions ....
8, For the avoidance of doubt, nothing in this Order shall preclude:
... (iii) any claims by the Insurance Assignees to enforce the Assigned Rights; (iv) any claim or right asserted by an MFG Plaintiff against any Dissenting Insurer on its own behalf (as distinct from the Assigned Rights) ....
(Global Settlement ¶¶ 3, 7,8.)
As noted in a brief filed earlier in this adversary proceeding (the “Allied Response,” ECF Doc. #28), in connection with the Global Settlement, Allied “tendered the full limit of liability of its separately-issued excess D & 0 policy, but declined to make the E & 0 coverage provided under the Allied [policy] available ... for a settlement” as Allied’s adversaries had requested. (Allied Response at 4-5.) Pursuant to the Global Settlement, the individuals ostensibly covered by the Allied E & 0 policy were to assign “their rights to full payment under the Allied [policy] to the Plaintiffs” and the “assignee would immediately commence action against the [Bermuda Insurers] to obtain proceeds” under the E & 0 policies. (Id. at 5.)
B. The Arbitration Clauses
The insurance policies issued by the Bermuda Insurers each contain a mandatory arbitration provision.2 These arbitra-, tion clauses provide that all disputes arising under or relating to these policies shall be fully and finally resolved by arbitration in Bermuda. (Complaint, Ex. B at 7.)
Allied maintains that as early as February 11, 2016, many months before' the Global Settlement was reached, Allied notified MFGAA and others “of its desire to arbitrate, pursuant to the ... arbitration clause in the Allied [policy] .... ” (Allied Response at 4.) Allied further maintains that over the next eight months, “(under a reservation of rights), Plaintiffs’ counsel ... worked with [Allied] to empanel the arbitrators for the Bermuda Arbitration, pursuant to the terms of the Allied [policy].” (Id.) The Plaintiffs dispute Allied’s assertions regarding the status of the alleged Bermuda arbitration.
C. The Complaint and the Injunctive Orders
On October 27, 2016, the Plaintiffs filed a complaint (the “Complaint,” ECF Doc. # 1) initiating this adversary proceeding *45against the Bermuda Insurers and Federal Insurance Company.3 The defendants had issued the top four layers of excess E & 0 insurance policies to MFGH. All other insurers in MFGH’s D & O and E & 0 insurance towers paid their policy limits (to the extent not already exhausted) as part of the Global Settlement. The Plaintiffs brought this action to recover the $25 million policy proceeds under the defendants’ E & 0 insurance policies.
On October 28, 2016, a summons and notice of a pretrial .conference was entered on the docket in this adversary proceeding. (ECF Doc. # 2.) On November 1, 2016, the Plaintiffs requested that the Clerk of the Court mail the summons and Complaint to the Bermuda Insurers pursuant to Rule 4(f)(2)(c)(ii). (ECF Doc. # 3.) The Clerk’s Office entered a Certificate of Mailing showing that the Clerk’s Office mailed (by DHL overnight carrier) the summons and Complaint to each of the Bermuda Insurers on November 3, 2016. (ECF Doc. # 4.) On November 4, 2016, the Plaintiffs filed an affidavit of service noting that the summons and Complaint were mailed to the Bermuda Insurers. (ECF Doc. # 5.)
On November 8, 2016, the Bermuda Insurers obtained, ex parte, injunctive orders from the Bermuda Court, ordering that:
[The Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, commence, prosecute or otherwise pursue litigation in the United States insofar as that litigation concerns, arises out of and/or relates to the insurance policy issued to the [Plaintiffs] by the [Bermuda Insurers], Policy No. C00735T/005 (“the Policy”) including, for the avoidance of doubt, litigation containing allegations of breach of “good faith and fair dealing” relating to the Policy) and/or otherwise breaches the terms of the valid and binding Bermuda arbitration agreement between the [Plaintiffs and the Bermuda Insurers] set out in Clause IX of the Policy, until trial or further order.
The [Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, seek and/or obtain an anti-suit injunction and/or an anti-anti-suit injunction and/or a temporary, preliminary or permanent order restraining and/or preventing the [Defendant] from pursuing and/or otherwise enforcing the said valid and binding Bermuda arbitration agreement, until trial or further order.
(ECF Doc. # 7-2 at 2.) Each of the Bermuda Insurers obtained substantially similar injunctive orders (the “Injunctive Orders”). (See ECF Doc. ## 7-2, 7-3.)
On November 22, 2016, the Plaintiffs submitted a letter to this Court! informing the Court that the Bermuda Insurers had obtained these Injunctive Orders, and suggesting that the entry of the Injunctive Orders violated (i) the Bar Order in the Global Settlement, and (ii) the Barton doctrine. (ECF Doc. # 7.) After receiving the Plaintiffs’ November 22, 2016 letter, the Court entered an order to show cause (the “First Order to Show Cause,” ECF Doc. # 6) raising the issue whether the filing of proceedings in Bermuda (the “Bermuda Action”) and the obtaining of the Injunc-tive Orders violated (i) the Bar Order included in the Global Settlement, or (ii) the Barton doctrine. The Bermuda Insurers submitted briefs and declarations in response, but the Plaintiffs, on account of the Injunctive Orders, were restrained from filing any papers.
*46The Court conducted a hearing on the First Order to Show Cause on December 14, 2016. At this hearing, counsel to the Bermuda Insurers refused to consent to allow the Plaintiffs’ counsel an opportunity to be heard in connection with the First Order to Show Cause, or any other matter. At the hearing, counsel to the Bermuda Insurers argued that (i) the Bar Order did not prevent the Bermuda Insurers from filing the anti-suit injunction in the Bermuda Court, (ii) this Court does not have jurisdiction over the Bermuda Insurers, and (iii) service on the Bermuda Insurers was improper.. Counsel to the Plaintiffs .stated their names to the Court on the record, and remained silent throughout the entire hearing. Following the hearing, the Court declined to hold the Bermuda Insurers in contempt.
D. The Motions to Dismiss and to Compel Arbitration
On November 28, 2016, both Allied and the Iron-Starr Insurers filed motions to compel arbitration (the “Motions to Compel Arbitration,” ECF Doc. ## 13-1, 20).4 Also on November 28, 2016, Allied and the Iron-Starr Insurers each filed motions to dismiss for lack of personal jurisdiction and improper service of process (the “Motions to Dismiss,” ECF Doc. ## 14, 17).5 On account of the Injunctive Orders, the Plaintiffs have not responded to these motions.
E. The Temporary Restraining Order
On December 21, 2016, this Court issued the TRO, enjoining the Bermuda Insurers from taking any action to enforce certain provisions of the Injunctive Orders issued by the Bermuda Court. As noted above, through the entry of the TRO, this Court restrained and enjoined the Bermuda Insurers from taking any action to enforce the Injunctive Orders issued by the Bermuda Court on November 8, 2016. Specifically, the TRO restrained and enjoined the Bermuda Insurers from taking any action to enforce the following provisions of the Injunctive Orders:
1. [MF Global Holdings, Ltd. (“MFGH”), as Plan Administrator, and MF Global Assigned Assets LLC (“MFGAA,” together with MFGH, the “Plaintiffs” or the “MFG Parties”) ] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, commence, prosecute or otherwise pursue litigation in the United States insofar as that litigation concerns, arises out of and/or relates to the insurance policy issued to the [Plaintiffs] by the [Bermuda Insurers], Policy No. C007357/005 (“the Policy”) including, for the avoidance of doubt, litigation containing allegations of breach of “good faith and fair dealing” relating to the Policy) and/or otherwise breaches the terms of the valid and binding Bermuda arbitration agreement between the [Plaintiffs and the Bermuda Insurers].
2. The [Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, seek and/or obtain an anti-suit injunction and/or an anti-anti-suit injunction and/or a temporary, preliminary or permanent order restraining and/or preventing the [Defendant] from pursuing and/or otherwise enforcing the said valid and binding Bermuda arbitra*47tion agreement, until trial or further order.
The TRO remained in effect for fourteen days (from December 21, 2016 to January 4, 2017), but was extended by this Court for an additional fourteen days and is set to expire at 3:00 p.m. on January 18, 2017. (See ECF Doc. # 51.)
F. The Skeleton Argument and the December 22, 2016 Bermuda Court Orders
On December 22, 2016, the day after this Court entered the TRO, the Bermuda Insurers filed certain pleadings (the “Skeleton Argument”) and appeared and were heard before the Bermuda Court. In the Skeleton Argument, the Bermuda Insurers expressly requested certain relief from the Bermuda Court, including:
12.1 An Order that the [Bermuda Insurers] be granted leave to amend the Originating Summonses in these proceedings, pursuant to RSC Order 20 rules 5 and 7, to include a further or alternative claim for permanent injunc-tive relief, in the form of a permanent injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith to dismiss (without prejudice) the Adversary Complaint proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”);
12.2 An interim injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith (i.e. within the next 28 days) to dismiss (without prejudice) the Adversary Proceedings (as defined above).
(Skeleton Argument ¶¶ 12.1, 12.2 (emphasis in original).) The Skeleton Argument further explains that “the [Plaintiffs’] conduct since 8 November 2016 in pursuit of the Adversary Proceedings, especially when that conduct is assessed in conjunction with the [Plaintiffs’] actions taken before 8 November 2016, and in light of its consequences, clearly demonstrate^] that a mandatory anti-suit injunction is now the minimum relief necessary to ensure that the [Bermuda Insurers’] contractual rights under their arbitration agreements with the [Plaintiffs] are properly protected and preserved by [the Bermuda Court.]” (Skeleton Argument ¶ 24.)
In addition to the Skeleton Argument, both Allied and the Iron-Starr Insurers submitted certain affidavits in support of their respective positions. The Iron-Starr Insurers submitted the Third Affidavit of Lawrence P. Engrissei (the “Third Engris-sei Affidavit”), which was signed and dated on December 20, 2016 (before the entry of the TRO); Allied submitted the Third Affidavit of Jan Elizabeth Haylett (the “Third Haylett Affidavit,” and together with the Third Engrissei Affidavit, the “Affidavits”), which is not signed or dated. Paragraphs 33 of the Affidavits are essentially identical, and set forth a number of the Bermuda Insurers’ concerns that provide the basis for the relief requested from the Bermuda Court on December 22, 2016. Specifically, the Affidavits state:
33. Given the [Plaintiffs’] and the [Plaintiffs’] US attorneys’ deliberate filings and communications with the United States Bankruptcy Court on 22 November 2016, 23 November 2016, 12 December 2016, 14 December 2016, and 19 December 2016 (as set out above), and *48the approach which they have thus far taken in these Bermuda proceedings through their Bermuda attorneys, Har-neys (Bermuda) Limited, the [Bermuda Insurers] are extremely concerned that:
33.1 the [Plaintiffs] do not intend to comply with this Court’s Orders and interlocutory AntiSuit Injunction dated 8 November 2016;
33.2 the [Plaintiffs] do not intend to comply with any permanent Anti-Suit Injunction which this Court might grant;
33.3 the [Plaintiffs] intend to proceed with the Adversary Complaint, in breach of and despite the valid and binding arbitration agreement between the parties (which is governed by and subject to Bermuda law and a Bermuda seat), and this Court’s Orders dated 8 November 2016;
33.4 the [Plaintiffs] intend to try to apply commercial pressure on the [Bermuda Insurers] to abandon their rights under the arbitration agreement and the Orders dated 8 November 2016, by (directly or indirectly) persuading United States Bankruptcy Judge Martin Glenn either to hold the [Bermuda Insurers] in breach, or contempt, of his Order dated 10 August 2016, alternatively to issue a new Order purporting to restrain the [Bermuda Insurers] from continuing, or purporting to mandate the [Bermuda Insurers] to discontinue, these Bermuda proceedings, before the Supreme Court of Bermuda can finally determine, or enforce, the [Bermuda Insurers’] claims in these proceedings against the [Plaintiffs]; and
33.5the [Plaintiffs] intend to try to apply commercial pressure on the [Bermuda Insurers] to settle the insurance coverage dispute between the parties, not by reference to the substantive merits of the insurance coverage dispute, but by reference to the publicity, costs and risks of litigation in the United States Bankruptcy Court (in breach of the arbitration agreement, and in breach of section 46 of the Bermuda International Conciliation and Arbitration Act 1993).
(Affidavits ¶ 33.) The Affidavits also each include substantially the same requests for relief as the relief sought in the Skeleton Argument at paragraphs 12.1 and 12.2.6 (Affidavits ¶¶ 34.1, 34.2.)
*49At the December 22, 2016 hearing, however, the Bermuda Insurers proclaimed a different rationale in support of the relief sought in the Skeleton Argument. Alex Potts (“Potts”), counsel to the Bermuda Insurers, stated that “[t]he interlocutory relief is not designed to enforce the existing interlocutory relief, it’s designed to enforce the Arbitration Agreement between the parties.” (December 22, 2016 H’rg Tr. 210:19-22.) Potts did note, though, that “it would appear that there is non-compliance with the existing anti-suit injunction, which was designed to preserve the status quo, pending a trial.” (December 22, 2016 H’rg Tr. 210:23-211:1.) Apparently recognizing the import of the circumstances following the issuance of the TRO,7 Potts added that this Court “has restrained [the Bermuda Insurers] temporarily from enforcing the existing anti-suit injunctions and [the Bermuda Insurers] are not enforcing those injunctions at this stage.” (December 22, 2016 H’rg Tr. 209:22-24.)
The Bermuda Court subsequently entered two orders (the “December 22, 2016 Orders”) in the Bermuda proceedings initiated by (i) Allied and (ii) the Iron-Starr Insurers.8 The December 22, 2016 Orders provide in relevant part that:
1. The [Bermuda Insurers] shall be granted leave to amend the Originating Summons in these proceedings, pursuant to RSC Order 20 rules 5 and 7, in the form of the draft Amended Originating Summons included in Exhibit JEH-3, to include a further or alternative claim for permanent injunctive relief, in the form of a permanent injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith to dismiss (without prejudice) the adversary proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”), with associated relief.
2. The [Plaintiffs] shall, and are hereby mandated on an interlocutory basis, acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith (i.e. within the next 28 days) to dismiss (without prejudice) the adversary proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”). For the avoidance of doubt, this interlocutory injunction shall remain in force until final determination of the [Bermuda Insurer’s] Originating Summons, or until further Order of this Court, save that the [Plaintiffs] shall be at liberty to apply to this Court to set *50aside or vary the terms of paragraph 2 of this Order on at least 48 hours’ written notice to the [Bermuda Insurers].
(December 22, 2016 Orders ¶¶ 1-2.)
- In the December 22, 2016 Orders, the Bermuda Court also stated that the Plaintiffs “will not be contravened by the [Bermuda Insurers] and/or their US attorneys addressing the United States Bankruptcy Court Southern District of New York on the limited issue of whether or not the [Bermuda Insurers have] contravened” the Bar Order. (December 22, 2016 Orders at 1.) With respect to whether the Bar Order and the Barton doctrine (described below) have been violated, the Court has set a schedule for one last round of briefs on those issues (January 11, 2017 for the Bermuda Insurers; January 18, 2017 for the Plaintiffs), and has scheduled argument for 10:15 a.m., January 23, 2017. The Court, however, remains unable to make a determination whether this dispute is arbitra-ble, and will not do so until the Court has full briefing on the issue.
The December 22, 2016 Orders, which included the above-referenced relief sought by the Bermuda Insurers in the Affidavits and Skeleton Argument, permit the Plaintiffs to address only the limited issue whether the Bar Order was breached, but still enjoin the Plaintiffs from conducting any other activity in this adversary proceeding. Moreover, the December 22, 2016 Orders require that the Plaintiffs dismiss this adversary proceeding within 28 days, without the ability to be heard on any other issues currently pending before this Court. (December 22, 2016 Orders ¶¶ 1-2.)
On December 23, 2016, the day after entering the December 22, 2016 Orders, the Bermuda Court issued its “Reasons for Decision,” a 10-page decision explaining the basis for its rulings in issuing the ex parte anti-suit injunctions.
G. The Second Order to Show Cause
On December 29, 2016, this Court entered the Order to Show Cause Why Allied World Assurance Company Ltd., Iron-Stair Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited Should Not be Held in Contempt for violating the TRÓ. The Second Order to Show Cause referred to the injunctive provisions of the TRO, the relief sought by the Bermuda Insurers in the Skeleton Argument, and the subsequently entered orders, and ordered the Bermuda Insurers to file a written response addressing why they should not be held in contempt for violating the TRO by asking the Bermuda Court to order the Plaintiffs to dismiss the adversary proceeding before this Court and for other relief.
H. The January 4, 2017 Hearing
On January 4, 2017, the Court held a hearing to address the Second Order to Show Cause and whether the temporary restraining order would give rise to a preliminary injunction. At the start of the hearing, the Court admitted into evidence the exhibits filed in connection with the responses to the Second Order to Show Cause and the TRO Opinion, along with the transcript from the December 22, 2016 hearing in the Bermuda Court. Neither the Plaintiffs nor the Bermuda Insurers offered any other evidence at the hearing. The Court heard argument from both the Plaintiffs and the Bermuda Insurers on whether the Bermuda Insurers willfully violated a clear and unambiguous provision in the TRO. The Court also heard argument on whether there are grounds to issue a preliminary injunction to further enjoin the Bermuda Insurers from taking any action to enforce the provisions of the Injunctive Orders.
*51H. THE PARTIES’ CONTENTIONS
A. The Plaintiffs’ Contentions
The Plaintiffs, at the January 4, 2017 hearing, argued that the Skeleton Argument, the Affidavits, and the transcript of the December 22, 2016 hearing in Bermuda, read together, demonstrate that the Bermuda Insurers have willfully violated the TRO. Specifically, the Plaintiffs argue that the basis for the injunctive relief outlined in the Affidavits, at least one of which is dated December 20, 2016, is materially different than the rationale set forth in court before Chief Justice Kawaley on December 22, 2016. The Plaintiffs point out that in the Affidavits, the Bermuda Insurers argue that additional relief is required because the Plaintiffs “do not intend to comply with [the Bermuda Court’s] Orders and interlocutory Anti-Suit Injunction dated 8 November 2016” and “do not intend to comply with any permanent Anti-Suit Injunction which [the'Bermuda Court] might grant .... ” (Affidavits ¶¶ 33.1, 33.2.) At the December 22, 2016 hearing, however, counsel to the Bermuda Insurers states that the very same relief requested in the Affidavits and Skeleton Arguments “is not designed to enforce the existing interlocutory relief, it’s designed to enforce the Arbitration Agreement between the parties.” (December 22, 2016 H’rg Tr. 210:19-22.)
The Plaintiffs argue that this inconsistency stems from the fact that the Affidavits were prepared before the issuance of the TRO, and the December 22, 2016 hearing occurred after the entry of the TRO. The Plaintiffs argue that the Bermuda Insurers were aware that the relief-they were seeking from the Bermuda Court was tantamount to enforcement of the Injunc-tive Orders (as explained in the Affidavits) because at the December 22, 2016 hearing, counsel to the Bermuda Insurers plainly stated that this Court has “restrained [the Bermuda Insurers] temporarily from enforcing the existing anti-suit injunctions” and the Bermuda Insurers only altered the purported rationale for the relief requested in an attempt to avoid a flagrant violation of the TRO.
B. The Bermuda Insurers’ Contentions
The Bermuda Insurers argue that they have not violated the TRO, and by seeking the relief they requested in the Bermuda Court on December 22, 2016, they were merely “prosecuting the case” they brought in Bermuda in compliance with the language of the TRO. See TRO Opinion, 561 B.R. at 630, 2016 WL 7388546, at *16 (“But, to be clear, at this stage of this case, the Court is not enjoining the Bermuda Insurers from prosecuting the case they filed in the Bermuda Court.”). Specifically, the Bermuda Insurers argue that they did not take “any action to enforce” the Injunctive Orders, though in their brief, the Bermuda Insurers acknowledge that they sought an injunction ordering the Plaintiffs to move to dismiss this adversary proceeding within 28 days. (Bermuda Insurers’ Brief at 4.) The Bermuda Insurers also note in their brief that in their Skeleton Argument, they state that “nothing in the [Bermuda Insurers’] ... Skeleton Argument, nor in the hearing that is scheduled to take place on 22 December 2016 either is, or is intended to be, ‘an action to enforce’ the ‘Injunctive Orders’ dated 8 November 2016, or any of the provisions thereof, whether directly or indirectly.” (Bermuda Insurers’ Brief at 4-5 (citing the Skeleton Argument ¶ 13).)
Additionally, the Bermuda Insurers argue that sanctions for contempt are not warranted because the Bermuda Insurers did not willfully violate the TRO, the Plaintiffs have not suffered any specific damages as a result of the alleged violation of *52the TRO, and the Plaintiffs declined to put forth any evidence or argument before the Bermuda Court in connection with the hearing on December 22, 2016 in Bermuda. (Bermuda Insurers’ Brief at 13-14.)
III. LEGAL STANDARD
A.Court’s Authority to Punish for Contempt
Courts have inherent power to enforce compliance with their lawful orders through civil contempt. See Spallone v. United States, 493 U.S. 265, 110 S.Ct. 625, 107 L.Ed.2d 644 (1990); Shillitani v. United States, 384 U.S. 364, 369, 86 S.Ct. 1531, 16 L.Ed.2d 622 (1966). As the Supreme Court stated in Ex parte Robinson, 86 U.S. (19 Wall.) 505, 510, 22 L.Ed. 205 (1874), “the power to punish for contempt is inherent in all courts; its existence is essential to the preservation of order in judicial proceedings, and to the enforcement of the judgments, orders and writs of the courts and, consequently, to the due administration of justice.”
Courts have embraced the inherent contempt authority as a power “necessary to the exercise of all others.” Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 831, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994) (“Courts independently must be vested with power to impose silence, respect, and decorum, in their presence, and submission to their lawful mandates, and to preserve themselves and their officers from the approach and insults of pollution.”); see also Roadway Express, Inc. v. Piper, 447 U.S. 752, 764, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980) (stating that contempt powers are “the most prominent” of court’s inherent powers “which a judge must have and exercise in protecting the due and orderly administration of justice and in maintaining the authority and dignity of the court”).
The power to impose civil contempt sanctions applies in Bankruptcy Court as well. Indeed, it is well established that bankruptcy courts have power to enter civil contempt orders. In re MarketXT Holdings Corp., Case No. 04-12078, 2006 WL 408317, at *1 (Bankr. S.D.N.Y. Jan. 27, 2006) (“It is well accepted, in light of the 2001 amendments to Rule 9020, that bankruptcy courts have power to enter civil contempt orders.”); see also In re World Parts, LLC, 291 B.R. 248, 253 (Bankr. W.D.N.Y.2003) (“Bankruptcy courts possess the power to impose sanctions for acts of civil contempt.”) (citing In re Chateaugay Corp., 920 F.2d 183, 187 (2d Cir. 1990)).
B. The Objectives of Civil Contempt
The purpose of civil contempt is to compel a reluctant party to do what a court requires of him. See Badgley v. Santacroce, 800 F.2d 33, 36 (2d Cir. 1986); see also Shillitani, 384 U.S. at 368, 86 S.Ct. 1531 (stating that the act of disobedience consisted solely “in refusing to do what .had been ordered” and the judgments imposed conditional imprisonment for the purpose of compelling the witnesses to obey the orders to testify). Civil contempt sanctions may also compensate for any harm that previously resulted. See Nat’l Org. for Women v. Terry, 159 F.3d 86, 93 (2d Cir. 1998); Weitzman v. Stein, 98 F.3d 717, 719 (2d Cir. 1996) (stating that sanctions for civil contempt serve two purposes: to coerce future compliance and to remedy any harm past noncompliance caused the other party).
C. Standards for Imposing Civil Contempt
A court’s inherent power to hold a party in civil contempt may be exercised only when (1) the order the party allegedly failed to comply with is clear and unambig*53uous, (2) the proof of noncompliance is clear and convincing, and (3) the party has not diligently attempted in a reasonable manner to comply. See King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995); Monsanto Co. v. Haskel Trading, Inc., 13 F.Supp.2d 349, 363 (E.D.N.Y. 1998). “Clear and unambiguous” means that the clarity of the order must be such that it enables the enjoined party “to ascertain from the four corners of the order precisely what acts are forbidden.” Monsanto Co., 13 F.Supp.2d at 363; see also New York State Nat. Organization for Women v. Terry, 886 F.2d 1339, 1351-52 (2d Cir.1989) (finding that the order could serve as the foundation for a contempt citation because it was sufficiently specific and clear as to what acts were proscribed to enable defendants to ascertain precisely what they could and could not do).
IV. DISCUSSION
The Bermuda Insurers argue that by asking the Bermuda Court to order the Plaintiffs to dismiss the adversary proceeding, they were simply following “the normal course of the already-pending Bermuda proceedings.” (Bermuda Insurers’ Brief at 11.) But this simplistic characterization conveniently ignores the fact that the Injunctive Orders restrained the Plaintiffs from prosecuting or otherwise pursuing litigation in the U.S. relating to the underlying insurance policy, and the Bermuda Insurers, through the Skeleton Argument, the Affidavits, and argument made at the December 22, 2016 hearing, asked the Bermuda Court to order the Plaintiffs to dismiss the adversary proceeding altogether. This is substantively indistinguishable from enforcement of the Injunctive Orders. The Bermuda Insurers have consistently undermined this Court’s ability to adjudicate the issues properly before it, and in order to protect “the due and orderly administration of justice,” the Court will hold the Bermuda Insurers in contempt. Roadway Express, 447 U.S. at 764, 100 S.Ct. 2455.
A. The TRO Opinion was Clear and Unambiguous
The TRO Opinion clearly stated that the Bermuda Insurers were restrained and enjoined from taking any action to enforce the Injunctive Orders issued by the Bermuda Court. TRO Opinion, 561 B.R. at 630, 2016 WL 7388546, at *17. The TRO Opinion did not enjoin the Bermuda Insurers from proceeding in the Bermuda Court altogether, and permitted the parties to appear and argue their respective positions before the Bermuda Court. For example, the parties were not prohibited from arguing in the Bermuda Court that the dispute is arbitrable. Put another way, the Bermuda Insurers were not completely enjoined “from prosecuting the case they filed in the Bermuda Court,” but were enjoined from seeking to enforce the In-junctive Orders, which have prevented this Court and the Plaintiffs from addressing the issues raised in this adversary proceeding. Id.
B. Proof of the Bermuda Insurers’ Noncompliance is Clear and Convincing
The evidentiary record in this case is substantial; the affidavits, pleadings, and hearing transcripts demonstrate that the Bermuda Insurers’ noncompliance with the TRO is clear and convincing.
First, the Affidavits, prepared before the issuance of the TRO Opinion, set forth the relief the Bermuda Insurers were seeking, and the reasons why they were seeking this relief. As noted above, the Affidavits explain the Bermuda Insurers’ *54position that the Plaintiffs intend to proceed with the adversary proceeding in this Court, and do not intend to comply with the Injunctive Orders, and as such, the Bermuda Insurers seek an injunction ordering the Plaintiffs to dismiss the adversary proceeding in this Court. (Affidavits ¶ 33.)
After the issuance of the TRO Opinion, however, the Bermuda Insurers, though still seeking the same relief in the Skeleton Argument at paragraph 12 as the relief laid out in the Affidavits at paragraph 34 (an order requiring the Plaintiffs to dismiss this adversary proceeding), changed the purported rationale for the relief to a supposed desire to “preserve the status quo” and “enforce the Arbitration Agreement.” (December 22, 2016 H'rg Tr. 210:21-22, 25.) The fact that the Bermuda Insurers changed their tune in this way points strongly to the fact that the Bermuda Insurers knew that the relief they were seeking was noncompliant with the TRO.
Ultimately, though, the simple fact that the Bermuda Insurers petitioned the Bermuda Court to order the Plaintiffs to dismiss this adversary proceeding after the issuance of the TRO provides sufficient grounds for this Court to find that the Bermuda Insurers violated the TRO. Through the TRO Opinion, this Court restrained and enjoined the Bermuda Insurers from taking any action to enforce the provision of the Injunctive Order that provides, in part, that the Plaintiffs shall not prosecute litigation in the United States relating to the underlying insurance policies. On December 22, 2016, the day after the TRO Opinion was issued, the Bermuda Insurers argued before Chief Justice Ka-waley that the Bermuda Court should order the Plaintiffs to dismiss this adversary proceeding altogether.
C. The Bermuda Insurers Have Not Attempted to Comply with the TRO
Despite the Bermuda Insurers’ numerous proclamations to the contrary, the evi-dentiary record is clear that the Bermuda Insurers have flouted the proscriptions of the TRO. If the Bermuda Insurers actually intended to comply with the TRO, they would not have asked the Bermuda Court to order the Plaintiffs to dismiss this adversary proceeding.
IY. CONCLUSION
For the reasons set forth above, the Court holds the Bermuda Insurers in contempt and orders the following relief.
The Bermuda Insurers shall have seven (7) days from the date of this Order to have the Bermuda Court vacate the Injunctive Orders and the December 22, 2016 Orders issued by the Bermuda Court at the request of the Bermuda Insurers. If the Bermuda Insurers fail to have those orders vacated within that time, the Court will strike all of the Bermuda Insurers’ pleadings filed in this adversary proceeding and enter a default in favor of the Plaintiffs.
If the pleadings are stricken and a default is entered, the case will then proceed in this Court with an inquest to determine and impose damages. In addition, on a proper showing, the Court will impose monetary sanctions to compensate the Plaintiffs for any harm that resulted from the contempt.
IT IS SO ORDERED.
, References to the docket in the main chapter 11 case will be denoted as "D.I.”
. For example, the Allied Policy’s arbitration clause reads in relevant part:
Any and all disputes arising under or relating to this policy, including its formation and validity, and whether between the Insurer and the Named Insured or any person or entity deriving rights through or asserting rights on behalf of the Named Insured, shall be finally and fully determined in Hamilton, Bermuda under the provisions of The Bermuda International Conciliation and Arbitration Act of 1993 (exclusive of the Conciliation Part of such Act), as may be amended and supplemented, by a board composed of three arbitrators to be selected for each controversy ....
(Complaint, Ex. B at p. 7.)
. Federal Insurance Company ("Federal”) did not seek to obtain an anti-suit injunction against the Plaintiffs, and is not the subject of this Order.
. An affirmation of Jan E. Haylett was filed in connection with Allied’s motion to compel arbitration on November 29, 2016. (ECF Doc. #23.)
. An affirmation of Jan E. Haylett was also filed in connection with Allied’s motion to dismiss on November 28, 2016. (ECF Doc. #14-2.)
. Specifically, the Affidavits request:
34.1 An Order that the Plaintiffs be granted leave to amend the Originating Summons in these proceedings, pursuant to RSC Order 20 rules 5 and 7, to include a further or alternative claim for permanent injunctive relief, in the form of a permanent injunction mandating the Defendants, acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith to dismiss (without prejudice) the adversary proceedings commenced by the Defendants against the Plaintiffs in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (the Adversary Proceedings). A copy of the draft Amended Originating Summons, for which leave to amend is sought, is attached at pages 194— 197 of Exhibit LPE-3;
34.2 An interim injunction mandating the Defendants, .acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith (i.e. within the next 28 days) to dismiss (without prejudice) the adversary proceedings commenced by the Defendants against the Plaintiffs in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (the Adversary Proceedings) ....
(Affidavits ¶¶ 34.1-2 (compare with Skeleton Argument ¶¶ 12.1-2).)
. Chief Justice Kawaley, at the hearing, observed that there was a "question of whether it might not be said that the purpose of the mandatory injunction that [the Bermuda Insurers] are seeking is to enforce the existing Order by getting additional relief.” (Decem- - her 22, 2016 H’rg Tr. 210:3-6.) Potts goes on to "invite [Judge Kawaley] to rule on whether or not the step [the Bermuda Insurers] are taking from the New York perspective is enforcement of an existing injunction or an application for a different injunction.” (December 22, 2016 H’rg Tr. 212:10-14.)
. The November 8, 2016 Injunctive Orders and the December 22, 2016 Orders were issued by Chief Justice Kawaley of the Bermuda Court in the proceedings denoted as “2016: No. 393” and "2016: No. 394.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500183/ | MEMORANDUM OPINION AND PRELIMINARY INJUNCTION
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
On December 21, 2016, this Court issued a Memorandum Opinion and Temporary Restraining Order (the “TRO Opinion” or the “TRO,” ECF Doc. # 35),1 enjoining the Bermuda Insurers from taking any action to enforce certain provisions of the Injunc-tive Orders (defined below) issued by the Supreme Court of Bermuda, Civil Jurisdiction (Commercial Court) (the “Bermuda Court”). See MF Global Holdings Lt. v. Allied World Assurance Co. Ltd. (In re MF Global Holdings Ltd.), 561 B.R. 608, 2016 WL 7388546 (Bankr. S.D.N.Y. Dec. 21, 2016). The TRO was issued for 14 days, with the preliminary injunction hearing scheduled for January 4, 2017, before the TRO expired. At the outset of the January 4, 2017 hearing, the Court extended the TRO for an additional 14 days to permit the Court to decide whether to issue a preliminary injunction. Now pending before the Court is the determination whether there are grounds to issue a preliminary injunction enjoining the Bermuda Insurers from taking any action to enforce these Injunctive Orders.
In connection with the preliminary injunction hearing, Allied World Assurance Company, Ltd. (“Allied”) filed the Memorandum of Law in Support of Defendant Allied World Assurance Company, Ltd.'s Opposition to Memorandum Opinion and Temporary Restraining Order (the “Allied TRO Response,” ECF Doc. # 37). In support of the Allied TRO Response, Allied filed the Affirmation of Erica Ker-stein in Support of Defendant Allied World Assurance Company, Ltd’s Opposition to Memorandum Opinion and Temporary Restraining Order (the “Kerstein Affirmation,” ECF Doc. #38). Attached' as exhibits to the Kerstein Affirmation are Allied’s Motion to Dismiss for Lack of Personal Jurisdiction and Lack of Service of Process, Allied’s Motion to Compel Arbitration, and Allied’s December 7, 2016 Opposition to This Court’s Order to Show Cause, along with the exhibits originally attached to each of these motions.
The Iron-Starr Insurers2 filed the Iron-Starr Defendants’ Memorandum of Law in Opposition to Court’s Sua Sponte Preliminary Injunction (the “Iron-Starr TRO Response,” ECF Doc. #36). MF Global Holdings, Ltd. (“MFGH”), as Plan Administrator, and MF Global Assigned Assets LLC (“MFGAA” and together with MFGH, the “Plaintiffs”), filed the Memorandum of Law on the Bermuda Defendants’ Continued Violation of This Court’s Bar Order (the “Plaintiffs’ TRO Response,” ECF Doc. # [—], filed under seal on December 28, 2016).
For the reasons set forth below, the Court finds that there are sufficient grounds to enter a preliminary injunction enjoining the Bermuda Insurers from taking any action to enforce the Injunctive Orders.
I. BACKGROUND
The facts relevant to the issue currently before the Court are set forth in the TRO *57Opinion and previous opinions and orders issued by this Court. Additional relevant facts are set forth below.
A. The Temporary Restraining Order
As noted above, through the entry of the TRO, this Court restrained and enjoined the Bermuda Insurers from taking any action to enforce the injunctive orders (the “Injunctive Orders,” ECF Doc. ## 7-2, 7-3) issued by the Bermuda Court on November 8, 2016. Specifically, the TRO restrained and enjoined the Bermuda Insurers from taking any action to enforce the following provisions of the Injunctive Orders:
1. [MF Global Holdings, Ltd. (“MFGH”), as Plan Administrator, and MF Global Assigned Assets LLC (“MFGAA,” together with MFGH, the “Plaintiffs” or the “MFG Parties”) ] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, commence, prosecute or otherwise pursue litigation in the United States insofar as that litigation concerns, arises out of and/or relates to the insurance policy issued to the [Plaintiffs] by the [Bermuda Insurers], Policy No. C007357/005 (“the Policy”) including, for the avoidance of doubt, litigation containing allegations of breach of “good faith and fair dealing” relating to the Policy) and/or otherwise breaches the terms of the valid and binding Bermuda arbitration agreement between the [Plaintiffs and the Bermuda Insurers].
2. The [Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, seek and/or obtain an anti-suit injunction and/or an anti-anti-suit injunction and/or a temporary, preliminary or permanent order restraining and/or preventing the [Defendant] from pursuing and/or otherwise enforcing the said valid and binding Bermuda arbitration agreement, until trial or further order.
TRO Opinion, 2016 WL 7388546, at *17.
B. The Skeleton Argument and the December 22, 2016 Bermuda Court Orders
On December 22, 2016, the day after this Court entered the TRO, the Bermuda Insurers filed certain pleadings (the “Skeleton Argument”) and appeared and were heard before the Bermuda Court. In the Skeleton Argument, the Bermuda Insurers expressly requested certain relief from the Bermuda Court, including:
12.1 An Order that the [Bermuda Insurers] be granted leave to amend the Originating Summonses in these proceedings, pursuant to RSC Order 20 rules 5 and'7, to include a further or alternative claim for permanent injunc-tive relief, in the form of a permanent injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith to dismiss (without prejudice) the Adversary Complaint proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”);
12.2 An interim injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith (i.e. within the next 28 days) to dismiss (without prejudice) the Adversary Proceedings (as defined above).
*58(Skeleton Argument ¶¶ 12.1, 12.2 (emphasis in original).) The Bermuda Court then entered two orders (the “December 22, 2016 Orders”) in the Bermuda proceedings initiated by (i) Allied and (ii) the Iron-Starr Insurers.3 The December 22, 2016 Orders provide in relevant part that:
1. The [Bermuda Insurers] shall be granted leave to amend the Originating Summons in these proceedings, pursuant to RSC Order 20 rules 5 and 7, in the form of the draft Amended Originating Summons included in Exhibit JEH-3, to include a further or alternative claim for permanent injunctive relief, in the form óf a permanent injunction mandating the [Plaintiffs], acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith to dismiss (without prejudice) the adversary proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”), with associated relief.
2. The [Plaintiffs] shall, and are hereby mandated on an interlocutory basis, acting by themselves and/or acting through their employees, servants, agents, representatives, and attorneys, to terminate, discontinue, withdraw and/or to apply forthwith (i.e. within the next 28 days) to dismiss (without prejudice) the adversary proceedings commenced by the [Plaintiffs] against the [Bermuda Insurers] in the United States Bankruptcy Court, Southern District of New York, Case No: 11-15059 (MG), Adv. Proc. No: 16-01251 (MG) (“the Adversary Proceedings”). For the avoidance of doubt, this interlocutory injunction shall remain in force until final determination of the [Bermuda Insurer’s] Originating Summons, or until further Order of this Court, save that the [Plaintiffs] shall be at liberty to apply to this Court to set aside or vary the terms of paragraph 2 of this Order on at least 48 hours’ written notice to the [Bermuda Insurers],
(December 22,2016 Orders ¶¶ 1-2.)
In the December 22, 2016 Orders, the Bermuda Court also stated that the Plaintiffs “will not be contravened by the [Bermuda Insurers] and/or their US attorneys addressing the United States Bankruptcy Court Southern District of New York on the limited issue of whether or not the [Bermuda Insurers have] contravened” the Bar Order. (December 22, 2016 Orders at 1 (emphasis added).) With respect to whether the Bar Order and the Barton doctrine (described below) have been violated, the Court has set a schedule for one last round of briefs on those issues (January 11, 2017 for the Bermuda Insurers; January 18, 2017 for the Plaintiffs), and has scheduled argument for 10:15 a.m., January 23, 2017. Because of the December 22, 2016 Orders, the Court, however, remains unable to make a determination whether this dispute is arbitrable. Until the Court has full briefing and argument on the issue from the Plaintiffs and the Bermuda Insurers, the Court cannot decide the Bermuda Insurers’ motion to compel arbitration. Our adversary system requires that all parties must be able to address the issues, not just the moving parties.
The December 22, 2016 Orders, which included the above-referenced relief sought *59by the Bermuda Insurers, permit the Plaintiffs to address only the limited issues whether the Bar Order and Barton doctrine prohibited the Bermuda Insurers from filing the Bermuda action, but those orders still enjoin the Plaintiffs from conducting any other activity in this adversary-proceeding—specifically including opposing the motion to compel arbitration that the Bermuda Insurers filed in this Court. Moreover, the December 22, 2016 Orders require that the Plaintiffs dismiss this adversary proceeding within 28 days, without the ability to be heard on any other issues currently pending before this Court. (December 22, 2016 Orders ¶¶ 1-2.) The effect of the orders obtained by the Bermuda Insurers is an intolerable interference in this Court’s ability to exercise its authority in a case within its jurisdiction.
C. The Bermuda Court’s December 23, 2016 “Reasons for Decision”
On December 23, 2016, the day after entering the December 22, 2016 Orders, the Bermuda Court issued its “Reasons for Decision,” a 10-page decision explaining the basis for its rulings in issuing the ex parte anti-suit injunctions. It is helpful to read Chief Justice Kawaley’s explanation of the rationale for entry of the anti-suit injunctions. To the extent consistent with this Court’s responsibility to decide matters properly before this Court, the Court strives through the exercise of international comity to avoid unnecessary conflict with foreign courts. But this Court cannot shy away from deciding issues properly presented to it. The ex parte anti-suit injunctions, entered after this adversary proceeding was filed, prevent this Court and the U.S.-based Plaintiffs from addressing important issues under U.S. bankruptcy law.
An underlying issue that one of the courts will have to decide is whether the insurance coverage dispute between the Plaintiffs and the Bermuda Insurers must be decided in arbitration in Bermuda or adjudicated by this Court. But the immediate issue pending in this Court is whether the Bermuda Insurers were prohibited by applicable U.S, law and orders previously issued by this Court from commencing the Bermuda Court proceedings. The Plaintiffs identify two separate grounds—either one potentially legally sufficient—to bar the filing of the Bermuda actions—namely, the Bar Order included in a global settlement approved by this Court in August 2016, or the Barton doctrine. Assuming that one of those two bases barred the Bermuda Insurers from commencing the Bermuda action, and assuming the Bermuda Insurers made a timely motion in this Court to compel arbitration in Bermuda, this Court would be required to decide the question whether this dispute is arbitrable. If the Bermuda Insurers prevail and this Court compels arbitration, an order compelling arbitration would be entered, and this adversary proceeding would then be dismissed. If the motion to compel arbitration is denied, this adversary proceeding would proceed in the normal manner. Essentially, then, the issue the Court will decide after briefing is complete and argument is heard on January 23,2017 is whether the Bermuda Insurers were barred by applicable U.S. law from filing the Bermuda Court action.
Once the motion to compel arbitration is fully briefed (something that the Bermuda Court Injunctive Orders currently prevents), this Court can decide whether to compel arbitration. The decision on that question—either in the U.S. or Bermuda courts—if both were able to decide the issue might not be the same. Under U.S. law, the answer to the question whether particular disputes must be arbitrated depends on the application of both arbitration law and U.S. bankruptcy law. It is a *60nuanced analysis. As explained in the TRO Opinion,
Courts in this district have recognized that when a Bankruptcy Court is presented with a motion to compel arbitration, as this Court currently is, the Court must apply a four-part test:
[F]irst, it must determine whether the parties agree to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether .to stay the balance of the proceedings pending arbitration.
Naturally, [w]hen arbitration law meets bankruptcy law head on, clashes inevitably develop. Specifically, [t]he issue of waiver predominates arbitration disputes involving bankruptcy claims, and the first indication of waiver is whether a claim is core or non-core. Despite what the Bermuda Insurers may have attested to before the Bermuda Court, the determination of whether a claim is core or non-core can be complex, including in insurance coverage disputes.
TRO Opinion, 2016 WL 7388546, at *14 (internal quotation marks and citations omitted); see also In re U.S. Lines, Inc., 197 F.3d 631, 636-37 (2d Cir. 1999).
Whether a motion to compel arbitration can be denied because arbitration conflicts with policies of the Bankruptcy Code depends on a careful analysis of both U.S. bankruptcy law and arbitration law. The excess E & 0 insurance policies issued by the Bermuda Insurers are expressly governed by New York law and the policies were issued to New York-based MF Global Holdings Ltd. This Court previously determined that all of the D & O and E & 0 insurance policies (primary and excess) issued to MF Global Holdings Ltd. were property of the Chapter 11 Debtors’ estates. In re MF Glob. Holdings Ltd., 469 B.R. 177, 190 (Bankr. S.D.N.Y. 2012), subsequently dismissed sub nom. Sapere Wealth Mgt. LLC v. MF Glob. Holdings Ltd., 566 Fed.Appx. 81 (2d Cir. 2014) (“[I]t is well-settled that a debtor’s liability insurance is considered property of the estate.”).
In explaining his Reasons for Decision, Chief Justice Kawaley relied heavily on his earlier decision in ACE Bermuda Insurance Ltd. v. Peers Pederson as Plan Trustee for the Estates of Boston Chicken Inc. [2005] Bda LR 44, a case in which he granted a similar ex parte anti-suit injunction “by way of enforcing agreements to arbitrate insurance coverage disputes.” (Reasons for Decision ¶ 4.)
Boston Chicken was a debtor in chapter 11 cases pending in the U.S. Bankruptcy Court for the District of Arizona. ACE Bermuda (“ACE”) was an upper level excess insurance carrier in Boston Chicken’s D & O insurance tower. ACE denied coverage for Boston Chicken’s officers and directors who had been sued by Gerald K. Smith (“Smith”), the Plan Trustee under Boston Chicken’s confirmed chapter 11 plan. The lawsuit filed by Smith in the federal district court also named as defendants the underwriters of Boston Chicken securities, and the company’s accountants and lawyers. With a coverage dispute clearly brewing, ACE preemptively obtained an ex parte anti-suit injunction from the Bermuda Court before coverage litigation was commenced by Boston Chicken in the bankruptcy court. See ACE Insurance Co., Ltd. v. Smith (In re BCE West, L.P.), 2006 WL 8422206 (D. Ariz. Sept. 20, 2006) [hereinafter Smith],
Smith, in his capacity as Plan Trustee, reached a settlement with several of the *61Boston Chicken officers and directors.4 The settlement included an assignment to Smith of the officers’ claims against the D & 0 insurers (including ACE) that denied coverage. Some of the non-settling defendants in the district court action objected to approval of the settlement. The district court overruled the objections and approved the settlement, and the Ninth Circuit affirmed. See Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005). Smith then brought an action against ACE in the bankruptcy court to recover on the insurance policy and for additional damages.5 ACE moved in the bankruptcy court to compel arbitration in Bermuda. The bankruptcy court granted in part ACE’s motion to compel arbitration, but on different terms than those included in the insurance contract, and granted Boston Chicken’s motion to enjoin the Bermuda case that ACE had earlier filed. The bankruptcy court also found that ACE had violated the Barton doctrine and awarded Smith $100,000 in damages.6 See Smith, 2006 WL 8422206, at *2-3.
The district court affirmed in part and reversed in part.7 Id. at *10.
The district court in Smith explained the Barton doctrine, named for the decision in Barton v. Barbour, 104 U.S. 126, 136-37, 26 L.Ed. 672 (1881) (“[W]hen the court of one State has ... property in its possession for administration as trust assets, and has appointed a receiver to aid in the performance of its duty by carrying on the business to which the property is adapted ... a court of another State has not jurisdiction, without leave of the court by which the receiver was appointed, to entertain a suit against him _”). See Smith, 2006 WL 8422206, at *2 n.4. The Barton doctrine operates independently of the Bar Order in the MF Global case, and may provide a separate basis for barring the Bermuda Insurers’ action.8 As the district court explained in affirming the bankruptcy court’s determination that ACE violated the Barton doctrine, the Barton doctrine requires that “leave of the appointing forum must be obtained by any party wishing to institute an action in a non-appointing forum against a trustee for the acts *62done in the trustee’s official capacity and within the trustee’s authority as an officer of the court.” Id. at *2 (quoting In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)). “There is no indication that the doctrine is limited in scope or that it is otherwise inapplicable to a party who seeks to file suit in an international forum.” Id. at *8. As such, “regardless of where ACE sought to file suit against the Trustee, the bankruptcy court correctly found that ACE was required under the Barton doctrine to seek leave prior to filing suit.” Id.9
Reviewing the portions of his Boston Chicken decision that Chief Justice Kawa-ley quotes in his Reasons for Decision, but also reviewing what transpired thereafter in the Boston Chicken case in the U.S. Bankruptcy Court for the District of Arizona (where the Boston Chicken bankruptcy case was pending), and, on appeal by ACE from the bankruptcy court decision, in the U.S. District Court for the District of Arizona, provides a better understanding of the conflict between the U.S. and Bermuda courts. With due respect to Chief Justice Kawaley, his decisions in Boston Chicken and MF Global reflect a disregard of the applicable U.S. bankruptcy law principles, specifically with respect to the bankruptcy court’s obligation to interpret and enforce its own previously entered orders, and to apply applicable common law such as the Barton doctrine. Perhaps this is so because in both Boston Chicken and in MF Global, Bermuda insurers obtained ex parte anti-suit injunctions, without the court having the benefit of full briefing or argument by the debtors, or their successors, on any of these issues.
Here, in part, is what Chief Justice Ka-waley explained in Boston Chicken:
It is difficult to imagine any jurisdiction in the world which, statutory incorporation apart, would apply a foreign procedural law instead of its own domestic law to an action properly commenced under local law within the jurisdiction. When Bermudian estate representatives seek the cooperation of the United States bankruptcy courts, they invariably do so under the umbrella of the provisions of section 304 of the US Bankruptcy Code [now replaced by chapter 15], if not chapter 11. They do not apply to set aside actions commenced in the US against Bermudian companies in liquidation on the grounds that leave of the Bermuda court should have been obtained by virtue of Bermuda domestic law. ...
But even if this Court had the power to stay proceedings brought in Bermuda in deference to a foreign bankruptcy proceeding, it seems improbable that such jurisdiction would enable this Court to grant the relief the Applicants presently seek. Because the only application presently before the Court is based on the premise that an extra-territorial doctrine of US bankruptcy law arguably supersedes Bermuda statute law ... and that US law deprives this Court of jurisdiction expressly conferred upon it to grant leave to serve abroad proceedings brought here to enforce a contract governed by Bermuda law.
It is also settled this court cannot stay proceedings on forum non-convenience grounds where the parties have agreed to arbitrate here, which is no doubt why this doctrine (in its traditional sense) has *63not, in any coherent way at least, been invoked by the Applicants. Yet the doctrine is relied upon in support of the proposition that the Arizona court is the more appropriate forum for determining whether or not the arbitration clause should be respected ....
(Reasons for Decision ¶4, citing Boston Chicken, [2005] Bda LR 44). Chief Justice Kawaley’s ruling appears to conclude that a decision from this Court that the Bermuda Insurers filed, the Bermuda action in violation of the Barton doctrine will not be recognized and enforced in Bermuda. (Id. (“But even if this Court had the power to stay proceedings brought in Bermuda in deference to a foreign bankruptcy proceeding, it seems improbable that such jurisdiction would enable this Court to grant the relief the Applicants presently seek. Because the only application presently before the Court is based on the premise that an extra-territorial doctrine of US bankruptcy law arguably supersedes Bermuda statute law ... and that US law deprives this Court of jurisdiction expressly conferred upon it to grant leave to serve abroad proceedings brought here to enforce a contract governed by Bermuda law.”).) But this Court sees the issues differently: Did the Bar Order or the Barton doctrine prohibit the Bermuda Insurers from filing the Bermuda action? If so, may this Court decline to recognize and enforce the Bermuda Court’s orders that prevent this Court from deciding issues in the adversary proceeding in which the Court concluded it has personal and subject matter jurisdiction over the Bermuda Insurers? And, if so, may this Court order the Bermuda Insurers to dismiss their Bermuda actions?
Obviously, this Court cannot force the Bermuda Court to recognize and enforce a decision of this Court based on a well-recognized doctrine of U.S. law, first set forth in the 1881 Supreme Court decision in Barton-, but a refusal to recognize and enforce such a decision should it be rendered is not a sufficient reason for this Court to avoid reaching a decision if the facts and law support it (something that is still undetermined and will be heard on January 23, 2017). Even if a decision by a U.S. court is not recognized and enforced in Bermuda, and a judgment is entered against the Bermuda Insurers, in New York, the Bermuda Insurers write insurance policies for and collect premiums from companies in the New York and the United States, so the Plaintiffs may well have recourse to recover on any judgment obtained in the United States, if that eventuality comes to pass.10 Hopefully, this cross-border dispute will not come to that.
D. The Second Order to Show Cause
On December 29, 2016, this Court entered the Order to Show Cause Why Allied World Assurance Company Ltd., Iron-Starr Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited Should Not be Held in Contempt for violating the TRO (the “Second OSC,” ECF Doc. #41). The Second OSC referred to the injunctive provisions of the TRO, the relief sought by the Bermuda Insurers in the Skeleton Argument after the TRO was issued, and the orders subsequently entered by the Bermuda *64Court on December 22, 2016. The Second OSC ordered the Bermuda Insurers to file a written response addressing why they should not be held in contempt for violating the TRO by asking the Bermuda Court to order the Plaintiffs to dismiss the adversary proceeding before this Court.11
II. THE PRELIMINARY INJUNCTION
A. Legal Standard
Pursuant to section 105(a) of the Bankruptcy Code, “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). The traditional standards for issuance of an injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure are made applicable to adversary proceedings under Bankruptcy Rule 7065. See Eastern Air Lines v. Rolleston (In re Ionosphere Clubs, Inc.), 111 B.R. 423, 431 (Bankr. S.D.N.Y. 1990). Moreover, the standards for a temporary restraining order and a preliminary injunction are not materially different. See Adelphia Commc’ns Corp. v. The American Channel, et al. (In re Adelphia Commc’ns Corp.), No. 02-41729 (REG), 2006 WL 1529357, at *4 (Bankr. S.D.N.Y. June 5, 2006). “A decision to grant or deny a preliminary injunction is committed to the discretion of the district court.” Polymer Tech. Corp. v. Mimran, 37 F.3d 74, 78 (2d Cir. 1994).
The Second Circuit has explained that a party seeking a preliminary injunction must show that either “he is likely to succeed on the merits; that he is likely to suffer irreparable harm in the absence of preliminary relief; that the balance of equities tips in his favor; and that an injunction is in the public interest,” or alternatively “show irreparable harm and either a likelihood of success on the merits or 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.” Am. Civil Liberties Union v. Clapper, 785 F.3d 787, 825 (2d Cir. 2015) (internal citations and quotations omitted); see also Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008) (“A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.") (citations omitted). Because the Court (rather than the Plaintiffs) initiated the TRO and preliminary injunction hearing to protect its jurisdiction over this adversary proceeding, the Plaintiffs are not required to post security for the preliminary injunction as otherwise required by Rule 65(c).
B. The Parties’ Contentions
1. The Plaintiffs’ Ccmtentions
The Plaintiffs, in the Plaintiffs’ TRO Response, argue that a preliminary injunction is necessary to address the Bermuda Insurers’ continued violations of the Bar Order, the Barton doctrine, and the TRO.12 As noted above, in the Second Circuit there are two formulations of the test for a preliminary injunction, and the Plaintiffs argue that a preliminary injunction is warranted because they have demonstrated “(a) irreparable harm and (b) ... [that *65there are] sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tip[s] decidedly toward the party requesting the preliminary relief.” Christian Louboutin S.A. v. Yves Saint Laurent Am. Holdings, Inc., 696 F.3d 206, 215 (2d Cir. 2012).
In particular, the Plaintiffs argue that there are serious questions as to the merits of both the Bermuda Insurers’ violation of the Bar Order and the Barton doctrine, as well as questions regarding whether this dispute is arbitrable under applicable bankruptcy law, and an injunction is necessary to permit the Court to address these issues. (Plaintiffs’ TRO Response at 16.) The Plaintiffs also argue that they continue to suffer irreparable harm by being forced to incur additional expense and effort in the Bermuda Court, by being unable to avail themselves of their chosen forum, and by being restrained from filing pleadings before this Court. (Id. at 17.) The Plaintiffs maintain that the balance of equities and public policy weigh in their favor because the Bermuda Insurers’ actions in the Bermuda Court undermine the efficient administration of the adversarial system in the United States, and because the Plaintiffs should not be forced to resort to a distant forum to adjudicate their rights when they have already chosen a legitimate forum. (Id. at 18-19.)
2. The Bermuda Insurers’ Contentions
Both Allied and the Iron-Starr Insurers, in their responses to the TRO, restate that this Court lacks specific personal jurisdiction and subject matter jurisdiction over the Bermuda Insurers and, in particular, over this dispute. (Allied TRO Response at 5-18; Iron-Starr TRO Response at 7-22.) Likewise, the Bermuda Insurers reiterate their belief that service of process on them was improper. (Allied TRO Response at 25; Iron-Starr TRO Response at 22-24.)
Additionally, the Iron-Starr Insurers argue that the Plaintiffs cannot establish a likelihood of success on the merits as the coverage claims dispute here is “squarely a ‘non-core’ claim.” (Iron-Starr TRO Response at 24.) The Iron-Starr Insurers also argue that the balance of hardships weighs in favor of the Bermuda Insurers, as a determination of the underlying coverage issues in this Court would strip the Bermuda Insurers of their bargained-for contractual rights. (Id. at 25.)
Similarly, Allied argues that the Plaintiffs cannot demonstrate imminent or irreparable harm because the Plaintiffs have known about the invocation of the arbitration provision for ten months. (Allied TRO Response at 19.) Allied also argues that requiring the Plaintiffs to arbitrate does not constitute “irreparable harm” when the Plaintiffs can still argue before the arbitration tribunal and the Bermuda Court that arbitration is improper. (Id. at 20-21.) Allied argues that the balance of equities tips in its favor because it will be irreparably harmed if forced to litigate in this Court as it would be stripped of its arbitration clause and forced to submit to jurisdiction in the United States. (Id.) Additionally, Allied argues that public policy weighs in favor of arbitration given the strong federal policy in favor of arbitration where parties have voluptarily agreed to arbitrate. (Id. at 22.) Relatedly, Allied argues that under the first-fíled rule, if applicable, the arbitration in Bermuda constitutes the first-filed action, and that as a matter of comity, anti-suit injunctions should be used sparingly, particularly where no bankruptcy policy would be frustrated if this dispute were arbitrated. (Id. at 22-24.)
C. Discussion
In the TRO Opinion, the Court already determined that the Court has personal *66and subject matter jurisdiction over the Bermuda Insurers and this dispute. The Court will not revisit those rulings in this Opinion.
“[T]he standards for a temporary restraining order and a preliminary injunction are not materially different,” Adelphia, 2006 WL 1529357 at *4, and though the Court set forth an analysis of the preliminary injunction factors in the TRO Opinion, the Court now has the benefit of briefing from both the Plaintiffs and the Bermuda Insurers.
For the reasons set forth below, the Plaintiffs have demonstrated that a preliminary injunction is warranted because they continue to suffer “irreparable harm and ... [there are] sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tip[s] decidedly” in their favor. Christian Louboutin, 696 F.3d at 215.
Each of these elements is discussed in turn below.
1. Irreparable Harm
The Plaintiffs have suffered and continue to suffer from the inability to meaningfully participate in the adversary proceeding that they commenced in the forum of their choice. The Bermuda Insurers have filed motions to dismiss and motions to compel arbitration. (ECF Doc. ## 13-1, 14,17, 20.) The Plaintiffs suffer the inequity of being unable to respond to any of these motions. As such, the Plaintiffs have demonstrated that they continue to suffer irreparable harm.
& Sufficiently Serious Questions Going to the Merits
Here, there are sufficiently serious questions going to the merits of both the purported violation of the Bar Order and the Barton doctrine such that these disputes are fair grounds for litigation. As noted in the TRO, the issue whether the Bar Order has been violated is nuanced, and each party has non-frivolous arguments that this Court should entertain. For example, the Plaintiffs argue that the Bermuda Insurers impermissibly seek to collaterally attack the reasonableness of the Settlement Agreement, and that the Bermuda Insurers have asserted claims against the Plaintiffs in violation of the Bar Order. (Plaintiffs’ TRO Response at 3-5.) The Bermuda Insurers maintain that the plain language of the Bar Order does not prohibit the filing of the Bermuda action. (See Allied TRO Response at 11 n. 4, Ex. C.)
The Court now has briefing on this issue, and will hold a hearing on the issue on January 23, 2017. Nevertheless, this factor is satisfied as the Plaintiffs have demonstrated that there are sufficiently serious questions going to the merits of this dispute.
3. The Balance of Equities
While the Plaintiffs continue to suffer the inequities described above, upon the issuance of this preliminary injunction, the Bermuda Insurers will suffer no apparent harm. The Bermuda Insurers complain that they are being stripped of their bargained-for arbitration provision, but the Bermuda Insurers ignore the procedural framework in which this dispute currently resides,. At this juncture, the Court has not determined whether the coverage dispute should properly be heard in this Court or in arbitration in Bermuda. The Bermuda Insurers filed motions in this Court to compel arbitration, but they filed the motions only after they obtained anti-suit injunctions from the Bermuda Court, which prevented the Plaintiffs from responding to the motions. After the TRO Opinion was entered, the Bermuda Insurers again obtained injunction orders from the Bermuda Court handcuffing the Plaintiffs. The Bermuda Insurers will not suffer any harm by having this Court decide the issues pre*67sented by the motions the Bermuda Insurers themselves filed in this Court.
The Bermuda Insurers have intolerably interfered in the Court’s exercise of its authority and undermined the Plaintiffs’ ability to participate in the proceedings properly before this Court, and in doing so, have undercut the adversarial nature of this adversary proceeding. The balance of equities weighs in favor of granting relief for the Plaintiffs.
h. The Public Interest
Additionally, public policy weighs in favor of granting injunctive relief to the Plaintiffs. As explained in the TRO, the determination whether a claim is arbitra-ble is complex, as is the determination whether a claim is core or non-core, including in insurance coverage disputes. By seeking to sidestep this entire analysis, and by taking actions that undercut this Court’s ability to apprise itself of all relevant facts and arguments, the Bermuda Insurers have upset the adversarial nature of the judicial system. Considerations of fairness and equity weigh in favor of granting relief for the Plaintiffs.
III. CONCLUSION
For the reasons set forth above, the Plaintiffs have demonstrated that there are sufficient grounds to issue a preliminary injunction.
By this Order, the Bermuda Insurers are hereby RESTRAINED and ENJOINED from taking any action to enforce the following provisions in the In-junctive Orders:
1. The [Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, commence, prosecute or otherwise pursue litigation in the United States insofar as that litigation concerns, arises out of and/or relates to the insurance policy issued to the [Plaintiffs] by the [Bermuda Insurers], Policy No. C007357/005 (“the Policy”) including, for the avoidance of doubt, litigation containing allegations of breach of “good faith and fair dealing” relating to the Policy) and/or otherwise breaches the terms of the valid and binding Bermuda arbitration agreement between the [Plaintiffs and the Bermuda Insurers].
2. The [Plaintiffs] shall not, whether by themselves or through their employees, servants, agents, representatives, attorneys or otherwise, seek and/or obtain an anti-suit injunction and/or an anti-anti-suit injunction and/or a temporary, preliminary or permanent order restraining and/or preventing the [Defendant] from pursuing and/or otherwise enforcing the said valid and binding Bermuda arbitration agreement, until trial or further order.
For the avoidance of doubt, the Bermuda Insurers are also RESTRAINED and ENJOINED from taking any action to impede or obstruct the administration of this adversary proceeding. The Bermuda Insurers are so enjoined until further order entered by the Court,
IT IS SO ORDERED.
. Capitalized terms not defined herein shall have the meaning ascribed to them in the TRO Opinion.
. Iron-Starr Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited are referred to collectively as the "Iron-Starr Insurers.”
. The November 8, 2016 and December 22, 2016 Orders were issued by Chief Justice Ka-waley of the Supreme Court of Bermuda, Civil Jurisdiction (Commercial Court) in the proceedings denoted as "2016: No. 393” and "2016: No. 394.”
. As I advised the parties during the preliminary injunction hearing, before I became a judge, I represented one of the Boston Chicken officer defendants in Smith’s district court action, and I represented two of the officers in negotiating a settlement with Smith of the district court action.
. After the Ninth Circuit affirmed the approval of the settlement, I had no further involvement in the matter, including in the insurance coverage case in the bankruptcy court.
. Unlike the MF Global case, there was no Bar Order in Boston Chicken that arguably prevented ACE from filing its Bermuda action.
. The district court determined that under applicable Ninth Circuit case law, the insurance coverage dispute in Boston Chicken was a non-core proceeding; therefore, the bankruptcy court erred "when it compelled arbitration on terms materially different than the terms contained in the D & O policy's arbitration clause.” Id. at *7. The district court also reversed the bankruptcy court's injunction barring ACE from prosecuting the Bermuda action since the decision to compel arbitration also provided that the bankruptcy court adversary proceeding would be dismissed. The district court, however, expressly noted that with respect to the "core/non-core determination,” Second Circuit case law was different, see In re U.S. Lines, Inc., 197 F.3d 631 (2d Cir. 1999) (concluding that the insurance coverage dispute was "core,” and the bankruptcy court properly denied the motion to compel arbitration), which may have resulted in a different conclusion. Id. at *5 n.14.
.On January 23, 2017, following the completion of further briefing, the Court will hear argument whether the Bar Order in this case prohibited the Bermuda Insurers from filing the Bermuda Action.
. The bankruptcy court and district court in Boston Chicken applied the Barton doctrine in circumstances similar to this case: Smith, the Plan Trustee in Boston Chicken, brought suit based on claims against ACE assigned by the officers and directors. The Plaintiffs here have done the same thing.
. To be clear, if the Court is not prevented from hearing and deciding the motion to compel arbitration based on full briefing by the parties, the Court intends to do so. The current anti-suit injunction prevents the Plaintiffs from briefing and arguing the motion to compel arbitration. The Court will issue a separate order determining whether the Bermuda Insurers should be held in contempt for violating the TRO in applying for and obtaining the December 22, 2016 Orders, with possible sanctions including striking their pleadings and entering a default.
. As noted above, the disposition of the Second OSC will be addressed in a separate order.
. A sizable portion of the Plaintiffs' TRO Response is dedicated to arguing that the Bermuda action continues to violate the Bar Order and the Barton doctrine. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500184/ | OPINION1
Sontchi, J.
INTRODUCTION
The Debtors in this case sought an order confirming their joint Chapter 11 plan of reorganization following an execution of a global settlement agreement among the Debtors, the lender, and the Official Committee of Unsecured Creditors.2 The Court conducted a confirmation hearing, and based upon the evidence presented con*71firmed the plan.3 Ordinarily, this would end the matter in a consensual way. However, the lender filed an objection to the Committee’s Counsel’s request for compensation and reimbursement of expenses. At large, the lender asserts that the compensation requested was incurred in violation of a dollar-amount cap included in the DIP Financing Order. In contrast, the Committee’s Counsel argues that the cap in the DIP Financing Order has no implication after the reorganization plan has been confirmed. For the reasons set forth below, the Court will overrule the lender’s objections and will approve the Committee’s Counsel’s fee application. The Court holds that absent specific language not found in the DIP Financing Order at issue here, a dollar-amount cap on professionals’ fee payment, or a carve-out, does not come into play once a Chapter 11 plan is confirmed. That is because a fundamental statutory requirement of the Bankruptcy Code is that, unless the holder of a particular claim has agreed to a different treatment, allowed professionals’ fees are administrative expenses that need to be paid in full under any confirmed plan. Additionally, the Court is satisfied that the Fee Examiner’s recommendations reflect reasonable compensation for actual and necessary services.
JURISDICTION AND VENUE
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. In addition, this Court expressly retained jurisdiction pursuant to the Order Establishing Procedures for Interim Compensation and Reimbursement of Expenses of Professionals.4 Venue is proper in this District pursuant to 28 U.S.C. § 1409(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (B) as relief is predicated on 11 U.S.C §§ 330 and 331. The Court has the judicial power to enter a final order.
STATEMENT OF FACTS
A. Factual and Procedural Background
On June 25, 2015, Molycorp, Inc. and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. The cases have been jointly administrated.5 Following the filing, the Debtors engaged in a series of intense negotiations in an attempt to obtain post-petition financing that would provide the Debtors with the liquidity they needed to continue to operate their business.6 Ultimately, the Debtors entered into a DIP financing facility with Oaktree Capital Management, L.P. (“Oaktree”). As a result, on July 1, 2015, the Debtors filed a motion for approval of financing and use of cash collateral (the “DIP Financing Motion”).7 An interim order pursuant to the *72DIP Financing Motion was entered on July 2, 2015.8 A final hearing was held on July 22, 2015, and on July 24, 2015, the Court entered its final order approving the DIP Financing Motion (the “DIP Financing Order”).9 In between, the Official Committee of Unsecured Creditors was formed (the “Committee”),10 and selected Paul Hastings LLP (the “Committee’s Counsel” or “Paul Hastings”) as its lead counsel'.11 Almost three weeks after entry of the DIP Financing Order, on August 13, 2015, the Court approved Paul Hastings’ retention by the Committee.12
Soon after its formation, the Committee launched an investigation into potential claims that could be asserted by the Debtors. The Committee’s investigation spanned over four months and involved extensive discovery process. As a result of its investigation, on December 23, 2015, the Committee filed a motion seeking standing to pursue certain causes of actions against Oaktree and the Debtors’ directors and officers (the “Standing Motion”). On January 14, 2016, the Court entered an order authorizing the Committee to bring litigation on behalf of the Debtors’ estate pursuant to the Standing Motion,13 and, on January 15, 2016, the Committee commenced an adversary proceeding and filed its complaint.14 Meanwhile, the parties participated in an extensive mediation before the Honorable Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York.15 Due to Judge Drain’s tireless efforts and the parties’ good faith negotiations, the mediation ultimately bore fruit and, on February 22, 2016, the Debtors filed a notice of execution of a global settlement agreement between different parties to this case, including between the Committee and Oaktree (the “Settlement Agreement”).16 The Settlement Agreement paved the way for a consensual reorganization plan for certain of the Debtors.17 On.March 29-30, 2016, the Court held a hearing to consider confirmation of the reorganization plan.18 After receiving documentary and testimonial evidence, the Court approved the plan on April 8, 2016 (the “Confirmation Order” and the “Confirmed Plan” respectively).19
*73B. Paul Hastings’ Second Interim Fee Application and Oaktree’s Objection
In its Second Interim Fee Application, Paul Hastings seeks approval of fees in the amount of $8,491,064.75 and reimbursement of expenses in the amount of $226,170.96, for the period from September 1, 2015, through March 31, 2016 (the “Second Interim Application”).20 Oaktree objects to the compensation requested on the grounds that the fees sought in the Second Interim Application are excessive, unreasonable, and were incurred in direct violation of the DIP Financing Order.21 Specifically, Oaktree asserts that the dollar-amount cap set in the DIP Financing Order, with regard to the Committee’s investigation into potential claims, constitutes an absolute cap on fee payments out of certain sources enumerated in the DIP Financing Order (i.e., the DIP loans, the prepetition Oaktree collateral, the DIP collateral, <Dr any portion of the carve-out (the “Restricted Sources”)).22 Oaktree argues that the Committee has long ago exhausted the dollar-amount cap in the DIP Financing Order, and that Paul Hasting has not identified, and cannot identify, any source of payment other than the Restricted Sources for the fees sought; that is, since the Restricted Sources account for substantially all of the Debtors’ sources of cash.23 In other words, Oaktree contends that there is no money left to be dispersed without rendering meaningless the cap in the DIP Financing Order.
Oaktree also maintains that the Second Interim Application conflicts with the DIP Financing Order for another, separate reason. Oaktree argues that, although the DIP Financing Order allows for limited payments out of the Restricted Sources for investigating potential claims, it does not authorize any compensation for the initiation and prosecution of such claims. According to Oaktree, a significant portion of the fees requested by Paul Hastings in the Second Interim Application should be denied because it relates to the initiation and prosecution of claims against Oaktree rather than to the Committee’s investigation. Thus, the argument goes, even if an alternative source of payment could be identified, the payment of such fees must be denied as strictly prohibited under the DIP Financing Order.24
Furthermore, Oaktree asserts that not only does the Second Interim Application conflict with the DIP Financing Order, but that it also fails to pass the reasonableness test under section 330(a) of the *74Bankruptcy Code.25 Oaktree advances that the dollar-amount cap in the DIP Financing Order represents the reasonable compensation standard for the Committee’s professionals’ services. Put another way, Oaktree claims that any portion of Paul Hastings’ fees that exceeds the cap set by the DIP Financing Order is presumptively unreasonable.26 Finally, Oaktree asserts that the descriptions of work performed by Paul Hastings’ attorneys are excessively vague. Accordingly, Oaktree believes that Paul Hastings has not met its burden with respect to these vague time entries, and allowance or payment of any fees associated with these entries should be denied.27
Paul Hastings rejects Oaktree objections. Paul Hastings maintains that a carve-out in a DIP order simply provides that a professional gets a right, that he or she otherwise would not had, to use a portion of the secured creditor’s collateral for payment of such professional’s fees. While this may be relevant in an administratively insolvent case, the argument goes, it is irrelevant in a case such as this with a confirmed Chapter 11 plan. In other words, Paul Hastings argues that the dollar-amount cap for using Oaktree’s collateral has no impact whether the requested fees should be allowed, and, to the extent they are allowed, they remain entitled to payment as administrative expense claims if the Debtors wish to have a plan of reorganization confirmed.28 Additionally, Paul Hastings asserts that the Committee and its professionals have worked diligently and efficiently, consistent with the Committee’s fiduciary duties to the unsecured creditors, to maximize the value of the Debtors’ estates. Paul Hastings argues that its investigation and litigation efforts, which led, in part, to the Settlement Agreement, resulted in significant value to the unsecure creditors that they would otherwise not have received. The matter is now fully briefed and is ripe for the Court’s consideration.29
DISCUSSION
Although the DIP Financing Order contains many provisions, this case centers on but one. Paragraph 4(b) of the DIP Financing Order provides an exception to the prohibition against the use of the Restricted Sources as follows:
Notwithstanding the foregoing, up to $250,000.00 in the aggregate proceeds of the DIP Loans, the DIP Collateral, the Prepetition Collateral, and the Carve-Out may be used to pay fees and expenses of the professionals retained by the Committee that are incurred in connection with investigating (but not prosecuting any challenge to) the matters covered by the stipulations contained in Paragraphs I and J of this Final Order.30
*75As set forth above, the parties offer different implications to the dollar-amount cap in paragraph 4(b) of the DIP Financing Order. These two opposite approaches lead to one fundamental question the Court has to answer: what does the dollar-amount cap in the DIP Financing Order mean? Specifically, does the DIP Financing Order set an absolute limit on fees incurred by the Committee’s professionals? If the Court concludes that the limitation in the DIP Financing Order represents an absolute cap then that would virtually end the matter.31 However, if the Court decides that the DIP Financing Order does not include a per se limit on what could be allowed as administrative expenses, it must proceed further and determine if the fees requested by the Committee’s Counsel satisfy the requirements of section 330(a) and 331 of the Bankruptcy Code.
A. Application of a Cap on Professionals’ Fees in a DIP Financing Order
Payment of professionals’ fees in Chapter 11 cases is a favored object of the Bankruptcy Code, but it is no more favored than protecting the rights of creditors with secured claims. As a general rule, administrative expenses must be satisfied from assets of the estate not subject to liens.32 A secured creditor’s interest in its collateral is a substantive property right created by non-bankruptcy law, which may not be substantially impaired when bankruptcy intervenes.33 A secured creditor should not be deprived of the benefit of its bargain and will be protected in bankruptcy to the extent of the value of its collateral; furthermore, only surplus proceeds are available for distribution to other creditors of the estate and administrative claimants. Therefore, absent equity in the collateral, administrative claimants cannot look to encumbered property to provide a source of payment for their claims.34
The bankruptcy court’s discretion to permit payment of administrative expenses is restricted by the existence of unencumbered assets that exceed any super-priority claims. While professionals’ fees allowed under sections 330(a) and 331 enjoy a certain preeminence under the Bankruptcy Code, their payment must be consistent with the Code’s overall scheme of priorities.35 Thus, as a matter of course, *76“[p]ost-petition attorneys’ and accountants’ fees are administrative expenses and may not be given priority over existing liens and super-priority claims.”36 In other words, where there are insufficient unencumbered assets with which to pay administrative expenses, professionals employed by the debtor or by creditors’ committees may not ordinarily look to secured creditors’ collateral for payment.
Indeed, “[i]n every case there is the uncertainty that the estate will have sufficient property to pay administrative expenses in full.”37 Those holding administrative claims may run the risk of nonpayment or partial payment whenever there is an adequate protection shortfall under section 507(b), supper-priority borrowing under section 364, or conversion of the case and subordination of Chapter 11 administrative expenses under section 726(b) of the Bankruptcy Code.38 These risks are well known to experienced bankruptcy practitioners, such as the attorneys for the Committee in this case. To deal with some of the abovementioned risks, professionals usually negotiate a carve-out to provide for the payment of their allowed fees. In other words, the effect of a carve-out is to allow affected professionals to look to the secured creditor’s collateral where otherwise they would not be able to do so. The carve-out is essentially an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets.39 In fact, “a secured creditor may, without doing violence to the letter or spirit of the Bankruptcy Code, selectively waive its liens and super-priority claims to permit payment of certain administrative expenses but not others.”40 The carve-out may be subject to a dollar-amount cap and also to restrictions on the services that can be paid out of the carve-out (usually, the agreement, as demonstrated here, would preclude the use of the carve-out to sue the secured creditor who agreed to it). And, only to close the loop, it should be noted that when there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out. In such cases the “secured creditor’s consent to the payment of designated expenses limited in amount will not be read as a blanket consent to being charged with additional administrative expenses not included in the consent agreement.”41
*77In the present case, paragraph 4(b) of the DIP Financing Order reflects Oaktree’s consent to payment of certain administrative expenses and imposes a limit on the amount of its collateral which may be used to pay the attorneys employed by the Committee (up to an aggregate sum of $250,000). As a consequence, in the event that a plan was not confirmed and the estate had become insolvent, the dollar-amount cap would have resulted in Paul Hastings not being compensated for all the work it has performed. That was a risk the Committee’s Counsel consciously took.42 Thus, it is unclear why Oaktree believes that paragraph 4 of the DIP Financing Order has no meaning unless the dollar-amount cap acts as a complete bar on the allowance of Paul. Hastings’ fees.43 As explained above, the DIP Financing Order capped Oaktree’s exposure and liability to payment of certain administrative expenses in case no reorganization plan had been executed.44 However, as things turned out, the Debtors were successful in their efforts to work out a plan and have it confirmed.
B. The Effect of a Confirmed Reorganization Plan on Administrative Expenses Payment
The Bankruptcy Code requires that in order to confirm a reorganization plan the court must satisfy itself that the plan meets all the requirements of Chapter ll.45 For our purposes, section 1129(a)(9) of the Bankruptcy Code provides for the mandatory treatment of certain claims entitled to priority. Specifically, section 1129(a)(9)(A) of the Bankruptcy Code requires that, unless agreed otherwise, each holder of an administrative claim will receive cash equal to the allowed amount of such claim on the effective date of the plan;46 this is true regardless to the existence of unencumbered assets.47 Put differently, “[t]he Code’s confirmation scheme elevates allowed administrative claims to a dominant priority such that unless the holders agree to a different treatment, a plan cannot be confirmed without full payment of those claims even if there are no estate assets to pay *78them.”48 Moreover, “if the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”49 The flip side of this requirement is that each administrative or priority creditor may hold the future of the case in its hands. “In bankruptcy, everyone’s fate—the debtors, its employees and its creditors—is often intertwined and dependent on the success of the plan. While certain parties have the right to be paid in full, it is sometimes impossible to do so.”50 Professor Douglas G. Baird well explains:
After the votes are received, the debtor can ask the court to approve the reorganization plan. The court must satisfy itself that the plan meets all the requirements of Chapter 11. Many are spelled in § 1129(a). The plan must, for example, pay off administrative expense claims in cash. § 1129(a)(9)(A). This requirement may be burdensome for businesses that lack ready access to capital markets ... [However,] [practices have emerged that make this requirement less rigid than it might first appear. Administrative creditors are free to scale back or modify their claims in a side deal. Them willingness to do so depends on their past and future relationship with the debtor. For example, among the largest administrative claims may be payments owed to the debtor’s counsel, and these are often structured with a schedule over time.51
The practices to which Professor Baird points where those who hold administrative expense claims agree to take another deal, rely on the exception set out in the preamble to section 1129(a)(9); that is, if “the holder of a particular claim had agreed to a different treatment of such claim.”52 In other words, in the context of a plan confirmation, a cap on the amount to be paid towards administrative expenses may only be approved after obtaining the administrative claimants’ consent.53 Yet, while the Bankruptcy Code requires an agreement, it does not state the form which a consent to a different treatment must be given, nor does it indicate the time or stage in a Chapter 11 case that such consent may be obtained.54
*79Here, both parties have suggested that it is possible, and it has been done in other cases, for a DIP order to include a provision that automatically disallows or precludes compensation for professionals costs over a certain amount—a per se dis-allowance of administrative claims provision.55 However, the parties disagree whether paragraph 4(b) of the DIP Financing Order constitutes such a per se disallowance provision. Inasmuch as the parties agree that paragraph 4(b) of the DIP Financing Order is unambiguous, no one requested an evidentiary hearing, and there was no testimony before the Court, with regard to the negotiations that led to its wording. The record makes clear that the parties expect the matter to be resolved as a matter of law.
In resolving this dispute the Court follows a basic cannon of construction providing that “a provision in a [court order] is ambiguous only when, from an objective standpoint, it is reasonably susceptible to at least two different interpretations.” 56 By the same token, “the parties are bound by the ‘objective definition of the words they use to express their intent,’ including the specialized meaning of any legal terms of art.”57 Applying these rules of interpretation, the Court concludes that paragraph 4(b) of the DIP Financing Order is not ambiguous. Concurrently, the Court holds that paragraph' 4(b) of the DIP Financing Order does not contain any language that can compel an automatic disallowance of Paul Hastings’ fees.58 The *80wording of Paragraph 4(b) is not different than a standard carve-out provision. It does not connote in any way that the dollar-amount cap would operate as a complete bar against the allowance of administrative claims following plan confirmation. In this respect, the dollar-amount cap was going to come into play if the attempts to confirm a reorganization plan had failed; it was not intended to come into play if a Chapter 11 plan was confirmed.59 Reinforcement to this conclusion can be found in comparison to other documents negotiated by the parties here. The Confirmed Plan explicitly states that: “[ejxcept as further specified ... and unless otherwise agreed by the Holder of an Administrative Claim and the applicable Plan Debtor or the Post-Effective Date Plan Debtors, as applicable, each Holder of an Allowed Administrative Claim (other than the DIP Facility Claims and postpetition Intercom-pany Claims) will receive Cash Equal to the Allowed amount of such Administrative Claim .60 The Confirmed Plan continues to provide a clear exception with regard to the Committee’s legal professionals: “[t]he fees and expenses of the Creditors’ Committee’s legal professionals incurred on and after the Committee Settlement Effective Date with Respect to Creditors’ Committee Legal Fee Cap Matters shall be subject to the Creditors’ Committee Legal Fee Cap. Any amounts incurred by the Creditors’ Committee’s legal professionals on and after the Committee Settlement Effective Date with respect to the Creditors’ Committee Legal Fee Cap Matters in excess of the Creditors’ Committee Legal Fee Cap shall be disallowed .. .”61 (emphasized’added). In light of the above, the distinction in the Confirmed Plan between the period before and after the Settlement Agreement and the failure- to include a similar disallowance provision in the DIP Financing Order speak for itself;62 that is, the DIP Financing Order lacks a language that can be interpreted as an automatic and absolute cap on the allowance of administrative claims.
However, this does not end the matter. Although the Court concludes that the costs incurred by Paul Hastings are not affected by the DIP Financing Order, the *81confirmation requirement of section 1129(a)(9)(A) only becomes applicable once Paul Hastings’ fees have been allowed as administrative claims.
C. Determination of the Committee’s Counsel Compensation
The Bankruptcy Code authorizes the bankruptcy court to award a professional “reasonable compensation for actual, necessary services.”63 In fact, the bankruptcy court not only has the power, it has also a duty to independently review fee applications notwithstanding the absence of objections by the trustee, debtor or creditors.64 In In re APW Enclosure Sys., Inc., Judge Walrath expounded this duty:
This statutory obligation must be taken seriously by the courts due to the particularities of bankruptcy procedure. The Third Circuit specifically noted the differences between statutory fee cases and bankruptcy cases. Busy Beaver, 19 F.3d at 842-43. In the former, the adversary system serves to ensure that fee requests are reasonable, whereas in the latter neither the debtor nor the attorneys for the creditors have an incentive in the “club” atmosphere of the bankruptcy bar to raise objections to fee requests ... Thus, it is the bankruptcy court’s obligation to “protect the estate, lest overreaching attorneys or other professionals drain it of wealth which by right should inure to the benefit of unsecured creditors.” Id. at 844.65
In determining the award of compensation, the court considers the nature, the extent, and the value of the professional’s services, taking into account factors such as “whether the services were necessary to the administration of, or beneficial at the time which the service was rendered toward the completion of, a case ... [and] whether the services were performed within a reasonable amount of time commensurate with the complexity, importance, and nature of the problem, issue, or task addressed_”66 For the same reasons, the bankruptcy court cannot allow compensation for services that were not reasonably likely to benefit the estate or were not necessary to the administration of the case.67 “Analytically, section 330(a) provides a two-tier test for determining whether and in what amount to compensate professionals in bankruptcy cases. First, the court must be satisfied that the professionals performed actual and necessary services. Second, the court must assess a reasonable value for those services.”68 In order to fulfill its duty, the *82bankruptcy court may appoint a fee examiner to aid it in accomplishing this “onerous burden.”69 Furthermore, the applicant bears the burden of proving that the fees and expenses sought are reasonable and necessary.70
In this case, the Court believes that a reasonable professional representing the Committee would have performed the services carried out by Paul Hastings.71 The Court is also confident that the record demonstrates that the services rendered benefited the Debtor’s estate and advantaged the Committee’s constituents.72 This is particularly apparent in light of the Settlement Agreement; as the Confirmation Order expressly indicates: “[t]he Committee Settlement Agreement ,.. conferfs] material benefits on, and [is] in the best interests of, the Debtors, the Debtors’ Estates, and their creditors » 73
Given- the size and complexity of the jointly administrated Chapter 11 cases, the Court appointed Direct Fee Review LLC (the “Fee Examiner”) as a fee examiner.74 After carefully considering the Fee Examiner’s report regarding the Second Interim Application (the “Fee Examiner’s Report”),75 and having given all interested parties an opportunity to justify or object to the Second Interim Application, the Court is satisfied that the fee recommendations advanced in the Fee Examiner’s Report succeed in reflecting reasonable compensation for actual and necessary services and reimbursement for actual and necessary expenses. Except as to a few minor reductions, the Second Interim Application was cleared by the Fee Examiner.76 The Court believes that the Fee Examiner’s Report significantly undercuts the position taking by Oaktree in its objections. Thus, the Court will adopt the recommendations set forth in the Fee Examiner’s Report and will approve Paul Hastings’ fees in the amount of $8,461,396.25 and reimbursement of expenses in the amount of $225,820.83.
*83CONCLUSION
Mindful of the importance of its independent duty to scrutinize fee applications, the Court has reviewed the Second Interim Application submitted by the Committee’s Counsel’s attorneys. For the reasons stated above, the Court holds that the language in the DIP Financing Order leaves no ambiguity with respect to the dollar-amount cap. Thus, under the circumstances of this case, the Court concludes that the costs incurred by Paul Hastings’ services are not affected by the DIP Financing Order, and therefore, to the extent they are allowed as administrative expenses they must be paid by the Debtors pursuant to section 1129(a)(9)(A) of the Bankruptcy Code, Additionally, the Court finds that the Second Interim Application falls within the mandates of sections 330(a) and 331 of the Bankruptcy Code. Thus, the Court overrules Oaktree’s objections and will approve the fees requested through the Second Interim Application in accordance with the Fee Examiner’s Report recommendations.
The Court directs Paul Hastings to submit an order under certification of counsel (upon consultation with Oaktree) consistent with this Opinion approving and directing payment of Paul Hastings’ fees and expenses in the amount of $8,461,396.25 and reimbursement of expenses in the amount of $225,820.83.77
. This opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052, which is applicable to this matter by virtue of Fed. R. Bankr. P. 9014.
. D.I. 1302.
. D.I. 1580.
. D.I. 229.
. On April 13, 2016, the Court entered an order amending the joint administration order. Case No. 15—11371, D.I. 8. Certain of the Debtors known colloquially as the “Neo Debtors” reorganized and their cases continue to be jointly administered under Case No. 15-11357. Certain other Debtors known as the "Mineral Debtors” have not been reorganized and are under the control of a Chapter 11 trustee. The Mineral Debtors’ cases are jointly administered under Case No. 15-11371. The bifurcation of joint administration has no effect on the issues before the Court.
. The background is relatively complex, and, except as necessary to frame the issues in this matter, will not be set forth. For a broader description of the Debtors’ attempts to obtain post-petition financing see D.I. 109 ¶¶ 1-8.
. D.I. 109.
. D.I. 130.
. D.I. 278. ■
. On July 8, 2015, the United States Trustee for the District of Delaware appointed the Committee pursuant to section 1102(a) of the Bankruptcy Code, D.I. 152. On July 22, 2015, the United States Trustee submitted an amended notice of appointment of the Committee, D.I. 264.
. At an organizational meeting of creditors held on July 8, 2015, the Committee selected Paul Hastings as its lead counsel, pursuant to section 1103 of the Bankruptcy Code, see D.I. 296, ¶ 4.
. D.I. 369.
. D.I. 1086.
. D.I. 1101; Adv. Proc. No.; 16-50005 (CSS).
. D.I. 849.
. D.I. 1302.
. That is, the "Neo Debtors.” See n. 5, supra.
. On April 5, 2016, and then again in April 8, 2016, the Debtors filed a revised proposed confirmation order consistent with the Court’s ruling on the record at the confirmation hearing and further comments from parties in interest, see D.I. 1556 and 1576 respectively.
. D.I. 1580. Subsequently, on May 2, 2016, the Court approved the Joint Motion of the Debtors and the Committee for Approval of Technical Modifications to the Confirmed Plan, D.I. 1663.
. D.I. 1760. The Second Interim Application requests compensation for services rendered and reimbursement of expenses for the period from October 1, 2015 through March 31, 2016. Additionally, the Second Interim Application includes a request for compensation and reimbursement for the period of September 1, 2015 through September 30, 2015, which had not previously been requested in this case. The Second Interim Application was submitted pursuant to the Order Establishing Procedures for Interim Compensation and Reimbursement of Expenses of Professionals, D.I. 229.
. Oaktree’s Objection to the Second Interim Application, D.I. 1800. This Objection incorporated by reference Oaktree’s Objection to Paul Hastings Fee Application for the Period from September 1, 2015, through September 30, 2015, and Oaktree’s Objection to Paul Hastings Fee Application for the Period from December 1, 2015, through December 31, 2015. Oaktree has reiterated the same arguments in its other objections to Paul Hastings’ monthly fee applications between September 2015 and February 2016.
. Id. at ¶ 3.
. See Oaktree’s Objection to Paul Hastings Fee Application for the Period from September 1, 2015, through September 30, 2015, ¶¶ 3-4, 25, D.I. 1174.
. See id, at ¶¶ 27-29.
. See id. at ¶33; 11 U.S.C, § 330(a)(1) (2012).
. See Oaktree's Objection to Paul Hastings Fee Application for the Period from December 1, 2015, through December 31, 2015, ¶ 8, D.I. 1686.
. See Oaktree’s Objection to Paul Hastings Fee Application for the Period from September 1, 2015, through September 30, 2015, ¶¶ 30-31, D.I. 1174.
. See Paul Hastings' Omnibus Response to Oaktree's Objection to the Second Interim Application, ¶¶ 7-9] D.I. 1804.
. The Court heard arguments on the Second Interim Application and Oaktree’s Objection on July 26, 2016, and at the conclusion of the hearing took the matter under advisement (the ''Hearing”).
. Paragraph I of the DIP Financing Order contains stipulations and admissions made by the Debtors as to the amount and enforceability of the prepetition Oaktree obligations, and *75as to the priority, validity, enforceability, and extent of the prepetition Oaktree liens. Paragraph J of the DIP Financing Order contains the Debtor’s stipulations regarding adequate protection obligations, including Oaktree’s entitlement.
.Paul Hastings has suggested alternative arguments in support of the Second Interim Application. Specifically, Paul Hastings asserted that it is entitled to the payment of its allowed fees from certain Debtors that were not obligors under the DIP facility. Paul Hastings also argued that the Confirmed Plan and the Settlement Agreement contain mutual releases that, among other things, waive Oak-tree’s right to object to Paul Hastings' fee applications. In light of the Court’s holding that the cap in the DIP Financing Order was not intended to come into play following a confirmation of a reorganization plan, the Court finds it unnecessary to consider Paul Hastings' alternative arguments.
. In re American Resources Management Corp., 51 B.R. 713, 719 (Bankr. D. Utah 1985).
. Id.; see also Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935). '
. In re American Resources, 51 B.R. at 719.
. 11 U.S.C. §§ 503(b)(2), 507(a)(2) and 507(b) (2012); see also In re Roamer Linen Supply, Inc., 30 B.R. 932, 935 (1983) ("[a]n attorney who is authorized by the court to represent a debtor in a case under the Bankruptcy Code is not a creditor of the estate; such attorney’s compensation is governed by the standards expressed in § 330(a)’’).
. In re American Resources, 51 B.R. at 719; see also In re Roamer Linen Supply (discussing, inter alia, the possibility of subordinating part of the secured creditor’s collateral to specific costs and administrative expenses incurred during efforts to enhance or protect the secured position, and the possibility of subordinating the secured creditor’s collateral under the equitable subordination doctrine).
. 124 Cong. Rec, H32395 (daily ed. Sep. 28, 1978) (statement of Rep. Edwards).
. In re American Resources, 51 B.R. at 721.
. As a practical matter, the secured creditor usually agrees to the carve-out because otherwise nobody will represent the debtor or the committee and the case will fall apart, further diminishing the overall value of the secured creditor’s collateral; see 3 Collier on Bankruptcy, ¶ 331.02[5][b] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016) (”[n]at-urally, if the secured creditor does not consent and cash collateral will not be available to pay professional fees in a chapter 11 case, the case will not long survive in chapter 11 and will either be dismissed or converted to chapter 7”).
. In re American Resources, 5Í B.R. at 722.
. In re Flagstaff Foodservice Corp., 762 F.2d 10, 12 (2d Cir. 1985).
. See Transcript of Hearing (July 26, 2016) (“Hr’gTr.”) 10:9-12; 10:25, 11:1-3. Counsel for Oaktree argued during the Hearing that if Paul Hastings knew that the dollar-amount cap was not going to come into play in case a plan is confirmed, then Paul Hastings had have no incentive to limit what it spends, see Hr’g Tr. 56:1-5. As mentioned above, this view completely disregards the risk undertaken by Paul Hastings that no plan would be confirmed and that the estate would become insolvent.
. See Oaktree's Sur-Reply to the Omnibus Response of Paul Hastings, ¶¶ 14 and 16, D.I. 1848.
. Section 4(b) of DIP Financing Order distinguishes between the Committee's investigation and the prosecution of certain claims. This distinction simply makes it clear that the right being given to the Committee to proceed against Oaktree’s collateral does not apply to the initiation and prosecution of claims.
. 11U.S.C. § 1129(a) (2012).
. See In re Heehinger Inv. Co. of Delaware, 298 F.3d 219, 224 (3d Cir. 2002) (“[i]n a Chapter 11 case, a court cannot confirm a distribution plan unless the plan provides full cash payment of all § 503(b) administrative expense claims or the claim holder agrees to different treatment”); In re American Home Mortg. Holdings, Inc., 411 B.R. .169, 175 (Bankr. D. Del. 2008) ("section [1129(a)(9)(A)] requires Chapter 11 plan proponents to demonstrate that the holders of administrative expense claims will be cashed out on the effective date of the plan or that the claims will be otherwise resolved on terms acceptable to the holder of the claim”).
. See, e.g., In re Aleris Intern, Inc., No. 09-10478, 2010 WL 3492664, at *25 (Bankr. D. Del. May 13, 2010).
. In re Scott Cable Communications, Inc., 227 B.R. 596, 600 (Bankr. D. Conn. 1998); see also Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438, 508 (S.D.N.Y. 1994) (referring to section 1129(a)(9)(A) as the "administrative solvency” requirement, which is "the ability of the [debtor's] estate to satisfy administrative claims at the confirmation hearing”),
. In re Emons Industries, Inc., 76 B.R. 59, 60 (Bankr. S.D.N.Y. 1987).
. In re Teligent, Inc., 282 B.R. 765, 772 (Bankr. S.D.N.Y. 2002).
. Douglas G. Baird, Elements .of Bankmptcy 240-241 (6th ed. 2014); similarly, Paul Hastings' counsel also suggested that in most cases disputes over professionals’ fees get resolved by the parties through a consensual resolution or through an agreement on a quantum of value that will be distributed to unsecured creditors, which include payment for professionals' fees, see Hr’g Tr, 51:19-25; 52:11-20.
. See also 7 Collier on Bankruptcy, ¶ 1129.02[9][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016).
. See In re TCI 2 Holdings, LLC, 428 B.R. 117, 173 (Bankr. D.N.J. 2010),
. For example, courts are divided with regard to the term "agreed:” whether this requires a creditor expressly or affirmatively consent to a different treatment, or whether consent may be implied from the creditor’s conduct. Compare In re Teligent, Inc. (The court approved a novel approach to securing the agreement of some administrative claimants. Through combination of offering a convenience class, and through implementing a well-staffed campaign to induce creditors to return ballots electing to take less than they were owed (since the debtor was administra*79tively insolvent), the court found that all administrative claimants who had not returned a ballot were dimmed to have agreed to the lesser treatment offered in the plan. Integral to the court's ruling in that case was the fact that creditors were also given reason to understand that the debtor intended to take a refusal to respond as an acceptance to a different treatment. Since no administrative claimant had affirmatively objected, this questionable fiction allowed the court to confirm the plan); and In re Cummins Util, L.P., 279 B.R. 195 (Bankr. N.D. Tex.2003) (holding that section 1129(a)(9)(A) requires express consent to a different treatment); In re Real Wilson Enters., No. 11-15697-B-ll, 2013 WL 5352697, 2013 Bankr. LEXIS 3997 (Bankr. E.D. Cal. Sept. 21, 2013) (concluding that "courts requiring affirmative consent have the better interpretation of 'agreed' ”).
. See Paul Hastings’ Omnibus Response to Oaktree's Objection to the Second Interim Application, ¶¶ 11, 63-64, D.I. 1804.
. United States v. State of New Jersey, 194 F.3d 426, 430 (3d Cir. 1999); see also In re Barnes Bay Development Ltd., 478 B.R. 185, 191 (D. Del. 2012); McDowell v. Philadelphia Housing Authority, 423 F.3d 233, 238 (3d Cir. 2005).
. United States v. State of New Jersey, 194 F.3d at 430 (citing In re Unisys Corp., 97 F.3d 710, 715 (3d Cir. 1996)).
.As an example, Paul Hasting attached to its response a DIP order entered in In re Granite Broadcasting Corp. (ALG) (Bankr. S.D.N.Y. Jan. 5, 2007). In that case, the DIP order stated that: "[n]otwithstanding anything to the contrary therein, and absent further Order of the Court, (i) in no event during the course of the Chapter 11 Cases will actual payments in respect of the aggregate fees and expenses of all professional persons retained pursuant to an Order of the Court by the Creditor’s Committee exceed $450,000 in the aggregate (the 'Creditors' Committee Expense Cap’) ... (iii) any and all claims (A) incurred by the Creditor’s Committee in excess of the Creditor's Committee Expense Cap or (B) incurred by any professional persons or any party on account of professional fees and expenses that exceed the applicable amounts set forth in the Budget shall not constitute an allowed administrative expense claim for purposes of section 1129(a)(9)(A) of the Bankruptcy Code.” The DIP order in that case further stated that: "[ejxcept with respect to the Creditor's Committee Investigation Fund, any claim incurred in connection with any of the activities described in this paragraph 23 shall not constitute an allowed administrative expense claim for purpose of section 1129(a)(9)(A) of the Bankruptcy Code", see Paul Hastings’ Omnibus Response to Oak-tree’s Objection to the Second Interim Application, ¶ 64 n.65 and Ex. E, ¶¶ 12(b) and 23, D.I. 1804. This Court offers no opinion as to *80whether it would approve a DIP order containing provisions such as those in the Granite Broadcasting order. The point is that there is no such provision in the DIP Financing Order in this case.
. See In re Barnes Bay Development Ltd., 478 B.R. at 189.
. Confirmed Plan Debtors' Fourth Amended Joint Plan of Reorganization (as modified), Article II.A.l., D.I. 1663-1; see also paragraph S. of the Confirmed Plan that incorporates section 1129(a)(9) of the Bankruptcy Code, D.I. 1580.
. Confirmed Plan Debtors’ Fourth Amended Joint Plan of Reorganization (as modified), Article II.A.5.b., D.I. 1663-1; the "Creditors' Committee Legal Fee Cap Matters” is defined under the Confirmed Plan Debtors’ Fourth Amended Joint Plan of Reorganization (as modified) as "any amounts incurred on and after the Committee Settlement Effective Date with respect to the matters set forth in section 1.5. of the Committee Settlement Agreement,” Article I.A.62.; see also paragraph NN.M.70. of the Confirmed Plan, D.I. 1580; Paul Hastings noted that it created a new matter number to ensure accurate time keeping for those limited matters covered by the Creditors’ Committee Legal Fee Cap, see Paul Hastings’ Omnibus Response to Oaktree’s Objection to the Second Interim Application, ¶ 66 n.68.
.Because the Court holds that the DIP Financing Order lacks language that can be interpreted as an absolute cap on the allowance of administrative claims, the Court does not reach the question whether a per se disal-lowance of administrative claims provision in a DIP order such as that in the Granite Broadcasting order satisfies the consent requirement under section 1129(a)(9) of the Bankruptcy Code. See n. 58, supra.
.11 U.S.C. § 330(a)(1) (2012) permits the bankruptcy court to award such compensation to professional persons employed under section 327 or 1103 of the Bankruptcy Code; 11 U.S.C. § 331 (2012) allows the bankruptcy court to award a professional an interim compensation or reimbursement of expenses; see also In re Busy Building Centers, Inc., 19 F.3d 833, 841 (3d Cir. 1994) (there the Third Circuit held that section 330 of Bankruptcy Code, "imbues the [bankruptcy] court with discretionary authority,” and that the bankruptcy court possesses both the power and the duty to review fee applications; Zolfo, Cooper & Co. v. Sunbeam-Oster Co., Inc., 50 F.3d 253, 258 (3d Cir. 1995).
. See In re Busy Building Centers, 19 F.3d at 841; In re Cal Dive International, Inc., No. 15-10458, 2015 WL 9487852, at *2 (Bankr. D. Del. Dec. 28, 2015); In re Channel Master Holdings, Inc., 309 B.R. 855, 861 (2004).
. In re APW Enclosure Sys., Inc., No. 06-11378, 2007 WL 3112414, at ⅜2 (Bankr. D. Del. Oct. 23, 2007).
. 11 U.S.C § 330(a)(3) (2012).
. 11 U.S.C. § 330(a)(4)(A)(ii); see also In re Cal Dive International, Inc., 2015 WL 9487852, at *2.
. In re Channel Master Holdings, Inc., 309 B.R. at 861.
. See In re Armstrong World Industries, Inc., 366 B.R. 278, 281 (2007) (citing In re Busy Building Centers, 19 F.3d at 843); 11 U.S.C. § 105(a) (2012) (giving the bankruptcy court power to issue "any process” to carry out its duty); Del. Bankr, L.R. 2016—2(j) ("[t]he Court may, in its discretion or on motion of any party, appoint a fee examiner to review fee applications and make recommendations for approval”).
. See, e.g., Zolfo, Cooper & Co, v. Sunbeam-Oster Co., Inc., 50 F,3d 253, 260 (3d Cir, 1995); In re Cal Dive International, Inc., 2015 WL 9487852, at *2; In re Channel Master Holdings, Inc., 309 B.R. at 861.
. See In re APW Enclosure Sys., Inc., No. 06-11378, 2007 WL 3112414, at *3 ("[a]t least one court has held that the applicant must show that an actual benefit was provided ... A majority of courts, however, have held that services are compensable if at the time the services were performed a benefit to the estate was likely”).
. See In re 14605, Inc., No. 05-11910, 2007 WL 2745709, at *4 (Bankr. D. Del. Sept. 19, 2007) (approving the official unsecured creditors committee’s professionals’ fees based on further finding that the "investigation resulted in a tangible benefit to the unsecured creditors by facilitating a consensual Plan which provided a substantial recovery for unsecured creditors guaranteed in large part by [the lender]”).
. The Confirmation Order, ¶ II, D.I. 1580.
. D.I. 508.
. D.I. 1813.
. The Fee Examiner requested Paul Hastings to review what the Fee Examiner preliminary believed to be certain shortcoming (including miscalculations, duplications, inappropriate or unreasonable charges). Paul Hastings responded to the Fee Examiner’s concerns; in some matters Paul Hastings agreed to modify the charges and in other matters the Fee Examiner accepted Paul Hastings' explanations.
. While this matter was under advisement, Paul Hastings submitted the Third Interim and Final Fee Application of Paul Hastings LLP as Counsel to the Official Committee of Unsecured Creditors for Period from July 8, 2015 through and Including August 31, 2016 [D.I. 1984] (the "Final Fee Application”). Oaktree raised the same objections to the Final Fee Application as it did to the Second Interim Application. On December 28, 2016, the Court entered an Order approving the Final Fee Application, excluding any fees and expenses subject to the pending objections to the Second Interim Application. For the reasons set forth herein, the Court will overrule Oaktree's remaining objection to the Final Fee Application, will approve Paul Hastings’ fees and expenses thereunder and will direct payment of any outstanding fee and expenses under the Final Fee Application. The order submitted trader certification of counsel should also address the Final Fee Application. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500185/ | OPINION
Honorable Ashely M. Chan, United States Bankruptcy Judge
TABLE OF CONTENTS
I. Introduction., .88
*88II. Facts and Procedural History...90
A. Background of High Fidelity House, Inc.... 90
1. Officers and Outside Accountant. . .90
2. HiFi’s Accounting Practices.., 91
a. Refreshed Invoices... 92
b. Inventory Valuation... 93
c. Advanced Billing.. .93
B. HiFi Commercial Loans with Fulton. . .93.
1. First Meeting... 94
2. Second Meeting.. .94
3. Third Meeting.. .95
4. Refreshing Invoices... 95
5. The Loan Agreements... 96
6. Drexel Contract.. .97
7. Borrowing Base Certificates... 97
C. 2012 Covenant Violation.. .98
D. 2013 Covenant Violation... 99
E. Fulton Field Examination of HiFi...99
F. Liquidation... 102
G. The Debtor’s Residential Loans with HiFi... 103
H. The Debtor’s Bankruptcy Proceeding. . .104
III. Discussion... 105
A. Fulton’s Nondischargeability Claim Under § 523(a)(2)(B).. .106
I. Material Falsity Under § 523(a)(2)(B)©... 106
2. Insider’s Financial Condition Under § 523(a)(2)(B)(ii).. .106
3. Reasonable Reliance Under § 523(a)(2)(B)(iii).. .109
4. Intent to Deceive Under § 523(a)(2)(B)(iv).. .109
5. HiFi’s Borrowing Base Certificates and Financial Statements... 110
a. HiFi’s Borrowing Base Certificates ... 110
b. HiFi’s Financial Statements ...Ill
B. Fulton’s Nondischargeability Claim Under § 523(a)(6)... 115
IV.Conclusion... 118
I. INTRODUCTION
In this case, an unfortunate confluence of events- caused the demise of a well-established, family owned business and the loss of collateral worth millions of dollars which significantly damaged both parties in this litigation.
Prior to filing for bankruptcy, Jon A. Robbins (“Debtor”) was the President and Chief Executive Officer (“CEO”) of High Fidelity House, Inc. (“HiFi”), a high end audio visual company founded by his father in 1955. For many years, the Debtor’s brother-in-law acted as Chief Financial Officer (“CFO”) of HiFi and, in that role, likely began “refreshing” invoices, a practice which had the effect of making invoices that were more than ninety days past due appear current. Although HiFi’s sales people generally only refreshed invoices on long term jobs which were still deemed collectible, the practice technically allowed HiFi to borrow higher monthly amounts from its lenders than it was otherwise permitted under its loan documents.
The CFO was ultimately terminated, in part, because he withdrew $700,000 from an entity related to HiFi as an unauthorized loan. At that point, the Debtor offered the CFO position to a long time employee at HiFi who did not have the requisite financial experience to act as CFO, but who the Debtor considered trustworthy and reliable.
In June of 2012, Fulton Bank (“Fulton”) agreed to lend HiFi up to $6 million. Ful*89ton required that HiFi submit monthly borrowing base certificates which set forth the inventory and eligible accounts receivable against which HiFi was permitted to borrow. At the beginning of 2013, Fulton loaned another $1.2 million to HiFi in connection with a large contract that HiFi obtained.
Later in 2013, HiFi disclosed to Fulton, and obtained a waiver of, a financial covenant violation from the prior year. However, in 2014, after HiFi suffered substantial losses in connection with the large contract noted above and disclosed another finan-' cial covenant violation, Fulton became concerned about HiFi’s operations.
Although HiFi immediately disclosed its practice of “refreshing” invoices (and advanced billing which was instituted in 2013) to Fulton’s field examiners when Fulton began an investigation of HiFi’s collateral, Fulton ultimately concluded that HiFi had engaged in fraud during its lending relationship with Fulton as a result of: (1) HiFi’s improper inclusion of accounts receivable, which were more than ninety days past due, in HiFi’s eligible accounts receivable as reported in the monthly borrowing base certificates submitted to Fulton; (2) Fulton’s (mistaken) belief that obsolete and display inventory should not have been included in the monthly borrowing base certificates; and (3) HiFi’s failure to maintain organized and accurate records in connection with its customers’ invoices.
Based upon Fulton’s belief that HiFi had defrauded it, Fulton was unwilling to release the Debtor and his father from their guarantees of HiFi’s commercial loans unless the Debtor’s father contributed exempt funds from his IRA account as part of the settlement agreement. When the Debtor’s father refused to do so, Fulton shut down HiFi and liquidated its inventory and accounts receivable. Although Fulton received over $1 million from HiFi’s inventory, it only received a de minimis amount from its accounts receivable because HiFi’s customers were unwilling to pay HiFi’s invoices after it had gone out of business. Fulton ultimately confessed judgment against both the Debt- or and his father in connection with their guarantees of HiFi’s commercial loans.
In this adversary proceeding, Fulton asserts that its claims against the Debtor are nondischargeable pursuant to § 523(a)(2)(B), based primarily on the inaccurate borrowing base certificates provided by HiFi to Fulton during their lending relationship. However, Fulton’s reliance upon the borrowing base certificates, which did not present a comprehensive picture of HiFi’s assets and liabilities, were insufficient to support its claims because they were not broad enough to constitute statements of HiFi’s “financial condition” as required by § 523(a)(2)(B)(ii).
Upon realizing this, Fulton ultimately shifted its focus during trial to the accuracy of financial statements provided by HiFi to Fulton near the end of their relationship. However, Fulton failed to provide any evidence that the financial statements submitted by HiFi to Fulton in June of 2012 or January of 2013 (prior to Fulton’s two extensions of credit) were materially false or that they were not in compliance with generally accepted accounting principles (“GAAP”). Specifically, Fulton presented no evidence that HiFi overvalued its inventory during the requisite time period and, in contrast, the Debtor credibly testified that HiFi’s premium inventory generally maintained its value over time. Nor did Fulton present evidence in support of its assertion that HiFi’s list of “current” accounts receivable in its financial statements included accounts receivable that were not collectible within one year of invoice. The Court therefore con-*90eludes that the financial statements relied upon by Fulton to extend credit to HiFi were not materially false.
The Court also concludes that Fulton failed to demonstrate that the Debtor intended to deceive Fulton when HiFi submitted financial statements to Fulton prior to the extensions of credit to HiFi because the Debtor, who was not sophisticated in financial «matters, reasonably relied upon HiFi’s independent accountant to prepare and submit financial statements to Fulton. Fulton accordingly has failed to demonstrate that its claim against the Debtor in connection with his guaranty of HiFi’s commercial loans is nondischargeable under § 523(a)(2)(B).
Fulton has also failed to demonstrate that it has standing to pursue a nondis-chargeability claim against the Debtor under § 523(a)(6) in connection with the Debtor’s drawdown of $250,000 under a line of credit with Citizens Bank which should have been closed, but was not, after Fulton refinanced the Debtor’s mortgages on his personal residence. As discussed below, Fulton has not yet sustained, and may never sustain, an injury in connection with that drawdown and, therefore, does not have standing to pursue such claim at this time. Moreover, even if Fulton sustains an injury related to the drawdown in the future, any claim for such injury would be subject to discharge under § 523(a)(6) as arising from a simple breach of contract.
II. FACTS AND PROCEDURAL HISTORY
A. Background of High Fidelity House, Inc.
1. Officers and Outside Accountant
HiFi was founded by the Debtor’s father, Saul Robbins (“Saul”), in 1955. Tr. Apr. 22, 7:8-11, ECF No. 58. HiFi supplied and installed premium audio visual systems and components in both commercial and residential properties. Tr. Apr. 11, 11:19-20, ECF No. 54. Its headquarters were in Broomall, Pennsylvania. Tr. Apr. 22, 28:4-7.
The Debtor began working full-time for HiFi in 1976 after he graduated from high school, and started out in HiFi’s warehouse. Id. at 5:6-6:4. He continued working at HiFi full-time while he attended college and eventually became a sales manager, which involved managing sales at many HiFi stores and supervising sales people at those locations. Id. at 5:12-6:15.
In the 1980s, Saul’s health began, to deteriorate and, by the mid-1980s, he withdrew from the full-time, day-to-day management of HiFi. Id. at 8:17-25. During that time, the Debtor became heavily involved in the role of purchasing and management at HiFi. Id. at 6:16-18, 7:5-7. In the 1990s, the Debtor became HiFi’s Chief Operating Officer (“COO”), and later became CEO- and President. Id. at 6:22-7:4. The Debtor eventually became a 75% shareholder of HiFi. Id. at 9:1-10..
During the Debtor’s entire tenure at HiFi, he never participated in the management of HiFi’s finances. Tr. Apr. 21, 196:11-16, ECF No. 57. The Debtor graduated from college with a political science degree, never studied finance, never received training in, and had no knowledge of, how to read financial statements and was “not particularly sophisticated in accounting matters.” Id. at 195:23-25; Tr. Apr. 22, 75:15-17,141:20-23.
Ken Adelberg (“Adelberg”), who was married to the Debtor’s sister, Edna Adel-berg (“Edna”),1 acted as CFO of HiFi. Tr. *91Apr. 11, 12:18-25; Tr. Apr. 22, 19:7-11. Adelberg supervised HiFi’s employees with respect to invoicing, handled all of HiFi’s finances and established HiFi’s accounting policies. Trial Tr. Apr. 11, 13:1-5; Tr. Apr. 22, 29:1-2, 29:10-11.
In 1994, Paul Sandquist (“Sandquist”) joined HiFi as a manager of its Abington, Pennsylvania location and oversaw its sales and operations. Tr. Apr. 11, 11:25-12:9. By 2010, Sandquist was appointed as COO of HiFi and eventually became a 25% shareholder of HiFi. Id. at 11:7-11, 13:22-14:2.
In 2007, Trida Zwaan (“Zwaan”) joined HiFi as its Director of Operations and oversaw HiFi’s warehouse operations, service department, inventory control, and some minor purchasing. Tr. Apr. 21, 118:20-119:7. Before joining HiFi, Zwaan was involved in operations in the warehouse and service departments at Bryn Mawr Stereo and Tweeter for over thirty-seven years. Id, at 117:6-118:2. In 2008, Zwaan assumed additional responsibilities at HiFi related to human resources and payroll, and initially reported directly to the Debtor. Id. at 121:8-25. In 2011, Zwaan began to report directly to Sand-quist. Id. at 122:1-11. In 2012, Zwaan assumed internal accounting duties at HiFi although she had no accounting experience. Id. at 124:1-11,125:12-18.
Beginning in 1986, HiFi retained the accounting firm of Downey Spevak & Associates, Ltd. (“DSA”), to review HiFi’s financial statements. Barry Spevak (“Spe-vak”) was a certified public accountant and a partner at DSA who, since 1990, maintained primary responsibility for HiFi’s account. Tr. Apr. 11, 13:6-9; Tr. Apr. 21, 171:18-173:13, Throughout the majority of his engagement with HiFi, Spevak’s primary contact was Adelberg. Tr. Apr. 21, 174:1-3.
In 2012, the Debtor and his parents decided that Adelberg should “not work within the company any longer.” Tr. Apr. 22, 19:20-20:19. The Debtor explained that this decision was made because Adelberg “didn’t work. He didn’t show up to work on time, he left work early ... he was [not] totally engaged in the family business.” Id. at 21:2-6. In addition, it was discovered that Adelberg had made an unauthorized withdrawal of $700,000 from a related real estate partnership which he had booked as a loan. Tr. Apr. 21, 174:4-20; Tr. Apr. 22, 22:12-24. Although the Debtor specifically denied that Adelberg was “fired,” he acknowledged that he could no longer trust Adelberg at that point. Tr. Apr. 22, 19:20-24, 57:23-24.
Once it was decided that Adelberg would leave HiFi, Sandquist was offered the position of CFO, which he accepted. Tr. Apr. 11, 14:11-19. Sandquist, however, did not have much, if any, experience in financial matters and never graduated from college. As a result, he leaned heavily on Spevak to discharge his responsibilities. Id. at 76:25-78:2.
Shortly thereafter, HiFi’s bookkeeper quit and Zwaan became its new bookkeeper. Id. at 14:20-15:4; Tr. Apr. 21, 123:10-21, 124:10-11. Zwaan did not have any experience with accounting practices before becoming bookkeeper and was not given-any training prior to assuming the new role. Tr. Apr, 21, 115:15-22, 118:3-6, 125:12-25.
2. HiFi’s Accounting Practices
Customers were typically billed at the conclusion of a project by HiFi’s sales personnel, and payment terms ranged from 30 to 120 days. Id. at 69:19-22; Tr. Apr. 22, 27:4-6, 29:15-17, 86:23-25. Some *92of HiFi’s residential and commercial projects were long term and extended past two years. Tr. Apr. 11, 81:4-5.
At the Debtor’s direction, HiFi updated its accounting system in 2013 in order to become “more efficient” and to hold its sales people accountable. Tr. Apr. 21, 163:5-7, 164:25-165:4. In the spring of 2013, HiFi transitioned to QuickBooks accounting software. Tr. Apr. 11, 15:24-16:2. Later that fall, HiFi transitioned to Tiger-paw, an inventory control system and customer relationship management system that integrates with QuickBooks. Id. at 16:8-11.
⅛. Refreshed Invoices
HiFi had a long standing practice of “refreshing invoices,” whereby the company would: (1) issue a credit memo for an invoice which was more than ninety days old, but still collectible, and typically related to a large, ongoing project; and (2) generate a new invoice for the credited amount using the updated re-invoice date. Id. at 15:5-7, 17:5-10, 82:22-25, 99:16-20; Tr. Apr. 21, 130:2-4. The refreshed invoices were not sent to customers. Tr. Apr. 21,161:10-13.
Prior to the implementation of Quick-Books and Tigerpaw in 2013, HiFi’s sales personnel were individually responsible for refreshing invoices and were able to track an invoice’s true age. Tr. Apr. 11,16:12-16, 66:12-20, 67:19-21. Afterwards, however, Zwaan became responsible for refreshing invoices at the direction of Sandquist. Id. at 16:17-20; Tr. Apr. 21, 128:11-16. Sand-quist, who decided on a monthly basis which invoices would be refreshed, would frequently, consult with Spevak, but only occasionally with the Debtor. Tr. Apr. 11, 16:21-17:4, 17:11-17, 75:10-13. When Zwaan became responsible for refreshing invoices, she began adding the letters “PS” to refreshed invoice numbers in order to distinguish those invoices from originally issued invoices. Id. at 170:15-22; Tr. Apr. 21, 130:12-19. Although Zwaan could distinguish between new and refreshed invoices in this manner, she did not keep track of how many times an invoice was refreshed and HiFi did not independently maintain an itemized list of refreshed invoices. Tr. Apr. 21,132:15-22.
The Debtor testified at trial that he believed that the. practice of refreshing invoices was legitimate because it had been in place for as long as he could recall. Tr. Apr. 22, 25:12-20, 62:18-19. He denied that the practice was intended to deceive HiFi’s lenders with respect to the true age of HiFi’s accounts receivable, and instead asserted that it was intended to enable HiFi to more accurately understand whether invoices for its long-term projects were collectible. Id. at 25:24-26:6, 49:17-20. The Debtor testified that he never discussed HiFi’s practice of refreshing invoices with Spevak because “[i]t was never brought to [the Debtor’s] attention that it was out of the ordinary.” Id. at 24:22-24, 62:13-17.
Sandquist also testified that he believed that refreshing invoices was legitimate because it was such a longstanding practice at HiFi and went back to at least the early 2000s. Tr. Apr. 11, 75:3-9. However, unlike the Debtor, Sandquist recognized that the practice of refreshing accounts receivable permitted HiFi to borrow more from its lenders. He testified that if an invoice was more than ninety days past due, “we’d have to re-bill it again or you wouldn’t be able to borrow against it.” Id. at 63:5-10.
Although Spevak was aware of HiFi’s practice of refreshing invoices, he did not believe that such practice had any effect on his review of HiFi’s financial statements. Tr. Apr. 21, 181:12-15. Under GAAP, HiFi was permitted to report accounts receivable that were more than ninety days past due as current assets on its financial statements as long as they *93were collectible within one year, Tr. Apr. 11, 211:23-212:3. To the extent such accounts receivable were not collectible within one year, however, Spevak testified that such accounts would not be considered “current” under GAAP and had to be reported as “long-term asset[s]” on HiFi’s financial statements. Tr. Apr. 21, 203:4-14. He also testified that Adelberg had previously told him that HiFi had a policy of refreshing invoices that were more than ninety days past due, but that all of the refreshed invoices were collectible within' a year. Id. at 181:3-8. Accordingly, Spevak did not note the practice of refreshing invoices in HiFi’s financial statements and considered his review of HiFi’s financial statements “appropriate.” Id. at 181:16-19, 202:21-203:3, 203:22-25.
b. Inventory Valuation
HiFi’s financial statements disclosed that HiFi valued its inventory at the lower of cost or market. Joint Ex. 7. Based upon the testimony of Spevak and Zwaan, however, it does not appear that HiFi had a specific policy whereby it would review and revise its inventory values. Id. at 80:6-7, 121:2-7, 157:5-8, 191:1-6, Tr. Apr. 22, 72:9-12. Although the Debtor testified that he would adjust an item’s price if he noticed that it changed, he did not recall whether other employees did so as well, and he was entirely unaware of HiFi’s policies regarding inventory valuation. Tr. Apr. 22, 72:19-73:17.
However, the Debtor testified that HiFi’s inventory consisted of “very high-end consumer [audio and video] electronics” that “could stay current as long as 10 to 12 years” after first entering the market. Id. at 145:11-146:4. In addition, he testified that HiFi’s high end inventory would not just maintain its value, it would sometimes increase in value over time, such that its value would exceed its cost. Id. at 146:5-7.
c. Advanced Billing'
Under GAAP, revenue should be recognized in the period in which it is earned. Tr. Apr. 21, 197:8-198:1. Beginning in 2013, however, HiFi occasionally engaged in the practice of “advanced billing,” whereby it prematurely issued invoices before the underlying projects were completed: “[t]he recognition of revenue preceding the performance of work.” Tr. Apr. 11, 174:13-16; Tr. Apr. 21, 133:11-16, 134:10-17. Sandquist instructed Zwaan regarding whether and when to implement this practice. Tr. Apr. 21,134:4-6.
B. HiFi Commercial Loans with Fulton
Prior to entering into a commercial loan with Fulton, HiFi had borrowed $1.5 million under a term loan, and maintained a $4.5 million line of credit, with its longtime commercial lender, Wilmington Trust. Tr. Apr. 13, 78:12-25, EOF No. 56. After Wilmington Trust was acquired by M & T Bank (“M & T”), M & T informed HiFi on March 22, 2012, that it planned to transfer HiFi’s accounts to its collateral control team. Tr. Apr. 22,109:4-21.
In April or May of 2012, Saul spoke with Steve Brightbill (“Brightbill”), a Fulton assistant branch manager who was helping Saul close and transfer several personal accounts that he maintained with Fulton. Tr. Apr. 13, 7:4-12, 9:4-11. During the conversation, Saul expressed his dissatisfaction with M & T, a sentiment that the Debtor later echoed. Id. at 10:17-25; see also id. at 76:16-77:5 (“[The Debtor] indicated that they were looking for a banker to understand who [they] were and ... to help them to continue to grow and prosper as a viable entity.”). Brightbill testified that many of the clients that M & T acquired through Wilmington Trust were dissatisfied with M & T’s services. Id. at 10:17-25. At that point, Saul and Brightbill *94began to discuss the possibility of a commercial relationship between HiFi and Fulton and, thereafter, representatives from both entities set up a meeting to further discuss such relationship. Id. at 9:4-11.
1. First Meeting
On May 3, 2012, Brightbill, Betsy Nied-ziejko (“Niedziejko”), who was a Fulton credit analyst, the Debtor and Sandquist participated in a meeting at HiFi’s headquarters (“First Meeting”). Id. at 10:3-9, 74:6-20, 76:6-11. Brightbill and Niedziejko viewed the meeting as an opportunity to tell Fulton’s “story” and to understand HiFi’s business and the type of relationship that HiFi wanted. Id. at 12:7-15. Brightbill described the meeting as “a higher level conversation” and Niedziejko described it as “very customary of any typical first appointment” between Fulton and a prospective borrower. Id. at 12:7-15, 84:4-5. Brightbill’s primary role was to introduce Niedziejko to the Debtor and Sandquist; he did not play any role in approving or reviewing the loans that were ultimately extended to HiFi. Id. at 22:20-22, 39:9-18.
Niedziejko and her notes from the meeting indicated that Sandquist and the Debt- or stated that HiFi’s inventory held its value over time, improved with usage, and was commonly purchased off of display. Id. at 37:5-10, 44:17-19, 83:24-84:1; Joint Ex. 62. Overall, Niedziejko characterized the discussion about HiFi’s inventory as “probably a little unique.” Tr. Apr. 13, 84:6-7. Sandquist’s recollection regarding the discussion of HiFi’s inventory was consistent with Niedziejko’s. Tr. Apr. 11, 86:1-16.
After the meeting, Niedziejko sent the Debtor and Sandquist an email with a standard list of documents that Fulton needed from HiFi to properly underwrite the loans. Tr. Apr. 13,13:20-14:5, 84:10-17, 85:14-19. The requested documents included three years of independently reviewed financial statements and year-to-date balance sheets, income statements, and accounts receivable and accounts payable aging reports as of March 31, 2012, for HiFi. Joint Ex. 2.
In response to Niedziejko’s email, Sand-quist submitted a number of documents, including, but not limited to: (1) financial statements for HiFi’s Pennsylvania entity from 2008 to 2011,2 Tr. Apr. 11, 27:21-24, Joint Ex. 7; (2) financial statements for HiFi’s Pennsylvania and Delaware entities for the quarter-ended March 31, 2012, Tr. Apr. 11, 28:11-17, Joint Ex. 8; and (3) a summary accounts receivable aging report and a detailed accounts payable aging report as of March 31, 2012, Tr, Apr. 11, 30:22-31:4, Joint Ex. 12. Although Sand-quist submitted a summary, rather than a detailed accounts receivable aging report, Niedziejko acknowledged that Fulton “relied on the summary ... report” and that she “felt confident” that the materials HiFi submitted were “satisfactory” for the purposes of underwriting and approving the loans. Tr. Apr. 13,180:5-11.
2. Second Meeting
On May 11, 2012, there was a second meeting between Brightbill, Niedziejko, and' Ken Goddu (“Goddu”) from Fulton, and Sandquist, Spevak, and the Debtor from HiFi (“Second Meeting”), again at HiFi’s headquarters. Id. at 14:6-17; 90:3-5. Goddu was a member of Fulton’s senior loan committee, which 'would confirm whether Fulton would enter into a commercial loan relationship with HiFi, and he attended the meeting because of the prospect that HiFi might enter into “a full service relationship” with Fulton. Id. at 14:18-15:9, 90:14-91:7. At the meeting, *95Fulton was told that HiFi carried approximately $4.3 million of inventory, which included $1 million of display inventory, and that most of its inventory was “pre-sold.” Id. at 94:10-14, 95:1-10.
After the meeting, Niedziejko and God-du discussed Fulton’s prospective commercial lending relationship with HiFi. Id. at 96:23-25. Goddu testified that Fulton evaluated prospective borrowers based upon the character of their management and their history, historical trends, cash flow, capital, profitability, and independently prepared financial statements. Tr. Apr. 11, 115:23-116:6. Fulton considered independently prepared financial statements to be especially reliable, and therefore did not independently validate such statements. Id. at 117:19-118:11, 156:20-157:7. If the relationship manager approved the prospective borrower, a regional loan committee, which in this case included Goddu, would finally decide whether to approve the loans. Id. at 110:19-24, 116:23-117:18. The foregoing practices were industry standard. Id. at 119:23-25.
According to Niedziejko, Goddu “was favorable towards the management of the company [and] the fact that they had been in business for decades,” during which HiFi had survived many “economic cycles and downturns.” Tr. Apr. 13, 97:2-5. God-du confirmed that Fulton appreciated that HiFi was a closely held, family business. Tr. Apr. 11, 142:2-9. Although Fulton was concerned with HiFi’s levels of liquidity, leverage, and inventory, it was impressed with HiFi’s cash flow. Id. at 138:17-22, 139:6-10,142:10-12.
On May 25, 2012, the Debtor, in his capacity as CEO, signed a commitment letter with Fulton. Tr. Apr. 22, 40:22-41:24; Joint Ex. 20.
3. Third Meeting
On May 31, 2012, there was a third meeting between Brightbill, Niedziejko, a wealth management representative and a relationship management representative from Fulton, and Saul, his wife Reina, his other son David, and the Debtor, at Saul’s house. Tr. Apr. 13, 18:24-19:14, 19:24-20:8; Joint Ex. 61. The meeting was intended to address Saul and Reina’s consumer relationship with Fulton. Tr. Apr. 13, 20:9-12. Although Saul ultimately did not use Fulton’s wealth management services, he did open an IRA account with Fulton (“IRA Account”). Id. at 57:13-20; Joint Ex. 107. The meeting also included a brief discussion of HiFi’s commercial relationship with Fulton. Tr. Apr. 13, 20:9-16. No other meetings occurred between Fulton and HiFi prior to the closing of the loans. Id. at 21:20-22:4.
4. Refreshing Invoices
At trial, there was conflicting testimony about whether and when representatives from HiFi disclosed the practice of refreshing invoices to Fulton. The Debtor recalled that either he or Sandquist discussed such practice at the First Meeting, but Sandquist and Spevak both believed that the practice was discussed at the Second Meeting. Tr. Apr. 11, 57:25-58:5, 61:12-24; Tr. Apr. 21, 183:17-20, Tr. Apr. 22, 30:20-24, 31:13-19. The Debtor testified that, in response to HiFi’s disclosure about the practice, Niedziejko asked whether HiFi’s accounts receivable were “good,” to which either Sandquist or the Debtor responded in the affirmative. Tr. Apr. 22, 33:19-34:10, 35:13-16, 36:1-6.
Niedziejko acknowledges that she asked such a question, but that it was merely “a typical question that I ask clients .... because it’s relevant to bad debt.” Tr. Apr. 21, 65:17-66:4. Both she and Brightbill testified that HiFi’s practice of refreshing invoices was never raised at any of the meetings. Tr. Apr. 13, 15:14-16, 50:12-20, *9653:1-10, 135:18-136:2; Tr. Apr. 21, 57:18-24.
On cross examination, both Goddu and Niedziejko testified that a senior lender at Fulton had sent an email on May 23, 2012, asking whether there were “[a]ny concerns on the over 90 day receivables?” Tr. Apr. 11, 132:24-134:18; Tr. Apr. 21, 59:20-21; Joint Ex. 93. Niedziejko testified that her boss had replied to the email and stated that Fulton had “no concerns” with those accounts receivable because HiFi had assured them that they were still collectible. Tr. Apr. 21, 59:21-24, 62:20-63:9; Joint Ex. 93.
5. The Loan Agreements
On June 11, 2012, HiFi and Fulton entered into a $1.8 million term loan and a $4.2 million line of credit (collectively, “Initial HiFi Loans”). Tr. Apr. 13, 21:15-19, 99:8-13; Joint Ex. 61. Under the line of credit, Fulton agreed to fund advances up to the combined value of 80% of HiFi’s eligible accounts receivable (accounts receivable that were less than ninety days past due), and 60% of HiFi’s inventory (“Borrowing Base Formula”), as evidenced by monthly borrowing base certificates prepared by HiFi (“Certificates”).3 Tr. Apr. 13, 99:8-18, 105:2-17; Joint Ex. 20 ¶ 3.a. Fulton did not impose a cap on the amount of inventory against which HiFi could draw advances, and there were “no exclusions” with respect to the inventory which HiFi was permitted to use as collateral under the Certificates. Tr. Apr. 13, 99:25-100:13; Tr. Apr. 22, 162:7-9, 163:18-20.
In addition, the Debtor and Saul each signed personal guarantees of the Initial HiFi Loans on the same date. Tr. Apr. 22, 43:1-11, 44:17-25, 51:20-24; Joint Exs. 23, 26. At that time, Saul had assets of approximately $4 million, although $2.8 million of his assets was held in an IRA Account with Fulton (“IRA Assets”).4 Tr. Apr. 13, 138:5-14; Tr. Apr. 21, 7:18-8:10.
In connection with the Initial HiFi Loans, the Debtor affirmatively covenanted that HiFi would “maintain its books and records in accordance with GAAP” and that “all financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.” Tr. Apr. 22, 56:7-18, 57:6-11; Joint Exs. 21, 24. HiFi was also “responsible for the preparation and fair presentation of [HiFi’s] financial statements in accordance with [GAAP] ... and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.” Tr. Apr. 22, 76:14-21; Joint Ex. 7. The Debtor testified that he entrusted responsibility for HiFi’s compliance with these covenants and obligations with Sandquist and Spe-vak. Tr. Apr. 22, 57:12-24, 61:8-11. The Debtor acknowledged that he did not personally take any action to ensure HiFi’s compliance with these requirements and admitted that he was not familiar with *97GAAP requirements. Id. at 76:22-24, 141:1-7.
6. Drexel Contract
On October 3, 2012, Niedziejko, Sand-quist, and the Debtor met to discuss HiFi’s request for additional funds in connection with a $3.3 million contract that HiFi had secured with Drexel University (“Drexel Contract”) and was supposed to be completed within one year. Tr. Apr. 11, 47:3-6; Tr. Apr. 13, 112:15-113:6. In response, Ni-edziejko requested a copy of the Drexel Contract and HiFi’s profit and loss statement (“P & L”) through October 2012 to supplement HiFi’s 2012 fiscal year budget, which she already had. Tr. Apr. 13,114:11-19; Joint Ex. 30. On December 3, 2012, Sandquist emailed HiFi’s P & L for the year-to-date through October 2012 to Ni-edziejko and indicated that HiFi recorded a net profit in October, a net loss in November, and expected a “really good” December. Tr. Apr. 13, 115:6-13; Joint Ex. 30.
On January 7, 2013, Fulton extended a short-term $1.25 million line of credit to HiFi in order to fund the Drexel Contract (“Second HiFi Loan,” and collectively with the Initial HiFi Loans, “HiFi Loans”). Tr. Apr. 13,113:1-7,116:3-15; Joint Ex. 28. In connection with the Second HiFi Loan, the Debtor signed another business loan agreement and promissory note in the principal amount of $1.25 million in his capacity as CEO and President of HiFi. Tr. Apr. 22, 45:1-46:2; Joint Exs. 27-28.
7. Borrowing Base Certificates
In connection with the HiFi Loans, HiFi was required to submit monthly Certificates in order “to monitor line usage.” Tr. Apr. 13, 105:3-6. The Debtor did not personally review, sign, or submit any of the Certificates. Id. at 165:21-166:1; Tr. Apr. 22, 140:5-12. Rather, Sandquist was responsible for preparing and submitting the Certificates to Fulton based upon information that he requested from Zwaan. Tr. Apr. 11, 37:6-8.
Niedziejko was in charge of reviewing the monthly Certificates for Fulton. Tr. Apr. 13, 111:5-10. She testified that, when she received the Certificates, she ensured that HiFi had sufficient excess collateral to support the outstanding loan balances by confirming that HiFi was in compliance with the Borrowing Base Formula, and then forwarded the Certificates to Fulton’s credit department for tracking. Id. at 111:5-10,168:6-10.
On cross-examination, however, Nied-ziejko admitted that she did not “specifically remember” reviewing each of HiFi’s Certificates, although she testified that she reviewed each borrowing base certificate submitted to her “as a course of action.” Id. at 170:18-20. In fact, Niedziejko could not recall taking any specific action to ensure that HiFi’s Certificates complied with Fulton’s policies. Id. at 174:24-175:1. Moreover, when Sandquist submitted Certificates which violated Fulton’s policies, Niedziejko typically did nothing and rarely contacted Sandquist to correct such violations. Tr. Apr. 11, 79:6-79:20.
Niedziejko was supposed to enforce Fulton’s policies which required borrowing base certificates to be timely sent, signed, dated, and submitted with a detailed accounts receivable aging report. Tr. Apr. 22, 157:15-158:13. In contravention of Fulton’s policies, HiFi:
(1) Failed to submit any Certificates to Fulton for the first three months after the Initial HiFi Loans closed, although it was required to do so by the fifteenth day after the end of each month, Tr. Apr. 13,105:21-24,171:16-18;
(2) Routinely filed late Certificates thereafter, id. at 172:1-4;
*98(3) Submitted fifteen of the nineteen Certificates without any signature, id. at 166:2-10; and
(4) Failed to submit- a detailed accounts receivable aging report every month,5 id. at 106:6-10,175:14-17.
At trial, Fulton’s Eastern Regional Manager of - Special Assets, Cathy Ashley (“Ashley”), testified that Niedziejko “should have been fully aware” of Fulton’s policies requiring borrowing base certificates to be signed, dated, and timely submitted with a detailed accounts receivable aging report. Tr. Apr. 22, 156:9-12, 158:9-13. Ashley agreed that HiFi violated Fulton’s policies related to the Certificates for the entirety of their business relationship. Id. at 160:9-12. Ashley also admitted that many of Fulton’s lenders were “sloppy” at the time and that, as a result of the discovery of HiFi’s violations, Fulton implemented more “checks and balances” to prevent such violations in the future. Id. at 160:25-161:4.
C. 2012 Covenant Violation
On March 18, 2013, Sandquist and Spe-vak met with Niedziejko to inform her that Adelberg had improperly manipulated HiFi’s accounts receivable during his employment with HiFi,- prior to its commercial lending relationship with Fulton. Tr. Apr. 13, 117:9-24. They explained that Adelberg had recorded various “false” accounts receivable and that, as a result, HiFi was going to record a bad debt expense in the amount of $190,000 (“Bad Debt Expense”). Id. at 118:2-5, 121:10-17. They also informed her that HiFi was going to violate its debt coverage ratio covenant for 2012 (“2012 Covenant Violation”) due to the Bad Debt Expense and requested a waiver of that violation.6 Id. at 119:8-18.
Niedziejko testified that Sandquist “was devastated,” that Spevak “was just beside himself,” and that they were both “mortified” and “surprise[d]” by the incident. Id. at 117:24-118:1. They “indicated that they were taking this opportunity to look at their books, [and] clean everything up.” Id. at 118:2-4. According to them, it was “a one-time incident.” Id. at 119:1-2.
As part of the conversation, Sandquist and Spevak also disclosed that Adelberg was paid a $250,000 severance • package upon his departure. Id. at 118:13-14, 131:22-23. This surprised Niedziejko because she had previously been told by HiFi that Adelberg had retired. Id. at 118:14— 18. Niedziejko therefore “began to ques*99tion the content” of what she had been told in previous meetings.7 Id.
In order to waive the 2012 Covenant Violation, Niedziejko requested on March 19, 2013, interim financial statements and accounts receivable and accounts payable aging reports from Sandquist and Spevak for submission to Fulton’s loan committee. Id. at 124:3-14,126:2-14; Joint Ex. 53. On July 16, 2013, Niedziejko spoke with Sand-quist and Spevak via telephone to obtain a more detailed understanding of the “sequence of events” related to Adelberg’s misconduct. Tr. Apr. 13, 128:24-129:7; Joint Ex. 66. Although they did not tell •Niedziejko when they first learned about the Bad Debt Expense, Sandquist and Spevak clarified during the call that Adel-berg’s manipulation of the false accounts receivable actually comprised only 50% of the Bad Debt Expense and that “truly bad debt accrued over several years” comprised the other 50%. Tr. Apr. 13, 129:18— 24.
On July 12, 2013, Niedziejko recommended that Fulton waive the 2012 Covenant Violation due to “the forthrightness and the embarrassment that [Sandquist] and [Spevak] had displayed,” which led her “to believe that they were being honest and that it truly was a one time event.” Id. at 132:3-10. Ultimately, Fulton granted a waiver of the 2012 Covenant Violation.
D. 2013 Covenant Violation
In March 2014, Niedziejko and a Fulton cash management representative attended a meeting with Sandquist and Spevak where HiFi disclosed that it would post a “significant loss” for the 2013 fiscal year. Id. at 132:19-133:7. Niedziejko was surprised by the loss because Sandquist and Spevak had previously assured her that they would break-even for the year, “at worst,” and Sandquist had never disclosed any financial issues to Niedziejko throughout the previous year. Id. at 133:10-23. They explained that HiFi’s loss was attributable to a “significant loss” associated with the Drexel Contract. Tr. Apr. 11, 84:5-7; Tr. Apr. 13,134:2-4.
Niedziejko informed Sandquist and Spe-vak that Fulton’s relationship with HiFi “was not going in the direction that we had anticipated,” and that she intended to refer the relationship to Ashley. Tr. Apr. 13, 134:4-9. Thereafter, Ashley assumed responsibility for Fulton’s relationship with HiFi. Id. at 134:22-135:5. At that point, Niedziejko’s only responsibility was to provide Ashley with “insight and information,” and she “had no further contact” with HiFi. Id. at 135:6-10,
E. Fulton Field Examination of HiFi
On April 24, 2014, HiFi engaged Michael DuFrayne (“DuFrayne”) to advise it in connection with future discussions with Fulton. Tr. Apr. 11, 161:10-15, 162:2-6, 162:20-163:7. DuFrayne was a restructuring professional who frequently advised financially distressed companies regarding their long term viability and strategic alternatives, specifically whether to sell, reorganize, or liquidate. Id. at 160:3-25.
On April 25, 2014, Spevak disclosed HiFi’s practice of refreshing invoices to DuFrayne. Id. at 167:14-16, 168:6-20, 210:6-17. DuFrayne testified that he had never previously encountered such a practice, did not believe it was “proper from an accounting perspective,” and advised HiFi to discontinue it until receiving approval from Fulton. Id. at 172:11-16, 173:3-7. *100However, DuFrayne did not believe that the practice materially impacted HiFi’s financial statements because an account receivable could simultaneously be more than ninety days past due and still collectible within one year as required by GAAP. Id. at 211:7-213:4. When DuFrayne discussed the practice with Sandquist, Zwaan, and the Debtor at a follow-up meeting, none of them seemed surprised to hear about the practice. Id. at 171:13-24.
On April 30, 2014, Zwaan disclosed HiFi’s practice of advance billing to Du-Frayne. Id. at 173:14-25. Although Du-Frayne did not believe that the practice “skewed” HiFi’s financial statements, he did state that it was improper from an “accounting perspective.” Id. at 176:7-15.
On May 6, 2014, at the request of Fulton, Stephanie Mesnick (“Mesnick”) and Trade Bressler (“Bressler”), who were employed by Trump Lender Services, Inc., initiated a field examination of HiFi to discover “weaknesses” within HiFi’s collateral base. Tr. Apr. 12, 14:16-23, 15:19-21, EOF No. 55; Tr. Apr. 22, 189:3-14. Mes-nick was the lead examiner and was in charge of reviewing HiFi’s inventory; Bressler was in charge of reviewing HiFi’s accounts receivable. Tr. Apr. 12, 15:1-17. Because it was beyond the scope of their engagement, Mesnick and Bressler did not review any of the financial information submitted to Fulton prior to the closing of the Initial HiFi Loans in June 2012. Id. at 138:25-139:12.
DuFrayne immediately disclosed HiFi’s practices of refreshing invoices and advanced billing to Mesnick and Bressler. Tr. Apr. 11, 178:2-3, 180:4-6; Tr. Apr. 12, 15:24-16:2, 98:4-12. When Bressler communicated this information to Ashley, she did not dispute that HiFi had previously told Fulton about its practice of refreshing invoices. Tr. Apr. 12,156:15-157:9.
For her part of the field examination, Mesnick compared HiFi’s “inventory perpetual” to its other documentation, including its financial statements, general ledger, and Certificates.8 Id. at 20:8-13. For the seven months of data available to Mesnick between September 2013 and March 2014, she observed that the amount of inventory on HiFi’s general ledger and Certificates consistently exceeded the amount of inventory on its inventory perpetual by $300,000 to $500,000. Id. at 22:23-23:10.
DuFrayne was unconcerned about the variance between HiFi’s general ledger and Certificates on one hand, and its inventory perpetual on the other, because he believed that it was immaterial relative to $3 million of inventory. Tr, Apr. 11, 213:11-214:7. Moreover, he attributed the most recent month’s inconsistency in part to obsolete inventory and in part to ongoing, but unbilled projects. Tr. Apr. 12, 23:18-24:13.
Mesnick also tested HiFi’s inventory perpetual to determine whether the costs of the items reported therein were overstated or understated relative to the costs reflected on the most recent vendor invoices. Id. at 31:12-13, 33:19-20. Accordingly, she requested that HiFi produce the most recent vendor invoices for approximately one hundred items on the perpetual, but HiFi produced only fifty-seven.9 *101Id. at 29:18-22. Mesnick then selected an additional twenty items for which she already had invoices from previous tests. Id. at 31:17-19. Ultimately, she tested approximately 40% of HiFi’s inventory and determined that HiFi’s inventory perpetual overstated its inventory costs by an average of 4.3%, which she admitted was immaterial. Id. at 34:2-6, 37:3-4, 78:1-3, 80:2.
Mesnick further examined HiFi’s inventory to assess its composition. She determined that, although 67% of HiFi’s inventory was warehouse inventory, 43% was “showroom inventory,” which, in her opinion, loses value over time because “it’s out of the box, it’s been used, people have been touching it, [and] it’s covered in dust.” Id. at 39:24-40:4, 41:23-25. Additionally, 62% of its warehouse inventory was considered “slow moving,” or over one year old. Id. at 38:7-12, 40:18-20. Finally, a significant portion of HiFi’s inventory was considered to be “excess units.” Id. at 42:20-21. Mes-nick concluded that HiFi did not employ “the best inventory practice^]” and recommended that Fulton restrict the types of inventory that could be considered collateral under the HiFi Loans. Id. at 56:18-22.
Finally, based on her discussions with HiFi, Mesnick concluded that the value of only one piece of inventory was actually adjusted in the inventory perpetual to the lower of cost or market. Id. at 44:21-45:4. However, Mesnick did not test the market value of HiFi’s inventory to determine whether any items required adjustments. Id. at 75:20-23.
For her part of the field examination, Bressler performed four accounts receivable tests: (1) an “invoice test” to determine whether HiFi’s invoices were valid and delivered to its customers in connection with work actually performed and completed; (2) a “credit memo test” to determine why accounts receivable credits were issued, e.g., for billing errors, allowances, or rebates; (3) a “cash application test” to compare accounts receivable aging reports and determine why accounts receivable were removed from the reports, e.g., for payment; and (4) a “past due review” to determine why invoices became, or might become, more than ninety days past due. Id. at 95:15-96:12. The scope of Bressler’s analysis was limited to HiFi’s accounts receivable from March 2013 to March 2014. Id. at 139:13-21.
To perform these tests, Bressler required accounts receivable aging reports, but the reports that - DuFrayne initially provided to her were invalid because they contained refreshed invoices and advanced billings. Id. at 96:13-15, 98:15-17. Du-Frayne then provided a revised accounts receivable aging report to Bressler as of March 31, 2014, which only omitted the advanced billings. Id. at 99:1-9, 108:19-23; Joint Ex. 58. The original detailed accounts receivable aging report stated eligible accounts receivable in the amount of $1.84 million, whereas the revised report stated eligible accounts receivable in the amount of $1.43 million. Tr. Apr. 12, 103:12-17.
*102Bressler subsequently determined that, of the $1.43 million of eligible accounts receivable, $775,000 was actually attributable to refreshed invoices that were more than ninety days past due, the majority of which were refreshed multiple times. Id. at 181:12-19, 132:14-16. However, she admitted that she had no idea if the $775,000 of refreshed invoices were collectible within one year of the date that they were originally invoiced because HiFi did not document how many times it refreshed such invoices. Id. at 142:16-23. Finally, Bressler testified that she did not believe that anyone at HiFi tried to hide the practice of refreshing invoices from her and that HiFi was very open with her about the practice. Id. at 141:7-11.
F. Liquidation
On May 9, 2014, HiFi and DuFrayne met with Fulton to discuss HiFi’s liquidity issues—its cash flow, its outstanding checks, and how it could collect accounts receivable and continue operations or “sell itself as a going concern.” Tr. Apr. 11, 186:5-13, 207:2-11. Following the meeting, it was DuFrayne’s understanding that, although HiFi’s credit line would be frozen, HiFi anticipated that Ashley would review and approve a list of outstanding checks that HiFi asked Fulton to honor.10 Id. at 208:19-25, 218:9-20. Accordingly, Du-Frayne prepared a thirteen-week cash flow that outlined a plan for HiFi to operate on a cash collateral budget using the expected cash flow from its existing accounts receivable rather than its credit line. Id at 163:22-164:1, 209:11-15.
Ashley subsequently indicated, however, that the checks would not be honored and that Fulton would charge overdraft fees. DuFrayne described this as “a watershed event” because the thirteen-week cash flow was insufficient to pay the checks. Id at 217:11-218:2. When HiFi’s outstanding checks to its vendors and employees then bounced, it resulted in a “tipping point,” according to Sandquist. Id. at 90:17-91:5. On May 23, 2014, Fulton notified HiFi, Saul, and the Debtor that HiFi was in default of the HiFi Loans even though HiFi was current on its payment obligations to Fulton. Joint Pretrial Statement 3, 8, EOF No. 28.
Subsequently, Ashley rejected settlement offers by Gramophone, Ltd. (“Gramophone”),11 and by the Debtor.12 Ashley rejected the Debtor’s offer because, based on her prior experiences, she expected Saul to voluntarily withdraw funds from his IRA Account to contribute to a global settlement “if he was a person of integrity.” Tr. Apr. 22, 203:10-21. Thus, she rejected the Debtor’s offer in order to persuade Saul to “sweeten the pot.” Id. at 204:3-6. In the absence of Saul’s contribution of IRA funds, she felt that the Debt- or’s offer was inadequate. Id. at 203:18-21. As of May 31, 2014, Fulton was “exploring” how to acquire the mandatory distri-*103buttons of Saul’s IRA Assets in connection with his personal guaranty of the HiFi Loans.13 Id. at 198:25-199:4. On June 12, 2014, Fulton confessed judgment against HiFi, Saul, and the Debtor in the amount of $6.73 million. Joint Pretrial Statement 3.
On July 8, 2014, DuFrayne sent Fulton an accounts receivable aging report which, for the first time, included comments from HiFi regarding the collectability of such accounts. Tr. Apr. 11, 197:12-198:1. The report indicated that only $544,000 of HiFi’s approximately $1 million of accounts receivable was collectible as of June 30, 2014. Id. at 198:20-199:4. DuFrayne testified, however, that at the time the report was issued, HiFi had been closed for four weeks which decreased HiFi’s ability to collect those accounts receivable. Id. at 201:20-24, 205:6-11, 206:9-19. Fulton ultimately liquidated HiFi’s accounts receivable and inventory and, although it did not collect much on the accounts receivable, it netted approximately $1.2 million on the inventory. Tr. Apr. 22, 220:11-18.
After HiFi ceased operations, the Debt- or initially began working for a digital marketing startup in Raleigh, North Carolina, as an enterprise sales manager. Id. at 137:3-13. The Debtor later transitioned to a company similar to HiFi in Barring-ton, Illinois, where he currently works as an executive director with substantially similar responsibilities as those he performed for HiFi. Id. at 137:11-138:19. The Debtor has maintained that he is “unqualified” to manage a business from a financial perspective. Id. at 139:16-22.
G. The Debtor’s Residential Loans with HiFi
On September 17, 2012, the Debtor signed two notes in favor of Fulton (collectively, “Residential Loans”) in order to refinance two loans previously issued to him, both of which were secured by his personal residence located at 8 Alyssa Circle in Malvern, Pennsylvania (“Property”). Compl. ¶42, ECF No. 1; Tr. Apr. 13, 59:21-24; Joint Exs. 77-78. Specifically, the Debtor signed: (1) a note in favor of Fulton in the amount of $417,000 (“First Alyssa Note”) to satisfy the first mortgage on his Property held by Wells Fargo; and (2) a note in favor of Fulton in the amount of $260,000 (“Second Alyssa Note”) to satisfy the second mortgage on his Property held by Citizens Bank. Compl. ¶¶ 43-46; Tr. Apr. 22, 127:5-21. The Citizens Bank mortgage secured a $260,000 line of credit (“Citizens Line”) previously extended by Citizens Bank to the Debtor. Tr. Apr. 22, 127:13-18.
Although both Fulton and the Debtor intended for the Citizens Line to be closed after Fulton refinanced it, Fulton failed to close the Citizens Line. Tr. Apr. 13, 25:12-19. Brightbill, who was in charge of servic*104ing the Residential Loans, attempted to deliver a pay-off notice, signed by the Debtor, to Citizens Bank (“Pay-Off Notice”) four days after the Residential Loans closed. Id. at 25:23-26:2, 27:2-28:1. The Pay-Off Notice stated that the Debtor “requested] that this account be permanently closed to further advances and a discharge of mortgage be issued.”14 Id. at 28:2-15; Joint Ex. 83.
However, when Brightbill delivered the Pay-Off Notice to Citizens Bank, the Citizens Bank teller returned it to Brightbill and indicated that “it was not something that they needed for their records.” Tr. Apr. 13, 27:2-27:11, 63:15-19, 64:8-10, 66:16-18. Although Brightbill was given a receipt for the funds used to pay down the Citizens Line, he “did not follow-up” with Citizens Bank afterwards to ensure that the Citizens Line was closed, nor did he notify anyone at Fulton that Citizens Bank had not accepted the Pay-Off Noticp. Id. at 63:19-22, 65:14-21.
Indeed, Citizens did not close the Citizen Line and continued to send statements to the Debtor which reflected that the Citizens Line was still open for the Debtor to draw down on. Tr. Apr. 22, 131:8-13. At that time, the Debtor did not realize why the Citizens Line remained open. Id. at 131:14-17. Fulton admitted at trial that the Debtor was not responsible for the failure of Citizens Bank to close the Citizens Line and that the Debtor “did everything he was supposed to do” in connection with the closing of the Citizens Line. Id. at 210:10-17-
On January 8, 2014, Fulton obtained a credit report on the Debtor which indicated that the Citizens Line was still open. Tr. Apr. 13, 189:19-190:15; Joint Ex. 100. However, Fulton did not take any further action to close the Citizens Line. Tr. Apr. 13, 65:22-24.
In February or March 2014, the Debtor drew down two advances on the Citizens Line totaling $250,000 (“Drawdown”) and reinvested the entire amount in HiFi in order to recapitalize the company. Tr. Apr. 22, 131:18-25, 143:13-24. The Debtor did so because HiFi was facing a temporary cash deficit and because it was customary for the Robbins family to invest personal funds in the company in such situations, pending the expected payment of outstanding accounts receivable. Id. at 132:3-11. Saul also invested personal funds into the company at that time. Id. at 142:23-24.
Although the Drawdown essentially eroded Fulton’s lien position on the Property by $250,000, the Debtor credibly testified that he did not understand how drawing upon the Citizens Line would affect the priority of Fulton’s mortgages on his Property, and that he did not intend to harm Fulton. Id. at 144:10-21, 233:19-22. He also denied that he drew upon the Citizens Line out of anger towards Fulton. Id. at 151:25-152:4.
H. The Debtor’s Bankruptcy Proceeding
On November 11, 2014, the Debtor filed a Chapter 7 voluntary bankruptcy petition. On December 22, 2014, Fulton filed a proof of claim against the Debtor in the amount of $5.35 million (“Claim”), of which approximately $4.44 million related to the Debt- *105or’s guaranty of the HiFi Loans (“HiFi Guaranty Claim”). Compl. ¶ 56.
Apparently, Fulton ultimately sold the First Alyssa Note to an undisclosed third party bank (“Bank”), but alleged that it is the servicer for such loan. Id. ¶ 54. Neither the Bank nor Fulton filed a proof of claim in connection with the First Alyssa Note or Second Alyssa Note. Id. ¶ 57; Claim 1-I, In re Robbins, Bankr. No. 14-8860 (Bankr. E.D. Pa. Dec. 22, 2014).
On December 22, 2014, Fulton filed an adversary complaint (“Adversary Complaint”) against the Debtor and sought a determination that: (1) the HiFi Guaranty Claim be deemed nondischargeable under § 523(a)(2)(B); and (2) “an additional $232,791.81 of the claim of Fulton Bank, N.A.” be deemed nondischargeable under § 523(a)(6), presumably in connection with the Second Alyssa Note. Compl. ¶¶ 65, 72. On March 2, 2015, the Debtor filed an answer (“Answer”) asserting, inter alia, the unclean hands doctrine as an affirmative defense to the Adversary Complaint. Answer ¶ 78, ECF No. 5.
After the parties filed pretrial statements and briefs, a five-day trial was held on the Adversary Complaint between April II, 2016, and April 22, 2016. At trial, the parties acknowledged that, although the Property was supposed to be sold at a foreclosure sale, the sale has not yet occurred. Tr. Apr. 22, 235:4-11. The parties subsequently filed proposed findings of fact and conclusions of law, as well as post-trial briefs and reply briefs. The issues raised by the Adversary Complaint are now ripe for decision.
III, DISCUSSION
The Bankruptcy Code provides debtors with the opportunity to “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.’ ” Grogan v. Gamer, 498 U.S. 279, 286, 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)). Section 523(a) of the Bankruptcy Code, however, provides that “[a] discharge under section 727 ... of this title does not discharge an individual debt- or” from certain categories of debts. 11 U.S.C. § 523(a).
The nondischargeability provisions of the Code “reflect a congressional decision to exclude from the general policy of discharge certain categories of debts,” including “liabilities for fraud.” Grogan, 498' U.S. at 287, 111 S.Ct. 654. “Congress evidently concluded that the creditors’ interest in recovering full payment of debts” incurred pursuant to fraud “outweighed the debtors’ interest in a complete fresh start.” Id. at 287, 111 S.Ct. 654. Thus, the “fresh start” policy is limited to the “honest but unfortunate debtor.” Id. at 286-87, 111 S.Ct. 654 (quoting Local Loan Co., 292 U.S. at 244, 54 S.Ct. 695); see also In re Bocchino, 794 F.3d 376, 380 (3d Cir. 2015).
The burden to prove that a debt is nondischargeable under § 523(a) is “upon the creditor, who must establish entitlement to an exception by a preponderance of the evidence.” In re Cohn, 54 F.3d 1108,1114 (3d Cir. 1995). In In re Cohn, 54 F.3d 1108 (3d Cir. 1995), the court stated that “the creditor at all times retains both the burden of proof and the burden of production regarding all four elements” of subsection (a)(2)(B), and that exceptions to discharge under § 523(a) “are strictly construed against creditors and liberally construed in favor of debtors.” Id. at 1113, 1120.
In this adversary proceeding,' Fulton asks the Court to determine that: (1) the HiFi Guaranty Claim is nondischargeable *106under § 523(a)(2)(B), as a debt incurred in connection with credit obtained by certain materially false written statements; and (2)' the Debtor’s obligation under the Second Alyssa Note is nondischargeable under § 523(a)(6) as a debt for a willful and malicious injury. 11 U.S.C. §§ 523(a)(2)(B), (6).
A. Fulton’s Nondischargeability Claim Under § 523(a)(2)(B)
Section 523(a)(2)(B) provides that a debt for “an extension, renewal, or refinancing of credit” is nondischargeable “to the extent obtained by” a written statement:
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such ... credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
Id. § - 523(a)(2)(B) (emphasis added). Thus, as a threshold matter, a creditor must demonstrate that a debtor made an “actionable misrepresentation” before the debtor obtained an extension, renewal, or refinancing of credit from the creditor. In re Booher, 284 B.R. 191, 200-01 (Bankr. W.D. Pa. 2002). Otherwise, the ’ creditor could not demonstrate that it issued the credit in reliance upon the debtor’s misrepresentation. Id.; see also In re Braathen, 364 B.R. 688, 699 (Bankr. D.N.D. 2006) (“The language ‘obtained by clearly indicates that the fraudulent conduct occurred at the inception of the debt, i.e., the debtor committed a fraudulent act to induce the creditor to part with its money, property or services.”).
1. Material Falsity Under § 523(a)(2)(B)(i)
A materially false statement is “an important or substantial untruth.” Cohn, 54 F.3d at 1114 (quoting In re Bog-stad, 779 F.2d 370, 375 (7th Cir. 1985)). “A finding of material falsity may be premised upon the inclusion of false information or the exclusion of information regarding the debtor’s [or an insider’s] financial condition.” In re Chryst, 177 B.R. 486, 499 (Bankr. E.D. Pa. 1994). Section 523(a)(2)(B)(i) articulates a question of law that is determined pursuant to an objective standard. Cohn, 54 F.3d at 1115,
Whether a false statement qualifies as material depends on “the effect of the falsity on the creditor’s decision to enter into the transaction,” i.e., “whether the lender would have made the loan had he known of the debtor’s true financial condition.” Id. at 1114 (quoting Bogstad, 779 F.2d at 375). However, such effect is merely an “indicia of the materiality of the falsity,” and actual reliance is unnecessary if “a reasonable person would have relied upon [the falsity] ... in the case at hand.”15 Id. Thus, a false statement may have been material if it was “capable of influencing, or had a natural tendency to influence, a creditor’s decision.” Id. at 1115; accord In re Chan, Bankr. No. 06-13521ELF, 2008 WL 5428271, at *15 (Bankr. E.D. Pa. Dec. 31, 2008).
2. Insider’s Financial Condition Under § 523(a)(2)(B)(ii)
Section 523(a)(2)(B)(ii) requires that the written statement respect “the *107debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(B)(ii). The term “insider” is defined in the Bankruptcy Code and includes, inter alia, a “corporation of which the debtor is a director, officer, or person in control.” Id. § 101(31)(A)(iv). The term “financial condition,” however, is not defined in the Bankruptcy Code and the Third Circuit has yet to address its meaning. In re Witmer, 541 B.R. 769, 782 (Bankr. M.D. Pa. 2015) (citing In re Feld-man, 500 B.R. 431, 436-38 (Bankr. E.D. Pa. 2013)).
However, the majority of courts which have analyzed this issue have adopted a strict interpretation of this term to “re-ferí ] only to the debtor’s overall financial condition, such as the debtor’s solvency or net worth.”16 Feldman, 500 B.R. at 436 (citing cases). The strict interpretation thus “limits an actionable statement of financial condition to financial-type statements including balance sheets, income statements, statements of changes in financial position, or income and debt statements.” Id. at 437 (quoting In re Joelson, 427 F.3d 700, 711-12 (10th Cir. 2005), cert, denied sub nom. Joelson v. Cadwell, 547 U.S. 1163,126 S.Ct.’2321, 164 L.Ed.2d 840 (2006)).
Under the strict interpretation, borrowing base certificates do not qualify as written statements about a borrower’s “financial condition” because they do not present the creditor with a comprehensive view of the borrower’s overall net worth. See In re Cohen, 599 Fed.Appx. 192, 193 (5th Cir. 2015) (affirming the district court’s decision that borrowing base certificates were not statements respecting the borrower’s financial condition because they did not list ■ the borrower’s other assets, such as equipment or cash, and they failed to provide any information about the borrower’s liabilities); In re Kakde, 382 B.R. 411, 422 (Bankr. S.D. Ohio 2008) (concluding that, under the “strict interpretation” of the term “financial condition,” the borrowing base certificates submitted to the lender in that case did not qualify as statements about the borrower’s financial condition because they omitted assets such as machinery, equipment, vehicles, and “substantial liabilities,” and therefore “were not intended,” nor did they serve to provide the creditor with “more comprehensive asset and liability information”).
Only the Fourth Circuit broadly interprets the term “financial condition.” See Engler v. Van Steinburg, 744 F.2d 1060, 1060-61 (4th Cir. 1984) (concluding that *108“Congress did not speak in terms of financial statements. Instead it referred to a much broader class of statements —”). The justification underlying this minority view is that the Bankruptcy Code uses the broader term “financial condition,” rather than “financial statement,” and that statements concerning the ownership of, or encumbrance upon, even a single asset can implicate “the very heart of a [debtor’s or insider’s] financial condition.” Feldman, 500 B.R. at 437 (alteration in original).
This Court is persuaded by the reasoning in the Tenth Circuit’s decision in In re Joelson, 427 F.3d 700 (10th Cir. 2005), cert, denied sub nom. Joelson v. Cadwell, 547 U.S. 1163, 126 S.Ct. 2321, 164 L.Ed.2d 840 (2006), which advocates for the strict interpretation based upon (1) the text, structure, and policy of the Bankruptcy Code; (2) the legislative history of the Bankruptcy Code; and (3) United States Supreme Court precedent.17 The Court therefore will join its sister courts and adopt the *109majority view. See Witmer, 541 B.R. at 782; Feldman, 500 B.R. at 437; In re Campbell, 448 B.R. 876, 886 (Bankr. W.D. Pa. 2011). Pursuant to the strict interpretation of the term “financial condition,” borrowing base certificates do not qualify as written statements about a borrower’s financial condition as required by § 523(a)(2)(B)(ii).
3. Reasonable Reliance Under § 523(a)(2)(B)(iii)
Section 523(a) (2) (B) (iii) requires that the creditor actually relied on the written statement and that such reliance was reasonable. Field v. Mans, 516 U.S. 59, 68, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); accord Chan, 2008 WL 5428271, at *18. “[T]he reasonableness issue under § 523(a)(2)(B) is not whether it was reasonable for the Plaintiff to have invested in the Debtor’s business, but whether it was reasonable for [it] to have relied upon the Debtor’s statements ... without making further inquiries before deciding to invest.” Chan, 2008 WL 5428271, at *20.
Whether it was reasonable for a creditor to rely on a written statement is determined pursuant to an objective standard, “i.e., that degree of care which would be exercised by a reasonably cautious person in the same business transaction under similar circumstances.” Cohn, 54 F.3d at 1117. Such a determination implicates:
(1) the creditor’s standard practices in evaluating credit-worthiness (absent other factors, there is reasonable reliance where the creditor follows its normal business practices); (2) the standards or customs of the creditor’s industry in evaluating credit-worthiness (what is considered a commercially reasonable investigation of the information supplied by debtor); and (3) the surrounding circumstances existing at the time of the debtor’s application for credit (whether there existed a “red flag” that would have alerted an ordinarily prudent lender to the possibility that the information is inaccurate, whether there existed previous business dealings that gave rise to a relationship of trust, or whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations).
Id.; accord Chan, 2008 WL 5428271, at *18. “[T]he greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact.” Field, 516 U.S. at 76, 116 S.Ct. 437. In other words, “reasonableness goes to the probability of actual reliance.” Id:
4. Intent to Deceive Under cn to CO
Section 523(a)(2)(B)(iv) will rarely be proven by direct evidence because a debtor “will rarely, if ever, admit that deception was his purpose.” Cohn, 54 F.3d at 1118. The intent to deceive requirement therefore may be “inferred from the totality of the circumstances.” Id. at 1118-19; accord Chan, 2008 WL 5428271, at *17. Moreover, it is sufficient that the debtor exhibited mere “reckless indifference to, or reckless disregard of,” the truth of his statements concerning his or an insider’s financial condition. Cohn, 54 F.3d at 1119.
“A writing is published under this subsection if it is ‘either written by the debtor, signed by the debtor, or adopted and used by the debtor.’ ” Chryst, 177 B.R. at 500 (quoting In re Martz, 88 B.R. 663, 671 (Bankr. E.D. Pa. 1988)); see also *110Bmathen, 864 B.R. at 700 (“The writing requirement is satisfied if the written statement was signed, adopted and used, or caused to be prepared by, the debtor.”). Moreover, the Third Circuit has suggested that, if an agent commits fraud, such fraud may be imputed to the principal under § 523(a)(2)(B)(iv), to the extent that the agent commits the fraud within the scope of the agency.18 Cohn, 54 F.3d at 1119.
5. HiFi’s Borrowing Base Certificates and Financial Statements
Fulton argues that the HiFi Guaranty Claim is nondischargeable under § 523(a)(2)(B) based upon false information contained in the Certificates and HiFi’s financial statements.
a. HiFi’s Borromng Base Certificates
Although Fulton based most of its case at trial on the falsity of the Certificates, as discussed above, the Court has concluded that the Certificates cannot be considered a written statement about HiFi’s financial condition under § 523(a)(2)(B)(ii). In fact, the Certificates submitted by HiFi completely omitted HiFi’s income and retained earnings and did not include HiFi’s other assets such as its automotive equipment, furniture and fixtures, improvements, insurance, and goodwill, which accounted for nearly one-third of HiFi’s total assets from 2012 to 2013.19 In addition, the Certificates omitted nearly half of HiFi’s total liabilities.20
Moreover, even if the Court had adopted the minority view and considered the Certificates in its analysis of Fulton’s § 523(a)(2)(B) claim, it is clear that Fulton did not actually rely upon the Certificates in extending the Initial HiFi Loans in June of 2012 as required by § 523(a) (2) (B) (iii) because HiFi only began submitting Certificates to Fulton in September of 2012. In addition, Fulton failed to provide any evidence at trial that it actually relied upon the Certificates in extending the Second HiFi Loan in January of 2013. Indeed, based upon Fulton’s significant lack of oversight over HiFi’s compliance with Fulton’s borrowing base certificate requirements, it is questionable whether Fulton actually or reasonably relied upon the Certificates for any purpose.21
*111Because the Certificates do not constitute statements regarding HiFi’s financial condition as required under § 523(a)(2)(B)(ii), the Court will deny Fulton’s nondischargeability claim to the extent that it is based upon allegedly false statements contained in the Certificates.
b. HiFi’s Financial Statements
Unlike the Certificates, HiFi’s independently reviewed year-end financial statements and internally prepared interim financial statements qualify as written statements reflecting HiFi’s financial condition under the strict interpretation of the term “financial condition.” Feldman, 500 B.R. at 437 (quoting Joelson, 427 F.3d at 711-12). HiFi’s financial statements also satisfy the other requirement of § 523(a)(2)(B)(ii), that the written statement pertain to an insider of the Debtor, because the Debtor was an officer of HiFi as required under the definition of “insider” pursuant to § 101(31)(A)(iv).
Although HiFi’s financial statements qualify as written statements related to HiFi’s “financial condition,” the only financial statements which can be considered a basis for determining the nondischarge-ability of the HiFi Guaranty Claim under § 523(a)(2)(B) are the financial statements provided to Fulton before HiFi obtained an extension of credit from Fulton. See Booker, 284 B.R. at 200-01. Thus, the only financial statements which are relevant to this Court’s determination of nondis-chargeability are the financial statements provided by HiFi to Fulton prior to the extension of the Initial HiFi Loans in June of 2012 and the Second HiFi Loan in January of 2013. Fulton, however, did not focus on these two points in time in its Adversary Complaint, at trial or in its post-trial briefing, and based its case on alleged inaccuracies contained in the financial statements provided by HiFi to Fulton after the HiFi Loans were extended.
For instance, Fulton generally argues that a significant amount of HiFi’s accounts receivable were not collectible within a year, and therefore should not have been listed as current assets in HiFi’s financial statements. Fulton Conclusions ¶ l.d, ECF No. 64. However, Fulton has not provided a shred of evidence that the accounts receivable listed in the financial statements provided by HiFi to Fulton, in connection with either the Initial HiFi Loans in June of 2012 or the Second HiFi Loan in January 2013 (collectively, “Financial Statements”), were false.22
Other than admitting copies of the Financial Statements into the record, Fulton did not provide any testimony or documents which pertain to any of the accounts receivable listed in the Financial State*112ments. Rather, Fulton relies upon the fact that HiFi generally engaged in the practice of refreshing invoices as evidence that the list of “current” accounts receivable in the Financial Statements must have been false. However, although the practice of refreshing invoices may constitute evidence that some of the Certificates were false, there is no evidence in the record that such practice had any impact on the Financial Statements. “Current” accounts receivable only need to be collectible within one year in order to be compliant with GAAP, and Fulton failed to provide any evidence that any of the “current” accounts receivable listed in the Financial Statements were not collectible within one year.
Moreover, Spevak credibly testified that he had previously been told that HiFi’s refreshed invoices were collectible within one year and, therefore, did not reference 'the practice in any of HiFi’s financial statements, In addition, DuFrayne testified that the practice of refreshing invoices was immaterial with regard to HiFi’s financial statements because HiFi’s accounts receivable could simultaneously be more than ninety days past due and still be collectible within one year as required by GAAP. Tr. Apr. 11, 211:7-213:4. Accordingly, DuFrayne did not believe that the practice “skewed” HiFi’s financial statements. Id. at 176:7-15. Indeed, based upon the testimony provided by HiFi’s representatives, it is clear that the only way to determine whether any of the “current” accounts receivable listed in the Financial Statements were false would have been to review the actual invoices kept by individual sales people at HiFi related to the “current” accounts receivable in the Financial Statements. However, Fulton failed to provide any evidence about these accounts receivable at trial.
Fulton also argued that HiFi’s accounts receivable were overstated. Fulton Conclusions ¶ l.c. As evidence of this, Fulton points to the results of Bressler’s field exam of HiFi’s accounts receivable, which suggested that (1) HiFi determined that only 2% of its accounts receivable more than ninety days past-due were collectible; (2) 55% of HiFi’s accounts receivable more than ninety days past-due were not current assets; and (3) $775,000 of the $1.4 million of eligible accounts receivable listed on HiFi’s February 2014 borrowing base certificate had been refreshed at least once.23 Fulton Post-Trial Br. 31, EOF No. 65. However, because Bressler’s exam was limited to HiFi’s accounts receivable from March 2013 to March 2014, her statements have no impact on the veracity of the accounts receivable in the Financial Statements. Tr. Apr. 12, 139:13-21. Moreover, DuFrayne credibly testified that the dismal statements in Bressler’s report about the collectability of those accounts receivable were based upon HiFi’s inability to collect such accounts receivable because it had already ceased operations.
Finally, Fulton argues that the Financial Statements were materially false because HiFi failed to maintain supporting documentation in connection with its practice of refreshing invoices, thus preventing Fulton from determining whether HiFi’s accounts receivable “were valid, or ... collectible at all.” Fulton Conclusions ¶ 9. However, the lack of supporting documentation in connection with HiFi’s practice of refreshing invoices does not prove anything and does *113not even come close to satisfying Fulton’s burden of proof in this regard.
For example, Fulton presented extensive testimony that HiFi’s inadequate record keeping hindered Bressler’s efforts to determine the extent to which HiFi overstated its accounts receivable between March 2013 and March 2014. Accordingly, Fulton argues:
There is no way to determine the precise amount that these representations were overstated, as HiFi has no records in support of the vast majority of its invoices for most of this period; that is to say there are no records of signed contracts, no signed proposals, no drawings with measurement^ for installation, no parts lists showing the required components and associated hardware, no specification sheets identifying specifications of components, no record of correspondence with the customers; in short, no record or copy of anything that would serve to substantiate that any goods or services were ever provided. We do know that for many years, HiFi had engaged in refreshing its accounts receivable, and had no records as to: the original date of refreshed invoices; which invoices were refreshed; or the dates that they were refreshed, other than the last date that was reflected before this practice came to an end, at the end of the Company’s existence.... We do know that neither the Debtor, nor Patricia Zwaan, nor Paul Sandquist have any idea as to how the actual age of most of the refreshed accounts receivables might be determined.
Fulton Post-Trial Br. 30-31 (emphasis added). However, Fulton was required to present such evidence at trial in order to satisfy its burden of proof under § 523(a)(2)(B), and it has failed to do so.
Moreover, as discussed above, Fulton only produced information about HiFi’s accounts receivable from March 2013 to March 2014, which is after the time that Fulton extended the HiFi Loans. HiFi’s failure to keep proper documentation of its practice of refreshing invoices related to these accounts, therefore, has no bearing on this Court’s determination about the veracity of the “current” accounts receivable listed in the Financial Statements. In order to determine whether HiFi’s practice of refreshing invoices had any effect on the “current” accounts receivable listed in the Financial Statements (i.e., whether those accounts were collectible within one year of being invoiced), Fulton would have had to review the actual invoices kept by individual sales people at HiFi related to such accounts. Fulton failed to produce this information at trial, so it necessarily cannot demonstrate that the accounts receivable in the Financial Statements were materially false as required under § 523(a)(2)(B)®.
Fulton also argues that the Financial Statements were materially false as to HiFi’s inventory because HiFi never took steps to value its inventory at the lower of cost or market, as required under GAAP. Fulton Conclusions ¶¶ l.e, 10. As evidence of this, Fulton references (1) Mesnick’s testimony that “HiFi’s inventory was extremely susceptible to emerging technology,” and therefore prone to obsolescence; (2) the discrepancies that DuFrayne and Mesnick discovered between HiFi’s general ledger and its'inventory perpetual; and (3) the fact that Fulton netted only $1.3 million when it liquidated HiFi’s inventory in August 2014. Fulton Post-Trial Br. 32-34.
Once again, Fulton failed to provide any evidence that the value of the inventory listed in the Financial Statements was false. Fulton did not provide expert testimony about the value of any of HiFi’s inventory, much less the value of the in*114ventory listed in the Financial Statements. In contrast, the Debtor credibly testified that HiFi’s high-end inventory maintained, and sometimes increased, its value over time. Because Fulton did not present contrary evidence (other than the testimony of Mesnick, who was not qualified to testify as an expert and did not appear to have any experience valuing high-end audio visual inventory), it is fair to presume that HiFi did not go through the motions of evaluating whether its inventory was properly valued because it knew that its inventory, at the very least, maintained its value over time.
In addition, as DuFrayne testified, the $300,000 to $500,000 discrepancy between HiFi’s inventory on its general ledger and its inventory perpetual was immaterial in the context of HiFi’s overall inventory of $3 million. Tr. Apr. 11, 213:11-214:7. And, as Mesnick admitted at trial, although HiFi’s inventory perpetual overstated its inventory by 4.3%, such overstatement was also immaterial. Tr. Apr. 12, 78:1-3, 80:2. Finally, to the extent that the liquidation value of HiFi’s inventory was less than the cost of HiFi’s inventory as listed on its 2014 financial statements, that shortfall has no impact on this Court’s determination of the value of HiFi’s inventory in the Financial Statements, and there was no evidence given that HiFi was required to list the liquidation value of its inventory in its financial statements under GAAP.
In sum, HiFi’s Financial Statements were not materially misstated as to either its accounts receivable or inventory. The Court therefore cannot conclude that, had Fulton, or a “reasonable” creditor, known of HiFi’s “true financial condition,” it would not have extended the HiFi Loans. Cohn, 54 F.3d at 1114-15 (quoting Bog-stad, 779 F.2d at 375), Accordingly, Fulton has not satisfied its burden of proof under § 523(a)(2)(B)(i) as it applies to HiFi’s Financial Statements.
Fulton also failed to prove at trial that the Debtor caused HiFi’s Financial Statements to be published “with the intent that the Bank be deceived into lending more money to HiFi than would have been otherwise loaned.” Fulton Conclusions ¶ 13. Fulton argues that the Court must infer such intent from the existence of HiFi’s practice of refreshing invoices because the practice serves “no legitimate purpose ... other than to deceive a lender.”24 Fulton Posh-Trial Br. 49. Alternatively, Fulton argues that the Debtor was at least recklessly indifferent as to the truth and accuracy of the Certificates and financial statements because he entrusted HiFi’s finances to Sandquist and Zwaan despite their lack of credentials, and subsequently failed to supervise them to ensure that HiFi complied with the loan agreements. Fulton Conclusions ¶ 14; Fulton Post-Trial Br. 52-53.
The Court finds that the weight of the evidence presented at trial demonstrates that the Debtor never intended to deceive Fulton when HiFi submitted the Financial Statements. In fact, the Debtor credibly presented himself at trial as a hard-working man with integrity. He was committed to HiFi and had worked there for almost forty years. For at least half that time, he acted as President and CEO and success*115fully operated HiFi during the many ups and downs in the market place. Indeed, at the outset of the relationship, Fulton’s representatives had the same impression of the Debtor and this was a factor which supported its decision to begin lending to HiFi.
Given the Debtor’s clear lack of financial education, training, and knowledge, which he never hid from Fulton, the Debtor appropriately delegated the preparation and review of the Financial Statements to HiFi’s outside accountant, Spevak. Tr. Apr. 21, 195:23-25, 196:11-14; Tr. Apr. 22, 75:15-17, 141:20-23. Also, as previously discussed, Fulton failed to prove that HiFi’s practice of refreshing invoices had any impact on the Financial Statements or that the Financial Statements were materially false. Fulton accordingly has also failed to satisfy its burden of proof under § 523(a)(2)(B)(iv) as it applies to HiFi’s Financial Statements.25
Based upon the foregoing, the Court will deny Fulton’s nondischargeability claim against the Debtor under § 523(a)(2)(B) in its entirety.
B. Fulton’s Nondischargeability Claim Under § 523(a)(6)
At the outset, the Court is constrained to note that it does not have jurisdiction to resolve Fulton’s § 523(a)(6) nondischargeability claim at this time, because it is unclear whether, and to what extent, if any, Fulton suffered an injury in connection with the Debtor’s Drawdown on the Citizen Line. Both the Supreme Court and the Third Circuit have “cautioned against the practice of assuming jurisdiction and reaching the merits of a dispute merely because a court concludes that the suit can be dismissed on the merits assuming arguendo that jurisdiction exists.” Society Hill Toivers Oumers’ Ass’n. v. Ren-dell, 210 F.3d 168, 175 (3d. Cir. 2000).
In Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998), the Supreme Court observed that this practice creates “hypothetical jurisdiction” which “produces nothing more than a hypothetical judgment—which comes to the same thing as an advisory opinion, disapproved by this Court from the beginning,” 523 U.S. at 101,118 S.Ct. 1003 (citations omitted).
A court must independently determine whether a plaintiff has constitutional standing to proceed regardless of whether parties challenge the court’s jurisdiction. Id. at 94,118 S.Ct. 1003. The Third Circuit has summarized the requirements for constitutional standing as:
(1) the plaintiff must have suffered an injury in fact—an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) there must be a causal connection between the injury and the conduct complained of—the injury has to be fairly traceable to the challenged action of the defendant and not the result of the independent action of some third party not before the court; and (3) it must be *116likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.
Society Hill Towers, 210 F.3d at 175-76.
In the case at hand, Fulton does not have standing to pursue the § 523(a)(6) nondischargeability claim against the Debtor at this time, since it has not yet sustained an injury as a result of the Debt- or’s Drawdown on the Citizens Line. Fulton’s injury is only hypothetical at this point in time because, although the Draw-down has the potential effect of eroding up to $232,791.81 of the outstanding balance of the Second Alyssa Note held by Fulton, the Property has not yet been sold and, depending upon the ultimate sale price, Fulton may not sustain any injury at all.
By way of background, the Debtor listed the value of the Property at $950,000 on Schedule A, and Fulton did not present any other evidence at trial regarding the Property’s value. The current priority, and outstanding balance, of liens on the Property appear to be:
(1) A first lien, up to the amount of $250,000, held by Citizens in connection with the Drawdown;
(2) A second lien, up to the amount of $417,000, held by the buyer of the First Alyssa Note; and
(3) A third lien, up to the amount of $232,791.81, held by Fulton as the holder of the Second Alyssa Note.
If the Property is sold for an amount above $899,791.81, Fulton will not have sustained any injury as a result of the Drawdown because the Second Alyssa Note will be satisfied in full. To the extent that the Property is sold for less than that amount, but more than $667,000, Fulton will have sustained an injury equal to the difference between the sale price and the sum of the outstanding balances of the first and second liens on the Property. If the Property is sold for less than $667,000, Fulton will have sustained an injury equal to the outstanding balance on the Second Alyssa Note, which was approximately $232,000 as of the filing of the Adversary Complaint. At this date, however, it is impossible to determine whether, or to what extept, Fulton will sustain an injury as a result of the Drawdown.
Based upon the foregoing, Fulton does not have standing to pursue the § 523(a)(6) nondischargeability claim against the Debtor at this time and, therefore, this Court does not have jurisdiction to determine this claim. The Court notes, however, that, even if Fulton sustains an injury as a result of the Drawdown, Fulton’s debt will be subject to discharge pursuant to § 523(a)(6) because the underlying injury was caused by a simple breach of contract, not an intentional tort.
Section 523(a)(6) provides that “[a] discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). Thus, two distinct elements comprise a willful and malicious injury.
In order to constitute a willful injury, the Third Circuit has held that a debtor must act “with the purpose of producing injury or ... with substantial certainty of producing injury.” In re Conte, 33 F.3d 303, 307 (3d Cir. 1994). Merely because there was “a high probability of producing harm ... does not establish that [the Debtor’s] conduct was substantially certain to produce [an] injury.” Id. at 309. Thus, “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” In re Malloy, Civ. A. No. 15-5046, 2016 WL 2755593, at *7 (E.D. Pa. May 11, 2016) (quoting Kawaauhau v. Geiger, 523 U.S. 57, 63-64, 118 S.Ct. 974, 140 L.Ed.2d 90 *117(1998)). Malice, on the other hand, “encompasses an injury that is ‘wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill-will.’” In re Malloy, 535 B.R. 81, 89 (Bankr. E.D. Pa. 2015) (quoting In re Jacobs, 381 B.R. 128, 136, 138-39 (Bankr. E.D. Pa. 2008), affd, Civ. A. No. 15-5046, 2016 WL 2755593 (E.D. Pa. May 11, 2016)).
As noted above, the “burden of proving that a debt is nondischargeable under § 523(a) is upon the • creditor, who must establish entitlement to an exception by a preponderance of the evidence” and “exceptions to discharge are construed strictly against creditors and liberally in favor of debtors.” Cohn, 54 F.3d at 1114 (citing Grogan, 498 U.S. at 287-88, 111 S.Ct. 654); Malloy, 535 B.R. at 88 (citations omitted).
A number of courts have held that § 523(a)(6) does not apply to damages incurred in connection with a simple breach of contract and that such damages can only be rendered nondischargeable under § 523(a)(6) to the extent that such breach was accompanied by tortious conduct. See In re Grasso, 497 B.R. 434, 445 (Bankr. E.D. Pa. 2013) (holding that “a creditor’s demonstration that a debtor breached a contract is not sufficient to render nondis-chargeable the creditor’s claim arising from that breach”); In re Glenn, Bankr. No. l:ll-bk-02164MDF, Adv. No. 1:11-ap-00324MDF, 2012 WL 3775977, at *3 (Bankr. M.D. Pa. Aug. 28, 2012) (holding that the debt incurred by debtors in connection with their failure to pay their mortgage was nondischargeable because debtors were also found to have intentionally damaged the real property, which secured the creditor’s lien, by taking out fixtures when they vacated the real property); In re Jacobs, 381 B.R. 128, 138 (Bankr. E.D. Pa. 2008) (holding that “§ 523(a)(6) is not intended to render non-dischargeable debts arising from simple breaches of contract”).
Many of these courts have come to this conclusion based upon the Supreme Court’s recognition in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), that expanding the “willful” element in § 523(a)(6) to cover breaches of contract would be “so broad [that it] would be incompatible with the Veil-known’ guide that exceptions to discharge ‘should be confined to those plainly expressed.’” 523 U.S. at 62,118 S.Ct. 974.
In addition, other courts have come to this conclusion based upon one or more of the following reasons:
(1) the terms “willful and malicious” have traditionally been used in the context of tort law not contract law; (2) the precursor to Section 523(a)(6) in the Bankruptcy Act of 1898 was generally applied only in situations of tortious conduct and Congress should be presumed to have intended to continue that practice when it chose to use the same terms in the 1978 Bankruptcy Code; (3) exceptions to discharge should be construed narrowly; (4) a policy of making intentional breaches of contract non-dis-chargeable is inconsistent with the policy behind Section 365(a) which authorizes a debtor in possession to reject executory contracts; (5) the potential for a breach of contract and the ensuing economic damage is foreseeable by both contracting parties; and (6) making damages for breach of contract nondis-chargeable whenever the breach was foreseeable would vastly decrease the number of dischargeable debts.
In re Snyder, 542 B.R. 429, 444 (Bankr. N.D. Ill. 2015).26
*118Based upon the foregoing, it is clear that, even if Fulton does have standing in the future to pursue a nondischargeability claim under § 523(a)(6) against the Debt- or, Fulton’s claim will be discharged since it relates only to a simple breach of contract. In its Adversary Complaint and at trial, the only basis alleged by Fulton in support of its § 523(a)(6) claim against the Debtor is the Debtor’s breach of the PayOff Notice. Fulton does not allege that the Debtor engaged in any tortious conduct in connection with the Drawdown.27 Therefore, any future claim made by Fulton for damages related to the Drawdown would be discharged since it would only relate to a simple breach of contract.
Although the Debtor raised the affirmative defense of unclean hands in his Answer, it is unnecessary for this Court to reach that issue since it has already determined that Fulton’s claims are dischargea-ble.
IY. CONCLUSION
Fulton’s claim against the Debtor in connection with his guaranty of HiFi’s commercial loans with Fulton will be discharged in the Debtor’s bankruptcy proceeding because Fulton has failed to demonstrate that: (1) the financial statements relied upon by Fulton in providing commercial loans to HiFi in June of 2012 and January of 2013 were materially false; or (2) the Debtor intended to deceive Fulton in submitting such financial statements. The Court also holds that it does not have jurisdiction to rule on Fulton’s non-dischargeability claim under § 523(a)(6) because Fulton has not yet sustained an injury in connection with such claim. Judgment therefore will be entered in favor of the Debtor and against Fulton in this adversary proceeding.
An appropriate order follows.
ORDER
AND NOW, this 21st day of December 2016, for the reasons given in the accompanying Opinion, it is hereby ordered that:
1. Judgment is entered in favor of the debtor/defendant, Jon A. Robbins (“Debt- or”), and against the plaintiff, Fulton Bank (“Fulton”), in connection with Fulton’s nondischargeability claim against the Debtor under § 523(a)(2)(B).
2. Fulton’s nondischargeability claim against the Debtor under § 523(a)(6) is dismissed for lack of prosecution.
, The Debtor ultimately transferred half of his ownership interest in HiFi to Edna, at which *91point they each became 37.5% shareholders of HiFi. Tr, Apr. 13, 77:9-14, ECF No. 56.
. HiFi was incorporated in both Pennsylvania and Delaware. Tr, Apr. 11, 27:6-11.
. In connection therewith, on June 11, 2012, the Debtor signed the following documents in his capacity as President and CEO of HiFi: (1) two business loan agreements, Tr. Apr. 22, 42:3-13, 43:14-24; Joint Exs. 21, 24; (2) two promissory notes in the principal amounts of $1.8 million and $4.2 million, respectively, Tr. Apr. 22, 42:16-25, 44:3-13; Joint Exs. 22, 25; and (3) two commercial security agreements. Tr. Apr. 22, 46:15-47:17; Joint Exs. 154-55.
. Niedziejko advised Fulton that the Debtor did not meet Fulton’s "underwriting standards as an individual guarantor,” but that Saul did. Tr. Apr. 11, 145:22-146:1, 147:1-5; Joint Ex. 92. However, Niedziejko denied that Fulton requested that Saul personally guarantee the HiFi Loans; rather, she testified that Saul freely offered his guaranty. Tr. Apr. 13, 139:11-15.
. Neither the Certificates nor the summary reports of accounts receivable submitted by HiFi reflected whether invoices for accounts receivable had been refreshed. Tr, Apr. 11, 67:8-12. However, the first three Certificates that HiFi submitted to Fulton did not list any accounts receivable over ninety days past due, and Debtor’s counsel argued that this indirectly disclosed the existence of'HiFi's practice of refreshing invoices because Niedziejko "knew at the time” that many of HiFi's projects extended beyond ninety days, Tr. Apr. 21, 74:21-76:11. Debtor's counsel also noted that the remaining Certificates reflected impossibly low amounts of ineligible accounts receivable. Id. at 76:12-77:22,
Niedziejko admitted that Sandquist and the Debtor explained that HiFi's commercial and residential projects typically extended past ninety days. Id. at 56:22-57:1, 63:23-64:1, 66:24-67:4. However, she testified that Sand-quist and the Debtor “were fully aware” that accounts receivable for such projects could not be used as collateral if they were ninety days past due. Id. at 57:2-11. Contradicting herself, she then testified that she assumed that only "a small percentage” of HiFi’s projects extended beyond ninety days. Id. at 57:5-11.
. Under the Initial HiFi Loans, Fulton was permitted to declare a default if HiFi failed to maintain a "debt-coverage ratio” of 1.2 to 1, Joint Exs. 21, 24.
. The Debtor was not present at the meeting, and Niedziejko did not subsequently contact him to discuss the Adelberg issue because she "assumed that he was privy to the information” that Sandquist and Spevak disclosed to her. Tr. Apr. 13, 120:20, 188:25-189:2.
. HiFi maintained an "inventory perpetual” after it updated its accounting systems in 2013, which was "a detailed listing of inventory by type, quantity and purchase price” that would "feed into the inventory listing on the general ledger.” Tr. Apr. 11, 181:2-9; Tr. Apr. 12, 22:21-23. As units of a particular item were purchased or sold, its count on the inventory perpetual would increase or decrease such that the inventory perpetual would be a "snapshot" of HiFi's inventory "at any point in time.” Tr. Apr. 12, 19:24-20:4.
. Mesnick testified that it was “very unusual” for a. company to be unable to produce such a *101large amount of vendor invoices to support its inventory costs and considered it to be a "red flag.” Tr. Apr. 12, 35:1-3, 89:11-14. However, Zwaan testified that HiFi encountered difficulties producing the invoices, and other documents Mesnick and Bressler requested, because they related to customers and projects that predated the installation of HiFi’s new accounting system. Tr. Apr. 21, 138:22-25. Under the previous accounting system, HiFi did not maintain its records in one place. Id. at 138:7-9. As a result, HiFi needed to locate and retrieve records from HiFi’s previous accounting system, its inventory system, and its sales people to comply with Mesnick’s request, but it lacked the manpower to do so by the deadline given. Id. at 135:19-24, 136:12-16, 137:8-12, 138:4-6. Moreover, some sales people did not maintain the requested records. Id. at 147:5-21.
. At the time that Fulton froze HiFi’s credit • line, Fulton had only advanced between $4 million and $5 million, and there was more than $1 million of credit available to HiFi. Tr. Apr, 22, 178:24-179:3, 220:2-4.
. Gramophone was a competitor of HiFi located in Maryland. Joint Pretrial Statement 4. Gramophone offered Fulton $1.5 million for HiFi's business assets and an unconditional release of the Debtor’s guaranty. Id. Gramophone requested the unconditional release of the guaranty because it intended to employ „the Debtor in its business. Id. at 8. Gramophone revised its offer to $1.6 million for HiFi’s business assets, excluding its accounts receivable, when it learned that Fulton planned to liquidate HiFi's assets. Id.
.The Debtor offered Fulton all of his nonexempt assets, which were worth between $300,000 and $500,000, to satisfy his and Saul’s guaranties and to avoid bankruptcy. Tr. Apr. 22, 202:2-203:3.
. Ashley denied that Fulton ever sought to acquire Saul’s IRA Assets before they were withdrawn from his IRA Account. Tr. Apr. 22, 200:2-14. In fact, she stated that Fulton's policies prohibited IRAs from serving as collateral for loans because Fulton could not legally execute or seize upon IRA funds. Id. at 197:11-19.
At her deposition, Niedziejko stated that, at the time of the closing on the Initial HiFi Loans, she did not have an understanding about whether federal or state law prohibited Fulton from executing upon Saul’s IRA Assets. Tr. Apr. 13, 146:1-6. However, after extensive cross-examination at trial, she admitted that, at the time of the closing on the Initial HiFi Loans, she had understood that Fulton could only execute upon Saul’s IRA Assets after they were withdrawn from his IRA Account and distributed to him. Id. at 158:20-159:5. Niedziejko also admitted on cross-examination that, although bank regulators -had questioned her belief that "Fulton's policy allows us to rely on IRA assets of individuals greater than 59½ for liquidity covenant,” she apparently failed to disclose this exchange during her deposition. Id. at 157:19-21; Tr. Apr. 21, 33:24-34:4.
. Brightbill testified that Fulton opened a title insurance policy for the Wells Fargo mortgage and that he did not recall whether Fulton opened a policy for the Citizens Bank mortgage. Tr. Apr. 13, 60:9-23. However, he testified that Fulton typically did not require title insurance for a mortgage of the size of the latter. Id. at 60:19-21. In fact, Fulton did not open a title insurance policy in connection with the Citizens Bank mortgage. Tr. Apr. 22, 208:2-20.
, Thus, although the reliance "component” of subsection (i) and the reliance "requirement” of subsection (iii) "are certainly overlapping concepts,” the former may be satisfied merely if it would have been reasonable if the creditor had relied on the falsity, whereas the latter (discussed below) may be satisfied only if the creditor actually relied on the falsity, Cohn, 54 F.3d at 1114-15.
. The majority view is supported by the Fifth, Ninth, and Tenth Circuits and the First and Sixth Circuit Bankruptcy Appellate Panels, See In re Bandi, 683 F.3d 671, 676-78 (5th Cir. 2012) (concluding that the term “financial condition” refers to "terms commonly understood in commercial usage” and is not “a broadly descriptive phrase intended to capture any and all misrepresentations that pertain in some way to specific assets or liabilities of the debtor"), cert, denied sub ncm. Bandi v. Becnel, — U.S.-, 133 S.Ct. 845, 184 L.Ed.2d 654 (2013); In re Joelson, 427 F.3d 700, 714 (10th Cir. 2005) (concluding "that the strict reading of 'respecting the debtor’s ... financial condition’ is correct”), cert, denied sub nom. Joelson v. Cadwell, 547 U.S. 1163, 126 S.Ct. 2321, 164 L.Ed.2d 840 (2006); In re Kirsh, 973 F.2d 1454, 1457 (9th Cir. 1992) (declining to apply § 523(a)(2)(B) because the statement "did not purport to set forth the debtors’ net worth or overall financial condition”); In re Kosinski, 424 B.R. 599, 609-10 (1st Cir. BAP 2010) (concluding that “[t]he normal commercial meaning and usage of 'statement’ in connection with ‘financial condition’ denote either a representation of an entity’s overall net worth or an entity's overall ability to generate income”); In re May, No. 06-8044, 2007 WL 2052185, at *7 (6th Cir, BAP July 19, 2007) (concluding that "a narrow interpretation, defining financial condition as statements that are made regarding a debtor’s overall net worth, assets and liabilities, best adheres to the meaning and purpose of the Bankruptcy Code”).
. First, the strict interpretation conforms to the definition of "insolvent” in §§ 101(32)(A) and (C), in which the term "financial condition” refers to "difference[s] between an entity's overall property and debts—the entity's net worth.” Joelson, All F.3d at 706-07. In addition, the strict interpretation also conforms to the "overall structure” of § 523(a)(2), which permits discharge of oral statements about a borrower’s "financial condition” under § 523(a)(2)(A) but does not permit discharge of written statements about a borrower's "financial condition” under § 523(a)(2)(B). The strict interpretation essentially gives debtors more "leeway,” i.e., dischargeability, with respect to false oral statements, which are more likely to include inadvertent mistakes, respecting their financial condition than it does to false written statements respecting the same. Id. at 707. Second, the strict interpretation finds support in the legislative history of the Bankruptcy Code. Before the 1960 amendments to the Bankruptcy Code, "if a debtor had obtained property on credit through the use of an oral misrepresentation, that particular debt would be excepted from discharge; if a debtor had obtained property on credit through the use of a written misrepresentation, none of the debtor’s debts could be discharged,” pursuant to the predecessor statute to § 523(a)(2). Id. at 708 (emphasis added). As a result, some creditors encouraged debtors to submit written statements omitting liabilities (which would allow the creditor to later claim that such statements were false), extended credit thereupon, and then used such false statements in subsequent bankruptcies to "intimidate” debtors into agreements whereby the creditor agreed not to oppose the discharge of all of the debtor’s debts if the debtor agreed to • pay the creditor’s debt "in full after discharge.” Id. To curb such abuses, Congress amended the predecessor statute so that false written statements "no longer barred the discharge of all of an individual debtor’s obligations.” Id.
The legislative history to the 1960 amendments referenced the term "financial statement” seven times, assigning the term "financial condition” a "strict, established meaning.” Id. at 708-09. In 1978, Congress recodified the predecessor statute into §§ 523(a)(2)(A) and (B) and did not intend to alter the predecessor statute. Id. at 709. Moreover, the reference to the business use of financial statements to “establish credit standing” in the legislative history to the 1960 amendments also supports the strict interpretation because it identifies statements respecting one's "overall financial condition that are typically used to establish- such standing.” Id.
Finally, in Field v. Mans, 516 U.S. 59, T16 S.Ct. 437, 133 L.Ed.2d 351 (1995), although it "did not address the issue directly,” the Supreme Court "freely substituted the phrases ‘statement of financial condition' and ‘financial statement’ for the phrase "statement respecting the debtor’s ... financial condition.’ " Joelson, ATI F.3d at 710; see also Field, 516 U.S. at 64, 76-77, 116 S.Ct. 437 (stating, for example, that § 523(a)(2)(B) excepts from discharge "debts traceable ... to a materially false financial statement," and that, with respect to the 1978 recodification, "Congress wanted to moderate the burden on individuals who submitted false financial statements, not because lies about financial condition are less blameworthy than others,” but to curb abuses by consumer finance companies) (emphasis added). As the former terms have "established meanings that involve an individual or entity’s overall financial health,” the same meaning should be *109given to the latter. Joelson, 427 F.3d at 710 (citing Black’s Law Dictionary (8th ed. 2004)).
.Under Pennsylvania law, “a principal is liable to third parties for the frauds, deceits, concealments, [and] misrepresentations ... of his agent committed within the scope of his employment even though the principal did not authorize, justify, participate in or know of such conduct.” Aiello v. Ed Saxe Real Estate, Inc., 508 Pa. 553, 499 A.2d 282, 285 (1985); see also Restatement (Third) of Agency § 5.03 (Am. Law Inst. 2006) ("For purposes of determining a principal’s legal relations with a third party, notice of a fact that an agent knows or has reason to know is imputed to the principal if knowledge of the fact is material to the agent's duties to the principal _”). Such imputation principles serve the public policy "that it is more reasonable that when one of two innocent persons must suffer from the wrongful act of a third person, that the principal who has placed the agent in the position of trust and confidence should suffer, rather than an innocent stranger.” Aiello, 499 A.2d at 285.
. HiFi’s accounts receivable and inventory comprised only 69% of its total assets on its balance sheet for the year-ended December 31, 2011; only 64% for the quarter-ended March 31, 2012; only 70% for the quarter-ended September 30, 2012; only 70% for the year-ended December 31, 2012; only 71% for the quarter-ended March 31, 2013; only 69% as of June 30, 2013; and only 68% as of August 31, 2013. Joint Exs. 8, 29, 31-34.
. HiFi's maximum borrowing amount comprised only 48% of its total liabilities on its balance sheet for the year-ended December 31, 2012; only 52% for the quarter-ended March 31, 2013; only 52% as of June 30, 2013; and only 54% as of August 31, 2013. Joint Exs. 8, 31-34.
. Ashley’s testimony and the exhibits presented at trial demonstrate that Niedziejko could not specifically recall reviewing most of the Certificates and substantially disregarded *111Fulton’s policies when she allegedly reviewed the Certificates. As discussed above, although Fulton required the Certificates to be submitted by the fifteenth day of each month, signed, and filed with a detailed accounts receivable aging report, Niedziejko: (1) ignored that HiFi failed to submit any Certificates for the first three months of its relationship with Fulton; (2) routinely accepted late Certificates thereafter; (3) accepted fifteen of the nineteen Certificates without signatures; and (4) accepted all of the Certificates without detailed reports. Tr. Apr. 13, 105:21-106:10, 166:2-10, 171:16-18, 172:1-4; Tr. Apr. 22, 157:20-25, 158:9-13, 160:9-12. Thus, Fulton did not substantially follow its own practices or industry standard practices with respect to its review of the Certificates. As a result, to the extent that Fulton did rely on the Certificates, such reliance was unreasonable.
. Although Fulton also alleges that HiFi’s practice of advanced billing skewed its financial statements, this practice did not begin until sometime in 2013 after the HiFi Loans had already been extended. Thus, any effect that such practice would have had on financial statements necessarily would not have impacted the Financial Statements at issue here.
. Fulton also references the "negligible” proceeds it netted when it liquidated HiFi’s accounts receivable in August 2014 as evidence that HiFi’s accounts receivable were overstated. Fulton Post-Trial Br. 34. However, DuFrayne credibly testified that when Fulton liquidated HiFi’s accounts receivable, they were rendered mostly uncollectible because HiFi had been closed for four weeks. Tr. Apr. 11, 201:20-24, 205:6-11, 206:9-19.
. Fulton also suggests that the Debtor intended to deceive Fulton because the Debtor initiated HiFi’s commercial lending relationship with Fulton shortly after M & T advised him that HiFi’s accounts were to be transferred to M & T’s collateral control team. Fulton Post-Trial Br. 50. However, Bright-bill’s observation at trial that many of M & T’s customers were terminating their relationships with M & T at that time undercuts the inference that HiFi terminated its relationship with M & T in order to continue its alleged fraud against Fulton.
. Fulton also argues that any evidence regarding whether HiFi's practice of refreshing invoices was disclosed to Fulton, and therefore permitted under the loan agreements, is barred pursuant to the parol evidence rule and to the loan agreements' integration clauses. Fulton Post-Trial Br. 43-44. However, the Debtor's evidence of the disclosure of the practice was not intended to modify its obligations under the loan agreements. Rather, the evidence was introduced to demonstrate the existence of a red flag that suggested that Fulton’s reliance on the Certificates and financial statements was unreasonable. Therefore, such evidence is not barred by the parol evidence rule or the loan agreements' integration clauses.
. See also Lockerby v. Sierra, 535 F.3d 1038, 1042 (9th Cir. 2008) ("Expanding the scope of *118§ 523(a)(6) to include contracts that are intentionally breached whenever it is substantially certain that injury will occur would severely circumscribe the ability of debtors to ‘start afresh.’ "); In re Best, 109 Fed.Appx. 1, 8 (6th Cir. 2004) ("Consistent with Geiger, we have held that a breach of contract cannot constitute the willful and malicious injury required to trigger § 523(a)(6).”); In re Flakker, Bankr. No. 14-00340, 2015 WL 4624545, at *3 (Bankr. D.D.C. Aug. 3, 2015) (“The plaintiff’s breach of contract claim is insufficient, on its own, to state a nondischargeability claim under § 523(a)(6), but coupled with the plaintiff's allegations of fraud, the allegations of breach of contract adequately allege a non-dischargeability claim under § 523(a)(6)."); In re Iberg, 395 B.R. 83, 89 (Bankr, E.D. Ark. 2008) (”[I]t is a well-settled principle of law that 'a simple breach of contract is not the type of injury addressed by § 523(a)(6).’ ").
. In fact, Fulton admitted at trial that its representatives were actually responsible for creating the circumstances which allowed the Debtor to take the Drawdown by failing to ensure that the Citizens Line was closed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500186/ | MEMORANDUM OPINION
Robert G. Mayer, United States Bankruptcy Judge
THIS CASE is before the court on the chapter 7 trustee’s objection to the debt- or’s homestead exemption in personal property. The trustee argues that the debtor did not fully comply with Va.Code (1950) § 34-14 which addresses how personal property is set apart for purposes of the homestead exemption. Va.Code (1950) § 34-4. The debtor recorded a homestead deed in 1991 and a second homestead deed in this case. The second homestead deed omitted the information about the first homestead deed which is required by § 34-14.
Section 34-4 establishes the homestead exemption. See also Va.Code (1950) § 34-13 (personal property). Sections 34-6 and 34-14 direct how the exempt property is set aside in real and personal property, respectively. Section 34-14 states:
§ 34-14. How set apart in personal estate; form to claim exemption of personal property.
Such personal estate selected by the householder and under §§ 34-4, 34-4.1, or § 34-13 shall be set apart in a writing signed by him. He shall, in the writing, designate and describe with reasonable certainty the personal estate so selected and set apart and each parcel or article, affixing to each his cash valuation thereof. Such writing shall be admitted to record, to be recorded as deeds are recorded in the county or city wherein such householder resides.
The following form, or one which is substantially similar, shall be used and shall be sufficient, when duly admitted to record in the county or city in which the householder resides, to exempt such described personal property from creditor process: ...
The statutory form was added to the statute in 1990. Acts of Assembly 1990 c. 942. It simplified the forms attorneys were using and made them uniform. It required only the essentials: the name and address of the householder, whether the householder was a disabled veteran, the names and ages of any dependents, the description of the property claimed as exempt and its value, and, if real property was claimed as exempt, the city or county in which is was located. The form was amended in 2010 to include information about any prior homestead deed that may have been filed. Acts of Assembly 2010 c. 186. The new information included the number of prior homestead deeds filed, the exemption amount previously claimed and the jurisdictions in which the homestead deeds were filed.
The trustee argued that the homestead deed recorded in this case was void be*121cause it did not contain the information about the 1991 homestead deed.
Section 34-14 sets out three requirements for an effective homestead deed: (1) the homestead deed must be in writing signed by the householder; (2) it “shall be admitted to record, to be recorded as deeds are recorded in the county or city wherein such householder resides;” and (3) the statutory form, “or one which is substantially similar, shall be used and shall be sufficient.” Va.Code (1950) § 34-14. The fourth required element is the time within which the homestead deed must be filed. Va.Code (1950) § 34-17.
The Court of Appeals for the Fourth Circuit held that “[generally, statutes creating debtors’ exemptions must be construed liberally in favor of the debtor and the exemption. Nevertheless, the debt- or must comply with procedural requirements, in this case those of § 34-17. In re Nguyen, 211 F.3d 105, 110 (4th Cir.2000) (citations omitted).
A debtor must strictly follow the procedures for filing a homestead deed in order to claim the exemption. In re Heater, 189 B.R. 629, 633-34 (Bankr. E.D. Va. 1995) (debtors to strictly comply with the statutory requirements); In re McWilliams, 296 B.R. 424, 426 (Bankr. E.D. Va. 2002) (debtors must comply strictly with statutory requirements). However, once the deed is properly recorded, it will be liberally construed. South Hill Production Credit Ass’n. v. Hudson, 174 Va. 284, 287, 6 S.E.2d 668, 669 (1940) (an exemption statute is remedial and must be liberally construed); Brown’s Comm. v. W. State Hosp., 110 Va. 321, 66 S.E. 48, 49 (1909) (“A statute exempting property from levy or sale is not to be construed strictly, but to carry out the obvious intent of the lawmaker.”) (citation omitted).
The procedural requirement has two components: where and when the homestead deed must be recorded. Both are strictly enforced. For real estate, the homestead deed must be recorded in the city or county where the real estate is located. For personal property, the homestead deed must be recorded in the city or county were the debtor resides. Zimmerman v. Morgan (In re Morgan), 689 F.2d 471 (4th Cir. 1982); In re Tate, 41 B.R. 946 (Bankr.W.D.Va. 1984) (personal property). Previously, the homestead deed had to be recorded prior to the initially scheduled first meeting of creditors. It is now within five days after the first meeting of creditors. In re Bernstein, 189 B.R. 113 (Bankr. W.D.Va. 1995); In re Nguyen, 211 F.3d 105 (4th Cir. 2000) (timely delivery to clerk satisfies filing requirement); In re Ahmed, 411 B.R. 537 (Bankr.E.D.Va. 2009) (placing the homestead deed in the mail that is not delivered timely to clerk is not sufficient).
The contents of a properly and timely filed homestead deed will be liberally construed in favor of the debtor and the exemption. Shirkey v. Leake, 715 F.2d 859 (4th Cir. 1983) (debtor may amend homestead deed to correct year of tax refund claimed as exempt); Ames v. Custis, 87 B.R. 415 (Bankr.E.D.Va. 1988) (debtor may amend value of property claimed exempt after the time to file the homestead deed has expired but may not add new items); In re Waltrip, 260 F.Supp. 448 (E.D.Va. 1966) (amendment of valuation).
In this case, the homestead deed was timely filed in the proper jurisdiction. The only defect was the information relating to the 1991 homestead deed. The omission of the required information does not invalidate the homestead deed. The information does not relate to the time or place when the homestead deed must be filed— requirements that are strictly construed. It concerns the content of the homestead deed—matters that are liberally construed in favor of the debtor and the exemption. The content may be amended. Values may *122be increased. The description of the year of a tax refund may be corrected. The inaccuracy or even the omission of the prior homestead deed may similarly be corrected or added. The homestead deed is clear about what the debtor seeks to exempt. The information relating to the prior homestead deed is necessary to determine whether the homestead exemption has been exhausted in whole or in part by a prior homestead deed. It is like the valuation of an item claimed exempt. Like valuation objections, the homestead deed is subject to objection and proof of a prior homestead deed that would cause the claimed exemption to exceed the maximum allowable amount. But its inaccuracy does not invalidate the homestead deed any more than an inaccurate valuation invalidates the homestead deed or the exemption claim of a particular item. Just as an inaccurate valuation exposes the property to the trustee’s administration only to the extent that the maximum allowable homestead exemption is exceeded, the information relating to prior homestead deeds would invalidate claims of exemption only to the extent that they exceed the maximum allowable homestead exemption.
The debtor timely requested leave to amend the homestead deed so that it will conform to the statutory form. The homestead deed can be freely amended without the necessity of leave of court. While leave of court is not generally necessary to amend the homestead deed or Schedule C, it will be granted. Of course, once an order sustaining an objection is entered, the order becomes the law of the case. In this instance there is no such order and the debtor’s motion for leave to amend the homestead deed will be granted. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500187/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING: (1) LETTER/MOTION OF DEFENDANTS TO RELEASE FUNDS, [ADV. DOC. NO. 50]; (2) RESPONSE OF PLAINTIFF TO DEFENDANTS’ LETTER/MOTION TO RELEASE FUNDS AND APPLICATION FOR PAYMENT OF FUNDS FROM COURT’S REGISTRY, [ADV. DOC. NO. 51]; AND (3) INTERVENORS, 3410 TOWNSHIP GROVE, LLC, AND KRISTINE PHAM’S MOTION TO INTERVENE AND APPLICATION FOR PAYMENT OF FUNDS FROM THE COURT’S REGISTRY [ADV. DOC. NO. 57] [This Order Relates to Adv. Doc. Nos. 50, 51, & 57]
Jeff Bohm, United States Bankruptcy Judge
I. Introduction
Ngo Xuan Dinh (“Mr. Dinh”) and Nina Nhathuy Dinh (“Ms. Dinh”) are the debtors in the main Chapter 7 case and the defendants in the above-referenced adversary proceeding. On August 22, 2016, Mr. Dinh and Ms. Dinh (collectively, the “Defendants”), now representing themselves pro se, filed a hand-written letter/motion regarding, among other issues, the release of certain funds on deposit in the registry of the Court (the “Motion to Release Funds”).1 [Adv. Doc. No. 50], Gulam Gula-mali, the plaintiff (the “Plaintiff’), filed a response to the Motion to Release Funds. [Adv. Doc. No. 51]. On November 10, 2016, this Court held a hearing on the Motion to Release Funds.
The pending dispute between the Plaintiff and the Defendants is this: How much of the proceeds from the sale of the Defendants’ homestead (which total $97,000.00 and are sitting in the registry of this Court) should be distributed to the Plaintiff? There is no question that the Plaintiff held a $16,932.72 lien on the homestead prior to its sale, and the Defendants do not dispute that the Plaintiff is entitled to a distribution in this amount. However, the Defendants assert that the Plaintiff is not entitled to a dime more. For his part, the Plaintiff, who holds a $50,000.00 non-dis-chargeable judgment against Mr. Dinh, takes the position that the proceeds are no longer exempt because more than six months has passed since the sale of the homestead; and that, therefore, the Plaintiff is entitled to a distribution not only of the $16,932.72 but also of the remaining balance owed under the judgment after application of the $16,932.72—i.e., $33,067.28.
Pursuant to Federal Bankruptcy Rules 9014 and 7052, this Court now issues the *124following Findings of Fact and Conclusions of Law. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party. For the reasons set forth herein, the Court finds that the Plaintiff is entitled to a distribution of only $16,932.72.
II. Findings of Fact
The findings of fact relevant to the Motion to Release Funds are as follows:
1. On October 29, 2015, this Court entered a judgment in the above-referenced adversary proceeding (the “Judgment”). [Adv. Doc. No. 29]. The Judgment set forth that the debt owed by Mr. Dinh to the Plaintiff in the amount of $50,000.00 is a non-dischargeable debt. [M]. The Judgment also ordered that “an equitable lien in the amount of $16,932.72 [be] attached to the townhome property commonly known as 3410 Township Grove Lane, Houston, Texas 77082 [(the “Townhome”) ].” [Id.]. The Townhome is the Defendants’ homestead, and they claimed this property as exempt in their Schedule C in their main case.' [Main Case No. 14-34123, Doc. Nos. 1 & 17]. Aside from granting the Plaintiff an equitable lien on the Townhome, the Judgment set forth that the Plaintiff is “entitled to pursue all actions necessary to foreclose his equitable lien on the [T]own-home under applicable Texas law.” [Adv. Doc. No. 29]. The Defendants did not appeal the Judgment.
2. On February 12, 2016, at the Plaintiffs request, the Clerk of Court issued an Abstract of Judgment for the benefit of the Plaintiff. [Adv. Doc. No. 31].
3. Also, on February 12, 2016, at the Plaintiffs request, the Clerk of Court issued a Writ of Execution to the U.S. Marshals Service commanding the Service to sell the Townhome for an amount sufficient to pay the Judgment in full and the cost of the writ. [Adv. Doc. No. 32].
4. On March 30, 2016, the U.S. Marshals Service levied on the Townhome. [Adv. Doc. No. 39].
5. On March 31 and April 2, 2016, the U.S. Marshals Service served process on the Defendants. [Adv. Doc. Nos. 37 & 38]. The documents completed and filed by the deputy U.S. Marshal who served process reflect that he personally traveled to the Townhome and met with Mr. Dinh on March 31, 2016 and Ms. Dinh on April 2, 2016 to serve the Writ of Execution on them, thereby giving them notice that the U.S. Marshals Service would be executing upon the Townhome.
6. On April 22, 2016, public notice was given setting forth that the U.S. Marshals Service, by virtue of the Writ of Execution, would hold a public auction to sell the Townhome on May 3, 2016 at 10:00 A.M. at the Bayou City Event Center, 9401 Knight Road, Houston, Texas 77045. [Adv. Doc. No. 40],
7. On May 3, 2016, the U.S. Marshals Service held a public auction to sell the Townhome. The highest bidder was Kristine Pham (“Ms. Pham”), who bid the cash sum of $97,000.00 for the Townhome (the “Sale Proceeds”). [Adv. Doc. No. 57].
8. On May 30, 2016, the Plaintiff filed his Application for Approval of Sale of Property and Issuance of Deed (the “Application to Sell”). [Adv. Doc. No. *12543]. The Application to Sell requests this Court to enter an order that: (a) approves the sale of the Townhome to Ms. Pham; and (b) authorizes the U.S. Marshals Service to execute and deliver a deed for the Townhome to Ms. Pham. [M].
9. Also, on May 30, 2016, the Plaintiff filed his Motion to Deposit Monies Into the Registry of the Court (the “Motion to Deposit”). [Adv. Doc. No. 42]. The Motion to Deposit requested this Court to order that the Sale Proceeds being held by the U.S. Marshals Service be deposited into the registry of the Court and to remain on deposit until further order of this Court. [Id.].
10. On June 3, 2016, this Court granted the Application to Sell. [Adv. Doc. No. 46].
11. Also, on June 3, 2016, this Court granted the Motion to Deposit and entered an order entitled: “Order Allowing Deposit of Monies into thé Registry of the Court.” [Adv. Doc. No. 47].
12. On August 2, 2016, the U.S. Marshals Service, which had been holding the Sale Proceeds since receiving the payment from Ms! Pham, deposited the Sale Proceeds into the registry of the Court.
13. On August 22, 2016, the Defendants, representing themselves pro se, filed the Motion to Release Funds. [Adv. Doc. No. 60]. Among other things, the Defendants request that the funds from the sale of the Town-home, after payment of the mortgage, be released to them. [See id. at p. 2 of 2].
14. On September 12, 2016, the Plaintiff filed a pleading responding to the Motion to Release Funds and affirmatively applying for distribution of the funds to himself (the “Re-, sponse/Application”). [Adv. Doc. No. 61]. In the Response/Application, the Plaintiff, in pertinent part, “petitions this Court for an Order of payment to him for his equitable lien amount of $16,932.72 in the [Townhome]. as awarded in the Judgment ... [and] for the remaining sums deposited into the Court’s registry for the remaining amount due to him under the Judgment, in the amount of $33,067.28.” [Id. at p. 4 ¶¶9-10]. In the Response/Application, the Plaintiff argued that he should receive a distribution for the $33,067.28 because he obtained the Judgment due to proving that Mr. Dinh had defrauded him. [Id. at p. 4 ¶10]. Essentially, the Plaintiff put forth the argument that as a matter of equity, due to Mr. Dinh’s skullduggery,' the Plaintiff should receive a distribution of $50,000.00 (enough to completely pay off the Judgment) even though his lien on the Townhome is only in the amount of $16,932.72. [See id. at pp. 4-6 ¶12].
15.On October 20, 2016, Ms. Pham filed her Motion to Intervene and Application for Payment of Funds from the Court’s Registry (the “Motion to Intervene”). [Adv. Doc. No. 57]. Ms. Pham sought to intervene because when she purchased the Townhome at the public auction held on May 3, 2016, she did not know that there was an existing lien on the Town-home in the approximate amount of $32,362.59. This lien was held by Ms. Jennifer Nguyen (“Ms. Nguyen”), who had extended a loan to the Defendants to facilitate their purchase of the Townhome. [Id. aj: p. 2 ¶3]. After Ms. Pham purchased the Townhome and discovered the exis*126tence of this lien, she made payment to Ms. Nguyen in order to own the Townhome free and clear. Ms. Pham thus seeks an order from this Court allowing her to intervene in this adversary proceeding and to recover the amount she paid to retire the lien held by Ms. Nguyen.
16. On November 4, 2016, the Plaintiffs counsel filed a brief in support of the Response/Application. [Adv. Doc. No. 59]. In this brief, in addition to making the equitable argument that he made in the Response/Application, the Plaintiff also adds an argument as to why he should receive a distribution of $50,000.00 instead of $16,932.72. Specifically, citing Texas Property Code § 41.001(c) and Viegelahn v. Frost, 744 F.3d 384, 387-89 (5th Cir. 2014), among other cases, the Plaintiff argues that the six-month safe harbor period on the Sale Proceeds expired as of 11:59 P.M. on November 3, 2016, and that therefore the Sale Proceeds áre no longer exempt property, thus allowing the Court to order a distribution to the Plaintiff of the entire amount of the Judgment debt—i.e., $50,000.00. [Id. at p. 4 ¶8].
17. On November 10, 2016, this Court held a hearing on the Motion to Release Funds, the Response, and the Motion to Intervene. Ms. Pham and both of the Defendants testified at this hearing, and then the Court heard oral argument from all parties as to how the Sale Proceeds should be distributed.
a. The Plaintiff took the position that the Sale Proceeds should be distributed in the following amounts (which this Court rounds off for purposes of ease):
Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham: $31,000.00
Less: Distribution to the Plaintiff: $50,000.00
Remaining Amount for the Defendants: $16,000.00
b. The Defendants took the position that the Sale Proceeds should be distributed as follows:
*127Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham:2 $31,000.00
Less: Distribution to the Plaintiff: $16,900.00
Remaining Amount for the Defendants: $49,100.00
18. After hearing arguments from the parties, the Court issued an oral ruling that: (a) Ms. Pham is entitled to receive $30,715.43; (b) the Plaintiff is entitled to receive only the amount of his equitable lien, i.e., $16,932.72; and (c) the Defendants are entitled to receive with the remaining proceeds. Thus, the Court ruled that the distribution should be as follows:
Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham: $30,715.43
Less: Distribution to the Plaintiff: $16,932.72
Remaining Amount for the Defendants: $49,351.85
19. After issuing its oral ruling' on November 10, 2016, but before this Court entered a -written order on the docket memorializing this ruling, the Plaintiff, through its counsel of record, filed a letter/brief on November 28, 2016, [Adv. Doc. No. 60]. In this letter/brief, the Plaintiff expands the argument that he made in the brief in support of the Response/Application as to why he should receive a distribution of $50,000.00. [See Finding of Fact No. 16]. Here, the Plaintiff argues that he is entitled to the entire $50,000.00 under the Judgment because the Defendants can no longer claim the Sale Proceeds as exempt property. [Adv. Doc. No. 60]. In support of this position, the Plaintiff cites case law that the Sale Proceeds lost their exempt status as of November 4, 2016—i.e., six months after the sale of the Townhome— because the Defendants had neither used the Sale Proceeds to purchase a new homestead nor requested this Court to toll the six-month safe harbor period during which the Sale Proceeds were exempt under Texas Property Code § 41.001(c). [Id.]. Thus, the Plaintiff wants this Court to enter an order authorizing the Clerk of Court to distribute the Sale Proceeds as follows:
*128Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham: $30,715.43
Less: Distribution to the Plaintiff: $50,000.00
Remaining Amount for the Defendants: $16,284.57
20. On December 5, 2016, the Defendants responded to the letter/brief filed by the Plaintiffs counsel by arguing that the six-month safe harbor period has not expired because they have had no access to the Sale Proceeds since the Townhome was sold, and therefore could not possibly have used the Sale Proceeds to purchase another homestead. Stated differently, the Defendants assert that the six-month safe harbor period has not yet run, but rather was tolled, because the Sale Proceeds were first controlled by the U.S. Marshals Service and, since August 2, 2016, have been controlled by the Clerk of Court, who has held the Sale Proceeds in the registry of the Court. Thus, the Defendants want this Court to stand by its oi-al ruling made at the November 10, '2016 hearing that the Clerk of Court distribute the Sale Proceeds as follows:
Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham: $30,715.43
Less: Distribution to the Plaintiff: $36,932.72
Remaining Amount for the Defendants: $49,351.85
III. Conclusions of Law
A. Jurisdiction, Venue, and Constitutional Authority to Enter a Final Order
1. Jurisdiction
The Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1334(b). This provision provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Bankruptcy Code], or arising in or related to cases under title 11,” District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
The dispute at bar is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0) because it affects the debtor-creditor relationship. Specifically, if the Sale Proceeds are not exempt, then the Plaintiff is entitled to a distribution of $50,000.00, which is sufficient to pay off the Judgment in its entirety—thereby resulting in the Plaintiff no longer being a creditor of the Defendants. Conversely, if the Sale Proceeds are exempt, then the Plaintiff is entitled to a distribution of only $16,932.72, which is insufficient to pay off the Judgment in its entirety—thereby resulting in the Plaintiff still being a creditor of the Defendants in the amount of $33,067.28.
2. Venue
Venue is proper pursuant to 28 U.S.C. § 1409(a) because this is an adversary pro*129ceeding arising under Title 11 or arising in or related to the main Chapter 7 case filed by the Defendants. That is to say, the Plaintiff initiated this adversary proceeding seeking a judgment that the Defendants owed him a debt that is non-dis-chargeable under 11 U.S.C. § 523(a). Such a suit is a proceeding that arises under Title 11. See In re Cimarolli, Adv. No. 04-3250, 2006 WL 2090212, at *1 (Bankr. S.D. Tex. July 11, 2006). Moreover, this Court’s adjudication of this suit relates to the Defendants’ main Chapter 7 case because how much of a non-dischargeable obligation Mr. Dinh owes to the Plaintiff directly affects how much of a “fresh start” the Defendants receive as a result of their filing a Chapter 7 petition in this Court.
3. Constitutional Authority to Enter a Final Order
In the wake of the Supreme Court’s issuance of Stern v. Marshall, 564 U.S. 462, 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 pending 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 503, 131 S.Ct. 2594. The pending dispute before this Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0). Because Stem is replete with language emphasizing that the ruling is limited to the one specific type of core proceeding involved in that dispute, this Court concludes that the limitation imposed by Stem does not prohibit this Court from entering a final order here. A core proceeding under § 157(b)(2)(0) is entirely different than a core proceeding under § 157(b)(2)(C). See, e.g., Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (8th Cir. BAP 2012) (“Unless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional.”); see also In re Davis, 538 Fed.Appx. 440, 443 (5th Cir. 2013) cert. denied sub nom. Tanguy v. W., — U.S. —, 134 S.Ct. 1002, 187 L.Ed.2d 851 (2014) (“[W]hile it is true that Stem invalidated 28 U.S.C. § 157(b)(2)(C) with respect to ‘counterclaims by the estate against persons filing claims against the estate,’ Stem expressly provides that its limited holding applies only in that ‘one isolated respect.’ ... We decline to extend Stem’s limited holding herein.”).
In the alternative, this Court has the constitutional authority to enter a final order because all of the parties in this matter have consented to adjudication of this dispute by this Court. Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) (“Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent .must be expressed. We disagree. Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be expressed. Nor does the relevant statute, 28 U.S.C. § 157, mandate express consent _”). Indeed, the Defendants filed the Motion to Release Funds, [Finding of Fact No. 13]; the Plaintiff filed the Response/Application, [Finding of Fact No. 14]; Ms. Pham filed the Motion to Intervene, [Finding of Fact No. 15]; the Court held a hearing on November 10, 2016, [Finding of Fact No. 17]; the Plaintiff filed his letter/brief on November 28, 2016, [Finding of Fact No. 19]; the Defendants filed their response to the letter/brief on *130December 5, 2016, [Finding of Fact No. 20]; and none of the parties—orally or in writing—ever objected to this Court entering a final order on any of the pleadings that they filed. The Court finds that these circumstances constitute consent of all of the parties for this Court to enter a final order in the dispute at bar.
B. Case Law Regarding Exemption of Proceeds From Sale of Homestead
The Sale Proceeds on deposit in the registry of the Court originated from the sale of the Townhome by the U.S. Marshals Service. [Findings of Fact Nos. 1 & 7]. Under the Texas Property Code, “proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” Tex. Prop.'Code Ann. § 41.001(c). Stated differently, the proceeds from the sale of a homestead are considered “exempt” (and protected from creditors) for only six months following the date of sale. In re Garcia, 499 B.R. 506, 511 (Bankr. N.D. Tex. 2013) (“Section 41.001(c) of the Texas Property Code provides that when a Texas homeowner sells his homestead, the proceeds are exempt for only six months from the date of the sale.”) (citing Tex. Prop. Code Ann. § 41.001(c)). Thus, if the sale proceeds are not applied to the purchase of a new homestead within six months of the date of sale, the exemption status is lost. In re Morgan, 481 Fed.Appx. 183, 187 (5th Cir.2012) (stating that the “proceeds [from the sale of the homestead] lost their exempt status when [the debtor] failed to reinvest them in a new Texas homestead within six months”).
However, some courts have allowed the tolling of the six-month statutory period if a party specifically requests the court to toll the six-month period before the expiration of the deadline. See, e.g., In re Crum, 414 B.R. 103, 110 (Bankr. N.D. Tex. 2009) (stating that tolling is only appropriate when “the debtor ... take[s] some action to protect his rights (i.e., request tolling) before the rollover period expires”).3 It is appropriate to review these cases to determine if their holdings are applicable in the dispute at bar. In reviewing these cases, this Court keeps in mind that homesteads have been recognized as “favorites of [Texas] law” and “[a court] must give liberal construction to the constitutional and statutory provisions that protect homestead exemptions.” Bradley v. Pac. Sw. Bank, FSB (In re Bradley), 960 F.2d 502, 507 (5th Cir. 1992); see Wallace v. First Nat. Bank, 120 Tex. 92, 35 S.W.2d 1036, 1040 (1931) (“The courts of this state have held, and it is now undoubtedly the settled rule, that the homestead laws are to be liberally construed to effectuate their beneficent purposes.”).
In In re Bading, the debtor owned two contiguous tracts of land—one on which a house was built. 376 B.R. 143, 146 (Bankr. *131W.D. Tex. 2007). A creditor eventually obtained a judgment against both the tract where the debtor’s house was located as well as the adjacent tract. Id. The debtor later found a buyer to purchase the two tracts but the creditor’s abstract of judgment prevented her from consummating the sale on both tracts. Id. The creditor consented to, releasing its lien on the tract where the house was built, which allowed the buyer to purchase this one tract first and hold off on closing on the second tract until the debtor could resolve the abstract of judgment lien issue. Id. When the debt- or filed for bankruptcy, she claimed as exempt property both the unsold tract as well as the proceeds from the sale of the-other tract. Id. The creditor contended that the debtor’s homestead exemption in the sale proceeds of the sold tract was lost unless the debtor reinvested those proceeds in another homestead within six months of the sale of this tract. Id. at 147. In response, the debtor filed a motion seeking to toll the running of the six-month period for reinvesting the sale proceeds into a new homestead. Id.
The court ruled as follows:
[F]or so long as the proceeds from the sale of a homestead are tied up—whether by a title company or by a Hobson’s choice created by the creditor—in such a way that only judicial intervention can resolve the problem, then the creditor should not, in equity, be able to reap an unwarranted benefit from its own position (regardless the bona fides of that position), to wit, depriving the debtor of all or any part of her homestead interest by the fiat of the passage of time needed to resolve the dispute put into play by the creditor’s own legal position. For so long as the dispute remains unresolved, the debtor could not be expected to reinvest proceeds—especially when doing so would all but have required her to give up part of her homestead just to make sure she acted within six months. The creditor’s legal position, regardless its motivation, should not result in a windfall to the creditor, especially when that windfall is the destruction of a Texas debtor’s homestead rights.
Id. at 153-55 (emphasis in original). Thus, based on the above reasoning, the court concluded that the six-month period did not begin to start running until the date that the debtor closed the sale on the second tract—i.e., closed the sale on all of her homestead (which, in this case, was two contiguous tracts). Id. at 155.
In Hodes v. Diagnostic Experts of Austin, the court of appeals affirmed the district court’s decision that: (a) denied the debtor’s motion to dissolve the writ of garnishment on the proceeds generated from the sale of the debtor’s homestead; and (b) precluded the debtor from claiming the sale proceeds of her homestead as exempt. No. 03-09-00185-CV, 2010 WL 2867344, *3 (Tex. App.—Austin July 22, 2010). Prior to filing for bankruptcy, Diagnostic Experts of Austin (Diagnostic) had sued the debtor in state court, but when the debtor filed her bankruptcy petition, the suit was removed to the bankruptcy court, which subsequently ordered her to pay Diagnostic over $3 million. Id. at *1. In her bankruptcy case, the debtor claimed two tracts of land—which she owned with her ex-husband—as her exempt homestead. Id. Later, she and her ex-husband agreed to sell both tracts. Id. The tracts were later sold and the proceeds were placed in a trust. Id. A few months after the bankruptcy court issued the judgment and over six months after the proceeds were placed in the trust, Diagnostic filed an application for writ of garnishment seeking the release of funds held in the trust. Id. The debtor opposed Diagnostic’s request and argued that the funds were exempt because they were proceeds from *132the sale of her homestead. Id. Without determining whether Texas law allows for tolling of the six-month period, the court in Hodes affirmed the district court’s decision because “[n]othing in the record ... suggests that [the. debtor] ever specifically-asked the district court or any court to toll the statutory deadline before the deadline expired.” Id. at *3.
' The lesson of Boding and Hodes is that if a debtor wants to stop the clock from running on the six month safe harbor period, the debtor, must request the court to toll the running of this period. The debtor cannot simply sit on his or her hands and expect that the six-month safe harbor will not run.
C. Analysis of the Dispute at Bar
In the suit at bar, the Townhome was sold for $97,000.00—all of which were proceeds first held by the U.S. Marshals Service and then deposited into the registry of the Court. [Findings of Fact Nos. 7, 9, 10, 11, & 12]. Pursuant to the Judgment, the Plaintiff owns an equitable lien of $16,932.72. [Finding of Fact No. 1]. However, the Plaintiff not only requests the distribution of $16,932.72 from the Sale Proceeds (pursuant to its equitable lien set forth in the Judgment), he also seeks distribution for the remaining amount due to him under the Judgment (i.e., $33,067.28). [Finding of Fact No. 14].
On May 3, 2016, the Townhome was sold, [Finding of Fact No. 7]; the U.S. Marshals received the Sale Proceeds and held them until August 2, 2016, [Finding of Fact No. 12]; and then, on August 2, 2016, the Sale Proceeds were deposited into the registry of the Court, [Id.]. Pursuant to Texas Property Code § 41.001(c), the Sale Proceeds are considered exempt for six months following the date of sale of the Townhome—or, until 11:59 P.M. on November 3, 2016. The Plaintiff contends that the Sale Proceeds “are no longer subject to the ‘safe harbor’ homestead protections of Texas Property Code § 41.001(c) because more than six months have elapsed since the May 3, 2016[ ] sale of the [Town-home].” [Adv. Doc. No. 60], The Plaintiff suggests that tolling the six-month period is impermissible; however, the Plaintiff argues that even if tolling of the six-month period is allowable, “at no time before the expiration of the six-month statutory period did the Defendants request that the Court toll the six-month statutory period.” [Id.]. Thus, the Plaintiff contends that all of the Sale Proceeds automatically became non-exempt on November 4, 2016 and that therefore the Court should authorize a distribution of $50,000.00, not just $16,932.72 to him.
As stated above, Texas homestead exemptions must be “liberally construed to effectuate their beneficent purposes.” Wallace, 35 S.W.2d at 1039. “Thus, when homestead-sale proceeds have been withheld from the homestead claimant, courts may equitably toll the six-months’ statutory exemption to prevent the claimant from being irrevocably deprived of the exemption’s benefits.” London v. London, 342 S.W.3d 768, 776 (Tex. App.—Houston [14th Dist.] 2011). Here, the U.S. Marshals Service had complete control of the Sale-Proceeds from May 3, 2016 until August 2, 2016, [Findings of Fact Nos. 9, 11, & 12]; the Defendants had no access to these proceeds during this three-month period. Then, the Sale Proceeds were deposited into the registry of the Court and have been sitting in the registry since August 2, 2016. [See Finding of Fact No. 12]. Once again, while the Sale Proceeds had been sitting in the registry of the Court, the Defendants had no access to these proceeds. Without access to the Sale Proceeds since the date of the sale of the Town-home, the Defendants have been unable to *133use the Sale Proceeds to purchase another homestead during the six-month period'between May 3, 2016 and November 3, 2016.
However, twenty days after the Sale Proceeds were deposited into the registry (on August 22, 2016)—i.e., prior to the expiration of the six-month safe harbor period—the Defendants filed the Motion to Release Funds. [Finding of Fact No. 13]. While the Defendants, representing themselves pro se, did not specifically request that this Court toll the six-month statutory period in the Motion to Release Funds, they certainly indicated that they wanted to obtain control of the Sale Proceeds by asking this Court “how would [the Court] release whatever was left from mortgage [i.e., the Sale Proceeds][?]” [Adv. Doc. No. 50, p. 2 of 2]. This Court construes the Defendants’ language as a request to allow them to gain control over the Sale Proceeds, a request that this Court finds is at least as compelling as—if not more compelling than—a request to toll the six-month safe harbor period. Moreover, it must be remembered that the Defendants now represent themselves pro se, and therefore they are not well-versed in drafting pleadings. It is nevertheless clear from the mere fact that the Defendants are asking in the Motion to Release Funds how they can gain access the Sale Proceeds that they are essentially asserting their exemption claim to the Sale Proceeds prior to the expiration of the six-month safe harbor period. See U.S. v. Riascos, 76 F.3d 93, 94 (5th Cir. 1996) (“To penalize Ríaseos for less-than-perfect pleading is a clear violation of the rule that courts must liberally construe pro se pleadings.”).
However, this Court could not simply order the Clerk of Court to distribute all of the Sale Proceeds to the Defendants at their mere request because the Plaintiff filed the Response/Application and requested this Court to pay him “the remaining sums deposited into the Court’s registry for the remaining amount due to him under the Judgment, in the amount of $33,067.28.” [Adv. Doc. No. 51, p. 4 ¶10]. Therefore, until this Court held a hearing and issued a ruling, the Court was unable to resolve the issue of how the Sale Proceeds should be distributed, as the Response/Application opposes the Defendants’ request that they should receive all of the Sale Proceeds. Due to this conflict, the Court did not release the Sale Proceeds on deposit in the registry of the Court to any party, but rather kept the Sale Proceeds in the registry and held a hearing.
Given the above-described circumstances and the law liberally construing homestead exemptions, this Court now equitably tolls the six-month statutory exemption period, effective May 3, 2016. See London, 342 S.W.3d at 776 (“[W]hen homestead-sale proceeds have been withheld from the homestead claimant, courts may equitably toll the six-months’ statutory exemption to prevent the claimant from being irrevocably deprived of the exemption’s benefits.”); see also Jones v. Maroney, 619 S.W.2d 296, 297-98 (Tex. App.—Houston [1st Dist.] 1981, no writ) (“[T]he purpose for which the statute was enacted would be destroyed if the court would not toll the statute during the period of time the proceeds were involved in court litigation.”). Thus, the Sale Proceeds, which were generated from the sale of the Town-home, constitute the exempt property of the Defendants pursuant to Texas Property Code § 41.001(c). Contrary to the Plaintiffs assertion, the six-month safe harbor period has not already expired, as the Sale Proceeds have been tied up in the litigation among the Defendants, the Plaintiff, *134and. Ms. Pham.4
IV. Conclusion'
Because the Sale Proceeds are exempt, the only valid and enforceable claims at this time on the Sale Proceeds are the purchase money lien held by Ms. Nguyen (which Ms. Pham paid off) and the equitable lien awarded to the Plaintiff by this Court in the Judgment. [Findings of Fact Nos. 1 & 15]. Thus, the appropriate distribution for the Clerk of Court to make is as follows:
Total Proceeds: $97,000.00
Less: Distribution to Ms. Pham: $30,715.43
Less: Distribution to the Plaintiff: $16.932.72
Remaining Amount for the Defendants: $49,351.85
Once this Court enters an order on the docket regarding the Motion to Release Funds, the Response/Application, and the Motion to Intervene (the “Order”), the clock will start running on the six-month safe harbor period. See Maroney, 619 S.W.2d at 298 (“Thus, the statutory period in which the proceeds from the above sale would be exempt for 6 months would date from August 19, 1980 [i.e., the date that the court entered judgment for the homestead claimants].”). During this six-month period, the $49,351.85 will constitute exempt property of the Defendants, and they will be allowed to use the $49,351.85 to purchase another homestead. However, if the Defendants fail to use these funds to purchase another homestead during this six-month period, then on the 181st day following entry of the Order, the funds will automatically become non-exempt property to which the Plaintiff can look to satisfy the balance of the $33,067.28 owed under the Judgment.
*135An order consistent with these Findings of Fact and Conclusions will be entered on the docket simultaneously herewith.
. At trial, the Defendants were represented by an attorney. However, since the conclusion of the trial,* they have been representing themselves pro se. The Motion to Release Funds was actually written by the daughter of the Defendants, as her written English is better than that of her parents.
. The Defendants do not dispute Ms. Pham’s request to receive a distribution for her paying off the lien held by Ms. Nguyen (the original lienholder on the Townhome). [Hr’g held on Nov. 10, 2016, at 12:35:26-12:36:15 P.M.], Specifically, they do not have any dispute with this Court entering an order distributing to Ms. Pham the amount of $28,000.00. [Id.]. They object to a higher distribution because they believe they owed Ms. Nguyen the amount of $28,000.00 on the date ¿at the Townhome was sold. [Id.]. However, Ms. Pham’s credible testimony, together with certain calculations made by this Court, convinces this Court that the amount owed was a bit higher than $28,000.00. [Id. at 11:17:59-11:18:17 P.M.; 1:07:08-1:07:39 P.M.],
. The Court in Crum, 414 B.R. at 110, expressly cited the Fifth Circuit's opinion of In re Zibman, 268 F.3d 298 (5th Cir. 2001), for the proposition that a debtor can toll the six-month safe harbor period by taking "some action to protect his rights (i.e„ request tolling) before the rollover period expires.” There is no question that in a footnote in Zibman, the Fifth Circuit discussed the tactic of seeking a tolling of the six-month period. Zibman, 268 F.3d at 305 n.30. However, the Fifth Circuit expressly declined to state whether the six-month safe harbor period could in fact be tolled: "Although the Zibmans allude in their argument to the possibility that the six months could be tolled during the bankruptcy proceeding, they did not seek such tolling in the bankruptcy court before the balance that remained on the 6-month period at filing eventually ran out. We therefore do not address that issue except to note that a Texas Court of Appeals has allowed the six months to be tolled during periods of dispute.” Id. (citation omitted). Thus, there is no controlling decision from the Fifth Circuit that the six-month period can be tolled.
. The Plaintiff has cited two of the undersigned judge's opinions in support of his argument that the safe harbor period has already expired. [Doc. No. 59, p. 4 ¶8]; [Doc. No. 60, p. 2 of 3], Specifically, he cites In re Smith, 514 B.R. 838 (Bankr. S.D. Tex. 2014), and In re Hawk, 524 B.R. 706 (Bankr. S.D. Tex. 2015), aff'd 556 B.R. 788 (S.D. Tex. 2016). Smith involved proceeds from the sale of the debtor’s homestead, whereas Hawk involved proceeds generated from the debtors' withdrawal of all of the funds from an IRA. In Smith, this Court held that the sale proceeds became non-exempt on the 181st day after the sale of the debtor’s homestead pursuant to § 41.001(c) of the Texas Property Code because the debtor did not use the proceeds during the six-month safe harbor period to purchase a new homestead. 514 B.R. at 843. In Hawk, this Court held that the withdrawn funds became nonexempt on the 61st day after withdrawal because § 42.0021 of the Texas Property Code requires reinvestment IRA funds within 60 days, and the debtors failed to roll over the liquidated IRA funds within 60 days. 524 B.R. at 714. The matter at bar is distinguishable from Smith and Hawk in one very important respect. In Smith and Hawk, the debtors had complete control over the proceeds from the sale of the homestead and the liquidation of the IRA, whereas here, the debtors have had absolutely no access to the Sale Proceeds since the day that the U.S. Marshals held the auction selling the Town-home. Thus, in Smith and Hawk, the debtors had no justifiable basis to toll the running of the safe harbor periods afforded by § 41.001(c) and § 42.0021 of the Texas Property Code. Here, the Defendants do have a justifiable basis. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500188/ | MEMORANDUM OPINION
Marvin Isgur, UNITED STATES BANKRUPTCY JUDGE
. On October 26, 2015, Melanie Miller Anderson initiated this lawsuit against several defendants, including David McKeand. (ECF No. 1). As a result of a settlement approved in the underlying bankruptcy case, McKeand is the only remaining defendant in this adversary proceeding. (Case No. 15-33603 at ECF No. 77). In her complaint, Anderson alleged that McKeand is a Debt Relief Agency as defined by 11 U.S.C. § 101 (12A) of the Bankruptcy Code, and further, that he violated certain requirements of debt relief agencies set forth in §§ 526-528 of the Bankruptcy Code. (ECF No. 12 at 7-10). On July 12, 2016, McKeand filed his initial motion for summary judgment. (ECF No. 33). McKeand supplemented the motion on *138September 2, 2016, and September 28, 2016. (ECF No. 36 and 42). In his motion, McKeand argues that he is not a Debt Relief Agency as a matter of law, and accordingly, he is not personally liable for the alleged Code violations. For the reasons set forth below, McKeand is not entitled to summary judgment.
Summary Judgment Standard
In McKeand’s second supplemental motion for summary judgment (ECF No. 42) he describes his motion by way of reference to Texas state law as a “no evidence motion for summary judgment.” (ECF No. 42 at 3). Federal law does not recognize this Texas procedure. In re Perry, 2009 WL 2753181, at *3 (Bankr. S.D. Tex. Aug. 26, 2009) (“[T]here is no such thing as a ‘no evidence’ summary judgment under Federal Rules.”). However, Fed. R. Civ. P. 56 provides an analogous alternative. The Court will consider McKeand’s Motion for Summary Judgment as one that invokes the framework originally set forth in Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986), and is applicable when a party that does not bear the burden of proof at trial moves for summary judgment.
“Summary judgment is proper ‘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.’ ” Fennell v. Marion Indep. Sch. Dist., 804 F.3d 398, 407 (5th Cir. 2015) (quoting Fed. R. Civ. P. 56(a)). Fed. R. Bankr. P. 7056 incorporates Rule 56 in adversary proceedings. A genuine dispute of material fact exists when the “evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Royal v. CCC & R Tres Arboles, L.L.C., 736 F.3d 396, 400 (5th Cir. 2013) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). “The evidence is viewed in the light most favorable to the nonmovant.” Id. (citing United Fire & Cas. Co. v. Hixson Bros., Inc., 453 F.3d 283, 285 (5th Cir. 2006)).
The party seeking summary judgment “always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.” Davis v. Ft. Bend Cty., 765 F.3d 480, 484 (5th Cir. 2014) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Where, as here, the nonmovant will bear the burden of proof at trial, the movant may satisfy its initial responsibility by “ ‘showing’—that is, pointing out to the [court]— that there is an absence of evidence to support the nonmoving party’s case.” Celotex, 477 U.S. at 325, 106 S.Ct. 2548; Stagliano v. Cincinnati Ins. Co., 633 Fed. Appx. 217, 219 (5th Cir. 2015). “It is not enough .to move for summary judgment without supporting the motion in any way or with a conclusory assertion that the plaintiff has no evidence to prove his case.” Celotex, 477 U.S. at 328, 106 S.Ct. 2548 (White, J., concurring).
If the movant satisfies its initial burden, “[t]he burden then shifts to ‘the nonmoving party to go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’” Davis, 765 F.3d at 484 (quoting Celotex, 477 U.S. at 323, 106 S.Ct. 2548). A party may not “defeat summary judgment with conclusory allegations, unsubstantiated assertions, or ‘only a scintilla of evidence.’ ” Id. (quoting Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007)).
*139Jurisdiction and Authority
This Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1384, While claims under 11 U.S.C. §§ 526-528 are not enumerated core proceedings under 28 U.S.C. § 157, they invoke substantive rights established by the Bankruptcy Code. In re Morrison, 555 F.3d 473, 479 (5th Cir. 2009) (“Core proceedings are those that invoke a substantive right provided by title 11") (internal quotations omitted); In re Harrelson, 537 B.R. 16, 27 (M.D. Ala. 2015); In re Kohlenberg, 2012 WL 3292854 (N.D. Ohio Aug. 10, 2012).
Analysis
(1) McKeand’s initial burden
In an effort to satisfy his initial burden, McKeand offers two exhibits to demonstrate that there is an absence of evidence supporting the allegation that he is a Debt Relief Agency as defined by § 101(12A). The first exhibit is the contract for legal services between Anderson and the J, Freeman Law Firm; the second is a transcript of a deposition McKeand took of Anderson. (ECF Nos. 33-1, 42-1). McKeand offers the contract to establish that Anderson did not enter into a contractual agreement with McKeand personally, but instead with the J. Freeman Law Firm. (ECF No. 33-1 at 1). McKeand offers the deposition transcript to establish that Anderson had no knowledge of McKeand until April 2016, well after she had filed bankruptcy, and thus he could not have offered her bankruptcy assistance—a requirement of a § 101(12A) Debt Relief Agency.
If Anderson cannot demonstrate that the J. Freeman Law Firm is a Debt Relief Agency, and that McKeand directed the firm to operate in violation of the Code, she may not pursue the alleged violations of §§ 526-528 against McKeand. McKeand’s exhibits demonstrate that Anderson neither entered into a contract with McKeand, nor even knew McKeand prior to filing a lawsuit against him. Though McKeand’s exhibits do not demonstrate with certainty that Anderson cannot prove her case, they suggest that McKeand’s involvement at the J. Freeman Law Firm may be remote or limited. The exhibits are sufficient to satisfy McKeand’s initial burden under Celotex. Accordingly, the burden shifts to Anderson to set forth specific facts showing that there is a genuine issue for trial. Davis, 765 F.3d at 484 (quoting Celotex, 477 U.S. at 323, 106 S.Ct. 2548). To survive McKeand’s motion, Anderson must present evidence upon which a factfinder might reasonably return a verdict in her favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (“[A] scintilla of evidence in support of the plaintiffs position will be insufficient; there must be evidence on which the [factfinder] could reasonably find for the plaintiff’).
(¾) McKeand’s objections to Anderson’s evidence.
In her amended responses to McKeand’s motion, Anderson attached twenty-two exhibits. (ECF No. 45-1-22). McKeand lodged objections to all but two: (1) McKeand’s own brief and (2) the transcript of McKeand’s deposition of Anderson. (ECF No. 53). At the outset it is important to note that evidence submitted in opposition to a motion for summary judgment does not have to be admissible under the Federal Rules of Evidence, as long as it could be reduced to an admissible form at trial. McMillian v. Johnson, 88 F.3d 1573, 1584 (11th Cir. 1996), aff'd sub nom. McMillian v. Monroe Cnty,, Ala., 520 U.S. 781, 117 S.Ct. 1734, 138 L.Ed.2d 1 (1997) (“We read this statement as simply allowing otherwise admissible evidence to be submitted in inadmissible form at the summary judgment stage, though at trial *140it must be submitted in admissible form”) (emphasis in original). For example, a sworn statement that would otherwise be considered inadmissible hearsay may be admissible if the declarant could be made available to testify at trial. See J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1542 (3d Cir. 1990) (non-movant could rely on inadmissible hearsay in affidavit for purposes of surviving opponent’s motion if the movant fails to show that the declarant could not be produced to testify at trial).
a. Agreed Judgment
Anderson seeks to admit an agreed judgment issued by this Court in a related miscellaneous proceeding. (ECF No. 45-2). The judgment was issued against several defendants, collectively referred to as the “Enjoined Parties.” The judgment designates McKeand as an Enjoined Party. The judgment states that the “Enjoined Parties now confirm and accept and agree that their operations did constitute a Debt Relief Agency under the Bankruptcy Code.” (ECF No. 45-2 at 2). The judgment further states that the “Enjoined Parties acknowledge that they failed to act in accordance with the restrictions and requirements of a Debt Relief Agency, as set forth in 11 U.S.C. §§ 526, 527, and 528.” McKeand objects to the admission of the judgment as a prohibited use of a compromise offer or negotiation under F.R.E. 408. “While [F.R.E. 408(a)] is ordinarily phrased in terms of offers of compromise, it is apparent that a similar attitude must be taken with respect to completed compromises when offered against a party.” Advisory Committee Notes to the 1972 Proposed Rules (emphasis added). To the extent Anderson is offering the agreed judgment as evidence to prove the validity of a disputed claim—that McKeand is a Debt Relief Agency and that he violated the requirements attendant to Debt Relief Agencies—McKeand’s objection is sustained. The agreed judgment is not admissible for this purpose. See United States v. Robinson, 2012 WL 5386037, at *3 (N.D. Ohio Nov. 2, 2012) (finding inadmissible in a criminal case an agreed judgment evidencing the settlement of a civil lawsuit).
i. Preclusive Effect of Agreed Judgment
Despite being inadmissible to prove the validity of a disputed claim, the judgment may have preclusive effect. Anderson asserts that McKeand is estopped by the agreed judgment from denying both his status as a Debt Relief Agency and his violations of §§ 526-528. (ECF No. 45 at 2). The Fifth Circuit has held that agreed judgments may be given preclusive effect. In re Lacy, 947 F.2d 1276, 1278 (5th Cir. 1991). Federal common law permits the use of issue preclusion (collateral estoppel) upon the showing of three necessary elements: “(1) that the issue at stake be identical to the one involved in prior litigation; (2) that the issue has been actually litigated in the prior litigation; and (3) that the determination of the issue in the prior litigation has been a critical and necessary part of the judgment in that earlier action.” Hicks v. Quaker Oats Co., 662 F.2d 1158, 1166 (5th Cir. 1981). Where, as here,' offensive, non-mutual collateral es-toppel is requested to be applied, a fourth element exists: “[t]here must be no special circumstance that would render [estoppel] inappropriate or unfair.” Kariuki v. Tarango, 709 F.3d 495, 506 (5th Cir. 2013).
The judgment issued in Miscellaneous Proceeding No. 15-307 adjudicated issues identical to those involved in this adversary proceeding and was issued after extensive pretrial discovery and motion practice occurred. See Lacy, 947 F.2d at 1278 (finding that the issue had been actually litigated where there were “extensive *141pleadings, depositions, and exhibits produced _”). Additionally, the determination that McKeand, among others, was a Debt Relief Agency that had violated §§ 526-528 of the Code was a critical and necessary part of the agreed judgment. The only remaining element is whether it would be inappropriate or unfair to apply issue preclusion in this instance. Generally, trial courts have broad discretion to determine when offensive collateral estoppel should be applied. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979). In the seminal case concerning the offensive, nonmutual use of collateral estoppel, Parklane Hosiery, the Supreme Court identified four “fairness factors” to analyze in determining whether offensive collateral estoppel should be applied. Id. at 329, 99 S.Ct. 645. One of these factors asks whether the plaintiff could have intervened in the earlier action. Because “a plaintiff will be able to rely on a previous judgment against a defendant but will not be bound by that judgment if the defendant wins, the plaintiff has every incentive to adopt a “wait and see’ attitude, in the hope that the first action by another plaintiff will result in a favorable judgment.” Id. at 330, 99 S.Ct. 645. Therefore, “in cases where a plaintiff could easily have joined the earlier action ... a trial judge should not allow the use of offensive collateral estoppel.” Id. at 331, 99 S.Ct. 645.
Anderson could have easily joined in the prior proceeding. In fact, Anderson opposed having her adversary proceeding included in the consolidated miscellaneous proceeding. (Case No. 15-307; ECF No. 45). On January 4, 2016, the Court considered whether Anderson’s adversary proceeding should be consolidated with the miscellaneous proceeding. The Court determined that Anderson’s adversary proceeding would be jointly litigated with the miscellaneous proceeding but that her causes of action would be preserved. Though Anderson participated extensively in the consolidated miscellaneous proceeding, she was not a party to it. Anderson simply litigated her case contemporaneously with the consolidated proceeding. The agreed judgment in the consolidated proceeding reflects this conclusion. Anderson was not among the debtors who were allocated payments required by the agreed judgment. (Case No. 15-307 at ECF No. 186). The Court need not address the remaining fairness factors. Because Anderson could have joined the consolidated proceeding and opted not to, it would be unfair to allow her the use of offensive, collateral estoppel in this proceeding.
b. Transcript of McKeand’s testimony at a hearing in the Eastern District of Texas
Anderson seeks to admit a portion of transcript from a hearing in the Bankruptcy Court for the Eastern District of Texas that dealt with issues and parties nearly identical to those in this adversary proceeding. McKeand objects on the basis of hearsay. The transcript reflects McKeand’s own testimony. Rule 801(d)(2) states than an opposing party’s statement offered against that party is not hearsay. Fed. R. Evid. 801(d)(2). Accordingly, McKeand’s objection is overruled. At the hearing, McKeand stated that he is a principal of, and equity holder in, the J. Freeman Law Firm. (ECF No. 45-4 at 195). He also represented that he is responsible for his firm’s Texas clients, and that he returns to Atlanta once a month to supervise and train his employees. (Id. at 200).
c. Email from Kirk Martells to Anderson
Anderson seeks to admit an email she received from Kirk Martells, an employee of the J. Freeman Law Firm. McKeand objects on the basis of hearsay. *142Though the statements in the email may be in an inadmissible form, they can be made admissible by adducing testimony from Martells at trial. Accordingly, McKeand’s objection is overruled. Anderson received the email shortly after she began communications with the J. Freeman Law Firm regarding services to obtain a mortgage modification for her home. Martells stated that as soon as Anderson submits “all documents along with [the] retainer fee” they will “address arresting the foreclosure from moving forward.” (ECF No. 45-11 at 1).
d. Letter from the J. Freeman Law Firm to Anderson
Anderson seeks to admit a letter she received from the J. Freeman Law Firm, signed by Daniel Saxton, principal of and equity holder in the J. Freeman Law Firm. McKeand objects on the basis of hearsay and relevance. The letter is relevant because it reflects the procedure the J. Freeman Law Firm advised clients to employ in order to delay imminent foreclosures—namely, the filing of a bankruptcy petition. (ECF No. 45-12 at 1). Because this practice implicates the Debt Relief Agency requirements of the Bankruptcy Code, it is relevant to the extent McKeand, as a principal and equity holder of the firm, played a role in designing and employing it. McKeand’s hearsay objection is also overruled. Again, though the letter itself may not be admissible in its current form, its contents could be presented through testimony at trial. Furthermore, it is not clear that the letter is being offered for its truth. If Anderson seeks to admit the letter simply to explain her decision to hire a bankruptcy petition preparer, the rule against hearsay is inapplicable.
e. Transcript of McKeand’s testimony at a hearing in this Court
Anderson seeks to admit a portion of transcript from a hearing in the miscellaneous proceeding before this Court. McKeand objects on the basis of hearsay. As noted previously, the statements are McKeand’s. Accordingly, the statements are not hearsay. At the hearing, McKeand explained to the Court that he had reviewed Title 11 of the United States Code and determined that he and his firm intended to operate in compliance with the statute. (ECF No. 45-16 at 16-17). McKeand acknowledged his firm’s transmission of the letter offering advice regarding bankruptcy, but disagreed with the Court’s finding that it violated §§ 526-528 of the Bankruptcy Code.
f Responses to Anderson’s Request for Production and Interrogatories
Anderson seeks to admit McKeand’s response to her request for production and interrogatories. McKeand’s response indicates an objection but fails to state the basis (ECF No. 53 at 7). Accordingly, McKeand’s objection is overruled. In a response to an interrogatory, McKeand acknowledges that Kirk Martells is his employee. (ECF No. 45-20 at 12).
g. Transcript of Natasha Bascus and Jeff Lalo’s Testimony.
Anderson seeks to admit a portion of transcript from a hearing in the miscellaneous proceeding before this Court. McKeand objects on the basis of hearsay. Natasha Bascus was a bankruptcy petition preparer that obtained her clients by referral from the J. Freeman Law Firm. Her testimony at the hearing explained how she contacted clients and processed them skeletal bankruptcy filing. Jeff Lalo was an employee of the J. Freeman Law Firm. Jeff Lalo testified that the firm had been determined to be a Debt Relief Agency in the Northern and Southern District of Georgia but continued its refusal to make the mandatory disclosure required *143by the Bankruptcy Code. He also testified that McKeand “has got a lot to do with” the management of the J. Freeman Law Firm. Though the transcript may present statements in an inadmissible form, both Jeff Lalo and Natasha Bascus’s testimony could be presented at trial through live witness testimony. Accordingly, McKeand’s objection is overruled.
(2) Anderson’s burden
Anderson’s evidence must demonstrate an issue of fact such that a reasonable factfinder might return a verdict in her favor. Liberty Lobby, Inc., 477 U.S. at 252, 106 S.Ct. 2505. As set forth below, Anderson has satisfied her burden.
McKeand is correct that he is not liable for any violations of §§ 526-528 committed by the J. Freeman Law Firm solely because he is a principal. Indeed, for liability to attach, McKeand must have directed the entity to operate in violation of the Bankruptcy Code. Ennis v. Loiseau, 164 S.W.3d 698, 707-08 (Tex. App.-Austin 2005, no pet.) (“A corporate officer may not escape liability where he had direct, personal participation in the wrongdoing, as to be the ‘guiding spirit behind the wrongful conduct’ or the ‘central figure in the challenged corporate activity.’ ”).
While an officer or director may not be held liable in damages for inducing a corporation to breach a contract (provided the officer or director acts in good faith and believes it was in the best interest of the corporation to breach), Maxey v. Citizens Nat'l Bank, 507 S.W.2d 722, 726 (Tex. 1974), they are liable for their own wrongful conduct. Typically this “wrongful” conduct refers to fraudulent or tortious conduct. Miller v. Keyser, 90 S.W.3d 712, 717 (Tex. 2002) (noting “Texas’ longstanding rule that a corporate agent is personally liable for his own fraudulent or tortious acts.”). However, in addition to fraudulent or tortious conduct, corporate agents may also have personal liability for their own statutory violations. Id. at 718 (holding that “an agent may be held personally liable for his own violations of the DTPA.”).
Anderson’s evidence suggests that McKeand played a significant role in directing the policies and procedures of the J. Freeman Law Firm. Her evidence also demonstrates that Daniel Saxton, Kirk Martells, Jeff Lalo, and Natasha Bascus all engaged in conduct that would qualify them as Debt Relief Agencies, leading to the reasonable conclusion that the J. Freeman Law Firm operated as a Debt Relief Agency. It is undisputed that the J. Freeman Law Firm did not comply with the Debt Relief Agency requirements of the Bankruptcy Code. Anderson has provided sufficient evidence to allow a factfinder to reasonably conclude that (1) the J. Freeman Law Firm was a Debt Relief Agency operating in violation of the Bankruptcy Code, and (2) for Texas cases like Anderson’s, the firm was operating in violation of the Bankruptcy Code at the direction and control of its one-half equity holder and principal, David McKeand.
(3) McKeand’s alternative basis for summary judgment relief
In addition to relying on Anderson’s lack of evidence, McKeand asserted several legal issues that—if he prevailed—would entitle him to a favorable summary judgment. Most of these are addressed above. However, McKeand also argues that Anderson has already been made whole, and therefore cannot pursue additional damages against McKeand. McKeand offers no evidence to support this position. Summary judgment on the issue of whether Anderson has any uncompensated damages is denied.
*144Conclusion
The Court will issue an Order consistent with this Memorandum Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500189/ | TRIAL OPINION
Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction
This adversary proceeding arises out of the participation' of the Defendants in an investor program run by Plaintiff/Debtor Ralph Roberts, Realty, LLC (“Realty”) (the “Investor Program”). The Defendants are Jon Savoy; Arnold Hassig, a.k.a. Butch Hassig; Adam Hassig; and four entities formed by them—Prime Residential Properties Group, LLC; Ryan Residential Properties Group, LLC; Adam Residential Properties Group, LLC; and 1836 Brys, LLC (collectively, the “Defendants”). Defendants’ participation in the Investor Program was under an oral agreement entered into before Realty filed bankruptcy. Some of the Defendants purchased sixteen real estate properties under the Investor Program. Realty seeks a judgment against all Defendants, jointly *147and severally, (1) declaring that 30% of any profits made on the sale of any properties purchased under the Investor Program that had not already been .sold as of the date the adversary complaint are property of the bankruptcy estate (Count I);1 (2) an accounting of the funds received from the prepetition sale of three of the properties purchased under the Investor Program (Count II); and (3) the turnover, under 11 U.S.C. § 542, of not less than $100,500.00 allegedly owed for the profit split on properties purchased under the Investor Program that were resold (Count III).2
The Court held a bench trial, which involved a day of opening arguments and the presentation of evidence,3 followed by briefs,4 and then a later date on which counsel made oral closing arguments.
The Court has considered all of the arguments of the parties; all of the exhibits admitted into evidence at trial, namely Plaintiff’s Exhibit 1 through 15 and Defendants’ Exhibits A through M, O, P, and Q;5 and all of the testimony of the witnesses, namely Ralph Roberts, Raymond Confer, and Defendant Jon Savoy.
This opinion constitutes the Court’s findings of fact and conclusions of law. For the reasons stated in this opinion, the Court will enter a judgment in favor of Plaintiff Realty and against certain of the Defendants, but for less than the full relief sought.
II. Jurisdiction
This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b) and 157(a), and Local Rule 83.50(a) (E.D. Mich.). The parties agree with this, and in their Rule 26(f) Reports filed early in this case, the parties agreed that this adversary proceeding is a core proceeding.6
To date, the Court has deferred making a determination as to whether or to what extent this adversary proceeding is a core proceeding. It now turns out to be unnecessary to do so, because the parties all have consented to the Bankruptcy Court entering a final judgment or final order in the adversary proceeding under 28 U.S.C. § 157(c)(2), to the extent any claim is non-core.7
In recent years, the legal landscape regarding a bankruptcy court’s authority to enter final judgments and orders has changed, because of the United States Supreme Court’s decisions in Stern v. Marshall and later cases. See Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2601, 2620, 180 L.Ed.2d 475 (2011) (holding that *148bankruptcy courts lack constitutional authority to enter final orders and judgments on certain types of claims that are designated as “core” proceedings under 28 U.S.C. § 157(b)(2)); Exec. Benefits Ins. Agency v. Arkison, — U.S. -, 134 S.Ct. 2165, 2168, 189 L.Ed.2d 83 (2014) (holding that, consistent with the Constitution, bankruptcy courts can adjudicate Stem claims as “non-core” proceedings, and enter “proposed findings of fact and conclusions of law to be reviewed de novo by the district court”); Wellness Int’l Nework, Ltd. v. Sharif, — U.S. -, 135 S.Ct. 1932, 1948-49, 191 L.Ed.2d 911 (2015) (holding that “Article III [of the Constitution] permits bankruptcy courts to decide Stem claims submitted to them by consent” and that consent need not be express but may be implied “based on ‘actions rather than words.’ ”).
In the wake of the Stem, Arkison, and Wellness cases just cited, there are three classes of claims:
(1) claims that are defined as “core” proceedings by 28 U.S.C. §§ 157(b)(1) and. 157(b)(2), on which bankruptcy courts have both statutory and constitutional authority to enter final judgments under Stem;
(2) claims that are defined as “core” proceedings by 28 U.S.C. §§ 157(b)(1) and 157(b)(2), but on which bankruptcy courts do not have constitutional authority to enter final judgments under Stem, absent consent of all the parties as permitted under Wellness (referred to below as “Stem-core claims”); and
(3) claims that are defined as non-core proceedings under 28 U.S.C. §§ 157(b) and 157(c), on which bankruptcy courts do not have statutory or constitutional authority to enter final judgments, absent consent of all the parties as permitted under 28 U.S.C. § 157(c)(2).
In the Arkison case, cited above, the Supreme Court held that claims of the type described in item (2) above are to be treated like claims of the type described in item (3) above (i.e., as non-core claims subject to the procedures of 28 U.S.C. § 157(c).) Exec. Benefits Ins. Agency v. Arkison, 134 S.Ct. at 2173. Thus, with respect to claims of the type described in both item (2) and item (3) above (Stem-core claims and statutory non-core claims), the following procedures apply, under 28 U.S.C. § 157(c): if all parties consent to the bankruptcy court entering a final judgment on such claims, under § 157(c)(2), then the bankruptcy court may do so; otherwise, the bankruptcy court must follow the procedure of § 157(c)(1), and submit proposed findings of fact and conclusions of law to the district court, for the de novo review described in § 157(c)(1).
Given the parties’ consent in this adversary proceeding, no matter which of the three categories the claims in this adversary proceeding fall under (core; Stems-core; or non-core), the law is now clear that this bankruptcy court has statutory and constitutional authority to enter a final judgment. This makes it unnecessary for this Court to determine which category the claims fall under, so .the Court will make no such determination.
III. Background and facts
Ralph Roberts (“Roberts”) is a real estate broker and the owner of Realty.8 Pre-petition, in the summer of 2009, Defendants, through Roberts, entered into an oral agreement with Realty to participate in Realty’s Investor Program.9 Certain of *149the Defendants purchased sixteen real estate properties through Realty’s Investor Program.10 With the possible exception of Raymond Confer, Defendants were the first investors under the Investor Program.11
A. The terms of the Investor Program as between Realty and Defendants, on which the parties agree12
In large part, the parties agree on what the terms of the Investor Program were that they orally agreed to. But they dispute some of the terms. The undisputed terms on which the parties agree include the following. Under the Investor Program, Realty searched for and researched distressed properties in Wayne, Macomb, and Oakland counties, which might be sold at sheriffs’ sales for below-market prices. Realty tried to identify properties that it believed could be purchased and resold at a profit, and to present those properties to the investors in the Investor Program.13 Three times a week, Realty would provide a list of properties to the investors, by email. Those investors who were interested in a particular property would then e-mail Realty back indicating their interest and the price they were willing to pay for the property. If an investor’s money for the opening bid and any overbid on the property being sold was not already in Realty’s trust account, Realty would require the investor to wire Realty the money for the opening bid and any overbid, or to bring to the office a cashier’s check in the amount the investor was willing to bid, no later than 10:00 a.m. on the morning of the sheriffs sale. Alternatively, if the investor was attending the sheriffs sale with Realty’s Ralph Roberts, the investor could bring to the sale the amount of cash or a cashiers check to cover the amount of the opening bid or any overbid to the sheriffs sale. Roberts would attend the sheriffs sales and bid on the property at the desired price of the investor.14 If Roberts was the successful bidder, the property would be acquired by the investor personally or by an entity created by the investor. Any investor who became the successful bidder at a foreclosure sale on one of the properties would owe Realty a $5,000 “Acquisition Fee,” payable in two installments. The first $2,500 installment was due at the time the investor received a sheriffs deed for the property. The second $2,500 installment was due when the statutory redemption period expired and legal title vested in the investor, or upon closing when the property was resold.15 If a prop*150erty was redeemed, such that the investor would not require ownership of the property, the investor was entitled to a $2,500 credit toward the Acquisition Fee charged on any property purchased in the future under the Investor Program.16 When a property was sold, the investor also was obligated to pay Realty 30% of the investor’s profit, meaning 30% of the difference between the investor’s purchase price and the sale price, less certain approved expenses.17 In calculating the profit, Defendants Butch Hassig and Jon Savoy, and no other investors, were allowed a $5,000 credit referred to as a “seller’s fee,” which they would share,18 and Defendants Butch Hassig and Jon Savoy, and no other investors, also were entitled to receive interest on the principal investment used for the purchase from the date of the acquisition of the property.19 If Realty was used as a broker in selling the property, it was entitled to be paid a realtor commission.20 Realty also agreed to pay Kelly Savoy, who worked for Defendant Jon Savoy, $500 on each closing, because she handled the closings.21
B. Disputed terms of the Investor Program
Certain terms of the Investor Program are in dispute. The parties disagree on what expenses are allowed to be deducted for purposes of the profit split calculation. Realty alleges that there were different ways of calculating the profit split depending on whether the property was purchased and then resold without first being rented (“flipped”); purchased, rented, and then resold; or purchased and then resold under a land contract. If the property was flipped, according to Realty, Defendants were permitted to deduct all of the allowable expenses such as repairs, improvements, commissions, closing fees, interest, insurance, property taxes, utilities, and maintenance fees. However, if the property was purchased, rented and then resold, or resold on a land contract, according to Realty, Defendants were only entitled to deduct the Acquisition Fee, commissions, normal closing costs, and transfer tax, but no other expenses, from the profit calculation.22 With regard to a land contract sale, Realty alleges that its portion of the profit split was to be paid after the investor had received his portion of the profit, either in cash or by the investor assigning the land contract to Realty.23 According to Realty, certain expenses—accounting fees, licensing fees, meals and entertainment, service' charges, professional fees, and office supplies—were not to be deducted for the purpose of calculating any profit split, re*151gardless of whether the property was flipped, rented than resold, or resold on land contract.24
Defendants, on the other hand, allege that there was only one way of calculating the profit’ split. According to Defendants, all expenses incurred during their ownership and sale of the properties were allowed to be deducted in this calculation, no matter whether the investor flipped a property, rented the property then resold it, or resold the property under a land contract.25 And Defendants allege that in calculating the profit split, they were allowed to deduct any expenses that could be deducted for the property as a business expense on a tax return, including accounting fees, licensing fees, insurance premiums, utilities, repair and maintenance costs, city inspection fees, title insurance, meals and entertainment, service charges, and office supplies.26 Defendants allege that Ralph Roberts never discussed with them any different way of calculating the profit split, that they always calculated the profit split the same way, and that the first time they ever heard of there being different ways of calculating a profit split was during trial.27
The parties also disagree as to whether Defendants had a right of first refusal— ie., a right to be first among all investors in picking properties. Realty alleges that Defendants had no such right.28 Defendants allege that they did.29
The parties also disagree about whether they were to share losses under the Investor Program. Defendants allege that they were entitled to a 100% credit for any losses they incurred on any property.30 Realty denies this, and contends that its oral agreement with Defendants did not provide for any sharing of losses.
The parties also appear to disagree as to when the profit split was to be paid, where a property was resold on a land contract. Realty alleges that at the point in time when all that was left to be paid by the land contract vendee on the land contract was the profit split amount owed to Realty, Defendants were required to pay Realty in cash for the amount owed under the profit split or alternatively, were required to assign the land contract, or the payments under the land contract, to Realty.31 Defendants, on the other hand, appear to allege that in a land contract situation, the profit split was to be paid out of the final, land contract balloon payment.32
C. The properties Defendants purchased under the Investor Program
Défendants purchased the following sixteen properties under the Investor Program:
*152• 50054 S. Jimmy Ct., Chesterfield, MI 48047 (“Jimmy”);
• 28795 Teppert, Eastpointe, MI 48021 (“Teppert”);
• 32404 Firwood, Warren, MI 48088 (“Firwood”);
• 31805 Raymond, Warren, MI 48093 (“Raymond”);
• 11147 Irene Ave., Warren, MI 48093 (“Irene”);
• 36403 Ledgestone, Clinton Twp., MI 48035 (“Ledgestone”);
• 50355 Foxcrest, New Baltimore, MI 48047 (“Foxcrest”);
• 38944 Lowell, Sterling Heights, MI 48310 (“Lowell”);
• 2630 Antonia, Warren, MI 48091 (“Antonia”);
• 33221 Duncan, Fraser, MI 48026 (“Duncan”); '
• 7376 Engleman, Centerline, MI 48015 (“Engleman”);
• 29179 Trailwood, Warren, MI 48092 (“Trailwood”);
• 17463 Breckenridge, Clinton Township, MI (“Breckenridge”);
• 17803 Eastland, Roseville, MI (“Eastland”);
• 28340 Palm Beach, Warren, MI (“Palm Beach Property”); and
• 27941 Ursuline, St. Clair Shores, MI (“Ursuline”).33
1. Properties that were redeemed
Of the sixteen properties Defendants purchased under the Investor Program, three of the properties were redeemed by the respective homeowners: Breckenridge; Palm Beach; and Ursuline.34
2. Property that was resold to homeowner
One property that was purchased under the Investor Program at a sheriffs sale— Eastland—was resold to the homeowner after the homeowner filed a lawsuit in Macomb County Circuit Court, and such lawsuit was settled. Realty alleges that there was no loss suffered on Eastland.35 Defendants allege that they had a $12,879.30 loss on Eastland.36
3. Properties that were flipped, on which Realty is not seeking any funds over and above what Defendants already paid to Realty under the Investor Program
The first four of the sixteen properties Defendants purchased under the Investor Program were flipped, and Defendants paid Realty what they believed was owed under the terms of the Investor Program. Those properties are Antonia, Foxcrest, Lowell, and Raymond. Realty is not seeking any payment above what Defendants already paid with respect to these properties.37
*1534. Properties that are being resold on land contract
As of the time of trial, two of the properties Defendants purchased under the Investor Program were being resold under land contracts: Jimmy, and Duncan.38 Jimmy was rented for a year and then resold under a land contract.39 The parties disagree on what expenses can be deducted from the profit split calculation. Realty alleges that Defendants’ profit split calculation includes impermissible expense deductions, and that after removing these expenses, the total allowed expenses would be $11,000, and the profit on this property would be $25,000.40
As to the Duncan property,41 Realty alleges that after removing the impermissible expenses in Defendants’ profit split calculation, there was a $60,000 profit on Duncan. And Realty says that it is entitled to 30% of that profit—$18,0"00.42 Realty alleges that it is currently either owed $18,000 in cash, or that the land contract on Duncan should be assigned to it.43
Defendants allege that due to the expenses that can properly be deducted in the profit split calculation, and their right to set off losses on other properties from profits, no money is owed under the Investor Program on either Jimmy or Duncan.44
5. Other Properties Defendants resold, on which they allege that they owe no money to Realty
Defendants allege that although they resold the following properties they purchased under the Investor Program, they owe no money to Realty on account of the sales: Engleman, Firwood, Ledgestone, and Trailwood.
a. Engleman
Engleman was purchased for $17,627.45 Defendants allege that they spent over $18,000 in repairs on the property46 En-gleman was rented first and then resold.47 Defendants allege that they lost just under $40,000 on Engleman.48 Defendants allege that because they suffered a loss on Engle-man, they do not owe Realty any money on account of the sale, and are entitled to set off the loss on Engleman against any profits made on other properties.49
Realty alleges that some $35,000 of the expenses that Defendants deducted in their profit split calculation on Engleman are not .allowable under the terms of the Investor Program. If these expenses are eliminated from the calculation, Realty alleges, the profit on Engleman was approximately $9,000.50
*154b.Firwood
Defendants allege that “Firwood was purchased for $28,288 and sold for $84,900” but “due to the numerous errors of the Plaintiff and the contamination of the property[,] this property was not profitable.”51 According to Defendants, because no profit was made on the Firwood property, Defendants do not owe Realty any profit split on this property.52
Realty alleges that Firwood was flipped and therefore not all of the expenses Defendants deducted in Defendants' profit split calculation are allowable. Realty al-legés that if the non-allowable expenses are eliminated from the profit split calculation, there was a $12,000-. profit on this property.53
c.Ledgestone
Defendants purchased Ledgestone for $23,500 and sold it for $69,900,54 Defendants allege that they made no profit on the sale of Ledgestone because of their expenses, and therefore they do not owe Realty any profit split on this property.55
Realty alleges that many of the expenses Defendants used in calculating the profit split on Ledgestone are not allowable, in part, because Ledgestone was rented before it was resold. Realty alleges that if the non-allowable expenses are eliminated from Defendants’ profit calculation, the sale of Ledgestone property resulted in a profit of $23,000.56
d.Trailwood
- Trailwood was rented before it was resold.57 Defendants allege that they made a $19,000 profit on Trailwood.58
Realty alleges that when all of the non-allowable expenses are eliminated from Defendants’ profit split calculation, the profit on the sale of Trailwood was about $81,000.59
6. Properties not yet sold
Irene and Teppert are properties Defendants purchased under the Investor Program which had not yet been resold at the time of trial.60 Teppert and Irene were rented to the persons who originally owned them but who lost the properties at a sheriffs sale.61 Realty estimates that there should be a $22,000 profit on Tep-pert and an $81,000 profit on Irene, when these properties are sold.62
Defendants allege that due to the losses they suffered on their other properties, and their right to setoff such losses against *155profits, they will not owe Realty anything when the Teppert and Irene properties are sold, even if they make a profit, unless and until Realty first pays them approximately $65,000 for the losses they suffered on other properties.63
D. Debtors’ bankruptcy cases
On May 25, 2012, Realty and Roberts (collectively, “Debtors”), each filed a voluntary petition for relief under Chapter 11, commencing Case No. 12-53023 (Realty) and Case No. 12-53024 (Roberts). On May 30, 2012, the Court entered an order directing the joint administration of Debtors’ bankruptcy cases,64
On December 6, 2012, Debtors jointly filed a Fifth Amended Plan.65 None of the Defendants filed an objection to Debtors’ Fifth Amended Plan or a proof of claim. On February 11, 2013, the Court entered an order confirming Debtors’ Fifth Amended Plan.66
IV. Discussion
A. Joint and several liability of certain Defendants
As noted at the beginning of this opinion, Plaintiff Realty has named seven defendants in this case—three individuals and four LLCs, Based on the evidence presented at trial, including the testimony of Ralph Roberts,67 and the names of the Defendants who purchased and resold the properties at issue, discussed below, the Court finds that Defendants Jon Savoy and Arnold (“Butch”) Hassig acted jointly in making the oral agreement with Plaintiff Realty regarding the Investor Program, and in purchasing all the properties discussed below, And they acted jointly with the particular Defendant LLC entities named below with respect to particular properties.
For these reasons, the Court finds that to the extent there are any sums owed to Realty with respect to any property discussed below, Defendants Jon Savoy and Arnold (“Butch”) Hassig are jointly and severally liable to Realty for such sums. And particular Defendant LLCs that participated in purchasing, or holding title to and reselling, any property discussed below on which any sums are owing to Realty, also are jointly and severally liable to Realty for such sums, with Defendants Jon Savoy and Arnold (“Butch”) Hassig. The details of this are spelled out more particularly below, in the Court’s discussion of each property at issue.
B. Expenses to be deducted in calculating the profit split under the parties’ oral agreement
As noted above, the parties dispute what expenses may be deducted in calculating the profit on a property, for purposes of calculating the profit split. On this issue, the evidence is conflicting as to what the oral agreement of the parties was. Details of that dispute are described in part III.B of this opinion, above.
There is a major problem with Realty’s version of what the agreement was on this point—namely, that the sworn testimony of Realty’s only witness with knowledge of this subject, Ralph Roberts, is inconsistent.68 Mr. Roberts testified about this *156subject on at least three different occasions—during the trial in this case, and twice before the trial in this case. And on each occasion, Mr. Roberts’s testimony was materially different. The Court will describe each of the three versions to which Mr. Roberts testified.
1. Version 1:
The version that Mr. Roberts testified to at trial is described in part III.B above. It makes a distinction between properties that are “flipped” (resold without first renting them), and properties that are rented, and then resold. Under this version, the deductible expenses for purposes of calculating the profit split are more limited for properties that are rented before they are resold. And under this version, many of the Defendants’ types of claimed expenses are not allowed to be deducted for purposes of calculating the profit split.
To summarize this, under this first version (“Version 1”), the following types of expense are allowed and not allowed to be deducted for purposes of calculating the profit split:
[[Image here]]
Program agreement was between Realty the Defendants in this case. (Trial Tr. (Docket # 61) at 142, 149-50.) (Henceforth, citations in this opinion to "Trial Tr.” are to the transcript filed at Docket # 61).
*157[[Image here]]
As noted above, the Defendants contend that all expenses, including all expenses of the type listed in the above table, are to be deducted in calculating the profit split. And this is so whether the property was rented before it was resold or not.
2. Version 2:
In testimony that Mr. Roberts gave in this Court during an earlier trial of a different adversary proceeding, he described a different version of his Investor Program. The earlier trial was held on July 16, 2013, in the case of Ralph Roberts Realty, LLC v. Roger and Shirley Roberts, Adv. No. 12-6132 (the “Roger Roberts case”).
In the Roger Roberts case, Ralph Roberts (no relation to Roger Roberts), testified as follows, regarding the Investor Program: 69
[in answer to the question “In your program, what kind of expenses do you generally include as credits against the split?”:]70
A: If you’re buying it and fixing it and flipping it, all expenses are against it. If *158you’re buying it and renting it, then there’s taxes and insurance we don’t count against it, but anything that has to take the property to be able to sell it would be an expense within reason. ,..
Q: Are there any expenses that aren’t included that you wouldn’t include?
A: The investor’s personal time. There’s no expense for the investor’s time, but everything else that’s paid to someone,. verified, paid to someone is an expense.
This Version (“Version 2”) is quite different from Version 1, and more favorable to Defendants than Version 1, in the types of expense that are allowed as deductions in calculating the profit split. First, in Version 2, numerous types of expense are allowed that are not allowed for either flips or rentals under Version 1. These include those types of expense that are listed as item nos. 14, 15, and 21 in the Version 1 table above (legal fees; accounting fees; and inspection fees). Second, in Version 2, numerous types of expense are allowed for properties that were rented before being resold, that are not allowed for such properties in Version 1. These include item nos. 8, 9 and 13 in the Version 1 table above (cost of repairs; cost of improvements; and utilities).
3. Version 3:
Ralph Roberts testified to yet a third version of the Investor Program, in an affidavit he signed on October 7, 2013.71 That affidavit was filed in this case by Realty on October 7, 2013, in support of its motion for summary judgment.72 In that affidavit, Mr. Roberts testified as follows:
30. Under the terms of the investor program, investors were entitled to a credit against the net profit split for reasonable amounts spent to maintain or refurbish the property, as well as for taxes and utilities paid by the investor.
31. If, however, an investor rented a property, the rental income was to be credited against any expenses incurred by the investor on the property.
32. Because of the strength of the rental market, the incoming rent for all properties purchased through my company’s investor program should more than offset, on a yearly basis, the expenses for each property.73
And at trial, Mr. Roberts reiterated the provisions of ¶ 31 of the affidavit, when he testified as follows:
Q: Can you show me in this affidavit that describes your procedural posture and dealings with Mr. Savoy where it talks about the rental agreement? ...
A: Well, 31 says if investors rented the property, the rental income would be credited against any expenses incurred by the investor on the property.74
This version (“Version 3”) is quite different from Version 1 and also from Version 2. The first difference between Version 3 and Version 1, in calculating the profit split for a property that is resold after being rented, is that under Version 3 the investor is entitled to deduct all the same expenses that he can deduct for a property that is resold without first being rented (ie., a “flipped” property).
The second difference between Version 3 and Version 1, which also is a difference *159between Version 3 and Version 2, is that under Version 3 the investor’s rental income is factored into the profit calculation, and expenses are netted against the rental income. Not only is that a striking difference from Version 1 (the position Realty took at trial in this case) and Version 2, but also it is quite different from the. Defendants’ version of the Investor Program agreement. That is, the Defendants’ version of the agreement, testified to at trial by Defendant Jon Savoy, is that rental income is not considered at all in the profit calculation. At trial, the parties agreed, and the testimony of Ralph Roberts and Defendant Jon Savoy agreed, on this point. And the parties and their witnesses agreed at trial on the fact that under the Investor Program the investor keeps all the rental income obtained from renting a property before selling it. And none of the parties’ competing profit/profit split, calculations for any of the sixteen properties involved in this case include rental income at all.
4. The Court’s findings and conclusions on this subject
As a general matter, the Court finds Ralph Roberts and Jon Savoy each to be a credible witness, even though their testimony is in sharp conflict on a number of issues. With respect to the method of calculating the profit and profit split on properties resold by Defendants, and specifically the types of expenses to be deducted in calculating the profit on a property, the Court finds and concludes that the Plaintiff Realty has failed to meet its burden of proving, by a preponderance of the evidence, that its version (Version 1) was what Realty and any of the Defendants orally agreed to. Ralph Roberts’s testimony at trial on this subject was clearly inconsistent with his prior sworn testimony given on two prior occasions, and all three versions sworn to by Mr. Roberts, at trial and prior to trial, are inconsistent with each other. At best, from Plaintiff Realty’s perspective, the evidence on this subject is confused and confusing, and unpersuasive. The evidence fails to convince the Court that Realty’s Version 1 more likely than not is what Realty and the Defendants orally agreed to.
This failure by Realty to meet its burden of proof on this issue means that in calculating the profit for each of the properties at issue the Court must use Defendants’ profit calculations, with certain specific exceptions discussed below.
C. The Court’s calculations, for the properties at issue, of profit, profit split, and other amounts owed to Realty
As noted in part III.C of this opinion above, there were sixteen properties that Defendants purchased under their oral Investor Program agreement with Realty. For one reason or another, Realty seeks no relief against Defendants with respect to eight of the properties. These are: Breckenridge; Eastland; Palm Beach; Ursuline; Antonia; Foxcrest; Lowell; and Raymond.75
Realty seeks relief, either monetary or declaratory, with respect to the remaining eight properties listed in part III.C of this opinion. As of the time of trial, six of those properties had been resold by Defendants, including two sold on a land contract. These are: Engelman; Firwood; Ledge-stone; Trailwood; Jimmy (land contract); and Duncan (land contract). The remaining two properties had not been resold as of the time of trial: Irene and Teppert.
*160The Court now will discuss each of the six sold properties separately. The table appended to the end of this opinion presents the Court’s detailed findings relevant to the question of what, if anything, Defendants owe Realty for each property.
1. Ledgestone
The Ledgestone property was purchased at a Sheriffs foreclosure sale by Defendant Ryan Residential Properties Group, LLC, rented for a time, and then resold.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (DX-J) are the following. First, the correct seller’s fee is $5,000, not the $10,000 claimed by Defendants. The parties agreed to $5,000 for this fee, not $10,000, and this is so for all of the properties discussed in this opinion.76 Second, of the expenses listed on DX-J, the Court does not include as allowable expenses the items for meals and entertainment; office supplies; service charges; or bad debt. There is no basis for including these items of expense here. These items total $251.09. Third, the Court does not include as an allowable expense the item listed as “Interest Expense” for $1,178.11. That item is for interest Defendants incurred to borrow money from a third party to purchase this property at the foreclosure sale. That is not an allowable expense under the parties’ agreement. Interest is limited to the $2,248.92 interest amount shown at the bottom of DX-J, which represents interest on the money paid by Defendants to acquire this property at the foreclosure sale, for the period from that time to the time when the property was resold. That is an allowable expense deduction, for all the properties discussed in this opinion, under the agreement - of the parties, for both properties that were flipped and properties that were rented before they were resold. Fourth, the Court includes in the allowable expenses the $5,000 acquisition fee to Realty incurred for the acquisition of this property.
After making these adjustments, the net profit for the split is $1,927.71; the split due to Realty is 80% of that amount, which equals $578.31. Plus $2,500.00 of the acquisition fee due to Realty for this property is still unpaid, so that too is owed to Realty.77 The total owed to Realty with respect to the Ledgestone property is $3,078.31.
Of the Defendants named in this case, this sum is owed to Realty by Defendants Ryan Residential Properties Group, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
2. Firwood
The Firwood property was purchased at a Sheriffs foreclosure sale by Defendant Jon Savoy, transferred by him to one of his LLC entities, Defendant 1836 Brys, LLC, and then later resold. (PX-8). This property was not rented before it was resold.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (PX-8) are similar to the ones described above with respect to the Ledge-stone property, except that Defendants do not claim any expense for Firwood for meals and entertainment; office supplies; service charges; or bad debt. Nor do they claim a separate interest expense for any interest incurred to finance the purchase of the Firwood property.
Realty contends that the expense item “repairs and maintenance” of $31,387.73, *161claimed as an expense for Firwood, is unreasonably high. The Court finds otherwise, however, based on the testimony of Jon Savoy.78
After making these adjustments, there is no net profit for the split; rather, there is a loss of $5,705.70. For Firwood, $2,500.00 of the acquisition fee due to Realty for this property is still unpaid, so that amount is owed to Realty.79 As discussed in part IV.G of this.opinion, below, Defendants are not entitled to set off or recoup any part of their $5,705.70 loss on this property against the $2,500.00 acquisition fee still owed to Realty for this property. Therefore, the total owed to Realty with respect to the Firwood property is $2,500.00.
Of the Defendants named in this case, this sum is owed to Realty by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
3. Trailwood
The Trailwood property was purchased at a Sheriffs foreclosure sale by Defendant Prime Residential Properties Group, LLC, rented for a time, and then resold.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (DX-M) are similar to the ones described above with respect to the Ledgestone property, except that Defendants do not claim any expense for Trail-wood for meals and entertainment; service charges; or bad debt. (A $46.37 item for office supplies is not counted as an allowable expense.) Nor do Defendants claim a separate interest expense for any interest incurred to finance the purchase of the Trailwood property.
After making these adjustments, the net profit for the split is $68,059.04; the split due to Realty is 30% of that amount, which equals $20,417.71. Plus the entire $5,000.00 acquisition fee due to Realty for this property is still unpaid, so that too is owed to Realty.80 The total owed to Realty with respect to the Trailwood property is $25,417.71.
Of the Defendants named in this case, this sum is owed to Realty by Defendant Prime Residential Properties Group, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
4. Engleman
The Engleman property was purchased at a Sheriffs foreclosure sale by Defendant Jon Savoy, transferred by him to Defendant 1836 Brys, LLC, rented for a time, and then resold.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (DX-E) are similar to the ones described above with respect to the Ledge-stone property, including disallowing the expenses claimed for meals and entertainment; office supplies; service charges, and “website,” all of which total $70.93. (As with the other items just listed, there is no basis shown for allowing a website expense.) Nor do they claim a separate interest expense for' any' interest incurred to finance the purchase of the Engleman property.
Realty contends that the expense item “repairs and maintenance” of $18,675.27 claimed as an expense for Engleman is ■unreasonably high. The Court finds otherwise, however, based on the testimony of *162Jon Savoy.81
After making these adjustments, there is no net profit for the split; rather, there is a loss of $37,245.12. For Engleman, $2,500.00 of the acquisition fee due to Realty for this property is still unpaid, so that amount is owed to Realty.82 As with Fir-wood, Defendants are not entitled to set off or recoup any part of their loss on this property against the $2,500.00 acquisition fee still owed to Realty for this property. Therefore, the total owed to Realty with respect to the Engleman property is $2,500.00.
Of the Defendants named in this case, this sum is owed to Realty by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
5. Duncan
The Duncan property was purchased at a Sheriffs foreclosure sale by Defendant Jon Savoy, transferred by him to Defendant 1836 Brys, LLC, and then resold. It was not rented before it was resold. It was resold on a 5-year land contract dated July 9, 2010. (PX-11). As of the time of trial, the land contract purchaser (vendee) was still making payments under the land contract.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (DX-A) include ones similar to those described above with respect to the Ledgestone and Engleman properties, including disallowing the expenses claimed for meals and entertainment; office supplies; service charges, and website, all of which total $62.97, and disallowance of an interest charge of $264.22, for interest incurred to finance the purchase of the Duncan property.
Realty argues that the $7,417.87 expense claimed for “Legal” is not correct, because there were no legal fees incurred with respect to this property.83 The Court agrees, so this expense item is disallowed.
Realty argues that because the land contract required the land contract purchaser to pay the property taxes and insurance on the Duncan property, those expenses listed by Defendants, in the amounts of $300.38 and $402,82 respectively, must be disallowed. But such items are allowed expenses for the roughly 9 month period from the acquisition of the property at the Sheriffs sale (October 9, 2009) until the July 9, 2010 date of the land contract. Realty has not demonstrated that the expense amounts claimed are for any post-land contract period.
After making .these adjustments, the net profit for the split is $38,117.73; the split due to Realty is 30% of that amount, which equals $11,435,32. This is the amount is owed to Realty with respect to the Duncan property.
Of the Defendants named in this case, this sum is owed to Realty by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
The final issue regarding this property is when the payment to Realty is due to be made. The Court described the apparent dispute between the parties about this issue, in part III.B of this opinion, above. The Court credits the testimony of Ralph Roberts on this issue, with respect to the Duncan property and the Jimmy property, both of which were resold on a land contract. Accordingly, the Court finds *163that the $11,435.32 payment for the Duncan property is due to be made by the Defendants to Realty when the land contract balance is $11,435.32 or less, and payment may be made either in cash or by assigning the balance of payments due under the land contract to Realty.' The Court will enter a declaratory judgment so declaring. (Realty did not prove that as of the time of trial, this payment due date for the Duncan property had occurred yet.)
6. Jimmy
The Jimmy property was purchased at a Sheriff’s foreclosure sale by Defendant Jon Savoy, transferred by him to Defendant 1836 Brys, LLC, rented for a time, and then resold. It was resold on a 5-year land contract dated April 27, 2011.84 As of the time of trial, the land contract purchaser (vendee) was still making payments under the land contract.
Adjustments the Court has made to the Defendants’ calculation worksheet for this property (DX-D) include ones similar to those described above with respect to the Duncan property, including disallowing the expenses claimed for meals and entertainment; office supplies; service charges, and website, all of which total $72.97.
Realty argues that the $7,447.88 expense claimed for “Legal” is not correct, because there were no legal fees incurred with respect to this property.85 The Court agrees, so this expense item is disallowed.
Realty argues that because the land contract required the land contract purchaser to pay the property taxes and insurance on the Duncan property, those expenses listed by Defendants, in the amounts of $3,945.32 and $833.90 respectively, must be disallowed. But such items are allowed expenses for the roughly 19 month period from the acquisition of the property at the Sheriffs sale (September 18, 2009) until the April 27, 2011 date of the land contract. Realty has not demonstrated that the expense amounts claimed are for any post-land contract period.
After making these adjustments, the net profit for the split is $7,887.14; the split due to Realty is 30% of that amount, which equals $2,363.14. Plus $2,500.00 of the acquisition fee due to Realty for this property is still unpaid, so that too is owed to Realty.86 Plus Realty is owed $1,000.00, as reimbursement for money that Realty paid to the former owner of the Jimmy property to give up the property before the redemption period expired, in a “cash for keys” type deal. Realty advanced this money at Defendants’ request.87 The total owed to Realty for the Jimmy property, therefore, is $5,863.14.
Of the Defendants named in this case, this sum is owed to Realty by Defendants 1836 Brys, LLC, Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
As with the due date for the payment for the Duncan property, discussed above, the Court finds that the $2,363.14 profit split for the Jimmy property is due to be made by the Defendants to Realty when the land contract balance is $2,363.14 or less, and payment for that split amount may be made either in cash or by assigning the balance of payments due under the land contract to Realty. The Court will enter a declaratory judgment so declaring. (Realty did not prove that as of the time of trial, this payment due date for the Duncan property had occurred yet.) But pay*164ment of the $2,500.00 acquisition fee is overdue, as is reimbursement for Realty’s $1,000.00 “cash for keys” advance. Thus, $3,500.00 is due to Realty now.
D. The liability of Defendant Adam Residential Properties Group, LLC with respect to the Raymond property
Realty contends that Defendants owe it $906.80 as reimbursement for property taxes that Realty paid for the Raymond property. Realty’s evidence shows that this amount is owed by, among others, Defendant Adam Residential Properties Group, LLC.88 Defendants appear to dispute this, based on the testimony of Jon Savoy.89 On this issue, the Court finds for Realty, and therefore finds that for this item the following Defendants are jointly and severally liable to Realty in the amount of $906.80: Adam Residential Properties Group, LLC; Jon Savoy, and Arnold “Butch” Hassig, jointly and severally, and only them.
E. Summary of amounts owed to Realty, by which Defendants
Following is a summary of which Defendants are liable to Plaintiff Realty and in what amounts, based on the above findings:
• Defendants Jon Savoy, Arnold “Butch” Hassig, and Prime Residential Properties Group, LLC are jointly and severally liable to Plaintiff Realty in the amount of $25,417.71, for the Trailwood property.
• Defendants Jon Savoy, Arnold “Butch” Hassig, and Ryan Residential Properties Group, LLC are jointly and severally hable to Plaintiff Realty in the amount of $3,078.31, for the Ledgestone property.
• Defendants Jon Savoy, Arnold “Butch” Hassig, and 1836 Brys, LLC are jointly and severally liable to Plaintiff Realty in the total amount of $22,298.46, for the Firwood, En-gleman, Duncan, and Jimmy properties.
• And Defendants Jon Savoy, Arnold “Butch” Hassig, and Adam Residential Properties Group, LLC are jointly and severally hable to Plaintiff Realty in the amount of $906.80.
Thus, the joint and several liability of Defendants Jon Savoy and Arnold “Butch” Hassig to Plaintiff Realty totals $51,701.28 for the six sold properties discussed above plus the $906.80 advanced by Realty for the Raymond property.
The Court will not include in its judgment any provision for prejudgment interest. Plaintiff Realty did not request prejudgment interest, in its Complaint;90 in the Final Pretrial Order;91 in opening or closing arguments at trial;92 or in Realty’s post-trial briefs.93 As a result, the Court will not consider exercising its discretion to award prejudgment interest. See generally Global Technovations, Inc. v. Onkyo U.S.A. Corp., 431 B.R. 739, 774-76 (Bankr. E.D. Mich. 2010), affd., 2011 WL 1297356 (E.D. Mich. 2011), affd., 694 F.3d 705 (6th Cir. 2012) (discussing the bankruptcy court’s discretion in deciding whether or not to award prejudgment interest). But post-judgment interest will ac*165crue on the judgment at the federal statutory rate in effect as of the date of entry of the judgment. See 28 U.S.C. § 1961(a).
No amounts are owed to Realty by the Defendant Adam Hassig; Realty presented no evidence to prove that Adam Hassig owes anything.
F. Realty’s request for a declaratory judgment regarding the two unsold properties—Irene and Teppart
The last two properties about which Realty seeks relief are the Irene and Teppart properties, which had not yet been resold by Defendants at the time of trial. Plaintiff Realty does not seek a money judgment regarding these properties yet, but rather seeks a declaratory judgment in which the Court makes various findings about these properties, including findings about expenses incurred as of the time of trial by Defendants.
In its discretion, the Court declines to grant any declaratory relief specifically about these properties at this time. See generally Wilton v. Seven Falls Co., 515 U.S. 277, 286-87, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) (discussing the discretion federal courts have in deciding whether or not to issue declaratory relief); Western World Ins. Co. v. Hoey, 773 F.3d 755, 758-59 (6th Cir. 2014) (same). In the Court’s view, it is sufficient to note that the Court’s findings and conclusions made in this opinion, about the terms and details of the oral Investor Program agreement between Realty and the Defendants in this case, and about any and all other issues that may be relevant, will apply and be binding on Plaintiff Realty and each of the Defendants in this case in any future litigation that may occur about these subjects, under the doctrine of collateral es-toppel. See generally Allstate Insurance Co. v. Harris {In re Harris), 480 B.R. 281, 287-88 (Bankr. E.D. Mich. 2012). That should suffice, with respect to the Irene and Teppert properties.
G. Defendants’ setoff and recoupment defenses
Defendants allege that under the Investor Program, they have the right to deduct any losses they suffer on any property from the profits they make on any other property. Defendants allege that, based on that contract right, they “are entitled to a setoff of $65,194.17 pursuant to losses from Engleman, Eastland, Fir-wood, and Ledgestone [against any monies allegedly owed Plaintiff for profits made under the Investor Program].”94
Plaintiff Realty alleges that the “[I]n-vestor [Pjrogram does not contain any provision for the setoff of losses on one property against future profits on another property.”95 Realty alleges further that, even assuming such a contractual provision exists, the Defendants are precluded from asserting any right of setoff for the following reasons:
(1) Each purchase of a property under the Investor Program “is a separate transaction, and separate transactions may not be aggregated for setoff purposes;”96
(2) Defendants’ failure to timely file a proof of claim precludes them from asserting any right of setoff;97
(3) Debtor’s confirmed Plan bars Defendants fi'om asserting any setoff *166rights;98
(4) “[T]he Properties were purchased by different Defendants, and therefore, the alleged losses suffered by one Defendant may not be setoff against profits received by a different Defendant;”99 and
(5) “[T]he alleged pre-petition losses may not be set off against postpetition profits,”100
The Court finds and concludes that under their oral agreement with Realty, (1) Defendants do not have any right to deduct any losses they suffer on any given property from what they otherwise owe to Realty for a profit split on another property; (2) nor may Defendants deduct any such losses from any acquisition fee they otherwise owe to Realty, on either the same property or on any different property; and (3) nor do Defendants have any valid claim against Realty, under any legal theory, for any losses they suffered or suffer on any property.
Defendants have none of these rights or claims against Realty because, the Court finds, they simply were not part of the agreement between the parties. No such loss-sharing was part of the agreement of the parties.
Ralph Roberts testified that he never discussed the subject of loss-sharing with Defendants, and did not agree to any sort of loss sharing with Defendants.101 Defendant Jon Savoy, on the other hand, testified that Ralph Roberts agreed that Realty would be responsible to Defendants for 100% of any losses Defendants suffered on any property.102
The Court credits the testimony of Ralph Roberts on this issue, and finds that Ralph Roberts’s version of the parties’ oral agreement on this issue is more credible and plausible than Jon Savoy’s version. And the Court finds Ralph Roberts’s version to be consistent with the prior testimony he gave on this subject in the Roger Roberts case trial and in his summary judgment affidavit filed in this case.
In his summary judgment affidavit filed in this case, Ralph Roberts testified that “[t]he investor program does not contain any provision for the splitting of losses on properties.”103 During his trial testimony in this case, Mr. Roberts explained, credibly and plausibly, that when he made that statement in his affidavit, he was thinking of and addressing specifically his oral Investor Program agreement with the Defendants in this case.
On the other hand, Ralph Roberts testified during the Roger Roberts case trial that under the Investor Program Realty shares 50% of the loss if an investor has a loss on a property.104 During his trial testimony in this case, Mr. Roberts explained, credibly and plausibly, that in this testimony'he was referring to a later version of the Investor Program, which applied to later and other investors, not to Defendants in this case.105 As Mr. Roberts explained, the Defendants here were the first investors in Realty’s Investor Program after that program began in June 2009, with the possible exception of Raymond Confer, and the deal Mr. Roberts made with the *167Defendants here was different, and in at least two important ways, more generous to the investors than the deal made with later investors. The Defendants here had a different and better deal, in that they only had to pay Realty 30% of the profit on a property, compared to the 50% profit split that later investors had to pay Realty. And the Defendants here got a $5,000 seller’s fee credited to them on every property, and were able to deduct that $5,000 fee from the profit for purposes of calculating the profit split. No other investors got that deal.106
The Court finds Ralph Roberts’s trial testimony on the subject of loss-sharing and losses to be credible, and finds that Realty has met its burden of proving that the oral Investor Program agreement between Realty and Defendants in this case did not include any provision for sharing of losses on any property. Rather, under the oral agreement in this case, if Defendants suffered a loss on any given property, the only legal consequence of that was that. Defendants did not owe a profit split to Realty for that property. Defendants did not and do not have a valid claim against Realty if they suffered a loss on any property, or any right to setoff or recoup such loss against any amount owed for any other property. Nor did Defendants have a right to withhold payment of any part of the acquisition fee on a property because that property turned out to be a loss for Defendants.
For these reasons, Defendants’ setoff/re-coupment defenses fail, and it is not necessary for the Court to discuss or decide Realty’s other arguments about setoff and recoupment.
H. Defendants’ other defenses
Defendants have argued other defenses in this case, but the Court rejects them as unproven, contrary to the evidence the Court finds persuasive, and without merit.
First, Defendants argue that there was no “meeting of the minds” on material contract terms, and therefore no enforceable contract. The Court finds otherwise, however, based on the evidence.
Second, Defendants claim that their oral agreement included a right of first refusal, as against other potential investors, on the purchase of any property, and that Realty breached this agreement term. Based on the testimony of Ralph Roberts,107 however, the Court finds that this was not part of the agreement between Realty and the Defendants.
Third, Defendants contend that Realty had a contractual duty to find profitable properties for Defendants, and that Realty breached that duty with respect to several properties that Defendants acquired and suffered losses on. But the Court finds that Realty had no such contractual duty. And there was no guarantee or requirement that properties would all be profitable that was part of the agreement between Realty and Defendants. Profit on every property certainly was everyone’s hope, but it was not guaranteed. ■
Defendants’ other arguments claiming various breaches by Realty of the parties’ agreement are not supported by the evidence; rather, they are refuted by the evidence, and so the Court rejects them.
Y. Conclusion
For the reasons stated in this opinion, the Court will enter a separate judgment that is consistent with this opinion.
Attachment
*168[[Image here]]
. In Plaintiff's complaint, Plaintiff sought a judgment declaring that 33% of any profits made on the sale of any properties under the Investor Program was property of the bankruptcy estate. (Docket # 1 at 7-8 ¶ 47.) Plaintiff has modified that claim, and now seeks a declaration that 30% of such profits are properly of the estate. (PL’s Post-Trial Br. (Docket # 62) at 7 ¶ 49.)
. The $100,500.00 figure was calculated based on a profit split of 33%. (See Compl. (Docket # 1) at 6 ¶¶ 29-37.) However, all parties now agree that the correct profit split percentage under the Investor Program is 30%. See supra note 1.
. Transcripts of the trial are filed at Docket ## 61 and 67.
. Docket ## 62, 63, 64.
. In this opinion, citations to Plaintiff’s trial exhibits will be in the form "PX~_” and citations to Defendants’ trial exhibits will be in the form ''DX-_”,
. "Report of Parties' Rule 26(f) Conference” (Docket # 17) at 2 ¶ 4(b).
. See id, at 3 ¶ 4(c); see also Adversary Proceeding Scheduling Order (Docket # 18) át 1 § I (b).
. Trial Tr. (Docket # 61) at 8 ln.10 (Testimony of Roberts).
. See Trial Tr. (Docket #61) at 9 Ins. 8-9 (Testimony of Roberts) (Investor Program started June 1, 2009), 156-57 (Testimony of *149Jon Savoy ("Savoy”)) (Defendants became participants in the Investor Program in August 2009); Defs.’ Post-Trial Br. (Docket # 63) at 1 (Defendants became participants in the Investor Program in August 2009).
. Final Pretrial Or. (Docket # 36) at 7 ¶ 4.a (Stipulation of Facts and Law).
. Pl.'s Post-Trial Br. (Docket # 62) at 2 ¶ 4; Trial Tr. (Docket # 61) at 194 In. 24 through 195 In. 1 (Testimony of Savoy).
. Some of the terms of the Investor Program were different for the Defendants than for later participants in the Investor Program.
. See Trial Tr. (Docket # 61) at 8-9 (Testimony of Roberts), 157 Ins. 5-15 (Testimony of Savoy). At the inception of the Investor Program, the Defendants and Roberts desired and believed that the properties Defendants purchased would be flipped, not rented. See id. at 12 Ins. 22-25 (Testimony of Roberts), 161 In. 19 through 162 In. 6 (Testimony of Savoy). However, in' some cases, it was necessary for the Defendants to rent the property for a period of time after their purchase of the property, because they could not flip them. Id. at 162 Ins. 5-6 (Testimony of Savoy).
. Trial Tr. (Docket # 61) at 8 In. 22 through 9 In. 5; 17 In. 7 though 21 In. 24 (Testimony of Roberts).
. Trial Tr. (Docket #61) at 110 Ins. 17-24 (Testimony of Roberts), 157 In. 22 through 158 In. 12 (Testimony of Savoy).
. Final Pretrial Or. (Docket # 36) at 3 (Plaintiff’s claims)(‘‘[I]f a property was redeemed by a homeowner, Plaintiff would credit the $2,500 paid by Defendants toward the Acquisition Fee for any property purchased by Defendants in the future.”); Trial Tr. (Docket # 61) at 36 In. 17 through 37 In, 3 (Testimony of Roberts), 177 Ins. 3-11 (Testimony of Savoy).
. Trial Tr. (Docket #61) at 34 In. 5 (Testimony of Roberts), 158 Ins. 6-12 (Testimony of Savoy). As discussed infra in part III.B, the parties disagree on what expenses Defendants were allowed to deduct in calculating the profit.
. Id. at 34 Ins. 5-8 (Testimony of Roberts),
. Id. at 34 In. 17 through 35 In. 5, 110 In. 25 through 111 In. 4 (Testimony of Roberts), 159 Ins, 1-3 (Testimony of Savoy).
. See id. at 160 In. 21 (Testimony of Savoy).
. Id. at 34 Ins. 8-16 (Testimony of Roberts).
. Trial Tr. (Docket # 61) at 13 In. 15 through 15 In. 4, 82 In. 19 through 83 In. 22 (Testimony of Roberts), 136 In. 6 through 137 In. 11, 143 In. 21 through 146 In. 5, 151 Ins. 3-9 (Testimony of Raymond A. Confer).
. Id. at 14 Ins. 15-22 (Testimony of Roberts).
. Id. at 41 Ins. 1-22, 70 Ins. 3-15, 73 In. 25 through 74 In. 1, 105 In. 5 through 107 In. 15 (Testimony of Roberts).
. Id. at 186 Ins. 11-13 (Testimony of Savoy); Defs.’ Post-Trial Br. at 8.
. Trial Tr. (Docket #61) at 159 Ins. 12-21 (Testimony of Savoy).
. Id. at 186 Ins. 4-22 (Testimony of Savoy); Defs.' Post-Trial Br. at 8, 10.
. Id. at 20 Ins. 1-3 (Testimony of Roberts).
. Id. at 161 Ins. 8-10 (Testimony of Savoy).
. Id. at 160 In. 12 through 161 In. 1, 186 Ins. 23-24 (Testimony of Savoy); Defs.’ Post-Trial Br. at 3.
. See Trial Tr. (Docket #61) at 70 Ins. 20-25, 126 Ins. 14-19 (Testimony of Roberts).
. Id. at 193 Ins. 9-12 (Testimony of Savoy); Defs.’ Post-Trial Br. at 10 (stating, regarding the properties resold on land contracts, that ”[a]ssuming arguendo that all properties were profitable the Plaintiff [would] only be entitled to 30% of the balloon payments after the customary profit calculation”).
. See Final Pretrial Or. (Docket # 36) at 2 (Plaintiff's claims).
. See id, at 3 (Plaintiff’s claims).
. Trial Tr. (Docket # 61) at 37 In. 18 through 39 In. 18, 116 Ins. 18-20 (Testimony of Roberts).
.Id. at 188 In. 14 through 189 In. 17 (Testimony of Savoy).
. Final Pretrial Or. (Docket # 36) at 3 (Plaintiff’s claims) (Antonia and Foxcrest were "[plaid as agreed”); Trial Tr. (Docket # 61) at 45 Ins. 7-8 (paid everything he was owed on Foxcrest, if $38,000 was the correct number), Ins. 11-13 (paid everything he was owed on Antonia and Raymond).
. Trial Tr. (Docket #61) at 116 Ins. 11-13 (Testimony of Roberts), 192 In. 24 through 193 In. 4 (Testimony of Savoy).
. Id. at 73 Ins. 13-14 (Testimony of Roberts).
. Id. at 74 Ins. 10-14 (Testimony of Roberts).
. Id. at 69 In. 21 (Testimony of Roberts).
. Id. at 70 Ins. 13-15 (Testimony of Roberts).
. Id. at 70 Ins. 20-25 (Testimony of Roberts).
. See Defs.’Post-Trial Br. at 10-11; Trial Tr. at 197 Ins. 17-19 (Testimony of Savoy).
. Trial Tr. (Docket #61) at 65 Ins. 4-5 (Testimony of Roberts).
. Id. at 165 Ins. 13-15 (Testimony of Roberts).
. Id, at 66 Ins. 7-8 (Testimony of Roberts).
. Id. at 176 Ins. 13-14 ("Just shy of $40,000”)(Testimony of Savoy); See Defs.’ Post-Trial Br. at 6 (“just less than $39,815.05”).
. Defs.’ Post-Trial Br. (Docket # 63) at 6.
. Trial Tr. (Docket #61) at 67 Ins. 16-18 (Testimony of Roberts).
. Defs.’ Post-Trial Br, at 7; Trial Tr, (Docket #61) at 177 In. 18 through 181 In. 8 (Testimony of Savoy).
. Defs.’ Post-Trial Br. at 8; Trial Tr, (Docket #61) at 177 In. 20 through 178 In, 1 (Testimony of Savoy).
. Trial Tr. (Docket # 61) at 60 Ins. 4-17 (Testimony of Roberts).
. Id. at 183 Ins. 20-23 (Testimony of Savoy).
. Defs.' Post-Trial Br. at 8.
. Trial Tr. (Docket # 61) at 59 Ins. 1-5 (Testimony of Roberts),
. Id. at 62 In. 21 through 63 In. 6 (Testimony of Roberts).
. Id. at 190 Ins. 11-18 (Testimony of Savoy).
. Id. at 64 Ins. 1-4 (Testimony of Roberts).
. Defs.’ Post-Trial Br. at 11; Trial Tr. (Docket #61) at 116 Ins. 9-10 (Testimony of Roberts).
. Trial Tr. (Docket # 61) at 79 Ins. 6-8 (Testimony of Roberts regarding Teppert), 76 Ins 3-5 (Testimony of Roberts regarding Irene), 169 Ins. 19-24 (Testimony of Savoy regarding Teppert).
. Id. at 80 Ins. 9-22 (Testimony of Roberts regarding Teppert), 76 In. 1 through 77 In. 11 (Testimony of Roberts regarding Irene).
. Id. at 192 Ins. 1-22 (Testimony of Savoy).
. Docket # 15 in Case No. 12-53023.
. Docket # 156 in Case No. 12-53023.
. Docket # 225 in Case No. 12-53023.
. See Trial Tr. (Docket # 61) at 22, 32-33.
. Three witnesses testified at trial: Realty’s Ralph Roberts; Raymond Confer; and Defendant Jon Savoy. Of these, Raymond Confer testified that he has no personal knowledge of, and does not know, whát the Investor
. Trial Tr. at 92-93.
. See DX-R at 31-32. The Court notes-that a transcript of Ralph Roberts’s testimony given in the Roger Roberts case was marked during the trial of this case as DX-R, but the entire exhibit was not admitted into evidence. The testimony of Ralph Roberts that is quoted here is in evidence in this case, however, because during trial Mr. Roberts admitted to making this specific testimony in the Roger Roberts case. The entire transcript of Ralph Roberts’s trial testimony in the Roger Roberts case is on file in that case at Docket # 64.
.This affidavit was marked as DX-S during trial, but the entire exhibit was not admitted into evidence. The testimony of Ralph Roberts that is discussed here is in evidence in this case, however; and during trial. Mr. Roberts testified about it.
. Docket # 40, Ex. A.
. DX-S at ¶¶ 30-31.
. Trial Tr. at 97-98.
. There is a minor exception to this for Raymond, which is discussed in part IV. D of this opinion, below.
. And Defendant Jon Savoy admitted this in his trial testimony. (See Trial Tr. at 175).
. See PX-6.
. Trial Tr. at 177-82.
. See PX-6.
. See PX-6.
. Trial Tr, at 171-76.
. See PX-6.
.Trial Tr. at 69-70 (Roberts testimony).
. PX-12.
. Trial Tr. at 73 (testimony of Roberts).
. See PX-6.
. Id. at 45 (testimony of Roberts); PX-6.
. PX-6, pp. 1, 2; Trial Tr. at 45-46 (testimony of Roberts).
. Trial Tr. at 196.
. Docket#!.
. Docket # 36.
. See Docket ## 61, 67.
. Docket ## 62, 64.
. Defs.’ Post-Trial Br. (Docket # 63) at 10-11.
. PL’s Post-Trial Br. (Docket # 62) at 20.
. Id.
. Id.
. PL’s Post-Trial Br. (Docket # 62) at 20; PL’s Reply (Docket # 64) at 3.
. PL’s Post-Trial Br. (Docket # 62) at 20.
. Id.
. E.g., Trial Tr. at 29, 32, 87-88.
. Id. at 160-61.
. DX-S and Docket # 40, Ex. A, at ¶ 23.
. DX-R at 22.
. Trial Tr. at 28-29, 94-96.
. Id. at 26.
. Id. at 20. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500190/ | MEMORANDUM OPINION
A. Benjamin Goldgar, United States Bankruptcy Judge
These jointly-administered chapter 11 cases are before the court for ruling after an evidentiary hearing on the objections of Wilmington Trust, N.A., as successor indenture trustee for the 10.75% senior unsecured notes (“Wilmington”), to two proofs of claim, both filed by first lien parties. One is the claim of Credit Suisse AG, Cayman Islands Branch, as agent on behalf of first lien lenders (the “First Lien Bank Lenders”); the other is the claim of UMB Bank, N.A., as successor indenture trustee for the first lien notes (the “First Lien Noteholders”) (collectively, the “First Lien Creditors”). Both proofs of claim assert secured claims. In its objections, Wilmington contends that the First Lien Creditors have waived their rights under section 1111(b)(1)(A) of the Bankruptcy Code to assert unsecured deficiency claims.
For the reasons that follow, Wilmington’s objections will be overruled.
1. Jurisdiction
The court has subject matter jurisdiction of this case under 28 U.S.C. § 1384(a) and the district court’s Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
2. Facts
The facts are drawn from the evidence adduced at the hearing, the parties’ stipulation, and the court’s docket.
The debtors in these cases are the primary operating units of what the parties call the Caesars gaming enterprise. The debtor in the lead case is Caesars Entertainment Operating Co., Inc. (“CEOC”). The other debtors are subsidiaries of CEOC.
On January 28, 2008, affiliates of Apollo Global Management, Inc., and TPG Capital, LP, acquired CEOC and its subsidiaries in a leveraged buyout (the “LBO”). (Stip. ¶28).1 As part of the LBO, CEOC entered into an agreement with the First Lien Bank Lenders to borrow $7.25 billion (the “Credit Agreement”). (Id; see also Tr. at 84). Along with the Credit Agreement, CEOC and its subsidiaries entered into a collateral agreement (the “Collateral Agreement”) under which they pledged assets to secure the Credit Agreement debt. (Stip. ¶ 28). On February 1, 2008, CEOC issued more debt in the form of 10.75% unsecured notes. (Stip. 1Í 34; Tr. at 84-85). The subsidiaries guaranteed the unsecured notes. (Stip. ¶ 34).
*173Several months later, on June 10, 2009, CEOC issued still more debt in the form of secured notes (the “first lien notes”). (Stip. ¶¶ 4, 40). To complete the transaction, the Credit Agreement was amended and restated to permit the issuance of the first lien notes. (Tr. at 111-112). The Collateral Agreement was amended and restated to ensure the collateral secured the notes. (Stip. ¶ 40; Tr. at 111). And the First Lien Bank Lenders and Noteholders entered into an intercreditor agreement governing them respective rights to the collateral (the “Intercreditor Agreement”). (Stip. ¶ 41; Tr. at 112-114). The Intercreditor Agreement appointed an agent (the “Collateral Agent”) to act on the.,-First Lien Creditors’ behalf. The Collateral Agent was authorized, among other things, to acquire, hold, and enforce the liens on collateral. (F.L. Ex. 15 at 14-15).
Three provisions in the contract documents from the 2009 issuance of the first lien notes are relevant here. First, section 7.18 of the Collateral Agreement limited the First Lien Creditors’ recovery from the subsidiaries to the value of the collateral:
No Recourse. Notwithstanding anything to the contrary in this Agreement, no recourse shall be had, whether by levy or execution, or under any law, or by the enforcement of any assessment or penalty or otherwise, for the payment of any of the Obligations, against any Pledgor or any of the assets of any Pledgor, other than the Collateral, it being expressly understood that the sole remedies available to the [Collateral Agent] and the Secured Parties pursuant to this Agreement with respect to the Obligations shall be against the Collateral.
(W. Ex. 16 at 34).
Second, section 4.10(b) of the Intercreditor Agreement protected the Collateral Agent from liability arising from an election under section 1111(b) of the Code, 11 U.S.C. § 1111(b): “Each of the First Lien Secured Parties waives any claim ... against the Collateral Agent ... arising out of ... any election by any Applicable Authorized Representative or any holders of First Lien Obligations, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b) of the Bankruptcy Code (F.L. Ex. 15 at 14-15).
Third, section 7.22 of the Collateral Agreement subjected the Collateral Agent’s exercise of rights and remedies to the Intercreditor Agreement’s provisions and in the event of a conflict deferred to the Intercreditor Agreement:
Subject to First Lien Intercreditor Agreement. Notwithstanding anything herein to the contrary, ... (ii) the exercise of any right or remedy by the [Collateral Agent] hereunder is subject to the limitations and provisions of the [In-tercreditor Agreement]. In the event of any conflict between the terms of the [Intercreditor Agreement] and the terms of [the Collateral Agreement], the terms of the [Intercreditor Agreement] shall govern.
(W. Ex. 16 at 36).
On January 15, 2015, CEOC and the debtor subsidiaries filed voluntary chapter 11 petitions in this district. (Stip. ¶ 10). Through their agents, the First Lien Creditors filed proofs of claim against CEOC and each subsidiary. (Stip. ¶¶ 13-14). The First Lien Bank Lenders asserted a claim of “at least $5,354,400,000” against each subsidiary. The First Lien Noteholders asserted a claim of “not less than $6,530,577,083.33” against each subsidiary. (Id.).2 Each proof of claim asserted a fully *174secured claim. In an attachment, each proof of claim also asserted an unsecured claim to the extent the claim amount exceeded the value of the subsidiaries’ collateral.
Wilmington has objected to the First Lien Creditors’ claims to the extent they asserted unsecured deficiency claims. (Bankr. Dkt. Nos. 2030, 2031). Wilmington contends that section 7.18 of the Collateral Agreement made the debts to the First Lien Creditors non-recourse, limiting any recovery to the collateral. Although section 1111(b)(1)(A) of the Code alters that result in bankruptcy, Wilmington contends that in section 7.18 the First Lien Creditors waived their rights under section 1111(b)(1)(A) to assert unsecured deficiency claims.
3. Discussion
Wilmington’s objections will be overruled. The language in section 7.18 on which Wilmington relies is broad and if read in isolation might be found a waiver of rights under section 1111(b)(1)(A). But section 7.18 cannot be read in isolation. Under New York law (which the parties agree applies here (see Bankr. Dkt. Nos. 3138 at 12, 3139 at 2, 3142 at 7 n.12)), the Collateral Agreement must be read together with the other contract documents executed as part of the parties’ 2009 transaction. When the documents are read together, the most reasonable interpretation is that the First Lien Creditors did not intend to waive their section 1111(b) rights.
a. Ripeness
At an April 13 hearing intended as the ruling date, the court questioned whether the objections presented a justiciable issue. The question was raised because it was not evident the First Lien Creditors had unsecured deficiency claims in the first place. To have- them, the First Lien Creditors would have had to have been underse-cured, with the collateral securing their claims worth less than the claim amounts. But the record gave no indication how much the collateral was worth. The proofs of claim themselves did not value the collateral.3 The parties had not stipulated to value. And no evidence of value was introduced at the hearing.4 Until the collateral was valued, it appeared, Wilmington’s objections were not ripe.
The First Lien Creditors were asked at the hearing whether they would stipulate that they were undersecured, allowing a decision to be issued. When they had no immediate answer, the First Lien Creditors along with Wilmington and other parties in interest were given time to file statements of position on justiciability. (Bankr. Dkt. No. 3544). In their statement, the First Lien Creditors decline to stipulate even as a general matter to the value of their collateral, declaring that doing so would be “premature and inappropriate.” (Id. No. 3653 at 2). With no evidence of value, they add, a ruling on the claim objections would be an advisory opinion and beyond the court’s subject matter jurisdiction. (Id. at 3-4). Wilmington and the *175Unsecured Creditors’ Committee take the opposite view. (Id. Nos. 3652, 3654).
After careful consideration, the court finds the claim objections present no jurisdictional problem, and the issue they pose is ripe for decision. Ripeness is a doctrine of justiciability “invoked to determine whether a dispute has yet matured to a point that warrants decision.” 13B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure ¶3532 at 365 (3d ed. 2008). Sometimes ripeness is considered jurisdictional—but sometimes it is not. See Meridian Sec. Ins. Co. v. Sadowski, 441 F.3d 536, 538 (7th Cir. 2006); South Austin Coal. Cmty. Council v. SBC Commc’ns Inc., 191 F.3d 842, 844 (7th Cir. 1999) (“Whether the district judge should have equated lack of ripeness to lack of subject-matter jurisdiction is debatable_”).
Ripeness presents a constitutional issue and thus a jurisdictional one only when a plaintiffs injury “depend[s] on so many future events that a judicial opinion would be advice about remote contingencies.” Sadowski, 441 F.3d at 538. At that point, ripeness “is part of the case-or-controversy requirement in Article III.” Id.5 In less extreme situations, however, ripeness is “a question of timing rather than a limit on subject-matter jurisdiction.” Id. (internal quotation omitted). Then, ripeness concerns “the appropriate exercise of discretion rather than the limits of judicial power.” Brandt v. Village of Winnetka, 612 F.3d 647, 649 (7th Cir. 2010). The distinction is between “constitutional ripeness and prudential ripeness.” Cassim v. Educational Credit Mgmt. Corp. (In re Cassim), 395 B.R. 907, 911 (6th Cir. BAP 2008); see also 13B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, supra, § 3532.1 at 374 (distinguishing between Article III limits and “a commonsense refusal to decide issues that have not yet become germane in purely private litigation”).
The ripeness question here is prudential rather than constitútional. The dispute between the First Lien Creditors and Wilmington is “purely private,” suggesting prudential ripeness. 13B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, supra, § 3532.1 at 374. A ripeness problem exists, moreover, only because the collateral securing the claims has yet to be valued. Id. Valuation is a single issue. A decision on the claim objections thus does not turn on “many future events,” making a decision “advice about remote contingencies.” Sadowski, 441 F.3d at 538. And although the claim objections technically depend on a valuation about which one can only speculate, they form “part of a larger controversy”—the proposal and confirmation of a plan that will classify and treat creditors’ claims—that is “neither conjectural nor speculative” but is ongoing. Id. (finding insurance coverage dispute ripe because it was part of the larger, ongoing controversy over the insured’s liability).6 *176Whether to address the objections thus involves “an exercise of discretion” rather than a jurisdictional decision. Brandt, 612 F.3d at 649.
Prudential ripeness weighs two factors: “ ‘the fitness of the issues for judicial decision’ and ‘the hardship to the parties of withholding court consideration.’ ” Wisconsin Right to Life State Political Action Comm. v. Barland, 664 F.3d 139, 148 (7th Cir. 2011) (quoting Pacific Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190, 201, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983) (internal quotation omitted)); see also Golden v. California Emergency Physicians Med. Grp., 782 F.3d 1083, 1086 (9th Cir. 2015); Center for Biological Diversity v. E.P.A., 722 F.3d 401, 408 (D.C. Cir. 2013); National Org. for Marriage, Inc. v. Walsh, 714 F.3d 682, 691 (2d Cir. 2013); Awad v. Ziriax, 670 F.3d 1111, 1124 (10th Cir. 2012). Both factors favor addressing the claim objections here.
First, the issue they raise is fit for decision. The “fitness” factor is designed “to delay consideration of the issue until the pertinent facts have been well-developed in cases where further factual development would aid the court’s consideration.” Coleman, 560 F.3d at 1009. The facts underlying the claim objections are undisputed—virtually all of the facts have been stipulated—and no additional facts would aid a decision. The issue presented is one of contract interpretation and so is one of law, not fact. Beal Sav. Bank v. Sommer, 8 N.Y.3d 318, 324, 834 N.Y.S.2d 44, 47, 865 N.E.2d 1210 (2007). “qiaims that present purely legal issues are normally fit for judicial decision.” Barland, 664 F.3d at 148; see also Awad, 670 F.3d at 1124; Coleman, 560 F.3d at 1009 (noting that “a case is more likely to be ‘fit’ if it involves pure legal questions that require little factual development” (internal quotation omitted)).
Second, the hardship in not deciding the claim objections would be considerable. Wilmington and the First Lien Creditors have already engaged in discovery, participated in an evidentiary hearing, and briefed the contractual issue not once but twice (first when the claim objections were filed and again in conjunction with the hearing). Whatever cost the litigation might have entailed, then, has been incurred. Judicial resources have been spent, as well: a decision has been ready since April 13. Nothing will be saved, and those efforts will potentially have been wasted, if the decision is postponed. See 13B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, supra, § 3532.1 at 372-74 (noting that ripeness is designed to conserve “judicial energies” and avoid forcing litigants to “bear the burdens” of unnecessary litigation).
The parties that a postponement would affect, moreover, include more than just Wilmington and the First Lien Creditors. If successful, Wilmington’s objections would benefit other unsecured creditors. (Hence the submission from the Unsecured Creditors’ Committee urging a decision.) A victory for the First Lien Creditors, on the other hand, would be a victory for the second lien noteholders as well—if, as Wilmington asserts, those noteholders are subject to an agreement with the same contractual language, so that any deficiency claims they might have would “be subject to disallowance for the same reasons _” (Bankr. Dkt. Nos. 2030 at 3 n.5, 2031 at 3 n.5). The battle, in other words, is broader than it appears.
*177Then there is the battleground itself to consider. The contractual dispute here is part of a much bigger bankruptcy puzzle, one the parties hope to solve through confirmation of a consensual plan. To that end, they have retained a private mediator, and the negotiations in which they have engaged off and on since the cases were filed have reportedly intensified of late. Even after many weeks, however, no resolution has been reached. A decision on the objections could assist the settlement effort. To delay would serve only to keep alive a contractual dispute fit for decision now, “preventing] the litigants from shaping a settlement strategy and thereby avoiding unnecessary costs.” ACandS, Inc. v. Aetna Cas. & Sur. Co., 666 F.2d 819, 823 (6th Cir. 1981) (finding insurance coverage dispute ripe although underlying liability had not been determined).7
The only obstacle to a decision, finally, is “the circumstance always present where ripeness questions occur, that the issue ... is one that in the end may never require adjudication.” 1108 K Street Assoc. v. Jewett, Nos. 91-1548, 91-1627, 91-1628, 1992 WL 237248, at *7 (4th Cir. Sept. 5, 1992). Again, the relevance to the bankruptcy cases of a ruling on the contractual issue depends on a valuation of collateral that has not happened. But that obstacle is more apparent than real because a valuation will happen, unless the parties arrive at a consensual plan, no later than the plan confirmation hearing. See Hudson, 260 B.R. at 431 n.18 (describing the procedural contexts in which valuation can take place, one of which is “a confirmation hearing”). The disclosure statement hearing is one week away, and the debtors project a confirmation hearing in six months. The contingency is not “remote,” Sadowski, 441 F.3d at 538, or even much of a contingency-
Because the issue presented is fit for judicial decision and all parties would suffer a hardship if a decision were withheld, the parties’ dispute is ripe for resolution.8
b. Section 1111(b)(1)(A)
To understand that dispute, some background on section 1111(b)(1)(A) is helpful. A secured claim under the Bankruptcy Code “means something different” from its meaning outside of bankruptcy. In re Okosisi, 451 B.R. 90, 93 (Bankr. D. Nev. 2011). Outside of bankruptcy, a secured creditor is considered secured regardless of the value of its collateral. Wong v. Green Tree Servicing, LLC (In re Wong), 488 B.R. 537, 544 (Bankr. E.D.N.Y. 2013). In bankruptcy, on the other hand, section 506(a) of the Code bifurcates a secured creditor’s claim. 11 U.S.C. § 506(a). The creditor has a secured claim only up to the value of the collateral; the rest of the claim is unsecured. Ryan v. United States (In re Ryan), 725 F.3d 623, 624 (7th Cir. 2013).
Sometimes, a secured creditor will lend on a non-recourse basis, meaning that upon a default the creditor can satisfy the debt only from the collateral itself; the *178creditor cannot recover from (i.e., has no recourse against) the debtor personally. See 7 Collier on Bankruptcy ¶ llll,03[l][a][i] at 1111-15 (Alan N. Res-nick & Henry J. Sommer eds., 16th ed. 2016). With non-recourse claims, however, the bifurcation under section 506(a) can prove unfair. Under section 506(a), the court decides the amount of the creditor’s claim by valuing the collateral. Id. ¶ 1111.03[l][a][ii][A]-[B]. Since the claim is non-recourse, any unsecured deficiency claim is disallowed. Id. ¶ 1111.03[l][a][ii][B] at 1111-17. If the amount of the claim exceeds the court’s valuation, an undersecured non-recourse creditor ends up “with neither full payment of the loan nor the right to foreclose on the property, resulting in a windfall to the debtor.” In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596, 600 (7th Cir. 2013).
Congress enacted section 1111(b)(1)(A) to prevent such a windfall. Id.\ 7 Collier on Bankruptcy, supra, ¶ 1111.03. Section 1111(b)(1)(A) declares: “A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 ... the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse.” 11 U.S.C. § 1111(b)(1)(A). Under this provision, state law and non-recourse agreements are ignored. 7 Collier on Bankruptcy, supra, ¶ 1111.03[l][a] at 1111-14. “[A] secured claim becomes a recourse claim automatically with the filing of a chapter 11 petition” no matter what the loan agreement says. See 1 Collier on Bankruptcy, supra, ¶ 1.07[3][d][vi] at 1-39.
Section 1111(b) entitles a creditor to have its non-recourse claim treated as recourse “because the judicial valuation specific to Chapter 11 was not part of a nonrecourse creditor’s bargain.” Brookfield Commons, 735 F.3d at 600. By treating a secured creditor’s non-recourse claim as recourse, section 1111(b)(1)(A) “allows the debtor to retain the property and effectuate its reorganization, but without frustrating the lienholder’s rights.” 680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. Co. in Rehab. (In re 680 Fifth Ave. Assocs.), 29 F.3d 95, 97 (2d Cir. 1994). The potential unfairness of section 506(a) is thus avoided.
c. The Waiver Theory
Section 7.18 of the Collateral Agreement unquestionably makes the obligations of CEOC’s subsidiaries to the First Lien Creditors non-recourse. Outside of bankruptcy, the First Lien Creditors would accordingly have rights only against the collateral. In bankruptcy, section 1111(b)(1)(A) treats their non-recourse, claims as recourse. Wilmington argues, however, that in the Collateral Agreement the First Lien Creditors waived that treatment because section 7.18 provided that “no recourse shall be had ... under any law.” Therefore, Wilmington maintains, the claims remain secured only and have no unsecured deficiency component.
This argument has considerable force. Under New York law, the “primary objective” of contract interpretation is “to give effect to the intent of the parties as revealed by the language of their agreement.” Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 773 F.3d 110, 113-14 (2d Cir. 2014) (internal quotation omitted); see also Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569, 780 N.E.2d 166, 170, 750 N.Y.S.2d 565 (2002) (“The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.”). The best evidence of the parties’ intent “is what they say in their writing.” Greenfield, 98 N.Y.2d at 569, 750 N.Y.S.2d 565, 780 N.E.2d at 170. When *179that writing is unambiguous on its face, it “must be enforced according to the plain meaning of its terms.” Id.; see also South Road Assocs., LLC v. I.B.M. Corp., 4 N.Y.3d 272, 277, 826 N.E.2d 806, 809, 793 N.Y.S.2d 835 (2005).
The plain meaning of the phrase “recourse ... under any law” includes recourse under the Bankruptcy Code. “Read naturally, the word ‘any’ has an expansive meaning, that is, ‘one or some indiscriminately of whatever kind.’ ” United States v. Gonzales, 520 U.S. 1, 5, 117 S.Ct. 1032, 137 L.Ed.2d 132 (1997) (quoting Webster’s Third New International Dictionary 97 (1976)); see also Norfolk S. Ry. v. Kirby, 543 U.S. 14, 31, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004) (interpreting contract); United States v. Winans, 748 F.3d 268, 272 (6th Cir. 2014) (“Any means any.”). And the Bankruptcy Code, a federal statute, is indisputably a “law.” Cf. Walsh v. Dively (In re Dively), 522 B.R. 780, 783 (Bankr. W.D. Pa. 2014) (holding ERISA provision declaring that ERISA may not be interpreted to alter or impair “any law of the United States” applied to Code provisions), aff'd, 551 B.R. 570 (W.D. Pa. 2016). So when section 7.18 says on its face that the First Lien Creditors have no recourse “under any law,” it means they have no recourse under the Bankruptcy Code—including section 1111(b)(1)(A).
Although this conclusion seems inescapable, the First Lien Creditors offer several arguments to escape it.
• The First Lien Creditors argue that a different meaning follows if the phrase is read in the context of section 7.18 as a whole. Their contextual argument is based on the doctrine noscitur a soeiis: a word’s meaning depends on the meaning of adjacent words. But that doctrine applies only when contract terms are ambiguous. Bilski v. Kappos, 561 U.S. 593, 604, 130 S.Ct. 3218, 177 L.Ed.2d 792 (2010); United States v. Stevens, 559 U.S. 460, 474, 130 S.Ct. 1577, 176 L.Ed.2d 435 (2010); see also Kese Indus., Inc. v. Roslyn Torah Found., 15 N.Y.3d 485, 491, 914 N.Y.S.2d 704, 708, 940 N.E.2d 530 (2010). The phrase “under any law” is not ambiguous. Even if it is, the First Lien Creditors fail to explain persuasively how the other words in section 7.18 limit its meaning.
• The First Lien Creditors argue that a finding of waiver under New York law requires a showing Wilmington has not made. They contend that a waiver “must be clearly established and cannot be inferred from doubtful or equivocal acts or language.” East 56th Plaza, Inc. v. Abrams, 91 A.D.2d 1129, 1130, 458 N.Y.S.2d 953, 955 (1983); see also Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt., L.P., 7 N.Y.3d 96, 104, 817 N.Y.S.2d 606, 611, 850 N.E.2d 653 (2006) (stating that a waiver “should not be lightly presumed” and requires “a clear manifestation of intent” (internal quotation omitted)). But the cases the First Lien Creditors cite—East 56th Plaza and others—involved waivers of contract breaches through post-breach conduct, not waivers in the contracts themselves. New York law permits the contractual waiver of statutory and even constitutional rights unless the waiver violates public policy. Hadden v. Consolidated Edison Co., 45 N.Y.2d 466, 469, 382 N.E.2d 1136, 1138, 410 N.Y.S.2d 274 (1978). All that is necessary is an “express agreement.” Id. Section 7.18 is an express agreement.
• The First Lien Creditors insist a waiver would be ineffective because rights under the Bankruptcy Code cannot be waived. True, debtors have been held protected against purported prepetition contractual waivers of the benefits of bankruptcy. See, e.g., Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th Cir. 1987). But debtors are one thing, creditors another. *180There is no similar protection for creditors—particularly not large, sophisticated creditors represented by large, sophisticated law firms. See, e.g., In re American Roads LLC, 496 B.R. 727, 732 (Bankr. S.D.N.Y. 2013); Ion Media Networks, Inc. v. Cyrus Select Opportunities Master Fund, Ltd. (In re Ion Media Networks, Inc.), 419 B.R. 585, 595 (Bankr. S.D.N.Y. 2009). A contrary decision from this district, Bank of Am. v. North LaSalle St. L.P. (In re 203 N. LaSalle St. P’ship), 246 B.R. 325 (Bankr. N.D. Ill. 2000), is unconvincing.
Read by itself, then, section 7.18 suggests that the First Lien Creditors have no section 1111(b)(1)(A) rights, and Wilmington’s objections should be sustained.
d. The Contract Documents Read Together
But section 7.18 cannot be read by itself. The language of that section must be considered not just in the context of the Collateral Agreement but in the context of all the other documents executed as part of the same transaction—in effect, taking them as a single agreement. Read as a single agreement, the contract documents exclude section 1111(b)(1)(A) from the otherwise broad reach of section 7.18.
Under New York law, contractual language cannot be read in isolation but must be considered in light of the entire agreement. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404, 892 N.Y.S.2d 303, 307, 920 N.E.2d 359 (2009). When a single transaction involves multiple writings, those writings are treated as the entire agreement and read together. This Is Me, Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir. 1998); Nau v. Vulcan Rail & Constr. Co., 286 N.Y. 188, 197, 36 N.E.2d 106, 110 (1941). Whether multiple writings should be taken as. a single agreement depends on the intent of the parties, a question of fact. TVT Records v. Island Def Jam Music Grp., 412 F.3d 82, 89 (2d Cir. 2005). But if the writings “reflect no ambiguity as to whether they should be read as a single contract, the question is a matter of law for the court.” Id.-, accord Genger v. Genger, 76 F.Supp.3d 488, 497 (S.D.N.Y. 2015).
There is no ambiguity here. The relevant transaction is CEOC’s 2009 issuance of the first lien notes. The parties’ agreement consisted of multiple documents, including the Collateral Agreement, the Credit Agreement, and the Intercreditor Agreement. These documents were plainly “part of a single transaction ... designed to effectuate the same purpose,” This Is Me, Inc., 157 F.3d at 143, since each was executed, or amended and restated, to permit the issuance of the first lien notes and to ensure that the collateral CEOC and its subsidiaries had pledged to the First Lien Bank Lenders also secured the new debt.
That these documents together formed a single agreement is evident not only from the structure of the transaction but also from the terms of the Intercreditor Agreement. The Intercreditor Agreement contains an integration clause expressly entitled “Integration.” It provides: “This Agreement together with the other Secured Credit Documents and the First Lien Security Documents represents the agreement of each of the Grantors and the First Lien Secured Parties with respect to the subject matter hereof — ” (F.L. Ex. 15 at 22).9 The Intercreditor Agreement defines “Secured Credit Document” to include the Credit Agreement and the “Loan Documents (as defined in the Credit Agreement).” The Credit Agreement de*181fines “Loan Documents” to include “Security Documents” which in turn includes the Collateral Agreement. (F.L. Ex. 15 at 7; F.L. Ex. 11 at 57, 77).
The documents are also intertwined in other ways. They refer to each other repeatedly and depend on one another for several defined terms. (See, e.g., F.L. Ex. 15 at 4-6; W. Ex. 16 at 2, 7; F.L. Ex. 11 at 30, 60-61, 66). The Collateral Agreement refers to the Intercreditor Agreement more than twenty times, makes the Collateral Agent’s rights and remedies subject to the Intercreditor Agreement, and defers to the Intercreditor Agreement if any terms conflict. (W. Ex. 16 at 36). The Intercreditor Agreement is similarly dependent on the Collateral Agreement. It sets priorities for the distribution of the collateral pledged under the Collateral Agreement. (F.L. Ex. 15 at 7-8). Without the Collateral Agreement, the Intercreditor Agreement would serve no purpose. The parties could not possibly have meant them to be read separately. Cf. Genger, 76 F.Supp.3d at 496-97 (finding documents formed an integrated agreement where they made no sense without each other and attached and cross-referenced each other).
Reading the documents together blunts the force of Wilmington’s argument. Unlike the Collateral Agreement, the Inter-creditor Agreement addresses section 1111(b) directly. Section 4.01(b) provides: “Each of the First Lien Secured Parties waives any claim ... against the Collateral Agent ... arising out of ... any election by any Applicable Authorized Representative or any holders of First Lien Obligations, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b) of the Bankruptcy Code ....” (F.L. Ex. 15 at 14-15). Under Wilmington’s reading, section 7.18 would conflict with this provision. Section 7.18 says the First Lien Creditors have no recourse “under any law,” suggesting they have no rights under section 1111(b). Section 4.01(b) says the First Lien Creditors waive any claim against the Collateral Agent arising from a section 1111(b) election, suggesting the First Lien Creditors do have those rights.
Under New York law, though, a contract must be interpreted in a way that gives “full meaning and effect to all of its provisions.” LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424 F.3d 195, 206 (2d Cir. 2005) (emphasis added) (internal quotation omitted); accord Beal, 8 N.Y.3d at 324, 834 N.Y.S.2d at 47-48, 865 N.E.2d 1210. That means two “seemingly conflicting” provisions must be interpreted in a way that reconciles them, if a reasonable reconciliation that gives effect to each is possible. Seabury Constr. Corp. v. Jeffrey Chain Corp., 289 F.3d 63, 69 (2d Cir. 2002); Lenart Realty Corp. v. Petroleum Tank Cleaners, Ltd., 116 A.D.3d 536, 537, 984 N.Y.S.2d 40, 41 (2014).
A reasonable reconciliation is certainly possible here. The phrase “under any law” in section 7.18, though broad enough on its face (and when read in isolation) to waive rights under section 1111(b)(1), must instead be read as more limited. In light of section 4.01(b), section 7.18 must be read as excepting section 1111(b) from the “law[s]” under which the obligations owed to the First Lien Creditors are non-recourse. Notwithstanding section 7.18, then, the First Lien Creditors retain their rights to treatment under section 1111(b)(1)(A).
Limiting section 7.18 this way reconciles the two provisions and gives effect to both. It is consistent with the usual rule that where contract terms conflict, specific terms control over general ones (since section 4.01(b) is specific and section 7.18 general). Hejna v. Reilly, 88 A.D.3d 1119, 1120-21, 931 N.Y.S.2d 192, 193 (2011); An*182dersen v. Andersen, 69 A.D.3d 773, 774, 892 N.Y.S.2d 553, 555 (2010).10 And it avoids reading section 4.01(b) in a way that would render superfluous its reference to section 1111(b) (since there would be no reason for section 4.01(b) to mention section 1111(b) if section 7.18 meant the First Lien Creditors had no section 1111(b) rights in the first place). Beal Sav. Bank, 8 N.Y.3d at 324, 834 N.Y.S.2d at 47-48, 865 N.E.2d 1210 (stating that contract terms should not be read to render them superfluous); Lawyers’ Fund for Client Prot. v. Bank Leumi Trust Co., 94 N.Y.2d 398, 404, 706 N.Y.S.2d 66, 69-70, 727 N.E.2d 563 (2000).
In short, section 7.18 supports Wilmington’s position that the First Lien Creditors have waived their section 1111(b) rights— if that section is considered alone. But Wilmington fails to take into account the other writings making up the 2009 transaction. When those writings are read together, as New York law says they must be, the most reasonable conclusion is that section 7.18 accomplishes no waiver. Wilmington’s claim objections must therefore be overruled.
e. Wilmington’s Remaining Arguments
In its objections, Wilmington makes its stand mostly on section 7.18, relying on the breadth of that section. Wilmington offers little that might lead to the same outcome when all of the contract documents are considered as a single agreement. What it does offer is unpersuasive.
Wilmington argues that the Collateral Agreement must be interpreted. indépen-dently from the Credit and Intercreditor Agreements. Because the subsidiaries are not parties to the Credit and Intercreditor Agreements, Wilmington says, the Collateral Agreement cannot be read together with those documents. Wilmington notes that section 7.09(b) of the Collateral Agreement provides: “Neither this Agreement nor any provision hereof or of any other Security Document may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Agent and the Loan Party or Loan Parties .... ” (W. Ex. 16 at 30).
Wilmington is mistaken. It makes no difference-that the contract documents involve different parties as long as “the parties assented to all the promises as a whole, so that there would have been no bargain whatever if any promise or set of promises had been stricken.” Commander Oil Corp. v. Advance Food Serv. Equip., 991 F.2d 49, 53 (2d Cir. 1993) (internal quotation omitted); see also Genger, 76 F.Supp.3d at 496-97. The documents here are interrelated in such a way that without the Collateral Agreement the 2009 transaction could not have been consummated. The Collateral Agreement recognizes as much in its recitals, stating that the subsidiaries executed the Collateral Agreement to induce the First Lien Creditors to extend credit. (W. Ex. 16 at 1). The Collateral Agreement is not a stand-alone document. As for section 7.09(b) of the Collateral Agreement, that provision is irrelevant. The purpose of reading the Credit Agreement and Intercreditor Agreement with the Collateral Agreement is not to “waive[ ], amend[ ], or modify! ]” *183its terras. The purpose is to determine the parties’ intent, as New York law requires.
Wilmington also argues that section 1111(b) does not apply to the First Lien Creditors’ claims at all. Wilmington points out that the CEOC subsidiaries themselves are not obligated on any of the first lien debt (neither the notes nor the bank loans). Because they are not, Wilmington continues, no payment could have been demanded from them outside of bankruptcy, and section 1111(b) does not entitle a non-recourse lender to assert claims against a debtor for the full amount of the debt when that amount was never the debtor’s obligation.
Again, Wilmington is mistaken. Section 1111(b) does exactly that. It provides recourse “whether or not recourse exists under applicable non-bankruptcy law.” 680 Fifth Ave., 29 F.3d at 97. The only prerequisite for section 1111(b) to apply is that the creditor hold a “claim secured by a lien on property of the estate.” 11 U.S.C. § 1111(b)(1)(A); see also Brookfield Commons, 735 F.3d at 599; 680 Fifth Ave., 29 F.3d at 98. The debtor and creditor need not be in “contractual privity” for the creditor to enjoy the “benefits and protection of section 1111(b).” 680 Fifth Ave., 29 F.3d at 98 (holding a creditor entitled to invoke section 1111(b) although the debtor held property subject to the creditor’s mortgage but had no personal obligation on the debt). The First Lien Creditors do not lose the “benefits and protections” of 1111(b) merely because the subsidiaries did not borrow money under the Credit Agreement. Id.
Because the contract documents read together show that the First Lien Creditors did not intend section 7.18 of the Collateral Agreement to waive their section 1111(b) rights, Wilmington’s claim objections will be overruled.
4. Conclusion
The objections of Wilmington Trust, N.A., as successor indenture trustee for the 10.75% senior unsecured notes, to the claims of Credit Suisse AG, Cayman Islands Branch, as agent on behalf of first lien lenders, and UMB Bank, N.A., as successor indenture trustee for the first lien notes, are overruled.
. The hearing transcript is cited in this decision as "Tr. at_” The parties’ stipulation is cited as "Stip. ¶_” Wilmington’s exhibits are cited as "W. Ex._” The First Lien Creditors’ exhibits are cited as "F.L. Ex._”
. The First Lien Bank Lenders and First Lien Noteholders each filed a single proof of claim *174intended to serve as a claim against the estates of each debtor. (See Bankr. Dkt. Nos. 2030 at 1 n.3, 2031 at 1 n.3).
. It would not have mattered if they had. In re Hudson, 260 B.R. 421, 431 (Bankr. W.D. Mich. 2001) (“Nothing in the Bankruptcy Code or Rules gives any evidentiary effect whatsoever to a secured creditor's asserted value of collateral_”).
. Valuation in the course of the claim objection proceeding would have been improper in any event. In re Duggins, 263 B.R. 233, 238 (Bankr. C.D. Ill. 2001) (noting that valuation under section 506(a) "is not properly part of the claims allowance process”).
. Wilmington and the Committee contend the jurisdictional limits of Article III do not apply to bankruptcy cases. The contention is frivolous. See In re FedPak Sys., Inc., 80 F.3d 207, 211-13 (7th Cir. 1996); Goldstein v. National City Mortg. Co. (In re Bulgarea), Nos. 08 B 19992, 08 A 1019, 2010 WL 3614278, at *5 (Bankr. N.D. Ill. Sept. 9, 2010) (“The limits Article III imposes on federal jurisdiction generally apply equally to bankruptcy courts.”); In re Trans World Airlines, Inc., 169 B.R. 91, 93-94 (Bankr. D. Del. 1994); In re Interpictures, Inc., 86 B.R. 24, 29 (Bankr. E.D.N.Y. 1988).
. At least one circuit, the Ninth, refuses to apply prudential ripeness principles to purely private contract disputes. See Golden, 782 F.3d at 1086. The Seventh Circuit does not appear to have addressed the question directly, but Sadowski suggests that court would take a different view. Even the Ninth Circuit *176employs prudential ripeness in bankruptcy cases raising issues under the Code. See In re Coleman, 560 F.3d 1000, 1006-07 (9th Cir. 2000).
. Most of the time “uncertainty promotes settlements.” Caesars Ent’mt Operating Co., et al. v. BOKF, N.A., et al., No. 64 N.H. 568, 15 A. 149 (Bankr. N.D. Ill. Feb. 26, 2016). But not always. When uncertainty fails, certainty may help.
. It is worth noting that the First Lien Creditors never asserted the dispute was unripe or a decision premature until the court itself raised the issue at the April 13 hearing and sought statements of position. In their preliminary objection, the First Lien Bank Lenders suggested in a single sentence that the objections concerned "issues such as valuation, subordination, and intercreditor relationships, among others, that are more appropriately suited for confirmation.” (Bankr. Dkt. No. 2229 at 3). But the argument was never developed. The parties’ evident desire for a decision suggests the issue is fit for decision. See Jewett, 1992 WL 237248, at *7.
. The Intercreditor Agreement defines "Grantors” to include the subsidiaries pledging collateral under the Collateral Agreement. (F.L, Ex. 15 at 4).
. Here, in fact, the terms of the parties’ agreement would cause section 4.01(b) to control over section 7.18 even if section 4.01(b) were broader. The Collateral Agreement is expressly subject to the Intercreditor Agreement and provides in section 7.22 that "[i]n the event of any conflict between the terms of the [Intercreditor Agreement] and the terms of [the Collateral Agreement], the terms of the [Intercreditor Agreement] shall govern.” (W. Ex. 16 at 36). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500193/ | MEMORANDUM DECISION AND ORDER REGARDING APPLICATION FOR A RULE 2004 EXAMINATION
STUART M. BERNSTEIN, United States Bankruptcy Judge:
Applicants CSI Leasing, Inc. (“CSILI”) and CSI Leasing Malaysia Sdn. Bhd. (“CSIM” and, together with CSILI, “CSI”) seek authorization to examine the Debtors pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure (“Rule 2004”). The proposed examination broadly relates to the sale of assets by a non-Debtor, who owes money to CSI, and the upstreaming of the sales proceeds to the Debtors. The Debtors opposed the application, and the Court held a hearing on November 17, 2016 and reserved decision. For the reasons that follow, the application is denied except to the limited extent noted below.
BACKGROUND2
On June 7, 2011, SunEdison Kuching Sdn. Bhd. (“SEK”)—a non-Debtor wholly-owned subsidiary of the Debtor SunEdison Products Singapore Pte. Ltd. (“SEPS”) 0Schedule A/B at 23 of 31 (ECF/SEPS Doc. # 5)—entered into an equipment lease with CSIM, which incorporated an equipment schedule dated July 1,2011 (the “Equipment Lease”). (Application on Presentment of Creditor CSI Leasing, Inc. for Entry of an Order Pursuant to Fed. R. Bankr. P. 2004 Authorizing and Directing the Examination of the Debtors, dated Aug. 23, 2016 (“Application”), at ¶ 2 (ECF Doc. # 1048).) SEPS guaranteed the Equipment Lease. (Application at ¶3.) SEPS is a direct subsidiary of SunEdison International, Inc., which, in turn, is a direct subsidiary of SunEdison, Inc. (“SUNE”). (See Corporate Ownership Statement of SunEdison Products Singapore Pte Ltd. at 7 of 18 (ECF/SEPS Doc. #1).) SEK defaulted on the Equipment Lease, and SEPS defaulted on the guarantee. (Application at ¶ 4.) As a result, each owes CSI approximately $2.5 million. (Id.)
In March 2016, SEK entered into an asset purchase agreement (the “APA”) to sell substantially all of its assets to XiAn *246LONGi (“LONGi”), a Chinese company, for approximately $63 million. (Id. at ¶ 5.) There is no evidence that any Debtor was a party to the APA. LONGi apparently paid all but $18 million (the “$18 Million Holdback”) at the closing to SEK, with the balance to be paid in the future upon the satisfaction of certain conditions. (Id.) In the meantime, SEK transferred the sale proceeds paid at the closing to the Debtors (the “Upstream”), “namely SunEdison, Inc.,” leaving little to no assets in SEK to pay its creditors. (Id. at If 6.) CSI has expressed concern that if SEK receives any part of the $18 Million Holdback, it will upstream those sums (the “Future Upstreams”) as well. (Id. at ¶ 7.)
Most of the Debtors, including SEPS and SUNE, commenced chapter 11 cases on April 21, 2016. In September 2016, CSI filed Proof of Claim No. 2879 against SEPS in the amount of $2,496,611.09, and Proof of Claim No. 2234 against SUNE in the amount of $51,144.47. The Debtors have reviewed the claims and determined that they should be allowed. (Debtors’ Objection to the Application of CSI Leasing, Inc. for Entry of an Order Pursuant to Fed. R. Bankr. P. 2004 Authorizing and Directing the Examination of the Debtors, dated Nov. 10, 2016 (“Debtors’ Objection”), at ¶ 13 (ECF Doc. # 1577).)
The actual value of CSI’s claims is, however, uncertain. During earlier proceedings in connection with the Court’s motion relating to the appointment of an official equity committee, the Court found that the Debtors owed $4.2 billion in prepetition secured and unsecured debt, and its contingent debt could exceed an additional $1.2 billion. In re SunEdison, Inc., 556 B.R. 94, 101 (Bankr. S.D.N.Y. 2016). Furthermore, the Debtors were authorized to borrow $300 million after the petition date. Id. at 101 n.7. In contrast, the projected value of its assets was no more than $1.5 billion, net of the debtor-in-possession financing. Id. at 101. The Court concluded that the Debtors appeared to be hopelessly insolvent, and declined to appoint an official equity committee. Id. at 107. It looks like CSI’s potential distribution in the chapter 11 cases, if any, will be only a small percentage of the face amount of its claims.
One other point is the status of SEK. The Debtors have informed the Court that SEK is currently the subject of a Malaysian insolvency proceeding, and a liquidator was appointed on October 4, 2016. (Debtors’ Objection at 4.) According to CSI, it may be the largest creditor in that proceeding. (See Memorandum of Law in Further Support of the Application [Docket Document No. 1048] of Creditor CSI Leasing, Inc. for Entry of an Order Pursuant to Fed. R. Bankr. P. 2004 Authorizing and Directing the Examination of the Debtors, dated Nov. 14, 2016 (“Supplemental Memorandum”), at ¶ 5 (ECF Doc. #1596).) The parties have not informed the Court whether the Malaysian liquidator has standing and intends to pursue the transfer by SEK to the Debtors.
A. CSI’s Rule 2004 Application
After most of the Debtors, including SEPS and SUNE, had commenced chapter 11 cases, CSI filed the Application seeking Rule 2004 discovery. The Application included sixteen paragraphs requesting the production of “documents,” and in most cases “communications” as well, relating to the subject matter of the specific request (the “Requests”).3 I have renumbered the *247Requests and placed them into the following three categories:
i.Documents and Communications relating to the Upstream and Future Upstreams
1. All documents “that relate to the Upstream.”
2. All documents “that relate to the Future Upstream.”
3. “All documents and communications related to the Debtor’s anticipated receipt of the Future Upstream.”
4. “All documents and communications related to the Debtor’s intended uses of the Upstreamed Funds as part of the Debtor’s plan of reorganization.”
5. “All documents and communications related to the Debtor’s intended uses of the Future Upstreams as part of the Debtor’s plan of reorganization.”
6. “All documents and communications reflecting any opinion or analysis that the Upstream or Future Upstreams did aid or will aid the Debtors’ ability to reorganize.”
ii. Documents and Communications relating generally to the Debtors’ Chapter 11 Cases
7. “All documents and communications related to the sources of funds which the Debtor may use to fund the Debtor’s plan of reorganization.”
8. “All documents and communications related to the projected income and expenses of the Debtors during this bankruptcy proceeding.”
9. “All documents and communications upon which the Debtors may rely to argue that the interests of CSI are adequately protected.”
iii. Documents and Communications relating to SEK, the Malaysian proceeding and CSI’s recovery in that proceeding
10. Documents “that relate to the APA.”
11. “All documents related to why SEK did not seek bankruptcy protection via the SunEdison Bankruptcy.”
12. “All documents related to SEK directors, officers, or employees who went *248to work for (or consult for) LONGi after (or around the time that) the APA was entered into.”
13. “All documents and communications reflecting any lawsuits, proceedings, me-diations, or actions that [the Debtors] are aware of relating to SEK’s debts to creditors in Malaysia or elsewhere.”
14. “All documents and communications relating to any direction or consultation the Debtors gave to SEK for the time period of the one-year period prior to the APA up to the present.”
15. “All documents and communications reflecting any claims, demand letters, lawsuits, proceedings, mediations, or actions that [the Debtors] are aware of where it is asserted or referenced that the Upstream or Future Upstreams damaged or will damage a creditor’s ability to recovery from SEK or SEPS or any of the Debtors.”
16. “All documents and communications reflecting any lawsuits, proceedings, me-diations, or actions that [the Debtors] are aware of relating to SEPS’s debts to creditors in Malaysia or elsewhere.”
(Requests, Ex. A, Documents Requested.)
B. The Informal Discovery
After CSI filed the Application, the Debtors began providing responsive information on a rolling basis and the parties agreed to adjourn the hearing on the Application to a later date. (Debtors’ Objection at 3.) On September 29, 2016, the Court entered an order further authorizing and directing the Debtors to produce to CSI “the APA and certain related supply agreements, and the closing binder for the same.” (Order Authorizing and Directing the Initial Production of Documents of the Debtors, dated Sep. 29, 2016 (the “Initial Order”); Ex. A, at 5 (ECF Doc. # 1284).) The Initial Order was entered without prejudice to CSI’s rights to seek additional relief demanded in the Application, (Initial Order at 2), and the Application was subsequently set for hearing on November 17, 2016. (Notice of Rescheduling of Application on Presentment of Creditor CSI Leasing, Inc. for Entry of an Order Pursuant to Fed. R. Bankr. P. 2001 Authorizing and Directing the Examination of the Debtors, dated Oct. 13, 2016 (ECF Doc. # 1385).)
C. Subsequent Proceedings Relating to CSI’s 2004 Application
The informal discovery efforts did not satisfy CSI. Consequently, the Debtors filed a formal objection to the Application, characterizing it as premature, overly broad, speculative and unduly burdensome. (Debtors’ Objection at 2, ¶¶ 8-9.) The Debtors argue that they have agreed to allow CSI’s claims, and CSI does not need the information to frame its claims. (Id. at ¶ 13.) In addition, authorizing discovery at this point in these chapter 11 cases might set an unwieldy precedent and open the floodgates for similar requests by other claimants. (Debtors’ Objection at ¶ 8.) Furthermore, CSI’s requests exceeded the scope of Rule 2004, (id. at ¶ 10), CSI had not demonstrated good cause, (Debtors’ Objection at ¶¶ 12-13), the Debtors had already provided information about the Malaysian proceeding and CSI should make any further requests in that proceeding, (id., at ¶ 14), and CSI could get information relating to the Debtors’ financial history by reviewing the Debtors’ publicly available Schedules of Assets and Liabilities, Statement of Financial Affairs and Monthly Operating Reports. (Debtors’ Objection at ¶¶ 11,15.)
CSI responded largely reiterating its arguments made in the Application. In contrast to the Debtors’ characterization that the Request was overly broad and speculative, CSI submitted that they were “nar*249rowly tailored.” (Supplemental Memorandum at ¶ 10 (footnote omitted).) CSI also acknowledged based upon its own due diligence that the Future Upstreams would probably never be tendered, (id. at ¶6), and characterized their requests simply as “directing the Debtors to provide oral testimony and produce documents related to the Upstream.” (Id. at ¶ 8 (footnotes omitted).) CSI further argued that its requests would not cause undue cost or disruption to the Debtors because it was not seeking discovery of any documents that the Debtors had already provided or documents that did not exist. (Id. at ¶ 10.) Furthermore, good cause existed because the Rule 2004 examination was necessary to effectively enforce their rights in the United States and in Malaysia. (Id. at ¶ 12.) Finally, CSI disputed the Debtors’ claim that it should first seek the documents and communications from the Malaysian liquidator. The Debtors had already admitted they had responsive documents, and the possible existence of such documents elsewhere did not relieve the Debtors of their obligations under Rule 2004. (Id. at ¶ 14.)
DISCUSSION
Rule 2004 provides in relevant part that the Court may authorize 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.” Fed. R. Bankr. P. 2004(b). In chapter 11 cases, the examination may extend to matters relating “to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.” Id. The party seeking Rule 2004 discovery has the burden to show good cause for the examination it seeks, and relief lies within the sound discretion of the Bankruptcy Court. Picard v. Marshall (In re Bernard L. Madoff Inv. Secs. LLC), Adv. Pro. No. 08-01789, 2014 WL 5486279, at *2 (Bankr. S.D.N.Y. Oct. 30, 2014); see In re Bd. of Dirs. of Hopewell Int’l Ins. Ltd., 258 B.R. 580, 587 (Bankr. S.D.N.Y. 2001) (Rule 2004 gives the Court “significant” discretion).
A party seeking to conduct a Rule 2004 examination typically shows good cause by establishing that the proposed examination “ ‘is necessary to establish the claim of the party seeking the examination, or ... denial of such request would cause the examiner undue hardship or injustice.’ ” In re Metiom, Inc., 318 B.R. 263, 268 (S.D.N.Y. 2004) (quoting In re Dinubilo, 177 B.R. 932, 943 (E.D. Cal. 1993)); accord In re AOG Entm’t, Inc., 558 B.R. 98, 109 (Bankr. S.D.N.Y. 2016); In re Drexel Burnham Lambert Grp., Inc., 123 B.R. 702, 712 (Bankr. S.D.N.Y. 1991). In evaluating a request to conduct a Rule 2004 examination, the Court must “balance the competing interests of the parties, weighing the relevance of and necessity of the information sought by examination. That documents meet the requirement of relevance does not alone demonstrate that there is good cause for requiring their production.” Drexel Burnham, 123 B.R. at 712; accord In re Coffee Cupboard, Inc., 128 B.R. 509, 514 (Bankr. E.D.N.Y. 1991); In re Fearn, 96 B.R. 135, 138 (Bankr. S.D. Ohio 1989) (“While the scope of Rule 2004 examination is very broad, it is not limitless. The examination should not be so broad as to be more disruptive and costly to the party sought to be examined than beneficial to the party seeking discovery.”)
In the past, courts have referred to the expansive reading of Rule 2004 comparing it to a “fishing expedition,” Drexel Burn*250ham Lambert Grp., Inc., 123 B.R. at 711, a concept generally attributed to an old case that described the examination of the bankrupt as a “fishing examination.” In re Foerst, 93 F. 190, 190 (S.D.N.Y. 1899). But the cost of compliance has increased substantially since then. The era of paper discovery in relatively small cases has given way to the discovery not only of paper but also of vast amounts of electronically stored information (“ESI”), possibly stored on outdated systems, on numerous personal computers and servers located throughout the world. ShiRA A. Scheindlin, Moore’s Federal Practice, E-Discovery: The Newly Amended Federal Rules of Civil Procedure 3 (2006). Discovery has become an increasingly expensive aspect of civil litigation.
The proliferation of information and the costs associated with retrieving, reviewing and producing discovery in civil litigation have led to the 2015 amendments to the Federal Rules of Civil Procedure which emphasize the concept of proportionality. Under Rule 26, the scope of discovery extends to any matter relevant to a party’s claim or defense and “proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Fed. R. Civ. P. 26(b)(1). In addition, a party need not provide discovery of ESI from sources “that the party identifies as not reasonably accessible because of undue burden or cost,” but the party from whom discovery is sought has the burden of showing “that the information is not reasonably accessible because of undue burden or cost,” and even it meets that burden, “the court may nonetheless order discovery from such sources if the requesting party shows good cause.” Fed. R. Civ. P. 26(b)(2)(B).
Rule 2004 has not been similarly amended but the spirit of proportionality is consistent with the historic concerns regarding the burden on the producing party and is relevant to the determination of cause. The Requests provide a good illustration. CSI’s claims, while significant in face value, are small when viewed in the context of chapter 11 cases involving over $5 billion in debt with little prospect of anything more than a small recovery for unsecured creditors. By the November 17, 2016 hearing, the Debtors had already produced over 1,200 pages of information responsive to Requests as well as supplemental requests not included in the Application. (.Debtors’ Objection at 3-4.) These documents covered, among other things, the APA, (id. at 4; Initial Order), information showing the flow of funds, (Tr. at 56:6-13),' and the Malaysian insolvency proceeding. (Debtors’ Objection at ¶ 14.) CSI wants more, but the cost of retrieving, reviewing and producing “all documents and communications” relating to4 each of the sixteen specific requests may exceed CSI’s distribution in the Debtors’ cases, and some of the requests could be made by every creditor and equity interest holder in these cases. Moreover, the Debtors have determined to allow CSI’s two claims, and the additional discovery does not appear to be necessary to resolve any mate-*251rial issues in these chapter 11 cases between CSI and the Debtors.
Turning to the Requests, CSI has not established cause for most of the information it seeks. The cause it is required to demonstrate must relate to these cases. Although many of the requests are ostensibly relevant to the subject matter of the Debtors’ cases, the primary focus of the Application is the need for information to use in the Malaysian insolvency proceeding.
CSI makes no secret of this purpose. CSI has implied that the Upstream was a fraudulent transfer by SEK. The Application argued that the Upstream left “little to no assets and little to no money to pay the just claims of SEK’s creditors,” (Application at ¶ 6), and the Debtors have information and knowledge regarding the Upstream, the $18 Million Holdback, and “other potential future expectant interests from SEK and/or LONGi.” {Id. at ¶7.) Most telling, CSI argued that it needed the Rule 2004 discovery immediately to support its request for relief in the Malaysian insolvency proceeding:
It also appears the Debtors are pursuing certain courses that are calculated, at least in part, to circumvent existing obligations and defeat Malaysian creditors (including but not limited to CSI) that may have rights to proceeds under the APA or otherwise. With possible legal actions that CSI could take in Malaysia (including, but not limited to, injunc-tive relief), and with three months having transpired since CSI’s Application was filed with this Court, it is imperative that CSI immediately obtain the information it has requested in the Application and without further delay so that it may effectively enforce its rights here and in Malaysia.
{Supplemental Memorandum at ¶ 12 (emphasis added).)
CSI confirmed the reason why it needed the information at oral argument. In response to the Court’s question, on that point, CSI’s counsel stated “[w]e need discover because of the related claims that exist in this case related to our Malaysian enterprise.” (Tr. at 49:1-3.) He also stated that the Upstream “directly affects our claims and rights in Malaysia,” (Tr. at 49:24-50:1), and “a debtor was used as a conduit to commit the overall transaction, which denied all the Malaysian creditors any recovery from SEK nondebtor and SPS debtor.” (Tr. at 53:13-16.) I do not mean to minimize the possible grievance of or the potential remedies available to SEK’s creditors and/or the Malaysian liquidator as a result of the Upstream, although I draw no conclusions. Nevertheless, the party seeking Rule 2004 discovery must show a need or undue hardship relating to the bankruptcy case in which the information is sought, not in some other, foreign proceeding.
While the Upstream may be germane to these cases because it arguably stripped SEPS of assets to pay CSI’s claim in that case,5 the extent of the discovery that CSI demands pertaining to the Upstream and other requests within the scope of Rule 2004 is disproportionate. Part of the problem may be CSI’s misperception of its own Requests. It has described the Requests as “narrowly tailored,” {Supplemental Memorandum at ¶ 10), and “surgical,” (Tr. at 54:24), but they are quite the opposite. First, CSI has not placed reasonable limits on the sources or types of information that the Debtors must search for and retrieve. *252The Requests generally ask for “all documents and communications” that “relate to” the subject matter of the specific request. The Court has noted the breadth of these terms. CSI will accept nothing less. It placed only two limits on the Debtors’ duty to disclose that are meaningless: the Debtors do not have to produce any documents and communications they have already produced, and they don’t have to produce any documents and communications that don’t exist, at least while they don’t exist. (Supplemental Memorandum at ¶ 10.) But for these limits, CSI insists that the Debtors must produce everything.
CSI has not articulated a rationale for compelling the production of all documents and communications relating to the Upstream. The Debtors have not disputed the Upstream, and it should be sufficient for CSI if the Debtors produce information showing how the money moved from SEK to SEPS and beyond. The Debtors should not be required to search every document, email and byte of data located on the servers and computers of its far-flung affiliates.6
Second, other requests are premature, unnecessary or overly broad. For example, CSI has acknowledged that Future Up-streams are unlikely. Nevertheless, it insists on compliance with three separate requests devoted entirely to Future Up-streams and a fourth request that includes both Upstreams and Future Upstreams. CSI also seeks discovery of all “documents and communications” related to (1) the possible sources of plan funding, (2) the Debtors’ projected income and expenses and (3) documents and communications the Debtors “may” use “to argue that the interests of CSI are adequately protected.” Given the broad duty to produce documents and communications “relating to” possible sources of plan funding and the Debtors’ projected income and expenses, these two requests could conceivably cover every document and communication that exists. Moreover, the request for plan funding documents is premature; there is no plan and, as far as I can tell, no funding. In any event, this is the type of information that would be disclosed in a disclosure statement.
The request relating to the adequate protection of CSI’s interests is the most perplexing. To begin with, CSI has not requested adequate protection. More importantly, it is not entitled to adequate protection. Adequate protection must be provided to protect against the decline in value to a non-debtor’s interest in property of the estate resulting from the imposition of the automatic stay, 11 U.S.C. § 362(d)(1), the use, sale or lease of that property, 11 U.S..C. 363(e), or the granting of a priming lien on that property to secure post-petition financing. 11 U.S.C. § 364(d)(1)(B); see also 11 U.S.C. § 361; In re Garland Corp., 6 B.R. 456, 462 ( 1st Cir. BAP 1980) (Cyr, J.) Unsecured creditors like CSI do not have an interest in property of the estate that merits adequate protection, and there is no express statutory requirement that unsecured creditors receive adequate protection. Garland Corp., 6 B.R. at 462; In re R.F. Cunningham & Co., 355 B.R. 408, 412 (Bankr. E.D.N.Y. 2006) (“There is no statutory requirement that unsecured creditors receive adequate protection, and the lack of adequate protection does not entitle an unsecured creditor to relief from the stay.”).
Accordingly, the Application is denied except to the extent that the Debtors are directed to provide sufficient information *253to identify the flow of funds that comprise the Upstream.
So ordered.
. The following conventions are used in citing to the record. "ECF Doc. #—” refers to documents filed on the docket of the main chapter 11 case, In re SunEdison, Inc., et al., case no. 16-10992. "ECF/SEPS Doc. #—■” refers to documents filed in the chapter 11 case, In re SunEdison Products Singapore PTE Ltd., case no. 16-11014. "# of #” refers to the page number and total number of pages placed by the CM/ECF filing system at the top of every page of a filed document. "Tr.” refers to the transcript of the hearing held in the main chapter 11 case on November 17, 2016 (ECF Doc. # 1646).
. The Requests include broad definitions of "documents and "communications.” " ‘Document’ or ‘documents' means any writing or record of any type or description, including but not limited to the original, any nonidentical copy or any draft, regardless of or*247igin or location, of any paper, electronically-stored file, book, pamphlet, computer printout, newspaper, magazine, periodical, letter, memorandum, telegram, report, record, study, inter-office or intra-office communication, handwritten or other note, diary, invoice, purchase order, bill of lading, computer print-out, transcript of telephone conversations and any other retrievable data, working paper, chart, deed, survey, notes, map, graph, index, disc, data sheet or data processing card, or any other written,- recorded, transcribed, punched, taped, magnetically recorded, filmed or graphic matter, however produced or reproduced to which You have, or have had, access.” (Requests, Ex. A, Definitions and Instructions at ¶ 13.) ‘Communication’ means any transfer of information, oral or written, be it in the form of facts, ideas, inquiries, opinions, or otherwise, by any means, at any time or place, under any circumstances, and is not limited to transfers between persons, but includes other transfers, such as records and memoranda to the file.” (Id. at ¶ 14.) I use the words "documents’ and "communications” as a short hand to refer to all of the things in the definitions.
The Requests also impose certain onerous obligations with respect to the production of documents. For example, the “Debtors have a duty to search for responsive documents and things in all media and sources in their possession, custody or control where paper or electronic files are kept or stored, including floppy disks, hard drives on or for personal computers, computer servers, mainframe storage tapes or disks, archive facilities and backup facilities,” (id. at ¶ 7), they are deemed “to be in control of a document if you have the right to secure the document or a copy thereof from another person having actual possession thereof,” and "shall identify and provide the location of all responsive documents of which you are aware but which are not in your custody, possession or control.” (Id. at ¶ 6.)
. "The term ‘relating to' (including any variant thereof), includes referring to, alluding to, responding to, pertaining to, concerning, connected with, commenting on or in respect of, analyzing, touching upon, constituting and being, and is not limited to contemporaneous events, actions, communications or documents. (Requests, Ex. A, Definitions and Instructions at ¶ 15.)
. On the other hand, CSI implies that the sale proceeds were fraudulently transferred and should be recovered for the benefit of SEK's creditors. This is inconsistent with the argument that the proceeds could or should be used to satisfy CSI’s claims in these cases.
. Nothing herein relieves the Debtors of tire duty to produce the APA-related documents that were the subject of the earlier order described above. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500194/ | Memorandum
LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE
Before the Court is Alfred Barr’s filing titled Interested Party Motion to Lift Au-. tomatic Stay or in the Alternative to Annul or Modify the Automatic Stay for Hire-Right Solutions Inc. (“Barr Motion”).2 Mr. Barr is proceeding pro se.3 The reorganized debtors filed an objection to the Barr Motion,4 and Mr. Barr filed a memorandum of law in support of his motion.5 At a hearing on September 21, 2016, both parties agreed to proceed by way of argument in the first instance to determine whether the matter could be disposed of on undisputed facts.6 Accordingly, on November 9, 2016—a date agreed to by the parties—I heard argument on the Motion; no evidence was taken.7 Nonetheless, I have reviewed each filing, including the exhibits attached to them. And, I have also reviewed and considered Mr. Barr’s post-hearing filing titled 11 U.S.C. § 362(b)(4) Judicial Notice of Code of Federal Regulations To Be Considered.8 This is my ruling on the Barr Motion.
Background
A. The Bankruptcy Filing
HireRight Solutions Inc. (“HireRight” or “Debtor”), together with certain of its affiliates, filed voluntary bankruptcy petitions under chapter 11 of title 11 of the United States Code on February 8, 2015. HireRight is a “leading provider of employment background screening, drug/ health screening and employment eligibility solutions.”9 On February 25, 2015, a committee of unsecured creditors was appointed.10
HireRight filed its bankruptcy schedules on March 20, 2015.11 Debtor listed Mr. Barr on its Schedules as a general unsecured creditor holding a contingent, unliq-uidated and disputed claim.12 Also on March 20, 2015, I entered an order establishing April 30, 2015, as thé last date by which all creditors were to file proofs of claim with the claims agent.13 The docket reflects that Mr. Barr was served with notice of the bar date,14 He did not file a *255proof of claim.15
On August 14, 2015, I entered an order (the “Confirmation Order”) confirming the Amended Joint Chapter 11 Plan of Altegrity, Inc., et al. (the “Plan”).16 The Plan constituted a separate chapter 11 plan of reorganization for each debtor. Under the Plan, holders of general unsecured claims against the Operating Debtors (which includes HireRight) receive their pro rata share of $1,250,000 in cash. Recoveries for this class were projected to be 11.9% based on the Debtors’ estimated midpoint amount of allowed claims excluding amounts for litigation claims, contract damages claims or other contingent or un-liquidated claims.17 The Plan went effective on August 31, 2015. The docket reflects that Mr. Barr was served with notice of the confirmation hearing,18 and the effective date of the Plan.19
B. Mr. Barr’s prepetition litigation
Mr. Barr is a truck driver. On December 31, 2012, Mr. Barr filed a complaint with the Regional Administrator, Occupational Safety and Health Administration (“OSHA”) under the employee protection provisions of Section 405 of the Surface Transportation Assistance Act (“STAA”) against CTL Transportation, Inc. and Comear Industries, Inc. (the “STAA Action”). In the complaint, Mr. Barr alleges that CTL and Comear terminated his employment as a truck driver in retaliation for expressing safety concerns, refusing to drive unsafe vehicles and complaining about hours of service.20
The filing of the complaint automatically triggered an investigation by the Secretary of Labor, through OSHA.21 In a letter dated November 22, 2013, OSHA advised Mr. Barr that, after investigation, the Secretary of Labor found “that there is no reasonable cause to believe that Respondent [CTL] violated STAA.” The Secretary made multiple findings in support of his conclusion, and dismissed Mr. Barr’s complaint.22 In this letter, OSHA advised Mr. Barr of his right to file objections to the Secretary’s findings and request a hearing before an administrative law judge. OSHA also advised Mr. Barr that the Department of Labor would not represent any party in that hearing, but rather it would be an adversarial proceeding presided over by an administrative law judge. Mr. Barr apparently exercised his right to take exception to the findings made by OSHA, and a September 9,2014 hearing date was initially set.23
*256In the meantime, on February 13, 2013, Mr. Barr emailed an amended complaint to OSHA which sought relief against not only CTL, but HireRight.24 The amended complaint generally describes a series of actions taken by CTL against Mr. Barr, including a retaliatory firing, false reporting to HireRight and the failure to correct information. But, it also includes an allegation of blacklisting by both CTL and Hire-Right.25 The Administrative Review Board has recognized that blacklisting, in response to an employee engaging in protected activity, may be a basis for relief under the STAA.26
HireRight objected to being designated a respondent in the STAA Action. Hire-Right argued, among other things, that: (i) as HireRight did not have an employment relationship with Mr. Barr, it has no Lability under the STAA and thus is not a proper respondent; (ii) the factual inaccuracies in Mr. Barr’s declaration preclude a finding of blacklisting; (iii) the addition of HireRight as a respondent is unnecessary to prevent prejudicing the public interest or Mr. Barr’s rights; and (iv) any remedy against HireRight lies under the Fair Credit Reporting Act and not the STAA.27 The administrative law judge assigned to the case (“ALJ”) rejected HireRight’s arguments and approved the addition of HireRight as a respondent in the action. In doing so, the ALJ found that HireRight was a proper respondent based on the language of the regulations promulgated under the STAA, and also because of Hire-Right’s “unique position as a consumer reporting agency in the trucking industry.” 28 Specifically, the ALJ stated:
In that capacity, HireRight makes available to prospective employers the work histories and driving records of thousands of commercial truck drivers. While HireRight may be storing and disseminating driver information provided by former employers in order that prospective employers may satisfy their statutory requirement to investigative [sic] the driving records of potential drivers, its products certainly have the capacity to affect the pay, terms, and privileges of employment for commercial truck drivers.29
HireRight also moved for summary judgment on similar grounds, which the ALJ denied.
When HireRight filed its bankruptcy petition, it notified the ALJ. The ALJ recognized the applicability of the automatic stay, and determined, in the interest of judicial economy, to hold the entire proceeding in abeyance pending the completion of the bankruptcy case.30 HireRight later notified the ALJ of the discharge it received by operation of the Confirmation *257Order and section 1141 of the Bankruptcy Code, and requested that the complaint be dismissed on that basis. In response, on June 29, 2016, the ALJ issued an Order to Show Cause31 why the case should not be dismissed as to HireRight and provided parties with thirty days in which to respond. Mr. Barr sought, and received, an extension of time to respond to the Order to Show Cause. He also filed the instant motion.
Discussion
In the Barr Motion, Mr. Barr seeks relief so that he may proceed with litigation. His filings are somewhat inconsistent with respect to the proceedings he seeks to continue to prosecute, but he mentions four: (i) the STAA Action; (ii) litigation before the United States District Court for the District of Columbia styled U.S. v. HireRight Solutions, Inc., Civil Action No. 12-1313 resulting in a stipulated final judgment on August 28,2012 (the “Federal Trade Commission Lawsuit”);32 (iii) U.S. Department of Transportation v. CTL Transportation, LLC, No. 2014-1485; and (iv) an as-yet unfiled action that Mr. Barr seeks to bring in the United States District Court for the Middle District of Florida under various theories.33
I have two preliminary observations. First, while Mr. Barr’s papers and the argument, to some extent, mention the four pieces of litigation just listed, only the STAA Action merits discussion. I will not grant relief from the discharge injunction with respect to the Federal Trade Commission Lawsuit as Mr. Barr was not a party to that suit, and the civil docket for this case reflects that it was terminated on August 29, 2012.34 Mr. Barr has cited no law that suggests that he may appear and/or re-open that action. Similarly, I will not grant Mr. Barr relief from the discharge injunction with respect to the matter involving the U.S. Department of Transportation to which Mr. Barr is not a party. Further, I will not grant relief from the discharge injunction to permit Mr. Barr to file a case not yet filed.
Second, I am treating the Barr Motion as a request for relief from the discharge injunction to proceed with litigation.35 As the Confirmation Order was entered on August 14, 2016, and HireRight was granted a discharge, the automatic stay is no longer in place.36 The question, therefore, is whether Mr. Barr should be *258granted relief from the discharge injunction to pursue the STAA Action.37
Mr. Barr makes several arguments in support of his request, but they boil down to two. His primary argument is that he should be permitted to continue with the STAA Action because it is a police or regulatory action conducted by a governmental agency pursuant to 1Í U.S.C. § 362(b)(4), and as such should go forward. His secondary argument is that he should be granted relief from the discharge injunction for “cause.”
HireRight contends that, as Mr. Barr did not file a proof of claim in the bankruptcy case, Mr. Barr is not entitled to any monetary recovery against HireRight because any debt has been discharged, therefore no relief should be granted. HireRight also contends that the STAA Action is not a governmental agency’s exercise of its police or regulatory powers, but rather private litigation being prosecuted by Mr. Barr before the ALJ. HireRight also asks me to find that the STAA Action should not go forward because there is no effective relief that Mr. Barr can obtain in that litigation as HireRight is merely a “middleman” who facilitates background investigations, not the drafter of any employment history.
Two of these arguments are easily dispensed with. First, I conclude that the STAA Action does not fall within the police powers exception of section 362(b)(4). This section excepts from the reach of the automatic stay the commencement or continuation of actions “by a governmental unit... to enforce such governmental unit’s ... police and regulatory power”38 The term “governmental unit” means: “United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.”39
Mr. Barr does is not a governmental unit, and his individual claims in the STAA Action seeking monetary damages are not on behalf of any governmental unit.40 And, *259while Mr. Barr insists that an investigation is being conducted by a governmental agency in the STAA Action, nothing in the documents he submitted supports this statement. Rather, the documents submitted, in particular the 11/22/13 Letter and the ALJ 9/3/14 Decision, show that governmental involvement in the investigation has concluded, and that the government— through the Office of Administrative Law Judges—is now acting as an adjudicatory body.41 The ALJ confirms this in his Order to Show Cause when he writes that no statutory exception to the operation of the automatic stay exists in the STAA Action noting that this exception “does not apply to STAA cases where the employee is the sole prosecuting party.”42 The only reading of this statement is that Mr. Barr, and not the government, is alone in prosecuting the action against HireRight, a conclusion supported by each document supplied by both parties. Accordingly, an argument based on section 362(b)(4) does not support the relief Mr. Barr seeks.
Second, I decline to deny the Barr Motion based on the argument that HireRight has been improperly kept in the STAA Action or that Mr, Barr cannot receive effective relief against HireRight in the STAA Action. The ALJ has considered and rejected both of these arguments in his decisions approving the joinder of Hire-Right-as a respondent and denying summary judgment. I will not second guess those decisions, assuming I could.
But, HireRight’s argument that Mr. Barr should be denied relief from the discharge injunction to pursue the STAA Action because he has not filed a proof of claim merits consideration. As HireRight points out, paragraph 85 of the Confirmation Order reflects the discharge provided to a reorganizing debtor under section 1141(d) of the Bankruptcy Code. Section 1141(d) of the Bankruptcy Code provides that the confirmation of a plan “discharges the debtor from any debt that arose before the date of such confirmation” whether or not a proof of claim based on that debt is filed, and regardless of whether the holder of such claim has accepted the plan.43 Further, section 524(a)(2) of the Bankruptcy Code provides that a discharge “operates as an injunction against the commencement or continuation' of an action .., to collect, recover or offset any such debt as a personal liability of the debtor_”44 Mr. Barr did not file a proof of claim by the Bar Date. As such, he is not entitled to share in distributions from the estate.45 There is no reason to liquidate any monetary damages against HireRight or for HireRight to defend litigation which results in a monetary judgment. To the extent that Mr. Barr is seeking to recover on a claim, there is simply nothing left for the ALJ to decide in the STAA litigation.46
*260The question, therefore, is whether Mr. Barr is asserting a claim in the STAA Litigation. The term “claim” is defined in the Bankruptcy Code 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; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.47
If the relief Mr. Barr seeks in the STAA Action can be reduced to a “right to payment” he has claims which have been discharged in this bankruptcy case; if not, the relief Mr. Barr seeks is not necessary because the discharge does not prevent continuation of the STAA Action. In performing this analysis, the court looks at each cause of action separately.48
Because the amended complaint in the STAA Action is more directed to actions taken by CTL, at argument I asked both Mr. Barr and HireRight what relief was being sought by way of the amended complaint. Their answers were less than enlightening. But, it appears that the relief includes back pay, reinstatement, the cessation of distribution of a DAC Report containing false information, referral to the Department of Justice and an investigation.49 These types of remedies are available under the STAA. Appropriate remedies include reinstatement of employment, back pay, compensatory damages, punitive damages up to $250,000 and expungement of the driver’s employment and DAC Reports.50
Back pay, compensatory damages and punitive damages are clearly “claims” under the Bankruptcy Code as these are monetary damages that may be awarded under the STAA. Mr. Barr’s request for reinstatement of employment cannot be directed at HireRight because it is undisputed that Mr. Barr was never employed by HireRight. Further, while the Third Circuit has recognized that the preferred remedy for wrongful discharge is reinstatement, it has also recognized that a monetary award is a viable alternative when reinstatement is impracticable.51 Accordingly, in this matter, any request for reinstatement of employment is a “claim” under the Bankruptcy Code.52
*261Research has not revealed any reported case law determining whether relief aimed at correcting or expunging a false DAC Report is a “claim” for purposes of the Bankruptcy Code. So, I must determine whether a monetary award is a viable alternative for this type of relief.53 In this analysis, I may reject the argument that a monetary award will suffice because Mr. Barr has also sought monetary damages.54
At argument, Mr. Barr stated that the DAC Report kept and/or generated by HireRight contains false information that has prevented him from obtaining employment as a truck driver for the last three years. This type of harm, if true, does not lend itself solely to monetary damages; moreover, it is a continuous harm.55
Two recent cases from the Administrative Review Board reflect that remedies for violation of the STAA include both monetary and non-monetary relief. For example, in Matter of Grant E. Timmons, Mr. Timmons, a truck driver, filed a complaint with OSHA alleging his employer blacklisted him in violation of the STAA. After finding that Mr. Timmons engaged in protected activity and was blacklisted, the ALJ awarded Mr. Timmons $17,000 in compensatory damages and ordered that his employer purge Mr. Timmon’s employment file and ensure the file reflected a satisfactory work and safety record.56 Similarly, in Matter of Albert Brian Canter, Mr. Canter’s employer was found to be in violation of the STAA’s whistleblowing protections by placing certain notations on Mr. Canter’s DAC report. Among other relief, the ALJ awarded Mr. Canter back pay, interest, attorney’s fees and costs, and abatement of the violation, which included deleting the improper notations from Mr. Canter’s DAC Report.57 In both cases, the Administrative Review Board affirmed the ALJ’s order of damages and remedies.
Monetary damages are not a viable alternative for correction or expungement of a DAC Report, rather, as reflected in the above cases, correction of a DAC Report is a necessary complement to any monetary award. Accordingly, I conclude that the ability to obtain a correction of his DAC Report—if, indeed, Mr. Barr’s assertions are correct—is not a “claim” that was discharged in the HireRight bankruptcy *262case.58
Finally, Mr. Barr asserts that on two previous occasions in 2015 he attempted to file a motion for relief from the stay with the Clerk of the Court, but his filings were refused.59 He contends that: (i) the Clerk improperly refused to docket two previous motions for relief from stay when he did not tender a fee with the filing; (ii) the United States Trustee arid/or HireRight were somehow responsible for the fact that his previous attempts to have his motions filed and/or heard were unsuccessful; and (iii) because his previous motions were not heard within thirty days, the automatic stay has already terminated as to any litigation he wants to pursue.
First, per the Bankruptcy Court Miscellaneous Fee Schedule, a fee of $176 is required to file a motion for relief from stay.60 Mr. Barr appears to have challenged the- Clerk’s ability to collect the fee (at least, in 2016) and, in any event, he did’ not tender the fee to the Clerk in 2015 or ■ in 2016 nor did he file a motion to proceed in forma pauperis until August 18, 2016.61
Second, while it appears that the Office of the United States Trustee (the “UST”) may have been served with previous motions,62 it was not the UST’s responsibility to take any action with respect to Mr. Barr’s motions. Mr. Barr cites to Federal Rule of Bankruptcy Procedure. 5005(c) for the proposition that the UST should have transmitted his previous motions to the Clerk of the Court for filing, but this in an inaccurate interpretation of the rule. Rule 5005(c) states that the UST shall transmit to the Clerk of the Court “any paper intended to be filed with the clerk but erroneously delivered to the [UST].” Mr. Barr did not erroneously deliver any previous 'motions to the UST, rather, he claims to have delivered the motions directly to the Clerk of the Court to be filed and served them upon the UST. In these circumstances, it was not incumbent on the UST *263to take any. action with respect to his motions.
Third, Local Rule 4001—1(b) requires the moving party, not the UST or the Debtors, to schedule a motion for relief from stay by either placing the motion on a regularly scheduled omnibus date or by obtaining a special setting from chambers.63 If the moving party does not obtain a date on his motion within the thirty-day period, he consents to the stay remaining in place until the motion is heard.64
As applied here, assuming without deciding, that the Clerk’s office should have accepted for docketing Mr. Barr’s previous motions absent the payment of the mandated fee or a motion to proceed informa pauperis,65 the question is the appropriate remedy. In McDowell v. Delaware State Police, the Third Circuit addressed the clerk’s failure to docket a motion intended to act as a complaint in the context of a 1983 action against the state police.66 The movant waited over fourteen months to respond to the clerk’s letter informing him that he needed to submit a filing fee or a request to proceed informa pauperis. The Third Circuit held that once the in forma pauperis motion was granted, the motion was constructively filed as of the date that the clerk received the motion for purposes of the statute of limitations. In so finding, the court considered that there was no evidence of bad faith, movant offered a plausible excuse for the delay—he was imprisoned and only learned of his rights after study—and there was no prejudice to the defendants.67
In Breckin v. MBNA America, the District of Delaware distinguished McDowell finding its holding regarding constructive filing to be dicta and limited to its factual scenario.68 Under the facts before it, the Brechin court refused to permit constructive filing of a complaint for age discrimination when the plaintiff paid the filing fee 109 days after the court denied his in forma pauperis request and 279 days after his right to sue letter was issued. In its analysis, the court considered policy considerations in the ADA context not present in McDowell.69
This matter is closer to Brechin than to McDowell. Mr. Barr claims to have attempted to file the Barr Motion, or some version of it, on two occasions in 2015. Notwithstanding the Clerk’s refusal to docket the motion, he waited over a year to follow up on the filing, apparently prompted by the ALJ’s Order to Show Cause. In the meantime, HireRight confirmed a plan and received its discharge. Mr. Barr seeks to have the court recognize his prior attempts to file a motion for relief from stay or to have the Barr Motion deemed constructively filed in 2015 so that he can argue that the automatic stay was terminated in 2015 by operation of law and he can proceed with the STAA Action, But, *264even assuming that the discharge injunction did not trump any previous termination of the automatic stay, permitting the Barr Motion to relate back under these circumstances would not be in keeping with McDowell. In McDowell and Brechin, the court examined the concept of constructive filing in the context of a possible forfeiture of a cause of action due to an expired statute of limitations and came to different conclusions based on the facts of their respective cases. Here, if I permitted constructive filing to 2015 and credited Mr. Barr’s argued concomitant termination of the automatic stay, it is HireRight and creditors of HireRight’s estate that would forfeit rights.70
Further, even if the Court were to recognize that the Barr Motion was filed in 2015, it was not scheduled for a hearing. Accordingly, the thirty-day period, to the extent it applies to this type of motion for relief from stay,71 did not begin to run and the automatic stay did not terminate as a *265result of inaction on any motion that should have been accepted by the Clerk in 2015.72
Conclusion
Having considered all of Mr. Barr’s arguments, and having addressed those I believe have some merit, I am denying the Barr Motion. All of the relief he seeks in the non-bankruptcy for a has been discharged by virtue of the Confirmation Order and section 1141 of the Bankruptcy Code, other than the ability to obtain a correction of his DAC Report, which is not a “claim” as that term is used in section 101(5). An order will follow.
. D.I. 1220.
. Because Mr. Barr is proceeding pro se, I will construe the Barr Motion liberally. At the same time, I will address only arguments actually presented. Boyd v. Russo, 536 Fed. Appx. 203, 205 n.1 (3d Cir. 2013) (per cu-riam).
. Reorganized Debtors’ Objection to Motion of Alfred Barr to Lift the Automatic Stay or in the Alternative to Annul or Modify the Automatic Stay for HireRight Solutions, Inc. ("HireRight Objection”), D.I. 1245.
. 11 U.S.C. § 362(b)(4) Memorandum of Law in Support of Petitioner's Motion for an Order for Relief from Automatic Stay and Evidence in Support ("Barr Memorandum of Law”). D.I. 1278,
.Tr„ Sept. 21, 2016, D.I. 1259.
. Hr'g Tr„ Nov. 9, 2016, D.I. 1285.
. D.I. 1284.
. Declaration of Jeffrey Campbell, President and Chief Financial Officer of Altegrity, Inc,, in Support of Chapter 11 Petitions and First Day Pleadings ¶ 6, D.I. 15.
. D.I. 127.
. D.I. 240 (the "Schedules”).
. D.I. 305 Ex. F-4, at 1.
. D.I. 238.
. D.I. 359 Ex. F, at 5.
. Hr’g Tr„ Nov. 9, 2016 25:24-26:8.
. D.I. 835 (Confirmation Order attaching Plan as Exhibit A).
. Disclosure Statement for the Joint Chapter 11 Plan of Altegrity, Inc., et al., D.I. 516) at 9.
. D.I. 565 Ex. A, at 56.
. D.I. 921 Ex. C, at 21.
. The complaint was not provided. The history of this matter is found in Barr v. CTL Transportation, LLC, 2014-STA-00022, AU’s Denial of Motions for Summary Judgment/Decision (Dep’t of Labor Sept. 3, 2014) (“ALJ 9/3/14 Decision”), Barr Memorandum of Law Ex. C.
. Investigation, 29 C.F.R. § 1978.104.
. November 22, 2013 Letter of Dep’t of Labor, OSHA, Atlanta Reg’l Div to Alfred Barr ("11/22/13 Letter”), HireRight Objection Ex. C, At argument, Mr. Barr asserted that the local office violated its policy in sending this letter and complained that the investigation was deficient in multiple ways. Hr'g Tr., Nov, 9, 2016 28:2-29:10. But, there is nothing in his submissions to support Mr. Barr’s contention, and, this finding is also noted subsequently in the ALJ 9/3/14 Decision.
. February 13, 2013 Letter of Alfred Barr to Dep’t of Labor, OSHA, Atlanta Reg’l Div., HireRight Objection Ex. B. See also ALJ 9/3/14 Decision.
. Id.
. ALJ 9/3/14 Decision 2-3. Blacklisting is “when an individual or a group of individuals acting in concert disseminates damaging information that affirmatively prevents another person from finding employment.” Timmons v. CRST Dedicated Services, Inc., 2014 WL 4966171, at *3 (Dep’t of Labor Admin. Review Bd. Sept. 29, 2014).
. See id.
. Barr v. CTL Transportation, LLC, 2014-STA-00022, ALJ’s Approval of HireRight Solutions, Inc., as Named Respondent & Continuance Order, at *3 (Dep’t of Labor Mar. 31, 2014), HireRight Objection Ex. D.
. Id. at *6.
. Id.
. Barr v. CTL Transportation, LLC, 2014-STA-00022, ALJ’s Order to Show Cause Why Complainant’s Action Against HireRight Solutions Should not. be Dismissed and Order Holding Case in Abeyance Against Remaining Respondents Lifted (Dep't of Labor June 26, 2016), Barr Motion Ex. E.
.' Id.
. Stipulated Final Judgment and Order for Civil Penalties, Permanent Injunction, and Other Equitable Relief, Barr Memorandum of Law Ex. B.
. Barr Motion 10-11.
. U.S. v. HireRight Solutions, Inc., Civ. No. 12-1313 (D.D.C. Aug. 28, 2012) (Docket).
. Consistent with this treatment, in connection with the In Forma Pauperis Motion, I determined that no fee was required because the current motion should be treated as a motion for relief from the discharge injunction, not a motion for relief from the stay. Tr. 14:13-20, Sept. 21, 2016. The Debtor treated the motion in the same manner. See Hire-Right Objection 2 n.4. See In re Gibellino-Schultz, 446 B.R. 733, 738-739 (Bankr. E.D. Pa. 2011) (“Rather than have the parties undergo [unnecessary] time and expense, and with their consent, I shall treat the instant motion as having sought relief from the scope of section 524(a)(2).”). Some courts .have held that the court cannot grant relief from the discharge injunction, but can only construe it. See, e.g., Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546 (9th Cir. BAP 2002). For purposes of this decision, the distinction does not make a difference sis I am denying the relief sought as to all “claims” held by Mr. Barr and finding that the discharge injunction does not apply as to relief sought that is not a “claim."
.11U.S.C. § 362(c)(2)(C).
. While not clear that Mr, Barr made this request, in this context I would not grant Mr. Barr relief from the discharge injunction in order to recover a monetary judgment outside of the bankruptcy distribution process.
. 11 U.S.C. § 362(b)(4) (emphasis added). See also Brock v. Morysville Body Works, Inc., 829 F.2d 383, 388 (3d Cir. 1987) (‘‘[Section 362(b)(4)] exempts from the automatic stay equitable actions brought by state and federal agencies to correct violations of regulatory statutes enacted to promote health and safety” (emphasis added)).
. 11 U.S.C. § 101(27). Assuming that the party seeking to fall within the exception is a governmental unit, then courts apply one of two objective tests to determine whether the exception applies—the pecuniary interest test or the public policy test. The pecuniary interest test “asks whether the governmental proceeding relates principally to the protection of thé government’s pecuniary interest in the debtor's property, rather than to its public policy interest in the general safety and welfare. In the former situation, the action is not exempt from the stay.” The public policy test determines “whether the government seeks to ‘effectuate public policy’ or ‘adjudicate private rights.’ ” In re The Fairchild Corp., 2009 WL 4546581, at *4 (Bankr. D. Del. Dec. 1, 2009).
.Cf. U.S. ex rel. Minge v. Hawker Beechcraft Corp. (In re Hawker Beechcraft, Inc.), 515 B.R. 416 (S.D.N.Y. 2014) (discussing U.S. ex rel. Fullington v. Parkway Hosp., Inc., 351 B.R. 280, 290 (E.D.N.Y. 2006)) (Southern District of New York has recognized that individual qui tarn relators under the False Claims Act "are not a domestic governmental unit and thus cannot invoke certain statutory privileges reserved to such governmental units, including the 'police power' exception to the automatic s¡tay under 11 U.S.C, § 362(b)(4).”).
. See generally 11 /22/13 Letter.
. Order to Show Cause 2 n.2. The ALJ further states that, "The Secretary of Labor must have a prosecutorial role for the exemption to apply," citing to Davis v. United Airlines, Inc., 2003 WL 21269147 (Dep’t of Labor Admin. Review Bd. May 30, 2003), which in turn cites to an order from the Secretary of Labor, Torres v. Transcon, No. 90-STA-29 (Dep’t of Labor Sec’y Jan. 30, 1991).
. 11 U.S.C. § 1141(d). -
. 11 U.S.C. § 524(a)(2),
.Fed. R. Bankr, P. 3003(c)(2); In re Acevedo, 441 B.R. 428, 435 (Bankr. S.D.N.Y. 2010).
. Cf. In re Londrigan, 2014 WL 4384368, at *8 (Bankr. C.D. Ill. Sept. 3, 2014) (After receiving his discharge, debtor sought to continue an appeal in state court from a Financial Industry Regulatory Authority ("FINRA”) arbitration decision. Ruling that the debtor’s license could not be affected by the adverse finding in the FINRA arbitration, the court denied the debtor’s request for relief from the discharge injunction (originally brought as a motion for relief from stay) because ”[t]he *260debtor/creditor relationship between [the debtor and the creditor] was fully resolved by the issuance of the Debtor’s discharge and the resulting discharge injunction. There is simply nothing left to litigate in the state court.”).
. 11 U.S.C.S 101(5).
. See In re Kaiser Aluminum Corp., 386 Fed. Appx. 201, 203-05 (3d Cir. 2010) (citing In re Ben Franklin Hotel Assocs., 186 F.3d 301, 303 (3d Cir. 1999)).
. Hr’g Tr„ Nov. 9, 2016 27:5-28:1. It is Mr. Barr’s understanding that if the AU determines that there are violations of the statute, he would then proceed to the district court for monetary relief.
. 11 U.S.C. § 31105(b)(3). See also Understanding the Surface Transportation Assistance Act (STAA), Part380.com, http://part380.com/ blog/2015/07/21/understanding-the-surface-transportation-assistance-act-stta (last visited Nov. 15, 2016).
. Air Line Pilots Ass’n v. Continental Airlines (In re Continental Airlines), 125 F.3d 120, 135-36 (3d Cir. 1997) (analogizing the remedy of seniority integration to reinstatement and finding monetary damages an appropriate alternative in both instances).
. It does not appear that referral to the Department of Justice or a further investigation are remedies under the STAA, but I am not ruling on the propriety of any further *261investigation that OSHA may deem appropriate or any referral that the ALJ may make to the Department of Justice.
. See In re Ben Franklin Hotel Assocs., 186 F.3d 301, 306 (3d Cir. 1999); In re Stone Res., Inc., 458 B.R. 823, 833 (E.D. Pa. 2011), vacated on other grounds, 482 Fed.Appx. 719 (3d Cir. 2012).
. Ben Franklin, 186 F.3d at 306-07 (recognizing the common practice of seeking alternative relief).
. See Stone Res., 458 B.R. at 833 (“Monetary damages are not a viable alternative as Appellant is continuously harmed by Appellee's breach of the non[-]compete provision.”). Indeed, as recognized by HireRight’s counsel at argument, if the reorganized HireRight violates any law related to Mr. Barr’s DAC Report post-confirmation, Mr. Barr is free to seek whatever relief he deems appropriate.
. Timmons v. CRST Dedicated Services, Inc., 2014 WL 4966171 (Dep't of Labor Admin. Review Bd. Sept. 29, 2014).
. Canter v. Maverick Transp., LLC, 2012 WL 2588598 (Dep’t of Labor Admin. Review Bd. June 27, 2012). See also News Release, U.S. Dep’t of Labor, U.S. Labor Department's OSHA Orders Missouri Trucking Company to Pay More Than $100,000 to Blacklisted Driver From New Jersey, 2014 WL 31417 (Jan. 6, 2014) (noting that OSHA is ordering lost wages, interest, compensatory damages for pain, suffering, emotional distress and loss of home and property, punitive damages, and expungement of the complainant’s employment and DAC Report for violation of the STAA).
. In re Udell, 18 F.3d 403, 409 (7th Cir. 1994) (holding that equitable relief is not a "claim” when award of injunction and liquidated damages are cumulative and not alternative, or address entirely separate remedial concerns).
. Mr. Barr submitted return receipts showing that both the Clerk’s office and the Office of the United States Trustee received documents from Mr. Barr on August 19, 2015. Barr Motion Ex. .D. Although he stated that he has similar return receipts for documents alleged to be sent to the Clerk’s office in April 2015, Mr. Barr did not append these documents as exhibits to the instant motion or his post-hearing filing.
. See Bankruptcy Courts Miscellaneous Fee Schedule ¶ 19, USCourts.gov, http://www. uscourts.gov/services-forms/fees/bankruptcy-court-miscellaneous-fee-schedule (last visited Nov. 15, 2016). As per Local Rule 1006(e), a schedule of fees also appears on the Clerk's website at http://www.deb.uscourts.gov/.
. Mr. Barr recounted in his filing titled In Forma Pauperis Motion/Requested to Waive Filing Fees (“In Forma Pauperis Motion”) that after researching rules and statutes he has not found any reference to a filing fee. D.I. 1222. Mr. Barr further recounts that on August 11, 2016, an administrator and supervisor from the Clerk’s office contacted him to inform him of the necessary $176 filing fee, but could not cite him to a rule or statute for the fee. He also recounts that the supervisor suggested that Mr. Barr file a motion in forma pauperis to excuse the filing of the fees and also that the Clerk could not docket the Barr Motion without either the required fee or motion. Ultimately, Mr. Barr filed the In For-ma Pauperis Motion.
.Mr, Barr also filed Certificates of Service showing service on HireRight’s counsel, Young Conaway Stargatt and Taylor, by email, but counsel stated to the Court that they did not receive any motions by email, including the instant motion. Mr. Barr did not purport to serve the Official Committee of Unsecured Creditors appointed in this case. See Fed. R. Civ. P. 4001(a).
. Del. Bankr. L.R. 4001-l(b). In his filings, Mr. Barr shows familiarity with Rule 4000-1. See, e.g., In Forma Pauperis Motion.
. Del. Bankr. L.R. 40014(b).
. See Patterson Dental Supply v. Hochhauser (In re Hochhauser), 2002 WL 1232933 (Bankr. W.D. Tenn. June 5, 2002) (under Bankruptcy Rule 5005(a)(1), the clerk of the court was obligated to accept a filing even though the payment of the filing fee was not in an appropriate form).
. 88 F.3d 188, 191 (3d Cir. 1996).
. In Beal Bank SSB v. Brown (In re Brown), the Bankruptcy Court for the Western District of Pennsylvania applied McDowell to determine that a Chapter 7 petition was filed before "the hammer fell” on a sheriff’s sale. 311 B.R. 721, 727-28 (Bankr. W.D. Pa. 2004).
. 28 F.Supp.2d 209, 211 (D. Del. 1998).
. Id.
. As the Third Circuit noted, section 362 is intended to benefit both the secured creditor and the debtor. See generally In re Wedgewood Realty Group, Ltd., 878 F.2d 693, 701 (3d Cir. 1989) (reversing the order of the district court and finding that the automatic stay was terminated by operation of law, but without prejudice to the right of the debtor to apply for relief to re-impose the stay under section 105 of the Bankruptcy Code).
. While not briefed, it is unclear whether there was a thirty-day clock on any motion Mr. Barr attempted to file for relief from stay in 2015. Section 362(e)(1) provides that "[tjhirty days after a request under subsection (d) of this section for relief from the stay of any act against property of the estate under subsection (a) of this section, such stay is terminated with respect to the party in interest malting such request” except in certain circumstances. 11 U.S.C. § 362(e)(1) (emphasis added). In turn, section 362(d)(2) addresses stays of "acts against property" (presumably either of the estate or the debtor), ■ but section (d)(1), which permits relief from stay for cause, does not use those words. And, distinctions are also made in section 362(a). Compare § 362(a)(1) (staying actions and proceedings "against the debtor”) and § 362(a)(5) (staying actions regarding liens "against property of the debtor”) with § 362(a)(2) (staying the enforcement of pre-petition judgments "against the debtor or against property of the estate"), § 362(a)(3) (staying actions to obtain possession “of property of the estate”) and § 362(a)(4) (staying actions regarding liens "against property of the estate”).
Further, the advisory committee’s original note to Bankruptcy Rule 4001 with regard to section 362(e) suggests there may not have been a running clock in this case: “the expressed legislative intent is to require expeditious resolution of a secured party’s motion for relief” Fed. R. Bankr. P. 4001(b) advisory committee's note (emphasis added). As does the Third Circuit:
Section 362, however, also provides two significant statutory protections for secured creditors. First, under section 362(d), a secured creditor may request the bankruptcy court to grant it relief from the automatic stay by nullifying, terminating, modifying, or conditioning the stay. Second, to prevent unnecessary delays and adverse effects on the bankrupt estate’s assets and the rights of secured creditors which had historically been occasioned by inaction of the bankruptcy courts, the Code also provides stringent time constraints in which a court must hold hearings and issue orders respecting the continuation of the automatic stay. 11 U.S.C.A. § 362(e) and Bankruptcy Rule 4001(a)(2). A violation of these time constraints results in automatic termination of the stay. 11 U.S.C.A. § 362(e) and Bankruptcy Rule 4001(a)(2); see also Bankruptcy Reform Act of 1978, H. Rep. No, 95-595, 2d Sess. 344 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6300.
Wedgewood, 878 F.2d at 697 (emphasis added); see also In re Small, 38 B.R. 143, 147 (Bankr. D. Md. 1984) (the thirty-day period was intended only to apply to secured creditors asserting interests in real property or non-consumer personalty). Here, Mr. Barr is not a secured creditor asking for relief from the stay to foreclose on property or continue foreclosure litigation. Rather, the request for relief from stay sought to continue prepetition litigation unrelated to any property of the estate.
. There is no time requirement on a hearing on a motion for relief from the discharge order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500195/ | OPINION ON CONFIRMATION OF THE DEBTORS’ MODIFIED FIRST AMENDED PLANS OF REORGANIZATION AND LIQUIDATION
KEVIN J. CAREY, UNITED STATES BANKRUPTCY COURT
Before me for consideration is confirmation of the Debtors’ Modified First Amend*269ed Plans of Reorganization and Liquidation (the “Plan”), a critical component to the global reorganization of Abengoa, S.A. (“Abengoa” or “Parent”).2 The debtors have resolved virtually all objections to confirmation of the Plan. Only two remain: the United States Trustee’s objection concerns the breadth of the “debtor releases” and the “third-party releases;” the other is by Portland General Electric Company (“PGE”), an Oregon public utility, who has raised almost every conceivable classic confirmation objection to the Plan.3
For the reasons that follow, the Plan will be confirmed.
Background
Abeinsa Holding, Inc. and certain affiliated debtors filed voluntary chapter 11 petitions on March 29, 2016. Additional affiliated entities filed chapter 11 petitions on April 6, April 7 and June 12, 2016. The chapter 11 cases are jointly administered for procedural purposes.
On April 13, 2016, the Office of the United States Trustee formed the Official Committee of Unsecured Creditors (the “Creditors’ Committee”).
Abengoa, S.A.
The Debtors are ultimately owned by Abengoa, S.A., which is “a Spanish company founded in 1941 [that is] a leading engineering and clean technology company, which together with its consolidated subsidiaries, has operations in more than 60 countries.”4 As of the end of 2015, Abengoa was the parent company of approximately 700 other companies around the world, including 577 subsidiaries, 78 associates, 31 joint ventures, and 211 Spanish partnerships, employing 35,000 people (collectively, the “Abengoa Group”).5
With investments of $3.3 billion, the United States has become one of Aben-goa’s largest markets in terms of sales volume, particularly from developing solar, bioethanol and water projects.6 The Debtors’ business operations can be categorized into (i) bioenergy projects; (ii) engineering, procurement and construction companies; and (iii) a solar company.7
The Spanish Proceeding
Abengoa and certain affiliates (the “5 bis Companies”) filed notices with the Mercantile Court of Seville, Spain (the “Spanish Court”) that they had commenced negotiations with their principal creditors to reach a global settlement on the refinancing and restructuring of their liabilities to achieve the viability of the Abengoa Group in the short and long term.8 The Spanish Court issued orders admitting the notices and granting the Article 5 bis Companies protection under the Spanish Insolvency Law.9
Abengoa negotiated with creditors to restructure the financial indebtedness and recapitalize the Abengoa Group (the “Restructuring Proposal”). To provide the Abengoa Group with sufficient time to solicit and obtain the requisite supermajority votes with respect to the Restructuring Proposal, several Abengoa Group companies asked financial creditors to adhere to a standstill agreement, under which the *270financial creditors agreed to stay certain rights and actions vis-á-vis the relevant Abengoa Group companies during a period of several months.10 When the standstill agreement was signed by at least 60% of the Company’s various financial creditors, the Abengoa Group applied for judicial approval (or homologation) of the standstill agreement pursuant to the Spanish Insolvency Law, so that the standstill agreement would become binding upon all relevant financial creditors of the 5 bis Companies.11 On April 6, 2016, the Spanish Court issued the Homologation Order.
Due to the passage of time, a new ho-mologation request was made and the process taking place in Spain was, essentially, restarted. On September 24, 2016, Aben-goa and certain, subsidiaries entered into a Master Restructuring Agreement (the “MRA”) with certain creditors in Spain.12 The MRA provides that certain “Go Forward Companies” will be reorganized, including the “Go Forward Chapter 11 Companies.” 13 The MRA also provides that the Non-Go Forward Chapter 11 Companies will be liquidated under chapter 11 plans of liquidation.14 Various creditors have challenged the Homologation Order, which Spanish Court will consider and then determine whether the Abengoa Group should proceed with the restructuring.15
The Chapter 15 Cases
On March 28, 2016, Abengoa and twenty-four affiliated Spanish companies filed chapter 15 petitions in this Court. On April 27, 2016, I entered an order recognizing the Spanish Proceeding as a foreign main proceeding.16 On December 8, 2016, I entered an Order recognizing the Spanish Court’s Homologation Order.17
The Debtors’ Chapter 11 Plans and Disclosure Statement
On September 26, 2016, the Debtors filed a Disclosure Statement and the Debtors’ Plans of Reorganization and Liquidation. On September 29, 2016, the Debtors filed the Motion for Entry of an Order (A) Approving the Disclosure Statement, (B) Establishing Procedures for the Solicitation and Tabulation of Votes to Accept or Reject the Plan, (C) Approving the Forms of Ballot and Solicitation Materials, (D) Establishing Voting Record Date, (E) Scheduling Confirmation Hearing and Setting the Deadline for Filing Objection to Confirmation of the Plan, and (F) Approving the Related Forms of Notice (the “Disclosure Statement Motion”).
Various creditors and the United States Trustee filed numerous objections to the Disclosure Statement Motion. After negotiations, a series of hearings (some held in Court and some held telephonically), and revisions to the documents, the Debtors presented the Court with revised documents and a consensual Order approving the Disclosure Statement Motion. I entered that Order on October 31, 2016 (D.I. 746). Thereafter, the Debtors sent the solicitation packages to Holders of Claims.18
More than twenty parties filed objections and informal comments to the Debtors’ Plan. The votes were received and tallied and, prior (some just prior) to the *271hearing on confirmation, the Debtors resolved most of the objections to the Plan, so that only the PGE and the U.S. Trustee objections remained. The confirmation hearing was held on December 6, 2016. At the hearing, the Debtor submitted into evidence five of six declarations in support of plan confirmation: 19
(1) Declaration of Christina Pullo of Prime Clerk LLC Regarding the Solicitation of Votes and Tabulation of Ballots Cast on Debtor’s Modified First Amended Plans of Reorganization and Liquidation (D.I. 944);
(2) Declaration of Sebastian Felicetti in Support of Confirmation of the Debtors’ Modified First Amended Plans of Reorganization and Liquidation (D.I. 957);
(3) Declaration of Jeffrey Bland in Support of Confirmation of the Debtors’ Modified First Amended Plans of Reorganization and Liquidation (D.I. 967);
(4) Declaration of William H. Runge III in Support of Confirmation of the Debtors’ Modified First Amended Plans of Reorganization and Liquidation (D.I. 972);
(5) Declaration of Samuel E. Star in Support of Confirmation of the Debtors’ Modified First Amended Plans of Reorganization and Liquidation (D.I. 975); and
(6)Supplemental Declaration Christina Pullo of Prime Clerk LLC Regarding the Solicitation of Votes and Tabulation of Ballots Cast on Debt- or’s Modified First Amended Plans of Reorganization and Liquidation (D.I. 981).
The Declarants were subject to cross-examination by the objecting parties. No other evidence was submitted by PGE or the U.S. Trustee in support of their objections. At the Court’s request, the parties filed post-hearing submissions in support of their positions for and against confirmation.
The Plan
The Plan is a single document composed ■ of four different plans: two are plans of reorganization and two are plans of liquidation. The following four debtor groups each will be partially substantively consolidated:
(1) EPC Reorganizing Debtors: 20
(2) Solar Reorganizing Debtor: 21
(3) EPC Liquidating Debtors: 22
(4) Bioenergy and Maple Liquidating Debtors: 23
*272The classes in the EPC Reorganizing Debtor Plan (which are set forth here because most of the objections pertain to this plan) are as follows:
• EPC Reorganizing 1—Secured Claims
• EPC Reorganizing 2A—Priority Tax Claims
• EPC Reorganizing 2B—Other Priority Claims
• EPC Reorganizing 3A—MRA Affected Debt Claims
• EPC Reorganizing 3B—US Debt Claims
• EPC Reorganizing 4—General Unsecured Claims
• EPC Reorganizing 5—Litigation Claims
• EPC Reorganizing 6—Debt Bonding Claims
• EPC Reorganizing 7A—Intercompa-ny Claims by non-debtor affiliates
• EPC Reorganizing 7B—Intercompa-ny Claims by Debtor affiliates
• EPC Reorganizing 8—Equity Interests
As part of the MRA, and in order to continue with the global restructuring, and to facilitate the Debtors’ exit from chapter 11, Abengoa is proposing to fund the Plans for the Debtors’ reorganization and liquidation, as applicable, as follows: 24
(i)With respect to the EPC Reorganizing Debtors, Abengoa will contribute $23 million in Cash, which is anticipated to be provided by the New Money Financing Providers in connection with the MRA. Of that amount, $20 million will be contributed to the EPC Reorganization Distribution, and $3 million will fund an advance to the Litigation Fund to prosecute claims, provided that the $3 million will revert back to Abengoa after the Litigation Trust has obtained a net recovery of more than $28 million;
(ii) Abengoa will gift the proceeds of Solar as follows (i) $65 million for a Surety Reserve for beneficiaries of Holders of Allowed Claims in EPC Reorganizing Debtors Class 6 (Debt Bonding Claims) and Solar Reorganizing Debtor Class 6 (Debt Bonding Claims), and (ii) an additional $4 million with respect to the EPC Reorganizing Debtors;
(iii) Abengoa will contribute $750,000 under each of the EPC Liquidating Plan and the Bioenergy and Maple Liquidating Plan; and, from the proceeds of Solar, Abengoa will gift an additional $1 Million for the EPC Liquidating Plan.25
Plans of Reorganization
From and after the Effective Date, the Reorganizing Debtors and the Creditors’ Committee will consult and select a “Responsible Person,” to act in the name of the Reorganized Debtors and administer the Reorganizing Plan. The EPC Reorganizing Debtors, in consultation with the Creditors’ Committee, will also establish a Litigation Trust for the purpose of prosecuting, compromising, and resolving the Litigation Causes of Action.
Plans of Liquidation
By the Effective Date, the EPC Liquidating Debtors and the Bioenergy and Maple Liquidating Debtors, in consultation with the Creditors’ Committee, will execute the respective Liquidating Trust Agreements, appointing the respective Liquidating Trustees.
Voting
The Supplemental Declaration of Christina Pullo, which reports the tabulation of votes for the Plans, reflects the *273changes that occurred after the Debtors, resolved the objections filed by sureties RLI Insurance Company, Zurich American Insurance Company, and Liberty Mutual Insurance Company, who then changed their votes from “rejecting” to “accepting” the Plans. As a result of the change, all classes entitled to vote have now accepted the Plans, except for the EPC Reorganizing Class 5 (Litigation Claims), which rejected the Plan. Although the votes of Class 5 (Litigation Claims) were cast 8 to 5 (or 61.54%) in favor of the Plan, the class clearly rejected the Plan based on the claim amounts, ie., $4.1 million in claims accepted, but over $134.9 million (or 97% of the claim amounts, dominated by the claim of Portland General Electric Company for $102 million) rejected the EPC Reorganizing Plan.
The EPC Liquidating Plan, the Bioener-gy Liquidating Plan and the Solar Reorganizing Plan were each accepted by all classes entitled to vote on those plans.
The Objections
I address first the objections of PGE.
(A) PGE Objections
As the result of a pre-petition competitive bidding process, PGE selected four of the EPC Reorganizing Debtors for the construction of the Carty Project, which consists of an energy generation facility in Oregon.26 After a dispute over progress and payment milestones on the project, PGE terminated the contract on December 18, 2015. Abengoa, as guarantor, commenced arbitration against PGE and joined the relevant EPC Reorganizing Debtors (the “Carty Debtor-Contractors”) and Sureties. On February 29, 2016 PGE commenced an action in the United States District Court for the District of Oregon against Abengoa, accompanied by a motion for a preliminary injunction to bar Aben-goa from pursuing the arbitration. The District Court action was stayed, first on a provisional basis, then on a final basis, in accordance with Orders entered in Aben-goa’s Chapter 15 case.27 On October 6, 2106, I granted PGE’s motion for relief from the stay to commence and prosecute to final judgment an action against the Carty Debtor-Contractors. On October 21, 2016, PGE commenced litigation in the United States District Court for the District of Oregon against those debtors.
The Creditors’ Committee asserts that PGE’s plan objections are part of its litigation strategy designed, in part, to force the Debtors into concessions by increasing the cost and the time the Debtors are required to devote to confirmation, and the inconvenience they must incur as a result. Counsel said it this way:
I think the reason PGE is the only party here today still left to object is that everybody else who is involved in this case had something to lose.... The Debtors obviously have an incentive to confirm their plan and to try to preserve businesses, so everybody had something to lose, but I don’t think PGE really did. Here’s why that is. .
PGE ... is prosecuting claims. You’re well aware of those, I won’t belabor them but ... what’s behind them? So, they’ve got ... a- bond from Liberty Zurich that’s somewhere north of $140-million dollars.' So, worse case for them, they’re getting, you know, 140 if they’re right. On top of that, they’ve got claims against Spain directly. Those claims against Spain directly are—looks like they’re going to be treated as non-financial claims. They’re trade claims. Under the terms of the Spanish restructuring, *274those trade claims are not affected. They’ve actually made some good progress in Spain trying to make sure that that is, in fact, the case. If that’s right, they’re going to recover, either from the surety bonds or from Spain or from some combination of the two, and they’re going to get out in whole with whatever their actual exposure is, and we don’t have to debate what that exposure is, but they get paid off.
[I]t strikes me that ... they have nothing to lose, if they object to the plan and because it’s so important that the US plans get confirmed as part of—as a key part of the MRA going forward, it gives them some leverage, and maybe that leverage makes somebody give them something to make them stop arguing.28
PGE’s claims are classified as part of the EPC Reorganizing Class 5 Litigation Claims. Therefore, I will review the objections in relation to the EPC Reorganizing Plan.
(1) Gerrymandering.
PGE alleges that the Plan violates Bankruptcy Code § 1122, arguing that the Debtors gerrymandered the classification of unsecured claims in the EPC Reorganizing Plan to create an impaired consenting class. The Debtors responded that the Plan separately classifies claims and equity interests based on differences in the legal nature and/or priority of the claims or equity interests.29
Section 1122(a) of the Bankruptcy Code provides that “a plan may place a claim or an interest in a particular class only if such claiml or interest is substantially similar to the other claims or interests of such class.” 11 U.S.C. § 1122(a). Section 1122(a) is mandatory in one respect: only substantially similar claims may be classified together. Yet, section 1122(a) is permissive in this respect: it does not provide that all similar claims must be placed in the same class.30
Although plan proponents have discretion to classify claims, they do not have complete freedom to place substantially similar claims in separate classes.31 The classification of claims or interests must be reasonable and cannot be grouped together for arbitrary or fraudulent purposes.32
The Debtors’ classification scheme is neither arbitrary nor fraudulent. It is reasonable for the Debtors to place claims related to significant, on-going litigation in a separate class. Moreover, the record does not support a finding that the classes were established with the intent to create an impaired- accepting class. Even before the sureties changed their votes, there were three impaired classes that accepted *275the EPC Reorganizing Plan. With the sureties’ resolution, there are currently four impaired classes accepting the Plan.
(2) Best interests of creditors test
PGE argues that the Debtors have failed to prove that the Plans meet the best interests of creditors test under Bankruptcy Code § 1129(a)(7)(A) by demonstrating that each non-accepting creditor will receive at least as much under the Plan as it would receive in a chapter 7 liquidation. The Debtors provided a liquidation analysis for each group of Debtors attached as Exhibit C to the Disclosure Statement. With respect to the EPC Reorganizing Debtors, the liquidation analysis projects that unsecured creditors could expect a distribution of approximately only 1.0% of their claims in a chapter 7 liquidation, whereas the unsecured creditors are projected to receive a distribution of approximately 12.5% of their claims under the chapter 11 Plan.33
PGE asserts that the Debtors’ liquidation analyses do not contain a meaningful discussion of intercompany claims and, therefore, do not present sufficient facts to determine whether the requirements of § 1129(a)(7)(A) are met. Further, PGE claims that Solar is 100% owned by Aben-goa U.S. Operations, LLC (one of the EPC Reorganizing Debtors) and has a net worth of approximately $30 million that is not accounted for in the liquidation analysis.
The notes to the liquidation analysis for the EPC Reorganizing Debtors state that the chapter 7 analysis assumes a recovery on intercompany receivables and cash deposited in the Central Treasury to be between 0% and 3%. The chapter 11 analysis does not include any recovery on intercom-pany claims, but the chapter 11 analysis assumes a cash injection of $20 million that would not be available in a chapter 7 liquidation.34
The big difference in the liquidation analysis comes from the estimated amount of unsecured claims. The chapter 7 analysis includes estimated unsecured claims of $8,499,853,000; while the chapter 11 analysis estimates unsecured claims of $427,332,000. The notes explain that the chapter 7 analysis includes “intercompany liabilities and guarantees on multiple tranches of Parent company debt amounting to approx. $6.8 billion.”35 Certain EPC Reorganizing Debtors are guarantors on Notes issued by Abengoa, Abengoa Finance, S.A.U., and Abengoa Greenfield, S.A.36 If the partial substantive consolidation as set forth in the Plan is not approved, then the intercompany claims will not be discharged and will have to be addressed along with all other claims against the applicable Debtor.37 The magnitude of the intercompany claims is significant and clearly affects the liquidation analysis.38
No evidence has been offered to rebut or cast any doubt on the chapter 7 liquidation analysis. The liquidation analysis shows that creditors of the EPC Reorganizing Debtors will receive more under the proposed Plan than in a chapter 7 liqui*276dation. The Debtors' have satisfied the requirement of Bankruptcy Code § 1129(a)(7).
(3) Feasibility
Bankruptcy Code § 1129(a)(ll) requires the Court to determine 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.” “Feasibility does not require that success be guaranteed but rather only a ‘reasonable assurance of compliance with plan terms.’ ”39
In his Declaration, Runge testified that the EPC Reorganizing Plan is feasible because the distributions to creditors will be made from the EPC Reorganizing Distribution, which consists of the New Value Contribution from Abengoa, together with interests in existing assets and litigation claims.40 The distributions to creditors are not in any way dependent on the future operations of the EPC Reorganizing Debtors, which will continue on a smaller scale.
PGE’s feasibility objection, however, asserts that the Plan does not contain any protections to ensure that the funds designated for the prepetition creditors .will not be subject to claims arising out of the EPC Reorganizing Debtors’ post-confirmation operations or will not be used by the Debtors to fund their post-confirmation operations.
However, the EPC Reorganizing Plan establishes a Disputed Claim Reserve, managed by the Responsible Person, who retains an amount estimated as necessary to fund the pro rata share of distributions to Holders of Disputed Claims, if such claims are allowed.41 An unliquidated or contingent Disputed Claim will be reserved in an amount reasonably determined by the Responsible Person.42 Further, Star’s Declaration states that the Committee’s negotiations resulted in increased oversight and control over the Responsible Person43 PGE argues that the Disputed Claim Reserve should hold the full face amount of the claim until an estimation proceeding can be held. In my experience, that would be highly unusual. Moreover, there is no basis in the record that would make such a requirement necessary. I conclude that the provisions for a Disputed Claim Reserve set forth in the EPC Reorganizing Plan are reasonable and provide protection to the Holders of Disputed Claims. The record before me supports the feasibility of the Plan.
(4) Cram Down/Absolute Priority Rule
Bankruptcy Code § 1129(a)(8) requires that the Debtors’ plan may be confirmed only if each class of claims that is impaired under the plan, accepts the plan. The EPC Reorganizing Debtors Class 5 (Litigation Claims) is impaired and has not voted to accept the Plan.
However, the Bankruptcy Code allows a plan proponent to “cram down” the plan on non-accepting impaired classes under § 1129(b)(1), which provides that:
[I]f all applicable requirements of subsection (a) of this section other than *277paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
To determine whether a plan is “fair and equitable” to the dissenting class of impaired unsecured creditors, Bankruptcy Code § 1129(b)(2) requires that the claims be paid in full or, in the alternative, 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 such junior claim any property.44 The latter condition is known as the “absolute priority rule,”45 Because the EPC Reorganizing Debtors’ Plan provides that Holders of Allowed Equity Interests will retain or have their equity interests reinstated without paying unsecured creditors in full, the Plan violates the absolute priority rule of § 1129(b)(2) (B)(ii).
Some courts, have recognized the “new value exception” or “new value corollary” to the absolute priority rule, which allows junior interests to receive property, not “on account of’ their interests, but in exchange for some other value.46 To invoke the new value exception to the absolute priority rule, the contribution must be (1) new, (2) substantial, (3) money or money’s worth, (4) necessary for a successful reorganization, and (5) reasonably equivalent to the value or interest received.47
The Debtors argue that the Holders of Allowed Equity Interests are providing the New Value Contribution in exchange for retaining or reinstating their Equity Interests. As a result of negotiations between the Debtors and the Creditors’ Committee (which were protracted, arms-length and, at times, contentious), the New Value Contribution has increased from $21.5 million in the initial plan to $38 million.48 The Runge Declaration describes the New Value Contribution:
The Parent will contribute $23 million in Cash, with respect to the EPC Reorganizing Debtors, which funding stems from the financing that is anticipated to be provided by the New Money Financing Providers in connection with the MRA, which includes the following: (i) Cash to fund the EPC Reorganization Distribution in the amount of $20 million, (ii) the first $28 million of Litigation Trust Causes of Action, following an advance of $3 million to the Litigation Fund to prosecute such claims (provided, hoivever, that the $3 million of recoveries resulting from the prosecution of the Litigation Trust Causes of Action will revert back to the parent at such time as the Litigation Trust has obtained a net recovery on the Litigation Trust Causes of Action of more than $28 million dollars ($28,000,000).) In addition, the Parent is gifting proceeds of Solar (i) $6.5 million for a Surety Reserve to beneficiaries of Holders of Allowed Claims in EPC Reorganizing *278Debtors Class 6 (Debt Bonding Claims) and Solar Reorganizing Debtor Class 6 (Debt Bonding Claims); and (ii) an additional $4 million with respect to the EPC Reorganizing Debtors. Additionally, the Parent wall contribute $750,000 under each of the EPC Liquidating Plan and the Bioenergy and Maple Liquidating Plan, and shall gift from the proceeds of Solar an additional $1 million dollars for the EPC Liquidating Plan.49
PGE argues that the New Value Contribution is not “new,” claiming that $30 mil-' lion of the funds used to pay the New Value Contribution come from Solar, which is 100% owned by EPC Reorganizing Debtors. Therefore, PGE argues, the funds already belong to the EPC Reorganizing Debtors. This argument has no support in the record. First, the record reflects that Solar, which (as previously pointed out) is not an EPC Reorganizing Debtor, but is the subject of a separate, stand-alone plan, is contributing only $11.5 million of new value. Second, even if this portion of the New Value Contribution were excised, the remaining portion of the contribution is sufficient to satisfy the exception.50
Mr. Runge’s Declaration provides that the New Value Contribution represents approximately eight percent of the amount of Allowed General Unsecured Claims against the EPC Reorganizing Debtors.51 It is essential to the successful reorganization of the EPC Reorganizing Debtors, as it is the only source of material cash consideration available to provide recoveries to creditors.52 He further testified that the New Value Contribution exceeds any potential value of the Equity Interests, which likely have little or no economic value.53 Mr. Runge further testified that:
[M]y review of the books and records of the EPC Reorganizing Debtors and their operating histories leaves me with the impression that, without the New Value Contributions and going forward financial and operating support of the Abengoa Group, the EPC Reorganizing Debtors would have no value, and should be liquidated. As such, absent the New Value Contribution, the Equity Interests in the EPC Reorganizing Debtors have no or de minimis market value, because without remaining part of the Abengoa Group, the EPC Reorganizing Debtors’ Estates would have little or no value and would be liquidated.54
The New Value Contribution must be viewed in the context of the Plan, including all four of the sub-plans, and the Spanish proceedings as a whole. Without it, the Plan cannot be confirmed and (as discussed in the Best Interests of Creditors Test of § 1129(a)(7)), liquidation of the EPC Reorganizing Debtors would result in less than 1% payment, especially when holders of the guaranty claims of approximately $6.8 billion would be entitled to share in the distribution to holders of unsecured claims.55 No contrary evidence was offered by PGE.
*279The record here supports a conclusion that the New Value Contribution meets the requirements for the new value exception; that is, it is new, substantial, money or money’s worth, necessary for a successful reorganization and reasonably equivalent to the interest being retained.
(5) Substantive Consolidation
Substantive consolidation “treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities (save for inter-entity liabilities, which are erased). The result is that claims of creditors against separate debtors morph to claims against the consolidated surviv- or.” 56 Consolidation restructures (and thus revalues) rights of creditors, and for certain creditors this may result in significantly less recovery.57
Section 1123(a)(5)(C) of the Code provides that a plan shall “provide adequate means for the plan’s implementation,” which may include “merger or consolidation of the debtor with one or more persons.” The Third Circuit has instructed:
In our Court what must be proven (absent consent) concerning the entities for whom substantive consolidation is sought is that (i) prepetition they disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors. Proponents of substantive consolidation have the burden of showing one or the other rationale for consolidation.58
Less often discussed are the principles articulated by the Owens Coming Court which underlie the often-quoted holding. In summary, they are:
1. Absent compelling circumstances, courts should respect corporate separateness.
2. Substantive consolidation is a tool to remedy harms caused by debtors (and entities they control) who disregard separateness.
-3. Mere benefit alone to case administration is not a harm calling substantive consolidation into play.
4. The “rough justice” occasioned by substantive consolidation should be avoided if more precise remedies are available.
5. Substantive consolidation may be used to remedy identifiable harms; it may not be used to disadvantage tactically agroup of creditors or to alter creditor rights.59
PGE argues that the Debtors cannot meet the Third Circuit’s requirements to allow substantive consolidation because the Debtors conceded that they observed corporate formalities and separateness *280prepetition. PGE claims that it is not enough to argue that substantive consolidation is more convenient or practical for the Debtors.
The Debtors provided the Declaration of Sebastian Felicetti, the Treasurer of EPC Reorganizing Debtors Abeinsa EPC LLC and Teyma Construction USA, LLC, in support of the Plans’ partial substantive consolidation with respect to EPC Debtors.60 He testified that the partial consolidation structure of the Plan is the result of a lengthy and wide-ranging analysis of the Debtors’ organizational, operational, and financial history.61 This analysis revealed that many of the significant creditors conducted business, (including extending credit) with certain groups of Debtors as consolidated entities, while other creditors extended credit to a single entity.62 However, the partial substantive consolidation was designed to give effect to the reasonable expectations of the Debtors’ creditors when they engaged in business with various members of the groups.63 Mr. Felicetti noted that the analysis relied upon the following:
(a)Legal Ownership. In order to ensure that the substantive consolidation structure under the Plan is consistent with the legal rights of third parties and is not materially inconsistent with the recoveries attainable under a Separate Entity Plan, the Plan’s partial substantive consolidation structure respects the Debtors’ prepetition ownership structure. Thus, the residual equity of each Debtor group inures to the benefit of the Debtor group that owned the Debtor group prior to the Petition Date.64
(b) Third Party Expectations. The partial substantive consolidation structure provided for under the Plan is also designed to respect the reasonable third party expectations of creditors and third parties. The Debtor identified three principal sets of expectations that they sought to preserve in the partial substantive consolidation structure; (a) the expectations of the lenders under the Debtors’ credit agreements, (b) the expectations of purchasers of Notes, and (c)the expectations of creditors of those Debtors that are project companies. The composition of certain Debtor groups is motivated as well by adherence to the expectations of more than one set of creditors.65
(c) Prepetition Guarantee Obligations. The Debtors’ prepetition credit agreements are each based on the credit of different sets of legal entities .... The lenders under these credit agreements received combined financial reports from the Debtors as to all obligors that were parties to the applicable credit agreements, and calculated financial covenant compliance based on the assets and liabilities of those entities. The ra-*281strictions imposed on the obligors by these credit facilities (e.g., restrictions on the ability to incur additional indebtedness, make certain payments, sell certain assets and grant certain security Equity Interests to third parties) indicate that the lenders under each of these facilities relied upon the collective'identity of their respective borrowers and guarantors when extending credit.66
(d) Consolidation Due to Operational Entanglement. Additional considerations support the Debtors’ contention that certain Debtors are operationally entangled and present a level of integration that adds further support to the proposed partial consolidation structures. For example, although the Debtors had individual management teams and professional resources, the Debtors’ management teams ultimately report to a single entity—the Parent (Abengoa). Moreover, the AEPC Debtors, whose assets and operations comprise the bulk of the substantively consolidating EPC Reorganizing Debtors, -while always under the ultimate control of Parent in Spain, in the U.S. were locally controlled out of the AEPC Debtors’ offices in Phoenix, Arizona.67
Additionally, with respect to certain Debtor groups, certain of the Debtors operated under very similar names and certain of the Debtors were formed as general partnerships under which the general partners are jointly and severally liable for certain obligations. Such prepetition operational entanglements woulcj also impede the formulation of Separate Entity Plans, and further justify the proposed partial consolidation structure provided for under the Plan.68
The proposed partial substantive consolidation of the EPC . Reorganizing Debtors is supported by the Owens Coming principles. The record reflects that no more precise remedy is available. Neither is there any evidence that the Debtors are employing substantive consolidation to disadvantage a group of creditors (including EPC Reorganizing Class 5 (Litigation Claims)) or alter their rights, in particular, those of PGE, which did not demonstrate that it was “adversely affected and actually relied on [the Debtors’] separate existence.”69 I agree with the Debtors that individual plans are not a viable option, in part, because otherwise there would be no $23 million New Value Consideration provided by the Parent (via the New Money Financing Providers) under the global financial restructuring.70 This is a harm (ie possible liquidation with reduced distributions to creditors) avoided by the proposed partial substantive consolidation.
The partial substantive consolidation in the Plans is not an imprecise lumping of assets and creditors together, but the result of careful analysis of ownership, operational entanglements, and creditor expectations based on their pre-petition dealings with the Debtor groups. Attempting to determine each separate entity’s fair share of material liability against debtor groups would be a “difficult, fact-intensive process that would be subject to challenge, and likely cost more than the distributions that could be made to creditors under a Separate Entity Plan.”71 Every class of creditors entitled to vote on the Plans accepted *282the terms, except EPC Reorganizing Class 5 (Litigation Claims), which is dominated by PGE. Accordingly, the creditors overwhelmingly consent to the partial substantive consolidation of the Debtor groups. PGE has provided no rebuttal to the Debtors’ evidence showing that the partial substantive consolidation is unfair, PGE argues only that the Debtors’ evidence is not sufficient. The Debtors’ evidence is sufficient to meet their burden. Most parties consented to the partial substantive consolidation, and there is nothing in the record demonstrating that the partial substantive consolidation particularly harms any creditor or other stakeholder.
B. U.S. Trustee Objections
The U.S. Trustee objects to the releases in the Plan, arguing that the releases are too broad, and the Debtors provided no evidentiary support for them. There are two types of releases at issue; (i) the Debtors’ release of claims against a litany of related companies, the Creditors’ Committee, and specific entities involved with (and defined in) the MRA, along with all of their “Representatives” and “Professionals” (the “Debtors’ Releases”); and (ii) the creditors’ release of claims against a similar litany of the Debtors, Debtor-related companies, the Creditors’ Committee, and specific entities involved with (and defined in) the MRA.
(1)The Debtors’ Releases
Section 1123(b)(3)(A) of the Bankruptcy Code provides that a plan may provide for “the settlement or adjust of any claim or interest belonging to the debtor or to the estate.” A debtor may release claims under § 1123(b)(3)(A) if the release is a valid exercise of the debtor's business judgment, is fair, reasonable and in the best interests of the estate.72
“Determining the fairness of a plan which includes the release of non-debtors requires the consideration of numerous factors and the conclusion is often dictated by the specific facts of the case.”73 When deciding whether a plan may include a debtor’s release of non-debtor third parties, notwithstanding section Bankruptcy Code § 524(e),74 bankruptcy courts in this district have considered the following factors:
(1) the identity of interest between the debtor and the third party, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete assets of the estate;
(2) substantial contribution by the non-debtor of assets to the reorganization;
(3) the essential nature of the injunction to the reorganization to the extent that, without the injunction, there is little likelihood of success;
(4) an agreement by a substantial majority of creditors to support the injunction, specifically if the impact*283ed class or classes “overwhelmingly” votes to accept the plan; and
(5) provision in the plan for payment of all or substantially all of the claims of the class or classes affected by the injunction.75
These factors are neither exclusive nor conjunctive requirements, but simply provide guidance in the Court’s determination of fairness.76
The Debtor’s releases at issue provide that the “Releasing Parties” include the “Debtors, the Estates, the Parent and each of the Debtors’, Estates’, and Parent’s current and former affiliates and Representatives.”77 The “Released Parties” include:
(a) The Debtors and their Representatives,
(b) The Parent and its Representatives,
(c) each of (i) the Note Agents,
(ii) the Creditors’ Committee,
(iii) each of the Creditors’ Committee’s members (solely in their capacity as members),
(iv) the Restructuring Committee,
(v) the NM1 Committee,
(vi) each of the Consenting Existing Creditors,
(vii) each of the New Money Financing Providers,
(viii) each of the Consenting Other Creditors, and
(ix) with respect to each of the foregoing Entities or Persons in clause (c), their respective Representatives, professionals, affiliates, subsidiaries, principals, partners, limited partners, general partners, shareholders, members, managers, management companies, investment managers, managed funds, as applicable, together with their successors and assigns.78
Moreover, the term “Representatives” is broadly defined in the Plan to mean “any current or former officers, directors, employees, attorneys, advisors, other Professionals, accountants, investment bankers, financial advisors, consultants, agents and other representatives (including their respective officers, directors, employees, independent contractors, members and professionals).79
The Releasing Parties are releasing all claims based upon acts or omissions existing or taking place prior to or on the Effective Date of the Plan, arising from or related in any way to the Debtor, including those related to the Chapter 11 Cases, the Plan, the Debtors’ restructuring, the MRA and Disclosure Statement.80
The U.S. Trustee argues that the defined terms are so broad that parties who are related to the parties granting releases (for example, agents or shareholders of the Releasing Parties), may be granting releases of all of the Representatives of Released Parties without any notice of who *284they are releasing or what they are giving up. The U.S. Trustee also asserts that the Debtors have not met their burden of proving that the Debtors’ Releases comply with factors cited above.
In support of the Releases, the Debtors offer Mr. Runge’s Declaration, which provides that:
The Debtors believe these [Release] provisions are appropriate because, among other things they are the product of extensive good faith and arm’s length negotiation, are in exchange for good, valuable, and reasonably equivalent consideration, and are supports by the Debtors and other various parties in interest....81
The Debtors believe that each of the Released Parties played an important and active role in negotiating and formulating'the Plan, has significantly contributed to the Plan and these Chapter 11 Cases, and the cooperation of each party is necessary to implement the provisions of the Plan. The Debtors believe that without the protection from liability, key constituents would have been unwilling to cooperate in connection with the formulation and distribution of the Plan, including, without limitation, the New Value Contribution.82
I have personal knowledge of the fact that the Plan is the result of extensive negotiations among the Debtors and various Released Parties. Based on my involvement in these negotiations, the Debtors’ cases, and the global restructuring, I believe that there is an identity of interest between the Debtors and the Released Parties arising out the shared common goal of confirming and implementing the Plan.83
The Debtors believe that the Released Parties all made important contributions to these Chapter 11 Cases. The Debtors believe the Released Parties’ contributions and material concessions have allowed these Chapter 11 Cases to move expeditiously towards confirmation. The Debtors believe that without these releases exculpation and injunctions, the Released Parties would not have been willing to contribute to the Plan process. The Debtors believe that the Plan presents the only opportunity for a recovery by creditors of the Liquidating Debtors and the best possible chance for an enhanced recovery for the creditors of the Reorganizing Debtors.84
I agree that reach of the Debtors’ Releases is quite broad. I also agree with the U.S. Trustee that, except with respect to the Parent and New Money Financing Providers, the actual contribution of each Released Party in exchange for the Debtors’ Release is imprecise. However, there is no doubt that the Plan before me is part of the overall global restructuring of the Abengoa Group. In reviewing whether this Plan meets the confirmation requirements, the U.S. Bankruptcy Code requires that my focus be directed to whether the Plan proposed here meets the § 1129 confirmation standards. But it is both relevant and consequential that confirmation of the Plan is a material component, and a condition, of the global restructuring of the Spanish companies. The evidence likewise demonstrates that the global restructuring is essential to the Plan. Based on the Liquidation Analysis, there would be little to no recovery for unsecured creditors without the parties’ agreement to fund the New Value Contribution, and the agreement by *285holders of guaranty claims not to share in the Plan distribution. I can conclude confidently from the accumulation of evidence in the record that the Plan and the Releases are the result of extensive negotiations and arm’s length bargaining.
Another key consideration to approval of the Debtors’ Release is the support of the Creditors’ Committee, because that entity has the greatest incentive to limit the Debtors’ Release to preserve any potential claims. Also, the classes entitled to vote on the Plan overwhelmingly voted to accept it. No creditors have objected to the broad Debtors’ Release.
Based on these specific facts and for this specific Plan, I conclude that the Debtors’ Release is a valid exercise of the Debtors’ business judgment and, based upon the agreement of the Committee and overwhelming support of creditors, I conclude that the Release is fair, reasonable and in the best interests of the estate.
(2) The Third-Party Release
The U.S. Trustee argues that there are three methods typically used to effect third party releases:
1. A creditor is deemed to grant releases to third parties when it votes in favor of a plan, although the U.S. Trustee would still prefer that such a creditor be able to “opt-out” of the releases.
2. A creditor is deemed to grant releases to third parties when it votes “no” on its ballot, but fails to check the “opt-out” box.
3.A creditor is deemed to grant releases to third parties when it is entitled to vote, but fails to do so (and also fails to check the “opt-out” box), or when it is considered unimpaired and does not vote.85
Here, the Plan falls under the first scenario. It provides that each Person who votes to accept the Plan is deemed to completely release the Released Parties (as defined in the Plan and discussed above) from claims existing before the Effective Date, related to the Debtors, the Chapter 11 Cases, the Plan, the Debtors’ restructuring, and the MRA—unless the Person marks the ballot to indicate their refusal to grant the release.86 Courts in this jurisdiction have upheld plan provisions that provide for third-party non-debtors to release other non-debtors upon the consent of the party affected.87 Consent to a third-party release is generally determined by voting to accept the plan.88
The third-party release in Article IX. B.2. of the Plan only applies to persons who vote to accept the Plan. The ballot also allows a person voting to accept the Plan to “opt out” of the third-party release. Of the 390 ballots submitted, 191 creditors voted to opt out of the third-party release, indicating that creditors understood the instructions. The third-party release in this Plan is designed to apply only to parties who affirmatively consent and, thus, is fair and equitable.
Conclusion
Accordingly, I conclude that the Plan meets the requirements for confirmation *286and the objections filed by PGE and the U.S. Trustee are overruled. The parties are directed to confer and to submit an order confirming the Plan, under certification, consistent with this Opinion.
. The latest revised version of the Plan is filed at docket item number 991.
. The only thing missing from the PGE objection is the proverbial kitchen sink.
. Runge Deck, ¶ 5.
. Id.
. Id., ¶ 9.
. ⅜¶10.
. Disclosure Statement, III.C.3.a.
. Id.
. Disclosure Statement, III.C.3.b,
. Id.
. Disclosure Statement, III.C.3.d.
. Disclosure Statement at III.C.3.d.
. Id.
. Id.
. Disclosure Statement, III.C.3.C.
. Case No. 16-10754, D.I. 169.
. Unless defined herein, capitalized terms are defined in the Plan.
. Tr. (12/6/2016) at 50-54. The first declaration of Christina Pullo was filed on December 2, 2016 at D.I. 944.
. The EPC Reorganizing Debtors are: Abener Teyma Mojave General Partnership; Abener North America Construction, LP; Abeinsa Abener Teyma General Partnership; Teyma Construction USA, LLC; Teyma USA & Abener Engineering and Construction Services General Partnership; Abeinsa EPC LLC; Abeinsa Holding, Inc.; Abener Teyma Hugo-ton General Partnership, Abengoa Bioenergy New Technologies, LLC Abener Construction Services, LLC; Abengoa US Holding, LLC; Abengoa US, LLC; and Abengoa US Operations, LLC.
. The sole Solar Reorganizing Debtor is Abengoa Solar, Inc.
. The EPC Liquidating Debtors are: Abene-cor USA LLC, Abener Teyma Inabensa Mount Signal Joint Venture; Inabensa USA, LLC; and Nicsa Industrial Supplies, LLC.
. The Bioenergy, and Maple Liquidating Debtors are: Abengoa Bioenergy Hybrid of Kansas, LLC; Abengoa Bioenergy Technology Holding, LLC; Abengoa Bioenergy Meramec Holding, Inc. and Abengoa Bioenergy Holdco, Inc.
. Runge Decl., ¶ 28.
. Runge Decl., ¶ 28.
. Disclosure Statement, Section III.D.7.a.L
. Case No. 16-10754, D.I. 20; D.I. 71.
. Transcript of Confirmation Hearing, Dec. 6, 2016, at 125-27 (D.I. 1017).
. Runge Decl. ¶ 49.
. In re Tribune Co., 476 B.R. 843, 854-55 (Bankr. D. Del. 2012) affd as modified 2014 WL 2797042 (D. Del. June 18, 2014) affd, in part, rev’d, in part, 799 F.3d 272 (3d Cir. 2015) (citing In re AOV Indus,, Inc,, 792 F.2d 1140, 1150 (D.C. Cir. 1986); In re Jersey City Med. Ctr„ 817F.2d 1055, 1061 (3d Cir. 1987) ("[W]e agree with the general view which permits the grouping of similar claims in different classes.”); In re Coram Healthcare Corp., 315 B.R. 321, 348 (Bankr. D. Del.2004) (the Code "does not expressly prohibit placing ‘substantially similar’ claims in separate classes.”)).
. Tribune, 476 B.R, at 855 (citing John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs. (In re Route 37 Bus. Park Assocs.), 987 F.2d 154, 158 (3d Cir. 1993).
. In re W.R. Grace & Co., 475 B.R. 34, 110 (D, Del. 2012) (citing Jersey City, 817 F.2d at 1061; Route 37, 987 F.2d at 159).
. At the confirmation hearing, Debtors’ counsel asserted that with the most recent increase in the New Value Contribution, projected recoveries for unsecured creditors are "somewhere around 15.9%.” Tr. (12/6/2016) at 115.
, Runge Decl. ¶ 27.
. Disclosure Statement, Appendix. C "Restructuring EPC—Liquidating Analysis,” n. 7.
. Disclosure Statement, III.B.2.
. Felicetti Decl. ¶ 19.
. Id.
.In re Tribune Co., 464 B.R. 126, 185 (Bankr. D. Del. 2011), modified on recon. 464 B.R. 208 (Bankr. D. Del. 2011) (citing In re Washington Mutual, Inc., 461 B.R. 200, 252-53, 2011 WL 4090757, *41 (Bankr. D. Del. Sept. 13, 2011).
. Runge Deck ¶ 38.
. Runge Deck ¶ 26.
. Id.
. Star Deck ¶ 8.
. 11 U.S.C. § 1129(b)(2)(B)(i) and (ii).
. Bank of America Nat. Trust and Sav. Assn v. 203 North LaSalle Street P'ship, 526 U.S. 434, 442, 119 S.Ct. 1411, 1416, 143 L.Ed.2d 607 (1999); In re G-I Holdings, Inc., 420 B.R. 216, 268 (Bankr. D. NJ. 2009).
. G-I Holdings, 420 B.R. at 269.
. In re Brown, 498 B.R. 486, 497 (Bankr. E.D.Pa. 2013) citing Bonner Mall P'ship v. U.S. Bancorp Mtg. Co. (In re Bonner Mall P’ship), 2 F.3d 899, 908 (9th Cir. 1993).
. Star Decl. ¶¶ 10, 14.
. Runge Decl. ¶ 28.
. Runge Decl. ¶ 31.
. Runge Decl. ¶ 30.
. Runge Decl, ¶ 30,
. Runge Decl. ¶ 31.
. Runge Decl, ¶ 31.
.Star Decl. ¶ 6 ("Another key provision of the Initial Plan was the treatment of the MRA Affected Debt Claims of approximately $6.8 billion. These are claims held by entities that lent billions of dollars to Abengoa S.A., or its affiliates in Spain, receiving guarantees from a number of Debtors, including almost all of the members of the EPC Reorganizing Debtors. These guarantees were issued in connection with a series of obligations entered into over a period of time, extending back to 2010. *279Under the MRA, and as carried through in the Initial Plan, the MRA Affected Debt Claims will receive replacement guarantees, but do not share in the distribution of existing assets, or of the new value contribution being provided. If any meaningful portion of the MRA Affected Debt Claims are allowed to share in the consideration being made available to satisfy claims of other creditors, the unsecured creditors would receive significantly lower recoveries.”)
. Genesis Health Ventures, Inc. v. Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416, 423 (3d Cir. 2005).
. In re Owens Coming, 419 F.3d 195, 205 (3d Cir. 2005), as amended (Aug. 23, 2005), as amended (Sept. 2, 2005), as amended (Oct. 12, 2005), as amended (Nov. 1, 2007).
. Owens Coming, 419 F.3d at 211-12.
. Id.
. The Debtors also provided the Declaration of Jeffrey Bland in support of the partial substantive consolidation of the Bioenergy Debtors. PGE’s attorney cross-examined Mr. Bland, but did not provide any basis to challenge the analysis in favor of partial substantive consolidation of the Bioenergy Debtors.
. Felicetti Decl. ¶ 11.
.Id. See In re Lisanti Foods, Inc., No. CIVA04-3868, 2006 WL 2927619, *8 (D.N.J. Oct. 11, 2006) affd 241 Fed.Appx. 1, 2 (3d Cir. 2007) (holding that substantive consolidation was appropriate under Owens Coming when "creditors did not render credit to each individual debtor, but rather as a combined entity,”); cf. Owens Coming, 419 F.3d at 213 (holding that substantive consolidation was inappropriate when, inter alia, prepetition lenders relied on entity separateness).
. Id.
. Felicetti Decl. ¶ 12.
. Felicetti Decl. ¶ 13.
. Felicetti Decl. ¶ 14.
. Felicetti Decl. ¶ IS.
. Felicetti Decl. ¶ 16.
. Owens Corning, 419 F.3d at 211.
. Felicetti Decl. ¶¶ 6, 10.
. Felicetti Decl. ¶ 8. "Mere” ease of administration alone is insufficient to support substantive consolidation (Owens Coming, 419 F.3d at 211), but the potentially overwhelm*282ing cost and delay of the exercise of allocating liability here is meaningful and relevant.
.In re Sponsion, 426 B.R. 114, 143 (Bankr. D. Del, 2010) (citing In re DBSD North America, Inc., 419 B.R. 179, 217 (Bankr. S.D.N.Y. 2009), affd 2010 WL 1223109 (S.D.N.Y. . March 24, 2010), rev’d in part on other grounds 627 F,3d 496 (2d Cir. 2010).
. In re Washington Mutual, Inc., 442 B.R, 314, 345 (Bankr. D. Del. 2011) (citing Gill-man v. Continental Airlines (In re Continental > Airlines), 203 F.3d 203, 212-14 (3d Cir. 2000).
. 11 U.S.C. § 524(e) provides in pertinent part that: “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”
. Washington Mutual, 442 B.R, at 346 (citing In re Zenith Elees. Corp., 241 B.R. 92, 110 (Bankr. D. Del. 1999). See also Master Mortg. Inv. Fund, Inc., 168 B.R. 930, 937 (Bankr. W.D. Mo. 1994). These factors are sometimes referred to as the Master Mortgage standards. See, e.g., Washington Mutual, 442 B.R. at 347.
. Washington Mut„ 442 B.R. at 346.
. Plan, Art. IX.B.l.
. Plan, Art. I.A. 123.
. Plan, Art. I.A. 128.
. The foregoing sentence is a brief summaty of the extensive terms of the Debtors’ Release and not meant in any way to limit the effect of the Release.
. Runge Decl. ¶ 56.
. Runge Deck ¶ 57.
. Runge Deck ¶ 58.
. Runge Deck ¶¶ 59-61.
. Tr. (12/6/2016) at 108-09.
. The foregoing sentence is a brief summary of the extensive terms of the Third-Party Release and not meant in any way to limit the effect of the Release.
. In re Indianapolis Downs, LLC, 486 B.R. 286, 305-06 (Bankr. D. Del. 2013).
."Courts have determined that a third party release may be included in a plan if the release is consensual and binds only those creditors voting in favor of the plan.” In re Sponsion, Inc,, 426 B.R. 114, 144 (Bankr. D. Del. 2010) (citing In re Specialty Equip., Cos., Inc., 3 F.3d 1043, 1047 (7th Cir. 1993)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500197/ | MEMORANDUM OPINION
Robert G. Mayer, United States Bankruptcy Judge
This case is before the court on the motion of Lora Holland for relief from the automatic stay to conclude a pending divorce case in which she is seeking a divorce a vincula matrimonii, support, equitable distribution, and attorney’s fees. The debtor concedes that most of the requested relief is not stayed by 11 U.S.C. § 362(a) and does not oppose relief as to those matters.1 However, he opposes relief *307that would permit the state court to make a monetary award based on an allocation of the marital debts between the parties. Va.Code (1950) § 20-107.3(A).
The divorce case was filed on September 5, 2014, and had been pending more than a year when the debtor filed this chapter 13 case on October 8,2015, on the eve of trial. The debtor fully disclosed in his schedules the divorce matters pending. He listed Ms. Holland, his non-filing spouse, as a creditor on Schedule F, describing the claim as “Divorce Action: Spouse’s Claim for Equitable Distribution, Subject to setoff.” He scheduled a “Possible Marital Settlement and/or Property Distribution” and an “Un-liquidated Interest in Equitable Distribution and/or Spousal Support” as assets on Schedule B. He identified most of the debts listed on Schedules E and F as having a codebtor and identified Ms. Holland as the codebtor on Schedule H.2 All but one creditor filed a proof of claim. Ms. Holland and her divorce attorney received notice of the filing of the petition and of the bar date to file claims which was February 8,2016.
Ms. Holland did not file a proof of claim.
The debtor’s chapter 13 plan was confirmed without objection on January 6, 2016. It will pay priority tax claims in full and approximately 37% of the unsecured claims.3 Ms. Holland is protected from collection action by joint creditors by the codebtor stay. 11 U.S.C. § 1301(a). The codebtor stay can be terminated to the extent that the codebtor received consideration for the claim and the chapter 13 plan does not propose to pay the claim. 11 U.S.C. § 1301(a) and (c).
On July 1, 2016, Ms. Holland filed a motion seeking relief from the automatic stay. The trustee had no objection to the relief as long as no action was taken against property of the estate. The debtor objected only to relief relating to marital debt and the entry of a monetary award. Va.Code (1950) § 20-107.3(C) permits the state court to enter an equitable distribution award based on the marital debt of the parties in the divorce action. Marital debt is all debt incurred in the joint names of the parties before separation and all debt incurred in either party’s name after the marriage and before separation. Va. Code (1950) § 20-107.3(A)(4) and (5).
Secrest v. Secrest (In re Secrest), 453 B.R. 623 (Bankr.E.D.Va. 2011) addressed the question of when relief from the automatic stay should be granted in a chapter 7 case to pursue equitable distribution of property of the bankruptcy estate. In Sec-rest, the marital home had equity of about $900,000. Ms. Secrest, the non-filing spouse, sought relief from the automatic stay so that the house would be equitably divided between the debtor and herself. If the state court awarded her more than her one-half interest, there would be less money available for the. chapter 7 trustee to pay creditors. Any award could affect the payment of joint creditors of the debtor and Ms. Secrest that the chapter 7 trustee would pay from joint assets, such as -the marital home. There was a clear conflict between Ms. Secrest and the bankruptcy estate.
The court considered three principal factors in deciding whether to grant relief from the automatic stay: (1) the extent to which state law is applicable; (2) judicial *308economy and the efficient administration of the bankruptcy case; and (3) protection of the bankruptcy estate. Id at 628-29. The three factors were earlier articulated by the Court of Appeals for the Fourth Circuit in Robbins v. Robbins (In re Robbins), 964 F.2d 342 (4th Cir. 1992) and Roberge v. Buis (In re Roberge), 95 F.3d 42 (table), 1996 WL 482686 (4th Cir. Aug. 27, 1996) (unpublished opinion). Both cases sought to balance the “potential prejudice to the debtor’s bankruptcy estate against the hardships that will be incurred by the person seeking relief from the automatic stay if relief is denied.” In re Robbins, 964 F.2d at 345.
In Robbins, a chapter 11 case, relief was granted to allow entry of a monetary equitable distribution judgment. The divorce case had been fully litigated and decided, but the debtor filed his chapter 11 petition before the state court entered the final order. Resolution of the equitable distribution claim was necessary so that the debt- or could formulate his chapter 11 plan and seek confirmation. Relief was granted so that the final order could be entered and the claim liquidated. The payment of the order was to be in pursuant to the debtor’s confirmed chapter 11 plan. No property of the estate was transferred to the non-filing spouse.
It is equally necessary in a chapter 13 ease as in a chapter 11 case to liquidate a monetary equitable distribution claim. Without a liquidated amount, it is difficult to determine whether a proposed chapter 13 plan satisfies the statutory requirements, and a chapter 13 trustee may not make a distribution to the non-filing spouse. This does not mean that relief from the automatic stay to liquidate monetary equitable distribution claims is a matter of right. The deciding factor in this case is that the bar date to file proofs of claims expired without Ms. Holland having filed a proof of claim. Without a timely-filed proof of claim, she cannot receive a distribution from the chapter 13 trustee. In re Blakely, 440 B.R. 443 (Bankr. E.D. Va. 2010); In re Nwonwu, 362 B.R. 705 (Bankr. E.D. Va. 2007); In re Day, 2009 WL 3233160 (Bankr. E.D. Va. Sept. 30, 2009). Even if relief were granted and the state court made a monetary award, the monetary award would be discharged. 11 U.S.C. § 1328(a)(2).4 In this case, no purpose is served by making a monetary equitable distribution award whether based on the marital debt of the parties or otherwise. It causes additional litigation, expense and delay for something that would have no significance. The claim cannot be paid by the chapter 13 trustee during the case and the claim is discharged at the end of the case.
Ms. Holland argues that the' chapter 13 plan may fail. To date, almost nine months after confirmation, there is no indication of a default under the plan. It is not sufficient to argue that a plan may fail. All plans may fail. In fact, many do not make it to completion. But, fear is not itself enough to grant relief from the automatic stay.
Ms. Holland is reasonably protected and some of the benefits of a monetary equitable distribution award particularly relating to marital debts will be achieved in this bankruptcy case.5 She has the protection *309of the codebtor stay during the pendency of the case subject to the statutory limitations. If the plan is successful, her obligation on joint debts will be reduced. The joint tax debt will be paid in full. A significant portion of the joint unsecured debt will be paid.
In this case, the entry of a monetary equitable distribution award by the state court would be futile. Ms. Holland did not timely file a proof of claim and any claim she may now file cannot be paid in this case. If a monetary equitable distribution award were entered by the state court, it would not survive the discharge in this case.
In balancing the harm between the debt- or, the bankruptcy estate, and Ms. Holland and considering the three factors, the court will confirm that no stay became effective as to certain actions; terminate the automatic stay as to property that is no longer property of the estate; and maintain the stay in full force and effect as to the allocation of marital debts and entry of a monetary award.
. Section 362(b)(2) expressly excludes certain domestic relations matters from the automatic stay, among which are the establishment or modification of a domestic support obligation and the dissolution of a marriage. 11 U.S.C. § 362(b)(2)(A)(ii) and (iv). However, a proceeding to determine the division of property *307that is property of the estate is not within the exclusion and is stayed by 11 U.S.C. § 362(a).
. The proofs of claims only assert a liability of the debtor.
. The priority tax claims total $5,167.81. The unsecured claims total $77,122.
. In chapter 7, an equitable distribution award is not dischargeable. 11 U.S.C. § 523(a)(15).
. Without knowing all of the debts—separate, joint, marital and non-marital—of both the debtor and Ms. Holland, this court cannot determine the extent to which the successful completion of the debtor’s chapter 13 plan will benefit Ms. Holland. If there are joint marital debts, a significant portion will be paid. Individual debts of the debtor that are *309also marital debts will be paid in part and discharged in part. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500199/ | MEMORANDUM OPINION
Paul M. Black, UNITED STATES BANKRUPTCY JUDGE
This matter is before the Court on an adversary proceeding filed by the Debtor, Samuel J. Boyd (the “Debtor”), against New Peoples Bank, Inc. (the “Bank”) for violation of the discharge injunction. The Court found in its May 27, 2016 Memorandum Opinion and corresponding Order that the Bank violated the discharge injunction and set the matter for further hearing as to what sanctions, if any, may be appropriate, (Docket Nos. 17 & 18). Two pre-trial conferences were held, as were two separate telephonic hearings on discovery disputes. A hearing was held on November 3, 2016 where the Debtor and the Bank presented evidence. Both the Debtor and the Bank pre-filed exhibits with the Court. (Docket Nos. 33 & 35). The Court admitted those exhibits not objected to and addressed the objections to the remaining exhibits as the parties presented their evidence.1 For the reasons set forth below, the Court will award the Debtor $11,796.29 in actual damages, $5,500.00 in attorneys’ fees, and $586.00 in court reporter fees. The Court finds no basis for an award of punitive damages.
*327FINDINGS OF FACT
On June 16, 2008, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. At that time, the Debtor owed a $78,922.00 secured debt and a $50,422.00 unsecured debt in connection with a 2005 promissory note (the “Original Note”) secured by a 2005 credit line deed of trust held by the Bank on two pieces of adjacent real property in Dickenson County, Virginia (the “Properties”).2 (Docket No. 1). According to testimony at the hearing, the Debtor’s father, Samuel G. Boyd, was also liable on the Original Note.3 The Debtor obtained a discharge on September 9, 2008. (Docket No. 16). At that time, the Debtor’s personal liability for the indebtedness evidenced by the Original Note was discharged.
The Debtor did not sign or file any reaffirmation agreement on the debts he owed to' the Bank. At the time he obtained his discharge, the Debtor was a beneficiary under an accidental injury and death insurance policy that continued to make payments of $750.00 per month on his secured obligation directly to the Bank. Dr. Ex. 13. The Debtor voluntarily paid the balance of $50.00 each month on that debt by automatic debit.
These payments continued until 2012, at which point the insurance policy was set to expire. In addition, the Original Note matured by its terms on July 25, 2012, and a balloon payment became due at that time. The Debtor testified that Janet Silcox, the Bank’s local branch manager, called him, both in his individual capacity and in his capacity as power of attorney for his father, to let him know that the loan was maturing and to ask him “what his intentions were.” Ms. Silcox testified that she informed him at that time that he would have to renew the Note if he wanted to continue- to make payments on the Properties. Ms. Silcox testified that the Debtor wanted to continue to pay for the house, and that he indicated he could afford a $600.00 payment at that time because he was on a fixed income. In addition, the Debtor testified that he told Ms. Silcox it was important to retain a lien on the properties so that there would be no equity that could adversely affect his father’s Medicare eligibility.4 The Debtor also testified, however, that at that time he did not care whether the Bank foreclosed as he had no use for either house. The Debtor testified that Ms. Silcox told him he had to come down and renew the Original Note because the insurance company had stopped making payments. The Debtor testified that he had no choice but to sign a new note because, given its maturity, the Bank wanted the total payment on the Original Note at that time. At no time did Ms. Silcox inform the Debtor that his personal liability had been discharged and he was under no obligation to reaffirm the debt or sign a new note.
*328The Debtor executed a new promissory-note secured by the same deed of trust on October 9, 2012 (the “Second Note”). The Debtor continued to make payments under the Second Note by automatic debit until it matured on October 23, 2013. The Debtor then executed another promissory note (the “Third Note”) and made payments by automatic debit until June 2015, at which time the Debtor advised the Bank to terminate the automatic payment feature. In total, the Debtor paid $2,400.00 towards the Original Note between when hp obtained his discharge and when the Second Note was executed. Dr. Ex. 1. The Debtor then paid $4,241.76 towards the Second Note and $7,554.53 towards the Third Note. Id. The Bank sent the Debtor payment notices regarding the Third Note on the following dates: August 7, 2015; October 8, 2015; November 9, 2015; December 8, 2015; January 8, 2016; February 8, 2016; and March 8, 2016. Dr. Ex. 8; Bank Ex. N. There has been no evidence that the Bank sent late notices or otherwise tried to collect the debt between the date of the discharge and the date of the execution of the Second Note. The Court finds that the payments made by the Debtor during that time frame were voluntary and not made with any coercion by the Bank.
The Debtor testified and introduced documentary evidence showing that he has continuously maintained insurance on the Properties, as well as electricity and water services. Dr. Ex. 2. In addition, the Debtor has paid real estate taxes on the Properties. Id. These costs totaled $20,744.10. The Debtor testified that he would not have done so if he had known that the debt had been discharged. However, the terms of the Deed of Trust state “[g]rantor will pay all taxes, assessments, liens, encumbrances, lease payments, ground rents, utilities, and other charges relating to the property when due.” Bank Ex. B. p. 2. In addition, the Deed of Trust states that “[g]rantor shall keep Property insured against loss by fire, flood, theft, and other hazards and risks reasonably associated with the Property due to its type and location.” Id. p. 3. The obligations would have continued even if the Debtor’s obligation were only in rem in nature.
The Debtor introduced evidence that he paid his attorney a $5,500.00 retainer in relation to the current matter and that those fees have since been earned. Dr. Ex. 3. The Debtor testified that his counsel’s bookkeeper estimates between $15,000.00 and $20,000.00 in additional attorneys’ fees have been incurred. No fee agreement or time records were produced or offered as evidence. No additional evidence as to the amount of attorneys’ fees incurred was presented; Debtor’s counsel requested a further opportunity to present evidence of the balance of his fees. Counsel for the Bank conceded in open court that at least $5,500.00 in attorney’s fees were fairly incurred by the Debtor in this case.5
The Debtor also called Randy Rasnake, a former collections officer at the Bank. Mr. Rasnake testified as to the Bank’s procedures for cases in which borrowers filed for bankruptcy protection during the time he was employed. Mr. Rasnake testified that when the Bank learned a borrower had filed bankruptcy, the borrower’s file would physically be transferred from the collections department to the legal department. At that point, the collections department was no longer permitted to contact the borrower. Mr. Rasnake could not recall any other cases in which the Bank had induced a borrower to sign a renewal note *329reviving an obligation previously discharged in bankruptcy.
Theda Viers, a loan officer at the Bank, was called by the Bank. Ms. Viers testified that she and the Debtor discussed the possibility of him taking out a loan with the Bank to purchase a new vehicle in April 2016. She testified that the Debtor wanted to add that loan to his current loan so as to have only one payment. Ms. Viers testified that the Debtor believed there was sufficient equity in the Properties to support this new obligation. Ultimately, the Debtor decided not to pursue this loan.
CONCLUSIONS OF LAW
This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the delegation made to this Court by Order from the District Court on December 6, 1994, and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that this matter is a “core” bankruptcy proceeding within the -meaning of 28 U.S.C. § 157(b)(2)(I) and (0). The Court has already determined in its Opinion of May 27, 2016 that the Bank violated the discharge injunction imposed by 11 U.S.C. § 524. Accordingly, only the issue of the appropriate measure of sanctions is at issue.
“[W]hile § 524 does not explicitly authorize an award of monetary damages for violation of the discharge injunction, damages for those violations may be awarded under § 105(a)_ Such sanctions may include ‘actual damages, attorney’s fees and, when appropriate, punitive damages.’ ” In re Mead, No. 10-09630-8-SWH, 2012 WL 627699, at *5 (Bankr. E.D. N.C. Feb. 24, 2012) (quoting In re Cherry, 247 B.R. 176, 187 (Bankr. E.D. Va. 2000)). The Debtor asks for actual damages, attorneys’ fees, and punitive damages. Each will be addressed in turn.
I. Actual Damages.
As a measure of actual damages, Debtor argues that the entire amount paid to the Bank post-discharge on each of the three notes is recoverable. In addition, the Debtor requests the total amount paid to maintain insurance, water, and electricity services on the Properties po'st-discharge. The Debtor also requests the total amount paid in real estate taxes on the Properties post-discharge.
The Debtor voluntarily continued to make payments on the Original Note from the time he obtained his discharge until the Second Note was executed. There is no evidence that the Bank made any attempt to collect the-discharged debt up until that point. No late notices were sent and no collection phone calls were made. Thus, no violation of the discharge occurred until the execution of the Second Note. Accordingly, the payments made on the Original Note are not recoverable. However, the executions of the Second and Third Notes were in violation of the discharge injunction. Rather than executing a non-recourse Note that renewed only the in rem obligation, the Bank chose to revive the Debt- or’s discharged personal liability on the loan. No reaffirmation agreement was ever executed, much less timely filed. Thus, the Court will direct the Bank to refund to the Debtor all payments made on the Second and Third Notes, totaling $11,796.29.
The Debtor made payments totaling $20,744.10 for taxes, insurance,, and utilities on the Properties post-discharge. These payments did not stem from obligations under the notes, but rather were in rem obligations contained in the deed of trust. Had the Bank not executed the Second or Third Notes, the Debtor would nonetheless have been obligated to make *330these payments up until the time the Bank foreclosed. Had the Debtor not made the payments, these amounts could have been paid by the Bank and charged against the collateral pursuant to the terms of the deed of trust. Accordingly, these payments did not arise from the violation of the discharge injunction and are not appropriate for recovery.
II. Attorneys’ Fees
The Debtor provided the court with evidence that he paid his attorney $5,500.00 in this matter. Debtor’s counsel cites In re Mickens, 229 B.R. 114 (Bankr. W.D. Va. 1999), in support of his request for a third hearing as an opportunity to present further evidence of his fees. In that case, Judge Krumm allowed the debt- or to file “an affidavit of damages sustained and attorney’s fees and costs incurred” following the initial hearing and gave opposing counsel an opportunity to object to the calculation of damages. Here, unlike in Mickens, the issue of whether the Bank violated the discharge injunction has already been decided. The present hearing was specifically devoted to the appropriate measure of sanctions—and attorney’s fees are typically included in a measure of damages in cases of violations of the discharge injunction. The November 3, 2016 hearing was the Debtor’s opportunity to present evidence of how he was damaged and the Court will not hold a further hearing on the matter. Having seen no fee agreement or attorney time records, the evidence before the Court demonstrates that the Debtor has incurred $5,500.00 in attorney fees and there is no evidence on the record to suggest that, in terms of “actual damages,” the Debtor is actually obligated to pay any additional attorneys’ fees. Cf., e.g., Skillforce, Inc. v. Hafer, 509 B.R. 523, 534 (E.D. Va. 2014) (addressing recovery of attorneys’ fees under 11 U.S.C. § 362(k)(l)). Nevertheless, counsel for the Bank conceded at trial that the $5,500.00 was fairly incurred. Thus, the Bank will be directed to pay the Debtor $5,500.00 in compensation for the attorneys’ fees he has incurred in the prosecution of this adversary proceeding, along with an additional payment of $586.00 in court reporter fees.
III. Punitive Damages
Punitive damages “may be appropriate under 11 U.S.C. § 105 when a creditor’s actions are egregious or malevolent.” In re Workman, 392 B.R. 189, 196 (Bankr. D. S.C. 2007) (citing Cherry, 247 B.R. at 189-90)). “[W]hether expressed as ‘egregious conduct,’ ‘malevolent intent,’ or ‘clear disregard of the bankruptcy laws,’ each of these decisions [awarding punitive damages] appear to employ the finding of creditor conduct beyond willfulness or deliberation and more closely resembling a specific intent to violate the discharge injunction in order to assess punitive damages.” Cherry, 247 B.R. at 190 (collecting cases). Here, the Debtor has not shown that the Bank apted egregiously or with malevolent intent. Indeed, the Debtor’s own witnesses provided no evidence of a pattern of similar misconduct. As determined in the Court’s prior opinion, the Bank acted willfully in its violation of the discharge injunction, but the Court does not find that it acted with the requisite degree of malevolence to require an award of punitive damages.
CONCLUSION
For the foregoing reasons, the Court will Order the .Bank to refund the Debtor $11,796.29 and pay an additional $6,086.00 to the Debtor in compensation for his attorneys’ fees and costs. This sum shall be payable to the Debtor by delivery to Debt- or’s counsel within thirty (30) days from *331the date of entry of the corresponding Order.
An Order to such effect will be entered contemporaneously herewith.
. The Debtor's Exhibits 1, 3, 4, 5, 7, 9, 10, and 13 were admitted without objection. The Bank’s Exhibit F was admitted without objection. The Bank's objections to the Debtor's Exhibits 2, 6, 11, and 12 were overruled. The Debtor stipulated that Exhibit 8 contained incomplete documents as filed and that the second page produced by the Bank was included with each notice. As such, the Bank’s objection to Exhibit 8 was overruled and the second page was admitted as the Bank's Exhibit N. The Debtor’s objections to Exhibits A, C, and L were overruled. The Court now overrules the Debtor's objection to the Bank's Exhibit B and the exhibit stands admitted. The Bank never moved for the admission of pre-filed Exhibits D, E, G, H, I, J, K, or M and as such the Court does not address the Debt- or's objections to these exhibits. The Debtor never moved for admission of pre-filed Exhibit 14 and as such the Court does not address the Bank’s objection to this exhibit.
. One of these properties belongs to the Debt- or and the other belongs to the Debtor’s father. Both the Debtor and his father are grantors under the Bank’s deed of trust. See Bank's Ex. B. Each property has been vacant for an extended period of time.
. The Debtor’s father also filed bankruptcy and received a discharge. See Case No. 09-70621. However, the Debtor’s father reaffirmed his personal liability to the Bank under the Original Note on May 13, 2009. See Bank’s Ex. C, Further, the Debtor holds a general power of attorney over his father’s affairs. See Bank’s Ex. A.
.The Debtor’s father was living in a rehabilitation facility at that time. He has since been moved to a nursing home. The Debtor has at times expected his father to return home to live in the Properties and made certain improvements to the Properties in anticipation of his return, but has since determined that his father is unlikely to return to live in the Properties due to the level of medical care he requires.
. The Debtor testified he also incurred $586.00 in court reporter fees in connection with depositions in the case, which he paid. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500200/ | ORDER GRANTING, IN PART, AND DENYING, IN PART, JULIO PAL-MAZ, M.D.’S MOTION FOR ENFORCEMENT OF INJUNCTION (ECF NO. 420)
CRAIG A. GARGOTTA, UNITED STATES BANKRUPTCY JUDGE
Came on to be considered the above-numbered bankruptcy cases, and, in particular, Julio Palmaz, M.D.’s Motion for *333Enforcement of Injunction (ECF No. 420) (the “Motion”), Trustee’s Joinder in Motion to Enforce Plan Injunction (ECF No. 429) (the “Joinder”) and The Turnbull Plaintiffs’ Response to Julio Palmaz, M.D.’s- Motion for Enforcement of Injunction and Trustee’s Joinder in Motion to Enforce Plan Injunction (ECF No. 444) (the “Response”). The Court held a hearing on the Motion on October 12, 2016, and took the matter under advisement. For the reasons stated below, the Court finds that the Motion should be GRANTED, in part, and DENIED, in part.
The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1384. Venue is proper under 28 U.S.C. § 1408(1). This matter is referred to this Court under the District’s Standing Order of Reference. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(L) (confirmation of plans) and (0) (other proceeding affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims), in which the Court may enter a final order. The Court finds that this is a contested matter as defined under Fed. R. Bankr. P. 9014. As such, the Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.
Background and Parties’ Contentions
On March 4, 2016, the Jointly Administered Debtors filed their bankruptcy petitions under Chapter 11 of the Bankruptcy Code, in which the Court entered an Order Jointly Administering Cases on March 9, 2016 (ECF No. 35). Subsequently, on March 10, 2016, the Court entered its Order Granting Complex Chapter 11 Bankruptcy Case Treatment (ECF No. 42). Debtors filed their Joint Disclosure Statement (ECF No. 235) and Joint Chapter 11 Plan (ECF No. 236) on May 23, 2016, intending to sell substantially all of Debtors’ assets and obtain confirmation of a plan of reorganization quickly.
Upon drawing numerous objections to the disclosure statement, proposed plan and sale motions, Debtors filed a Modified Joint Disclosure Statement (ECF No. 273) and First Amended Joint Chapter 11 Plan (ECF No. 272) on June 9, 2016. Thereafter, at a hearing held June 10, 2016, this Court approved Debtors’ Sale Motion (ECF No. 234); approved, as amended, Debtors’ Joint Disclosure Statement; and granted Debtors’ Motion to Shorten Time For Soliciting Votes and For Opportunity to Object to Joint Plan of Reorganization and to Set Expedited Hearing on Confirmation of Joint Plan of Reorganization (ECF No. 251). Debtors filed their Amended Disclosure Statement (ECF No. 281) and Second Amended Joint Plan of Reorganization (ECF No. 282) on that same day. On June 17, 2016, the Court entered Orders approving Debtors’ Disclosure Statement, as modified (ECF No. 294); and shortening time to solicit votes and to object to plan, and setting an expedited hearing on plan confirmation (ECF No. 292). The Court set the deadlines to vote on the plan and file written objections to confirmation as June 24, 2016, and required the ballot summary to be filed by June 27, 2016, at 10:30 a.m. The confirmation hearing was set for June 27, 2016, at 1:30 p.m.
On June 24, 2016, Debtors filed a First Supplement to Debtors’ Second Amended Joint Plan of Reorganization (ECF NO. 305). Objections to the Plan were filed by the Official Committee of Unsecured Creditors (ECF No. 308); Stock Holder John B. Foster, Interested Parties Brad Hickman, Bradley Hickman, Clifton Hickman, Brenda Kostohryz, Keely Kostohryz and Margaret Lane (ECF No. 307); the United States Trustee (ECF No. 303); and *334Norton Rose Fulbright US LLP (ECF No. 298). At the confirmation hearing held June 27, 2016, the Court entertained lengthy arguments regarding discrepancies in the plan and ballot’s opt-in/opt-out language for releases. Ultimately, releases by parties other than those given by the Debtor and the estate were struck to avoid the requirement to re-notice the plan. Upon resolution of numerous objections on the record, the Court confirmed Debtors’ Joint Plan, as amended by the modifications stated on the record. Debtor incorporated those changes into a final plan and confirmation order, inclusive of all modifications and agreed to language, which the Court signed on July 15, 2016 (ECF No. 356). As a means for funding equity claims, the Plan created a Litigation Trust allocating defined Litigation Trust Assets including Director and Officer (“D & 0”) Claims.
Thereafter, on July 22, 2016, a group of investors in Debtor Palmaz Scientific (the “Turnbull Plaintiffs”) filed a suit against Movant in Dallas County. Additionally, pri- or to the bankruptcy case, a second group of investors in Debtor Palmaz Scientific (the “Ehrenberg Plaintiffs”) had asserted claims against the Debtor, Dr. Palmaz and Mr. Solomon in state court in Dallas County. As a result of the bankruptcy filing, the Ehrenberg Plaintiffs’ suit was stayed. The Ehrenberg Plaintiffs filed a Motion for Relief from Stay (ECF No. 119) on April 1, 2016; however, the hearing on that motion was voluntarily continued until after confirmation of the Plan and ultimately withdrawn on September 6, 2016 (ECF No. 392). .
On September 30, 2016, Julio Palmaz, M.D. (“Dr. Palmaz” or “Movant”) filed his Motion for Enforcement of Injunction (ECF No. 420) requesting this Court enjoin two sets of plaintiffs—the Ehrenberg Plaintiffs and Turnbull Plaintiffs—from their respective suits against Dr. Palmaz under the injunction provisions of the confirmed Joint Plan in this case. Dr. Palmaz also requested this Court award attorney’s fees and costs after a hearing to establish the amount of said fees. Movant argues that the language of the confirmation order and plan prohibits commencement or continuation of any action against Litigation Trust Assets (as created by the Confirmed Plan) or the D & O policies because only the Litigation Trustee has standing to commence or prosecute D & O Claims for the beneficiaries of the Litigation Trust. Thus, Movant argues that the claims alleged by the Ehrenberg or Turnbull Plaintiffs must be brought by the Litigation Trustee, if they are to be brought at all, because the claims fall within the definition of “D & O Claims” which were vested in the Litigation Trustee pursuant to the terms of the Confirmed Plan.
On October 5, 2016, the Litigation Trustee joined Movant’s motion and requested this Court likewise enjoin the Ehrenberg and Turnbull Plaintiffs from commencing or continuing their suits against Dr. Pal-maz. The Trustee argues, first, that the claims asserted against the former officers and directors of the Debtors are derivative claims which belong to-the Debtors and that those claims were transferred to the Litigation Trust upon confirmation of the Plan. Second, the Trustee argues that, even if the shareholders are able to pursue individual claims, the recovery for sueh claims implicates the available director and officer liability insurance policies, which were transferred to the Litigation Trust as an asset. Therefore, the Trustee requests the injunction be enforced to safeguard the property of the Litigation Trust for equitable distribution to its beneficiaries.
In their Response filed October 11, 2016 (ECF No. 444), the Turnbull Plaintiffs (“Respondents”) argue that the claims' they have alleged in the state court suit *335against Dr. Palmaz are direct claims for which the Litigation Trust has no standing and for which the Debtor would not be directly liable. Additionally, Respondents argue that they do not seek to recover from any insurance proceeds as Dr. Pal-maz and the Litigation Trustee contend. Rather, Respondents argue that they intend only to recover from the personal assets of Dr. Palmaz and the other responsible individuals—not the Debtor. Respondents further argue that the possibility that the D & 0 insurance policy might advance defense costs to Dr. Palmaz is inapposite when considering that a release of third parties for direct claims on the basis that D & 0 coverage might be implicated would impermissibly convert every direct claim into a derivative claim and thereby, accomplish impermissible third party releases by confirmation of the bankruptcy plan. The Ehrenberg Plaintiffs did not file a response to Movant’s Motion.
Analysis
A. Jurisdiction and Authority
This Court has subject matter jurisdiction to interpret the Plan and determine whether continuation of the Respondent’s litigation would violate the Plan, Confirmation Order, and permanent injunction provided therein. In the Confirmation Order, the Court specifically retained jurisdiction over this case to resolve any disputes over the interpretation of the terms of the Plan (ECF No. 356, Confirmation Order ¶ F). Further, the Court always has jurisdiction to clarify and enforce its own orders. See 11 U.S.C. § 105(a); see also In re U.S. Brass Corp., 277 B.R. 326, 328 (Bankr. E.D. Tex. 2002).
This Court’s retention of jurisdiction is consistent with 28 U.S.C. § 1334, which grants the Court jurisdiction over “all cases under title 11” and “all civil proceedings arising under title 11 or arising in or related to cases under title 11.” This grant of jurisdiction extends to resolving disputes regarding the interpretation of a confirmed plan. See In re Craig’s Stores of Tex., Inc., 266 F.3d 388, 391 (5th Cir. 2001) (a bankruptcy court has jurisdiction over a civil proceeding if the litigated matter bears on the interpretation or execution of the debtor’s plan); In re Birting Fisheries, Inc., 300 B.R. 489, 501 (9th Cir. BAP 2003) (holding that “the bankruptcy court had exclusive jurisdiction to interpret and enforce its Plan and Confirmation Order”); In re Resorts Int’l, Inc., 372 F.3d 154, 168-69 (3d Cir. 2004) (“[Wjhere there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate.”).
Here, the Movant’s Motion implicates interpretation of the Confirmation Order’s injunction language. Specifically, the Confirmation Order provides:
Except as otherwise expressly provided in the Plan or this Order, all Persons or entities who have asserted, held, hold or may hold Claims against or Equity Interests in the Debtors are permanently enjoined, from and after the Effective Date, from (i) commencing or continuing in any manner any action or other proceeding of any kind on any such Claim against the Debtors, the Reorganized Debtors, the Litigation Trust, the Litigation Trustee, Litigation Trust Assets, or the D & O Insurance Policies ...
(ECF No. 356, Confirmation Order fN). An identical injunction provision is included in the Plan (ECF No. 356, Plan § 11.4). As such, the Court maintains jurisdiction and authority to interpret and implement *336its own Confirmation Order and administration of the confirmed Plan.
B. Confirmation Order and Plan Provisions
A critical provision of the Confirmation Order and Plan is creation of a Litigation Trust for the benefit of equity holders. In Paragraph 12 of the Confirmation Order, the Debtors retained “all claims belonging to the Debtors and the Bankruptcy Estates” including D & 0 Claims, as defined by the Plan. Thereafter, in the same paragraph, the Confirmation Order states:
Pursuant to the provisions of the Plan, the Litigation Trust shall be the responsible party for pursuing the collection of these claims.
The Litigation Trustee is and shall be deemed a representative of the Debtors’ Estates pursuant to sections 1123(a)(5)(B) and 1123(b)(3)(B) of the Bankruptcy Code, and shall be vested with standing to prosecute, settle and otherwise administer all Litigation Trust Assets transferred to the Litigation Trust, without the need for Bankruptcy Court approval or any other notice of approval, except as set forth in the Trust Agreement.
(ECF No. 356, Confirmation Order ¶ 12). “Litigation Trust Assets” is defined in the Plan as “(i) the Expense Fund, (ii) the Causes of Action (iii) and [sic] (iv) the D & 0 Claims and which shall vest in the Litigation Trust on the Effective Date.” (ECF No. 356, § Plan 1.1). The Plan defines “D & 0 Claims” as
any and all claims and causes of action arising from any act or omission, including, but not limited to misconduct, misfeasance, malfeasance, breach of fiduciary duty, breach of duty of loyalty, breach of duty of care, breach of duty of obedience, negligence, gross negligence, fraud or any other intentional tort, and any civil conspiracy or civil RICO claims for such misconduct against any current or former officer or director resulting in damage to the Debtors.
(ECF No. 356, Plan § 1.1). Movant and Trustee argue that the definition of D & 0 Claims clearly places the Respondents’ claims against Dr. Palmaz in the Litigation Trust Assets, which only the Trustee has the standing to assert pursuant to the Confirmation Order. Respondents, however, focus on the qualifying language “resulting in damage to the Debtors” in the definition of D & 0 Claims, arguing that the definition is not broad enough to capture all claims asserted against Dr. Pal-maz. Rather, Respondents assert that the claims which they have brought against Dr. Palmaz in state court are direct claims—not derivative—because their claims did not result in damage to the Debtors.
In interpreting the definition of D & 0 Claims under the Plan, the Court agrees with Respondents. A plain reading of the definition reflects that the qualifying phrase “resulting in damage to the Debtors” applies to “any and all claims and causes of action arising from any act or admission ... against any current or former officer and director_■” As such, if Respondents assert claims against Dr. Pal-maz which did not result in damage to the Debtors, then such claim is not a part of the Litigation Trust Assets and the Confirmation Order does not vest standing to pursue such a claim in the Trustee.
Movant and Trustee also argue that the Plan and Confirmation Order give sole control of the D & 0 insurance to the Litigation Trust and asserts that any effort that implicates or diminishes the Trustee’s ability to recover on those policies must be enjoined. Section 6.6(d) of the Plan provides:
*337The right to control the D & 0 Claims and all D & 0 Insurance Recoveries, including negotiations relating thereto and settlements thereof, shall be vested in the Litigation Trust on and after the Effective Date. Notwithstanding the foregoing, the Debtors shall cooperate with the Litigation Trustee in pursuing the D & 0 Claims and the D & 0 Insurance through such means, and shall provide reasonable access to personnel and books and records of the Debtors relating to the D & 0 Claims and D & 0 Insurance to representatives of the Litigation Trust, to enable the Litigation Trustee to perform the Litigation Trustee’s tasks under the Trust Agreement and the Plan. Nothing in this paragraph nor the Plan limits, excuses or in any way affects or impairs any coverage to which the current and/or former Officers and Directors are entitled to with respect to any and all D & 0 Insurance or other applicable insurance policies of the Debtors.
(ECF No. 356, Plan § 6.6(d)).
Movant and Trustee assert that Dr. Pal-maz has already provided notice to the insurance carriers and requested coverage of his defense costs under the D & 0 policies as a result of the allegations in Respondents’ Complaint. Trustee argues that such action triggers a bar on Respondents’ claims, even if they are direct claims, because Dr. Palmaz may still be entitled to coverage or advancement of defense costs under the policies—notwithstanding the fact that Respondents do not name the Debtors or seek recovery from the D & 0 policies. Respondents point out that they do not contend they are entitled to recover from the D & 0 policies, but argue that they are well within their rights to demand and recover from the personal assets of Dr. Palmaz. Further, Respondents argue that the existence of D & 0 coverage or advancement of defense costs should not be offensively used to deny Respondents the ability to seek recovery upon direct claims from the personal assets of Dr. Palmaz.
With respect to the D & 0 policies, the Court finds that Section 6.6(d) of the Plan does not act as a bar to any direct claims brought against former directors and officers that may have an effect on the D & 0 policies. The Plan vests the right to control the D & 0 Insurance Recoveries, including negotiation and settlement, but explicitly does not limit the rights of the former officers and directors to seek coverage under the policies. The Plan defines “D & 0 Insurance Recoveries” as
(a) the right to pursue and receive benefits and/or proceeds of the D & 0 Insurance Policies; and (b) the right to pursue and receive recovery from or as a result of any D & 0 Claims, including but not limited to consequential, contractual, extracontractual and/or statutory damages, or other proceeds, distributions, awards or benefits; and (c) the right to pursue and receive any other recovery related to the D & 0 Claims.
(ECF No. 356, Plan § 1.1). As previously stated, the Court finds that the claims asserted by Respondents do not fall within the definition of D & 0 Claims under the Plan. Therefore, the definition of D & 0 Insurance Recoveries and Section 6.6(d) of the Plan cannot act as a bar to non-D & 0 Claims against the former officers and directors.
The negotiated language of Section 6.6 of the Plan explicitly permits the former officers and directors of the Debtors to seek coverage from the D & 0 policies. To use that language as a tool for enjoining any claim against a former officer and director because the defendant may seek coverage from the D & 0 policies on a direct claim would amount to a non-con*338sensual third party release in the Plan. The Court finds that, if Respondents only seek to recover from the personal assets of Dr. Palmaz and not the insurance policies, the Plan allows Dr. Palmaz to seek whatever coverage he is entitled to under the policies without barring Respondents’ direct claims.
Based on the Court’s reading of the language' of the Plan and Confirmation Order, the Court must now consider whether the Respondents’ Claims asserted in the state court litigation are direct or derivative claims.
C. Respondents’ Claims
Movant’s Exhibit E is the Plaintiffs’ Original Petition and Request for Disclosure against Julio Palmaz, M.D., and Steven B. Solomon which was filed in Dallas County District Court under Cause No. DC-16-08830 (“Complaint”). In their Complaint, Respondents state claims for fraud under the Texas Business and Commerce Code § 27.01, violations of the Texas Securities Act, negligent misrepresentation, breach of fiduciary duty, aiding and abetting, control person liability and the discovery rule of fraudulent concealment. Respondents assert that all of these claims are direct claims, not derivative, and resulted in no damage to the Debtor. Trustee, however, argues that the only way Respondents are able to prevail on their asserted claims is by showing damage to the Debtor and as such, the claims must be derivative.
The parties agree that the Supreme Court of Texas articulated the standard for determining whether a claim is derivative under Texas law in Wingate v. Hajdik, 795 S.W.2d 717, 719 (Tex. 1990), superseded by statute on other grounds as stated in Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015).
A corporate stockholder cannot recover damages personally for a wrong done solely to the corporation, even though he may be injured by that wrong.
Ordinarily, the cause of action for injury to .the property of a corporation, or the impairment or destruction of its business is vested in the corporation, as distinguished from its stockholders, even though it may result indirectly in loss of earnings to the stockholders. Generally, the individual stockholders have no separate and independent right of action for injuries suffered by the corporation which merely result in the depreciation of the value of their stock ...
The rule does not, of course, prohibit a stockholder from recovering damages for wrongs done to him individually “where the wrongdoer violates a duty arising from contract or otherwise, and owing directly by him to the stockholder.”
Wingate, 795 S.W.2d at 719 (quoting Massachusetts v. Davis, 140 Tex. 398, 407-08, 168 S.W.2d 216, cert. denied, 320 U.S. 210, 63 S.Ct. 1447, 87 L.Ed. 1848 (1943)). In order to recover individually, “a stockholder must prove a personal cause of action and personal injury.” Wingate, 795 S.W.2d at 719. Although “a corporate shareholder has no individual cause of action for personal damages caused solely by the wrong done to the corporation,” a shareholder “may still bring suit if a director violates a duty arising from a contract or representa-: tion owing directly to the shareholder.” Great Am. Food Chain, Inc. v. Andreottola, 2016 WL 852962, at *3 (N.D. Tex. March 4, 2016) (citing Faour v. Faour, 789 S.W.2d 620, 622 (Tex. App.-Texarkana 1990, writ denied)).
Respondents point this Court to the longstanding state court precedent from the Court of Appeals in Dallas in Cotten v. *339Republic Nat’l Bank of Dallas, 395 S.W.2d 930, 941 (Tex, Civ. App.-Dallas 1965, writ ref'd n.r.e.).
But some actions for fraud are by their nature personal to each creditor, or each stockholder, or each policyholder, and the receiver may not then maintain a suit in his representative capacity for their joint benefit. In such case each claimant and he alone may bring and maintain the suit himself, for the action is personal, separate and several, not joint, and extends no-further than the individual loss of each particular creditor who sues. For example, one who proves that he relied on false representations as to the corporation’s financial condition and was thereby induced to extend credit to the corporation, or to purchase stock in it, or to take out an insurance policy with it, must in his own name maintain a separate suit for his damages against the person who uttered the fraudulent ' representation. The aggrieved party and he alone may maintain the suit. Even then a creditor, stockholder, or policyholder who did hot know or rely on such false representation, or was not induced by it to extend credit or invest his money cannot recover for the alleged fraud. The receiver has no right to bring or maintain such a suit.
Id. Respondents also cite this Court to a number of cases outside of Texas espousing the view held in Cotten. See Stephenson v. Citco Grp. Ltd., 700 F.Supp.2d 599, 610-24 (S.D.N.Y. 2010) (Fraudulent inducement claims “are direct because they allege a harm suffered by plaintiff independent of the partnership and a duty to plaintiff that is not merely derivative of [the defendant’s] fiduciary duties to the partnership.”); Medkser v. Feingold, 307 Fed.Appx. 262, 265 (11th Cir. 2008) (“The complaint states that the defendants made intentional misrepresentations to these plaintiffs and thereby fraudulently induced them to invest their money into [the companies] which they would not otherwise have done. This is not an injury to the corporation, but to these investors, and the suit may be brought as a direct action.”); In re Smith Barney Transfer Agent Litig., 765 F.Supp.2d 391, 399 (S.D.N.Y. 2011) (investment induced by misrepresentations was direct .claim); Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 401 (S.D.N.Y. 2010) (tortious inducement was direct claim); Poptech, L.P. v. Stewardship Inv. Advisors, LLC, 849 F.Supp.2d 249, 263 (D. Conn. 2012) (nondisclosure in offer and sale of securities was direct claim); Albert v. Alex. Brown Mgmt. Serv., Inc., Nos. Civ. A. 762-N, Civ. A 763-N, 2005 WL 2130607, at *12 (Del. Ch. Aug. 26, 2005) (“Generally, nondisclosure claims are direct claims.”).
Movant and Trustee also cite this Court to In re Chiron Equities, LLC, 552 B.R. 674 (Bankr. S.D. Tex. 2016) (Bohm, J.). In Chiron, the plaintiff made a number of allegations against corporate officers of the debtor which the Court determined to be derivative. At first glance, the court’s holding regarding a fraud allegation appears to be in contravention of the Cotten standard. In Chiron, Judge Bohm held that a fraud claim based on allegations that the defendant lied or tricked plaintiff into depositing funds into the debtor’s account and then embezzled those funds was a derivative claim. 552 B.R. at 690-91.
The fact that [defendant] may have lied to [plaintiff] ..., or tricked [plaintiff] into transferring [plaintiffs] funds into the Debtor’s account, or failed to disclose to [plaintiff] his embezzlement of the Debtor’s funds, does not somehow give [plaintiff] a direct cause of action against [defendant].
[[Image here]]
*340The value of [plaintiffs] stock ownership interest in the Debtor may have declined due to improper draining of the Debtor’s cash by [defendant], but, as set forth in Wingate, these circumstances do not give rise to a personal claim that [plaintiff] can prosecute; rather, they only give rise to a derivative claim of the Debtor. See 795 S.W.2d at 719. To reiterate, the draining of the funds may injure [plaintiff] insofar as the value of its stock ownership declines, but this injury to [plaintiff! cannot occur without the injury to the Debtor—and this nexus makes it a derivative claim.
Id. at 690-91. Specifically, in Chiron, the allegations of wrongdoing related to what the defendant actually did with investments after they were made as opposed to what he represented the investments would be used for to induce the investment. Thus, upon closer examination, Chi-ron is distinguishable from Cotten and the allegations in this case.
Here, the allegations in the Complaint relate to the Movant’s conduct in soliciting investments from the Respondents in the Debtor corporation. Unlike in Chiron, there are no allegations of embezzlement or wrongdoing by the former officers and directors to the corporation. Rather, the Respondents allege inducement by way of false statements regarding the state of the corporation, the histories of the CEO and president, and the history of the corporation and its predecessors. In reviewing the Complaint and accepting all allegations as true, the Court concludes that the allegations listed support only personal causes of action and personal injury so that Respondents’ claims cannot be considered derivative. Further, the allegations of harm are not caused solely by a wrong done to the corporation with investor monies after they were in the Debtors’ control but, rather, a wrong done to the individual Respondents in solicitation of their specific investments. Indeed, no resulting wrong or harm to the Debtor corporation is alleged. Rather, the alleged wrongdoing took place prior to Respondents becoming stockholders. As in Cot-ten, the Respondents’ causes of action are personal to each investor and do not necessarily result in harm to the Debtors or all stockholders in general. 395 S.W.2d at 941. Rather, it is possible that every stockholder would not be able to allege reliance on false representations in their decision to invest and therefore, could not recover for the alleged harm. As such, the Court concludes that the causes of action asserted in Respondents’ Complaint are solely direct claims for which the Plan and Confirmation Order do not provide an injunction or third party release,1
D. Ehrenberg Plaintiffs’ Claims
As previously stated, the Ehren-. berg Plaintiffs did not file a response to Movant’s Motion for Enforcement of Injunction. Movant’s Exhibit B provides the Ehrenberg Plaintiffs’ Second Amended Original Petition filed in Dallas County District Court under Cause No. DC-15-11994 (“Ehrenberg Complaint”). The Ehrenberg Complaint differs from the Respondents’ Complaint in several key ways that support enjoining the Ehrenberg suit. First, Palmaz Scientific, Inc. remains a named defendant. Second, the Ehrenberg Plaintiffs raise allegations of fraud or breach of duties for actions taken after the *341Plaintiffs invested in the corporation which affected all stockholders equally and would have caused harm to the Debtors. As previously discussed, such claims would be derivative and belong to the Litigation Trust. Third, the Ehrenberg Plaintiffs raise agency allegations which may require harm to have resulted to the Debtors if the corporation must be a named defendant in order to allege agency. Insofar as agency is alleged, the Court will not parse through the Ehrenberg Complaint in an attempt to presume what causes of action Plaintiffs may allege as direct claims. As such, the Court shall grant Movant’s request to enforce the injunction and require the Ehrenberg Plaintiffs to amend their Complaint within fourteen (14) days to reflect only those causes of action which they believe do not run afoul of the injunctive language of the Plan and Confirmation Order, given this Court’s instant Order.
Conclusion
IT IS THEREFORE ORDERED that Julio Palmaz M.D.’s Motion for Enforcement of Injunction (ECF No. 420) is DENIED as to the Turnbull Plaintiffs.
IT IS FURTHER ORDERED that Julio Palmaz M.D.’s Motion for Enforcement of Injunction (ECF No. 420) is GRANTED as to the Ehrenberg Plaintiffs. The Ehrenberg Plaintiffs must amend their state court complaint within fourteen (14) days to meet compliance with this Order or the state court case must be dismissed.
All other relief not specifically granted herein is DENIED.
. The Court will note that the Complaint, as currently drafted, does not name any of the Debtors as defendants. If, however, Plaintiffs are required to name any of the Debtors as defendants in the state court litigation, this Court finds that such action is expressly prohibited by the Confirmation Order and Plan because harm would necessarily have resulted to the Debtors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500201/ | OPINION
GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge.
Creditor Ivan Qi (“Qi”) filed involuntary petitions against husband and wife, Vin*344cent and Robin Zenga (the “Zengas”).1 The Zengas filed a motion to dismiss the involuntary petition in each of their respective cases, arguing that 11 U.S.C. § 303(b)(1) required a minimum of three petitioning creditors to institute an involuntary bankruptcy against them because they each had 12 or more creditors. At the hearing on the motions, Qi argued that the Zengas were estopped from asserting that they had more than 11 creditors because in response to a post-judgment interrogatory asking them to identify their other creditors, they listed ten creditors. The bankruptcy court agreed with Qi, denied the Zengas’ motions to dismiss the petitions, and entered orders for relief against them. The Zengas obtained stays of the orders for relief pending disposition of these appeals. For the reasons that follow, the Panel REVERSES the bankruptcy court’s decision and vacates the orders for relief and REMANDS the cases for further proceedings consistent with this opinion.
ISSUES ON APPEAL
The Zengas raised the following issues on appeal:
1. Whether the bankruptcy court erred in granting orders for relief under Chapter 7 of the Bankruptcy Code against the Zengas?
2. Whether the bankruptcy court applied the doctrine of judicial estoppel or equitable estoppel in determining whether the number of petitioning creditors was correct under the statute? And whether the bankruptcy court erred in application of either of those doctrines?
3. Whether the requirement under 11 U.S.C. § 303(b) that when a person has 12 or more creditors there must be three petitioning creditors to comrpence an involuntary petition is jurisdictional in nature and, therefore, cannot be waived or modified on equitable grounds?
4.Whether a court may preclude a debtor from introducing evidence as to the 12 creditor threshold of 11 U.S.C. § 303(b) through an equitable doctrine, such as equitable estoppel, following the Supreme Court’s decision in Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014)?
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Middle District of Tennessee has authorized appeals to the Panel, and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citation omitted). An order for relief in an involuntary case is a final order. Mktg. & Creative Sols., Inc. v. Scripps Howard Broadcasting Co. (In re Mktg. & Creative Sols., Inc.), 338 B.R. 300, 302 (6th Cir. BAP 2006). As this Bankruptcy Appellate Panel has previously noted:
In granting the relief sought in an involuntary petition, the bankruptcy court must consider the factual as well as legal issues. Findings of fact are reviewed under the clearly erroneous standard. Fed. R. Bankr. P. 8013; Fed R. Civ. P. 52. “A finding of fact is clearly errone*345ous ‘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.’ ” United States v. Mathews (In re Mathews), 209 B.R. 218, 219 (6th Cir. BAP 1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)); see United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Conclusions of law are reviewed de novo. Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (6th Cir. BAP 1997); Belfance v. Bushey (In re Bushey), 210 B.R. 95, 98 (6th Cir. BAP 1997). Furthermore, a bankruptcy court’s interpretation of the Bankruptcy Code is reviewed de novo. In re Troutman Enters., 253 B.R. [8] at 10 [ (6th Cir. BAP 2000) ]. De novo review means that the issue is decided as if it had not been heard before. Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir.1996). No deference is given to the trial court’s conclusions of law. In re Eastoum Auto Co., 215 B.R. 960 [ (6th Cir. BAP 1998) ] (citing Razavi v. Comm’r, 74 F.3d 125 (6th Cir.1996)).
Id.
The standard of review regarding the application of estoppel has been called into question recently by the Sixth Circuit Court of Appeals.
In Lewis v. Weyerhaeuser, 141 Fed. Appx. 420, 423-24 (6th Cir. 2005), we questioned the continuing viability of our de novo standard for judicial estoppel, noting the Supreme Court’s characterization of the doctrine as an equitable remedy “invoked by the court at its discretion,” New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (citation omitted), and recognizing that the “majority of federal courts” review for abuse of discretion.
Kimberlin v. Dollar Gen. Corp., 520 Fed. Appx. 312, 313 n.1 (6th Cir. 2013). Other circuits have held that the standard of review for equitable estoppel is abuse of discretion. See Radio Sys. Corp. v. Lalor, 709 F.3d 1124, 1130 (Fed. Cir. 2013); Bah. Sales Assoc., LLC v. Byers, 701 F.3d 1335, 1340 (11th Cir. 2012). The Sixth Circuit B.A.P. has previously held that “[equitable estoppel involves mixed questions of law and fact.” Rossi v, Westenhoefer (In re Rossi), No. 11-8048, 2012 WL 913732, at *2 (6th Cir. BAP Mar. 20, 2012) (citing Noonan v. Sec'y of Health & Human Servs. (In re Ludlow Hosp. Soc’y, Inc.), 124 F.3d 22, 25 n.6 (1st Cir. 1997)). However, the result of each of the Zenga appeals is the same whether the bankruptcy court’s application of estoppel is reviewed de novo, as a mixed question of law and fact, or for an abuse of discretion because, by definition, it is an abuse of discretion to apply an erroneous legal standard. The bankruptcy court’s use of estoppel was erroneous because Qi failed to establish the elements of either judicial or equitable estoppel.
FACTS
Qi obtained judgment against the Zen-gas for $2,500,000 in state court and filed separate involuntary chapter 7 bankruptcy petitions against each of them. The Zengas filed motions to dismiss the involuntary petitions, asserting that because they have 12 or more creditors, the involuntary petitions required at least three petitioning creditors. The Zengas also assert that the cases should be dismissed because the cases are not in the best interest of creditors. . ■
The bankruptcy court held a hearing on the motions to dismiss at which Qi argued that the Zengas were estopped from pre*346senting evidence that they had more than 11 creditors due to their responses to post-judgment sworn interrogatories which were previously served in the state court proceedings. The bankruptcy court agreed with Qi, denied the motions to dismiss, and entered orders for relief against them. The Zengas filed separate appeals.
DISCUSSION
Bankruptcy Code § 303 provides for the filing of involuntary bankruptcy petitions, stating in part:
(b) An involuntary case against a person is commenced by the filing with the bankruptcy. court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities ...
(2) if there are fewer than 12 such holders ..., by one or more of such holders that hold in the aggregate at least $ 15,775 of such claims;....
11 U.S.C. § 303(b).
In this case, the involuntary petitions were filed by Qi alone after he relied on the answers to the post-judgment interrogatory responses provided by the Zengas which described ten creditors in addition to Qi—one creditor under the 12 creditor threshold requiring three or more petitioning creditors. In addition to the original responses to the interrogatories, prior to filing the bankruptcy petitions, Qi also requested the Zengas to supplement their responses. The Zengas failed to do so. Based upon these facts, the bankruptcy court determined that the Zengas were estopped from establishing in the bankruptcy court that they had more than 11 creditors. The Zengas contest that determination, asserting that: the numerical threshold of § 303(b)(1) is jurisdictional in nature and, therefore, cannot be overridden through use of an equitable doctrine; the Supreme Court’s decision in Law v. Siegel, — U.S.-, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014), precludes the use of equitable doctrines such as estoppel in the bankruptcy courts; the bankruptcy cases should be dismissed because they are not in the best interest of their creditors; and the bankruptcy court erroneously applied the doctrines of judicial and equitable estoppel.
I. The Number of Petitioning Creditors is Not Jurisdictional
The Zengas argue that the number of petitioning creditors required to file an involuntary petition is jurisdictional and, therefore, equitable doctrines such as estoppel may not be utilized to supplant the statutory requirement of three petitioning creditors. Courts that have examined this issue following the Supreme Court’s decision in Arbaugh v. Y & H Corp., 546 U.S. 500, 126 S.Ct. 1235, 163 L.Ed,2d 1097 (2006), have determined that the threshold is not jurisdictional. The Panel agrees with the post-Arbaugh decisions which hold that the threshold requirement is not jurisdictional.
In Arbaugh the Supreme Court addressed the issue of whether the 15-em-ployee threshold for imposition of Title VII employment protections and liability was jurisdictional. The Court framed the issue as whether the 15-employee threshold was a “determinant of subject-matter jurisdiction,” as, opposed to merely being an element of Arbaugh’s claim. Id. at 513-14,126 S.Ct. 1235. In finding that it was not jurisdictional, the Court noted that Congress provided for the “basic statutory grants of federal-court subject-matter jurisdiction” under 28 U.S.C. §§ 1331 and 1332. Id. at 513, 12& S.Ct. 1235. The Court also noted that while Congress could have expressly made the 15-employee threshold jurisdictional as it did with the amount-in-controversy limit of diversity-of-citizenship jurisdiction under § 1332, it did not. The Court *347then laid out a bright-line test for determining if a numerosity requirement in a statute is jurisdictional: “when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.” Id. at 516, 126 S.Ct. 1235. On that basis, the Court held that the 15-employee threshold for imposing liability under Title VII was not jurisdictional and could be waived if not raised at the appropriate juncture of the case. Id.
Following Arbaugh, those courts which have addressed whether the numerosity threshold of § 303(b)(1) is jurisdictional have all uniformly concluded that it is not. Thus in Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 166-67 (2d Cir. 2010), the Second Circuit noted that the other subdivisions of § 303 implicitly permit the bankruptcy court’s exercising of jurisdiction over the case even if the creditor threshold has not been met; § 303 does not contain an explicit reference to the creditor threshold being jurisdictional; the statute does not instruct the bankruptcy court to sua sponte raise the issue; and the bankruptcy courts are governed by a separate jurisdictional statute, 28 U.S.C. § 1334. Similarly, the 7th, 9th, 10th and 11th Circuits have all expressed that the numerosity threshold of § 303(b)(1) is not jurisdictional. Mitchell v. Weinman (In re Mitchell), 554 Fed.Appx. 756, 760 (10th Cir. 2014); Trusted Net Media Holdings, LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC), 550 F.3d 1035, 1046 (11th Cir. 2008); Rubin v. Belo Broad. Corp. (In re Rubin), 769 F.2d 611, 614 n.3 (9th Cir. 1985); Kelly v. Herrell, 602 Fed.Appx. 642, 646-47 (7th Cir. 2015) (issue addressed in dicta).
While the Sixth Circuit Court of Appeals has not determined whether the creditor threshold of § 303(b)(1) is jurisdictional, it has addressed a similar question in the context of the Consolidated Omnibus Reconciliation Act, or COBRA, 29 U.S.C.S. § 1161(b), In Thomas v. Miller, the Sixth Circuit held: “[i]n the wake of the Supreme Court’s decision in Arbaugh,” that “the doctrine of equitable estoppel can, in appropriate cases, bar an employer, con-cededly not meeting COBRA’s numerical application threshold, from defending an action under that statute on that basis.” 489 F.3d 293, 297 (6th Cir. 2007). It seems likely that the same principles would be applicable to § 303. In fact, Thomas contains language that can be read as indicating that its holding is applicable in other contexts. “[W]e hold that, in appropriate cases, courts may exercise their equitable powers to estop defendants from arguing that they fall below a statute’s numerical threshold.” Id. at 302.
Accordingly, following the Supreme Court’s decision in Arbaugh, the Sixth Circuit’s decision in Thomas v. Miller, and the post-Arbaugh circuit decisions holding that the threshold is not jurisdictional, the Panel finds that the creditor threshold requirement of § 303(b)(1) is not jurisdictional.
II. The Motions to Dismiss Under 11 U.S.C. § 707 are not Properly Before this Panel
On appeal the Zengas also argue that the involuntary cases should be dismissed because they are not in the best interest of creditors. However, they did not raise that issue in their motions to dismiss the involuntary petitions and the bankruptcy court did not address it. Appellate courts do not generally consider issues on appeal which were not raised in the trial court. Hayward v. Cleveland Clinic Found., 759 F.3d 601, 614-15 (6th Cir. 2014); Burley v. Gagacki, 834 F.3d 606, 613 n.2 (6th Cir. 2016). After the orders for relief were entered, creditor *348William T. Zenga filed motions to dismiss the cases under § 707 of the Code, and the parties agreed to a continuance of those motions while this appeal is pending. Thus, creditor Zenga’s motion to dismiss is not the subject of a final order and, therefore, this court does not have jurisdiction over that matter.2
III. Law v. Siegel is Not Applicable
The Zengas argued in their reply brief that the Court’s decision in Law v. Siegel precluded the bankruptcy court’s use of equitable estoppel to avoid the application of the three or more petitioning creditor requirement of § 308(b)(1). Law v. Siegel, — U.S.-, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). In Law v. Siegel, the Court held that a bankruptcy trustee could not use § 105(a) of the Code to surcharge a debtor’s exemptions for costs that the trustee incurred in avoiding a lien on the debtor’s residential property which the debtor fraudulently imposed upon the property when the Bankruptcy Code exemption provisions and other provisions of the Code do not expressly authorize such a surcharge. In so holding, the Court stated:
It is hornbook law that § 105(a) “does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code.” Section 105(a) confers authority to “carry out” the provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits. That is simply an application of the axiom that a statute’s general permission to take actions of a certain type must yield to a specific prohibition found elsewhere. ... We have long held that “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of’ the Bankruptcy Code, [citations omitted].
Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014). In Redmond v. Jenkins (In re Alternate Fuels, Inc.), 789 F.3d 1139, 1149 (10th Cir. 2015), the Tenth Circuit Court of Appeals succinctly summarized Law v. Siegel’s holding: “Law held simply that a court may not employ § 105(a) to override other explicit mandates in the Bankruptcy Code. Here, no explicit mandate of the Bankruptcy Code prohibits recharacterization [of putative debt to equity] under § 105(a).”
The Zengas cite In re Colon, No. 06-04675 (ESL), 2016 WL 4597279, at *4-5 (Bankr. D.P.R. Sept. 2, 2016), in which a bankruptcy court recently determined that it could not use principles of equity to overcome the 12 creditor threshold requirement. The bankruptcy court initially determined that there were “special circumstances” in the nature of “fraud, artifice, or scam” relating to fraudulent trans*349fers made by the debtor which justified allowing an involuntary petition to proceed with two petitioning creditors, although the debtor had more than 12 creditors. Id. at *2. In reversing its prior decision, the court held that: “[ajfter Law v. Siegel, the equitable powers of the bankruptcy courts, to the extent they existed, have been diminished or restricted whenever exercising such equitable powers contravenes specific statutory provisions.” Id. at *3. In this case, the bankruptcy court used equitable estoppel to prevent the Zengas from introducing evidence that they had more than 11 creditors.
In the present case, the Panel has already determined that, the numerosity requirement found in § 303 is not jurisdictional. While § 303(b) requires three petitioning creditors when there are 12 known creditors, this requirement is not an absolute bar to the administration of a case filed with less petitioning creditors. See, e.g., Adams v. Zarnel (Zarnel), 619 F.3d 156 (2d Cir. 2010). Absent the Supreme Court’s or Sixth Circuit Court of Appeals’ determination that Law v. Siegel prevails under these circumstances and not Arbaugh v. Y & H Corp. and Thomas v. Miller and their progeny, this Panel does not believe that Siegel can be extended to prevent use of equitable doctrines to overcome a numerical threshold requirement of a statute when that statutory provision is not jurisdictional. Therefore, the Panel will consider whether es-toppel was properly applied under the facts of this case.
IY. Qi has Conceded that Judicial Estoppel is not Applicable and the Bankruptcy Court Erred in Applying Equitable Estoppel
Due to the bankruptcy court reference ■to both judicial estoppel and equitable es-toppel in its oral decision, the parties do not agree and the record is not clear as to which type of estoppel the bankruptcy court applied.3 The Zengas assert that the bankruptcy court incorrectly applied the doctrine of judicial estoppel while Qi asserts that the bankruptcy court correctly applied equitable estoppel.
Qi admits that judicial estoppel is not applicable given that no court previously made a decision in reliance on the Zengas’ prior false oaths. “[Jjudicial estop-pel bars a party from (1) asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding, where (2) the prior court adopted the contrary position either as a preliminary matter or as part of a final disposition.” White, 617 F.3d at 476 (citing Browning v. Levy, 283 F.3d 761, 775 (6th Cir. 2002)). See also Henry v. Abbott Labs., 651 Fed.Appx. 494, 503 (6th Cir. 2016); Haddad v. Randall S. Miller Assocs., PC, 587 Fed.Appx. 959, 965 (6th Cir. 2014). Qi is correct that the elements of judicial estoppel are not met. Since Qi has conceded that judicial estoppel is not applicable and was not applied by the bankruptcy court,4 the Panel need only determine if *350the bankruptcy court correctly applied equitable estoppel to prevent the Zengas from establishing that they had more than 11 creditors.
The bankruptcy court held that “this is a textbook case where equitable estoppel prohibits the Zengas from now claiming that there are more than the 10 creditors ... The elements of equitable estoppel are all here and there is no equitable balance to them that would inspire me to overlook the fact that the answers were given under oath.” (Tr. at 25:16-26:2).
To establish equitable estoppel, a party must prove “(1) misrepresentation by the party against whom estoppel is asserted; (2) reasonable reliance on the misrepresentation by the party asserting estoppel; and (3) detriment to the party asserting estoppel.” Mich. Express, Inc. v. United States, 374 F.3d 424, 427 (6th Cir. 2004) (citing LaBonte v. United States, 233 F.3d 1049, 1053 (7th Cir. 2000)). See also Dobrowski v. Jay Dee Contractors, Inc., 571 F.3d 551, 557 (6th Cir. 2009).
There appears to be no dispute that the first two elements of equitable estoppel were met. The Zengas made factual misrepresentations that they only had 10 creditors in addition to Qi. The Zengas’ counsel stated during the hearing: “[a]d-mittedly the interrogatory answers that were given were deficient.” (Tr. at 4:21-4:22). Regarding the second element, Qi asserted that he reasonably .relied upon the misrepresentation, “There’s nothing else my client could have done to ascertain the number of creditors here, other than what they did.” (Tr. at 8:3-8:4). The Zen-gas have not challenged the reliance element. In fact, the Zengas’ briefs conceded that Qi “reasonably relied on inaccurate interrogatory answers in basing its decision to commence an involuntary bankruptcy proceeding.” (Appellants’ Br. at 6, ECF No. 19).
However, the bankruptcy court made no factual finding that Qi suffered a detriment due to his reliance on the Zen-gas’ statements regarding the number of creditors. The detriment suffered by a party seeking to employ the doctrine of equitable estoppel must be “actual and substantial.” Deschamps v. Bridgestone Ams., Inc. Salaried Emps. Ret. Plan, 840 F.3d 267, 276 (6th Cir. 2016); Smiljanich v. Gen. Motors Corp, 302 Fed.Appx. 443, 450 (6th Cir. 2008). See also Trustees of Michigan Laborers’ Health Care Fund v. Gibbons, 209 F.3d 587, 591 (6th Cir. 2000) (party must have suffered “substantial detriment”). Examples of detriment justifying the invocation of equitable estoppel have included the “loss of opportunity to improve one’s position” or loss of evidence. Smiljanich, 302 Fed.Appx. at 450.
At oral argument the Panel inquired what detriment Qi had suffered in reliance upon the Zengas’ misrepresentations. Qi’s attorney was unable to articulate any specific detriment, other than the loss of time. The court did not employ 11 U.S.C. § 303(c) and Federal Rule of Bankruptcy Procedure 1003(b) to address any reliance which Qi placed on the answers to the post-judgment interrogatories. Section 303(c) provides that:
After the filing of a petition under this section but before the case is dismissed or relief is ordered, a creditor holding an unsecured claim that is not contingent ... may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section.
11-U.S.C. § 303(c). Rule 1003(b) implements that section, providing:
If the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a *351list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more creditors as provided in § 803(b) of the Code, the court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.
Fed. R. Bankr. P. 1003. Faced with similar circumstances, other courts have granted petitioning creditors such as Qi leave to seek the joinder of additional petitioning creditors. See In re Lee, 247 B.R. 311, 314 (Bankr. M.D. Fla. 2000) (court refused to apply doctrine of judicial estoppel as to the number of creditors based on debtor’s pri- or testimony and gave the petitioning creditors 20 days to obtain an additional petitioning creditor); In re Nazarian, 5 B.R. 279, 281 (Bankr. D. Md. 1980) (when only 2 qualifying creditors filed the petition, court refused to dismiss the case and granted the petitioning creditors 30 days to seek the joinder of a third petitioning creditor). See also In re J. V. Knitting Servs., Inc., 4 B.R. 597 (Bankr. S.D. Fla. 1980) (court did not need to examine validity of original petitioning creditor’s claim once three additional qualifying creditors joined the involuntary petition). Thus, if the bankruptcy court took evidence and found that the Zengas had more than 11 creditors, the court could have granted Qi leave to join additional petitioning creditors.
Accordingly, based upon the bankruptcy court’s failure to find actual and substantial detriment to Qi and Qi’s inability to point to any detriment other than loss of time, the Panel finds that the bankruptcy court erred as a matter of law in applying equitable estoppel to bar the Zengas from introducing evidence of the existence of more than 11 creditors.5
CONCLUSION
For the reasons stated, the bankruptcy court’s Orders for Relief are VACATED and the cases are REMANDED for further proceedings consistent with this opinion.
. Because they were involuntary petitions, separate cases have been maintained. However, to date all of the filings in each case appear identical in substance. This opinion is being entered in each individual case.
. It also seems doubtful that a non-petitioning creditor has standing to oppose an involuntary petition. Section 303(d) states: "[t]he debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section.” Further, Federal Rule of Bankruptcy Procedure 1011(a) provides that "[t]he debtor named in an involuntary petition may contest the petition. In the case of a petition against a partnership under Rule 1004, a nonpetition-ing general partner, or a person who is alleged to be a general partner but denies the allegation, may contest the petition.” Fed. R. Bankr. P. 1011(a). Conspicuously missing from the persons stated in the Bankruptcy Code and Rules as to whom may file an answer to an involuntary petition are nonpeti-tioning creditors. Courts have held that such creditors do not have such standing. See In re QDN, LLC, 363 Fed.Appx. 873 (3d Cir. 2010); Broadview Sav. Bank v. Royal Gate Assocs. Ltd. (In re Royal Gate Assocs., Ltd.), 81 B.R. 165 (Bankr. M.D. Ga. 1988); In re Zoomaire, Inc., 47 B.R. 628 (Bankr. S.D. Ohio 1985); and Dunlop Tire and Rubber Corp. v. Earl’s Tire Serv., Inc. (In re Earl’s Tire Serv., Inc.), 6 B.R. 1019 (D. Del. 1980) (superseded by rule on other grounds).
. On pages 6 and 7 of the transcript of the hearing the bankruptcy court referred to judicial estoppel; on pages 8 and 25 of the transcript of the hearing the court referred to equitable estoppel; on pages 7 and 24 counsel for Qi referred to equitable estoppel; throughout the 6 pages of the transcript devoted to the court’s oral decision, the court refers to the responses to the post-judgment interrogatories being "under oath” or "sworn” at least 7 times. (Tr. of Proceedings, May 31, 2016, ECF No. 10). The first element of judicial estoppel is usually described as “asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding.” White v. Wyndham Vacation Ownership, Inc., 617 F.3d 472, 476 (6th Cir. 2010).
. (Appellee's Br. at 3-4, ECF No. 20).
. Law v. Siegel further supports the conclusion that the use of equitable estoppel to preclude the Zengas from introducing evidence of the existence of more than 11 creditors was erroneous when § 303(c) and Bankruptcy Rule 1003(b) were available to minimize the detriment to Qi. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500202/ | MEMORANDUM OPINION AND ORDER
Tracey N. Wise, Bankruptcy Judge
This matter is before the Court on the United States Trustee’s (“UST”) Motion to Disqualify Bingham Greenebaum Doll LLP from Representing the Chapter 7 Trustee [ECF No. 2044]1 (“Motion to Disqualify”) in which two groups of Debtors’2 largest creditors join: (i) East Coast Miner LLC, East Coast Miner II LLC, Keith Goggin and Michael Goodwin (collectively, the “ECM Entities”), and (ii) CAMOFI Master LDCM, CAMHZN Master LDC, Centrecourt Asset Management, LLC and Richard Smithline (collectively, the “CAM Entities,” and together with the ECM Entities, the “Objecting Creditors”). The UST and Objecting Creditors seek to disqualify Bingham Greenebaum Doll LLC (“BGD”) from representing the chapter 7 trustee, Phaedra Spradlin (“Spradlin”), in certain adversary proceedings discussed below.
PROCEDURAL BACKGROUND REGARDING BGD’S EMPLOYMENT
BGD’s prede.cessor-in-interest3 represented debtor U.S. Coal Corporation (“U.S. Coal”) and its debtor subsidiaries beginning July 25, 2007, and ending shortly before the involuntary petitions were filed in the spring, 2014.
When these cases converted to chapter 7 in April 2015, the Court granted the chapter 7 trustee’s application to employ BGD as special counsel pursuant to § 327(e)4 for the following purposes: (i) to serve as conflicts counsel with sole responsibility to review and litigate carve-out related issues on behalf of the bankruptcy estates; (ii) to conduct litigation other than a pending adversary proceeding against the ECM Entities; and (iii) to represent the estates on matters pertaining to the debtors’ coal business, environmental and related matters. [See Mem. Op. & Order Granting Tr.’s Appl. to Employ, Sept. 22, 2015, ECF No. .1698 (hereinafter “Employment Order”).]
In the Employment Order, the Court addressed the ECM Entities’ argument that BGD’s proposed employment to conduct litigation was not for a “specified” purpose as required by § 327(e) because the targets of any such litigation were not specifically listed. The Court found the lack of a specific list of potential defendants did not prevent a finding that BGD’s employment as litigation counsel was for a special purpose under § 327(e), but re*354served ruling on the terms of BGD’s compensation until such litigation was identified. The Court found that with respect to certain creditors which BGD disclosed it had previously represented, BGD did not hold an adyerse interest on any matter on which BGD was to be employed as special counsel under § 327(e).
Thereafter, in May and June 2016, BGD filed multiple adversary proceedings, including:
1. Spradlin v. CAMOFI Master LDC, et al., Adv. No. 16-1003 ("CAM Adversary”);
2. Spradlin v. Futurtec, L.P., et al., Adv. No. 16-1032 (“Futurtec Adversary”);
3. Spradlin v. Collins, et al., Adv. No, 16-1038 (“D&O Adversary”);
4. Spradlin v. The Nelson Law Firm, LLC, Adv. No. 16-1039 (“Nelson Adversary”); and
5. Spradlin v. USC Management, LLC, Adv. No. 16-1041 (“USCM Adversary”),
In a supplemental declaration [ECF No. 1980] filed June 16, 2016, C.R. Bowles, Jr., a partner in BGD, disclosed that on June 8, 2016, he became aware that BGD’s predecessor-in-interest had represented one of the CAM Entities, Centrecourt Asset Management LLC (“Centrecourt”). He disclosed that the representation occurred between May and December 2008, and involved a transaction with debtors U.S. Coal and J.A.D. Coal Company, Inc. (“JAD”) in which JAD agreed to purchase certain mining equipment from Centrec-ourt for $4.8 million (“Equipment Transaction”). Centrecourt is a named defendant in the CAM Adversary BGD filed on Spradlin’s behalf in which she seeks to avoid multiple transactions between debtors and the CAM Entities, including the Equipment Transaction. BGD advised Spradlin and counsel for the CAM Entities of - the conflict on June 9 and 10, 2016, respectively. As part of the Equipment Transaction, debtors paid BGD $53,770.72 representing Centrecourt’s attorney fees; thus raising an additional issue of whether BGD is also subject to an avoidance action.
In a second supplemental declaration [ECF No. 2005] (“BGD Supplement 2”), filed August 16,2016, BGD disclosed:
1. The CAM Entities were not willing to waive BGD’s conflict in representing Spradlin in the CAM Adversary, and BGD would withdraw from its representation therein.
2. BGD intended to withdraw from representing Spradlin in the Futurtec Adversary which “involve[d] most of the same investments at issue as in the CAM AP.” However, BGD stated that its “withdrawal from the Futurtec AP is for cost and convenience reasons, as BGD would not be disqualified from pursuing the Futurtec AP, as that does not involve litigation against a former client.” [BGD Suppl. 2 ¶ 8.]
3. “[I]n response to questions from counsel for John Collins, BGD determined (and with the agreement of [Spradlin], disclosed to John Collins’ counsel) that [BGD] represented U.S. Coal in the corporate and tax documentation matters in connection with the USC Management LLC transaction.” [BGD Suppl. 2 1113.] BGD did not discuss or provide insight as to the implications, if any, of this disclosure.
4. BGD would reimburse debtors’ estates the $53,770.72 paid to it in connection with the Equipment Transaction, write off fees and expenses in the approximate amount of $100,000.00 related to the CAM and Futurtec Adversaries and assist replacement counsel in transitioning the adversary proceedings without charge to the estates.
*355On September 7, 2016, pursuant to agreed orders, BGD withdrew and Foley & Lardner LLP was substituted as Sprad-lin’s counsel in the CAM and Futurtec Adversaries. On October 24, 2016, an order was entered granting Spradlin’s and BGD’s joint motion to settle any avoidance action against BGD in exchange for its payment of $53,770.72 into the debtors’ bankruptcy estates.
The UST’s Motion to Disqualify contends BGD must also be disqualified from representing Spradlin in the D & 0 and USCM Adversaries. The Objecting Creditors join in the UST’s Motion to Disqualify and further argue for BGD’s disqualification in the Nelson Adversary (collectively, the “Challenged Adversaries”).5 Spradlin opposes BGD’s disqualification in these additional adversary proceedings. Spradlin states she has no doubt that BGD is acting in the debtors’ and their estates’ best interest and the estates will be harmed if BGD is disqualified. Spradlin joins in and incorporates6 BGD’s Objection and Response to the Motion to Disqualify [ECF No. 2063] (“BGD Objection”), in which BGD argues that state ethical rules as well as the Bankruptcy Code permit the representation because BGD is not adverse to any former client and none of the services BGD provided to Centrecourt in “documenting an equipment deal” will be at issue in the Challenged Adversary proceedings. [BGD Obj. ¶¶ 1, 6, 7.] Finally, BGD and Spradlin assert that under Sixth Circuit precedent, disqualification is a drastic measure which the Court should hesitate to impose except when it is absolutely necessary and Spradlin’s choice of counsel should be upheld.
JURISDICTION
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). Venue in this district and division is proper pursuant to 28 U.S.C. § 1409.
LAW AND ANALYSIS
BGD was employed as debtors’ special counsel under § 327(e) which provides:
(e) 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). Employment under § 327(e) eliminates the disinterestedness requirement and “also narrows the conflict of interest issue to one of factual evaluation of actual or potential conflicts only as related to the particular matters for which representation is sought.” 3 Collier on Bankruptcy ¶327.04[9] (Alan N. Resnick & Henry J. Sommers eds., 16th ed.) (quoting In re Statewide Pools, Inc,, 79 B.R. 312, 314 (Bankr. S.D. Ohio 1987)).
Although the Court previously determined that BGD did not have an adverse interest based on its original disclosures, new information has arisen, both in *356the identification of the adverse parties in the Challenged Adversaries and the information disclosed in BGD’s supplements. No party asserts that BGD knowingly withheld information, and the Court specifically finds that once discovered, BGD promptly and properly disclosed the supplemental information, including its prior representation of Centrecourt.7 That said, when evaluating conflicts of interest, the Court must do so objectively, “‘irrespective of the integrity of the person under consideration.’ ” In re Leslie Fay Cos. Inc., 175 B.R. 525, 536 (Bankr. S.D.N.Y. 1994) (quoting In re Martin, 817 F.2d 175, 181 (1st Cir. 1987)).
Relying on two Sixth Circuit cases, Spradlin contends the UST and Objecting Creditors have a heavy burden and must carry a high standard of proof to support BGD’s disqualification. See Dana Corp. v. Blue Cross & Blue Shield Mut. of N. Ohio, 900 F.2d 882, 889 (6th Cir. 1990) (setting forth a three-factor analysis for disqualification of counsel); Official Unsecured Creditors Comm. v. Ampco-Pittsburg Corp., (In re Valley-Vulcan Mold Co.), 237 B.R. 322, 337 (6th Cir. BAP 1999), aff'd, 5 Fed.Appx. 396 (6th Cir. 2001) (citing Dana Corp. and noting that a party seeking disqualification has a heavy burden and high standard of proof). Neither case was decided in the context of professionals employed under § 327; thus both cases are inappo-site to the facts and issues presented here.8
BGD does not dispute that it failed to disclose its prior representation of Cen-trecourt in its initial disclosures. Under the Bankruptcy Code, counsel seeking employment under § 327 has a continuing duty to disclose any adverse interest throughout its employment on behalf of the estate. In re Granite Partners, LP, 219 B.R. 22, 35 (Bankr. S.D.N.Y. 1998) (“Continuing disclosure is necessary to preserve the integrity of the bankruptcy system by ensuring that the trustee’s professionals remain conflict free.”). BGD met its duty of continued disclosure, which in turn, gives rise to the Court’s obligation to revisit the propriety of counsel’s engagement.
BGD is correct that the burden of proof is on the movants as the parties seeking disqualification of a professional appointed' under § 327. In re Cleveland Trinidad Paving Co., 218 B.R. 385, 388 (Bankr. N.D. Ohio 1998). However, the burden is not a heightened one; rather, “[tjhat burden must be borne by a preponderance of the evidence to show that the standards of § 327[ (e) ] and Rule 2014 have been compromised.” Id.
The narrow issue before the Court is whether BGD holds an interest adverse to the debtors or their estates with respect to the Challenged Adversaries. For the reasons set forth below, the Motion to Disqualify will be granted as to the D & O and USCM Adversaries and denied as to the Nelson Adversary.
A. Legal Standards Governing Retention under § 327(e)
The Employment Order sets forth applicable law interpreting § 327(e). At issue here is the requirement that proposed *357counsel must not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which counsel is to be employed. In re West Point Props., L.P., 249 B.R. 273, 284 (Bankr. E.D. Tenn. 2000).
“Adverse interest,” not defined in the Bankruptcy Code, is often construed to mean:
(1) to possess ... an economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate.
In re Greystone Holdings, L.L.C., 305 B.R. 456, 461 (Bankr. N.D. Ohio 2003) (quoting In re Fretter, 219 B.R. 769, 777 (Bankr. N.D. Ohio 1998)). “[I]nterests are not considered ‘adverse’ merely because it is possible to conceive a' set of circumstances under which they might clash.” Greystone Holdings, 305 B.R. at 461 (quoting In re Caldor, Inc.-NY, 193 B.R. 165, 172 (Bankr. S.D.N.Y. 1996)). In determining whether to disqualify debtors’ counsel which had been employed under § 327(a), and addressing whether an actual (as opposed to potential) conflict of interest is required for disqualification, the court in Leslie Fay stated:
Potential conflicts, no less than actual ones, can provide motives for attorneys to act in ways contrary to the best interests of their clients. Rather than worry about the potential/actual dichotomy it is more productive to ask whether a professional has “either a meaningful incentive to act contrary to the best interests of the estate and its sundry creditors— an incentive sufficient to place those parties at more than acceptable risk—or the reasonable perception of one.”
Leslie Fay, 175 B.R. at 533 (quoting Martin, 817 F.2d at 180-81). Relying, in part, on Leslie Fay, the court in In re Midway Motor Sales, Inc., 355 B.R. 26 (Bankr. N.D. Ohio 2006) stated:
In determining whether a professional has or represents an “adverse interest,” one court observed: “[I]f it is plausible that the representation of another interest may cause the debtor’s attorneys to act any differently than they would without that other representation, then they have a conflict and an interest adverse to the estate.” In re The Leslie Fay Cos., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994). An actual conflict exists if there is “an active competition between two interests, in which one interest can only be served at the expense of the other.” In re BH & P, Inc., 103 B.R. 556, 563 (Bankr. D.N.J. 1989), aff'd in pertinent part, 119 B.R. 35 (D.N.J. 1990). “As a general principle, professional persons employed by the trustee should be free of any conflicting interest which might, in the view of the trustee or the bankruptcy court, affect the performance of their services or which might impair the high degree of impartiality and detached judgment expected of them during the administration of a case.” In re Amdura Corp., 121 B.R. 862, 865 (Bankr. D. Colo. 1990), quoting Collier on Bankruptcy ¶ 327.03 (1985).
Id. at 33 (alteration in original) (quoting In re Git-N-Go, Inc., 321 B.R. 54, 58-59 (Bankr. N.D. Okla. 2004)).
Also relevant is § 327(c), which provides:
(c) In a case under chapter 7,12, or 11 of this title, a person is not disqualified for employment under this section solely because of such person’s employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case *358the court shall disapprove such employment if there is an actual conflict of interest.
11 U.S.C. § 327(c) (emphasis added); see also In re Polaroid Corp., 424 B.R. 446, 453 (Bankr. D. Minn. 2010) (stating § 327(c) “applies generally to all employment under § 327” and applying § 327(c) to its analysis of employment of counsel under § 327(e)). Here, “clearly, the ‘actual conflict of interest’ that [§ 327(c)] references must be analyzed in the narrower context of § 327(e).” Id. at 453.
B. Application of Law to Challenged Adversaries
1. The D & 0 Adversary
The defendants in the D & 0 Adversary, John Collins, John Whitt, Kenneth Whitt, Robert Gabbard and Michael Windisch (collectively, the “D & 0 Defendants”), are former officers and/or directors of U.S. Coal. Spradlin generally asserts the D & 0 Defendants breached their fiduciary duties to U.S. Coal and the other debtors to ensure that their personal interests, as well as those of the CAM and ECM Entities,9 were preserved and enhanced to the detriment of the debtors and other creditors. Spradlin specifically asserts that the D & 0 Defendants improperly granted control of the debtors to the CAM Entities by causing or permitting U.S. Coal to enter into an Advisory Services Agreement with Centrecourt. She contends this resulted in U.S. Coal and JAD entering into the Equipment Transaction. In short, she claims the debtors overpaid for the equipment in the Equipment Transaction.
The D & 0 Adversary originally asserted that the CAM Entities made false representations and withheld material information regarding the value and condition of the equipment and that the D & 0 Defendants breached their duties by: (i) failing to properly investigate; (ii) allowing the CAM Entities to control debtors; and/or (iii) acquiescing in the CAM Entities’ actions. After the Motion to Disqualify was filed, Spradlin amended the D & 0 Adversary complaint, with the D & 0 Defendants’ consent, to remove the allegations that the CAM Entities made false representations and/or withheld material information as to the value of the equipment. Spradlin still asserts that the D & 0 Defendants improperly permitted the CAM Entities, including Centrecourt, to obtain and exercise control over debtors and the D & 0 Defendants violated their fiduciary duties by failing to ensure that “Centrecourt did not abuse its dual position of controlling the Debtors and providing services to Debtors under the Advisory Services Agreement” and by failing to properly investigate the background or value of the equipment prior to purchasing it from Centrecourt. [Second Am. Compl. ¶¶ 39-48, D & O AP ECF No. 36.]
Spradlin and BGD contend that the removal of the allegations that Centrecourt made false representations/withheld material information in connection with the Equipment Transaction, coupled with the fact that none of the Objecting Creditors are defendants therein, removes the taint of any adverse interest BGD may have had and it should not now be disqualified from representing Spradlin in the D & 0 Adversary.
■ The UST and Objecting Creditors disagree, asserting the Equipment Transaction and Centrecourt’s alleged improper conduct in controlling debtors remain sig*359nificant issues in the D & 0 Adversary and BGD’s attorneys may be put in a position of becoming witnesses in the action. BGD claims the scope of its representation in the Equipment Transaction was to merely document the previously negotiated transaction; however, the Objecting Creditors insist that BGD’s representation of the CAM Entities was much more extensive. The CAM Entities contend BGD represented them in connection with two complicated loan transactions, which included the Equipment Transaction. The Objecting Creditors contend that BGD’s representation involved numerous documents including a secured note, stock put agreements, mortgages and leasehold mortgages, inter-creditor agreements and a variety of other documents—some of which were drafted by BGD and others which were reviewed by, commented on and/or negotiated by BGD. The D & 0 complaint further avers that the USCM investment,' discussed infra pp. 360-62, also represents impermissible control of the U.S. Coal board.10 [Second Am. Compl. ¶¶ 93-101,198-202.]
BGD describes its representation of Centrecourt as follows:
[BGD’s] work [representing Centrec-ourt] began in May, 2008, and involved review for two loans and various financial and other documents related to the previously negotiated Equipment Sale. [BGD] did nothing more than document the transaction approved by the Debtors and its client before the representation began. The documentation involved detailed financing and related agreements and spanned about six months. Although the [CAM] Entities suggest that [BGD] “served as counsel to the [CAM] Entities in connection with multiple transactions, not just the Equipment Transaction,” this is simply incorrect. As the non-privileged documents produced in these proceedings show, there were multiple financing documents and other agreements among the [CAM] Entities and some of the Debtors that arose directly out of, and relate to, the broadly defined Equipment Transaction. But, [BGD] never advised the [CAM] Entities on general matters involving the Debtors; and, all work from May, 2008 through December, 2008 (the only time frame involving [BGD’s] representation of the [CAM] Entities) involved, in some fashion, local counsel for the Equipment Transaction.
[BGD Obj. ¶ 11.]
Clearly, the parties dispute the scope of BGD’s involvement in the 2008 transactions between the debtors and the CAM Entities. When asked at the hearing whether evidence as to the scope of BGD’s prior representation of Centrecourt was necessary to resolve the Motion to Disqualify, counsel for BGD stated his belief that an evidentiary hearing was unnecessary because the “scope of [BGD’s] representation doesn’t affect whether we are adverse to CAM anymore because we’re not. And we’re not adverse to the former client in the context of any of these challenged AP’s.” [Hr’g Tr. 51:5-16, ECF No. 2091.]
In support, BGD argues that Kentucky state ethical rules governing attorneys’ conduct vis-a-vis former clients authorizes *360its representation of Spradlin in the Challenged Adversaries because Centrecourt is not named as a defendant in those actions. [BGD Obj. ¶¶ 22-35.] However, the issue here is not whether BGD is adverse to the CAM Entities as it might be if the matter is reviewed only under state ethical rules; but rather, whether under § 327(e), BGD holds an interest adverse to the debtors or their estates. “[I]n the bankruptcy context we are not constrained simply by the Code of Professional Responsibility but by the Bankruptcy Code itself.” Leslie Fay, 175 B.R. at 538. Resolution of that question does not revolve merely around the identity of the named defendants.
The Court agrees that an evidentiary hearing on the scope of BGD’s representation is unnecessary. While the Court is mindful of the potential abuse of disqualifications based on notice pleadings, under the unique procedural posture and factual underpinnings of this case, further litigation of the Motion to Disqualify will not assist in its resolution and is not in the best interests of the within estates. Like the notion of an emerging conflict discussed in Leslie Fay, 175 B.R. at 53⅛ the supplemental disclosures, coupled with the allegations in the D & 0 Adversary, have morphed a hypothetical or theoretical conflict into an adverse interest within the meaning of § 327(e). Although a merits decision in the subject adversaries may resolve whether BGD is a witness in the adversaries or has other consequences for its services,11 the Court may and should make this determination based on the supplemental disclosures, pleadings, the parties’ declarations and a review of the record as a whole. In re Bullitt Utilities, Inc., 558 B.R. 181, 185 (Bankr. W.D. Ky. 2016) (citing Midway Motor Sales, 355 B.R. at 33) (In employing the Midway Motor Sales test to determine whether an actual conflict exists, “the Court considers the interplay of the parties, pleadings and the record set forth in the proceeding.”).
The record shows a legitimate dispute regarding the nature and extent of the relationship between the debtors, their officers and directors and Centrecourt and whether that relationship led to the alleged breaches described in the D & 0 complaint. Clearly, BGD represented Cen-trecourt’s interest in complex loan and related agreements involving the debtors. It does not matter whether BGD was local or lead counsel, whether it negotiated the terms of the transactions, or whether it drafted original documents or merely reviewed documents. By its own statements, it represented Centrecourt’s interest in “detailed financing and related agreements.” BGD now seeks to represent a party to challenge, not only the Equipment Transaction, but the entire transaction involving two loans and various financial and other documents, of which the equipment sale was a part. The theory to set aside the transactions is based, in part, on allegations that BGD’s former client, Centrec-ourt, abused its power causing the D & 0 Defendants to breach their fiduciary duties in relinquishing control of the debtors. It is this central dispute, the alleged ceding of authority by the D & 0 Defendants as a result of their relationship with Centrec-ourt, which puts BGD in a direct conflict position.
*361The Court finds it is plausible that BGD’s prior representation of Centrecourt may cause BGD to act differently.12 At the very least, representing Spradlin in the D & 0 Adversary requires BGD to challenge the Equipment Transaction, the subject matter of the services it provided to its former client. Cf. Filene’s Basement, 239 B.R. at 858 (counsel held an actual adverse interest and was disqualified from representing debtor under § 327(a) where contracts prepared by counsel for both debtor and creditor were the subject of litigation and lawsuit involved the interpretation of those contracts , and possible testimony by counsel). The Court finds BGD holds an interest adverse to the estates with respect to the D & 0 Adversary and is disqualified from representing Spradlin in that action.
2. The USCM Adversary
The above analysis applies with equal force to the USCM Adversary. The sole defendant, USC Management, LLC (“USCM”),13 was incorporated on September 30, 2009. The complaint challenges U.S. Coal’s management’s (including the D & 0 Defendants’ defined above) actions in granting themselves $800,000 from U.S. Coal for investment in USCM. The complaint avers USCM’s formation was an improper vehicle for U.S. Coal’s management to invest in East Coast Miner LLC, a primary lender to U.S. Coal. U.S. Coal’s management was allegedly given such interest to incentivize them to favor lender ECM over other U.S. Coal creditors. Spradlin asserts U.S. Coal was insolvent when the funds were transferred, and U.S. Coal was not indebted to USCM, not obligated tio fund management’s interest in USCM, and received no value from funding USCM. Spradlin seeks to avoid the $800,000 transfer as a fraudulent conveyance under the Bankruptcy Code and state law. As reviewed above, the allegations regarding the formation, capitalization and alleged improper purpose for which USCM was organized serve as an additional basis for Spradlin’s claims asserted against the D & O Defendants in the D & O Adversary.
USCM’s answer, filed subsequent to the hearing on the Motion to Disqualify, states:
USCM admits that U.S. Coal partially capitalized USCM by contributing $800,000, which was in turn invested in ECM. USCM avers that certain resulting interests in USCM were granted, after a specified vesting period and as incentive compensation, to certain U.S. Coal employees.
[Answer & Affirmative Defenses of USCM ¶ 17, USCM AP ECF No. 24.]
The UST’s Motion states that during BGD’s representation of U.S. Coal, BGD prepared a restricted company interest agreement granting John Collins, one of the D & O Defendants, a membership interest in USCM as “incentive compensation.” The UST argues the complaint against USCM puts BGD in the position of having to argue that a transaction in which it performed the legal work was improper. BGD denies it was involved in the formation or capitalization of USCM or that it prepared a restricted company interest agreement at that time. However, BGD concedes it prepared a restricted company interest agreement for U.S. Coal after Collins and others were granted a membership interest in USCM, stating:
After these grants occurred, Ernst & Young, who was providing tax advice to U.S. Coal, raised questions on how the *362U.S. Coal portion of the capitalization should be characterized for tax purposes. Issues arose as to whether U.S. Coal could invest in its own debt, and whether U.S. Coal should be taxed on future distributions from ECM to USC Management since the membership interests funded by U.S. Coal did not immediately vest in the individuals, At the prompting of Ernst & Young, U.S. Coal asked [BGD] to advise it on such tax issues. [BGD] recommended to U.S. Coal, and prepared for U.S. Coal, a Restricted Company Interest Agreement to address the tax complications of the company’s previous grants that provided the investment in USC Management. This work was done solely on behalf of U.S. Coal.
[BGD Obj. ¶ 12 (emphasis in original).]
Regardless of the timing or reasons surrounding the preparation of the agreement, the adversary puts BGD in the position of challenging transactions which it reviewed and acted upon, even “if only” for tax purposes. For the same reasons set forth above, BGD holds an interest adverse to the estates with respect to the USCM Adversary and is disqualified from representing Spradlin with respect thereto.
3. The Nelson Adversary
In the Nelson Adversary, Spradlin seeks to avoid and recover as a fraudulent conveyance approximately $1.8 million debtors paid to The Nelson Law Firm, LLC (“Nelson Firm”) for legal services rendered to the ECM Entities. The general factual underpinnings for the claims are allegations that the Nelson Firm represented the ECM Entities in various state court lawsuits, in at least one of which it appears the ECM Entities and U.S. Coal were co-defendants. However, U.S. Coal had its own counsel in these matters, Nixon Peabody LLP, and Spradlin alleges the debtors received no consideration for the payment of the Nelson Firm’s fees.14 The complaint generally alleges the ECM Entities’ improper influence over U.S, Coal as one basis for the alleged improper fee payment.15
Only the EClYf Entities request BGD’s disqualification in' the Nelson Adversary; neither the UST nor any other party16 join in this aspect of the disqualification motion.
Although their position is not entirely clear, the ECM Entities appear to suggest that BGD is disqualified from representing Spradlin in this adversary because for many years BGD served as general counsel for U.S. Coal and BGD is now challenging the actions of debtors’ officers and directors in suing the Nelson Firm. There is no suggestion that BGD ever represented the ECM Entities, the alleged beneficiary of the transfers at issue in the Nelson Adversary. Further, as conceded' by counsel for the ECM Entities and unlike the D & O and USCM Adversaries, BGD was not directly involved in the transactions which are the subject of the Nelson *363Adversary. Essentially, the ECM Entities contend that BGD’s role as general counsel is enough to warrant disqualification. The Court disagrees.
As reviewed above, disqualification under § 327(e) requires an adverse interest in the matter on which counsel is to be employed. The ECM Entities, as the party with the burden of proof, have failed to provide any factual or legal basis upon which this Court can find that BGD has an “actual conflict” or represents or holds any interest adverse to the debtors or their estates with respect to the Nelson Adversary. See 11 U.S.C. §§ 327(c), (e).
ORDER
Based on the foregoing, '
IT IS HEREBY ORDERED that the U.S. Trustee’s Motion to Disqualify is GRANTED and BGD is disqualified from representing Spradlin in the D & 0 Adversary and the USCM Adversary.
IT IS FURTHER ORDERED that the ECM Entities’ request to disqualify BGD from representing Spradlin in the Nelson Adversary is DENIED.
. References to the docket in the debtors' main case appear as [ECF No.-].
. Debtors are U.S. Coal Corporation and its Subsidiaries: J.A.D. Coal Company, Inc., Licking River Mining, LLC, Licking River Resources, Inc., S. M. & J., Inc., Fox Knob Coal Company, Inc., Oak Hill Coal, Inc., Sandlick Coal Company, LLC, Harlan County Mining, LLC, and U.S. Coal Marketing LLC.
. BGD is the successor-in-interest by merger to Greenebaum, Doll and McDonald PLLC. The Court discerns no relevant distinction between BGD and its predecessor firm to the issues presented herein.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
. References to the dockets in the Challenged Adversaries discussed herein appear as:
a. Spradlin v. Collins, et al., Adv. No. 16-1038: [D & O AP ECF No.-.]
b. Spradlin v. The Nelson Law Firm, LLC, Adv. No. 16-1039: [Nelson AP ECF No. -.]
c. Spradlin v. USC Management, LLC, Adv. No. 16-1041: [USCM AP ECF No. -.]
. [See Spradlin Obj. to Mot. to Disqualify n.2, ECF No. 2064.]
. The Court likewise dismisses, as without merit, any suggestion that Centrecourt had a duty to discover and disclose BGD’s prior representation of it by the predecessor firm.
. Dana Corp. involved mail fraud and racketeering activity totally outside the bankruptcy context. Although Valley-Vulcan involved an adversary proceeding before a bankruptcy court, the disqualification issue concerned counsel for a non-debtor entity which did not require prior approval for employment under § 327.
. Neither the CAM Entities nor the ECM Entb ties are named defendants in any of the Challenged Adversaries.
. At the hearing, when asked about its position with respect to BGD’s representation of Spradlin in the USCM Adversary, counsel for the CAM Entities advised the Court that their position was the same with respect to "any of the adversary proceedings where the legitimacy of the transaction documents that [the CAM Entities] entered into will become an issue, [the CAM Entities have] a real problem with the lawyers who represented them in connection with drafting, negotiating and finalizing those documents standing up in this Court and saying that they were a problem. [Hr’g Tr. 23:12-18, ECF No. 2091.]
. The Court accords no weight to the arguments suggesting that BGD may become a target for a lawsuit and/or disciplinary action instigated by the CAM Entities. [See Hr’g Tr. 54:4-11], Cf. In re Filene's Basement, Inc., 239 B.R. 850, 858 (Bankr. D. Mass. 1999) (considering possibility of malpractice action against proposed counsel as creating potential conflict in representing debtor in case that might involve interpretation of contracts drafted by counsel on behalf of debtor and creditor).
. The amendment of the D & O complaint which BGD claims removes any taint of conflict may be one example of BGD acting differently.
. USCM’s incorporator, Dean Hunt, was originally a named defendant but was voluntarily dismissed, with prejudice, on August 30, 2016.
. The Trustee has also sued the ECM Entities in a separate proceeding to recover some of the same fees and concedes she may only have a single satisfaction of these claims. [Compl, ¶ 4, Nelson AP ECF No. 1.]
. Spradlin acknowledges that debtors may have been obligated to indemnify the ECM Entities for fees and expenses related to certain loan documents and financing transactions, but that amount is minimal.
.The CAM Entities joined in the objection of the ECM Entities generally, but did not provide any specific arguments as to BGD’s disqualification in the Nelson Adversary. At the hearing, the CAM Entities’ counsel advised the Court that its client did not have a position on BGD’s disqualification in the Nelson Adversary. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500203/ | SALADINO, Bankruptcy Judge
The debtor appeals from an order of the bankruptcy court1 sustaining the trustee’s objection to an exemption claimed by the debtor. Specifically, the bankruptcy court held that a Minnesota property tax refund under Minn. Stat. Ann. § 290A.04 (West) is not exempt under Section 550.37 (Subd. 14) of the Minnesota statutes as “government assistance based on need,” following this panel’s decision in Manty v. Johnson (In re Johnson), 509 B.R. 213 (8th Cir. BAP 2014). The debtor appeals, asserting that Johnson was implicitly overruled by a subsequent decision of the Eighth Circuit Court of Appeals in In re Hardy, 787 F.3d 1189 (8th Cir. 2015).
For the reasons set forth below, we affirm.
STANDARD OF REVIEW
The panel reviews the bankruptcy court’s findings of fact for clear error and conclusions of law de novo. Manty v. Johnson (In re Johnson), 509 B.R. 213, 214 (8th Cir. BAP 2014) (citing Addison v. Seaver (In re Addison), 540 F.3d 805, 809 (8th Cir. 2008)). The bankruptcy court’s statutory interpretation is a question of law that is subject to de novo review. Id. at 214-15 (citing Graven v. Fink (In re Graven), 936 F.2d 378, 384-85 (8th Cir. 1991)). Likewise, the allowance or disallowance of an exemption is subject to de novo review. Id. at 215 (citing Drenttel v. Jensen-Carter (In re Drenttel), 309 B.R. 320, 322 (8th Cir. BAP 2004)).
BACKGROUND
Bankruptcy debtors in Minnesota may choose either the federal exemptions or the exemptions provided under Minnesota and other federal law. Johnson, 509 B.R. at 215 (citing Martin v. Bucher (In re Martin), 297 B.R. 750, 751-52 (8th Cir. BAP 2003)). The debtor in this case opted to protect her assets under the Minnesota exemption provisions and claimed an exemption in a portion of a $1,500.00 property tax refund as government assistance based on need. The bankruptcy court sustained the Chapter 7 trustee’s objection to the exemption, stating that the precedent of Johnson and In re Padilla, 513 B.R. 116 (D. Minn. 2014), precluded a contrary ruling.
*365Section 550.37 of the Minnesota statutes sets forth a list of property that may be claimed as exempt. Subdivision 14 of that statute in effect as of the petition date exempts public assistance, as follows:
Subd. 14. Public assistance. All government assistance based on need, and the earnings or salary of a person who is a recipient of government assistance based on need, shall be exempt from all claims of creditors including any contractual setoff or security interest asserted by a financial institution. For the purposes of this chapter, government assistance based on need includes but is not limited to Minnesota family investment program, general assistance medical care, Supplemental Security Income, medical assistance, MinnesotaCare, payment of Medicare part B premiums or receipt of part D extra help, MFIP diversionary work program, work participation cash benefit, Minnesota supplemental assistance, emergency Minnesota supplemental assistance, general assistance, emergency general assistance, emergency assistance or county crisis funds, energy or fuel assistance, and food support. The salary or earnings of any debtor who is or has been an eligible recipient of government assistance based on need, or an inmate of a correctional institution shall, upon the debtor’s return to private employment or farming after having been an eligible recipient of government assistance based on need, or an inmate of a correctional institution, be exempt from attachment, garnishment, or levy of execution for a period of six months after the debtor’s return to employment or farming and after all public assistance for which eligibility existed has been terminated. The exemption provisions contained in this subdivision also apply for 60 days after deposit in any financial institution, whether in a single or joint account. In tracing the funds, the first-in first-out method of accounting shall be used. The burden of establishing that funds are exempt rests upon the debtor. Agencies distributing government assistance and the correctional institutions shall, at the request of creditors, inform them whether or not any debtor has been an eligible recipient of government assistance based on need, or an inmate of a correctional institution, within the preceding six months.
Minn. Stat. Ann. § 550.37 (West).
The asset that the debtor claimed as exempt under that statute was a property tax refund the debtor received under the State of Minnesota Property Tax Refund Act, Minn. Stat. Ann. § 290A.01, et. seq. (West). The stated purpose of the Act is “to provide property tax relief to certain persons who own or rent their homesteads.” Minn. Stat. Ann. § 290A.02 (West).
In Johnson, we determined that the Minnesota property tax refund was not “government assistance based on need” under Minn. Stat. Ann. § 550.37 (West) and, therefore, not exempt. In doing so, we described the property tax refund:
The Act sets out three ways an individual may be eligible for such a property tax refund. First, the Act provides a refund for homeowners whose property taxes are in excess of certain percentages of household income. This provision provides for a phase-out of the refund as income level increases. The household income limit for these homeowners in 2012 was $103,729.20. Second, Minnesota provides a refund to renters whose rent exceeds certain percentages of their household incomes. Similar to the homeowners’ refund, the statute has a phaseout of the renters’ refunds as income increases. The household income limit *366for the renters’ refund in 2012 was $56,219.22. And third, a homeowner may receive a refund if property taxes on a homestead increase more than twelve percent over the previous year, excluding increases attributable to improvements made to the property. This refund is available regardless of the homeowner’s income.
Johnson, 509 B.R. at 217. We then discussed our decision in In re Hardy, 503 B.R. 722 (8th Cir. BAP 2013), which involved a similar issue under Missouri law. In that case, we affirmed the bankruptcy court’s holding that the refundable component of the federal child tax credit, also known as the “additional child tax credit,” was not an exempt “public assistance benefit” under Missouri law. After further discussion of the Minnesota property tax refund statute, we said, “In sum, for the same reasons articulated in In re Hardy, we conclude that the property tax refund at issue here is not ‘government assistance based on need,’ and is therefore not exempt under § 550.37, subd. 14.” Johnson, 509 B.R. at 219.
Hardy was appealed to the Eighth Circuit Court of Appeals, which reversed. In re Hardy, 787 F.3d 1189 (8th Cir. 2015). The . Court of Appeals focused on a series of amendments to the child tax credit statute in determining that Congress designed it to benefit low-income families and therefore it is need-based and within the Missouri exemption requirement for a public assistance benefit. The Eighth Circuit reached this conclusion after reviewing a decade’s worth of legislative activity that made the credit available to all families with qualifying children, increased the amount of tax credit per child, increased the refundable portion of the tax credit, and lowered the threshold earned income amount for refund eligibility. The applicable tax tables indicated the phase-out income levels for various family sizes were modest—one example in the opinion showed the refundable credit for a single parent with two children phasing out completely at $37,550.00. 787 F.3d at 1196. The substantive effect of the amendments, the court observed, “substantially shifted the balance between providing incentives for taxpayers to earn income, on the one hand, and simply providing benefits to the needy, on the other.” Id. at 1195.
In this appeal, the debtor argues that our decision in Johnson was implicitly overruled by the reversal of our decision in Hardy by the Eighth Circuit. We disagree.
DISCUSSION
In the Eighth Circuit, it is clear that under most circumstances, a decision by one panel binds a subsequent panel addressing the same issue:
“[A]bsent an intervening opinion by a [state] court,” we are bound by a prior panel’s interpretation of state law. Washington v. Countrywide Home Loans, Inc., 747 F.3d 955, 958 (8th Cir. 2014); see also Mader v. United States, 654 F.3d 794, 800 (8th Cir. 2011) (en banc) (“It is a cardinal rule in our circuit that one panel is bound by the decision of a prior panel.” (quoting Owsley v. Luebbers, 281 F.3d 687, 690 (8th Cir. 2002))).
Neidenbach v. Amica Mut. Ins. Co., 842 F.3d 560, 566 (8th Cir. 2016). However, the rule regarding the binding precedent of a previous panel decision “does not apply when the earlier panel decision is cast into doubt by an intervening Supreme Court decision.” [United States v. Anderson, 771 F.3d 1064, 1066-67 (8th Cir. 2014) ] (citing [United States v.] Williams, 537 F.3d [969,] 975 [(8th Cir. 2008)]). United States v. Eason, 829 F.3d 633, 641 (8th Cir. 2016).
*367Accordingly, our earlier decision in Johnson is binding on this panel, absent an intervening opinion on the issue by a state court—which has not been alleged—or an intervening decision by a higher court which casts doubt on the earlier panel’s decision. The debtor asserts that our decision in Johnson was overruled by the Eighth Circuit’s decision in Hardy. For several reasons, we determine that it was not overruled—implicitly or otherwise.
In Hardy, the Eighth Circuit actually agreed with much of our analysis, saying: “We agree with the BAP that ‘public assistance benefits’ are those government benefits provided to the needy.” 787 F.3d at 1193. Ultimately, the Court of Appeals held that the Additional Child Tax Credit met that definition, basing its decision in large part on amendments to the statute since its inception:
As evidenced by the various amendments to the initial CTC and the accompanying legislators’ comments about those changes, the intent of the legislature when modifying the ACTC was to benefit low income families. The ACTC' has fulfilled Congress’s goals. In practice, it appears to, overwhelmingly benefit low-income families.
Id. at 1196.
Of course, the amendments to the federal Additional Child Tax Credit statute discussed in Hardy have no bearing on the Minnesota property tax refund statute at issue here and in Johnson. However, the debtor in this case set out the legislative history of the Minnesota Property Tax Refund Act in an effort to show this court that through “numerous changes and adjustments to the form of, manner of, amount of, and qualification for relief under the Act ..., the Legislature has not abandoned its purpose of providing relief to homeowners based upon the Legislature’s determination of need.” Appellant’s Br. at 13. We disagree.
A review of that history indicates the legislature has never tailored the refund to low-income homeowners. In 1994, the Minnesota Legislature made the property tax refund more readily available to higher income individuals by reducing the “percent paid by claimant” and increasing the refund available to all claimants other than those in the highest income bracket. The refund eligibility phase-out level was also increased to $61,929.00. In 2001, the statute was further amended to increase the maximum household income eligibility to $77,519.00. In 2008, the legislature decreased the percentage-of-income threshold for the top five income brackets from 4.0% to 3.5%. In 2011, the maximum refund was increased to $2,460.00, and the maximum eligible household income level was increased to $100,779.00. In 2013, the legislature increased the maximum refund available to $2,580.00, and raised the phase-out to household incomes exceeding $105,500.00. The 2013 changes also lowered the threshold percentage for determining eligibility for all homeowners with household incomes exceeding $19,530.00, including those individuals at the highest income brackets. The amendments to the Minnesota Property Tax Refund Act demonstrate the legislature’s intent to make the refund available to individuals besides the needy by raising the maximum eligible household income and lowering the threshold income percentage for higher income individuals. There is no basis in the legislative history for a finding that the Act was intended to benefit low-income homeowners.
Finally, counsel for the debtor acknowledged at oral argument that this appeal only - involves subdivision 2 of section 290A.04 of the State of Minnesota Property Tax Refund Act. That is because one of *368the other ways to obtain a refund under the Act is set forth at subdivision 2h of section 290A.04. That subdivision provides an additional property tax refund to homeowners whose property taxes increased more than 12% over the prior year. This additional refund is available without regard to income level or need and is instructive in interpreting a different subsection of the same statute.
When engaging in statutory interpretation we must “read and construe the statute as a whole, giving effect wherever possible to all of its provisions, and interpreting] each section in light of the surrounding sections to avoid conflicting interpretations.” Eclipse Architectural Grp., Inc. v. Lam, 814 N.W.2d 692, 701 (Minn. 2012) (citation omitted).
Minnesota ex rel. N. Pac. Ctr., Inc. v. BNSF Ry. Co., 686 F.3d 567, 572 (8th Cir. 2012).
CONCLUSION
To be clear, Hardy in no way alters the ruling in Johnson. The issue in Johnson and in this case is whether the property tax refund is “government assistance based on need,” and in.-Johnson we looked to legislative expression and other Minnesota cases in determining that the property tax refund is not a need-based benefit because it goes beyond addressing the basic economic necessities of low-income persons. The statute has not changed significantly since Johnson, and neither has our interpretation of it. Johnson is still good law, the Minnesota Property Tax Refund Act does not provide government assistance based on need, and the decision of the bankruptcy court is hereby affirmed.
. The Honorable Michael E. Ridgway, United States Bankruptcy Judge for the District of Minnesota. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500204/ | AMENDED ORDER ON DEUTSCHE ZENTRALGENOSSENSCHAFT-BANK AG DEFENDANTS’ FED. R. CIV. P; 12(c) MOTION FOR JUDGMENT ON THE PLEADINGS
KATHLEEN H. SANBERG, CHIEF UNITED STATES BANKRUPTCY JUDGE .
This adversary proceeding was commenced by Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 *394Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC, (collectively “Plaintiff’) in the Chapter 11 cases of Petters Company, Inc., and related entities. The history of Tom Pet-ters’ Ponzi scheme and the history of this adversary proceeding are well documented in other decisions.1 This decision addresses Deutsche Zentralgenossenschaftbank AG’s (“DZ Bank”) Motion for Judgment on the Pleadings pursuant to Fed. R. Civ. P. 12(c). For the reasons stated below, the motion is granted in part and denied in part.
DZ Bank’s motion was heard on November 18, 2015 and taken under advisement.2 James A, Lodoen, Adam C. Ballinger, and Mark D. Larsen appeared for the Plaintiff. Michael A. Rosow and H. Peter Haveles, Jr. appeared for defendant DZ Bank.3 ■
This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157(b)(1) & 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070-1. This is á core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
This adversary proceeding was reassigned to the undersigned when Chief Judge Gregory F. Kishel retired on May 31, 2016. The undersigned hereby certifies familiarity with the record and determines that the matter at bar may be addressed without prejudice to the parties in accordance with Fed. R. Civ. P. 63, as incorporated by Fed. R. Bankr. P. 9028.
Introduction
This motion arises out of DZ Bank’s interface with Tom Petters’ Ponzi scheme. Beginning in 2002, DZ Bank made loans to Opportunity Finance as part of a “tripartite business relationship.”4 Opportunity Finance used the loan proceeds to invest with Tom Petters and his entities through promissory notes with one or more of the Petters debtor-entities.5 The Petters entities would make payments on the notes with those payments ultimately being acquired by DZ Bank.6,7 In 2003, DZ Bank ended its lending relationship with Opportunity Finance. The debtor-entities made no transfers to DZ Bank after August 2003.8
The Plaintiff seeks to avoid transfers made by the debtor-entities to DZ Bank, as both an initial and subsequent transferee, under the actual and constructive fraud provisions of 11' U.S.C. § 544(b)9 and Minn. Stat. § 513.41 et seq. (“MUFTA”).10
*395Procedural History
The Plaintiff filed his initial complaint on September 30,2010.11 The Plaintiff filed an amended complaint on February 25, 2011.12 DZ Bank filed an answer to that complaint [Dkt. No. 42] while the other defendants in this proceeding filed motions to dismiss.13 In 2013, the Court addressed many of the grounds for dismissal raised in those motions in the Common Issues Decisions.14 The Court granted the Plaintiff leave to amend the complaint in response to those decisions.15 The Plaintiff filed his Second Amended Complaint on May 23, 2014.16 DZ Bank elected to answer17 the Second Amended Complaint and then filed a Motion for Judgment on the Pleadings under Fed. R. Civ. P. 12(c).18
Before oral argument was heard on DZ Bank’s motion,19 the Minnesota Supreme Court issued its decision in Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015) (“Finn”).20 In response to the Finn decision, the Plaintiff filed a motion for leave to amend the Second Amended Complaint.21 The Court granted the Plaintiffs motion and the Plaintiff filed his Third Amended Complaint, which added two new claims for avoidance.22 DZ Bank elected not to amend its answer or motion in response to the Third Amended Complaint but proceeded on its motion for judgment on the pleadings as filed.23
DZ Bank is a fraudulent transfer defendant in the Third Amended Complaint, as provided by Counts 1 through S.24 DZ Bank seeks judgment on the pleadings on the constructive fraud claims.25 The Plain*396tiff and DZ Bank entered into a stipulation dismissing Counts 3 and 4 of the Third Amended Complaint with prejudice.26 The remaining Counts subject to DZ Bank’s motion are the constructive fraud claims under § 544(b) and MUFTA in Counts 6, 7, and 8. To the extent DZ Bank seeks judgment on the pleadings for the actual fraud counts, its motion is denied for failure to meet its burden as movant27 pursuant to Fed. R. Bankr. P. 7012 applying Fed. R. Civ. P. 12(c).
Discussion
I. Legal Standard
Under Fed. R. Civ. P. 12(c), “[ajfter the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings.” Courts review motions for judgment on the pleadings under the same standard as motions to dismiss made under Rule 12(b)(6).28 When deciding these motions, courts accept all facts pleaded by the nonmoving party as true, and the court draws all reasonable inferences from the facts in favor of the nonmoving party.29 A complaint must be dismissed if the complaint fails to plead “enough facts to state a claim to relief that is plausible on its face.”30 Further, “factual allegations must be enough to raise a right to relief above the speculative level... .”31 “[A] plaintiffs obligation to provide the ‘grounds of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”32 Granting a motion for judgment on the pleadings is “appropriate only when there is no dispute as to any material facts and the moving party is entitled to judgment as a matter of law.”
Under these standards, in order to prevail on its motion for judgment on the pleadings under Rule 12(c), DZ Bank has the burden to establish that there are no disputes over material facts regarding the Petters transactions and that it is entitled to judgment as a matter of law on the constructive fraud claims under MUFTA.33
*397 34 The facts must allow the court to draw a reasonable inference that the defendant is liable for the conduct alleged.35
II. Material Facts in Dispute
In its Answer, DZ Bank made a general denial of each allegation in the Complaint.36 DZ Bank also made specific denials of particular allegations, qualifying those denials with limited admissions.37 Further, DZ Bank asserted twenty affirmative defenses.38 Judgment on the pleadings is not appropriate “if the defendant pleads by denial or by affirmative defense so as to put in question a material allegation of the complaint_”39 The allegations and affirmative defenses included in the Answer are considered denied by the Plaintiff.40 Thus, the majority of the facts in this case are disputed. The facts setting out the transactions between the parties to this suit are material as they set forth the basis for avoidance of the transfers. Since those facts are in dispute, judgment on the pleadings is not appropriate.
A. Avoidance Claims
To establish a claim under MUFTA, a debtor must have made a transfer to a creditor without the debtor receiving reasonably equivalent value in exchange for that transfer. Here, the Plaintiff has alleged that DZ Bank received funds originating with PC Funding as either an initial or subsequent transferee. In its Answer, DZ Bank admits that it received payment for its loan to Opportunity Finance from funds in the PC Funding bank account and that funds were also deposited into that account for repayment to Opportunity Finance, who controlled the account.41 Whether DZ Bank was an initial or subsequent transferee is not known at this point. However, the facts alleged are sufficient to state a claim that DZ Bank was a transferee from either PC Funding or Opportunity Finance. Twombly “simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of [the matter complained of],”42 Here, discovery will reveal evidence of how DZ Bank actually received the transfers to resolve the issue of whether DZ Bank was an initial or subsequent transferee, or neither.
The Court will next address both the initial transferee and subsequent transfer*398ee claims in terms of receipt of reasonably equivalent value.
1. Initial Transferee Claims
a. Reasonably Equivalent Value
DZ Bank argues that the Plaintiff has not pleaded sufficient facts to support a claim that PC Funding did not receive reasonably equivalent value in exchange for transfers made to DZ Bank.43 Whether reasonably equivalent value is given in exchange for a transfer is a question of fact.44 If the exchange of value is contested, that contest is a dispute over a material fact since determining that fact alters the outcome of the case.45
DZ Bank argues that under MUFTA, the payments it received constituted repayments on a valid antecedent debt and are therefore reasonably equivalent value as a matter of law.46 DZ Bank argues that the. valid antecedent debt is supported by documents attached to the Answer.. Thus, DZ Bank argues it is entitled to judgment on the pleadings.
The Plaintiff argues that there that the payments received did not constitute antecedent debt because there was no antecedent debt running between PC Funding and DZ Bank.
In support of its arguments about a valid antecedent debt, DZ Bank relies on its Answer and the attachments as proof that transfers made from the PC Funding account to DZ Bank were repayment on a valid antecedent debt. Many of these documents are loan documents. The Court will address first the appropriateness of the submissions of the attachments and documents.
A court should consider materials on a motion for judgment on the pleadings that: 1) are part of the public record attached to the complaint, 2) do not contradict the complaint, or 3) are necessarily embraced by the pleadings.47
First, the documents attached to the Answer are not part of the public record. Second, DZ Bank offers these documents for the purpose of contradicting the allegations in the Complaint that the repayments were not made on a valid antecedent debt to Opportunity Finance. DZ Bank wants to use the documents to establish the existence of valid antecedent debt in order to prove the exchange of reasonably equivalent value.48 Consideration of the exhibits to the Answer for this purpose is improper.
DZ Bank argues that when a contract attached to a complaint contradicts the allegations made in the complaint, the plain language of the contract controls.49 This is an accurate statement of the law, but DZ Bank’s proposed application of the law is incorrect.50 None of the exhibits *399attached to the Complaint contradict the narrative in the Complaint establishing a debtor-creditor relationship between PC Funding and Opportunity Finance (although the validity of the debt is contested in the causes of action relating to Opportunity Finance and related entities). Section 8.13 of the Credit Agreement between PC Funding and PCI, attached as Exhibit A to the Complaint, states that Opportunity Finance is the third party beneficiary of the agreement between PC Funding and PCI, and that Opportunity Finance has the authority to assign its rights to another party.51 The contract provisions relied on by DZ Bank do not establish the existence of an antecedent debt running between PC Funding and DZ Bank.
Third, the documents attached to the Answer are not “necessarily embraced by the complaint.” Documents necessarily embraced by the complaint are those which form the basis of a plaintiffs complaint or are integral to the claim.52
Here, the basis of the initial transferee claims is the transfer of funds from a debtor entity to DZ Bank. The Plaintiff has sufficiently pleaded a prima fade case for avoidance without including or discussing the exhibits attached to the Answer. The attachments are not integral to nor do they form the basis of the cause of action. Instead, the documents proffered establish that facts are disputed. Therefore, the Court will not consider the exhibits attached to DZ Bank’s Answer in deciding this motion.
Based on the allegations in the Complaint and admissions in the Answer, the Court finds that DZ Bank’s argument that the payments it received constituted antecedent debt fails because there was no antecedent debt running directly between PC Funding and DZ Bank.
DZ Bank also argues that if there is not an antecedent debt owed directly by the debtor entities, there is an antecedent debt due to the lending relationship and corporate structure of the three parties and the payments it received therefore constitute reasonably equivalent value. The Plaintiff argues that there was no debt owed by the Petters entities to DZ Bank. Rather, at best, there was a debt owed by the Petters entities to Opportunity Finance and a debt owed by Opportunity Finance to DZ Bank.
A brief review of the Ponzi scheme factual allegations regarding the Defendants is necessary. DZ Bank lent money to Opportunity Finance so that Opportunity Finance could lend it to Petters. Opportunity Finance lent the funds to PC Funding in order to fund Petters’ diverting transactions. Petters, through PCI, ostensibly needed cash to purchase goods that he (or his entities) would resell for profit. When PCI sold these goods to the end retailer that sale would, in theory, create an account receivable owing to PCI. PCI would then assign the account receivable to PC Funding, which used the funds lent by Opportunity Finance. When the retailer paid for the goods on the account receiv*400able, now owed to PC Funding, the retailer was to pay into a bank account at US Bank owned by PC Funding. PC Funding entered into an account control agreement with Opportunity Finance for this bank account. This arrangement allowed Opportunity Finance to “sweep” the account when funds were deposited for payment on the receivable. Opportunity Finance, having control over the account, had the ability to direct funds out of that account to DZ Bank to pay its own debt.53
DZ Bank maintains that these transfers constitute reasonably equivalent value because they were made in repayment of an antecedent debt owed to DZ Bank by Opportunity Finance and because DZ Bank was an assignee of Opportunity Finance’s third party beneficiary rights. DZ Bank relies on various sections of the transactional documents to support this debt repayment theory. DZ Bank argues that Section 8.13 of the Credit Agreement between PC Funding and Opportunity Finance (attached to the Complaint) provides that Opportunity Finance is a third party beneficiary of the Sale Agreement between PC Funding and PCI.54 Section 8.13 of the Credit Agreement allows Opportunity Finance to transfer, assign, or pledge its rights as third party beneficiary to another party.55 DZ Bank asserts that Opportunity Finance transferred its rights as third party beneficiary to DZ Bank, purportedly supported somewhere in the numerous attachments to the answer.56 Further, DZ Bank points to ¶¶ 44, 55, 56, and 86 of the Complaint to support the position that DZ Bank, as assignee of third party beneficiary rights, became a senior lender to Opportunity Finance.57 The allegations in those paragraphs do not support the position advocated by DZ Bank.
None of DZ Bank’s arguments address the particular “rights” that were transferred as third party beneficiary rights or whether those rights would have been enforceable debt obligations under Minnesota law such that they would fall within Minn. Stat. § 513.43(a). Rather, DZ Bank argues that it was able to “claim against the funds in the PC Funding bank account” so that Opportunity Finance could repay the debt it owed.58 DZ Bank asserts that there was a “direct connection” between them.
Even assuming these assertions by DZ Bank are true, it has no impact on the reasonably equivalent value dispute. At most, it allows the Court to infer that DZ Bank was the third party beneficiary of a contract between PC Funding and PCI. It does not allow the Court to make the inferential leap to conclude, as a matter of law, that PCI or PC Funding owed a valid and enforceable debt to DZ Bank under Minnesota law and that any transfer to DZ Bank resulted in a dollar for dollar reduction of a purported third party beneficiary debt liability. Such an inference would be improper as all inferences are to be drawn in favor of the non-moving party.59
DZ Bank’s reliance on the contract provisions in support of its arguments is misplaced. The contracts set forth the facts about how the parties were supposed to conduct themselves and how the transac*401tions were supposed to occur. What actually happened, as alleged in the Complaint, is that Tom Petters and his entities frequently ignored contractual obligations.
The contracts, Complaint and Answer do not set forth facts that PCI or PC Funding owed a debt to DZ Bank. Further, DZ Bank’s repeated assertion that it was being repaid for loans made to Opportunity Finance is irrelevant for purposes of this particular analysis. As noted above, the debt reduction must inure to the debt- or-transferor. The debt reduction here is the debt owed by Opportunity Finance to DZ Bank.60
The Court cannot find that reasonably equivalent value was transferred to the debtor entities by DZ Bank as a matter of law based on the current submissions. The Motion for Judgment on the Pleadings must be denied for the claims under the initial transferee allegations.
2. Section 550 Avoidable Transfer to a Subsequent Transferee
To recover an avoidable transfer from a subsequent transferee under § 550, a plaintiff must allege both that the initial transfer is voidable and that the subsequent transferee received the debtor’s property from the initial transferee.61 However, a plaintiff cannot recover from a subsequent transferee if the subsequent transferee received the property for value and in good faith.62 The value and good faith exception is an affirmative defense, but if the defense is clear from the face of the complaint then it is a bar to recovery.63 Therefore, if the undisputed facts establish that DZ Bank received the transfers from Opportunity Finance for value and in good faith, then DZ Bank is entitled to judgment as a matter of law on the § 550 theory of liability. The Court first addresses the transfers from the debtor entities to DZ Bank.
a. Subsequent Transferee
The Plaintiff has sets a factual narrative whereby Opportunity Finance was alleged to be an initial transferee of PC Funding and subsequent transferee of PCI. The rulings on the avoidance of the transfers to Opportunity Finance similarly apply to the extent that they impact any claims by PCI and PC Funding against DZ Bank as a subsequent transferee under § 550.
Next, the Plaintiff includes in the Complaint the allegation that to the extent DZ Bank was not an initial transferee, it was a subsequent transferee from Opportunity Finance.64 The Plaintiff alleges that PC Funding entered into a lending relationship with Opportunity Finance, thus creating a debt obligation to Opportunity Finance. It is alleged that PC Funding gave access to its bank account to Opportunity Finance and that PC Funding repaid Opportunity Finance on the outstanding debt obligation directly out of that same account through the “sweep” function. Opportunity Finance also, having control over the account, had the ability to direct funds out of that account to DZ Bank to pay off its own debt. This factual narrative set forth by the Plaintiff has created a plausible sce*402nario under which DZ Bank could be held liable as a subsequent transferee. DZ Bank’s Answer does not dispute this narrative, rather it admits many of the facts. What is not known at this point, is how the transfers actually happened and the Answer does not resolve the ambiguity.65 As counsel for the Plaintiff admitted, discovery is necessary in order to determine exactly how the funds made it to DZ Bank. The Plaintiff has met his burden to plead “enough fact to raise a reasonable expectation that discovery will reveal evidence of [the matter complained of].”66
. b. Taking for Value under § 550
Section 550 provides that a trustee may not recover from a transferee if that transferee took for value. The undisputed facts demonstrate that DZ Bank received transfers from Opportunity Finance for value. It is undisputed that there was a creditor-debtor relationship between DZ Bank and Opportunity Finance.67 It is undisputed that Opportunity Finance used funds from the PC Funding account to satisfy antecedent debt owed to DZ Bank.68 The Plaintiff has not alleged any facts that challenge the validity or enforceability of the debt between DZ Bank and Opportunity Finance. Thus, the motion is granted on this issue.
c. Good faith under § 550
The remaining issue for subsequent transferee liability is whether there are undisputed facts establishing that DZ Bank took the transfers in good faith pursuant to § 550(b)(1). Good faith is not defined in the Bankruptcy Code and “is determined on a case-by-case basis.”69 A finding of good faith is “primarily a factual determination.”70 To determine whether a party received a transfer in good faith, courts “look to what the transferee objectively ‘knew or should have known’ instead of examining the transferee’s actual knowledge tom a subjective standpoint,”71
The Plaintiff alleges that DZ Bank “knew or should have known that they were benefiting Jfrom fraudulent activity; or at a minimum, failed to exercise reasonable due diligence with respect to Petters, PCI, PC Funding, and SPF Funding in connection with the Ponzi scheme.”72 This allegation must be taken as true for purposes of this motion.73 The Plaintiff also alleges that DZ Bank was on actual notice of numerous “indicia of fraud and financial irregularity but failed to make sufficient *403inquiry.”74 In light of these allegations, the Plaintiff has sufficiently pleaded that DZ Bank lacked good faith for purposes of § 550.
DZ Bank denies both allegations,75 In its Answer, DZ Bank pleaded an affirmative defense that it received all transfers in good faith and “acted at all relevant times in good faith and without knowledge or notice of any alleged fraud on the part of PCI, PC Funding and SPF Funding.”76 The allegations and associated denials create a dispute over material facts preventing a ruling in DZ Bank’s favor as a matter of law on this issue. DZ Bank failed to meet its burden so its motion on this issue must be denied.
B. Miscellaneous
Many of the Defendant’s affirmative defenses were also argued as grounds for dismissal in the Opportunity Finance Motion to Dismiss.77 Those affirmative defenses are subject to the same rulings in the decision on that motion.
Conclusion
DZ Bank has failed to meet its burden to show that there is no dispute as to any material fact and that DZ Bank is entitled to judgment as a matter of law on all points. Whether the debtor received reasonably equivalent value is tied to the litigation against Opportunity Finance which is mired in its own dispute. This adversary proceeding is ready to proceed to discovery and final resolution.
ORDER
IT IS THEREFORE ORDERED:
1.The Motion for Judgment on the Pleadings brought by Defendant DZ Bank in Adv. No. 10-4301 is granted in part and denied in part as discussed herein.
2. Pursuant to Fed. R. Civ. P. 15(a)(2), the Plaintiff is granted leave to amend the complaint in accordance with this decision and the orders issued by Judge Kishel after these motions were filed but prior to June 1, 2016, arising out of the general claw back litigation in the Petters related adversary proceedings.
3. Within 30 days of the issuance of this order, the Plaintiff shall schedule a status conference to discuss the schedule for amendment and answer.
4. After the amendments granted in paragraph 2 are filed, no further motions to dismiss, motions for judgment on the pleadings, or requests to amend the complaint may be filed without leave of the Court.
. See In re Petters Co., Inc., 550 B.R. 438, 440-442 (Bankr. D. Minn. 2016); see also In re Petters Co., Inc., 506 B.R. 784, 806-811 (Bankr. D. Minn. 2013).
. As well as all other outstanding matters in this adversary proceeding. See Dkt. No. 159.
. Joseph G. Petrosinelli and John R. McDonald appeared fpr the Opportunity Finance defendants. David E. Runck appeared on behalf of the Official Committee of Unsecured Creditors. Eric R. Sherman, Thomas Kelly, and Darryn Beckstrom appeared for defendant WestLB,
. Dkt. Nos, 149, pg, 6-7, ¶ 20; 124, pg. 5-6 ¶ 21; 160, pg. 3h
. Dkt. No. 149, pg. 58, ¶ 113; Dkt. No. 124, pg. 38 ¶315. Dkt. No. 149, ¶¶ 63, 103, 104.
. Dkt. No. 149 ¶¶ 44, 107, 113.
. Exactly how DZ Bank acquired those funds is at issue.
. Dkt, No. 149, pg. 63-64 ¶ 115(f); Dkt. No. 124 pg. 38 ¶ 317.
. The Third Amended Complaint, as drafted, includes claims against DZ Bank under 11 U.S.C. § 548. However, the parties have stipulated to the dismissal of those claims in Counts 3, and 4.
. Now the Minnesota Uniform Voidable Transactions Act. See Minn. Stat. § 513,51.
. Dkt. No. 1.
. Dkt. No. 36.
. See e.g., Dkt. Nos. 40, 41, 44.
. In re Petters Co., Inc., 494 B.R. 413 (Bankr. D. Minn. 2013) ("Common Issues I”); In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013) ("Common Issues II”); In re Petters Co., Inc., 499 B.R. 342 (Bankr. D. Minn. 2013) ("Common Issues III”).
. Dkt. No. 59.
. Dkt. No. 83.
. As amended at Dkt. No. 124.
. Dkt. No. 122.
. As well as the motions to dismiss brought by the other Defendants.
. The impact of that decision on this adversary proceeding and the claw back litigation as a whole has been addressed by this Court in In re Petters Co., Inc., 550 B.R. 457 (Bankr. D. Minn. 2016) (“Effect of Finn”). That decision also addressed the impact Finn had on the rulings in the Common Issues decisions from 2013. In re Petters Co., Inc., 494 B.R. 413 (Bankr. D. Minn. 2013) ("Common Issues I”); In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013) ("Common Issues. II”); In re Petters Co., Inc., 499 B.R. 342 (Bankr. D, Minn. 2013) ("Common Issues III”), Those decisions are still in force to the extent they are unaffected by Finn.
. Dkt. No. 130.
. See e.g. Dkt. Nos. 130-6 and 148.
. See Dkt. No. 160 pg. 7, FN. 1.
. DZ Bank is also included as a defendant in Counts 24 and 25, but those Counts were not included in the motion before the Court. •
. DZ Bank seeks dismissal of Counts III, IV, and V of the Second Amended Complaint. Dkt, No. 122, pg. 2, ¶ 3. Counts III and IV of the Second Amended Complaint are claims for avoidance under actual fraud and constructive fraud respectively under MUFTA. Dkt. No. 83, pg. 71-74, ¶¶ 141-156. In the wherefore clause of the motion, DZ Bank requests that the Court dismiss Counts III, IV, and V of the Second Amended Complaint with prejudice. Dkt. No. 122 at pg. 3. In that complaint Count V is another constructive fraud claim under MUFTA. Dkt. No. 83, pg. 75-76, ¶¶ 157-164. In the introductory sec*396tion of the attached memorandum of law, DZ Bank requests dismissal of Counts I, II, IV, V, and VI. Dkt. 122 at pg. 11. Count II is a constructive fraud claim under the Bankruptcy Code [Dkt. No. 83, pg. 69-70, ¶¶ 136-140] and Count VI is a constructive fraud claim under MUFTA. Dkt. No. 83, pg. 77-78, ¶¶ 165-172. Then in its response to the motion for leave to amend, DZ Bank asserts that it is moving for dismissal of constructive fraud counts. Dkt. 137, pg. 4, ¶ 12. Despite these inconsistent statements the Court will address the constructive fraud claims under MUFTA.
. Dkt. Nos. 168, 170.
. The argument presented by DZ Bank related to the actual fraud claims was limited to the availability of a presumption of fraudulent intent in a Ponzi scheme. DZ Bank offered no argument that the Complaint failed to state a claim or that the undisputed facts concerning the actual fraud claims entitled DZ Bank to judgment as a matter of law. The Court has previously ruled that the Plaintiff sufficiently alleged fraudulent intent through badges of fraud. See In re Petters Co., Inc., 495 B.R. 887, 912 (Bankr. D. Minn. 2013), as amended (Aug. 30, 2013); see also Finn v. All. Bank, 860 N.W.2d 638, 647 (Minn. 2015) (noting MUFTA does permit allegations and proof of intent through badges of fraud).
. Clemons v. Crawford, 585 F.3d 1119, 1124 (8th Cir. 2009)(citations and internal quotation omitted).
. Waldron v. Boeing Co., 388 F.3d 591,593 (8th Cir. 2004)(citations omitted).
. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
. Id. at 555, 127 S.Ct. 1955.
. Id at 555, 127 S.Ct. 1955.
. Greenman v. Jessen, 787 F.3d 882, 887 (8th Cir. 2015)(quotations omitted); See also Porous Media Corp. v. Pall Corp, 186 F.3d 1077.
. A fact is material if resolving a dispute over that fact will determine the outcome of the case. King v. Dingle, 702 F.Supp.2d 1049, 1063 (D. Minn. 2010) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)).
. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868, (2009).
. Dkt. 124, pg. 2, ¶ 1.
. See Fed. R. Civ. P. 8(b)(3).
. Dkt. No. 124, pg.38-43, ¶¶ 318-33.
. 5 Wright & Miller, Federal Practice & Procedure § 1368 (1969). Smith & Zobel, Rules Practice § 12.16 (1974).''); see also Kimber v. Gunnell Gold Min. & Mill. Co., 126 F. 137, 140 (8th Cir. 1903).
. The Plaintiff was not required to and did not respond to the Answer or other affirmative defenses; there were no counterclaims. Curry v. Pyramid Life Ins. Co., 271 F.2d 1, 6 (8th Cir. 1959) (“A reply is required to a counterclaim, but not to any other allegations of the answer containing the counterclaim, and is the final pleading required or permitted.'') (citations omitted). Since no response was required, and the Court had not ordered one, any new assertions in the Answer are considered denied. See Fed. R. Civ. P. 8(b)(6); see also Traylor v. Black, Sivalls & Bryson, 189 F.2d 213, 217 (8th Cir. 1951).
. Dkt. 12, pg. 13, ¶ 316 and Dkt. 121, pg. 12, ¶ 89.
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007).
. Dkt. 122 pg. 22-34.
. In re Ozark Rest. Equip. Co., Inc., 850 F.2d 342, 344 (8th Cir. 1988).
. See Dkt. 149, pg. 77, ¶ 167, cf. Dkt. 121, pg. 39 ¶ 323.
. Dkt. 122, pg. 23; citing Neubauer v. Cloutier, 265 Minn. 539, 122 N.W.2d 623, 629 (1963).
. Noble Sys. Corp. v. Alorica Cent., LLC, 543 F.3d 978, 982 (8th Cir. 2008); Porous Media Corp. v. Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999).
. See Dkt. 160, pg. 31.; cf. Dkt. 149 pg. 77, ¶ 167.
. Dkt. 122, pg. 21.
. See N. Indiana Gun & Outdoor Shows, Inc. v. City of S. Bend, 163 F.3d 449, 454 (7th Cir. 1998) ("It is a well-settled rule that when a written instrument contradicts allegations in the complaint to which it is attached, the *399exhibit trumps the allegations.") (emphasis added).
. Dkt. 149-1, pg. 19.
. Miller v. Redwood Toxicology Lab., Inc., 688 F.3d 928, 931 (8th Cir. 2012) ("courts additionally consider ‘matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint whose authenticity is unquestioned' ”); see also BJC Health Sys. v. Columbia Cas. Co., 348 F.3d 685, 688 (8th Cir. 2003) ("It is true that the plaintiff must supply any documents upon which its complaint relies, and if the plaintiff does not provide such documents the defendant is free to do so.") (emphasis added).
. In reality, it is alleged that there were no goods or payments from retailers. Rather, Petters obtained money from other investors in order to keep the scheme going.
. Dkt. No. 149-1 pg. 19.
. Id.
. Dkt. 166 pg. 49.
. Dkt. 160, pg. 31-32.
. Dkt. 160, pg. 31-32
. Waldron v. Boeing Co., 388 F.3d 591, 593 (8th Cir. 2004).
. In this case, the Plaintiff has pleaded the avoidability and challenged the enforceability of the debt owing to Opportunity Finance. The foundational facts giving rise to those claims are nearly all contested.
. In re Circuit All., Inc., 228 B.R. 225, 231 (Bankr. D. Minn. 1998).
. See 11 U.S.C.§ 550(b)(1).
. C.H. Robinson Worldwide, Inc. v. Lobrano, 695 F.3d 758, 764 (8th Cir. 2012),
. Dkt. 149, pg. 78, ¶ 168.
. DZ Bank admits that it lent to Opportunity Finance in order to fund loans to PC Funding Dkt. 124, pg. 4, ¶ 21, pg. 14, ¶ 97; PC Funding established the account to pay Opportunity Finance Dkt. 124, pg. 8, ¶ 48; and Opportunity Finance used the funds in that account to satisfy its obligation to DZ Bank Dkt. 124, pg. 13, ¶ 89, pg. 38, ¶316. The Answer does not provide any clarity as to the route the funds took from the PC Funding account to DZ Bank. Thus DZ Bank does not challenge any of the possibilities noted above. Any assertion that DZ Bank was solely an initial transferee is not included in the written sub- ■ missions.
. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007).
. Dkt. 124, pg. 4, ¶ 24.
. Dkt. 124, pg. 13 ¶ 89.
. In re Sherman, 67 F.3d 1348, 1355 (8th Cir. 1995).
. In re Armstrong, 285 F.3d 1092, 1096 (8th Cir. 2002).
. In re Sherman, 67 F.3d 1348, 1355 (8th Cir. 1995) (citations omitted).
. Dkt. 149, pg. 58, ¶ 114.
. Ashley Cty., Ark. v. Pfizer, Inc., 552 F.3d 659, 669 (8th Cir. 2009).
. Dkt. 149, pg. 62 ¶ 115.
. Dkt. 124, pg. 16, ¶ 114, 115.
. Dkt. No. 124, pg, 40, ¶ 325, 326.
. See e.g., Dkt. 124, pg. 38 ¶ 318 "failure to state a claim”; pg. 40, ¶327 "insolvency"; pg. 40, ¶ 328 "standing.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500205/ | ORDER SUSTAINING RAC ACCEPTANCE EAST LLC’s OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN
Arthur B. Federman, Bankruptcy Judge
Creditor RAC Acceptance East LLC (“RAC”) objects to confirmation of Debtor LaRita Jean Harris’s proposed Chapter 13 Plan. In essence, the Debtor asserts that her rent-to-own-furniture agreement with RAC is a disguised security agreement, rather than a lease, and is proposing to pay RAC’s claim as a secured claim over the life of her plan, as opposed to assuming or rejecting the' lease pursuant to 11 U.S.C. § 365. For the reasons that follow, I conclude that the Lease-Purchase Agreement is a true lease and, therefore, RAC’s Objection to confirmation will be SUSTAINED.
The facts are undisputed. On August 1, 2015, the Debtor executed a Lease-Purchase Agreement with RAC regarding a king size bed, mattress, and mattress pad (collectively, the “Bedroom Furniture”). The Agreement stated that the “cash prices” for the bed frame and box springs were $1,597.99; the mattress was $999.00; and the mattress pad was $99.00; for a total “cash price” of $2,695.99.
Under the terms of the Agreement, the Debtor agreed to rent the Bedroom Furniture for a minimum four-month term. She agreed to a rental payment of $224.99, plus sales tax of $18.79 per month, for a total monthly payment of $243.78. The Agreement provides that the Debtor may obtain ownership of the Bedroom Furniture by making 36 payments, totaling $8,776.08 in rent and sales tax. Alternatively, the Agreement provides that the Debtor may obtain ownership of the Bedi-oom Furniture by exercising an “Early Purchase Option” under the Agreement. The Early Purchase Option requires the Debtor to pay any past due lease payments and other charges, plus an amount shown on a chart based on the payments made thus far.
The Debtor made four monthly payments prior to filing her Chapter 13 bankruptcy ease on December 18, 2015. The Debtor is proposing to treat RAC as a secured creditor holding a claim for a purchase money security interest in the Bedroom Furniture, which was purchased within a year prior to filing, and thus entitled to payment “in full” under *405§§ 1325(a)(5) and 506. However, the Debt- ■or is proposing to use the “cash price” of $2,695.99 as the amount of the secured claim, and is proposing to pay interest at the Chapter 13 rate. As a result, the Debt- or is proposing to pay RAC $75 per month over 36 months. RAC objects, asserting that, if the Debtor intends to keep the Bedroom Furniture, RAC is entitled to treatment as an unexpired lease pursuant to § 365.
Thus, confirmation of the Debtor’s proposed Plan turns on whether the Agreement is a lease or a disguised security agreement. If it is a disguised security agreement, then RAC’s objection to confirmation should be denied. If it is a lease, then, as RAC asserts, § 365(b)(1) requires that the Plan provide that the Debtor either: (1) cure all defaults under the Agreement; compensate RAC for its pecuniary losses resulting from the defaults; and provide adequate assurance of future performance; or (2) reject of the Agreement, in which case RAC will be entitled to repossess the Bedroom Furniture and make a claim for damages against the Debtor’s estate.1
As RAC suggests, the existence, nature, and extent of a security interest in property is governed by state law.2 As relevant here, the Missouri legislature has enacted legislation, known as the “Rental-Purchase Agreement law,” to regulate rent-to-own transactions.3 The statutes define a “rental-purchase agreement” as:
an agreement between a merchant and a consumer for the use of merchandise by the consumer for personal, family, or household purposes, for an initial period of four months or less that is automatically renewable with each payment after the initial period, and that permits the consumer to become the owner of the merchandise. A rental-purchase agreement shall not be construed tobe ... [a] security interest as defined in subdivision (37) of section 400.1-201_4
The statutes then set forth a number of required and prohibited provisions for rental-purchase agreements.5
However, the parties agree, as do I, that the answer to the question of whether the Agreement here is a true lease or disguised security agreement lies in Article 2A of the Uniform Commercial Code. Particularly, § 400.1-201(37) of the Missouri Revised Statutes provides, in relevant part:
“Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. ...
Whether a transaction creates a lease or security interest is determined by the facts of each case; however, a transaction creates a security interest if the *406consideration the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease not subject to termination by the lessee, and
(1) the original term of the lease is equal to or greater than the remaining economic life of the goods,
(2) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods,
(3) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement, or
(4) the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration upon compliance with the lease agreement.6
Although the Debtor emphasizes the facts-of-each-case directive, the parties agree, and the statute is clear, that the threshold question is whether the lessee has the option to terminate the agreement at any time. The Honorable Jerry W. Ven-ters has interpreted § 400.1-201(37) as follows:
[Section 400.1-201(37)] suggests that a transaction creates a lease if the obligation to pay for the right of possession -is subject to termination, and this suggestion has been consistently adopted as the proper interpretation of § 400.1— 201(37). “[T]he existence of an absolute obligation by the lessee to purchase the rental property is the touchstone in determining whether a security interest was intended.” The reasoning behind this interpretation of § 400.1-201(37) is straightforward. A security interest, by definition, secures an obligation. In the absence of an obligation, there can be no security interest.7
The Agreement in this case unquestionably provides that the Debtor has the right to terminate the Agreement, without penalty, at any time after four months. Therefore, “[i]n the absence of an absolute obligation to pay the purchase price, the Agreement cannot be construed as a security agreement under § 400.1-201(37); it is a lease.”8
The Debtor relies primarily on In re James,9 a case applying Kansas’ version of § 400.1-201(37). There, the contract at issue provided that, in order to terminate before the end of the full term, the debtors were liable to pay any unpaid monthly payments due under the contract (as is the case here), plus a $500 early termination fee, and “the amount of the adjusted lease balance that exceeds the Vehicle’s realized value at termination.”10 “Realized value” was defined , as “the price we [the lessor] receive for the Vehicle at disposition; the highest offer we receive for the disposition of the Vehicle; or the fair market value of the Vehicle at the end of the Lease *407term.”11 In other words, in order to “terminate” the lease there, the debtors were essentially obligated to pay the full value of the vehicle at issue. Because of that, the Court concluded that the contract was not subject to termination by the lessee and thus went on to discuss the second prong of the analysis under the statute.
As stated, that is not the case here because the Debtor can terminate the Agreement at any time after the first four months, with no penalty. All she has to do is return the Bedroom Furniture (or arrange for RAC to pick it up) and pay any unpaid rent up to that point. In re James is, therefore, distinguishable.
Because the Agreement here is terminable, I need not discuss the remaining factors under § 400.1-201(37).12 The Agreement is a true lease.
That said, the Debtor cites In re Turner,13 an unpublished decision by Judge Venters, in which a vehicle lessor was seeking relief from the stay. The debtor in that case had proposed a plan treating the lessor’s claim as a secured claim. After concluding that the vehicle lease agreement was a true lease under § 400.1-201(37) because it was terminable by the debtor, Judge Venters summarily held that, in order to keep the vehicle and obtain confirmation of her plan, the debtor would have to propose adequate protection payments of $120 per month (even though the lease payments had been $49 per week). The Debtor here asserts that despite the conclusion that the Agreement is a lease, Turner stands for the proposition that she can propose a plan essentially treating RAC as having a secured claim. However, the Turner decision does not mention § 365 at all, perhaps because the lessor did not raise it in the context of stay relief. As a result, I conclude that In re Turner is of little persuasive weight on the issue of whether the Debtor must treat RAC’s claim in accordance with § 365.
Finally, the Debtor does not assert that the Agreement here violates any of the requirements or prohibitions of Missouri’s Rental-Purchase Agreement Law and, indeed, it is very clear as to the Debtor’s rights and obligations under it. Rather, despite the Agreement’s clear termination right, the Debtor asserts that the financial realities of the situation make the Agreement non-terminable “as a practical matter” because the Debtor would not be able to recover the equity of her investment in the property if she does terminate. But that is true of any rent-to-own lease. In essence, the Debtor asserts that rent-to-own agreements such as the Agreement here unfairly target unsophisticated people who lack access to credit. However, as RAC points out, they do serve some benefit to people who do not qualify for traditional financing. Either way, the Missouri legislature has approved rent-to-own leases, albeit with many consumer protections, and since the Debtor does not argue that the Agreement is unenforceable under Missouri law, it must be treated as an unexpired lease in her Chapter 13 Plan.14
*408ACCORDINGLY, RAC Acceptance East LLC’s Objection to Confirmation of Chapter 13 Plan is SUSTAINED. The Debtor is ORDERED to file an amended plan treating RAC’s claim as an unexpired lease within 21 days.
IT IS SO ORDERED.
. 11 U.S.C. § 1322(b)(7) (providing that a plan must, "subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section.”
. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). See also In re Hoskins, 266 B.R. 154, 157 (Bankr. W.D. Mo. 2001) ("To determine a debtor’s property rights, such as an interest in a lease, the bankruptcy court is required to look at state law.”).
. Mo. Rev. Stat. § 407.660 (Sections 407.660 to 407.665 shall be known and may be cited as the "Rental-Purchase Agreement Law.”).
. Mo. Rev. Stat. § 407.66 l(6)(f) (emphasis added).
. See, e.g., Mo. Rev. Stat. § 407.662 ("Rental-purchase agreements, in writing—prohibited provisions—required provisions”) and § 407.663 ("Advertisements, requirements”).
. Mo. Rev. Stat. § 400.1-201(37)(A).
. In re Dutzel, 2008 WL 5157679 at *2 (Bankr. W.D. Mo. Oct. 17, 2008) (quoting In re Morris, 150 B.R. 446, 448 (Bankr.E.D.Mo. 1992)).
. Id. The Debtor agrees that Judge Venters came to the correct conclusion under Missouri law in Dutzel, but asserts that that case is distinguishable because it involved a trustee’s attempt to avoid the lease as an unper-fected security interest, rather than confirmation of a debtor’s Chapter 13 plan, which is the situation here. I see no basis to distinguish the application of Missouri law based on the procedural context of the case.
. 2014 WL 5785316 (Bankr. D. Kan. Nov. 4, 2014).
. Id. at *4.
. Id. at *4 n. 44.
. Accord, In re Wade, 501 B.R. 870, 874 (Bankr. D. Kan. 2013) (holding that, because the agreements at issue could be cancelled at any time by the lessee surrendering or returning the property without penalty, they were "true leases” under Kansas law, and the court need not discuss the remaining factors)
. 2011 WL 2490600, Case No. 11-41588 (Bankr. W.D. Mo. June 22, 2011).
. Accord, In re Porterfield, 331 B.R. 480 (Bankr. S.D. Fla. 2005) (holding that rental-purchase agreement of household property was a true unexpired lease under Florida’s UCC, which had to be assumed or rejected pursuant to § 365); In re Rembert, 293 B.R. 664 (Bankr. M.D. Pa. 2003) ("There are nu*408merous bankruptcy cases involving state statutes similar to the RPAA that cover rental-purchase agreements. Many of them hold that the rental purchase agreements are ‘true leases’ and not security agreements. Other bankruptcy courts hold that rental-purchase agreements are neither true leases or security agreements, but are peculiar creatures of consumer financing sufficiently executory to fall within § 365 of the Bankruptcy Code that governs executory contracts. No bankruptcy court applying a state rental-purchase agreement statute found that such agreements were security instruments.”) (citations omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500206/ | MEMORANDUM OF DECISION GRANTING JUDGMENT TO DEBTOR/DEFENDANT ROBERTA MACKEY
Geraldine Mund, United States Bankruptcy Judge
On July 6, 2015, Roberta Mackey (“Roberta” or the “Debtor”) filed the above chapter 7 bankruptcy petition. At that time there was a pending superior court case brought by Jacquelynn (“Jacquelynn”) and William (“William”) Gordon against Roberta for breach of written contract, fraud and deceit, and financial abuse of elder under Welfare & Institutions Code § 15600 et seq. (“the Superior Court Case”).1 Relief from stay was granted to proceed to trial and on December 31, 2015 judgment was entered against Roberta for $125,000 of compensatory damages and prejudgment interest of $39,902.62 on the grounds of elder abuse under Welfare & Institutions Code §§ 15610.30 and 15657.5(A) (the “Superior Court Judgment”).2
The present adversary proceeding was filed on October 7, 2015 and sought a determination that the debt to the Gordons represented by the Superior Court Judgment would not be discharged under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6). It further objected to the Debtor’s discharge pursuant to 11 U.S.C. §§ 727(a)(2) and 727(a)(4).
On February 2, 2016, Roberta filed a motion for summary judgment and on February 29, 2016, the Gordons filed their motion for summary judgment.3 Hearings were held before Judge Kaufman, who—in a group of extensive rulings—granted judgment to the Defendant as to § 727(a)(2) and § 523(a)(2)(A), but denied it to both parties as to § 727(a)(4) and § 523(a)(6).4 This proceeding was transferred to Judge Mund on August 8, 2016 and the remaining issues went to trial on October 27 and November 7, 2016.
CLAIM FOR RELIEF UNDER § 727(a)(4)
Basic Facts and Timeline as to § 727(a)(4)
In or about May 2007, Roberta incorporated her business as Roberta Mackey Insurance, Inc. (“the Agency”) and became *412the sole shareholder and owner of 1,000 shares of stock. Roberta was the president and treasurer and her husband Fredric Robin (“Fred”)5 was the vice-president and secretary. Both were signatories to the Agencies’ bank account, but there is no evidence that Fred ever participated in the insurance business. Roberta was a Life and Health Agent and in 2012 she decided to also become a Property/Casualty Agent.
Starting in at least 2010, Roberta’s daughter Sarah Robin (“Sarah”) began working for the company and that year Roberta brought Sarah into corporate governance as vice-president and treasurer— Fred having resigned from those positions. The next year Fred was removed as a signatory on the corporate bank account and Sarah took his place. By 2013, Roberta decided to make Sarah a corporate director and—at the annual meeting on May 8, 2013—she “discussed issuing stock to Sarah Robin.” This was discussed again at the May 9, 20Í4 annual meeting and it was decided that “Roberta Mackey would transfer to Sarah Robin 50% of her stock (500 shares) in Roberta Mackey Insurance Agency, Inc. to be issued during the month of May, 2014.”6 However, according to Roberta’s testimony, the corporation did have the ability to issue additional shares and was not limited to a total of 1,000 shares.
On May 19, 2014, Roberta cancelled her stock certifícate and issued two new ones, each for 500 shares—one to herself and one to Sarah.7 This transfer was partially a gift and partially an incentive to Sarah, who had a very large client from which the agency may or may not have received part of the commission. At some point it was agreed that Sarah would pay part of her commissions to the Agency as compensation for her stock: she paid $50,650, but this figure was not linked to the actual value of the shares she received.8
Roberta filed her chapter 7 petition, schedules, and statement of financial affairs on July 6, 2015. In her schedules and statement of. affairs, she showed that she owned one-half of the Agency, but did not list the transfer of her other one-half interest to Sarah even though it had taken place within two years before the bankruptcy was filed.
At the § 341(a) meeting, Roberta told the Trustee about the details of the transfer of stock. She had also revealed these to her attorney, who met with her twice—for about two hours each time—while preparing her bankruptcy filing. Her attorney knew that the Trustee would be interested in the transfer of stock as a possible asset, but he either failed to ascertain the date or simply missed adding it to the schedules and statement of affairs. Her attorney told the Trustee about the transfer during a conversation a week before the § 341(a) and provided the Trustee with documentation. The Trustee decided not to pursue the transfer.
Because the transfer was discussed at the § 341(a) meeting, Debtor’s counsel felt there was no need to amend the schedules, although he might have done so had he been aware of the $50,000 amount.
Law and Analysis as to § 727(a)(4)
11 U.S.C. § 727 provides, in part:
*413(а) The court shall grant the debtor a discharge, unless—
(4)the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account.
Thus, § 727(a)(4)(A) denies a discharge to a debtor who “knowingly and fraudulently” makes a false oath or account in the course of the bankruptcy case. Id. A false statement or an omission in the debtor’s bankruptcy schedules or statement of financial affairs can constitute a false oath. Khalil v. Developers Surety and Indemnity Company (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007)(citing Searles v. Riley (In re Searles), 317 B.R. 368, 377 (9th Cir. BAP 2004)), aff'd, 578 F.39 1167 (9th Cir. 2009). “The fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations.” Id. (quoting Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999)). “That said, a false statement or omission that has no impact on a bankruptcy case is not material and does not provide grounds for denial of a discharge under § 727(a)(4)(A).” Id.
For discharge to be denied, the Gordons must show by a preponderance of the evidencé that: (1) Debtor made such a false statement or omission, (2) regarding a material fact, and (3) did so knowingly and fi*audulently. Id.
Here, the first element, the Debt- or’s omission, has been satisfied. When Roberta filed her bankruptcy schedules, she included the fact that she owned one-half of the Agency. However, she failed to list the prior transfer of her other one-half interest to her daughter Sarah. Other transfers were noted in the schedules and statement of financial affairs; however this transfer was not listed nor were amended schedules ever filed to reflect the transfer to Sarah.
The second element, that the omission relates to a material fact, is arguably satisfied, as well. 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.” Khalil v. Developers Sur. & Indemnity. Co., 379 B.R. at 173 (quoting Wills, 243 B.R. at 62). Since the transfer relates to shares of Debtor’s business, the Court finds the omission of the transfer is a material fact.
The third element of intent asks whether Roberta, when she filed her bankruptcy schedules and statement of financial affairs, knowingly and fraudulently omitted the transfer of the shares to Sarah. “A debtor ‘acts knowingly if he or she acts deliberately and consciously.’ ” Id. (quoting Roberts v. Erhard (In re Roberts), 331 B.R. 876, 883 (9th Cir. BAP 2005)). In this case, there is no evidence that Roberta made a deliberate attempt to omit the transfer to her daughter. In her schedules, Roberta clearly disclosed she owned 50% of the corporation. She did not attempt to hide the fact that someone else owned the remaining 50%. She had told her attorney about the transfer, although he did not include it in her schedules. Her attorney told the Trustee about the transfer at her § 341(a) meeting and the Trustee was able to collect sufficient information about the corporation and whether to pursue the assets of the corporation. Therefore, the Court finds that the Gordons have failed to satisfy this third element under § 727(a)(4)(A). The Gordons’ request to deny Roberta’s discharge under § 727(a)(4)(A) is denied.
CLAIM FOR RELIEF UNDER § 523(a)(6)
Basic Facts and Timeline as to § 523(a)(6)
In December 2004, Roberta Mackey married Fred Robin. In 2007, Roberta met *414the Gordons. Fred and William Gordon became quite friendly and the two couples socialized on a regular basis, having dinner together once or twice a month. In the spring of 2012, Fred approached William for a loan. Fred told William that he would repay the loan with interest in August.
Although the purpose of the loan was not specifically discussed in the bankruptcy trial, it clearly was intended to be a business loan for Fred.
A note was created and William insisted that both Fred and Roberta sign it. William appears to have given the check to Fred before the note was signed, but it was understood that cashing it was contingent on William receiving the note signed by both Fred and Roberta.9
The check was made out to Fred, who endorsed it to Roberta10 and obtained her signature on the note. The money went into Roberta’s personal account, from which she disbursed some $70,000 to or for the benefit of Fred’s business.11 The parties stipulated that on August 1, 2012—the date that the loan was due—some $30,000 of the original $100,000 remained in Roberta’s bank account.
It appears from the evidence that although the loan came due in August 2012, the Gordons did not insist on immediate repayment. No part of the money was repaid and on June 9, 2013, the Gordons sent a letter to Fred and Roberta demanding repayment of the $100,000 loan,' giving Fred and Roberta until June 17, 2013 to do so, and threatening legal action if they failed to repay.12 There is no response on the record and no part of the loan was repaid. Nonetheless, on April 25, 2014, the Gordons made a further loan of $10,000, with another $10,000 loan on May 2, 2014 and yet another $5,000 loan on May 30, 2014. The April 25 and May 2 loans are memorialized in promissory notes signed by Fred and Roberta and the May 30 loan is evidenced by a copy of a check made payable to Fred and endorsed by him to Roberta. These three loans appear to have been due on June 15, 2014.13
Once again there was no repayment and on July 29, 2014, Fred filed for bankruptcy.14 On August 25, 2014, the Gordons’ attorney sent a demand letter to Roberta for repayment of all four loans.15 Roberta responded that she was never a borrower, but merely a witness to Fred’s signature. She denied having been part of any discussions concerning these loans and threatened suit for harassment.16
On September 24, 2014, the Gordons filed the Superior Court Case against Ro*415berta.17 And on September 30, 2014, the Gordons filed an adversary complaint in the bankruptcy court against Fred seeking to have the debt declared nondischargeable, for which judgment was granted to the Gordons on November 19, 2015.18
Roberta filed her bankruptcy ease on July 6, 2015 and the Superior Court Case proceeded to trial after relief from stay was granted. The Superior Court Judgment was rendered orally on November 9, 201519 and the written order was filed on December 31, 2015.20 This adversary proceeding was filed on October 7, 2015.
Jacquelynn Gordon’s testimony was admitted through her deposition (Ex. 41), the trial transcript in the Superior Court case (Ex. 42), and the bankruptcy trial transcript in the case of Gordon v. Robin (ex. 43). For ease, relevant sections are set forth herein:
Ex. 41
Gordon v. Mackey, Superior Court LC102166 Deposition of Jacquelynn Gordon, June 11, 2015
Q. How long have you known Ms. Mackey?
A. I can’t remember.
Q. What is your relationship with Ms. Mackey?
A. I would say casual friend.
Q. Casual friend?
A. Casual friend.
Q. What about your relationship with Fred?
A. Same. [20:11-19]
Q. Okay. Do you know what the purpose of this loan was for, why they needed the money? '
A. I have no idea. [30:12-14]
Q. Was there any discussion about where Mr. Robbin [sic] and Ms. Mackey were going to get the money to repay you?
A. There was no discussion, no.
Q. Okay. So the money was just loaned, you had no idea how it was going to come back to you?
A. No. [30:22-31:3]
Q. So—so you don’t believe that inherent in any loan that there is a risk of not being paid back?
A. Fred Robbin [sic], I remember him telling me that, don’t worry, that there was a million dollars sitting in the bank in Santa Monica under the Robbins Brothers business. [31:13-19]
Q. How did your trust for Ms. Mackey develop?
A. There was no trust to develop because my husband was the one that did the negotiating—loaned the money to Mr. Robbin [sic]. [37:7-11],
Q. Okay. So how much time passed between that note being signed and the money being transferred?
Mr. Bowen: We are now talking about the hundred thousand dollar note?
By Mr. Taran:
Q. Yes.
A. I believe they immediately went to Santa Monica and deposited the check, the $100,000 check in the commercial bank with their Robbins Brothers business.
Q. It was in a Robbins Brothers business account?
A. Huh?
Q. Robbins Brothers business account?
*416A. Yes.
Q. Not Ms. Mackey’s personal account?
A. Not at first.
Q. Okay, Did anyone review this transaction?
Did you have an attorney or any other person review this?
A. No.
Q. Why not?
A. I did not do the darn transaction. My husband did. And he trusted Fred, he thought Fred was a friend. [37:14— 38:14]
Q. Did you and your husband talk before this loan was actually made?
A. I don’t have any memory of it.
Q. So you don’t remember telling your husband that you approve of this loan?
A. I have no memory of it. [48:7-12]
Q. Okay. So let me ask you, was any of the money repaid as it was supposed to be?
A. Not one penny.
Q. Okay. Why did you continue to loan money?
A. I have no idea.
Q. Do you think you were taken advantage of?
A. Absolutely.
Q. Why?
A. At this point in time because they refused to not only pay it back, but the last time Fred Robbin [sic] was in our office he sat there beside me and I asked him again how the divorce of your brother [was] coming along and had the attorneys settled so we could be repaid and he gave me this song and dance, “No, the attorneys are working it out. But, Jackie, if I have to file for bankruptcy I’ll make sure you are taken care of.”
And he left the office and went immediately and filed for bankruptcy that same day. That told me he has no intention of paying back any other money he borrowed.
Q. So Fred Robbin [sic] was going to pay you back with proceeds from his brother’s divorce?
A. He told me to my face and my husband was sitting there, “I’ll see that you are taken care of, even if I have to file for bankruptcy.” And he went right from our office and filed for bankruptcy that same day.
Q. And how do you know that?
A. Because of the dates.
Q. Okay. Now, you just said that Fred Robbin [sic] was—he told you that he was waiting on the settlement of his brother’s divorce?
A. What?
Q.. Fred Robbin [sic] was waiting on the settlement of his brother’s divorce to pay you back?
A. According to him, the money we originally lent him was tied up in the bank of the Robbin Brothers in Santa Monica.
Q. So the funds—
A. And A1—his brother Al’s wife who he was divorcing was not happy with the divorce settlement so she froze the bank account. And supposedly our money was sitting in that bank in Santa Monica.
Q. Okay.
A. At last that is the insinuation that he gave me. Because he kept saying they hadn’t settled the divorce yet, they haven’t settled.
Q. So you think at the time that these loans were taken out that you were lied to?
A. Huh?
*417Q. At the time that they loans were taken out, do you feel that you were lied to?
A. I don’t know.
Q. Do you think that things were concealed from you?
A. Would you repeat that?
Q. Do you think that anything was concealed from you?
Mr. Bowen: Do you understand the question?
The witness: Yes.
By Mr. Taran:
Q. You do?
A. Yes.
’ Q. What was concealed?
A. The fact that he told me at the beginning that they had billions sitting in the bank account with his brothers, the Robbin Brothers, and he couldn’t touch it because Al’s wife Dolores froze the account, bank account because she wasn’t happy with the divorce settlement. She thought she was entitled to more money.
Q. And why do you think that’s untrue?
A. Because that’s what I was told by Fred Robbin [sic] and—
Q. Fred Robbin [sic] told you that was not true?
Mr. Bowen: He denied ever saying it.
The witness: All I know is I was told the money could not be touched until they finally settled the divorce. 54:16-57:22
Ex. 42
Gordon v, Mackey, Superior Court LC102166, Trial transcript, August 25, 2015
Q. After you wrote the letter—and I believe it is June of 2013—did you have occasion to ask Miss Mackey for information or how she was going to pay it back, when she was going to pay it back?
A. Well, when Fred and Roberta would take us out to dinner, first thing I would ask them is how is the divorce handling going along for your brother Al. It seems that they were at odds about her share—his share of the family business.
Q. How did you learn that information?
A. Roberta told me.
Q. So when you asked the question how is the divorce lawsuit coming along, what was that designed to inquire?
A. To find out when we would be repaid.
Q. Why did the settlement of the divorce and the repayment have anything to do with each other?
A. Our $100,000 check was placed in the Santa Monica bank account of the Robin Brothers.
Q. Do you know why?
A. No. Well, yes. The only thing I know of there was that Fred Robin does not have a bank account.
Q. No, when the m^ney was put into the account, what were the reasons given for not paying you back?
A. The bank account was frozen.
Q. And do you have any knowledge that the bank account was not frozen.
A. Well, shortly after the $100,000 check from the East-West- Bank cleared the bank, $100,000 was taken from that account at Santa Monica and placed in a bank account in Studio City under Roberta’s name. [116:25-117:27]
Ex. 43
Gordon v. Robin, U.S. Bankruptcy Court l:14-ap-01169-VK Trial transcript, August 27, 2015
*418Q. Okay. And with regard to the monies that Mr. Robin and Ms. Mackey borrowed from you, did you ever ask questions about being repaid the money that had been borrowed from you?
A. Yes. Every time we went out for dinner, I would ask, “How is the—your brother Al and his ex-wife settling their divorce problems?
Q. Now, why would you ask about the divorce problems of Mr. Robin’s brother Al and his ex-wife?
A, Because we were under—I was under the understanding that our $100,000 loan was placed in the Robin Brothers bank account in Santa—Santa Monica.
Q. And why was that a problem if it was ultimately placed in the Robin Brothers bank account in Santa Monica?
A. Well, Al and his wife Delores and their attorneys were fighting it out because she didn’t think she got her fair share of his share of the Robin Brothers business. So consequently, the bank account where our money was supposed to have been deposited was frozen,
Q. Now, all of this information that you’ve just shared with us, Ms. Gordon, came from whom?
A, Came from Roberta Mackey. 212:9-213:5
Q. Did you consider Ms. Mackey to be somebody you could trust before you made the loans?
A. We were casual friends because of my husband’s friendship with Fred Robin.
Q. As with regard to Ms. Mackey did she treat you in a way that caused you to think she cared about you
A. Yes. She was always very solicitous, like honoring my old age.
214:15-22
Law and Analysis as to § 523(a)(6)'
Plaintiffs § 523(a)(6) claim is for “willful and malicious injury.” The requirements of “willful” and “malicious” are considered separately. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146 (9th Cir. 2002). The plaintiff must establish the elements of each requirement by a prepondérance of the evidence. See, e.g., Hopper v. Lewis (In re Lewis), 551 B.R. 41, 51 (Bankr. E.D. Cal. 2016).
The Superior Court Judgment may have a preclusive effect on some of these issues. California law (the law of the state in which the judgment was rendered) determines the preclusive effect of a state court judgment. Diruzza v. County of Tehama, 323 F.3d 1147, 1152 (9th Cir. 2003)(quoting Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)). Under California law, issue preclusion can be applied when: (1) the issue decided in the prior proceeding is identical to the issue sought to be relitigated in the subsequent proceeding; (2) the issue was actually litigated in the prior proceeding; (3) the issue was necessarily decided in the prior proceeding; (4) a final judgment on the. merits was issued in the prior proceeding; and (5) the party against whom issue preclusion is sought was a party to the prior proceeding. Lucido v. Superior Court, 51 Cal.3d 335, 341, 272 Cal.Rptr. 767, 795 P.2d 1223 (1990), cert. denied, 500 U.S. 920, 111 S.Ct. 2021, 114 L.Ed.2d 107 (1991).
There is no question that the Superior Court Judgment was a final judgment on the merits and that Roberta was a party to the Superior Court Case. The open question is whether the Superior Court actually and necessarily determined an issue identical to one before this Court under § 523(a)(6). .
*419Even if this is the case, this Court has “broad discretion” in applying issue preclusion to the Superior Court Judgment:
Bankruptcy courts “have exclusive jurisdiction to determine dischargeability of debts under §§ 523(a)(2) (fraud and deception); (a)(4) (fiduciary fraud, embezzlement, or larceny); and (a)(6) (willful and malicious injury to person or property).” Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1128 (9th Cir.2012); § 523(c)(1). The effect of this rule is that “the bankruptcy court is not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of [a creditor’s] debt.” Brown v. Felsen, 442 U.S. 127, 129-30, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). As the Ninth Circuit has instructed, “final judgments in state courts are not necessarily preclusive in United States bankruptcy courts.” Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 872 (9th Cir.2005). In other words, while all federal courts have “broad discretion” in a decision to apply issue preclusion based on a state court judgment, Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979), that discretion is particularly expansive in exceptions to discharge under § 523(a)(2), (a)(4) and (a)(6). Rein v. Providian Fin. Corp., 270 F.3d 895, 904 (9th Cir.2001) (“Bankruptcy Courts have exclusive jurisdiction over nondischarge-ability actions brought pursuant to 11 U.S.C. § 523(a)(2), (4), (6) and (15).”).
Jenkins v. Mitelhaus (In re Jenkins), 2015 WL 735799 at *9 (9th Cir. BAP Feb. 20, 2015). “[Reasonable doubts about what was decided in a prior judgment should be decided against applying issue preclusion.” Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 108 (9th Cir. BAP 2007)(relying on Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979)).
Willful Injury
“A ‘willful’ injury is a ‘deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.’ ” Albarran v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008)(quoting Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (emphasis in original)). At a minimum, willful requires “a deliberate act with knowledge that the act is substantially certain to cause injury.” Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1208 (9th Cir. 2001). The Court “may consider circumstantial evidence that tends to establish what the debtor must have actually known when taking the injury-producing action.” Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010)(citing Su, 290 F.3d at 1146).
Roberta’s acts that potentially led to the Gordon’s injury were signing the original note and depositing the $100,000 check in her bank account. There is no evidence that Roberta discussed this loan with William or with Jacquelynn prior to signing the $100,000 note. According to Jacquelynn, prior to the $100,000 loan all discussions concerning it were solely between Fred and William.21 Roberta agreed that she had not discussed this with the Gordons.
The question is whether she acted “with knowledge that” her acts were “substantially certain to cause injury.” The Gor-dons argue that Roberta knew that her failure to repay the Gordons would result in injury to them. But this is true of *420virtually any loan. The question is whether she knew at the time of the loan that a failure to repay was substantially certain.
Roberta asserts—without contradiction—that she did not discuss the terms of the loan with Fred although she did testify that at the time that she signed the note she asked Fred why he wanted to borrow the money and whether he could pay it back. He assured her that he could.
(It is interesting that two years after the initial loan—and some twenty months after that was due—the Gordons loaned another $25,000 to Fred. Roberta signed two of the notes, but there was no testimony as to Roberta’s involvement in the formation of the two $10,000 loans and the $5,000 loan other than that the checks were endorsed to her and that she deposited them in her bank account. For that reason, the Court granted judgment as to these three loans for the Debtor at the close of the Gordon’s case-in-chief.)
The findings by Judge Kussman in the Superior Court Case appear to contradict Roberta’s claim of a lack of involvement.
First, he held that the “Court finds that defendant Roberta Mackey knew or should have known that her conduct of borrowing $100,000 from plaintiffs on April 30, 2012, to be paid back in full within 90 days by August 1, 2012, was likely to be harmful to the plaintiffs despite it being by agreement as she was unable to pay the same by its due date.” (emphasis added) He found that this fell within the definition of financial elder abuse as set forth in California Welfare & Institutions Code §§ 15610.30 and 15657.5(A).22
“Willful” under § 523(a)(6) requires actual knowledge at the time of the act in question—in this case the $100,000 loan. The phrasing of this inferential finding under the Welfare Code is such that it cannot be accepted as a final determination of Roberta’s actual knowledge—at the time of the loan—of likely harm to the Gordons. The Superior Court imputed knowledge merely because the loan was subsequently not repaid in a timely fashion. This Court has no evidence to support Roberta’s actual knowledge at the time that the loan was made and has been given no basis.for Judge Kussman’s finding to that effect.
While there is evidence that Fred would likely have had trouble paying it back, there is no evidence that Roberta knew the details of his financial affairs. Roberta testified that at the time that she signed the note, she knew that Fred owed her about $200,000 that she had previously loaned to his business. While there is testimony that Roberta had no access to Fred’s personal or business financial affairs—for example, he received his bills at a post office box which was next door to his office and she did not have a key to his office—she does not dispute that she was aware that his business’was in need of money. She also knew that he owed his ex-wife for support and that this was in litigation. But she also asserted that she did not know the amount and because she and Fred had a prenuptial agreement, she did not ask about this. Further, she never asked when he would pay her back the $200,000 that he owed her.
Furthermore, there is no evidence that Roberta lacked the ability to repay the $100,000 at the time the loan was made in the spring of 2012. In fact, the evidence shows that, in addition to access to the proceeds of her own insurance agency business, she had $30,000 of the $100,000 remaining in her bank account several months later.
*421In fact, it has not been established that Roberta was aware of the 90-day payment terms. Roberta testified that she was only given the signature page by Fred and that she did not read the note and was not aware of the date for repayment. She testified that she merely signed where told to—without seeing the actual terms of the note—and took the endorsed check and. put it in her bank account. Although the Court notes that there is a memo on the front of the check that reads “90 day loan,” no testimony was elicited as to whether she saw this.23
Thus, the Court concludes that this first Superior Court finding does not determine the issue of Roberta’s actual knowledge on the date of the $100,000 loan and that, even if it did, the Court will exercise its discretion and not give this first finding preclusive effect. Reasonable doubts about what was decided in a prior judgment should be decided against applying issue preclusion.
Second, Judge Kussman held that Fred was on the verge of bankruptcy and that Roberta knew that and thus, although she thought that the money could be paid back, there was no likelihood that it could happen within the 90-day window allowed by the $100,000 note:
The fact that Mr. Robin was having financial trouble and on the verge of bankruptcy, an argument could be made that borrowing the money at that time— that when borrowing the money at that time, they must have known or should have known it was likely to be harmful to the Plaintiffs because it was likely they weren’t going to be able to pay it back.
But you could make an argument, as Mrs. Mackey has, that, no, we could pay it back, but there is no reasonable likelihood to believe that it could have been paid back in 90 days.
I don’t think any reasonable trier of fact could conclude, given the evidence presented in this case, that borrowing a $100,000 from the Plaintiffs in April of 2012, even if there was property owned in Texas that may have been an asset that could be sold, no reasonable person signing that document under those circumstance ... would say that the loan would be paid back in full in 90 days.
The fact that the loan was for 90 days makes the Court conclude that the defendants should have known that the conduct was likely to be harmful to the Plaintiffs despite it being by agreement. 24 (Emphasis added)
The Court is confused by this ruling in that the Superior Court Case was solely against Roberta (and unnamed Doe defendants) and not against Fred Robin. It was filed on September 24, 2014, about two months after Fred had filed his bankruptcy case (l:14-bk-13578-VK) and thus Fred was not included as a defendant. However, Judge Kussman refers to the “defendants” or “they” and seems to be imputing knowledge of Fred’s financial condition to Roberta. Further, the loan was in April 2012 and Fred did not file bankruptcy until two- and-a half years later. This Court has no evidence as to what happened in that period of time and why Judge Kussman would ignore that period of time, particularly when there were the three loans of May and June 2014, which definitely were made while Fred was on the verge of bankruptcy.
Furthermore, Judge Kussman finds that they “must have known or should have *422known” while “willful” requires actual knowledge.
Thus, the Court concludes that this Superior Court finding does not determine the issue of Roberta’s actual knowledge on the date of the $100,000 loan and that, even if it did, the Court will exercise its discretion and not give this second finding preclusive effect.
As the Gordons have not established that Roberta signed the note and endorsed the check “with knowledge that” these acts were “substantially certain to cause injury” to the Gordons, the “willful” requirement of § 523(a)(6) has not been met. Malice
“A malicious injury involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause.” Ormsby, 591 F.3d at 1207.
The Gordons argue that Roberta’s “wrongful” act was obtaining $100,000 from the Gordons, when she knew that she and Robin could not repay this loan. They argue that the act was “intentional” and “necessarily caused injury” based on that same knowledge of inability to repay. However, as set forth above, the record does not establish that Roberta had that knowledge at the time of the loan.
The Gordon’s argue that “lack of just cause” is shown from Roberta’s failure to take steps to repay the loan. However, the act in question under § 523(a)(6) occurred when the $100,000 loan was made. So Roberta’s activities months or years later are irrelevant.
The Gordons also argue that the Superi- or Court’s ruling that Roberta committed financial elder abuse in violation of the Cal. Wei. <& Inst. Code could be the basis for malice. (They likewise argue that malice is supported by Roberta’s commission of conversion; civil conspiracy; and fraud, oppression, malice and/or misrepresentation.) However, as set forth above, the Gordons have not established that Roberta had actual knowledge (or even reason to know) at the time of the $100,000 loan that the loan was unlikely to be repaid. Thus, with respect to that loan Roberta is only a borrower who failed to repay. This shows breach of contract, but not that additional element of tortious conduct required for malice under § 523(a)(6).
Other Evidence
The Court is left with some loose ends.
One of the issues that was raised in discovery and the Superior Court Case trial dealt with the assertion that Fred could not reach the money to repay the Gordons since Fred’s ex-sister-in-law had tied up the business account of Robin Brothers. There was oral argument at one time that hinted that the loan was to tide over the business until the divorce proceedings were completed. But the testimony of Jacquelynn (from her deposition and the prior trial) shows that the divorce was used as a reason for the delay in repayment, not as a purpose for obtaining the loan. In fact, it was her understanding that the money initially had gone into the Robin Brothers bank account, which was later frozen, and thus the money could not be refunded.25
At trial, Fred testified that he needed the $100,000 as “bridge money” while he sold some assets. He told William that he had some insurance payments to make and other business expenses. Fred testified that he believed that he could repay the *423$100,000 in a timely manner, but realized before the loan came due that he could not. So he asked William for an extension until at least February 2013, which William agreed to. In February 2013, Fred told William that he could not pay him back and proposed a payment plan. William agreed to deferred payments and just said that Fred should pay him back when he could. In April 2014, Fred told William that he was in dire financial straits and needed $25,000 to pull himself out and that he might have to go bankrupt. William loaned him the money in three pieces.
The Court is not convinced that this is the full story and William is unable to provide his side of the story. But, actually, it is irrelevant to the trial before this Court since, as noted above, the testimony of Jacquelynn does not show that she and Roberta ever discussed the loan before it was made. And there is no evidence of such discussions between William and Roberta.26
There is also a variety of testimony about the freezing of the Robin Brothers bank account, but no actual evidence that this occurred or when. As noted above, Jacquelynris testimony shows that the freezing of the bank account was not a stated reason for the loan—just an excuse for delay of repayment. However, the Court is concerned that Roberta testified that repayment was never mentioned when she and Fred went out to dinner with the Gordons, which they did every few months. This is both unlikely and a direct contradiction to the testimony of Jacquelynn, who tied the discussions of the brother’s divorce in with the timing of repayment. At most the Court could find that Roberta was knowingly involved in the delay of the repayment. But this would only be if the story of the frozen bank account was not true—and there is no. evidence that it was false.
The Superior Court transcript shows that there was some land in Texas that Fred was, apparently, intending to sell. No evidence of this was put before this Court. It is important to note that Ex. 25 (which is the Superior Court transcript) has only 7 pages—the cover, p.l, pp. 54-57, and the reporter’s certification. In his closing brief Mr. Lally extensively quotes from pp. 49-53, none of which are in evidence. While interesting and relevant, these are not being considered. Similarly, Mr. Lally refers to other evidence which was either not admitted (Ex. 27, only the first page was admitted) or to testimony that was not given in this trial (that Roberta communicated with the managing partner of the Texas LLC and had received an email that they would buy her real estate for $100,000). None of this is being considered as evidence.
Conclusion
The Court cannot find that Roberta acted willfully or maliciously at the inception of the $100,000 loan. She did not assert anything about its use or its repayment. At most, she signed the note and was or should have been aware of the repayment date due to the note and/or the memo on the check. While she knew that Fred owed her money and that there was a suit that might end up creating a debt to Fred’s former wife, there is no evidence that in April 2012 she knew or had reason to believe that Fred would be unable to timely repay the $100,000 note. And it appears that even the Gordons were satisfied about a delay and suffered no damages from that in that no demand for repayment was made until June 2013.
*424RULING
Judgment will be granted to the Debtor on both the § 727(a)(4) and the § 523(a)(6) causes of action.
. Los Angeles Superior Court Case No. LC102166.
. Ex. 25 and Ex. 26. (All references to exhibits are to the Gordon’s trial exhibits.)
. Adv. dkt ## 14 and 22 respectively,
. Adv. dkt. ## 58, 59, and 78.
. First names are used throughout to avoid confusion.
. Ex. 22. Note that the stock certificate is labeled "Roberta Mackey Insurance, Inc.,” but the minutes are titled "Roberta Mackey Insurance Agency, Inc.” The Court finds—for purposes of this adversary proceeding—that there is no legal significance to this discrepancy.
. Ex. 23, 24.
. Testimony of Roberta and ex. 44.
. Ex. 1.
. Ex. 2—this check was signed by William on his personal account at East West Bank.
. Ex. 19 shows that Roberta wrote checks for Fred’s business expenses as follows: 4/30/12 $316; 4/30/16 $10,180.40; 4/30/16 $615; 5/2/12 $6,000; 5/8/12 $5,000; 6/11/12 $1,500; 6/13/12 $10,000; 6/21/12 $3,000; 7/2/12 $2,500; 7/9/12 $1,500; 7/11/12 $1,000; 8/3/12 $1,000; 8/28/12 $18,5000; 8/29/12 $1,500; 10/1/12 $1,500; 10/4/12 $300; 10/5/12 $5,000.
.Ex. 6.
. Ex. 3, 4, and 5. The two $10,000 checks were signed by Jacquelynn Gordon and were drawn on the Seascamp Account at U.S. Bank. Ex. 10, 11. The $5,000 check was also signed by Jacquelynn Gordon and drawn on the California Western Realty Inc., dba Towne and Country Real Estate, California Business Investments account at Bank of America.
. 1:14-bk-l 3578-VK.
. Ex. 7. Fred had already filed bankruptcy, so this demand letter was addressed solely to Roberta,
. Ex. 8.
. Los Angeles Superior Court LC102166,
. 1:14-ap-01169-VK.
. Ex. 25.
. Ex. 26.
. Ex. 41, 37:7-11; 37:14-38:14.' William is incompetent to testify at this time and no evidence of his prior téstimony was submitted to counter this.
. Ex. 26.
. Ex. 2.
. Ex. 25.
. Ex. 41, 30:12-14; 30:22-31:3; 37:14-38:5, 56:2-15-57:22. Ex. 42, 116:25-117:27. Ex. 43, 212:9-213:5.
. Ex. 41, 30:12-14. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500207/ | MEMORANDUM DECISION ON OBJECTION TO CLAIMS OF EXEMPTION1
Honorable Mike K. Nakagawa, United States Bankruptcy Judge
On May 20, 2014, the court heard the Objection to Claims of Exemption brought on behalf of Federal Deposit Insurance Corporation as Receiver for La Jolla Bank, FSB (“FDIC”). The appearances of counsel were noted on the record. After oral arguments were presented, the matter was taken under submission.
BACKGROUND
On December 19, 2013, Daniel Tarkani-an and Amy Tarkanian (“Debtors”) filed a voluntary Chapter 7 petition. (ECF No.-1). The case was assigned for administration to William A. Leonard (“Trustee”) and a meeting of creditors was scheduled to be held on January 22, 2014. (ECF No. 4). On January 3, 2014, Debtors filed their schedules of assets and liabilities and other information required by Section 521(a)(1). (ECF No. 12).
On their real property Schedule “A,” Debtors listed a property located at 3008 Campbell Circle in Las Vegas, Nevada (“Residence”). Debtors state that the current value of the Residence is $450,000 and that there is a claim secured by the Residence in the amount of $248,000. On their secured creditor Schedule “D,” Debtors identify Bank of America as having a claim in the amount of $248,000 secured by the Residence. On their Schedule “C,” Debtors claim a homestead exemption in the Residence in the amount of $202,000 pursuant to NRS 21.090(1X1) and NRS 115.050. On their non-priority unsecured creditor Schedule “F,” Debtors list the Federal Deposit Insurance Corporation (“FDIC”) as receiver for La Jolla Bank, FSB, as having a claim of $16,995,005,17, based on a personal guaranty of business debt. On the same schedule, Debtors also list Nevada State Bank (“NSB”) as having a claim in the amount of $14,800,000.00, based on a personal guaranty of business debt. Stan-corp also is listed as having claim in the amount of $3,076,000 based on a personal guaranty of business debt. On their Schedule “H,” Debtors list an entity identified as JAMD, LLC as a co-debtor with respect to both the NSB and the Stancorp obligations.
In Item 4 of their Statement of Financial Affairs (“SOFA”), Debtors disclosed a *428lawsuit by the FDIC against the Debtors, Jerry Tarkanian, Lois Tarkanian, George Tarkanian, Zafrir Diamant, Josephine Diamant, Douglas R. Johnson, and Debra Johnson, denominated Case No, 10-cv-0980-WQH (KSC), for which a judgment had been entered by the United States District Court for the Southern District of California. Debtors also disclose in Item 18 that they have an interest in or relationship to a variety of entities, including JAMD, LLC, Tark, LLC, Tarkanian Basketball Academy, Inc., Vegas Diamond Properties, LLC, and others.
On January 28, 2014, the Trustee reported that there are assets to administer after having completed the meeting of creditors. (ECF No. 16).2
On February 21, 2014, the Trustee filed an objection to the Debtors’ claim of exemption with respect to their interest in JAMD, LLC and Tark, LLC. (ECF No. 88).
Aso on February 21, 2014, the FDIC filed the instant objection to the Debtors’ claim of an exemption with respect to their Residence (“Homestead Objection”). (ECF No. 40).3 On March 12, 2014, Debtors filed their response (“Debtors’ Response”) to the Homestead Objection. (ECF No. 69). The response was accompanied by the declarations of Daniel Tarkanian (“Daniel Declaration”) (ECF No. 70), Jodie Diam-ant (“Jodie Declaration”) (ECF No. 71), and Lois Tarkanian (“Lois Declaration”) (ECF No. 72). On March 19, 2014, the FDIC filed its reply (“Reply”). (ECF No. 75).
On March 20, 2014, Debtors filed an amended Schedule “C” that eliminated any claim of exemption as to their interest in JAMD, LLC and Tark, LLC. (ECF No. 79). As a result, the Trustee withdrew his objection to those claims of exemption. (ECF No. 80).
On March 26, 2014, an initial hearing on the Homestead Objection was conducted. At the initial hearing, the court was advised that separate counsel had been retained by debtor Amy Tarkanian. An evidentiary hearing on the Homestead Objection was scheduled for May 1, 2014.
On April 14,2014, a notice of appearance of separate counsel for Amy Tarkanian was filed. (ECF No. 113).
On April 28, 2014, the FDIC filed its trial brief (“FDIC Brief’) in support of the Homestead Objection (ECF No. 121) accompanied by a request for judicial notice (“RJN”). (ECF No. 122). On the same date, a trial brief in response to the Homestead Objection was filed on behalf of Daniel Tarkanian (“Daniel Brief’) (ECF No. 120) as well as a separate trial brief on behalf of Amy Tarkanian (“Amy Brief’). (ECF No. 125).4
On May 1, 2014, the evidentiary hearing on the Homestead Objection commenced. Because additional time was required to complete the witnesses’ testimony, the *429hearing was continued to May 20, 2014. After completion of the testimony, closing arguments were presented and the matter was taken under submission.
APPLICABLE LEGAL STANDARDS
Under FRBP 4003(b)(1), a party in interest must object, if at all, to a debtor’s claim of exemptions within 30 days after conclusion of the meeting of creditors. Failure to timely object bars any subsequent challenge to the validity of the claimed exemption, see Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 1648, 118 L.Ed.2d 280 (1992)5, except to the extent the debtor subsequently seeks relief under Section 522(f). See Fed. R.BaNKr.P. 4003(d).
Under FRBP 4003(c), the objecting party has the burden of proving that an exemption is not properly claimed. In Diener v. McBeth (In re Diener), 483 B.R. 196 (9th Cir. BAP 2012), the appellate panel explained the allocations of the burdens of production and persuasion on an exemption objection as follows:
A claimed exemption is “ ‘presumptively valid.’” Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 2010)(citing Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 n. 3 (9th Cir.1999)). “[I]f a party in interest timely objects, ‘the objecting party has the burden of proving that the exemptions are not properly claimed.’ ” Id. (quoting Rule 4003(c)). Initially, this means that the objecting party has the burden of production and the burden of persuasion. In re Carter, 182 F.3d at 1029 n. 3. The objecting party must produce evidence to rebut the presumptively valid exemption. Id Once rebutted, the burden of production then shifts to the debtor to come forward with unequivocal evidence that the exemption is proper. Id. The burden of persuasion, however, always remains with the objecting party. Id
483 B.R. at 203. The standard of proof is by a preponderance of the evidence. See Leavitt v. Alexander (In re Alexander), 472 B.R. 815, 821 (9th Cir. BAP 2012).
THE TIME LINE OF EVENTS
[[Image here]]
*430[[Image here]]
*431[[Image here]]
[[Image here]]
*432THE EVIDENTIARY RECORD
Forty-three exhibits were admitted into evidence. Six witnesses testified at the hearing and each was subject to cross-examination.
A. The Exhibits7.
In addition to the items referenced in the foregoing TIME LINE, the other exhibits admitted at the hearing included copies of the Daniel Declaration (Ex. “1”), the Jodie Declaration (Ex. “20”); an Adjustable Rate Note dated June 6, 2005 (Ex. “3”), a Bank of America loan history statement dated April 9, 2014 (Ex. “6”), a Personal Financial Statement of Daniel Tarka-nian dated December 22, 2011 (Ex. “14”), an Affidavit of Financial Condition of Daniel Tarkanian dated December 22, 2011 (Ex. “16”), a Personal Financial Statement of Amy Tarkanian dated December 22, 2011 (Ex. “17”), an Affidavit of Financial Condition of Amy Tarkanian dated December 22, 2011 (Ex. “18”), an email message from NSB to Daniel Tarkanian dated October 16, 2012 (Ex. “22”), a check payable to John Hancock Freedom 529 dated April 29, 2012 (Ex. “23”), a check payable to Lois M. Tarkanian dated June 1, 2012 (Ex. “24”), copies of letters from Danny Tarka-nian to Phoenix Home Life dated June 3, 2012, bearing the stamped endorsement guaranty of Wells Fargo Bank (Ex. “25”), a letter from NSB to Daniel Tarkanian dated December 11, 2012 (Ex. “26”), an email message from Daniel Tarkanian to NSB dated October 16, 2012 (Ex. “27”), an assessor’s parcel map encompassing the Residence (Ex. “A”), photographs of a walkway between the Residence and the home of Jerry and Lois Tarkanian (Ex. “B”), and portions of Jerry Tarkanian’s medical records from Dr. Stephen Miller (Ex. “O”).
B. The Witnesses.
Live witness testimony was presented by James Main, Stephen Miller, Lois Tar-kanian, Jodie Tarkanian Diamant, Amy Tarkanian, and Daniel Tarkanian.
1. James Main (“Main”).
Main is a certified public accountant who has been employed by Daniel Tarkanian since 2007 to prepare income tax returns for the Debtors, as well as the various entities managed by Daniel Tarkanian. Those entities include JAMD, LLC, Tark, LLC, certain trusts for which Daniel Tar-kanian is the trustee, and Tarkanian Basketball Academy, LLC. In preparing the tax returns through 2012, Main was provided information from Daniel Tarkanian. Apparently the information was provided in the form of a spreadsheet setting forth loan activity. Main would compare the loan activity set forth in the spreadsheet against the bank statements, mortgage statements, and checkbooks for the entity. Where applicable, a property management report also would be reviewed. Any loan balances would be reflected in the tax return. Main testified that he followed the same process for each return that he prepared.
As to the Tarkanian Basketball Academy, Main testified that in 2009, he probably received a general ledger produced through common bookkeeping software known as QuickboOks in lieu of a spreadsheet. He would compare the information on the general ledger against the bank statements and checkbook for the entity. Sometime after 2009, Tarkanian Basketball Academy began using a different bookkeeping system, but Main continued to compare the results to bank statements and the checkbook to prepare the tax re*433turn. He testified that Tarkanian Basket-? ball Academy began using Quickbooks again in 2012, and the same process was followed thereafter to prepare the tax return.
Main testified that no audits of the returns have ever been requested by the Internal Revenue Service. He has no recollection of discussions with Daniel Tarkani-an other than those involving the preparation of the tax returns and did not hear Daniel Tarkanian express any concerns that the Residence would be subject to foreclosure. Main also has no knowledge of the specifics of any loan, never saw any documentation memorializing any loans between JAMD and Daniel Tarkanian, and has no knowledge regarding the financial performance of any of the entities. Main also has never audited to determine whether any loan payments were actually gifts, never audited the disposition of any cash withdrawals, never audited whether funds received from JAMD were compensation or loan repayments, and never asked about Daniel Tarkanian’s intentions in making any transfers. Main testified that a copy of the FDIC Judgment was not included in the documents provided by Daniel Tarka-nian in preparing the Debtors’ income tax return for 2012. He also testified that he does not review bank statements in preparing personal income tax returns.
2. Stephen Miller (“Miller”).
Miller is a doctor of internal medicine who first started treating Jerry Tarkanian in 2009. As of that time, Jerry Tarkanian had a history of prostate cancer for which he was treated in 2004. In 2009, he was being treated for thyroid, back, blood pressure, high cholesterol, eye, and balance issues, and was pre-diabetic. As of 2009, Jerry Tarkanian had required more than six stents to be put into his heart.
Miller testified that Jerry Tarkanian fell some time in 2009 while in San Diego. Miller saw him in August 2009 in Las Vegas shortly after the incident. He noticed a cognitive decline and believed Jerry Tarkanian to be in far worse condition than his previous visits. Miller also saw Jerry Tarkanian throughout 2010.
In March 2010, Miller noted in his medical records that Jerry Tarkanian was “a walking time bomb.” He expressed that view to Jerry Tarkanian’s family members, including Daniel Tarkanian. Miller saw Jerry Tarkanian in June and October 2010, and he was still suffering from shortness of breath. In December 2010, Miller thought Jerry Tarkanian had decreased considerably in his cognitive abilities. Members of Jerry Tarkanian’s family were present at each medical visit, with Daniel Tarkanian there most of the time.
By 2011, Miller thought that Jerry Tar-kanian’s overall health was continuing in a downward spiral. He testified that Jerry Tarkanian suffered another fall in the middle of 2011 that injured his elbow. Miller drained the elbow.
Miller testified that in March 2012, Jerry Tarkanian suffered a heart attack that required him to be hospitalized for three weeks. As he is not a cardiologist nor did he have hospital privileges, Miller visited Jerry Tarkanian in the hospital, but was not' the treating physician. Miller testified that Jerry Tarkanian thereafter started an accelerated decline in his overall health. A family member would always accompany Jerry Tarkanian in subsequent office visits and in telephone communications.
Miller testified that some time shortly after the March 2012 heart attack and his release from the hospital, Jerry Tarkanian visited his office on a weekend, pushed in a wheelchair. Miller believed that he was having complications from his medications and that he had torn the Achilles tendon in one of his ankles. Miller recalled that on *434July 27, 2012, Jerry Tarkanian sought a medical clearance from him to obtain a driver’s license, but Miller did not recommend that a license be issued. In September 2012, Jerry Tarkanian visited him again and Miller thought his breathing was 'better. He testified that Jerry Tarkanian was well enough to visit the Cleveland Clinic for a general medical workup.
Miller testified that he believes there has been a marked decline in Jerry Tarka-nian’s health since March 2012 based on a multitude of factors. Those include his ability to walk, his talking and breathing problems, and his hospitalization. He characterized the hospitalization as the “second bump in the road” with the first “bump in the road” being Jerry Tarkanian’s fall in 2009.
Miller testified that he also treats Lois Tarkanian. He testified that Lois Tarkani-an has numerous health problems, including an autoimmune disease, uterine cancer, and dermatopolymyositis.
3. Lois Tarkanian (“Lois”).
Lois is the wife of Jerry Tarkanian, and the mother of Daniel Tarkanian, George Tarkanian, Pamela Tarkanian, and Jodie Tarkanian Diamant. She also is a current member of the Las Vegas City Council. She testified that in 1992, she and her husband set up an irrevocable trust for the benefit of her children and grandchildren. She does not know who is the trustee of the trust, nor how much is in the bank account for the trust. Lois does not know how much money was in the account when the $17,000,000 judgment was entered against her and her family members in May 2012.
Lois testified that she does not recall any conversations with Daniel Tarkanian about opening an account for the trust at Wells Fargo Bank. She testified that in her judgment debtor examination in June 2013, she did not know the source of the $220,000 deposit into the account nor why $220,000 was withdrawn from the account the following day. Lois did not personally withdraw any cash from her life insurance policies. She does not remember any conversations with Daniel Tarkanian about taking the cash value out of her life insurance policies, but thinks her husband, Jerry Tarkanian, probably did. She was not present for any such conversation nor does she have any specific knowledge that such a conversation actually took place.
Lois testified that Daniel Tarkanian had permission to use funds that are resources for business purposes and he would provide information on a paper or would come before the family as a group to vote on it. She did not believe that use of insurance policy funds would be a business use, but does not think she would have objected to it. Lois does not recall that Daniel Tarka-nian ever told her that his residence was in foreclosure. She testified that Daniel Tar-kanian received permission to transfer $220,000 out of the life insurance policies some time after the transfer already had been made. Lois also testified that she personally would not take money out of an insurance policy and was shocked to find out later that funds actually could be taken out of the insurance policy.
Lois testified that she and her husband had an enclosed walkway constructed between her home and Daniel Tarkanian’s residence. Describing a picture of the walkway, she testified that the walls enclosing the walkway bear various paintings by the grandchildren, with names, ages, heights, and the like.
Lois testified that she has been married to Jerry Tarkanian for 58 years and that he is of Armenian ancestry. She testified that in Armenian families there is an extremely strong bond between the father and the eldest son. Lois testified that there *435is such a bond between Daniel Tarkanian and his father, Jerry Tarkanian.
Lois testified that she is not strong enough to lift her husband and that having Daniel Tarkanian nearby provides a feeling of security. She testified that her husband had another heart attack within the last three weeks and that she arrived at the house after the heart attack occurred. After she arrived, 911 was called and Jerry Tarkanian was taken to the hospital by the fire department.
Lois also testified that her son George Tarkanian is unavailable to assist in the care of Jerry Tarkanian due to his own health issues. Her daughter Pamela works full time and sometimes comes over to take care of her father.
4. Jodie Tarkanian Diamant (“Jodie”).
Jodie is one of Daniel Tarkanian’s sisters and lives, with her husband and two children, about a quarter mile away from her parents, Jerry and Lois Tarkanian. Her older sister, Pamela, also lives in Las Vegas, along with her four children, not far away. Her brother George, along with his wife and son, also lives in Las Vegas.
Jodie is a registered nurse who initially practiced for- eight years, ceased practice after her youngest daughter was born, and then resumed practice in 2013. She visits her father, Jerry Tarkanian, at least twice per week, and puts together his medications in a pill box. Her brother Daniel Tarkanian visits her father at least two days during the week and usually spends Sundays at her father’s home as well. Because of Jodie’s medical background, the family frequently asks her questions about her father’s medical care. She testified that as the oldest son of the family, Daniel Tarkanian is vocal in his opinions and the family looks to him for leadership. Jodie also testified that Daniel Tarkanian’s opinion regarding their father is more valuable to her because he sees his father more frequently due to his close proximity. In addition, Daniel Tarkanian spends far more time with their father than any of their siblings, even on the days when Jodie is supposed to be there. When phone calls late at night are not answered by their parents, Daniel Tarkanian is available to go to their parents’ house to check on them. Jodie is aware that the Debtors’ residence is connected to her parents’ home by a walkway and is comforted by her brother’s close proximity. She testified that at some point in time she had told her brother the same thing.
Jodie testified that as an example, a couple of weeks ago, her nephews were visiting Jerry Tarkanian and saw him slumped over in his chair. They were unable to reach Jodie and others by telephone, so they went and got Daniel Tarka-nian at the Residence.
She believes that Jerry Tarkanian has had nine, or ten stents put in his heart, one over the past summer. Jodie testified that her father had a serious fall in San Diego during the summer of 2009 where he broke his shoulder and also had to have a bone spur removed from his back. She believes that her father was in the hospital and/or in rehabilitation for around six weeks. After Jerry Tarkanian returned home, Jodie believes that both a physical therapist and an occupational therapist came to the house, but does not recall if her father had nursing care on a daily basis. She believes that a nurse visited perhaps once a week to determine whether physical and occupational therapy continued to be necessary. Jodie described the fall in 2009 as the first major incident with her father’s health.
Jodie testified that she was present in March 2012 when Jerry Tarkanian suffered a heart attack. While visiting a dermatologist, her father was having difficulty *436walking and breathing, and so she took him to a cardiologist who practiced in the office across the hallway. Thereafter, her father was taken to a local emergency room where she was informed that Jerry Tarkanian was having a heart attack. After her father got out of the hospital, he was weaker, had difficulty talking, difficulty swallowing, and difficulty walking.
Jodie also testified that the family has been trying to have meetings each month regarding the health of the parents, but have not had a meeting for the past couple of months. In addition to Jerry Tarkani-an’s health problems, Lois Tarkanian has cancer, Lupus, and fibroids.
Jodie also testified that in March 2014, Jerry Tarkanian was able to attend games played by the University of Nevada Las Vegas (“UNLV”) basketball team prior to the start of the NCAA basketball tournament. He also went with Daniel Tarkanian to Dallas where the final four teams in the tournament played for the national championship, but he did not attend any games.
Jodie never had any conversation with the Debtors before they purchased the Residence located near their parents, nor did she know anything about how the purchase was financed. She does not recall any conversation with the Debtors in 2012 about them being worried about losing their home nor of any cost-cutting measures to make payments on their home. She never questioned any of the financial decisions that Daniel Tarkanian made on behalf of their parents.
Jodie testified that her husband had loaned $400,000 to JAMD out of a line of credit, in order to help construct a building on certain hospital property. She testified that she is a part owner of JAMD and that her husband was repaid the moneys that were loaned. She testified that Daniel Tar-kanian manages JAMD and makes the financial decisions. Jodie was never told by Daniel Tarkanian that $220,000 would be drawn from her parents’ life insurance policies and out of the Jerry and Lois Tarka-nian Irrevocable Trust to loan to JAMD, which ultimately would be used to pay down the Debtors’ mortgage. She was unaware of the transaction occurring until about a year ago and she knows nothing about nor was she aware of any loans between JAMD and Daniel Tarkanian. She has never discussed the transaction with her parents nor does she recall any conversations with her siblings about the transactions when they were taking place. Jodie testified that there is a family reunion every summer where an informal family meeting would take place. During the family meetings, Daniel Tarkanian would discuss the status of the various properties owned by the family. Only recently did she become aware of any loans the Debtors had made to JAMD.
Jodie testified that at the informal family meetings, Daniel Tarkanian would give them statements or something that she had no interest in. Her husband attended the meetings and thought everything was fine. Jodie has not reviewed any of the financial spreadsheets lately concerning the outstanding loans owed by JAMD.8
5. Amy Tarkanian (“Amy”).
Amy married Daniel Tarkanian in 2001 and they have four children. She testified that at some point in time she was an actress in Los Angeles and that she also worked in the theater as well.
Amy testified that she leaves all of her finances to her husband because she did *437not manage her personal finances at all well before they got married.9 She has no idea about the terms of the mortgage on the Residence and does not know if it was ever refinanced. She does not know the amount of tuition paid for one of her children in private school. She does not recall ever having a conversation with her husband about whether they could afford it. Sometimes she checks the mail, but she sets aside for her husband anything that does not have her name on it. She does not open any credit card bills and gives no thought to whether any bills get paid or not.
Amy testified that she does not know if she has any bank or investment accounts for her children. She does not know if there are any investment accounts for herself or her husband. She has never gone online to look at any bank or investment accounts for herself or her children. Amy testified that Daniel Tarkanian runs the show at home and she just makes sure the kids get fed. She does not discuss household finances with her husband and does not know how bills come in for basic living expenses like water, utilities, or garbage. Her husband gives her cash or credit cards to buy groceries, but she does not know which banks issue the credit cards. She does not know the amount of the monthly mortgage payment on her home and has never known. She testified that she does not know how her husband makes the mortgage payments. Amy testified that she does not remember who her husband was working for in 2005 when they bought the house. She does not know how much money Daniel Tarkanian was making in 2005, nor how much money he earns today.
Amy did acknowledge signing a check dated April 29, 2012, in the amount of $7,500 payable to John Hancock Freedom 529, but testified that she does not know what the account is. She also acknowledged signing a check dated June 1, 2012, in the amount of $2,000 payable to her daughter, Lois M. Tarkanian, which may have been a birthday gift in an amount to make up for moneys previously given to the grandchildren by her husband’s parents.
Amy testified that Daniel Tarkanian once mentioned the importance of keeping the Residence after Jerry Tarkanian’s heart attack and doing whatever it takes, probably through refinancing, but nothing beyond that. She testified thdt she has heard of the term underwater with regard to a mortgage but does not know whether the Residence has been refinanced. She testified that she believes it to be important to stay in the Residence because her children attend schools nearby, the Residence is close to the family, and her husband wants to remain near to Jerry Tarka-nian due to his declining health condition.
Amy testified that she is aware of the $17,000,000 judgment entered against her, as well as her husband, but has no idea how the process of paying the judgment would work. Although she does not know her finances, she is pretty sure that she did not have $16.9 million dollars in assets to pay the judgment when it was entered against her in May 2012. She testified that she was not interested in trying to figure out how to respond to the judgment because she left that up to her husband. She does not know if she had any equity in the Residence at the time the judgment was entered and does not know if she has any equity in the Residence today. Amy also testified that she never went with her husband to discuss with any accountants or financial advisors how to satisfy the judg*438ment. She also had no conversations with any family members about the judgment, nor did she do an analysis of how to satisfy the judgment. She discussed no options with Daniel Tarkanian about satisfying the judgment or protecting her assets other than filing for bankruptcy. Amy recalls no discussion with her husband about taking $220,000 out of Jerry and Lois Tarkanian’s life insurance policies or paying $400,000 to the mortgage holder in July and August 2012. Amy testified that she knows that the entity JAMD exists, but has never asked her husband about it. She knows nothing about $400,000 having come from JAMD’s bank accounts into her account and then to Bank of America.
Amy testified that the Tarkanian family has meetings to discuss family business matters but she does not attend them. She is not aware of the large principal payment made on the Residence in 2012 and never discussed it with her husband or participated in any way in making the payment.
Amy testified that in January 2013, she started a job as a political pundit representing the conservative agenda where she debates important political positions and topics. She testified that on a political show called “What’s Your Point” she engages in almost daily discourse with Rory Reid. The televised show is on Channel 3 and she is paid an annual salary.
Amy testified that she has been selected as a member of the Silver State Excellence of Women Program geared to recruit women to run for political office or to participate in the political process. She testified that she also served on the Clark County Republican Executive Board and was once elected and re-elected as the Nevada Republican Party chairperson. Amy testified that she served as the leader of the Republican Party in Nevada after she was elected the chairperson. She testified that as party leader, she would raise funds and an executive director and treasurer would take care of the money. She testified that fund-raising only required talking about obtaining money rather than about how much money is needed because the amount needed is unlimited. Amy testified that in her roles on the executive board and as party leader, the executive director and treasurer would make the financial decisions, and she would go fund-raise. She testified that when Daniel Tar-kanian ran for political office in 2012, she campaigned for him going door to door.
Amy also testified that her job at Channel 3 is her first job making money personally after she married in 2001, other than her job in real estate. She testified that she once had a real estate license, but does not recall whether she was involved in two or more transactions. She believes she may have been involved in the purchase of the Residence. She testified that she was involved in a transaction involving commercial property, but does not remember the property or the persons involved in the transaction. She testified that her husband Daniel Tarkanian was involved in every transaction, and that someone would bring her documents and she would sign them. She does not recall who brought her the documents.
Amy testified that she does not remember how she used her real estate license in the purchase of the Residence. She does not recall whether she received a commission, who she represented on the sale, or whether the home originally was purchased in her husband’s name as separate property. She testified that she did not talk to her husband about whether they could afford to purchase the home because she trusted him. She also testified that she does not know whether she is even on title to the house.
Amy testified that when the Residence was purchased in 2005, she intended that *439her children be raised in the house as long as they needed it. When shown a copy of the homestead declaration for the 'Residence that she signed, Amy testified that she does not understand what it is even though she once was a licensed realtor. She testified that she signed the homestead declaration in January 2013 but does not remember reading it. When asked if she typically reads documents before signing them, Amy testified that she just signs them.
Amy testified that she does not recall signing a personal financial statement in 2011, although she recognized her signature on the copy shown to her. She testified that she may have read the document, but does not remember. Because she does not remember reading the document, Amy testified that she does not know if the statements made in the financial statement were accurate as of December 22, 2011. She testified that she does not know if the $12,000 monthly income figure for her husband was accurate and that her husband came up with that figure. She also did not do anything to follow up on the accuracy of the income figure because she did not know where Daniel Tarkanian worked in 2011. Amy testified that she did not remember knowing the amount of the monthly mortgage payment when the personal financial statement was filled out. She also testified that she has no idea where a figure for $15,000 cash on hand or a figure of $24,500 in other assets came from. Amy testified that she did not participate in the preparation of the personal financial statement nor did she provide any of the information in it. Additionally, she did not ask her husband whether the information was correct before she signed it.
Amy testified her signature appears on an affidavit of financial condition. She testified that she does not remember if she did anything to confirm or verify any of the information appearing in the affidavit. She testified that she signs every document that is handed to her by Daniel Tarkanian. She does not remember if the investment account figures in the affidavit were accurate when she signed the document. Amy testified that she did not participate in the preparation of the affidavit and assumes it was prepared by her husband. .
6. Daniel Tarkanian.10
Daniel Tarkanian purchased the six bedroom, five bathroom Residence in his own name in 2005, then transferred it to Amy and himself as husband and wife. He testified that he initially took title only in his name because his wife’s credit was not very good and the interest rate would be higher if she was on title. Thereafter, it was transferred to him and his wife as community property, and then to the Daniel and Amy Tarkanian Revocable Family Trust. He testified that title to the Residence remains in that family trust. Daniel Tarkanian testified that the purchase price was $810,000, with $162,000 as a down payment, requiring a loan of $648,000 to complete the purchase. He testified that the down payment was obtained from the sale of their prior residence. He testified that the purchase was financed through a 30-year, adjustable rate mortgage, requiring interest-only payments. The loan application provided for initial monthly mortgage payments of around $3,400. He testified that the original interest rate was 5.75 percent and he was paying close to $3,800 a month. He testified that he purchased the Residence *440primarily because it was close to his parents’ home.
Daniel Tarkanian testified that he has always taken care of the family finances during his marriage to Amy. His wife has no interest in the finances and had credit problems in the past. He testified that he has taken complete control over payments being made and books being kept. Amy has no involvement in the mortgage payments for the Residence and does not review the monthly mortgage statements. Daniel Tarkanian testified that Amy was not involved in the transactions to pay down the mortgage in 2012. She did not attend any of the meetings where family business was involved and she had no interest in the meetings
He testified that the only principal payments on the loan were made in July arid August 2012. Until that time, he had only paid interest'on the loan. As a result of the principal payment, the balance remaining on the loan was around $248,000. Daniel Tarkanian testified that at the time of the principal payments, he had not had an appraisal done on the Residence, but did have a tax assessor’s statement for that time period.
Daniel Tarkanian testified that part of the principal payment came from proceeds from his parents’ irrevocable trust that had insurance policies on his parents’ lives. He testified that he and his siblings are the beneficiaries of the parents’ trust, and that the trust is not a judgment debtor on the FDIC judgment. Two separate checks, each in the amount of $110,000, were issued by the Phoenix Life Insurance Company. Both checks are dated July 3, 2012. He testified that on July 2, 2012, he applied to open a bank account for his parents’ trust at a nearby branch of Wells Fargo Bank because it was located much closer than the only Ameritrade office more than thirty minutes away. He testified that on July 9, 2012, he deposited two checks that he received from Phoenix Life Insurance Company into the account.
Danny Tarkanian testified that he withdrew the funds from the parents’ trust account on July 10, 2012, and the funds were immediately loaned by the parents' trust to JAMD. Because he had a close-knit family and the transaction was within family members, the loan was not formalized by a promissory note, but was reported on an Excel spreadsheet provided to the accountant who prepared the tax returns. Daniel Tarkanian testified that he believed it would raise fiduciary questions and possibly a breach of fiduciary duty if he had transferred the funds directly to himself to pay down his mortgage. He testified that JAMD had borrowed funds from the trust on at least seven occasions over the past several years. He testified that the decisions to borrow funds from the life insurance policies to maintain JAMD’s survival depended on the interest charged by other sources and whether the insurance policies were the only source of income. Daniel Tarkanian testified that he never told the other beneficiaries of his parents’ trust that he was borrowing money to loan to JAMD in advance of doing so. He did not do so before the $220,000 was borrowed by JAMD to repay its loans to him, nor did he do so before any of the other six times that JAMD borrowed money’ from the parents’ trust. He testified that he is not the trustee of the Lois Tarkanian Irrevocable Trust and that Judy Steel is the trustee. He is the trustee of two of his parents’ irrevocable trusts as well as the manager of all of the family entities that he described.
Daniel Tarkanian testified that on July 12, 2012, JAMD used the $220,000 in funds borrowed from the parents’ trust to repay Daniel Tarkanian for loans that he previously had made to JAMD. He believed it *441was permissible to do so because his parents owned their irrevocable trust and also owned an interest in JAMD, and therefore had a mutual interest. As the parents’ trust also had an interest in JAMD, he testified that the trust had an interest in ensuring that JAMD would be able to remain solvent and survive. He never told his siblings in advance of doing so and has never made any other loans from the trust to JAMD that were used” to pay down his mortgage.11 Daniel Tarkanian testified that he would have informed his siblings of any transfers during their annual meetings.
Daniel Tarkanian testified that when he received the loan repayment from JAMD, he deposited the funds into his personal account and then had a cashier’s check made payable to Bank of America as a principal reduction on the mortgage. He testified that the amount of the cashier’s check was $300,000, consisting of $250,000 from JAMD and an additional $50,000 that was a repayment of a loan that he had made to the Daniel Tarkanian congressional account. The same day he deposited $53,000 into his personal account that he received from the Daniel Tarkanian congressional account. He testified that he was running for Congress in 2012 and had loaned his campaign money during the primary. After he won the primary, campaign donations were received from which he was repaid the money he had loaned the campaign. He testified that the $250,000 from JAMD included the $220,000 JAMD had borrowed from his parents’ trust plus $30,000 from JAMD’s operational income.
Daniel Tarkanian testified that on August 3, 2012, a cashier’s check in the amount of $50,000 was made payable to Bank of America. The source of the $50,000 was the Tarkanian Basketball Academy, a non-profit entity that operates a sports facility, which had loaned the funds to JAMD. At the time, the Academy had excess cash because it received its biggest revenues in June and July for the summer basketball tournaments. Daniel Tarkanian testified that after JAMD borrowed the $50,000 from the Tarkanian Basketball Academy, JAMD paid back $50,000 that JAMD had borrowed from Daniel Tarkanian. Daniel Tarkanian then obtained the cashier’s check payable to Bank of America. He testified that Tarka-nian Basketball Academy could not have given $50,000 directly to him because he was not working for the Academy at that time as he was involved in the last two months of his congressional campaign. Daniel Tarkanian testified that the funds were loaned to JAMD but that no promissory note was prepared. He testified that the loan was documented on the Excel spreadsheets, ledger sheets, cancelled check, and bank account statements provided to the accountant. He does not remember whether he told Judith Flynn, who signed the check from the Academy payable to JAMD, that the $50,000 was a loan. He testified that he was the only person authorized to decide whether or not the loan was a reasonable use of the Academy’s cash. He also testified that if the Tarkanian Basketball Academy had excess cash ten months earlier, it could have loaned $50,000 to JAMD at that time. Daniel Tarkanian testified that neither JAMD nor the Tarkanian Basketball Academy are debtors on the FDIC judgment.
Daniel Tarkanian testified that JAMD was opened in 2007 and owns a commercial development project consisting of fifteen acres of land across from the San Martin Hospital. He made all management and *442operational decisions for JAMD in 2012, including how the money would be spent. He testified that JAMD’s need to repay loans was based on whether the party who loaned funds to JAMD needed to be paid back. Daniel Tarkanian testified that he did have a promissory note from JAMD in the early 2000s, but that he cannot find a copy of his note. He testified that he receives five percent interest on the loans he makes to JAMD. He testified that JAMD borrowed money from family members with a policy or understanding that if JAMD had the ability to do so, it would repay the loans any time the lender needed the money back. He testified that the policy or understanding is not in writing because it is between family members.
Daniel Tarkanian testified that he is the sole person who decides whether it is necessary for JAMD to repay the loans. One such loan was for $450,000 that JAMD borrowed from Zafi Diamant for the construction of a building which was paid back when Zafi needed to pay back his line of credit. He testified that there was another loan to JAMD from the Diamants, but that it has not been paid off and has a balance of $73,005. He testified that another example was when he borrowed against his parents’ life insurance and loaned the funds to JAMD, which then repaid the $250,000 it had borrowed from his parents. He testified that his parents needed to retrofit their home after his father’s illness. Daniel Tarkanian testified that after he was repaid the loans in 2012, JAMD also repaid loans to his parents, to the Tarkanian Family Limited Partnership, to the Lois Tarkanian Revocable Trust, to the Jerry and Lois Tarkanian Irrevocable Trust, and perhaps others.12
Daniel Tarkanian testified that at the time Tarkanian Basketball Academy loaned the $50,000 to JAMD, there were no promissory notes to Daniel Tarkanian coming due that needed to be paid. He testified that neither JAMD nor the Tar-kanian Basketball Academy are debtors on the FDIC judgment, so that the FDIC could not pursue the Academy for the $50,000 loaned to JAMD. Daniel Tarkanian testified that the FDIC could only pursue JAMD for the moneys it owed to him.
Daniel Tarkanian testified that on August 22, 2012, JAMD repaid him another $50,000 by a check that he cashed and converted to a cashier’s check payable to Bank of America. It was to be applied to reduce the principal owed on the mortgage. He testified that he usually made mortgage payments by personal checks and the use of cashier’s checks was not typical.
Daniel Tarkanian testified that before the principal payments were made on his mortgage in 2012, he had been sued on a personal guaranty of a $14 million loan from La Jolla Bank. The loan had been guarantied by his wife, his parents, his sister Jodie and her husband, and his brother George. He testified that the FDIC judgment was entered on May 22, 2012, about six weeks before he started making principal payments on his mortgage. Daniel Tarkanian testified that he *443could not pay the $17 million FDIC judgment as he did not have that kind of money. He also testified that for that reason he had no intention of paying the judgment.
Daniel Tarkanian testified that he signed a personal financial statement dated December 22, 2011. He testified that he signed an affidavit of financial condition on December 22, 2011. On the affidavit he listed a receivable from JAMD in the amount of $670,379. He testified that the receivable would have been reduced by at least $350,000 due to the subsequent loan repayments in 2012. Daniel Tarkanian testified that in July 2010, JAMD owed him $748,465.
Daniel Tarkanian testified that he personally guarantied a $14 million loan that Nevada State Bank had made to JAMD. He testified that for six months in 2012 he was being paid a salary by JAMD. He testified that Nevada State Bank objected to JAMD’s payment of property management fees and legal fees to Daniel Tarkani-an. He testified that he received a letter from Nevada State Bank dated December 11, 2012, accusing him of manipulating accounting practices by claiming attorneys fees of $7,500 per month without substantiation of the amount. He testified that he did not disclose to Nevada State Bank the loan repayments made by JAMD to Daniel Tarkanian because those repayments were not an operating expense such as management and legal fees, and did not have to be disclosed under the bank’s loan documents. He testified that from the time that Nevada State Bank had loaned money in 2005, it was not given notice of any of the 40 to 50 loan repayments that JAMD made to his siblings, himself and the trusts, because it was not relevant to the loan documents.
Daniel Tarkanian testified that he and his family members also formed a business called Tark, LLC, in 1999. That entity owns a retail building located in Clovis, California. He testified that he manages Tark, LLC, including review and approval of leases and working with leasing agents. He also reviews and approves leases for JAMD. Daniel Tarkanian testified that at the end of 2013, Tark, LLC, took out a loan of $822,000, by refinancing its property. Daniel Tarkanian testified that the refinancing was a smart business decision because the loan was obtained at a four percent interest rate and the moneys received from the loan are nontaxable. He testified that part of the loan proceeds were used to repay a loan that Tark, LLC had received from the Tarkanian Basketball Academy. He testified that another part of the loan proceeds were loaned to JAMD which in turn used the funds to repay the Jerry and Lois Tarkanian Irrevocable Trust for the $220,000 it had borrowed against the Phoenix Life Insurance policy.
Daniel Tarkanian testified that in 2010, his brother George ran the Tarkanian Basketball Academy because Daniel Tarkani-an was running for the United States Senate. He testified that due to a serious illness, George had to step down from running the facility. George’s wife was doing the bookkeeping and running the office while George ran the basketball programs. At the end of August 2010, Pete Zopolos came in to run the facility and Amy came in to help transition from George to Pete. He testified that his wife Amy was paid to help organize the office and files, and do other things.
Daniel Tarkanian testified that he made the principal payments on the mortgage in 2012 because he was afraid that the payments would go up some time in the future and he would not be able to afford them. He testified that his mortgage payments in fact had been going down, but that he *444believed that interest rates would start going up because interest rates were at historical lows. He testified that if the interest rate went back to the initial rate, his monthly mortgage payment would go up by $2,300, and if the interest rate went up to 7.5 or 8.0 percent, he would be paying $3,500 or $4,000 more per month.
Daniel Tarkanian testified that interest rates have not gone up, but if so, very little. He testified that in July 2010, the interest rate on his mortgage was about to change. He testified that even though JAMD owed him $748,465 at the time, he does not know if JAMD had the cash flow to repay the amounts owed. Daniel Tarka-nian testified that JAMD could have borrowed against his parents life insurance policies through his parents’ trust, but that JAMD had already borrowed $144,000 in April 2010. He testified that Jerry Tarka-nian’s health had begun to fail in 2009, but he did not attempt to pay down or refinance his mortgage or engage in any transaction similar to principal reductions he made in 2012.
• Daniel Tarkanian testified that he did not record a homestead declaration in 2005 when he purchased the Residence. He testified that he and his wife filed the homestead declaration in January 2013, but acknowledged that he had previously testified that he could not explain the reason for delaying the filing of the homestead declaration because of the attorney-client privilege. He testified that as of July 2012, he was current on his mortgage payments and had not received any notices of default. He testified that the Residence was not in foreclosure and that he could have made the payment the next month. Daniel Tarkanian testified that he was worried that the interest rate would rise and he would not be able to make the higher monthly payment.
Daniel Tarkanian testified that he believed he had three options in July 2012. He testified that his first option was to remain in the home and wait for interest rates to increase from $1,500 currently to as high as $3,700. He testified that the monthly interest-only payment on the loan started at $3,105 for the first five years, then dropped to $1,552 in July 2010, then dropped to $1,485 in February 2011, then dropped to $1,417.50 in August 2011, then remained at $1,417 in November 2011, then increased to $1,552 in February 2012, and then dropped to $1,209 in July 2012. He testified that Tarkanian Basketball Academy’s lease with Station Casinos had expired and the Academy’s revenue could end if it is required to move. He also testified that JAMD was upside down several million dollars and would not be a source of income if it went under. He testified that his second option was to walk away from the Residence, let it be foreclosed or short sold, and then purchase another home away from his father. Daniel Tarkanian testified that his third option was to obtain repayment of the funds loaned to JAMD and then pay down the mortgage. He testified that as a result of the principal reductions made in 2012, the monthly interest-only payment had dropped to $869.00 in August 2012. He testified that the $400,000 in transfers during July and August 2012 were the first time he had ever made any payments of principal on the mortgage.
Daniel Tarkanian testified that he graduated from the UNLV with a business finance degree and then graduated from the University of San Diego School of Law. He is admitted to the Nevada bar and currently is a licensed attorney. Daniel Tarkanian testified that he started a law firm in January 2014, Tarkanian & Knight Law Group, but does not practice law except for dealing with his family’s various business entities. He testified that he does *445not know if his law firm website advertises him as a lawyer specializing in business law and consulting. He testified that he provides oversight to his partner who just passed the bar and he practices law for his family’s entities. He could recall one instance where he made a collection call for a client, but that he has never gone to court, prepared any documents, or any of that stuff.
Daniel Tarkanian testified that he is very close to his father, Jerry Tarkanian, as are all eldest sons of Armenian ancestry with their fathers. He testified that he named his only son, Jerry, after his father. Daniel Tarkanian testified that he was a ball boy for Jerry Tarkanian and traveled with the basketball teams that his father coached. He testified that Jerry Tarkanian coached at San Joaquin Memorial High School, Redlands High School, Antelope Valley High School, Riverside City College, Pasadena City College, Long Beach State, UNLV, and Fresno State. He played basketball for his father for one year at a junior college and then for three years at UNLV where his father coached a team that was ranked number One in the nation. He testified that his father won a national championship while coaching at UNLV, went to the Final Four of the collegiate national basketball tournament four times, and had the highest winning percentage of any coach when he left UNLV. Daniel Tarkanian testified that after graduating from law school, he practiced law for a few years and left practice to coach with his father at Fresno State. At the end of Jerry Tarkanian’s employment at Fresno State, Daniel Tarkanian testified that he acted as his father’s attorney at a hearing before the NCAA infractions committee. He testified that during the course of his life, he has spent much of his time with his father, working with his father, and defending his father. Daniel Tarkanian testified that about a month ago, he flew with Jerry Tarkanian to Dallas for a coaching convention where the Final Four basketball tournament was held.
Daniel Tarkanian testified that his father’s health had been declining since 2009 but his father had not had another major problem until his heart attack and hospitalization in March 2012. He testified that he had concerns about his father’s condition after that hospitalization, including Jerry Tarkanian’s inability to walk, his risk of falling, his inability to go to the restroom without assistance, and his limited speech. Daniel Tarkanian testified that he would assist his mother in lifting his father at times when he fell out of his chair or bed. He testified that he spent a lot of time with his father and also brought his children along to interact with their grandfather.
Daniel Tarkanian testified that after his father’s March 2012 heart attack, he decided it was important to remain in the Residence by paying down the mortgage and refinancing it at a low interest rate. He testified that during 2012 he believed the fair market value of the Residence was somewhere in the mid-$300s based on a county tax assessment. He testified that prior to the principal reductions in 2012, he and his wife had no equity in the Residence and that it was upside down several hundred thousand dollars. Daniel Tarkani-an testified that the actual reduction in principal was $398,701.92, resulting in $93,596 in equity based on the county assessor’s valuation of the Residence. He testified that the principal payment of $398,701.92 resulting in $93,596 of equity was a lousy investment but it was more important to remain in the Residence after his father’s heart attack. He testified that he tried to refinance the Residence at the end of 2012, but had to wait until after he filed his 2012 tax return. Daniel Tarkanian *446testified that when he tried to refinance in 2013 at Bank of the West, he could not do so because of the FDIC judgment.
Daniel Tarkanian testified that a little over a month ago, Jerry Tarkanian suffered another heart attack. He was able to rush over from the Residence to his father’s house and was the first adult to arrive. Jerry Tarkanian was taken to the hospital and was diagnosed with another heart attack. Daniel Tarkanian testified that his sister had arrived before him and placed a CPAP mask on Jerry Tarkanian to force air into his lungs.
DISCUSSION
Under Section 541(a)(1), all property in which a debtor has a legal or equitable interest as of the commencement of the bankruptcy case • constitutes property of their bankruptcy estate. Under Section 522(b)(1), an individual Chapter 7 debtor may exempt from property of the bankruptcy estate property that may be claimed as exempt under applicable state law pursuant to Section 522(b)(3). Under Section 522(b)(3)(A), property claimed as exempt under state law is subject to the provisions of Section 522(o). Under Section 522(g)(4), “the value of an interest in” real property that a debtor claims as a homestead "shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on.such date the debtor had held the property so disposed of.” (Emphasis added.)
Under Section 522(b)(2), each State may elect not to allow its residents to claim the federal bankruptcy exemptions set forth in Section 522(d). Under NRS 21.090(3), Nevada has “opted out” of the federal bankruptcy exemptions. See Leavitt v. Alexander (In re Alexander), 472 B.R. 815, 821 (9th Cir. BAP 2012).
Subject to specific exceptions, the Nevada Constitution exempts from a forced sale the homestead that is available to Nevada residents. See Nev. Const, art. 4, § 30. NRS 21.090(1)(1) permits Nevada residents to claim the “homestead as provided for by law ... ” NRS 115.005(2)(a) defines a homestead to mean property consisting of “a quantity of land, together with the dwelling house thereon and its appurtenances.” Under NRS 115.020, a homestead is claimed by recording a declaration of homestead at any time before an execution sale of the property. See Myers v. Matley, 318 U.S. 622, 627, 63 S.Ct. 780, 87 L.Ed. 1043 (1943). Under NRS 115.010(2), a homestead claimed as exempt from execution “extends only to that amount of equity in the property held by the claimant which does not exceed $550,000 in value ... ”13
The homestead provided for by Nevada law is limited by the Nevada Supreme Court’s decision in Maki v. Chong, 119 Nev. 390, 75 P.3d 376 (Nev. 2003). In Maki, the court rejected a homestead claim by a judgment debtor who had converted the creditor’s funds to acquire a residence. In pertinent part, the court observed as follows:
There is a time-honored principal that states that he who keeps property that he knows belongs to another must restore that property. This idea, manifest*447ed in the doctrine of equitable liens, permeates our entire system of justice regarding equity. “[0]ne who has purchased real property with funds of another, under circumstances which ordinarily would entitle such other person to enforce a constructive trust in, or equitable lien against, the property, cannot defeat the right to enforce such trust or lien on the grounds that [the homestead exemption applies].”
***
Under equitable lien principals, the homestead exemption is inapplicable when the proceeds used to purchase real property can be traced directly to funds obtained through fraud or similar tor-tious conduct.
119 Nev. at 393, 75 P.3d at 378-79 (citations and footnotes omitted).
There is no dispute that the Residence is property of the Debtors’ bankruptcy estate and that the Debtors have claimed a homestead exemption under NRS 21.090(1)(1) and NRS 115.050. There also is no dispute that the Homestead Objection was timely filed by the FDIC under FRBP 4003(b)(1).’
Although the FDIC initially asserted only that the Debtors had made fraudulent transfers for which their Nevacla homestead exemption would be denied under Maki, see Homestead Objection at 8:2-27, it also argues that the Debtors’ claim of exemption is limited by Section 522(o). See Reply at 4:3 to 6:21; FDIC Brief at 6:16 to 9:7. Debtors’ opposition to the Homestead Objection actually raised Section 522(o) in the first, instance, see Debtors’ Response at 7:11 to 13:22, and they of course maintain that Section 522(o) does not apply. See Daniel Brief at 7:18 to 15:18; Amy Brief at 3:9 to 8:2. Because the limitations under Section 522(o) apply only if an exemption is available to begin with, the court will initially examine whether the Debtors may even claim a Nevada homestead under Maki.
I. Availability of the Nevada Homestead Exemption.
In Maki, the Nevada Supreme Court acknowledged the fundamental purpose of the homestead exemption is to preserve “the family home despite financial distress, insolvency or calamitous circumstances ... ” 75 P.3d at 378 & n.2, citing Jackman v. Nance, 109 Nev. 716, 718, 857 P.2d 7, 8 (Nev. 1993). The protection provided by the homestead exemption, however, is not absolute. In addition to express statutory exceptions to a judgment creditor’s execution against a homestead, e.g., tax liens, mortgages, deeds of trust, and homeowners association liens, the Nevada Supreme Court acknowledged its pri- or recognition of an additional exception for payment of child support obligations. 75 P.3d at 378-79 & nn.5 & 6, citing, e.g., Breedlove v. Breedlove, 100 Nev. 606, 608, 691 P.2d 426, 427 (Nev. 1984). With respect to parents who owed child support arrearages,- the court concluded that they are “not the type of debtor whom the legislature sought to protect.” 75 P.3d at 379.
The type of debtor before the court in Maki was the sister of a Nevada prison inmate. While her brother was in prison, she misappropriated his state insurance disability settlement funds and his monthly disability benefit checks. She used the monies to purchase a residence and then claimed a Nevada homestead exemption after her brother obtained a fraud judgment against her.14 In rejecting her home*448stead claim, the Nevada Supreme Court observed:
“The homestead exemption statute cannot be used as an instrument of fraud and imposition.” Public policy supports our application of an exception to homestead exemptions for victims of fraud or similar tortious conduct. An individual using fraudulently obtained funds to purchase real property should not be protected by the homestead exemption because the exemption’s purpose is to provide protection to individuals who file the homestead exemption in good faith.
75 P.3d at 379 (footnotes omitted) (Emphasis added). Because the sister had obtained her brother’s funds by fraudulent means, the court concluded that her homestead exemption was invalid and could not prevent an execution sale of the residence to enforce the judgment. Id. at 379-80.
The Maki court relied primarily on a decision by the Washington Supreme Court in Webster v. Rodrick, 64 Wash.2d 814, 394 P.2d 689 (Wash. 1964). Webster involved a homestead claim by a married couple where the wife had embezzled funds from her employer,, and the funds may have been used to purchase and improve the couple’s residence. The employer obtained a judgment against the wife and the marital community based on misappropriation. The embezzled funds had been sufficiently traced to the residence to support the inclusion of an equitable lien against the debtors’ residence. The Washington Supreme Court rejected the debtors’ claim of a homestead exemption, concluding that the Washington “homestead exemption statute cannot be used as an instrument of fraud and imposition.” 394 P.2d at 692 (citations omitted).15
In both Maki and Webster, it is clear that the funds at issue originally belonged to the judgment creditor. In Maki, disability checks payable to the judgment creditor were misappropriated and used to acquire the debtor’s residence. In Webster, funds *449embezzled from the judgment creditor were used to acquire and improve the debtor’s residence. In each case, there was tortious conduct by which the debtor acquired the funds belonging to the judgment creditor that were traceable to the residence for which a homestead exemption was claimed. In each circumstance, the facts supported the imposition of an equitable hen or the recognition of a constructive trust in favor of the judgment creditor notwithstanding the debtor’s attempt to claim a homestead.
In Henry v. Rizzolo, 2012 WL 4092604 (D. Nev. 2012), a Nevada debtor faced with execution of a judgment asserted an exemption in certain annuity contracts pursuant to NRS 687B.290.1. That statute included a specific exception with respect to “amounts paid for or as premium on any such annuity with intent to defraud creditors ...” The federal court interpreting Nevada law concluded that the exception to the annuity contracts exemption required proof of intent to defraud creditors. 2012 WL 4092604 at *5. A judgment under NRS 112.180(l)(a) already had been entered in favor of the executing creditors, however, determining that the same debt- or had received a fraudulent transfer of funds owned by her stepson. Applying the statutory exception and “the equitable hen principals set forth in Maki ...,” 2012 WL 4092604 at *8, the court rejected the claimed exemption of the annuity contracts as there was a sufficient basis to conclude that the contracts had been purchased in whole or in part with funds owned and fraudulently transferred by the judgment debtor’s stepson. Thus, as was the case in Maki and Webster, in Henry there was no question that the funds used to acquire the claimed exemption did not belong to the judgment debtor.16
But neither Maki, Webster nor Henry address whether a judgment debtor outside of bankruptcy may engage in exemption planning in contemplation of a judgment being entered. Most states have adopted statutes providing remedies for judgment debtors who fraudulently transfer their assets to thwart the collection efforts of judgment creditors. See, e.g., Nev.Rev.Stat. 112.140 to 112.250 (Uniform Fraudulent Transfer Act). Even for individuals who petition for bankruptcy protection, prebankruptcy exemption planning is permitted. See In re Stern, 345 F.3d 1036, 1043 (9th Cir. 2003). In Nevada, it is well established that a judgment debtor can record a homestead declaration at any time before the execution sale is completed. See Herndon v. Grilz, 112 Nev. 873, 878, 920 P.2d 998, 1001 (Nev. 1996). Thus, Nevada law contemplates that a judgment debtor can convert his or her otherwise non-exempt residence into a fully exempt homestead even on the day of the execution sale.
In the present case, neither the FDIC nor the Debtors have cited an instance where the equitable lien concepts articulated in Maki and Webster have been ap*450plied to bar debtors from using their own assets for exemption planning. In particular, the parties have cited no instance where a judgment debtor has been barred under Nevada law from using his or her own assets to acquire or increase the equity in a residence for purposes of the homestead exemption. As previously noted, individual debtors are allowed to engage in exemption planning prior to bankruptcy, subject to judicially created limitations applicable in bankruptcy. In a bankruptcy context, such limitations serve a fundamental bankruptcy purpose of ensuring a ratable distribution to creditors. Outside of bankruptcy, however, individual states must determine the degree of exemption planning permitted by their residents.17 The Nevada Supreme Court’s decision in- Maki, like Webster, expressed the court’s concern for debtors who fraudulently or- tortiously obtain property from others and invoke the homestead exemption as a shield to protect their ill-gotten gains. Because Nevada permits its residents to claim the homestead exemption at any time before completion of an execution sale, the concerns expressed by the court in Maki do not appear to be applicable here,
In the instant case, there is no dispute that the Debtors purchased the Residence in June, 2005 for $810,000 using a down payment of $162,000 from the sale of their prior residence. There is no dispute that after the Debtors acquired the Residence in 2005, they owed a balance of $648,000. There is no dispute that after 2005, Debtors made only interest payments on their mortgage. There is no dispute that the Debtors could have filed a homestead declaration at any time after they purchased the Residence in 2005. There is no dispute that the maximum amount of the Nevada homestead exemption was $200,000 at the time the Debtors purchased the Residence. There is no dispute that the maximum amount of the Nevada homestead exemption was $350,000 between July 1, 2005 and June 30, 2007. There is no dispute that the maximum amount of the Nevada homestead exemption after July 1, 2007, is $550,000.
There is no dispute that as of July 1, 2012, the Debtors had no equity in the Residence. There is no dispute that the Debtors made no principal payments on their mortgage until July 12, 2012. There is no dispute that the Debtors made additional principal payments on August 3, 2012 and August 22, 2012. There is no dispute that the principal payments made by the Debtors in July 2012 and August 2012 reduced their mortgage balance to approximately $248,000. There is no dispute that the reduction in the mortgage balance resulted in the Debtors having equity in their Residence. There is no dispute that the amount of the Debtors’ equity in tile Residence is less than the $550,000 maximum allowed for a Nevada homestead. There is no dispute that the Debtors did not record their homestead declaration until February 6, 2013.
Although other facts are established by the evidence and will be discussed below, *451the salient fact is that the assets which enabled the Debtors to claim a homestead exemption in the Residence were the Debtors’ assets, not those of a third party. Under these circumstances, the court concludes that the decision in Maki.does not prohibit the Debtors from claiming a homestead in their Residence under Nevada law. As to that basis, the Homestead Objection will be overruled. The remaining inquiry is whether Section 522(o) limits the amount of the Debtors’ homestead claim.
II. Applicability of Section 522(o).
In 2005, i.e., the year the Debtors purchased the Residence, Section 522(o) was enacted, along with Section 522(p) and Section 522(q), to limit an individual’s ability to claim a homestead in bankruptcy. Section 522(p) attempts to close the so-called “mansion loophole” by capping the amount of a homestead exemption to now-$155,67518 for any residence acquired by the debtor within 1215 days before commencing bankruptcy. See In re Greene, 583 F.3d 614, 619 (9th Cir. 2009). This prevents well-heeled individuals from relocating to States that have more generous homesteads, e.g., Florida and Texas,19 shortly before filing for bankruptcy protection. See In re Kane, 336 B.R. 477, 482 (Bankr.D.Nev. 2006). Section 522(q) further limits the exemption permitted by Section 522(p) for a debtor who is convicted of certain felonies or if the debtor has a debt arising from certain types of wrongful conduct, e.g., securities fraud, serious physical injury or death, and the like. For individuals who do not relocate to another state, Section 522(o) attempts to prevent individuals from increasing the value of their homestead by disposing of non-exempt assets “with the intent to hinder, delay, or defraud a creditor ...”
In this district, a party objecting to a homestead exemption under Section 522(o) must demonstrate: “(a) an increase in the value of the debtor’s homestead; (b) that the increase was ‘attributable’ to the disposition of nonexempt assets; (c) that the disposition of the nonexempt assets was made with the intent to hinder, delay, or defraud a creditor; and (d) that the disposition occurred during the ten-year period ending on the date the debtor’s bankruptcy petition was filed.” In re Stanton, 457 B.R. 80, 91 (Bankr.D.Nev. 2011). See also In re Halinga, 2013 WL 6199152 at *4 (Bankr.D.Idaho Nov. 27, 2013).20
*452In the instant case, the parties do not dispute that any increase in the value of the Debtors’ homestead is entirely attributable to the payments made on July 12, 2012, August 3, 2012, and August 22, 2012, because the Debtors had no equity whatsoever in the Residence prior to those principal payments. Additionally, there is no dispute that any challenged disposition of assets in this case occurred within ten years prior to the filing of the Debtors’ bankruptcy petition.21 What remains in dispute are: (1) whether the Debtors’ resulting homestead exemption was attributable to a disposition of nonexempt assets, and (2) whether that disposition of assets was made with intent to hinder, delay or defraud creditors.
A. Disposition of Non-Exempt Assets.
The evidence adduced at trial established that the source of the funds for the July 12, 2012, payment to Bank of America was: (1) $220,000 from the life insurance policies of the parents’ irrevocable trust that were loaned to JAMD which then partially repaid prior loans made to JAMD by the Debtors; (2) $30,000 from JAMD’s available operational income which then partially repaid prior loans made to JAMD by the Debtors; and (3) $50,000 from the Daniel Tarkanian congressional campaign to repay a loan previously made by the Debtors to the campaign. The source of funds for the August 3, 2012, payment to Bank of America was from a $50,000 loan made by the Tarkani-an Basketball Academy to JAMD which then partially repaid the prior loans to JAMD made by the Debtors. The source of funds for the August 22, 2012, payment to Bank of America was from JAMD’s partial repayment of prior loans to JAMD made by the Debtors. Thus, according to Debtors’ evidence, the direct source of all of the funds that the Debtors used to make the principal payments on their mortgage were repayments of loans by JAMD ($350,000) or the repayment of a loan by the Daniel Tarkanian congressional campaign ($50,000).
Debtors jointly argued that they did not dispose of non-exempt assets as required by Section 522(o). See Debtors’ Response at 12:11-12. As to the July 12, 2012 payment, Debtors also argued that $220,000 of the $300,000 principal reduction originated from the life insurance policies held by the parents’ irrevocable trust. Debtors then argue that the life insurance policies are exempt under NRS 21.090(l)(k). See Debtors’ Response at 12:14-18; Daniel Brief at 15:9-12. Debtors do not claim that the $30,000 in operational income of JAMD or the $50,000 in funds from the Daniel Tar-kanian campaign fund are exempt. As to the August 3, 2012 payment, Debtors do *453not identify an exemption that would encompass the $50,000 loaned by the Tarka-nian Basketball Academy to JAMD. As to the August 22, 2012 payment, Debtors do not identify an exemption that would encompass the $50,000 apparently made from the operational income of JAMD.
Debtors’ reliance on the insurance exemption under NRS 21.090(l)(k) is misplaced. There is no dispute that the life insurance policies issued by Phoenix Life Insurance Company are held by the parents’ irrevocable trust rather than the Debtors.22 The Debtors jointly as well as separately, have cited no authority explaining how NRS 21.090(l)(k) could be applied to allow them to exempt an interest in life insurance policies in which they have neither an ownership nor a beneficial interest.23 The few cases applying NRS 21.090(l)(k) involved voluntary Chapter 7 proceedings where the debtors had purchased or received life insurance policies and scheduled their interest in the policies in their bankruptcy schedules. See In re Bower, 234 B.R. 109 (Bankr.D.Nev. 1999); In re Dawson, 2004 Bankr. LEXIS 2039 (Bankr. D. Nev. 2004).
In her own response to the Homestead Objection, Amy does not rely on NRS 21.090(l)(k), but separately argues that Section 522(o) somehow is meant to address the disposition of the debtor’s residence rather than the disposition of separate non-exempt property. In her written argument, Amy relies on the following language from a leading bankruptcy treatise:
There are two different time periods that apply to the limitation in section 522(o). The first time frame deals with the debtor’s intent to hinder, delay or defraud a creditor, and it is measured at the time of disposition of the nonexempt property. Section 522(o) requires that the disposition must occur within the 10-year period ending on the filing date of the petition.
The second time frame concerns the question of whether the debtor could exempt the converted assets. Although the time of disposition would seem to be the logical choice for determining the converted assets’ nonexempt status, given the potential relevancy of this status to the debtor’s fraudulent intent, the statute uses a different time frame. The language of section 522(o) requires the court to look at whether the converted property could be exempted “if on such date the debtor had held the property so disposed of.” Since the phrase “on such date” must refer to the only other date specified in section 522(o), which is the date of the filing of the petition, it is the petition date that controls in determining whether the converted property could be exempted. Therefore, if the *454property converted within the 10-year period could be exempted under any applicable provision of section 522(b) at the time the petition is filed, the debtor’s exemptible interest in the homestead should not be reduced under this provision.
See Amy Brief at 6:15-21, citing 4 CollieR on Bankruptcy ¶ 522.08[5] (Alan N. Res-nick and Henry J. Sommer, eds., 16th ed. 2014) (Emphasis added). Based on this language, Amy argues that the “applicable exemption in question is undeniably the homestead exemption under Nevada law, not whether ‘loan repayments’ are exempt as the FDIC-R attempts to recharacterize.” Amy Brief at 6:21-28. This argument is circular, however, inasmuch as the purpose of the statute is to prevent a debtor from disposing of nonexempt assets to increase the value of the homestead exemption. Contrary to Amy’s position, the statute focuses on whether the assets disposed of by the debtor, i,e., the “converted assets,” could have been claimed as exempt on the petition date if the debtor actually held the converted assets on the petition date. Thus, just as the Debtors jointly have misplaced their reliance on NRS 21.090(l)(k) with respect to the $220,000 originally loaned by the parents’ irrevocable trust to JAMD, Amy’s separate focus on any dispositions of the homestead rather than other nonexempt assets is equally misguided.
But the Debtors also jointly argued that the repayment of $350,000 of loans by JAMD to Debtors is excluded by Section 522(o) because the FDIC could have enforced its judgment only by seeking a charging order against the Debtors’ interest in JAMD pursuant to NRS 86.401. See Debtors’ Response at 12:20-22.24 This is a non-sequitur because Section 522(o) focuses on the non-exempt asset that was disposed of rather than the mechanism by which the judgment creditor attempts to reach an asset. According to their personal property Schedule “B,” the Debtors have a 6.3 percent ownership interest in JAMD,25 According to the Debtors, Daniel Tarkani-an and perhaps Amy Tarkanian had a membership interest in JAMD and Daniel Tarkanian separately loaned monies to JAMD. According to his Personal Financial Statement dated December 22, 2011 (Ex. “14”), JAMD owed Daniel Tarkanian $670,379. According to Item 16 of the Debtors’ personal property Schedule “B” filed on January 3, 2014, there were no accounts receivable owed to the Debtors, not even by JAMD, as of the date the Debtors filed their bankruptcy petition, i.e, December 19, 2O13.26
*455There is no apparent dispute that JAMD is a limited liability company under Nevada law. There also is no apparent dispute that at least Daniel Tarkanian is a member of JAMD. There also is no dispute that the FDIC has a judgment against both Daniel Tarkanian and Amy Tarkanian. Under NRS 86.401(1), a judgment creditor of a member of a limited liability company may apply to a court for an order to “charge the member’s interest with payment of the unsatisfied amount of the judgment with interest.” The statute further provides that “To the extent so charged, the judgment creditor has only the rights of an assignee of the member’s interest.”
A party may, of course, be both a member of a limited liability company and a creditor of á limited liability company. No evidence has been provided as to whether JAMD is a member managed or a manager managed limited liability company. Members of a limited liability company may have both economic and non-economic interests, see Nev.Rev.Stat. 86.293, and the capital contributions of members may take the form of cash, property, services rendered, promissory notes, or another binding obligation to contribute cash. See Nev.Rev.Stat. 86.321. The management of a limited liability company generally is vested in its members in proportion to their capital contributions. See Nev.Rev. Stat. 86.291(1).
Under NRS 86.401(1), a judgment creditor may obtain a charging order allowing access to the member’s economic interest in the share of the profits and distributions of the limited liability company. See Weddell v. H20, Inc., 271 P.3d 743, 750 (Nev. 2012). If the member files a Chapter 7 petition, both the member’s economic and non-economic interests become property of the bankruptcy estate, and the bankruptcy trustee may exercise the management rights, if any, that the debtor has in the limited liability company. See In re B & M Land and Livestock, LLC, 498 B.R. 262, 268 (Bankr.D.Nev. 2013) (prior Chapter 7 filing by sole member of limited liability company precluded subsequent filing of Chapter 11 by limited liability company without participation or consent of Chapter 7 trustee).
In the instant case, the Trustee has control over whatever management rights, if any, that Daniel Tarkanian has in JAMD in proportion to Daniel Tarkanian’s capital contribution unless otherwise providéd in the articles of organization or operating agreement for JAMD.27 As to any monies that Daniel Tarkanian previously loaned to JAMD, he no longer owned those funds and he was paid back from other funds received by JAMD, e.g., loans from his parents’ irrevocable trust. What Daniel Tarkanian owned in July and August 2012 were claims against JAMD for the monies he had loaned. Compare In re Bernard, 96 F.3d at 128328. Those claims are separate *456from Daniel Tarkanian’s economic interests (profits, losses and distributions) as well as his non-economic interests (management rights) in JAMD.29
Likewise, when Daniel Tarkanian loaned monies to his congressional campaign, he no longer owned the funds, but instead held claims against his campaign fund.
In this case, the Debtors’ factual and legal position is that JAMD and the Daniel Tarkanian congressional campaign repaid claims that were owed to Daniel Tarkani-an. Debtors do not dispute that the decision by JAMD and the congressional campaign to repay those claims were made on behalf of JAMD and the campaign by Daniel Tarkanian. Those claims against JAMD and the congressional campaign were converted to money which the Debtors used to make their principal payments to Bank of America. As any mode of disposing of or parting with property is considered to be a transfer under Section 101(54)(D), certainly the Debtors’ conversion of their claims against JAMD and the congressional campaign constituted a disposing of a debtor’s assets under Section 522(o). Compare In re Bernard, 96 F.3d at 1283 (“Instead of owning money sitting in their accounts, the Bernards owned claims against their bank. When they withdrew from their accounts, they exchanged debt for money (which, more than incidentally, was more difficult to the Sheaffers to acquire). Thus, when the Bernards made their withdrawals they parted with property, satisfying the Code’s definition of transfer.”).
In this instance, neither the Debtors jointly, nor the Debtors separately, have pointed to an exemption that would encompass their claims against JAMD or the Daniel Tarkanian congressional campaign. The only exemption they cite, e.g., NRS 21.090(l)(k), simply does not apply as the Debtors are not the owners or beneficiaries of the parents’ life insurance policies. Thus, the court concludes that the increase in the Debtors’ homestead exemption, in fact, the very existence of the homestead exemption, is attributable to the disposition of non-exempt assets.
B. Disposition With Intent to Hinder, Delay or Defraud.
In determining whether a debtor disposed of nonexempt assets with intent to hinder, with intent to delay, or with intent to defraud a creditor under Section 522(o), the traditional “badges of fraud” employed in the fraudulent transfer context are often explored. See Stanton, 457 B.R. at 92-93, citing, e.g., Addison v. Seaver (In re Addison), 540 F.3d 805 (8th Cir. 2008), and In re Maronde, 332 B.R. 593 (Bankr.D.Minn. 2005). Only on rare occasions will there be direct proof of the debtor’s intent to hinder, delay or defraud, i.e., an admission. A debtor may simply *457deny that he or she acted with intent to hinder, delay or defraud, or may testify to another purpose for disposing of property. The trier of fact, of course, must assess the credibility of such direct testimony. In evaluating such testimony, the trier of fact must take into consideration all of the circumstantial evidence presented, such as the traditional badges of fraud. See In re XYZ Options, Inc., 154 F.3d 1262, 1271 (11th Cir. 1998).
The nonexclusive list of badges indicating fraud include whether: (1) the transfer was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer was disclosed or concealed; (4) the debtor was sued or threatened with suit before the transfer; (5) the transfer was of substantially all of the debtor’s assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the consideration received was reasonably equivalent to the value of the asset transferred; (9) the debtor was insolvent or became insolvent shortly after the transfer; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets of a business to a lienor who then transferred the assets to an insider. See Stanton, 457 B.R. at 93, citing Unif. Fraudulent Transfer Act § 4(b) (1984). As one would expect, the opposing parties in the present dispute cite eases favorable to their position where the intent of various debtors was examined under the prism of badges of fraud.
For example, the FDIC relies primarily on the conclusions reached by a bankruptcy court in this district in Stanton, as well the fraudulent transfer conclusions reached by the same court in In re National Audit Defense Network, 367 B.R. 207 (Bankr.D.Nev. 2007). Additionally, the FDIC cites In re Thaw, 496 B.R. 842 (Bankr.E.D.Tex. 2013) and In re Maronde, where the courts referenced the badges of fraud in sustaining the trustees’ homestead objections under Section 522(o). See FDIC Brief at 5:25 to 6:9 and 8:17 to 9:7; Reply at 4:5 to 6:21. Daniel Tarkanian maintains that the cases referenced by the FDIC are distinguishable and cites In re Chin, 492 B.R. 117 (Bankr.E.D.N.Y. 2013) as an example where the absence of badges of fraud constituted evidence of a lack of fraudulent intent in an action to avoid a fraudulent transfer under state law. See Daniel Brief at 13:15-17. Amy Tarkanian primarily relies on the In re Addison decision, as well as In re Arends, 506 B.R. 516 (Bankr.N.D. Iowa 2014), where the courts found insufficient badges of fraud on which to infer fraudulent intent under Section 522(o). See Amy Brief at 6:24 to 8:3.30
The Addison court discussed a conceptual trap in mechanically applying the badges of fraud analysis to Section 522(o): fraudulent transfers implicated by the badges of fraud typically involve the debt- or’s movement of asset values to third parties, while the latter statute involves the debtor’s movement of asset values to another asset of the debtor. Thus, the activity contemplated by Section 522(o) invariably implicates at least three of the badges of fraud: the debtor’s exempt asset is enhanced by the disposition of a nonexempt asset (transfer of value to an insider); the debtor claims the enhanced asset as exempt (debtor has retained possession or control); and the debtor disposed of non-exempt assets prior to filing bankruptcy (debtor was insolvent or became insolvent shortly after the transfer). 540 F.3d at 814 n.12. Because prebankruptcy ex*458emption planning is generally permitted, however, the Addison court required the identification of “extrinsic evidence of fraud” beyond the .conversion of non-exempt to exempt assets to support a finding of fraudulent intent. 540 F.3 at 814,31
In Stanton, the trial court did not fall into the conceptual trap discussed in Addison. Compare In re Chin, 492 B.R., at 131, citing Lippe v. Bairnco Corp., 249 F.Supp.2d 357, 375 (S.D.N.Y. 2003) (absence of badges of fraud constituting evidence of lack of intent to defraud). Indeed, the court emphasized that the existence of any or all of the badges of fraud is not dispositive of the issue of impermissible intent nor does it even create a presumption of such intent. 457 B;R. at 93-94. In Stanton, the court emphasized the timing and unusual nature of the debtor’s disposition of non-exempt assets, 457 B.R. at 94.32 The court also considered the debtor’s explanations for the transfers and found both the explanations and the debtor’s testimony not to be credible. Id. at 95-96. The court concluded that the debtor had disposed of numerous non-exempt assets with intent to hinder and delay the judgment creditor. Id. at 96. Accordingly, the Stanton court applied Section 522(o) and reduced the debtor’s interest in the residence by the amount her homestead was enhanced. Id at 9733
In the present case, the timing of the repayment of loans by JAMD and the Daniel Tarkanian congressional campaign fund, and the use of the loan payments to pay down the mortgage on the Residence, all commencing within six weeks after the FDIC Judgment was entered, infers that the, Debtors disposed on their claims against JAMD and the congressional campaign fund with the intent to hinder or delay the FDIC’s collection efforts. Additionally, because Daniel Tarkanian controlled both the repayment of the loans by JAMD and the congressional campaign fund, and the use of the funds to pay the *459mortgage, the FDIC maintains that the Debtors’ intent to hinder or delay has been established. Moreover, the FDIC argues that the Debtors’ explanations for their actions are not credible.
Debtors maintain that their principal payments in July and August 2012 were done out of concern for the health of Daniel Tarkanian’s parents. They argue that after Jerry Tarkanian had a heart attack in March 2012, it became more important to remain in the Residence located close by. To remain in the Residence, Daniel Tarkanian contends that a substantial reduction of the principal balance was necessary to ensure that the Debtors could afford to make monthly payments if the interest rate on then’ loan significantly increased. Debtors maintain that they did not intend to hinder, delay or defraud creditors, but instead disposed of their nonexempt assets to remain nearby to Daniel Tarkanian’s parents.
The FDIC rejects this explanation. It maintains that Jerry Tarkanian’s health deteriorated sharply beginning with his fall that occurred in the summer of 2009, leading to Miller describing him as a walking time bomb in March 2010. In spite of Daniel Tarkanian being informed of this description in 2010, the FDIC maintains that Daniel Tarkanian did nothing to reduce the principal on the mortgage until after the FDIC Judgment was entered on May 22, 2012. Similarly, the FDIC argues that Jerry Tarkanian had many other significant health problems between 2009 and 2012, and Still the Debtors did nothing to retain the Residence until after the FDIC Judgement was entered. In other words, the FDIC contends that Jerry Tarkanian’s health had little to do with the Debtors’ decision to reduce the principal balance of their mortgage.
The FDIC also argues that Daniel Tar-kanian’s concerns over the monthly interest only payments on the loan are illusory. It refers to the reduction in the monthly payment from approximately $3,400 at the inception of the residential loan in 2005 to $1,552 at the first interest rate change in July 2010. It also refers to subsequent interest rate changes where the monthly payments fluctuated but never exceeded $1,552, culminating in a monthly payment of $1,209 in July 2012. Thus, the FDIC maintains that Daniel Tarkanian’s purported concern over his ability to respond to interest rate fluctuations is belied by the actual history of the Debtors’ loan. Coupled with the declines in Jerry Tarkanian’s health for many years prior to entry of the FDIC Judgment, the FDIC argues that Daniel Tarkanian’s sudden concern over possible interest rate increases simply lacks credibility.
The other witnesses who testified contributed only modestly, if at all, to the issue of credibility. The accounting testimony from Main established only that Daniel Tarkanian characterizes the loan transactions and other financial activity of the entities for which Main prepares tax returns, including JAMD, the Tarkanian Basketball Academy, Tark, LLC, and certain trusts managed by Daniel Tarkanian. Main testified that he received the information from Daniel Tarkanian in the form of a spreadsheet, and compared the information against bank statements and the like, but never saw any documentation memorializing loans between Daniel Tarkani-an and JAMD. As previously discussed, the medical testimony from Miller established that Jerry Tarkanian had significant health issues prior to 2009 and has had significant health setbacks since 2009. Miller’s testimony also established that Daniel Tarkanian as well as his sister Jodie keep abreast of their father’s medical condition. Miller’s testimony further established that Lois Tarkanian also has serious medical *460issues. Neither Main nor Miller were consulted nor participated in the transactions resulting in the principal reductions for the mortgage on the Residence. ■
The testimony from Lois Tarkanian confirmed an exceptionally close relationship between Daniel Tarkanian and his father, Jerry Tarkanian, both in the past as well as in the present.34 Her testimony established that she would have great difficulty caring for Jerry Tarkanian by herself. Her testimony also established, however, that she was not consulted nor did she authorize or participate in the transactions resulting in the principal reductions to Daniel Tarkanian’s mortgage, but that she would approve the transactions now.
The testimony from Jodie Tarkanian Diamant confirmed that Daniel Tarkanian spends more time with Jerry Tarkanian than any of his other children. Her testimony confirmed that Jerry Tarkanian suffered a major health incident in 2009 and that she and her siblings recently have had meetings concerning the health of their parents. Her testimony established that Daniel Tarkanian’s close proximity to their parents’ home was important in responding to a recent additional heart attack suffered by Jerry Tarkanian. Her testimony also established, however, that she was not consulted nor did she authorize or participate in the transactions resulting in the principal reductions, to Daniel Tarkani-an’s mortgage.
The testimony from Amy Tarkanian confirmed that her husband was concerned about Jerry Tarkanian’s health after the latter’s heart attack in March 2012. She also testified, however, that she did not discuss with Daniel Tarkanian, nor did she participate in, the transactions resulting in the principal reductions to her mortgage.
The focus then, is on the credibility of Daniel Tarkanian’s explanation that he disposed of the claims against JAMD and the congressional campaign fund with the intent of living close to his parents, or whether he disposed of- the claims with intent to hinder or delay collection of the FDIC Judgment. Based on the timing of his actions, the interrelationships between the entities, and the inconsistencies in the record, the court concludes that both intentions were present. As a result, Section 522(o) applies in this case.
The FDIC concedes and the credible testimony of the Debtors and their family members establish beyond question their love for Jerry Tarkanian as well as their concerns for his health. The evidence also establishes beyond question that the close proximity between the Residence and the parents’ home is at least convenient and perhaps vitally important in assuring the presence of a family member available to assist in the care of Jerry Tarkanian and, if needed, Lois Tarkanian.35 No one disputes that paying the mortgage down from $648,000 to $248,000 makes it far easier for the Debtors’ to meet their monthly payments on the Residence even if the interest rate increases sharply. No one disputes that the end ultimately intended by Daniel *461Tarkanian—providing for the care of aging parents—was both common and permissible. The means he chose to achieve that end, however, were not permissible under Section 522(o)..
As previously noted, Daniel Tarkanian testified in his declaration that non-exempt assets were not disposed of with intent to hinder, delay or defraud his creditors. The timing of Jerry Tarkanian’s health concerns, however, infer that the intent was to hindér or delay creditors rather than only to address the needs of Daniel Tarkanian’s parents.36 As was the case in Stanton, the timing of the principal payments made by Daniel Tarkanian is critical.
On July 12, 2007, the Debtors personally guarantied a loan by La Jolla Bank to Vegas Diamond Properties in the amount of $14,568.750. By March 1, 2009, the loan was in default as default interest already was being charged on the loan.37 During 2009, Jerry Tarkanian was being treated for a variety of ailments, including thyroid, back, blood pressure, cholesterol, eye, and balance issues. He already had more than six stents placed into his heart. In the summer of 2009, Jerry Tarkanian suffered a fall while in. San Diego. His internist, Miller, saw him in August and thought Jerry Tarkanian was in far worse condition than in prior visits. Jodie Tarkanian Diamant characterized her father’s fall as the first major incident involving his health.
By the spring of 2010, Miller described Jerry Tarkanian as a “walking time bomb” and conveyed that description to Daniel Tarkanian and other members of his family. Despite these red flags concerning his father’s health, no steps were taken by Daniel Tarkanian to reduce the principal owed on the Residence or to refinance the Residence in order to lock in a lower monthly payment.
On May 6, 2010, the FDIC as receiver for La Jolla Bank commenced suit in the federal district court in San Diego on the Debtors’ personal guaranty of the $14,568,750 loan. The Debtors’ parents, Jerry and Lois Tarkanian, as well as Jodie Tarkanian Diamant and her husband, and George Tarkanian, also were named defendants. On or about July 1, 2010, the interest-only payment on the Debtors’ mortgage decreased from $3,105.00 per month to $1,552.50 per month, while the principal balance, of course, remained at $647,999.99.38 By December 2010, Miller believed that Jerry Tarkanian’s cognitive abilities had decreased considerably.
In 2011, Miller believed that Jerry Tar-kanian’s health continued a downward spiral. On or about February 1, 2011, the interest-only payment on the Debtors’ mortgage decreased from $1,552.50 per month to $1,485.00 per month. In the middle of 2011, Jerry Tarkanian suffered another fall. It required Miller to drain his elbow. Despite these additional red flags concerning his father’s health, in addition *462to the pronounced fluctuation in the interest rate charged on the mortgage, no steps were taken by Daniel Tarkanian to reduce the principal owed on the Residence or to refinance the Residence in order to lock in a predictable monthly payment.
On or about August 1, 2011, the interest-only payment on the Debtors’ mortgage decreased from $1,485.00 per month to $1,417.50 per month. On November 21, 2011, in the FDIC Collection Action, the FDIC filed its motion for summary judgment with respect to its claims on the personal guaranties. On or about February 1, 2012, the interest-only payment on the Debtors’ mortgage increased from $1,417.50 per month to $1,552.50 per month. In March 2012, Jerry Tarkanian suffered a heart attack while at a dermatologist appointment and was admitted to a hospital. Despite these additional red flags concerning his father’s health, plus two opposite fluctuations in the interest rate charged on the mortgage, no immediate steps were taken by Daniel Tarkanian to reduce the principal owed on the Residence or to refinance the Residence in order to lock in a stable monthly payment.
On May 4, 2012, however, the FDIC’s summary judgment motion was granted. On May 22, 2012, judgment was entered in the FDIC Collection Action against the Debtors and the other named defendants in the amount of $16,995,005. On June 3, 2012, Daniel Tarkanian requested Phoenix Home Life to loan $110,000 of the cash value from each of the insurance policies on the lives of Jerry Tarkanian and Lois Tarkanian. On. July 2, 2012, Daniel Tarka-nian opened an account at Wells Fargo Bank for the parents’ irrevocable trust. On July 3, 2012, two separate checks in the amount of $110,000 were issued by Phoenix Life Insurance Company payable to the parents’ irrevocable trust of a loan against his parents’ life insurance policies. On July 9, 2012, Daniel Tarkanian deposited the insurance company checks into the new account at Wells Fargo Bank. On July 10, 2012, the funds borrowed by the parents’ irrevocable trust were loaned to JAMD. On July 11, 2012, the Daniel Tar-kanian congressional campaign repaid Daniel Tarkanian $53,755.83 that he previously loaned to his U.S. Senate campaign. On July 12, 2012, JAMD used the $220,000 borrowed from the parents’ irrevocable trust plus an additional $30,000 of operational funds to repay Daniel Tarkanian $250,000 that Daniel Tarkanian had previously loaned to JAMD. On July 12, 2012, Daniel Tarkanian obtained from his Wells Fargo Bank account a cashier’s check payable to Bank of America in the amount of $300,000, using the loan repayments from JAMD and the congressional campaign, which is delivered as a principal payment on his mortgage.
Daniel Tarkanian testified that all of these transactions that were set into motion eleven days after the FDIC Judgment was entered, i.e., borrowing on his parents’ life insurance policies, opening the new bank account at Wells Fargo, JAMD borrowing and the irrevocable trust loaning $220,000, JAMD using $30,000 of operating funds, JAMD’s repayment out of its checking account the funds borrowed from Daniel Tarkanian, and Wells Fargo Bank’s issuance of a. cashier’s check payable' to Bank of America, were all determined and carried out by the same person: Daniel Tarkanian. Neither his wife Amy, nor any of Daniel Tarkanian’s family members were consulted in advance or'were even aware of the transactions.
On July 27, 2012, the Tarkanian Basketball Academy loaned and JAMD borrowed, $50,000. On or about August 1, 2012, the interest-only payment on the Debtors’ mortgage decreased from $1,552.50 per month to $869.00 per month due to the *463July principal reduction. On August 3, 2012, JAMD used the $50,000 borrowed from the Tarkanian Basketball Academy to repay Daniel Tarkanian $50,000 that Daniel Tarkanian had previously loaned to JAMD. On August 3, 2012, Daniel Tarkani-an obtained from his Wells Fargo Bank account a cashier’s check payable to Bank of America in the amount of $50,000, which is delivered as a further principal payment on his mortgage. Daniel Tarkanian testified that all of these transactions, i.e., JAMD borrowing and the Tarkanian Basketball Academy loaning $50,000, JAMD’s repayment out of its checking account of funds borrowed from Daniel Tarkanian, and Wells Fargo Bank’s issuance of a cashier’s check payable to Bank of America, were all determined and carried out by Daniel Tarkanian. As with the prior principal payment, neither his wife Amy nor any of his family members were consulted in advance or were even aware of these transactions.
On August 22, 2012, JAMD used $50,000 from its operating funds to repay Daniel Tarkanian another $50,000 that Daniel Tarkanian had previously loaned to JAMD. On the same date, Daniel Tarkanian obtained from his Wells Fargo Bank account a cashier’s check payable to Bank of America in the amount of $50,000, which is delivered as another principal payment on his mortgage. Daniel Tarkanian testified that all of these transactions, i.e., JAMD using the operating funds in its checking account to repay funds borrowed from Daniel Tarkanian, and Wells Fargo Bank issuing a cashier’s check payable to Bank of America, were all determined and carried out by Daniel Tarkanian. As with the two prior principal payments, neither his wife Amy nor any of his family members were consulted in advance or were even aware of these transactions.39
Daniel Tarkanian testified that he had never previously used cashier’s checks to make any mortgage payments to Bank of America. All of the cashier’s checks were signed by a representative of Wells Fargo Bank because they were written on the bank’s funds rather than Daniel Tarkani-an’s funds. As such, neither the FDIC nor any other creditor could reach those funds by post-judgment levy or pre-judgment attachment of the Debtors’ bank accounts.40 Because the principal reductions commenced with urgency only after the FDIC Judgment was entered, and the practice of using only cashier’s checks for principal payments occurred only after the FDIC Judgment was entered, the court can and does conclude that these steps were undertaken to both hinder and delay the collection efforts of creditors as well *464as to reduce the principal balance of the mortgage.
This conclusion is bolstered by the fact that at the time the FDIC was actively pursuing a multi-million dollar judgment on its claim, it was not the only creditor holding or perhaps pursuing multi-million dollar claims against the Debtors. When they commenced their bankruptcy proceeding on December 19, 2013, Debtors scheduled possible claims against them exceeding $17,000,000 by creditors NSB and Stancorp, based on personal guaranties of JAMD’s indebtedness. Thus, not only does it appear that the Debtors were confronted with the FDIC Judgment which they admittedly did not have the funds to pay, their primary source of funds for payment of the principal on their mortgage, JAMD, also had other debt obligations exceeding the amount of the FDIC Judgment. Daniel Tarkanian testified that JAMD was upside down several million dollars at the time he was considering the option of making the principal reductions on his mortgage. Moreover, NSB, which apparently extended loans totaling approximately $14,800,000 to JAMD starting in 2005, was actively monitoring Daniel Tarkanian’s management of JAMD during 2012.41 His use of JAMD’s apparently limited and closely monitored resources to repay loans to JAMD’s interest-holders, all while never disclosing those loan repayments to NSB, infers an intent to hinder or delay those additional creditors.42
The interrelationship between the various family entities also suggests the type of intention forbidden by Section 522(o). An individual who has unfettered control over the finances of multiple entities can determine who, when, where, why, and how obligations between the entities will be incurred and repaid. Daniel Tarkanian testified, and both Lois Tarkanian and Jodie Tarkanian Diamant confirmed, that he manages the affairs of JAMD, the Tarka-nian Basketball Academy, Tark, LLC, the parents’ irrevocable trust, and other family entities. Ml three testified that Daniel Tar-kanian does not consult and is not required to consult with his family before making decisions for the family business entities, including inter-entity loans. Only after he takes action does Daniel Tarkanian report his activities to his family members and then only in the form of spreadsheets that he prepares.43
*465The FDIC does not dispute that the actions taken by Daniel Tarkanian without prior notice or prior consent of his family members can be ratified. It appears from the testimony of Lois Tarkanian and Jodie Tarkanian Diamant that they have either ratified, consented to, or do not object to Daniel Tarkaniaris decisions to have JAMD borrow funds from the life insurance policies or from the Tarkanian Basketball Academy so that JAMD could repay prior loans made by Daniel Tarkanian. Among members of a close family, this is hardly surprising. The problem, however, is that Daniel Tarkaniaris family has placed him in, or allowed him to assume, a hopelessly conflicted position where the best interests of his extended family may not match the best financial interests of the entities he manages. Even he testified that the roughly $400,000 principal reduction on |the Residence was a bad financial decision because it did not produce an equivalent amount of equity in the property. Additionally, while the action served the common family objective of keeping Daniel Tarkanian nearby to assist in the care of his parents, it may not have been the best business decision at the time for JAMD to repay the loans previously made by Daniel Tarkanian.44 This interrelationship gave Daniel Tarkanian the unchecked ability to dispose of non-exempt assets to hinder or delay his creditors, which the court concludes that he did in this case.
Finally, Daniel Tarkanian’s testimony regarding his purported intentions was contradictory. In his declaration, Daniel Tarkanian attested that at the time the principal payments were made, “ ... the home was underwater” because he “owed approximately $648,701.92 and the property was valued at $342,369 by the Clark County Assessor’s office for the 2011-2012 tax year.” Daniel Declaration at ¶ 10. He also stated that the amount of the principal reduction “was calculated to provide an estimated 80/20 loan to value ratio on the residence so that we could refinance the home and remain there to care for my parents.” Daniel Declaration at ¶ 8.45 Daniel Tarkanian also attested that “The Payments were in no way made to hinder, delay, or defraud my creditors. We knew when- we made the Payments that we would not receive a dollar for dollar increase in equity in our home. We did not make the Payments to acquire or increase equity in our home; we made the Payments to enable us to remain, with our children, in the home in order to care for my parents.” Id. (Emphasis added).
A “loan to value ratio” typically reflects the amount of the secured debt in proportion to the value of the collateral. An owner’s “equity” in its collateral typically represents the difference between the amount of the debt and the collateral’s value. The loan to value ratio can be reduced and the amount of equity can be increased either by reducing the amount of the debt or increasing the value of the collateral. Obviously, a principal reduction intended to provide an 80 percent loan to value ratio either increases the existing equity in the subject collateral or creates equity in the collateral where none previously existed. It is not readily apparent how one can seek to improve the loan to value ratio on encumbered property without also seeking to *466acquire or increase the equity in the same property. On its face, Daniel Tarkanian’s testimony that the principal payments were not made with intent to acquire or increase the equity in the Residence is contradicted by his own testimony that there was no previous equity in the Residence and that he calculated the payments to provide an 80/20 loan to value ratio. In this respect, Daniel Tarkanian’s characterization of his intention is not credible.
In summary, the Debtors clearly intended to keep the Residence so they could remain living close to Jerry Tarkanian and Lois Tarkanian, both of whom they love.. To achieve that end, however, they disposed of their claims against JAMD and the Daniel Tarkanian congressional campaign with the intent to hinder or delay their creditors, particularly the FDIC. Because the proceeds of those non-exempt assets were used to create the equity in their Residence for which they now claim their homestead exemption, Section 522(o) applies in this case. This aspect of the Homestead Objection will be sustained. Thus, an order will be entered reducing the value of the Debtors’ interest in their homestead by $202,000, i.e., the amount of equity in their Residence on the petition date that is attributable to the disposition of the nonexempt assets.
III. The Innocent Spouse Doctrine.
Amy maintains that she had no knowledge of or participation in any of the measures taken by Daniel Tarkanian. Amy testified to only one mention by her husband of the importance of retaining the Residence after Jerry Tai’kanian suffered a heart attack in March 2012. She insists that she had no involvement in the financial affairs of the household nor the financial affairs of her husband or his family, and that she had no discussions with her husband as to how the mortgage would be paid or the FDIC Judgment would be satisfied,- She argues that she is an “innocent spouse” who should not lose her homestead protection for one-half of the exempt value of the Residence. See Amy Brief at 12:24-27, citing Matter of American Business Machines, Inc., 6 B.R. 166 (Bankr.D.Nev. 1980).46.
Daniel Tarkanian testified that he makes all financial decisions in his marriage to Amy due to undescribed financial difficulties that Amy had before their marriage. He confirmed that his wife had no involvement in the decision to have loans be repaid by JAMD as well as the congressional campaign fund, and then using the funds to pay down the mortgage.
Amy also disclaimed knowledge of even the most basic economic elements of her family’s household, e.g., the amount expended on utilities, the amount of private school tuition fori her children, the amount of the monthly mortgage payment, the existence of any bank accounts, or the amount earned by her husband. She testified that she signed any documents that her husband gave to her, including the Personal Financial Statement and Affidavit of Financial Condition in December 2011, without verifying any information. *467Moreover, Amy testified that even though she was a licensed real estate agent early in her relationship with her husband, she has no understanding of a homestead declaration, no idea of whether she is on title to the Residence, and no idea whether she has any equity in the Residence.
Amy’s portrayal of herself as a virtual “Stepford” wife as to her marital finances 47 contrasted sharply with the FDIC’s portrayal of Amy as a statewide political party leader, successful political fundraiser, effective political campaigner for her husband, and savvy political pundit paid to appear on local television. Although it is not unheard of or perhaps not even unusual for competent individuals to compartmentalize their personal and professional lives, or to define complementary roles in a marriage, reconciling perhaps diametrically opposite versions of the same person is unusual at best.
Based on her testimony as well as that of Daniel Tarkanian, it might be easy to conclude that Amy is truly an innocent spouse for whom the protection of the homestead is appropriate regardless of any inappropriate conduct of her spouse. Unlike the situation in American Business Machines, however, Amy is jointly and severally liable on the FDIC Judgment. Unlike the situation in American Business Machines, the FDIC debt is not a specific penalty imposed only on the “responsible persons” of an employing entity. See 26 U.S.C. §§ 6671(b) and 6672(a). Unlike the situation in American Business Machines, the liability to the FDIC is not a federal tax obligation for which relief to an “innocent spouse” might be available even outside of the equitable jurisdiction of a federal court. See, e.g., 26 U.S.C. § 6015 (relief from understatement of personal incomes taxes in joint return). Under these circumstances, the decision in American Business Machines does not support recognition of an equitable “innocent spouse” exception to Section 522(o) in this case.48 Thus, it is unnecessary to reach a factual conclusion that reconciles the apparently competing portrayals of Amy’s knowledge of or participation in the disposition of her interest in the Debtors’ non-exempt assets.49
*468IV. The Relief Provided by Section 522(o).
As previously recited, the language of Section 522(o) specifies that “the value of an interest in real ... property that the debtor ... claims as a homestead ... shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of ... with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt ...” 11 U.S.C. § 522(o )(4) (Emphasis added).
In Stanton, the court found that the debtor had disposed of non-exempt property with intent to hinder or delay the objecting creditor, and therefore granted the relief provided by the language of Section 522(o): it reduced the value in the debt- or’s interest in her homestead by the $89,945 she had paid off on her mortgage. 457 B.R. at 97. In view of that determination, the bankruptcy trustee stepped in to sell the debtor’s homestead and sought an order authorizing him to market the property. (Stanton ECF No. 144)50. At a subsequent hearing on April 3, 2012, the court referred to its prior ruling as authorizing a “surcharge” of the debtor’s homestead for the amount of the loan payoff, consistent with the circuit decision in Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004). The term “surcharge” was included in the subsequent order. (Stanton ECF No. 158). The trustee then obtained authorization to employ a real estate agent. (Stanton ECF No. 170). The residence was thereafter sold with court approval (Stanton ECF No. 208) and the Trustee received the mortgage payoff amount. (Stanton ECF No. 212). The debtor did not appeal the original order reducing the value of her interest in the homestead under Section 522(o),' nor the subsequent orders that resulted in the sale of the residence.
In Law v. Siegel, — U.S. --, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014), a Chapter 7 trustee sought to surcharge a recalcitrant debtor’s homestead exemption in order to pay allowed administrative expenses of the estate that far exceeded the amount of the homestead. The net effect of the surcharge was to deny to the debtor any funds from his homestead. After canvassing the exceptions and limitations on exemptions imposed by the Bankruptcy Code, including Section 522(o), the Court observed: “The Code’s meticulous—not to say mind-numbingly detailed—enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to create additional exceptions.” 134 S.Ct. at 1196. The Court concluded that the bankruptcy court had neither statutory authority under Section 105(a)51, nor inherent authority to deny an exemption on a ground not specified in Section 522.134 S.Ct. at 1198.
In the instant case, the express language of Section 522(o) requires this court to reduce the value of the Debtors’ homestead. However, Section 522(o) does not permit the court to surcharge the homestead. Likewise, it does not appear that *469either Section 105(a) or the court’s inherent authority permits it to impress an equitable lien on the Debtors’ homestead as a predicate to a forced sale.52 Such a remedy would deny the Debtors the homestead available under Nevada law on a basis not expressly permitted by Section 522.53 Thus, the net result of the instant objection may be that the Debtors can remain in their Residence so long as they maintain their monthly mortgage payments.54 No other relief will be ordered at this time.
CONCLUSION
Based on the foregoing, the Homestead Objection will be overruled with respect to the Debtors’ entitlement to claim a homestead exemption under Nevada law. The Homestead Objection will be sustained with respect to the application of Section 522(o). A separate order has been entered concurrently with the Memorandum Decision.
. In this Memorandum Decision, all references to “ECF No.” are to the numbers assigned to the documents filed in the abové-captioned bankruptcy case as they appear on the docket maintained by the clerk of the court. All references to “Section” are to the provisions of the Bankruptcy Code, 11 U.S.C. §§ 101-1532. AH references to "NRS” are to provisions of the Nevada Revised Statutes. All references to “FRBP” are to the Federal Rules of Bankruptcy Procedure. All references to "FRE” are to the Federal Rules of Evidence.
. On May 6, 2014, the Trustee issued a notice indicating a deadline of August 7, 2014, for parties in interest to file proofs of claim in the case. (ECF No. 142).
. On March 7, 2014, an order was entered approving a stipulation between the Trustee and the Debtors to extend until June 23, 2014, the deadline for which objections to discharge under Section 727 may be filed by the Trustee. (ECF No. 68). On March 17, 2014, an order was entered approving a stipulation between the FDIC and the Debtors to extend until June 23, 2014, the deadline for which objections to discharge under Section 727 or to dischargeability of debt under Section 523 may be filed by the FDIC. (ECF No. 74).
.In the brief filed on behalf of Amy Tarkani-an, she maintains that she should be treated as an “innocent spouse” who can claim a homestead in the Residence irrespective of whether the Homestead Objection is meritorious as to Daniel Tarkanian.
. The Court’s subsequent decision in Schwab v. Reilly, 560 U.S. 770, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), did not alter the requirement under FRBP 4003(b)(1) that objections challenging the validity or amount of claimed exemptions be filed timely.
. The exhibits offered by the FDIC were marked numerically, e.g., “Ex. "1," while the exhibits offered by the Debtors were marked alphabetically, e.g., “Ex. “A.”
. The matters stated in the Jodie Declaration were consistent with Jodie’s testimony in court.
. Amy was not asked to explain the personal financial difficulties that led her to this decision, nor was she asked about her educational background.
. Daniel Tarkanian testified at length on two different days both as a witness for the FDIC and as a witness for the Debtors. This non-sequential summary of his testimony roughly follows the order in which his testimony was elicited at the hearing.
. In his declaration submitted along with the Debtors' Response to the Homestead Objection, Daniel Tarkanian stated that the payments made to reduce the principal on his Residence were made "after consulting with family members.” Daniel Declaration at ¶ 8.
. In his declaration, Daniel Tarkanian stated that "Over a period of twelve years, members of the Tarkanian family and its entities loaned JAMD over $2 million to pay for the construction. The loans were memorialized with promissory notes, and the loans and repayments of loans were kept as part of the records of JAMD.,, On September 29, 2006, I made my first loan to JAMD. Over the course of seven and a half years, I loaned JAMD $1,181,814.00 and was repaid $1,428,000. (The repayments included interest at 5%). Approximately $984,900.00 in payments were made to me prior to entry of the Judgment in California in favor of FDIC-R, and all of the repayments were made prior to the FDIC registering the Judgment in Nevada on April 17, 2013.” Daniel Declaration at ¶ 15.
. As of 1995, the maximum amount of the Nevada homestead exemption was $125,000. Effective July 1, 2003, the amount was increased to $200,000. Effective July 1, 2005, the amount was increased to $350,000. Effective July 1, 2007, the amount was increased to the current maximum of $550,000.
. At the time Maki was decided, the maximum amount of the Nevada homestead exemption under then-NRS 115.010(2) was $125,000 of equity in the'judgment debtor’s residence. 75 P.3d at 378.
. All of the other decisions cited by the Nevada Supreme Court in Maki, 119 Nev. at 393 & n.9, 75 P.3d at 379 & n.9, involved constructive trusts or equitable liens imposed on parties that had acquired or improved their homestead properties through funds which had been obtained through fraud, embezzlement or unjust enrichment. See, e.g., Mack v. Marvin, 211 Ark. 715, 202 S.W.2d 590, 594 (1947) [constructive trust imposing a lien applied where defendants defrauded plaintiff out of funds and spent on residence claimed as a homestead]; Duhart v. O'Rourke, 99 Cal.App.2d 277, 221 P.2d 767, 769 (1950) [sale of homestead to execute a judgment proper where funds fraudulently obtained were traced to residence]; Jones v. Carpenter, 90 Fla. 407, 106 So. 127, 130 (1925) [equitable lien imposed on homestead equal to value of funds misappropriated from an insolvent corporation]; In re Munsell’s Guardianship, 239 Iowa 307, 31 N.W.2d 360, 367 (Iowa 1948) [former guardian’s homestead may be subject to constructive trust for mortgage payment made from funds improperly paid from guardianship estate]; Long v. Earle, 277 Mich. 505, 269 N.W. 577, 582 (1936) [constructive trust imposed on homestead acquired with funds embezzled by a trustee]; American Ry. Express Co. v. Houle, 169 Minn. 209, 210 N.W. 889, 890 (1926)[constructive trust imposed on homestead dwelling constructed using funds embezzled from husband’s employer; wife’s assertion of innocent spouse for value defense rejected]; Wells Fargo Bank Intern. v. Binabdulaziz, 124 Misc.2d 1072, 478 N.Y.S.2d 580, 582 (Sup.Ct.1984) [homestead exemption denied to defendants who used portion of funds misdeposited into their bank account to acquire residence]; Curtis Sharp Custom Homes, Inc. v. Glover, 701 S.W.2d 24, 25-26 (Tex.App.1985) [foreclosure on equitable lien against homestead for portion of funds embezzled from plaintiff employer denied due to constitutional protection in Texas for homestead]; Warsco v. Oshkosh Savings & Trust Co., 190 Wis. 87, 208 N.W. 886, 887 (1926) [trust funds improperly distributed to a beneficiary and used to invest in a homestead may be impressed with a lien].
. Other than the unreported decision in Henry, Westlaw and Lexis list two reported cases that have cited Maki. In Coppler & Mannick, P.C. v. Wakeland, 138 N.M. 108, 117 P.3d 914 (N.M. 2005), the judgment creditors judicially foreclosed on the debtor’s residence. In light of the foreclosure, the debtor trashed the residence. In a separate action, the same creditors obtained a judgment against the debtor for damages based on waste of the property. In light of the debtor’s egregious conduct, the New Mexico Supreme Court imposed an equitable lien against the debtor’s New Mexico homestead to secure payment of the damages that the debtor had inflicted upon the creditors’ property. In Rusheen v. Cohen, 37 Cal.4th 1048, 1064, 128 P.3d 713, 724, 39 Cal.Rptr.3d 516 (Cal. 2006), the California Supreme Court cited Maki only as an example of a State providing exemptions as an alternative remedy to asserting a claim for abuse of process.
. Compare Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001)(under Florida constitution, an individual’s residence acquired by conversion of nonexempt assets with specific intent to hinder, delay or defraud creditors remains protected by the homestead exemption). Compare also Society of Lloyd’s v. Collins, 284 F.3d 727 (7th Cir. 2002)(life insurance policies exempt under II-linois law were not subject to garnishment under Illinois statute requiring proof that policies were purchased with intent to convert nonexempt property or to defraud creditors); Dona Sav. and Loan Ass'n, F.A. v. Dofflemeyer, 115 N.M. 590, 855 P.2d 1054 (N.M. 1993) (conversion of certificate of deposit and real estate to annuity exempt under New Mexico law was not fraudulent per se).
. When Section 522(p) was enacted effective April 20, 2005, the cap was $125,000. As a result of adjustments every three years, the cap was raised to $155,675 effective April 1, 2013.
. Florida permits its residents to homestead 160 acres of contiguous land located outside of a municipality, or, one-half of an acre of contiguous land located within a municipality, without a dollar value limitation. See Fla. Const, art. X, § 4; Fla.Stat.Ann. §§ 222.01, 222.02 & 222.05. Texas permits its residents to homestead up to 100 acres of rural property for a single adult, up to 200 acres of rural property for a family, or up to ten acres of urban property for a residential and/or business homestead, with no dollar value limitation. See Tex. Const, art. XVI, §§ 50, 51; Tex. Prop. Code §§ 41.001 to 41.002.
.Section 522(o) refers to property that the debtor "disposed of.” It does not use the word "transferred.” The term "transfer” is defined in Section 101(54) broadly and subsection (D) includes "each mode...of disposing of or parting with—i) property; or (ii) an interest in property.” The term transfer is used in many sections of the Bankruptcy Code, including the provisions governing the recovery of avoidable transfers under Sections 544, 547, 548, 549, 550 and 551, as well as the provision denying an individual debtor’s discharge under Section 727(a)(2), For purposes of the latter, the term "transfer" includes withdrawing money from a bank account as an exchange of debt for money. See In re Bernard, 96 F.3d 1279, 1283 (9th Cir. 1996). When a debtor parts with claims against a bank to hinder the collection efforts of a creditor, a transfer has occurred and the dis*452charge may be denied under Section 727(a)(2)(A) regardless of whether the funds are deposited into a separate account of the debtor. See, e,g., A & H Insurance, Inc. v. Huff, 2014 WL 904537 (9th Cir. BAP March 10, 2014) (reversing bankruptcy court conclusion that transfer had not occurred based on Bernard, but affirming dismissal of creditor complaint).
. Section 522(o) addresses a Chapter 7 debt- or’s act of disposing of non-exempt assets within ten years before the commencement of the case with intent to hinder, delay, or defraud a creditor. Because the "disposing of” assets constitutes a "transfer” within the meaning of Section 101(54)(D), see discussion at note 20, supra, the same conduct implicating a homestead limitation under Section 522(o) may not result in a denial of discharge under Section 727(a)(2). The latter exception to discharge is based on impermissible transfers of assets that occur only within one year before or any time after the commencement of the case. In the instant proceeding, Debtors’ last principal reduction occurred on August 22, 2012, more than 16 months before the commencement of the case.
. Indeed, any ownership or beneficial interest in the parents’ life insurance policies that the Debtors' held on the petition date would have been listed at Items 9 or 20 of their personal property Schedule "B,” but it was not. Likewise, if the Debtors’ held such an interest in July 2012 and later transferred that interest before filing their bankruptcy petition, the transfer would have to be disclosed in Item 10 of their SOFA, but it was not. (ECF Nos. 12 and 170). Additionally, the separate Personal Financial Statements of Daniel Tar-kanian and Amy Tarkanian, as well as the separate Affidavits of Financial Condition of Daniel Tarkanian and Amy Tarkanian, all dated December 22, 2011 (Exs. "14,” "17,” "16” and "18”), did not list or disclose an ownership interest in the policies insuring the lives of the parents.
. A copy of the parents’ irrevocable trust was not introduced into evidence. Because the Debtors have never disclosed or claimed that they are the named beneficiaries of the parents’ life insurance policies, the court assumes that the irrevocable trust is the named beneficiary of the insurance policies and that the parents are the named beneficiaries of the trust.
. As previously noted, Daniel Tarkanian testified that because JAMD and the Tarkanian Basketball Academy are not judgment debtors, the FDIC could pursue JAMD only for the moneys that JAMD owes to Daniel Tarkanian.
. Even though the Debtors indicate the same percentage ownership interest in JAMD in their schedules as community property, the ownership interest in JAMD is reflected in the Affidavit of Financial Condition of Daniel Tar-kanian dated December 22, 2011 (Ex. "16”), but not in the Affidavit of Financial Condition of Amy Tarkanian of the same date. (Ex. "18”). Similarly, the Personal Financial Statement for Daniel Tarkanian (Ex. "14”) listed an accounts receivable owed by JAMD in the amount of $670,379, but no similar accounts receivable was listed in the Personal Financial Statement of Amy Tarkanian (Ex. "17”).
.Daniel Tarkanian testified that the $670,379 receivable from JAMD listed in the December 22, 2011, Personal Financial Statement would have been reduced by the $350,000 in loan repayments that were made by JAMD in July and August 2012. Assuming that the Debtors had made no additional loans to JAMD between the date of the Personal Financial Statement and the repayments by JAMD in 2012, the balance owed by JAMD to the Debtors would have been approximately $320,379.
. A copy of the articles of organization or a copy of the operating agreement for JAMD was not admitted into evidence. Those documents would specify whether JAMD is member-managed or manager-managed. It appears that Daniel Tarkanian is the manager. As previously discussed at 2-3, Debtors originally claimed an exemption of their interest in JAMD but amended their schedules to eliminate that exemption claim after the Trustee objected. (ECFNos. 12, 38, 79, 80).
. In Bernard, the debtors had deposited funds into a bank account and then withdrew the funds when faced with a potential prejudgment attachment by a creditor. 96 F,3d at 1281. Under California law, the relationship between a bank and a depositor is a debtor creditor relationship. As ¿ result, the debtors did not own the monies they had deposited, but instead had a claim to the funds. In Huff, the appellate panel observed that under Nevada law, the relationship between a bank and a depositor also is a debtor creditor relation*456ship that gives rise to a claim between the parties. 2014 WL 904537 at *6. In the present case, the Debtors have characterized the July and August 2012 payments to Daniel Tarkani-an not as the return of capital contributions, but as the repayment of loans. The debtor-creditor relationship that the Debtors had with both JAMD and the Daniel Tarkanian congressional campaign therefore resulted in claims that the Debtors had against both entities.
. Items 16, 18, 21 and 35 of the Debtors’ personal property Schedule "B” directed them to list any accounts receivable, liquidated debts owed to them, contingent and unliquidated claims of every nature, and other personal property of any kind not already listed. Those items do not list any amounts owed by JAMD to either of the Debtors. If Daniel Tarkanian had any claims against JAMD for unpaid loans or receivables as of the petition date, those claims against JAMD would have been property of the bankruptcy estate pursuant to Section 541(a)(1). See Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 707 (9th Cir. 1986).
. Amy Tarkanian’s reference to the Arends case occurred in the opening and closing arguments of her counsel at the evidentiary hearing.
. The Arends case cited by Amy was decided by an outstanding Iowa bankruptcy court judge who serves as a visiting judge in this court. Beyond that connection, that decision is not particularly persuasive here because there is a substantial difference between the value of the assets disposed of 'in that case compared to the instant case ($28,000 versus $400,000). That disparity might imply a more than subtle difference in the motivations of the respective debtors. Moreover, the Arends court determined that the assets disposed of were in fact exempt under Iowa law and the debtors’ act of unnecessary exemption planning was due to incorrect advice of their bankruptcy counsel. 506 B.R. at 519 and 522-23. Finally, the trustee’s objection under Section 522(o) was primarily based on inaccuracies in the debtors' schedules and testimony attributable to the admittedly improper advice or other mishandling of the case by the debtors’ attorney. Id. at 525, This is far different from the factual and legal issues raised by the FDIC in the instant proceeding.
. With respect to the “insolvency” badge of fraud, the court found the evidence to be inconclusive. 457 B.R, at 95-96 & no.13. In the instant case, Daniel Tarkanian testified that he did not have the kind of money to pay the FDIC Judgment and therefore had no intention of paying it.
.The specific facts of Stanton were that the debtor had purchased her Nevada residence in 2002 for $252,000. Of the purchase price, the debtor borrowed $175,000. Through a variety of lump sum payments, she quickly reduced the principal balance of the loan. In 2008, after her sister obtained a $525,000 judgment against her, the debtor orchestrated various transactions that resulted in the $89,945 balance of her residential mortgage being paid off. 457 B.R, at 84 and 91 n.ll. Because there was no question that the entire value of her residence could be protected by ' the $550,000 homestead available under Nevada law, the pay off enhanced her homestead claim by $89,000. In other words, under Section 522(o), the amount of the homestead value attributable to the challenged transactions was $89,945.
. Both Lois Tarkanian and Daniel Tarkanian testified that the strong bond between Jerry Tarkanian and Daniel Tarkanian is consistent with relationship between a father and the eldest son in Armenian culture. As there is no evidence even offered by the FDIC to dispute the close relationship between Daniel Tarka-nian and his father, it is not entirely clear why their ethnic heritage or the notion of primogeniture was even raised. Certainly children can form exceptionally close bonds with their parents without regard to immutable characteristics or events.
. Jerry Tarkanian did not testify at the hearing, but Lois Tarkanian did. Despite her serious health concerns, Lois Tarkanian remarkably displayed no ill effects during her courtroom appearance and testimony.
. Debtors were not asked at the hearing whether any consideration was given to having the parents simply move into the six bedroom, five bathroom Residence along with the Debtors. Instead, it appears that in 2011, JAMD repaid $242,000 in loans to the parents so they could repair and retrofit their residence for a handicap senior. See Daniel Declaration at ¶ 22.
. Attached as Exhibit "A” to the FDIC Judgment is an Estimated Statement of Account on which the $16,995,005.17 judgment was determined. Included in the statement is a figure for default interest from March 1, 2009 to May 21, 2012. Thus, some time prior to March 1, 2009, the borrower presumably had defaulted on the loan.
.Portions of a Bank of America statement showing the payment history on the Debtors' mortgage was admitted as Exhibit “6.”
. As a result of the two additional principal payments in August 2012, on or about September 1, 2012, the interest-only payment on the Debtors' mortgage further decreased from $869.00 per month to $621.63 per month. On or about February 1, 2013, the interest-only payment further decreased to $589.82 per month. On or about August 1, 2013, the interest-only payment on the Debtors’ mortgage decreased to $543.92 per month.
. A cashier’s check is written on a bank’s own funds, see Nev.Rev.Stat. 104.3104(7), and under NRS 104.3412(l)(a) must be honored even if there is a levy upon the purchasing customer’s bank account. See Pelton v. Meeks, 993 F.Supp. 804, 808 (D.Nev. 1998)(“In this case, Mr. Meeks withdrew the $27,000 via bank draft, purchased the cashier's check, and gave it to his wife; such a cashier’s check is not subject to revocation or stop-payment and all Ms. Meeks had to do to take possession of the money was present it to the bank.”). In other words, delivery of a cashier’s check is the equivalent of delivering cash and is subject to collection only through possession. Levying upon the judgment debt- or’s bank account would be too late. Moreover, attempting to physically obtain cash or a cashier’s check in the possession of a third party requires the judgment creditor to know who has it.
. Daniel Tarkanian testified that he never disclosed to NSB any of JAMD's loan repayments to him in 2012, nor has he disclosed to NSB any loan repayments by JAMD to family members since 2005. He explained that the NSB loan documents do not require such disclosures. The NSB loan documents were not offered into evidence by the FDIC nor the Debtors.
. It must be remembered that the FDIC Judgment did not include JAMD, the Tarkani-an Basketball Academy, or Tark, LLC, as none of them were borrowers under or guarantors of the original loan by La Jolla Bank to Vegas Diamond Properties, LLC. Those entities are neither judgment debtors nor bankruptcy debtors, and claims under the Nevada fraudulent transfer statutes, see Nev.Rev.Stat, 112.140, et seq., have not been brought against them. As previously noted, however, the Debtors have scheduled themselves as co-obligors with JAMD as to the claims of both NSB and Stancorp, aggregating in excess of $17,000,000.
.As previously noted, Main testified that the tax returns he prepares for the various entities are based on the spreadsheet information provided by Daniel Tarkanian. Main testified that he compares any reported loan activity against the bank statements, mortgage statements, and checkbooks, but does not audit the information and has never seen any loan documentation. He also prepares the Debtors’ personal tax returns and has never audited whether funds received by Daniel Tarkanian from JAMD are compensation or loan repayments.
. Daniel Tarkanian testified that there is an unwritten policy for JAMD to repay any loans made by family members whenever the family member needed the money back. Repayment could be accomplished by JAMD borrowing money from other family members or family-related entities.
. If that was the calculation, then reducing the principal balance to roughly $248,000 on a property value of $342,369 resulted in a debt to value ratio of approximately 72/28.
. In American Business Machines, a joint liquidation petition was filed under the Bankruptcy Act by a married couple whose bankruptcy trustee consensually sold the debtors’ residence. The debtors then claimed a homestead interest in the proceeds. The Internal Revenue Service ("IRS”) asserted a tax lien claim against only the husband for his failure to withhold payroll taxes. 6 B.R. at 167 & n.3. While acknowledging that a federal tax lien may have priority over the interests of a defaulting taxpayer spouse in his homestead, 6 B.R, at 170-71, the court applied its equitable powers to allow the non-taxpayer spouse to retain one-half of the proceeds of the sale of the homestead, while the IRS received the other half of the proceeds in view of its superior tax lien. 6 B.R. at 172,
. The term “Stepford Wife" has been defined as “a woman who does not béhave or think in an independent way, always following the accepted rules of society and obeying her husband without thinking.” Oxford Learner's Dictionaries (2014 Oxford University Press) (online). The term is based on a 1972 novel written by author Ira Levin in which married women in the fictional community of Stepford, Connecticut, are depicted as entirely submissive to the demands of their husbands. In a 2004 film adaptation, the term was expanded to apply to spouses or partners of either gender.
. In Namow Corp. v. Eager, 99 Nev. 590, 668 P.2d 265 (Nev. 1983), the Nevada Supreme Court rejected an "innocent spouse” defense to the imposition of a constructive trust on a condominium purchased with funds embezzled by the other spouse. Despite the spouse’s lack of knowledge or participation in the embezzlement, the court con-eluded that a constructive trust on the condominium was appropriate while allowing the non-culpable spouse to obtain only reimbursement for mortgage payments, improvements, taxes paid, and other charges. Compare Crawford v. Silette, 608 F.3d 275 (5th Cir. 2010) (condominium paid off by innocent owner with funds obtained through Ponzi scheme subject to equitable lien in favor of receiver).
.There actually may be nothing to reconcile. Amy testified that even in the significant positions she has held in political organizations, the financial decisions were left to others. The FDIC offered no evidence to the contrary. Amy’s asserted financial role in those organizations appears to be consistent with her limited involvement in the financial decisions in her marriage. Thus, it may well be that Amy simply admits that the management of finances, both personally and professionally, is not one of her strengths and so she *468delegates or concedes those responsibilities to others. Of course, the risks occasioned by doing so may be substantial, but that appears to be her choice.
. All references to “Stanton ECF No.” are to the numbers assigned to the documents filed in the Stanton bankruptcy proceeding, Case No. 10-33338-LED, which remains pending in this judicial district. The court takes judicial notice of those documents pursuant to FRE 201(b). See Gree v. Williams, 2012 WL 3962458 at *1 n.1 (D.Nev. Sept. 07, 2012); Braunstein v. Cox, 2012 WL 3638772 at *1 n.l (D.Nev. Aug 22, 2012).
. Section 105(a) permits the court to issue “any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code.
. As the Nevada homestead exemption is $550,000 under NRS 115.010(2), it appears that a forced sale of the Residence would produce no proceeds for creditors of the estate unless it is sold for at least $798,000 ($248,000 owed on the mortgage, $202,000 of homesteaded equity attributable to principal payments, and $348,000 remaining from the maximum available homestead exemption).
. Likewise, the language of Section 522(o) does not include an “innocent spouse” exception to the homestead limitations imposed by Congress.
. Moreover, at this juncture, the Debtors have not sought to avoid the FDIC’s judicial lien under Section 522(f)(1) to facilitate a refinance of the existing loan.
. The docket for the Diamant proceeding reflects that a voluntary Chapter 7 petition was filed on December 6, 2012, and that a discharge was entered on March 26, 2013. A voluntary Chapter 7 proceeding previously was filed on July 31, 2012, by George Tarka-nian, denominated Case No. 12-18968-MKN, who also was named as a defendant in the FDIC Collection Action. On February 7, 2013, a discharge was entered in favor of George Tarkanian. On April 3, 2013, a limited order terminating the automatic stay was entered in the George Tarkanian proceeding that allowed the FDIC Judgment to be registered and recorded. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500208/ | MEMORANDUM OPINION AND JUDGMENT GRANTING THE MOTION OF THE BARTLETT PARTIES FOR RELIEF FROM THE DISCHARGE INJUNCTION TO LITIGATE THEIR CLAIMS AGAINST DEBTOR IN FEDERAL DISTRICT COURT
■ Dale L. Somers, United States Bankruptcy Judge
The Bartlett Parties1 move to modify the discharge injunction to permit them, notwithstanding Debtor Paul Robben’s discharge, to pursue their action in the United States District Court for the District of Kansas against Debtor and RDC Holdings, LLC, to a conclusion and to thereafter litigate before this Court their pending adversary proceeding objecting to Debtor’s discharge of most of the claims they are asserting against him in the federal court case. The Bartlett Parties appear by Frank Wendt, John M. Duggan, Deron A. Anliker, and Thomas J. Hamilton. Debtor opposes the motion. He appears by Jeffrey A. Deines, Shane J. McCall, and Robert M. Pitkin. The Court has jurisdiction.2
BACKGROUND FACTS.3
1. Prebankruptcy events.
In 2000, Debtor began developing a 160-acre tract of raw land located in Olathe, Kansas. The development was initially undertaken by Foxfield Associates, LLC, owned indirectly by Debtor and two others. Financing was provided by Bank of Blue Valley. By 2007, the loan to Foxfield Associates was in default.
In March 2008, after being approached by the bank and Debtor, two of the Bartlett Parties, Ernest Straub and Richard Bartlett, invested in Foxfield Villa Associates, LLC (Foxfield Villa), which had acquired the project. Foxfield Villa was owned by the Bartlett Family Real Estate Fund and PRES, LLC, a company co-owned by Straub and RDC Holdings LLC (RDC), a company Debtor owned.4 Financing was provided by Bank of Blue Valley and Bank Midwest. The development project failed.
On September 1, 2011, Foxfield Villa sued Bank of Blue Valley in a state court. *472Debtor was not a party. On August 10, 2012, the Bartlett Parties filed a suit in the federal district court for the District of Kansas against various board members of Bank of Blue Valley.5 The federal suit was stayed because of the state court action. On March 8, 2018, the Bartlett Parties filed a second federal court lawsuit (the “District Court Case”) against many of the same defendants they had sued in the first federal suit, plus RDC and Debtor.6 The thrust of their claims in the District Court Case is that Debtor and RDC committed various torts, including misrepresentation, fraud, and breach of fiduciary duty, when they induced the Bartlett Parties to invest in the development project.
2. The bankruptcy filing and subsequent events.
On April 3, 2013, Debtor filed for bankruptcy relief under Chapter 7. On June 28, 2013, the Bartlett Parties filed a dis-chargeability complaint against Debtor, alleging that any judgment they might obtain against him in the District Court Case would be excepted from discharge by 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(19).
On August 9, 2013, the two federal cases were consolidated under the first district court case number and then stayed pending the outcome of the state court action. In September 2013, the Bartlett Parties’ motions for relief from stay to pursue the District Court Case and to stay the dis-chargeability proceeding were granted. Debtor did not object to either motion. The stay relief order states that it permits the “continuation of and conclusion to the entry of final judgment in the District Court Actions of [the Bartlett Parties’] claims against the Debtor.”7
On February 6, 2014, Debtor was granted a discharge under § 727.
On June 2, 2015, a judgment was entered in the state court action in favor of Bank of Blue Valley on the plaintiffs’ claims and against Foxfield Villa, Straub, and the Bartlett Parties, who evidently were counterclaim defendants. The state court case and the claims against the state court parties in the District Court Case were settled in October 2015, before an appeal from the state court judgment was determined. After the settlement, the only remaining claims in the District Court Case were the Bartlett Parties’ claims against Debtor and RDC.
On November 25,2015, the Bartlett Parties filed a 32-count second amended complaint against Debtor and RDC in the District Court Case.8 The counts against Debtor are: Count 1—Negligent Misrepresentation; Count 3—Negligence as a Real Estate Broker and/or Salesperson; Count 5—Negligent Misrepresentation as a Certified Public Accountant; Count 7— Negligence as a Certified Public Accountant; Count 9—Violation of sections 10(b) and (10)(b)(5) of the Securities Exchange Act of 1934; Count 10—Violation of the Kansas Uniform Securities Act; Count 12—Breach of Contract; Count 13— Breach of the Duty of Good Faith and Fair Dealing; Count 14—Breach of Fiduciary Duty as an Officer of Foxfield Villa; Count 17—Aiding and Abetting RDC’s Breach of Fiduciary Duty; Count 18—Fraudulent Nondisclosure; Count 20—Aiding and Abetting RDC’s Fraudulent Nondisclosure; Count 21—Fraud; Count 23—Aid-ing and Abetting the Bank of Blue Valley’s and Regnier’s Fraud; Count 24—Tortious *473Interference with Contracts and Business Expectancy; Count 26—Aiding and Abetting the Bank’s and Regnier’s Tortious Interference with Contracts and Business Expectancies; Count 27—Conversion; Count 29—Fraudulent Concealment; Count 31—Civil Conspiracy Between Debtor and RDC; and Count 32—Joint Venture Between Debtor and RDC. The remaining counts are against RDC, all but two of which are for aiding and abetting Debtor in performing the alleged actions on which the claims against him are based. A jury trial has been demanded. A ten-day trial in the District Court Case is currently scheduled to start on October 2,2017.
On June 30, 2016, Debtor filed a motion to dismiss the following counts of the District Court Case against him based upon his bankruptcy discharge: Count 1—Neg-ligent Misrepresentation; Count 3—Negli-gence as a Real Estate Broker and/or Salesperson; Count 6—Negligent Misrepresentation as a Certified Public Accountant; Count 7—Negligence as a Certified Public Accountant; Count 12—Breach of Contract; Count 13—Breach of the Duty of Good Faith and Fair Dealing; Count 24—Tortious Interference with Contracts and Business Expectancy; Count 27— Conversion; and Count 31—Civil Conspiracy.
3. Proceedings in this Court addressing the issue whether the Bartlett Parties’ claims against Debtor should be tried in the District Court Case before this Court addresses the dischargeability complaint.
The question whether Debtor’s liability should be determined in the District Court Case before this Court hears the dis-chargeability complaint has been presented by three motions. The first was a motion the Bartlett Parties filed on June 29, 2016, for a determination that all issues related to dischargeability should be determined by the Bankruptcy Court and to confirm that the Bartlett Parties may pursue all their claims against Debtor in the District Court Case.9 Debtor opposed that motion.10 The second was Debtor’s motion filed on August 10, 2016, seeking an order staying the District Court Case under § 106 and an injunction against the continuation of the District Court Case until after the completion of the dischargeability proceeding.11 The Bartlett Parties opposed that motion.12 The third motion is the one that is being decided by this order.
The Court heard arguments on the first and second motions. The status of the District Court Case, the nature of the claims asserted, and their relationship to the adversary proceeding were addressed. During that hearing, the Court noted the interplay between the stay of § 362, which under § 362(c)(2) expires at the time a discharge is granted to an individual who is a Chapter 7 debtor, and § 524(a)(2), which states that a discharge acts as an injunction against actions to collect any discharged debts. The Court and the parties discussed the Tenth Circuit BAP’s decision in In re Eastburg,13 which interpreted the § 524(a)(2) discharge injunction to apply not only to discharged claims, but also to claims that are the subject of unresolved dischargeability complaints, which are “‘presumptively discharged’ until a court makes a finding regarding discharge-*474ability.”14 Thereafter, on September 19, 2016, the Bartlett Parties filed the third motion, seeking modification of the discharge injunction. They called this motion a supplement to their motion for a determination that all issues of dischargeability should be determined by this Court and for confirmation that the Bartlett Parties may pursue all the claims they have asserted against Debtor in the District Court Case. Debtor opposes this third motion.
The Court has ruled separately on the first two motions. The Court found the relief sought in Debtor’s motion for an injunction to be unnecessary because under Eastburg, the District Court Case against Debtor is presently enjoined by the § 524(a)(2) discharge injunction for all the Bartlett Parties’ claims, including those which are the subject of the dis-chargeability complaint.15 With respect to the Bartlett Parties’ motion regarding the district court’s authority to determine dis-chargeability issues, the Court held that although jurisdiction to determine which debts are excepted from discharge generally resides in the bankruptcy court, other courts, such as the district court, have jurisdiction to consider the effect of the discharge.16 But the Court also held that when Debtor was granted a discharge on February 6, 2014, the § 362 stay terminated, and the September 18, 2013 order granting the Bartlett Parties relief from the stay became a nullity.17 The rulings on both motions are based upon the finding that the proceedings in the District Court Case against Debtor are enjoined by the discharge injunction of § 524(a)(2).
This leaves the third motion, referred to as the supplemental motion, for determination. Because it is so closely related to the first and second motions, the Court will consider the arguments submitted in support of and in opposition to the first and second motions when ruling on the supplemental motion.
The Bartlett Parties submit that the discharge injunction should be modified to allow the District Court Case to proceed to a conclusion before the dischargeability complaint is considered. First, they argue that Debtor should not be able to abandon his “agreement” in 2013 that the District Court Case be tried to conclusion before the dischargeability complaint. According to the Bartlett Parties, an enforceable agreement arose when Debtor decided not to oppose their 2013 motion for relief from stay to litigate their claims in the District Court Case to a conclusion and their related motion to stay the dischargeability adversary proceeding. Second, the Bartlett Parties argue that under the doctrine of collateral estoppel, the district court’s findings would apply in the adversary proceeding, eliminating any need to retry issues. In addition, they point out that discovery has proceeded in the District Court Case and that the case is currently scheduled for a jury trial commencing on October 2, 2017.
Debtor argues that staying the District Court Case is supported by judicial economy and the benefit to him of the lower cost of litigating the four dischargeability claims in a bench trial in this Court rather than the 32 claims alleged against him and RDC in a jury trial in the district court. He also argues that if the district court is not barred from considering all the claims alleged against him, there is a risk he will be required to defend many claims that have no .possibility of being excepted from *475his discharge by any provision of § 523.18 Further, Debtor points out that the reasons originally stated by the Bartlett Parties in support of their 2013 stay relief motion are no longer valid. As stated in the 2013 motion, at that time, 15 individuals in addition to Debtor were defendants in the District Court Case and the claims against those individuals were intertwined with the claims against Debtor.19 This is no longer the situation; Debtor and RDC, which is owned 100% by Debtor, are the only remaining defendants. Debtor asserts that RDC has no assets and no applicable insurance coverage, but the Bartlett Parties do not concede these matters.
ANALYSIS.
A. Modification of the Discharge Injunction for the Purpose of Recovery from Debtor.
Section 524(a)(2) provides:
(a) A discharge in a case under this title—
[[Image here]]
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
As stated above, the Tenth Circuit BAP in Eastburg has interpreted this subsection to mean that claims which are the subject of an unresolved dischargeability complaint when a discharge is granted are “ ‘presumptively discharged’ until the bankruptcy court makes a determination regarding dischargeability.”20 The BAP’s interpretation removes these types of debts from “ ‘debt limbo’ with neither the automatic stay nor the discharge injunction functioning to protect debtors.”21 Even though the Bankruptcy Code does not expressly provide for relief from the discharge injunction, the BAP found that a majority of courts have concluded that the discharge injunction may be modified and that modification is one method for the bankruptcy court to exercise its role of “traffic cop” with respect to creditors’ actions against discharged debtors.22 The BAP noted that although the bankruptcy court has exclusive jurisdiction over a determination of dischargeability under § 523(a)(2), (4), and (6), it has concurrent jurisdiction with other courts to adjudicate the extent of debts within these exceptions. Accordingly “whether or not the validity and extent of a debt is better litigated in the bankruptcy court or the state court [where the creditor’s litigation against the Eastburgs was pending] is left to the bankruptcy court’s discretion.”23
The factors which the Court should consider when exercising its discretion to modify the discharge injunction have not been definitively identified.24 In the cir-*476cumstanees of this case, the decision whether to modify the discharge injunction is indistinguishable from a decision whether to grant relief from the automatic stay.25 The Court therefore finds that the factors relevant to stay relief should control its analysis. “In the absence of a comprehensive Tenth Circuit test, a list of factors identified in In re Curtis is often relied on by courts in their determination of whether stay relief should be granted”26 to permit litigation against the debtor to proceed in another forum. The Curtis factors are:
(1) Whether the relief will result in a partial or complete resolution of the issues.
(2) The lack of any connection with or interference with the bankruptcy case.
(3) Whether the foreign proceeding involves the debtor as a fiduciary.
(4) Whether a specialized tribunal has been established to hear the particular cause of action and that tribunal has the expertise to hear such cases.
(5) Whether the debtor’s insurance carrier has assumed full financial responsibility for defending the litigation.
(6) Whether the action essentially involves third parties, and the debtor functions only as a bailee or conduit for the goods or proceeds in question.
(7) Whether litigation in another forum would prejudice the interests of other creditors, the creditors’ committee and other interested parties.
(8) Whether the judgment claim arising from the foreign action is subject to equitable subordination under Section 510(c).
(9) Whether movant’s success in the foreign proceeding would result in a judicial lien avoidable by the debtor under Section 522(f).
(10) The interest of judicial economy and the expeditious and economical determination of litigation for the parties.
(11) Whether the foreign proceedings have progressed to the point where the parties are prepared for trial.
(12) The impact of the stay on the parties and the “balance of hurt.”27
The Curtis court observed that “[i]n considering the foregoing factors, it must be borne in mind that the process of determining the allowance of claims is of basic importance to the administration of a bankruptcy estate.”28
*477After due consideration of the Curtis factors, the Court finds that the discharge injunction should be modified. The factors of primary importance are the first, tenth, eleventh, and twelfth; the others are not material considerations in this case. The first and the tenth factors are closely related. The first asks whether modification will result in a partial or complete resolution of the issues. The tenth focuses upon the impact of modification on judicial economy, and the expeditious and economical determination of the litigation for the parties.
In this case, if modification is denied, the dischargeability complaint cannot be fully resolved by this Court. A bankruptcy court has jurisdiction to determine the extent of liability on claims alleged to be nondischargeable under § 528(a)(2), (4), and (6)29 and the dischargeability of such liability.30 But, as examined below, the Court finds that it does not have similar jurisdiction with respect to the § 523(a)(19) exception from discharge. That exception has two parts. Subsection (A) specifies the underlying conduct of the debtor that is covered, which includes the violation of state or federal securities laws. Subsection (B) requires that the debt be the subject of a judgment, settlement, or order.31 As originally enacted, § 523(a)(19) required a prepetition judgment, settlement, or order, but the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) eliminated any such time limitation, expanding the exception from discharge to include postpetition judgments, settlements, and orders.32 The question is whether a bankruptcy court has jurisdiction to adjudicate liability on a claim to satisfy the subsection (B) requirement. The only case law is from bankruptcy courts, and they disagree. In In re Chan,33 a bankruptcy court in the Eastern District of Pennsylvania held that it had such authority, reasoning that because a bankruptcy court clearly had jurisdiction to rule on the dischargeability of a judgment for a securities violation, it also had authority to determine the debtor’s liability. But in In re Jafari,34 Bankruptcy *478Judge Elizabeth Brown of the District of Colorado rejected the reasoning of Chan. Based upon a thorough examination of the legislative history, the language, and the structure of § 528, she concluded that “[sjubsection (B) evidences a conscious choice to have the liability determination occur outside of the bankruptcy forum.”35 This Court finds Judge Brown’s analysis to be convincing. Therefore, if modification of the discharge injunction were denied, this Court could not adjudicate all the allegations of the Bartlett Parties’ objection to discharge.
On the other hand, if the discharge injunction is modified to allow the claims against Debtor in the District Court Case that are allegedly excepted from his discharge to be tried there before the dis-chargeability complaint is tried here, the parties will need to return to this Court to finally resolve the dischargeability question. This is because the bankruptcy court has exclusive jurisdiction to determine dis-chargeability under § 523(a) (2), (4), and (6).36 To the extent that rulings in the District Court Case have collateral estop-pel effect, the dischargeability litigation would be simplified, but it cannot be avoided except by a settlement.
The Court therefore concludes that judicial economy and the expeditious determination of the litigation favors modification of the discharge injunction. The division of jurisdiction strongly supports modification. If this Court were to determine Debtor’s liability on and the dischargeability of the § 523(a)(2), (4), and (6) claims first, subsequent litigation of the securities discharge-ability claim would likely require consideration of the same conduct that was at issue here. Likewise, the Court understands that the majority of the claims against RDC are based upon Debtor’s alleged wrongful conduct and that resolution of those claims will likely require the presentation of some of the same evidence that would have been presented to this Court to prove the § 523(a)(2), (4), and (6) claims. If instead the District Court Case is concluded first, hopefully the findings in that case will expedite the resolution of the discharge-ability complaint before this Court and duplicative litigation will be minimized.
With regard to the eleventh Curtis factor, the Bartlett Parties assert that the District Court Case is close to being ready for trial, which is scheduled for the fall of 2017. Although Debtor does not agree that the pretrial proceedings are essentially complete, it is clear that the case is well on its way to being ready for trial. The status of the case therefore supports modifying the discharge injunction, since the District Court Case can be resolved within a year. The economies of the alternative litigation options are not clear.
The twelfth Curtis factor requires the Court to consider the impact of the injunction on the parties and the “balance of hurt.” Here, only the litigants are affected. Debtor had no nonexempt assets and no creditors that could be affected by a modification of the injunction. Whether Debtor will benefit from or be harmed by a modification of the injunction is' difficult to predict. Granting the modification will benefit the Bartlett Parties by preserving their demand that Debtor’s liability be determined by a jury, a right which would be in jeopardy if liability on the § 523(a)(2), (4), and (6) claims were litigated before this Court.37
*479Based upon the foregoing evaluation of the Curtis factors, the Court determines that the discharge injunction should be modified. However, that modification is limited to allowing the District Court Case to proceed against Debtor for the purpose of judgment against Debtor only on those claims that have elements that are the same as the elements of one or more of the exceptions to discharge under § 528(a)(2), (4), (6), and (19). The scope of this modification of the discharge injunction is less than the scope of the relief from stay that was previously granted to the Bartlett Parties to allow the “continuation of and conclusion to the entry of final judgment in the District Court Actions ... against the Debtor.” Circumstances have changed since that relief was granted, and Debtor is no longer bound by his failure to object to such broad relief. Debtor has been granted a discharge, and the District Court Case has been resolved for all parties except Debtor and RDC.
B. Modification of the Discharge Injunction to Establish Debtor’s Liability for the Purpose of Recovery from Third Parties.
In addition to seeking modification .of the discharge injunction for purposes of obtaining judgments against Debtor on claims that may be excepted from his discharge, such as for fraud, the Bartlett Parties also argue that they should be permitted to pursue claims that are clearly not within the scope of the exceptions to discharge so they may recover from third parties on the claims.38 The claims for Debtor’s alleged negligence when acting as a real estate broker or sales person and for his alleged breach of contract are examples.
A debtor’s discharge is intended to preserve the debtor’s fresh start, but not to provide a shield for third parties, such as insurers, who may be liable on the debtor’s discharged claims.39 Section 524(a)(2) establishes the discharge injunction, but § 524(e) provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” “[T]his provision permits a creditor to bring or continue an action directly against the debtor for the purpose of establishing the debtor’s liability when ... establishment of that liability is a prerequisite to recovery from another entity.”40 “[TJhis exception ... hinges ‘upon the condition that the debtor would not be personally liable in a way that would interfere with the debtor’s fresh start in economic life.’ ”41 Although defense costs incurred by a debtor could frustrate the fresh start, such costs standing alone have been rejected as a basis to find that the injunction bars such claims, in part because the realities of litigation are likely to *480compel the third party to defend the underlying action.42
Section 524(e) does not expressly require a motion or a ruling by this Court as a prerequisite for the Bartlett Parties to proceed against Debtor as a nominal defendant. A noted commentator states, “There is disagreement about whether relief from the discharge injunction must be sought when an action must be brought against the debtor to collect from another entity or whether the injunction simply does not apply to an action in which the plaintiff explicitly waives any right to collect a monetary recovery from the debt- or.”43 The Tenth Circuit has stated, “It is well established that this provision permits a creditor to bring or continue an action directly against the debtor for the purpose of establishing the debtor’s liability when ... establishment of that liability is a prerequisite. to recovery from another entity.”44 Based upon this statement and the statutory language, the Court finds that in this circuit, modification of the discharge injunction is not required when an action against a discharged debtor comes within the exception of § 524(e).
Nevertheless, the issue is before this Court by virtue of the Bartlett Parties’ arguments in their briefs that they may proceed against Debtor on many discharged claims which are clearly outside the exceptions to discharge because third parties may be liable for any judgments entered against Debtor on these claims.45 But the suggestion of third-party liability appears to be a speculative, newly-found argument.46 The third parties who might be liable are not identified. The basis for third-party liability is not alleged in the amended complaint. With one exception, there is no argument that a judgment against Debtor is required to establish third party liability.47 Further, the Bartlett Parties have not waived their right to collect any judgment on such claims from Debtor and have not stated that Debtor is only a nominal defendant as to such claims. Given the current status of the District Court Case, the Court does not find that any of the claims alleged in the District Court Case which have been discharged and are not the subject of the dischargeability complaint are excepted from the discharge injunction by § 524(e). A ruling on the applicability of the § 524(e) limit on the discharge injunction is better made after discovery has been completed -and the District Court Case is ready for trial, when the nature of the alleged third-party liability can be stated with more certainty.48
*481CONCLUSION.
The discharge injunction shall be modified to allow the Bartlett Parties to pursue their claims against Debtor in the District Court Case that have elements that are the same as those of one or more of the exceptions to discharge under § 523(a)(2), (4), (6), and (19). The Court does not find that any of the allegations of the amended complaint in the District Court Case state claims that fall within the § 524(e) exception to the discharge injunction which allows proceedings against a debtor on discharged claims for the purpose of recovering from third parties.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a) of the Federal Rules of Civil Procedure applicable to this matter.
JUDGMENT.
Judgment is hereby entered modifying the § 524(a) discharge injunction to allow the Bartlett Parties to pursue their claims against Debtor in the District Court Case that have elements that are the same as those required to except a debt from discharge under § 523(a)(2), (4), (6), or (19). The judgment based on this ruling will become effective when it is entered on the docket for this case, as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
. Bartlett Family Real Estate Fund, LLC; PRES, LLC; Foxfield Villa Associates, LLC; Richard A. Bartlett, and Ernest Straub, III. In the text, these parties will be referred to collectively as the Bartlett Parties.
. This Court has jurisdiction 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 the 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). A motion to modify the discharge injunction is a core proceeding which this Court may hear and determine as provided in 28 U.S.C. § 157(b)(2)(A) and (O). There is no objection to venue or jurisdiction over the parties.
. The Court draws the statement of background facts primarily from the pleadings submitted by the parties. They are intended to provide background for understanding the issue before the Court and are not intended to be definitive findings of fact.
. Since December 2012, Straub has been the sole owner of PRES, so RDC and Debtor no longer have a financial interest in Foxfield Villa.
. Foxfield Villa Assocs., LLC, v. Regnier, case no. 12-CV-2528-CM-JPO.
. Bartlett Family Real Estate Fund, LLC, v. Regnier, case no. 13-CV-2120-JWL-D JW.
. Doc. 39 at 2.
. Doc. 52-2.
. Doc. 48.
. Doc. 52.
. Doc. 57.
. Doc.60.
. BUKB, LLC v. Eastburg (In re Eastburg), 447 B.R. 624, 632 (10th Cir. BAP 2011).
. Id. (bold-face omitted).
, Doc. 76.
. Doc.72.
. Id.
. This risk exists because the district court has not ruled on Debtor’s motion to dismiss some of the claims alleged in the District Court Case, based upon his discharge.
. Doc. 36 at 2-3 (Bartlett Parties’ motion for relief from stay).
. Eastburg, 447 B.R. at 632 (bold-face omitted), The facts in Eastburg were similar to those before this court, with the exception that the nonbankruptcy court action was pending in state court rather than federal court.
. Id. at 632, n. 38.
. Id. at 633.
. Id.
. The Court has not located any widely-accepted enumeration of relevant factors. The Eastburg decision, without citing any authority, identified the following as relevant considerations, but they have not been adopted by other courts:
Many factors may impact a bankruptcy court’s decision in this regard, and as a *476result, such decision would necessarily be made on a case-by-case fact specific basis. Among the relevant criteria would likely be judicial economy and efficiency (for example, at what phase of litigation is the state court action), the burden and expense to the parties (for example, the time and expense that would be involved in duplication of discovery and litigation), whether there are additional integral parties to the state court action over which the bankruptcy court does not have jurisdiction, the right to a jury trial in state court, whether the state court proceeding negatively impacts the bankruptcy estate, and whether the state court proceeding would impair a debtor’s reorganization efforts.
In re Eastburg, 447 B.R. at 633-634. These considerations are either expressly or impliedly included in the Curtis factors discussed later in the text.
. See In re Gibellino-Schultz, 446 B.R. 733, 739 (Bankr. E.D. Pa. 2011) (treating motion for relief from stay as motion for modification of discharge injunction where § 362 stay expired while relief from stay motion was pending because debtor was granted discharge).
. Dampier v. Credit Investments, Inc. (In re Dumpier), 2015 WL 6756446, *4 (10th Cir. BAP Nov. 5, 2015) (not designated for publication).
. In re Curtis, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984) (citations omitted).
. Id. at 800.
. Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir. 1997); Lang v. Lang (In re Lang), 293 B.R. 501, 516-17 (10th Cir. BAP 2003).
. 11 U.S.C. § 523(c)(1); 4 Collier on Bankruptcy ¶ 523.03 at 523-17 (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed. 2016).
. Under § 523(a)(19) an individual debtor cannot obtain a discharge of any debt that: '
(A) is for—
(i) the violation of any of the Federal securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange- Act of 1934), any of the State securities laws, or any regulation or order issued under such Federal or 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 Federal or State judicial or administrative proceeding; (ii) any settlement agreement entered into by the debtor; or (iii) any court or administrative order for any damages, fine, penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.
. In re Chan, 355 B.R. 494, 503 (Bankr. E.D. Pa. 2006) (citing Pub. L. No. 109-8, § 1404(a), 119 Stat. 23 (2005)); see also 4 Collier on Bankruptcy, ¶ 523.27[1] at 523-132.3 (suggesting pre-BAPCPA version of § 523(a)(19) “may have” required prepetition determination of debtor’s liability).
. In re Chan, 355 B.R. at 502-05.
. Faris v. Jafari (In re Jafari), 401 B.R. 494 (Bankr. D. Colo. 2009).
. Id. at 499 (emphasis omitted).
. 11 U.S.C. § 523(c)(1); 4 Collier on Bankruptcy, ¶ 523.03 at 523-17. The Bartlett Parties agree that the bankruptcy court has exclusive jurisdiction to determine dis-chargeability under § 523(a)(2), (4), and (6). Doc. 56 at 17.
. See Pearson Educ., Inc. v. Almgren, 685 F.3d 691, 694-95 (8th Cir. 2012) (by filing claims in bankruptcy case, creditors relinquished right to have jury determine amount of damages debtor owed them for copyright infringement); Lang v. Lang (In re Lang), 166 B.R. 964, 966-67 (D. Utah 1994) (nondis-chargeability complaint qualified as informal proof of claim which was sufficient to waive right to jury trial in resulting adversary proceeding).
. See doc. 56 at 7 and 20-22, and doc. 60 at 8. The claims included in this category are Counts 1, 3, 5, 7, 12, 17, 20, 23, and 26.
. Walker v. Wilde (In re Walker), 927 F.2d 1138, 1142 (10th Cir. 1991).
. Id. (emphasis added).
. Id. (quoting Owaski v. Jet Florida Sys., Inc. (In re Jet Florida Sys., Inc.), 883 F.2d 970, 975 (11th Cir. 1989)).
. In re Jet Florida Sys., 883 F.2d at 976; see also In re Walker, 927 F.2d at 1143-44.
. 4 Collier on Bankruptcy, ¶ 524.05 at 524-59.
. In re Walker, 927 F.2d at 1142 (emphasis added).
. Doc. 56 at 7 and 20-22; Doc. 60 at 8.
. For example, the argument that the Bartlett Parties seek a judgment against Debtor for the purpose of subsequently seeking recovery from the Kansas Real Estate Recovery Revolving Fund under K.S.A. 2015 Supp. 58-3068 was raised only in opposition to Debt- or’s motion to impose a stay under § 105. See doc. 60 at 7-8.
. K.S.A 2015 Supp. 58-3068(b)(l) does require a judgment as a condition of recovery.
. At that time, the filing of a motion in this Court to modify the discharge injunction will not be required to proceed against Debtor as a nominal defendant, since § 524(e) is an exception to the discharge injunction. The district court’s jurisdiction over the District Court Case includes jurisdiction to determine what claims, if any, fall within the § 524(e) exception to the injunction and what claims may be pursued under the modification of the discharge injunction granted herein, | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500476/ | ORDER DENYING APPROVAL OF THE DEBTOR’S AMENDED DISCLOSURE STATEMENT
Elizabeth S. Stong, United States Bankruptcy Judge
WHEREAS, on August 16, 2016, Yeshivah Ohel Moshe, aka Yeshiva Ohel Moshe (“Yeshivah”), filed a petition for relief under Chapter 11 of the Bankruptcy Code; and
*451WHEREAS, on November 3, 2016, Yeshivah filed an amended Chapter 11 plan (the “Amended Chapter 11 Plan”), ECF No. 42, and amended disclosure statement (the “Amended Disclosure Statement”), ECF No. 48; and
WHEREAS, on November 16, 2016, the Court issued a Stipulation and Order directing Yeshivah and NY Five Star Equity Corp. (“Five Star”) to file briefs on the issue of whether the Bankruptcy Code permits or prohibits Yeshivah to reinstate its debt to Five Star by curing the existing default at the non-default interest rate. Stipulation and Scheduling Order 2, ECF No. 57; and
WHEREAS, on November 22, 2016, Yeshivah filed a brief on mortgage reinstatement under Bankruptcy Code Section 1124, in support of the Amended Disclosure Statement; and
WHEREAS, on November 22, 2016, Five Star filed a brief on mortgage reinstatement under Bankruptcy Code 1124, in opposition to the Amended Disclosure Statement; and
WHEREAS, on December 20, 2016, Yeshivah filed a reply; and •
WHEREAS, on December 20, 2016, Five Star filed a response; and
WHEREAS, on January 12, 2017, February 2, 2017, March 3, 2017, and March 10, 2017, the Court held hearings on the Amended Disclosure Statement and the opposition thereto, at which Yeshivah, Five Star, and the United States Trustee appeared and were heard; and
WHEREAS, on May 10, 2017, the Court held a continued hearing on the Amended Disclosure Statement and the opposition thereto, at which Yeshivah, Five Star, and the United States Trustee, each by counsel, appeared and were heard, and the Court denied Yeshivah’s request to approve the Amended Disclosure Statement.
NOW THEREFORE, it is hereby
ORDERED, for the reasons stated in the Memorandum Decision Denying Approval of the Debtor’s Amended Disclosure Statement dated May 11, 2017, and based on the entire record, Yeshivah’s request to approve the Amended Disclosure Statement is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500478/ | OPINION
Mary D. France, Bankruptcy Judge
Before the Court is Richard Hackerman (“Hackerman”)’s Motion to convert the Chapter 18 case of Donald Demeza (“Debt- or”) to Chapter 7 (the “Motion”), and Debtor’s Answer thereto as well as the record and exhibits from the hearing conducted on December 6, 2016. For the reasons set forth below, the Motion will be denied.
I. Procedural History
Debtor filed a Chapter 13 petition and plan on July 5, 2016. The Chapter 13 Trustee filed an objection to the plan and subsequently withdrew it on November 15, 2016. Hackerman also objected to Debtor’s plan alleging that it was filed in bad faith. On September 4, 2016, Hackerman filed the Motion alleging that Debtor’s bankruptcy petition itself was filed in bad faith and requested that the case be converted to Chapter 7. Debtor filed the Answer on September 16, 2016. An evidentiary hearing was held on December 6, 2016. The parties have submitted briefs, and the matter is ready for decision.1
II. Facts2
Debtor resides at 500 Orrtanna Road, Orrtanna, Adams County, PA (the “Property”). Debtor works as a horse trainer. In 2012 Debtor, through his company Toledo Racing Stables, LLC., agreed to board Hackerman’s pregnant mare.3 After sustaining injuries during the foaling process, the broodmare and foal had to be put down while in Debtor’s care. On December 12, 2012, Hackerman’s attorney sent a demand letter to Debtor notifying him that Hack-erman intended to file a lawsuit against Debtor related to the deaths of the mare and foal.
On November 26, 2013 Hackerman sued Debtor for gross negligence in the District Court for the Middle District of Pennsylvania. The suit was pending in the District Court when Debtor filed his bankruptcy petition. On June 15, 2016, Hackerman filed a second suit in District Court, this time asserting a fraudulent conveyance action against Debtor and his daughter. Debtor filed his bankruptcy petition shortly thereafter on July 5, 2016. Debtor first discussed the possibility of filing for bankruptcy with his attorney in April or May, 2016.
In his schedules, Debtor listed the Property as a single family home. The parties agreed that the Property is more properly characterized as a farmette. The Property was titled in Debtor’s name alone when it was acquired, but it was transferred into joint names with his daughter shortly be*476fore Debtor took out a loan secured by the Property on February 5, 2013, When he applied for the loan, Debtor had inadequate income to qualify. So in order to obtain financing, it was necessary to include Debtor’s daughter as a joint obligor on the note and mortgage. To secure the loan, her name had to be added to the deed. The proceeds of the loan were used to pay various debts totaling $31,000, including credit card debt and a student loan of approximately $22,500. Debtor testified that in addition to the credit card and student loan payments, he used the funds to cover expenses related to maintaining several horses he owns and for legal and other personal expenses. Debtor also testified that $3000 was disbursed to pay down his daughter’s credit card.
Debtor’s schedules indicate that the value of the Property is $160,000 and that Debtor’s equity interest is $80,000. U.S. Bank National Association has filed a proof of claim in the secured amount of $117,979.27 with an arrearage amount of $321.21. As of the date of the hearing, the cash payout Debtor received from the mortgage transaction had been depleted. Debtor’s daughter does not live on the Property, and Debtor makes all the mortgage payments.
Other than his interest in the farmette, Debtor’s only other significant assets are his interest in Toledo Racing Stables, LLC, valued at $4400, a 25% interest in FDO Holdings, LLC, valued at $57,000, two thoroughbred horses having a value of $2000, and. ,two thoroughbred horses owned jointly with another party having a value of $1500.
Debtor’s income from Schedule I is listed as $2132,33 per month. Debtor testified that his father lives on the Property and pays rent in an amount between $300 and $400 per month. He also has a roommate who pays approximately $400 per month in rent. When Debtor filed his petition, his monthly mortgage payments were $877, including the escrow for taxes and insurance.
Debtor’s schedules show that he owes a total of $417,305 to secured creditors, including a judgment that was entered in Franklin County in the amount of $241,103.4 Debtor owes $5547.70 to priority unsecured creditors and $49,784.23 to non-priority unsecured creditors. Debtor’s schedules list Debtor and his daughter as joint obligors on a student loan, however, the student loan statement designates Debtor as the sole obligor.
At the hearing date, Debtor had made all payments required under the proposed Chapter 13 plan and was current on all mortgage payments.
III. Discussion
Hackerman argues that Debtor’s case should be converted to one under Chapter 7 because creditors will receive a larger payout under Chapter 7 than under Chapter 13. He also argues that by paying the entire mortgage payment when his daughter has a one-half interest in the Property, Debtor is benefitting his daughter to the detriment of his creditors. Hackerman also alleges that Debtor has not been candid with the Court. He further argues that Debtor should not be in a Chapter 13 ease because he does not have regular income.
Some of Hackerman’s arguments relate to whether Debtor’s Chapter 13 petition was filed in good faith, others relate to whether the proposed plan was filed in good faith. A debtor must file a Chapter 13 *477petition in good faith, In re Myers, 491 F.3d 120, 125 (3d Cir. 2007), and a Chapter 13 plan cannot be confirmed unless it has been proposed in good faith, 11 U.S.C. § 1325(a)(3). Additionally, a Chapter 13 plan cannot be confirmed unless the petition was filed in good faith. 11 U.S.C. § 1325(a)(7). Courts apply the same standards when analyzing good faith when considering grounds for dismissal or conversion of a case under § 1307(c) and when evaluating a plan under the § 1325 confirmation requirements. The only distinction between the two sections of the Code is that the objecting creditor has the initial burden to demonstrate bad faith under § 1307(c), while the debtor bears the burden of showing good faith under the confirmation standards of § 1325. Sullivan v. Solimini (In re Sullivan), 326 B.R. 204, 211 (1st Cir. BAP 2005). Accordingly, both the request for conversion of the case and the objection to the plan will be analyzed together keeping the respective burdens of the parties in mind.
On request of a party in interest, a Chapter 13 bankruptcy case may be converted to a case under Chapter 7 of the Bankruptcy Code or dismissed “for cause.” 11 U.S.C. § 1307(c). “‘A Bankruptcy Court has considerable discretion in determining whether ‘cause’ exists In re Monteleone, 553 B.R. 288, 293 (Bankr. W.D. Pa. 2016) (citing in re Orawsky, 387 B.R. 128, 137 (Bankr. E D. Pa. 2008)); In re Soppick, 516 B.R. 733, 745 (Bankr. E D. Pa. 2014).
Although the Bankruptcy Code does not explicitly require that a Chapter 13 petition be filed in good faith, the Court of Appeals for the Third Circuit recognizes the absence of good faith or presence of bad faith as grounds for dismissal. Myers, 491 F.3d at 125. However, “good faith is a term incapable of precise definition. [T]he good faith inquiry is a fact intensive determination .., [which] ... must be assessed on a case-by-case basis in light of the totality of the circumstances.” In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996). A bankruptcy court must assess a debtor’s good faith based on the facts of each case, “considering the ‘honest intention’ of the debt- or and ‘whether the debtor has abused the provisions, purpose, or spirit of bankruptcy law.’ ” Perlin v. Hitachi Capital Am. Corp. (In re Perlin), 497 F.3d 364 (3d Cir. 2007) (quoting Frank v. Tamecki (In re Tamecki), 229 F.3d 205, 207 (3d Cir. 2000)). Dismissal or conversion should be reserved for “ ‘those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.’ ” Id. (quoting In re Zick, 931 F.2d 1124, 1129 (6th Cir. 1991)); cf. Perlin at 497 F.3d at 375 (holding that debtors with substantial income who filed bankruptcy after creditor requested default judgment against them did not display bad faith); In re Dahlgren, 418 B.R. 852, 856-57 (Bankr. D.N.J. 2009) (holding that debtor filing bankruptcy on eve of sale in lieu of partition of real property, while “suspicious,” was insufficient to warrant dismissal of case).
When analyzing whether a petition was filed in good faith, once a creditor makes a prima facie showing that a case was filed in bad faith, the burden shifts to the debtor to prove by a preponderance of the evidence that the Chapter 13 case was filed in good faith. Alt v. U.S. (In re Alt)., 305 F.3d 413, 420 (6th Cir. 2002); In re Scotto-Diclemente, 459 B.R. 558, 562 (Bankr. D. N.J. 2011) (citing Tamecki, 229 F.3d at 207).
The Third Circuit has adopted the following factors when considering whether a Chapter 13 case should be dismissed *478or converted to one under Chapter 7 based on bad faith under 11 U.S.C. § 1307(c):
(1) the nature of the debt;
(2) the timing of the petition;
(3) how the debt arose;
(4) the debtor’s motive in filing the petition;
(5) how the debtor’s actions affected creditors;
(6) the debtor’s treatment of creditors both before and after the petition was filed; and
(7) whether the debtor has been forthcoming with the bankruptcy court and the creditors.
Lilley, 91 F.3d at 496 (citations omitted), quoted in Myers, 491 F.3d at 125. However, the Third Circuit also has made it clear that “no list is exhaustive of all the factors which could be relevant when analyzing a particular debtor’s good faith.” 15375 Mem’l Corp. v. Bejco, LP. (In re 15375 Mem’l Corp), 589 F.3d 605, 618 n. 8 (3d Cir. 2009).
A. Nature of the debt
Debtor’s schedules indicated that he owes $417,305 to secured creditors, including a judgment in the amount of $241,103 that was entered on April 18, 2016; that he owes $5547.70 to priority unsecured creditors; and that he owes $49,784.23 to non-priority unsecured creditors.5 No evidence was introduced that Debtor incurred substantial debt before he filed his petition or that extensive debts were incurred for gifts or luxury items. Hackerman’s motion is centered on the treatment of his claim alone. Hacker-man holds a contingent, unliquidated and disputed claim against Debtor in the amount of $500,000. He argues that his claim is based on Debtor’s alleged “criminal” conduct in relation to the death of Hackerman’s mare and her foal.6 While Hackerman may regard Debtor’s action or inaction as criminal, his claim against Debtor sounds in tort. Further, at this point, no determination has been made that a tort was committed. Even if Hack-erman prevails on his claim, it is not conclusive on the issue of bad faith. In re Caldwell, 895 F.2d 1123, 1127 (6th Cir. 1990) (“It is not conclusively bad faith for a debtor to seek to discharge a debt incurred through his own criminal or tor-tious conduct, but that factor may be considered.”) Therefore, the nature of the debt included in the petition does not support a finding of bad faith.
B. Timing of the petition and motive in filing the petition
Hackerman argues that Debtor filed his bankruptcy petition in order to avoid liability on his claim. He states that Debtor planned to file for bankruptcy once he was notified that Hackerman intended to file a lawsuit against him. This assertion is not supported by the record. Hackerman’s claim arose in the spring of 2012, four years before Debtor filed his bankruptcy petition. Debtor testified that he first discussed the possibility of filing a bankruptcy case with his attorney in April, 2016. Debtor first contacted bankruptcy counsel at the time a judgment was entered against FDO Holding, LLC and Debtor in Franklin County. This judgment, rather than Debtor’s claim, along with mounting tax liabilities, precipitated the Chapter 13 filing. See In re Zaver, 520 B.R. 159, 167 (Bankr. M.D. Pa. 2014) (finding that even *479where a lawsuit causes a debtor to file for bankruptcy, other circumstances impacting debtor’s affairs could evidence the debtor’s intent to reorganize).
C. Debtor’s treatment of creditors
Hackerman argues that creditors will receive a larger payout if Debtor’s case is converted to one under Chapter 7 allowing the trustee to pursue a fraudulent conveyance action. This argument is premised on the assumption that the student loan paid with the proceeds of the refinancing bene-fítted Debtor’s daughter rather than Debt- or. The evidence at trial did not support this conclusion. Hackerman also asserts that because Debtor’s daughter is a joint owner, she should be paying one half of the $877 monthly mortgage payment because she has a one-half interest in the Property. First, this conclusion is unmerited because Debtor’s daughter does not reside in the Property. But even if she did, Debtor receives approximately $800 in rents monthly from his father and roommate that he does not share with his daughter. Thus, the rents received significantly offset the $877 monthly mortgage expense. Debtor’s daughter would be entitled to share in the rents if she were required to contribute to payment of the mortgage.
Hackerman also argues that the one-half interest in the Property was transferred to Debtor’s daughter fraudulently and that a Chapter 7 Trustee could pursue that claim under the Pennsylvania Uniform Fraudulent Transfers Act (“PUFTA”). Debtor testified that he transferred the Property into joint names to qualify for an equity loan to pay debts. Debtor’s daughter was gainfully employed when the Property was refinanced and enabled him to qualify for the loan. Whether a Chapter 7 trustee would regard this conveyance as fraudulent and whether he would pursue an action is speculative. Because good cause for the transfer has been shown, I am not persuaded that it is more likely than not that a fraudulent conveyance action exists to be pursued by a trustee.
While Hackerman objects to Debtor’s treatment of creditors, since the filing of the petition Debtor has pursued his plan in good faith. The Chapter 13 trustee withdrew his objection to Debtor’s plan and has recommended that it be confirmed. Debtor is current on his mortgage payment as well as on his Chapter 13 plan payments. These factors weigh in favor of finding that Debtor filed his case with the intent to reorganize and to treat his creditors fairly.
D. Whether Debtor has been forthcoming with the Bankruptcy Court and with creditors
Hackerman argues that Debtor has not been candid with the Court by failing to describe the Property as a farm; by undervaluing his horses; by failing to report that his mortgage payments benefit an insider; and by failing to accurately report his income. Debtor testified that a more accurate description of the Property is “farmette” rather than a single family home. However, I do not find the characterization to be materially misleading. In re Manfredi, 434 B.R. 356, 362 (Bankr. M.D. Pa 2010) (“in the absence of any evidence to support that the omission ... was more than an oversight, the omissions are not material to a determination of bad faith”) (citing In re Kerschner, 246 B.R. 495, 499 (Bankr.M.D. Pa.2000)).
Debtor testified that he valued his horses based on their age, performance, and his experience. Hackerman did not present any evidence of a value different from that provided by Debtor. Therefore, there is no evidence to support the assertion that Debtor undervalued the horses. See In re *480Zaver, 520 B.R. at 167 (where no conclusive evidence of undervaluation was provided, the court concluded that the debtor had not misrepresented the value of his assets).
Debtor has argued that even though he transferred a one-half interest in the Property to his daughter, only he derives a benefit from the home and only he pays the mortgage. Furthermore, Debtor has indicated that he is willing to- have the Property transferred back into his name only if the lender would agree.
Next, even though there was some confusion related to how Debtor’s income was calculated, I disagree that Debtor was deceitful on his schedules with regard to his income. Debtor may have been unclear as to how bankruptcy schedules are generated, but his attorney was able to explain the process to the Court’s satisfaction. Moreover, no evidence was provided that Debt- or’s reported income was materially inaccurate. Thus, I do hot find that Debtor has concealed any property or assets or that he has not been candid with the Court or his creditors.
Hackerman raised sufficient issues surrounding the transfer of the real estate to shift the burden to Debtor to demonstrate that the case was filed in good faith. Considering all of the factors above, I find that Debtor has met this burden. One issue not addressed is Hackerman’s allegation that Debtor does not have regular income with which to fund a Chapter 13 plan and that Debtor is constantly borrowing funds from friends and family in order to meet his obligations. These allegations are particularly relevant to whether Debtor’s plan has been filed in good faith. I will reserve ruling on this allegation until the confirmation hearing to be considered in connection with the feasibility of Debtor’s proposed plan.
IV. Conclusion
For the reasons set forth above, and after considering the totality of the circumstances, I find that Debtor has shown that his case was filed in good faith. I further find that the record supports a finding that the Chapter 13 plan was filed in good faith, I reserve a final determination on this latter issue, particularly in regard to Debt- or’s ability to fund the plan, until the hearing on confirmation. An Order denying the Motion will be entered.
. This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A). This Opinion constitutes findings of fact and conclusions of law made pursuant to Federal Rule of Bankruptcy Procedure 7052 made applicable to contested matters by Rule 9014.
. There have been many averments that relate to Debtor’s handling of Hackerman’s broodmare and foal. However, in front of me is the issue of whether Debtor has filed his Chapter 13 case in good faith and has filed his plan in good faith. Therefore, I will focus on the facts that relate to that issue.
.In his brief, Debtor has included an excerpt from a “boarding agreement,” however, such agreement was not authenticated and introduced at the evidentiary hearing on the Motion and has not been admitted into evidence. Therefore, the Court will disregard its alleged contents and any arguments related thereto.
. No evidence was provided that the Franklin County < judgment had been transferred to Adams County such that it would constitute a lien on the Property. Debtor personally guaranteed the debt of FDO Holdings, LLC.
. The judgment held by Richard and Annetta Long is secured by the assets of FDO Holdings, LLC., which includes two parcels of real estate in Franklin County, Pennyslvania.
. No criminal proceedings have been commenced in connection with Hackerman’s claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500480/ | MEMORANDUM OPINION
Kevin R. Huennekens, UNITED STATES BANKRUPTCY JUDGE
These Consolidated Contested Matters concern related Objections to proofs of claim in the bankruptcy cases of Rachel Maddux (“Maddux”), Jeffery Light (“Light”), Patricia A. Jones (“Jones”), Calvin A. Johnson (“Johnson”), Dianne Renee Peterson (“Peterson”), and Rae Blaha (“Blaha”) (each, a “Debtor,” and collectively, the “Debtors”). Each Debtor filed a separate voluntary petition under chapter 13 of the bankruptcy code.1 Midland Credit Management, Inc., as Agent for Midland Funding, LLC (“Midland”) filed a total of 16 proofs of claim in these Bankruptcy Cases.2 The Debtors, by counsel, separately objected to all of the Midland Claims (the “Objections”).3 On July 14, 2016, the *491Court entered an order that consolidated these contested matters as each involved nearly identical facts and common issues of law (the “Consolidated Contested Matters”).4 On October 13, 2016, the Court conducted a trial on the Consolidated Contested Matters (the “Trial”). At the end of Trial, the Court took the matters under advisement so that the parties could file post-trial briefs. Having now fully considered the pleadings, the legal memoranda, the supporting affidavits, the evidence presented at Trial, and the arguments of counsel, the Court finds that while the Midland Claims failed to comply with requirements of Federal Rule of Bankruptcy Procedure 3001(c)(2)(A) (the “Bankruptcy Rule(s)”), the Midland Claims should not be disallowed. This Memorandum Opinion sets forth the Court’s findings of fact and conclusions of law in support of its decision in accordance with Bankruptcy Rule 7052.5
Jurisdiction and Venue
The Court has subject matter jurisdiction over the Consolidated Contested Matters pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). Venue is appropriate in this Court pursuant to 28 U.S.C. § 1408.
Procedural and Factual Background
The factual background and procedural history of these Bankruptcy Cases are nearly identical. With the exception of the Peterson Bankruptcy Case, all of the Midland Claims involve revolving consumer credit accounts purchased from Synchrony Bank.6 Midland is engaged in the business of acquiring unpaid consumer debt from credit card companies and banks. Synchrony Bank sold a pool of charged-off accounts, which included certain of the Debtors’ credit card debt, to Midland under the terms of a Purchase and Sale Agreement and Mis of sale (the “Sale”). In each instance, the Sale occurred after the respective Debtor had filed his or her Bankruptcy Case. As part of the Sale transaction, electronic records and other records were transferred on the Debtors’ accounts to Midland.7 All of the Debtors have confirmed chapter 13 plans, which propose distributions to unsecured creditors ranging from 3% to 100%. Midland, as assignee of the Synchrony Bank consumer credit card debt, filed proofs of claim in the Bankruptcy Cases for the outstanding balance (the “Original Midland Claims”).8
*492The Original Midland Claims disclosed that the amounts claimed due did not include any interest, fees, expenses, or other charges in addition to the principal balance. Midland did not check the box on Official Form 10 that would indicate the claims included interest or other charges. The itemized statement attached to the Original Midland Claims, indicated that there was $0.00 “Interest Due,” $0.00 “Fees,” and $0.00 “Costs.” The Debtors’ Objections to the Original Midland Claims alleged that (i) no amount was owed to Midland, (ii) the writing on which the Midland Claim was based was not attached, and (iii) interest and fees had not been properly disclosed.
Instead of filing a written response to the Debtors’ Objections as required by Local Bankruptcy Rule 9013-l(H)(3)(d), Midland timely filed amended versions of the Original Midland Claims (the “First Amended Claims”).9 The First Amended Claims asserted once again that the amounts claimed due included no interest, fees, or other costs.10 Unlike the Original Midland Claims, the First Amended Claims attached support documentation, which included a copy of the applicable bill of sale, an affidavit of sale, purchase price reconciliation/funding instructions related to the purchase of the Midland Claims, copies of the applicable Account Statements reflecting the last payment made and charge-off of the applicable account, and a copy of the Seller Data Sheet. On April 11, 2016, the Debtors filed objections to the First Amended Claims wherein the Debtors renewed their original Objections.
On August 11, 2016, the Debtors jointly filed a motion for summary judgment11 together with Debtors’ Memorandum in Support of Motion for Summary Judgment12 (collectively, the “Debtors’ Motion for Summary Judgment”). The Debtors sought summary judgment on the following two issues: (1) that the First Amended Proofs of Claim failed to properly itemize interest, fees, and other costs as required by Bankruptcy Rule 3001(c)(2)(A): and (2) that Midland’s violation of Bankruptcy Rule 3001 was “willful” and sanctions were warranted.13 The Court conducted a hearing on the Debtors’ Motion for Summary *493Judgment on September 13, 2016 (the “Summary Judgment Hearing”).
The Debtors argued that both the Original Midland Claims and the First Amended Claims failed to comply with Bankruptcy Rule 3001(c)(2)(A), as they improperly asserted that no interest or other fees were included in the Midland Claims. Bankruptcy Rule 3001(c)(2)(A) provides that in a bankruptcy case in which the debtor is an individual “[i]f, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was fled, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.” Fed. R. Bankr. P. Rule 3001(c)(2)(A), Official Form 410, to which .a proof of claim must substantially conform, requires the claimant to check one of two alternate boxes, either "yes” or “no,” to disclose whether the amount claimed due includes interest or other charges.14 Both the Original Midland Claims and the First Amended Claims disclosed a $0.00 amount in “Interest Due,” “Fees,” and “Costs” on the attached itemization account summary. Instead, Midland asserted that the entire amount claimed due was comprised of principal only. The Debtors argued, on the other hand, that the supporting documentation attached to the First Amended Claims clearly showed that the Midland Claims included an interest component. The Debtors asserted that both the charge-off statements and the last payment Account Statements that Midland had received from Synchrony Bank and attached to the First Amended Claims identified embedded interest and fees in the total amount claimed due. Furthermore, the Seller Data Sheet disclosed the full amount of accrued interest on the Debtors’ accounts. The Debtors concluded that Midland’s own internal data belied its representation that the Midland Claims included no interest: and, accordingly, Midland violated Bankruptcy Rule 3001(c)(2)(A) when it failed to disclose that fact.
In response, Midland argued that it was not obligated to check the box stating that interest, fees, expenses, or other charges were included in its claim, as any such interest or other charges had been capitalized as new principal. Midland relied on In re Osborne, No. 03-25176, 2005 WL 6425053, (Bankr. D. Kan. Apr. 25, 2005) for the proposition that holders of revolving credit obligations are not required to provide an itemized statement of interest, fees, expenses, or other charges. Midland concluded that in light of In re Osborne, it was not required to provide an itemized statement of interest, fees, expenses, or other charges because any interest, fees, expenses, or other charges had been capitalized into the principal.
In re Osborne, the case upon which Midland relies, was overruled in 2011 with the adoption of Rule 3001(c)(2). Although the Advisory Committee on Bankruptcy Rules (the “Advisory Committee”) specifically noted opposition from commentators on behalf of the credit card industry to the proposed amendment to Rule 3001 adding paragraph (c)(2) that required creditors to submit an itemization of interest and other charges, the amendment to the Bankruptcy Rule was adopted without any change from its proposed form and became effective December 1, 2011.15
*494The Bankruptcy Rules govern the conduct of cases under Title 11 of the United States Code. The Rules Enabling Act of 1934, 28 U.S.C. §§ 2071-2077, authorizes the United States Supreme Court to promulgate general rules of practice and procedure. See 28 U.S.C. § 2072, 2075.16 As a legislative enactment, the Bankruptcy Rules are interpreted under the traditional tools of statutory construction. See Beech Aircraft Corp. v Rainey, 488 U.S. 153, 163, 109 S.Ct. 439, 102 L.Ed.2d 445 (1988) (interpreting the Federal Rules of Evidence).
The plain language of Bankruptcy Rule 3001(c)(2)(A) requires an itemized statement of interest and other charges to be filed with the proof of claim if a claim includes interest, fees, expenses, or other charges in any case in which the debtor is an individual. See Fed. R. Bankr. P. 3001(c)(2)(A). Bankruptcy Rule 3001(c)(2)(A) does not contain an exception for any interest, fees, expenses, or other charges that may have been capitalized by the holder of a claim. Whereas Bankruptcy Rule 3001(c)(1) includes an explicit exception for a claim based upon an Open End or Revolving Consumer Credit Agreement, Bankruptcy Rule 3001(c)(2) makes no such exception for credit card debt. Midland’s contention that it could not comply with the dictates of Bankruptcy Rule 3001(c)(2) because it lacked access to information pertaining to the amount of interest embedded in the Midland Claims is disingenuous. Even assuming it was without the information, the assertion that the Midland Claims included no interest was' simply .incorrect.17 But in the case at bar, Midland possessed the information. The Seller Data Sheets prepared by Midland disclose the accrued interest figures. Midland simply failed to report the information either on the proof of claim forms or on the attached account summaries that it filed.
Midland’s reliance on In re Osborne was misguided in light of the 2011 amendments made to Bankruptcy Rule 3001. Midland cannot escape the requirements of Bankruptcy Rule 3001(c)(2) simply by relabeling the interest component of the amount claimed due as capitalized interest and reporting it as principal. Whatever label Midland may choose to apply, the Midland Claims include an interest component. The *495Court found that there was no genuine dispute as to any of these material facts. Accordingly, at the conclusion of the Summary Judgment Hearing, the Court granted the Debtors’ Motion for Summary Judgment on the issue of Midland’s failure to comply with Bankruptcy Rule 3001(c)(2)(A). The Court held that the First Amended Claims violated Bankrupt cy Rule 3001(c)(2)(A) because the Midland Claims contained interest that was neither disclosed nor itemized.
The Court denied the Debtors’ Motion for Summary Judgment on the issue of sanctions. The Court found that material facts were in dispute with regard to whether Midland’s violation of Bankruptcy Rule 3001(c)(2) was willful and with regard to whether sanctions were appropriate under the circumstances. The Court reserved the evidentiary issues pertaining to sanctions for trial.18
Trial
a. Validity and Amount of Midland’s Claims
Section 502 of the Bankruptcy Code governs the allowance and disallowance of claims. See 11 U.S.C. § 502. A proof of claim filed under section 501 of the Bankruptcy Code is deemed allowed unless a party in interest files an objection. See 11 U.S.C. § 502. The Debtors in the cases at bar did file Objections to the allowance of the Midland Claims. Generally, a proof of claim filed in compliance with Bankruptcy Rule 3001 is entitled to an initial presumption of validity. See In re Smith, 419 B.R. 622, 627 (Bankr. E.D. Va. 2008): see also Fed. R. Bankr. P. 3001(f).19 Since the Court had found in connection with the Motion for Summary Judgment that Midland did not comply with Bankruptcy Rule 3001(c)(2)(A) by failing to itemize interest and other charges embedded in the Midland Claims, the Court did not allow Midland to rely on the presumption of validity normally afforded to claims at trial. See In re Varona, 388 B.R. 705 (Bankr. E.D. Va. 2008) (holding that the proper remedy for a violation of Bankruptcy Rule 3001 is to deny the claim prima facie effect under 11 U.S.C. § 502(a)).
Midland called three witnesses on its behalf at trial. The testimony of Rodrigo Bedoya (“Bedoya”), Midland’s Director of Bankruptcy Operations, was uncontro-verted. Bedoya explained the process under which Midland acquired the Debtors’ Recounts from Synchrony Bank. Midland purchased pools of charged-off accounts from Synchrony Bank. The charged-off accounts were bundled by date. Synchrony Bank effected the assignment of each pool through a bill of sale. Ownership of a specific account within a pool can be verified by matching the account numbers on the account statements with the charge-off statements that Midland received from Synchrony Bank. Bedoya was able to demonstrate in this manner that each of the Debtors’ accounts had been assigned from Synchrony Bank to Midland. The Court is satisfied that Midland is the .owner of the Debtors’ credit card accounts in these Consolidated Contested Matters.
Midland bought the closed-end installment loan in the Peterson Bankruptcy Case from OneMain Financial. Bedoya testified that OneMain Financial transferred *496the Peterson Disclosure Statement, Note, and Security Agreement (the “Peterson Note”) to Midland in connection with a Purchase and Sale Agreement. Once again, the transfer was effected through a bill of sale along with an accompanying account statement and charge-off statement.- The same last four digits of the Peterson account number appear on each of the documents. The executed bill of sale indicates that OneMain Financial assigned the Peterson closed-end account to Midland on May 21,, 2015.
The Debtors argue that Midland is not a person entitled to enforce the note underlying the Peterson Claim under Virginia law because Midland is neither “(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is' entitled to enforce the instrument pursuant to § 8.3A-309 or § 8.3A-418 (d).” Va. Code Ann. § 8.3A-301. Midland introduced without, objection a copy of the Peterson Note into evidence at trial. See Fed. R. Evid. 1003 (“A duplicate is admissible to the same extent as the original unless a genuinp question is raised about the original’s authenticity ..”). The Court finds that Midland does have the right to enforce the Peterson Note. In Virginia, an “instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” Va. Code Ann. § 8.3A-203(a). Be-doya’s uncontested testimony established that the Peterson Note was delivered to Midland through the bill of sale executed by OneMain Financial for the purpose of giving Midland the rights to enforce the instrument.
Bankruptcy Rule 3001(e)(1) authorizes the transferee of a claim, such as Midland in the cases at bar, to file a proof of claim. Prior to the 2012 amendments to Bankruptcy Rule 3001, a transferee had “an obligation under Rule 3001 to document its ownership of a claim” by attaching a copy of the assignment to its proof of claim. In re Armstrong, 320 B.R. 97, 106 (Bankr. N.D. Tex. 2005): In re Hughes, 313 B.R. 205, 212 (Bankr. E.D. Mich. 2004). The 2012 amendments to “Rule 3001(c)(3)(A) replaced the requirement of attaching [any writing on which the debt is based] unless the documents are requested from the claimant pursuant to Rule (c)(3)(B).” In re Hill, No. 13-50707, 2014 WL 801517, at *6 (Bankr. E.D. Ky. Feb. 28, 2014) (citing In re Umstead, 490 B.R. 186, 195 (Bankr. E.D. Penn. 2013) (emphasis in original).20 The Midland Claims complied with the disclosure requirements for debt based on open-end or revolving consumer credit agreements set forth in Bankruptcy Rule 3001(c)(3)(A).21 The Debtors offered no evidence suggesting that Midland does not own the Midland Claims. The Court concludes that Midland has standing to collect the Midland Claims and was authorized to file its proofs of claim in each of the Consolidated Contested Matters.
Brenden Magnino (“Magnino”), a process manager employed at Midland, testified about the internal computer systems *497used by Midland to process and store data concerning the accounts Midland purchases. All of the account information that Midland receives from the seller is loaded into a Media Portal computer program that was developed and is maintained by Midland. Certain of the account information is uploaded into another system called I Series. Midland does not transfer all of the data it receives from the Media Portal into the I Series program. Specifically, information related to pre-charge-off interest and fees on the open-end or revolving consumer credit accounts it purchases are not loaded into the I Series system because Midland treats the entire amount it purchases as- principal. The I Series program is the system Midland uses to generate prepopulated forms for purp'osés of filing claims in bankruptcy cases.
Bedoya testified regarding the accuracy of the amount of each of the Midland Claims. One of the bankruptcy specialists who works under Bedoya’s supervision will be tasked with filing a proof of claim in a given bankruptcy case. The bankruptcy specialist must verify the debtor’s social security number, the debtor’s name, and the claim amount. After the bankruptcy specialist validates the information and believes the account is eligible for filing a proof of claim, the bankruptcy specialist will generate a prepopulated proof of claim form from the Midland I Series system. After the proof of claim has been prepared, the bankruptcy specialist verifies that the proof of claim form contains the correct information. Once the bankruptcy specialist validates the information on the proof of claim form, he signs it and files it. Any issue that a bankruptcy specialist may encounter with a claim, such as inconsistent information, must be resolved before any claim is filed.
Bedoya also testified regarding Midland’s process for amending the proofs of claim that it files. The most common reason for Midland to amend a claim is when an objection is filed requesting additional documentation. Upon receipt of such an objection, the Midland bankruptcy specialist assigned to that claim will use the Media Portal program to access the additional documentation such as the bill of sale, the last payment Account Statement, the charge-off Account Statement, and the Seller Data Sheet (the “Media”). The bankruptcy specialist will attach the Media to an amended proof of claim form and file it with the court. Bedoya further testified that he has no knowledge of any Midland employee filing a claim not in conformity with Midland’s process.
Midland’s final witness was Barry Isaac Strickland (“Strickland”), a certified public accountant, who was designated and duly qualified as an expert witness. Strickland demonstrated that the 11 Midland Claims filed in the Maddux Bankruptcy Case, the Light Bankruptcy Case, the Peterson Bankruptcy Case, and the Jones Bankruptcy Case were essentially identical or substantially similar to the amounts scheduled by the Debtors.22 Of the remaining five Midland Claims, one was filed in an amount that was substantially less than *498the scheduled amount.23 The documentation attached to the other four First Amended Claims adequately explained the difference between the filed and scheduled amounts.24
None of the Debtors appeared at the trial to dispute any of the evidence offered by Midland as to the validity or amounts of the Midland Claims. The answers given by the Debtors to Midland’s discovery requests provided no substantive grqunds for the objections they had raised to the validity or the amounts asserted in the Midland Claims. After considering the evidence presented to the Court, the Court is satisfied that Midland has proven the validity and amount of the Midland Claims in each instance. The sole dispute is whether the Midland Claims should be disallowed for failing to comply with Bankruptcy Rule 3001(c)(2)(A).
b. Midland’s Failure to Comply with Bankruptcy Rule 3001(c)(2)(A)
Bedoya testified regarding Midland’s policy on interest and accounts in bankruptcy. When Midland filed its Original Proofs of Claim in these Bankruptcy Cases, Midland believed it was not proper to check the box stating that the claim contained interest. This was because Midland did not charge any interest or fees on any of the post-bankruptcy accounts that it purchased. It was Midland’s policy to treat the entire amount of a purchased claim as principal. Bedoya understood the Original Midland Claims to accurately represent the interest and fees that had accrued on the account prior to the charge-off date as capitalized into principal. Strickland corroborated this testimony explaining that it was the common practice throughout the credit card industry to capitalize accrued interest’and fees as principal.
Bedoya explained that Midland immediately changed its policy in this regard in response to the entry of the Court’s Summary Judgment Order. Midland immediately amended its First Amended Claims (individually, a “Second Amended Proof of Claim,” and collectively, the “Second Amended Proofs of Claim”) within days after the Court’s decision. The Second Amended Proofs of Claim checked the box to indicate that the Midland Claims did contain pre-charge-off interest. The itemization sheet attached to each Second Amended Proof of Claim included the words “See attached” in the “Interest Due,” “Fees,” and “Costs” itemization boxes. The Charge-off Statement and the Seller Data Sheet attached to each of the Second Amended Proofs of Claim disclosed the amounts of interest and fees charged year to date and the amount of charged-off interest on the account.
c. Sanctions for Violations of Bankruptcy Rule 3001(c)(2)(A)
The Debtors argue that the Midland Claims in these Consolidated Contest*499ed Matters should be disallowed for violation of Bankruptcy Rule 3001(c)(2)(A). The Debtors maintain that Midland willfully 'filed false claims and that it continues to do so. The Debtors rely on Commonwealth Biotechnologies, Inc. v. Fornova Pharmworld, Inc. (In re Commonwealth Biotechnologies, Inc.), No. 11-30381-KRH, 2012 WL 5385632 (Bankr. E.D. Va. Nov. 1, 2012) and In re Varona, 388 B.R. 705 (Bankr. E.D. Va. 2008) for the proposition that the Court may disallow Midland’s claims for non-compliance with Bankruptcy Rule 3001 under 11 U.S.C. § 105.
The Court finds that Midland did not willfully file false claims. In fact it took immediate measures to correct the deficiency in the proofs of claim it had filed when the Court issued its Summary Judgment Order. Indeed, Midland has been forthcoming with information supporting the basis of its claims throughout the pen-dency of these Consolidated Contested Matters. The Court will not disallow the Midland Claims under § 105 of the bankruptcy Code. See In re Goeller, No. 12-17123-RGM, 2013 WL 3064594, at *3 (Bankr. E.D. Va. June 19, 2013) (“Mere non-compliance with the informational requirements of Rule 3001 such as attachment of documentation or providing- specific information should not be, in and of itself, grounds to disallow the claim”).25
The Court will confine its consideration to the remedies specifically set forth in Bankruptcy Rule 3001(c)(2)(D). The Bankruptcy Rule provides that, if the Debtor is an individual, the Court may issue two sanctions when the holder of a claim fails to comply with Bankruptcy Rule 3001:
If the holder of a claim fails to provide any information required by this subdivision (c), the court may, after notice and hearing, take either or both of the following actions: (i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the fáilure was substantially justified or is harmless: or (ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
Fed. R. Bankr. P. 3001(c)(2)(D): see also Critten v. Quantum3 Group, LLC (In re Critten), 528 B.R. 835, 840 (Bankr. M.D. Ala. 2015) (noting that the remedy for a violation of Bankruptcy Rule 3001 is limited to the provisions in Fed. R. Bankr. P. 3001(e)(2)(D)): In re Reynolds, 470 B.R. 138, 145 (Bankr. D. Colo. 2012).
Although it does not believe that Midland willfully filed false claims, the Court cannot find that the failure of Midland to itemize interest and fees in these Consolidated Contested Matters under Rule 3001(c)(2)(A) was “substantially justified or ... harmless.” Fed. R. Bankr. P. 3001(e)(2)(D)(i).26 The language of Bank*500ruptcy Rule 3001(c)(2)(A) clearly requires holders of claims, including credit card claims, to provide an itemization of interest, fees, expenses, and other charges when the debtor is an individual. See Fed. R. Bankr. P. 3001(c)(2)(A). The supporting documents provided by Midland for each of the Midland Claims clearly indicated that there was an interest component in the claims. Representing on the proof of claim form that the claimed amount did not include interest was misleading. Nor did appending documents and stating “See attached” satisfy the obligation to itemize. Strickland testified that it took him an hour of his time to reconcile the Midland Claims with the Debtors’ schedules. The itemization of fees and interest must be in a form that does not require a certified public accountant to decipher. The resolution of claims in bankruptcy is designed to be a fair and inexpensive process. These Debtors were entitled to sufficient information to evaluate the validity of the Midland Claims without undue burden or expense. See In re DePugh, 409 B.R. 125 (Bankr. S.D. Tex. 2009) (“This Court does not believe that the Supreme Court contemplated that creditors could ignore Bankruptcy Rule 3001’s requirements unless and until a debtor complains and then cry ‘no harm no foul’ by producing documents that should have been produced to begin with.”).
The Court finds that the Debtors have been harmed. They have had to incur legal fees on account of Midland’s non-compliance with Bankruptcy Rule 3001. In most of these Consolidated Contested Matters, it was the other creditors of the Debtors and not the Debtors themselves who stood to benefit from the Debtors’ policing the claims process.27 The legal fees incurred by these Debtors may negatively impact the dividend that the other unsecured creditors in these the Bankruptcy Cases may expect to receive. The Court finds that the Debtors are entitled to be reimbursed the reasonable expenses and attorneys’ fees caused by Midland’s noncompliance with Bankruptcy Rule 3001(c)(2)(A). See Fed. R. Bankr. P. 3001(c)(2)(D)(ii) (“[A]ward other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.”).
No other additional remedy is necessary. The Court, in applying the discretion that the Bankruptcy Rule accords to it, does not find that the sanction of precluding the omitted evidence under Bankruptcy Rule 3001(c)(2)(D)(i) is appropriate in the cases at bar. The Court is satisfied with Midland’s good faith. The Original Midland Claims and the First Amended Claims did comply with Bankruptcy Rule 3001(c)(3). Midland does not add interest or fees to the claims it buys. Midland amended the First Amended Claims within two days after the entry of the Summary Judgment Order by checking the appropriate box on Official Form 410 to indicate that the Midland Claims include interest and directing parties to the attached documents for specific information about what the seller was reporting as accrued interest before charge-off. Since that time, Midland has filed other proofs of claim in this district that further attempt to comply with the Summary Judgment Order. Additional sanctions are not necessary to deter future noncompliance with Bankruptcy Rule 3001.28
*501Counsel for the Debtors must submit a fee application for the Court’s consideration within fourteen days of the issuance of this memorandum opinion and schedule a hearing thereon for a date mutually agreeable to Midland’s counsel of record in this case. The Court will evaluate the application, applying such factors as those set forth in 11 U.S.C. § 330(a). See also Perdue v. Kenny A., 559 U.S. 542, 550-57, 130 S.Ct. 1662, 176 L.Ed.2d 494 (2010).
Conclusion
Midland failed to comply with Bankruptcy Rule 3001(c)(2)(A) when it filed proofs of claim in these cases reporting that no interest was included in the balance. Accordingly, the Midland Claims were denied prima facie validity. Midland was able to establish its ownership of the Midland Glaims and its entitlement to collect the Midland Claims in these Bankruptcy Cases. Midland proved the validity and accuracy of the Midland Claims at Trial. Accordingly, the Court will overrule the Debtors’ objections to the First Amended Claims. The Second Amended Proofs of Claim filed by Midland will be allowed under 11 U.S.C. § 502. The Court finds that the Debtors’ recovery of the reasonable expenses and attorneys’ fees they incurred that was caused by Midland’s noncompliance with Bankruptcy Rule 3001(c)(2)(A) is warranted in this case under Bankruptcy Rule 3001(c)(2)(D). As Midland did comply with Bankruptcy Rule 3001(c)(3) and promptly amended the Midland Claims within two days after the entry of the Summary Judgment Order, the Court finds that no additional sanction is necessary or appropriate in these cases.
A separate order shall issue.
. The Bankruptcy Cases are: Maddux, case number 15-33574, filed on July 16, 2015: Light, case number 15-33590, filed on July 17, 2016: Jones, case number 15-36032, filed on November 20, 2015: Johnson, case number 15-35437, filed on October 22, 2015: Peterson, case number 15-34358, filed on August 20, 2015: and Blaha, case number 15-34453, filed on August 26, 2015 (the “Bankruptcy Case(s)”).
. Midland filed claims 13-1, 14-1, and 18-1 in the Maddux Bankruptcy Case: claims 8-1 and 9-1 in the Light Bankruptcy Case: claims 7-1, 8-1, 9-1, 10-1, and 11-1 in the Jones Bankruptcy Case: claims 6-1, 7-1 and 8-1 in the Johnson Bankruptcy Case: claims 7-1 and 8-1 in the Blaha Bankruptcy Case: and claim 10-1 in the Peterson Bankruptcy Case (the "Midland Claims”).
.A proceeding involving a claim objection is treated as a contested matter and Fed. R. Bankr. P. 9014 applies. See In re Fleming, No. 08-30200-KRH, 2008 WL 4736269, at *1 (Bankr. E.D. Va. Oct. 15, 2008): In re Pasc*491hall, No. 07-32048, 2011 WL 5553483, at *1 (Bankr. E.D. Va. Nov. 15, 2011).
. See Pre-Trial Order, Maddux, et al. v. Midland Credit Mgmt. Inc., as Agent for Midland Funding, LLC, No. 15-33574-KRH (Bankr. E.D. Va. July 14, 2016), ECF No. 55.
. Certain rules under part VII of the Bankruptcy Rules are applicable to contested matters, including Bankruptcy Rule 7052. See Fed. R. Bankr. P. 9014(c). Findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact when appropriate. See Fed. R. Bankr. P. 7052.
. The debt that Midland purchased in the Peterson Bankruptcy Case was a closed-end account, commonly referred to as an installment loan.
. The records included account statements for each of the credit card accounts (the "Account Statements)”). After receiving the electronic records from Synchrony Bank, Midland generated seller data sheets for each of the accounts, it had purchased (the "Seller Data Sheet(s)”).
. In order to participate in any distribution proposed under a chapter 13 plan, a creditor must file a proof of claim for the creditor's claim to be allowed and paid. See Fed R. Bankr. P. 3002(a), 3021. Bankruptcy Rule 3001 governs the manner of filing proofs of claim, which must conform substantially to *492the appropriate Official Form. See Fed R. Bankr. P. 3001: see also Fed R. Bankr. P. 9009 (stating that “the Official Forms prescribed by the Judicial Conference of the United States shall be observed.”).
. Debtors complain that the amended Midland Claims were filed without leave of Court. However, Bankruptcy Rule 9014(c) does not make Bankruptcy Rule 7015 applicable to contested matters unless otherwise directed by the Court. See Fed. R. Bankr. P. 9014(c).
. The Official Form used for filing a proof of claim had been updated since the Original Midland Claims were filed. New Official Form 410 which replaced the old Official Form 10, now requires claimants to check alternative boxes in response to question 7 indicating affirmatively whether or not the claim includes interest or other charges. The First Amended Claims were properly filed using new Official Form 410. The box indicating that the amount claimed due did not include interest or other costs was checked.
. See Debtors’ Motion for Summary Judgment, Rachel Rena Maddux, et al. v. Midland Credit Mgmt. Inc., as Agent for Midland Funding, LLC, No. 15-33574-KRH (Bankr. E.D. Va. Aug. 11, 2016), ECF No. 67.
. See Debtors’ Memorandum in Support of Motion for Summary Judgment, Rachel Rena Maddux, et al. v. Midland Credit Mgmt. Inc., as Agent for Midland Funding, LLC, No. 15-33574-KRH (Bankr. E.D. Va. Aug. 11, 2016), ECF No. 69.
. The Debtors’ Motion for Summary Judgment only addressed the 15 revolving consumer credit accounts that Midland purchased from Synchrony Bank and did not involve the Midland Claim filed in the Peterson Bankruptcy Case.
. See supra note 8,
. The opposition asserted, as Midland does here, that “it is often impossible to break out the components of credit card debt because, depending upon the terms of the applicable credit agreement, unpaid interest and fees may be folded into the. principal balance.” Report of the Advisory Comm. On Bankr. R. to *494Standing Committee on R. of Practice and P., at 7-8 (May 27, 2010).
. The rule-making process has been delegated to committees of the Judicial Conference of the United States (the "Judicial Conference”). See 28 U.S.C. § 2073. Advisory Committees of the Judicial Conference solicit comments from the bench, bar and general public after publication of a proposed rule or amendment to a rule. The Advisory Committee makes findings in response to the public comments and may elect to discard, review, or transmit the proposed rule or amendment to the Committee on Rules of Practice and Procedure of the Judicial Conference, which makes recommendations to the Judicial Conference. The Judicial Conference makes recommendations to the Supreme Court, The Supreme Court must transmit its proposed rule to Congress by May 1 of the year in which the rule is prescribed. The Rule becomes effective on Decemberl of the same year unless Congress provides otherwise by law. See 28 U.S.C. § 2075.
. Many of the regulations that govern the extension of open-end revolving credit, including the issuance of credit cards, are found in the regulations implementing the Truth in Lending Act, 15 U.S.C. § 1601 et seq., known as Regulation Z ("Reg. Z”), See 12 C.F.R. § 1026 et seq. Among the detailed disclosure requirements mandated by Reg. Z are requirements to identify finance and other charges and to disclose how those charges are calculated. See 12 C.F.R. § 1026.7(b)(5). Reg Z requires that credit card statements disclose the total finance charges over the billing statement period and calendar year to date period. See 12 C.F.R, § 1026(b)(6)(D). At a minimum, this information attributable to finance charges was available to Midland from Synchrony Bank.
. See Order Denying Motion for Summary Judgment, Maddux, et al. v. Midland Credit Mgmt. Inc., as Agent for Midland Funding, LLC, No. 15-33574-KRH (Bankr. E.D. Va. Sept. 21, 2016), ECF No. 92 (the “Summary Judgment Order”),
. Bankruptcy Rule 3001(f) provides that "[a] proof of claim executed and filed in accordance with [Bankruptcy Rule 3001] shall constitute prima facie evidence of the validity and amount of the claim.”
. Although the Debtors objected to the ownership of the Midland Claims, they did not request that Midland provide a copy of the writing on which the claims were based until discovery in these Consolidated Contested Matters was well underway.
. The information required by Bankruptcy Rule 3001(c)(3)(A) is: (i) the name of the entity from whom the creditor purchased the account: (ii) the name of the entity to whom the debt was owed at the time of the account holder’s last transaction: (iii) the date of the last transaction: (iv) the date of the last payment: and (v) the date that the account was charged to profit or loss,
. By way of example, the parties’ Joint Stipulation of Undisputed Facts reveals that Mad-dux scheduled a Lowes’ credit card debt for $1,996 (the "Scheduled Amount of the Claim”). Strickland matched the Scheduled Amount of the Claim with the amount indicated on the last payment Account Statement dated July 7, 2015 (which was attached to Midland’s First Amended Claim 14-2) by rounding down by 26 cents to the nearest dollar amount. The amount set forth in Midland’s First Amended Claim 14-2 was $2,077.31 (the "Claimed Amount”). Strickland was able to reconcile the Claimed Amount with the Scheduled Amount of the Claim by using the charge-off Account Statement attached to Midland’s First Amended Claim 14-2. The account was charged off on July 26, 2015 (the "Charge-off Date”). Additional interest and fees had accrued between *498the end of the closing date reflected on the last payment Account Statement and the Charge-off Date, which accounted for the difference between the Scheduled Amount of the Claim and the Claimed Amount. The charge-off Account Statement shows that amount of principal charged-off was $1,917.23 and the amount of accrued interest that was charged-off was $160.08. The sum of these two charged-off amounts is $2,077.31, the Claimed Amount set forth in Midland’s First Amended Claim 14-2.
. The Midland Claim filed in the Johnson Bankruptcy Case was in the amount of $4,439.40. The scheduled amount of this claim was $6,524.00.
. The last payment Account Statement and the charge-off Account Statement attached to the First Amended Claims provide information in each instance from which the amount of interest, fees and purchases that accumulated between the dates of the two Account Statements could be ascertained.
. The Court recognized that non-compliance with Bankruptcy Rule 3001 could be a basis for disallowance of a claim in In re Commonwealth Biotechnologies, Inc., But the Debtors’ reliance on the holding in that case is misplaced given the facts presented in the cases at bar. In In re Commonwealth Biotechnologies, Inc., the court found that the claimant was not entitled to enforce the note underlying the claim because no evidence had been presented that the note was ever transferred to the claimant. See In re Commonwealth Biotechnologies, Inc., 2012 WL 5385632, at *5, *6. The Court actually disallowed the claim under 11 U.S.C. § 502(b)(1) because the claimant was not entitled to enforce the note under Virginia law. See id. In this case, Midland has satisfied its burden on the ownership of the credit card accounts.
. In addition to In re Osborne, Midland cites In re Armstrong, 320 B.R. 97 (Bankr. N.D. Tex. 2005), In re Kemmer, 315 B.R.706 (Bankr. E.D. Tenn. 2004), and In re Cluff, 313 B.R. 323 (Bankr. D. Utah 2004) in arguing that it was substantially justified in disclosing *500capitalized interest as principal. All those cases predate the amendments to the Bankruptcy Rule that added Bankruptcy Rule 3001(c)(2)(A).
. Only those Debtors who confirmed and completed 100% plans would benefit from the disallowance of a claim.
. Midland has included a disclaimer on the itemization it is now attaching to its proofs of *501claim explaining that "it is itemizing the balance due based on data provided to it by Synchrony Bank.” While counsel for the Debtors took issue with this disclaimer, the Court finds that it accurately explains the source of the interest figure Midland is now reporting. At Trial, Midland asked the Court for guidance as to how it could improve the process for debtors and trustees to quickly review its claims and ascertain their validity. The district may consider amending its local rules at a future date in order to accommodate this request. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500481/ | MEMORANDUM OPINION AND ORDER
Frank W. Volk, Chief Judge
This matter is before the Court on Quality Car and Truck Leasing, Inc.’s Motion for Partial Summary Judgment Under Section 523 of the Bankruptcy Code (doc. 73), filed on September 15, 2016, and Quality Car and Truck Leasing, Inc.’s Motion for Partial Summary Judgment Under Section 727 of the Bankruptcy Code (doc. 71).
After receiving no response from the Defendant, Bobby Keith Adkins, a Rose-boro Notice issued allowing Mr. Adkins until October 28, 2016, to respond. He did so on October 31,2016 (doc. 78), and Quality Car and Truck Leasing, Inc. (“Quality Car”) replied on November 7, 2016 (doc. 82), The matter is thus ripe for adjudication.
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The Court has jurisdiction pursuant to 28 U.S.C. § 157 and 28 U.S.C. § 1334.
I.
A. Facts and Procedural History
Bobby Keith Adkins filed his Chapter 7 Petition on April 23, 2014. In July of that year, Quality Car filed the above-captioned adversary proceeding. In the main case, the Chapter 7 Trustee filed a Report of Assets and Request to Issue Claims Notice on August 28, 2014 (doc. 59). However, that Report was withdrawn on December 20, 2016, and a Report of No Distribution was issued on the same day (doc. 94). Quality Car has objected to that withdrawal and a hearing is scheduled for February 2, 2017. No discharge has been entered for Mr. Adkins.
This adversary proceeding was commenced with the filing of a Complaint by Quality Car under sections 523 and 727 of the Bankruptcy Code. Mr. Adkins filed an Answer on August 20, 2014. Quality Car filed a Motion for Default Judgment in May of 2015, to which Mr: Adkins responded and Quality Car replied. After a hearing in September of 2015, the Motion for Default Judgment was denied, but the Court ordered Mr. Adkins to fully cooperate with the Chapter 7 Trustee in identifying and liquidating assets, and to provide his tax returns, his complete file regarding application for disability benefits, and all information regarding his employment since filing. A.P. Dckt. 38.
Soon thereafter, Mr. Adkins’ counsel withdrew from his representation, and Mr. Adkins proceeded pro se as of December ^0, 2015. Following some discovery, Quali*504ty Car filed the instant Motion for Partial Summary Judgment.
Mr. Adkins lives on a farm in Jackson County, West Virginia, and sometimes conducts business as himself, or as either “Adkins Farm” or “Adkins Farms Rental Equipment.” Mr. Adkins has a son, Jacob Adkins, who lives or has lived with him on the farm and worked with Mr. Adkins in the farm businesses.
Prior to 2009, Mr. Adkins purchased several items of farm equipment which were financed by Quality Car, pursuant to purchase money security interests. This equipment was to be used solely in his farm equipment rental business. Mr. Adkins defaulted under these security agreements during or before 2009. Quality Car agreed to refinance the agreements, conditioned upon Jacob Adkins acquiescing to become a joint obligor and co-maker. Under these refinanced agreements, under which Mr. Adkins and Jacob Adkins were joint obligors, Quality Car was granted liens and security interests in 87 pieces or categories of equipment/vehicles. Provided to Quality Car were VINs, bills of sale, serial numbers, purchase prices, and other documentation. Quality Car properly perfected the liens by making UCC filings and was in first position on all of them.
Eventually, Mr. Adkins and Jacob Adkins defaulted on these refinanced agreements. Quality Car made numerous attempts to locate and repossess the collateral, ■ but the Adkins’ refused to comply and allegedly “concealed and secreted” the equipment. Quality Car resorted to calling equipment dealers and auctioneers in an attempt to locate the equipment. Several transactions were uncovered.
1. Joe R. Pyle Auctioneer Service Transaction
Mr. Adkins sold several pieces of equipment in October of 2009 through the Joe R. Pyle Auction Service in Mount Morris, Pennsylvania. Quality Car learned of the sale in December of 2009. Following the auction, Mr. Adkins engaged in a financing scheme wherein he used $17,000 of the sale proceeds from the auction to purchase a vehicle, which was titled in Jacob Adkins’ name, and which was then used as collateral to obtain a $17,000 loan from.Traders Bank in Ripley, West Virginia. Only the Traders Bank lien was listed on the title. The vehicle was sold to bona fide purchasers in the spring of 2010, who took it free and clear of any attachment lien by Quality Car. Quality Car has since received $7,000 in proceeds from this sale, but $10,000 was ultimately diverted.
2. Quarrick Equipment & Auction, Inc. Sale(s)
In the spring of 2009, Mr. Adkins took several unidentified pieces of equipment to Quarrick Equipment & Auction, Inc., in Uniontown, Pennsylvania. Following an auction on April 2, 2009, Mr. Adkins was issued a check (no. 6119) in the amount of $10,523.50. That check was deposited on April 20, 2009, into Jacob Adkins’ account at City National Bank, at which time funds were also withdrawn.
A separate auction transaction may have taken place in 2009 or 2010, pursuant to a letter from David K. Moore, Mr. Adkins’ attorney, to Quality Car. The letter indicated several pieces of equipment that were sold at auction but did not list a place or time. The total amount of the sales was $16,600. The proceeds of this sale were transmitted from Mr. Moore to Quality Car via a check drawn on Mr. Moore’s trust account.
Quality Car was not aware of either of these auction transactions prior to their occurrence, nor did Quality Car provide Mr. Adkins with permission to auction this collateral.
*505B. Greg May Sale
Mr. Adkins, at an unknown time, sold to Greg May two pieces of equipment for a combined $13,000. This information was relayed to Quality Car by Mr. Moore, who sent the proceeds of the sale to Quality Car via cashier’s check.
Quality Car was unaware of this transaction prior to its occurrence, nor did Quality Car provide Mr. Adkins with permission to sell this collateral.
4. Miscellaneous Sale
Mr. Adkins, at some unknown time, sold two pieces of equipment to an unidentified person for a total of $2,150. This information was relayed to Quality Car by Mr. Moore, who transmitted proceeds from the sale to Quality Car via a check drawn on Mr. Moore’s trust account. Quality Car was unaware of this unauthorized transaction prior to its occurrence.
Following Mr. Adkins’s default on the refinanced agreements, and Quality Car’s futile attempts to locate and repossess its collateral, Quality Car instituted an action in Jackson County, West Virginia. The action was titled Quality Car & Truck Leasing, Inc. v. Keith Adkins and Jacob Adkins, Civil Action No. 09-C-130. Quality Car sought both immediate possession of the equipment it could not locate, along with damages. Quality Car repossessed and sold at foreclosure all of the collateral it could locate. Mtn. Sum. Jdgmt. p. 5. In December of 2010, the Circuit Court eventually compelled discovery responses from Mr. Adkins and Jacob Adkins, and after the two failed to submit sufficient responses, the Circuit Court found that “the defendants had ‘failed in their duties to respond to the discovery requests.’ ” Complaint, p. 7, no. 40. In January of 2011, the Circuit Court concluded that -the Adkins violated the December 2010 court order, and the violation was “willful and contumacious.” Id., pp. 7-8, no. 41. Mr. Adkins was penalized with a per diem fine of $100 for every day he did not provide answers to Quality Car’s discovery requests. Id.
During these proceedings, Mr. Adkins threatened Quality Car with destruction and/or permanent concealment of the collateral. Around the time of the January 2011 hearing, Mr. Adkins made some of the missing collateral available to Quality Car, but not all of it. As of today, no discovery requests have ever been filed in the Jackson County action.
Eventually, the Jackson County Circuit Court entered judgment in favor of Quality Car in the amount of $281,459.83, plus interest of at least $83,523.47. This was a deficiency judgment entered pursuant to Quality Car’s motion for summary judgment.
To date, Quality Car has been unable to locate at least thirty-two (32) pieces of collateral (which are listed more specifically in the Complaint and Exhibit A). Quality Car alleges in its Motion for Summary Judgment that Mr. Adkins has damaged Quality Car’s interest in collateral in the amount of $90,743. That amount is the value of the missing collateral plus the $10,000 that was diverted from Quality Car following the Pyle Auction.
Mr. Adkins has varying responses to Quality Car’s allegations. He asserts that he either does not remember the collateral, the location of the collateral, or purchasing or possessing the collateral. He has also claimed that the collateral was stolen or incinerated or that Quality Car already has the collateral in its possession. Mtn. Sum. Jdgmt. p. 5 & Exh. 1.
In Mr. Adkins’ handwritten Response to the Motion for Summary Judgment, he “object[s] to this judgment.” Response, p. 1. He asserts that he is unwell and is unable to “get around to collect some of this evidence.” Id. Mr. Adkins claims that *506Quality Car knew of his health conditions prior to issuance of the loan, that “he was filing bankruptcy,”1 and that the company took him on as a signer because he was “not incorporated and owned property.” Id. Mr. Adkins further asserts that the loan from Quality Car was a “predatory one” and it was made to “cover up other mistakes.”
Mr. Adkins explains that he was making payments on the loan, but Quality Car began refusing payments made by his son when he was placed on a daily chemotherapy regimen prior to the refinancing of the agreements. Id. When Jacob Adkins became a joint obligor on the loan, he was only eighteen years old (18). Id.
Mr. Adkins accuses his prior counsel of “only set[ting] [sic] around and listening] to Mr. Vanderford’s half truth and lies.” Id. at 2. He admits that he “owed money to Quality, but it took both them and [him] to cause this mess.” Id. Mr. Adkins wishes “he could pay them, but [he is] broke and in poor health.” Id. He asks this Court to grant him “complete bankruptcy” and attaches medical records evidencing his inability to work in the future. Id. Importantly, Mr. Adkins does not address or refute any of the specific allegations of conversion or concealment of assets.
In its Reply, Quality Car alleges that, inasmuch as Mr. Adkins states he has “nothing left to sell or take,” he must have sold his “rather extensive” collection of livestock and equipment. Reply, p. 2. Quality Car also points out that Mr. Adkins does not refute any of the factual statements made in the Motion for Summary Judgment and in the Complaint. Quality Car refers to Mr. Adkins’ “predatory” characterization of the loan at issue as “fantastical and [ ] typical of Mr. Adkins’ obfuscations and reliance upon his infirmities as an excuse for his behavior.” Id.
With regards to Mr. Adkins’ reference to Mark Hatfield in his Response, Quality Car attempts in its Reply to explain. Mr. Hatfield owns All Around the Farm, which sold farm supplies until he ceased operating the rental aspect and sold the rental equipment. Some of that equipment was sold to Mr. Adkins, and Mr. Adkins used loan money from Quality Car for the purchase. Mr. Hatfield did borrow money from Quality Car, but never defaulted on his loan and never filed a bankruptcy petition.
Quality Car also notes in its Reply that Mr. Adkins avers quite often that he has cancer. There is, however, “no [objective] evidence” that he had or has cancer, and the attachment to Mr. Adkins’ Response supports that theory. There is no cancer diagnosis or reference in any of the attached medical records. Reply, p. 4. In fact, in one of the documents, a family nurse practitioner notes on August 23, 2016, that Mr. Adkins was in no pain, had no acute distress, appeared well, had' a normal heart rate, motor strength, and movement of all extremities, along with a normal gait and stance. Reply, p. 4; Response pp 6 & 7 of 16. Quality Car also asserts that Mr. Adkins is able to do some of the work on his farm, including mowing, raking, and riding the tractors, and that he admitted as much in his § 2004 examination. Reply, p. 5. Additionally, Jacob Adkins currently operates the farm. Id.
Quality Car seeks summary judgment under section 523(a)(6) of the Bankruptcy Code and a concomitant conclusion that Mr. Adkins’ debt to Quality Car in the amount of $90,743.90 is nondischargeable.
*507II.
A. Governing Standard
Federal Rule of CM Procedure 56, made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7056, authorizes summary judgment only if “there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c), Fed. R. Bankr. P. 7056. The moving party bears the burden. Emmett v. Johnson, 532 F.3d 291, 297 (4th Cir. 2008) (“When a party has submitted sufficient evidence to support its request for summary judgment, the burden shifts to the nonmoving party ....”) (emphasis added); Mitchell v. Data Gen. Corp., 12 F.3d 1310, 1315 (4th Cir. 1993). The Court “view[s] the evidence in the light most favorable to ... the nonmoving party, and draw[s] all reasonable inferences in ... [the nonmovant’s] favor.” Design Res., Inc. v. Leather Indus. of Am., 789 F.3d 495, 500 (4th Cir. 2015). Once the moving party has made a prima facie showing of its right to judgment as a matter of law, the non-moving party must go beyond the pleadings and demonstrate that there is a genuine issue of material fact which precludes summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Specifically, “To show that summary judgment should not be awarded, ... [the nonmovant] ‘must provide more than a scintilla of evidence — and not merely conclusory allegations or speculation — upon which a jury could properly find in its favor.’ ” Verisign, Inc. v. XYZ.COM LLC, No. 15-2526, 848 F.3d 292, 297-98, 2017 WL 514206, at *8 (4th Cir. Feb. 8, 2017) (quoting Design Res., Inc., 789 F.3d at 500).
B. Law and Analysis
1. Section 523(a)(6)
Quality Car seeks a nondis-chargeability determination under 11 U.S.C. § 523. A presumption exists that all debts owed by the debtor are dischargea-ble unless the party contending otherwise proves nondischargeability. 11 U.S.C. § 727(b). The purpose of this “fresh start” is to protect “honest but unfortunate” debtors. Bosiger v. US Airways, Inc., 510 F.3d 442, 448 (4th Cir. 2007). Courts are admonished to narrowly construe exceptions to discharge against the creditor and in favor of the debtor. Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 2008) (quoting Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999)). The burden is on the creditor to prove the exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Kubota, 524 F.3d at 497.
Section 523(a)(6) excepts from dischargeability debts incurred by “willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6) (2012). Generally, § 523(a)(6) applies to torts, but conversion can sometimes fall under § 523(a)(6). Lewis v. Lowery (In re Lowery), 440 B.R. 914, 928 (Bankr. N.D. Ga. 2010) (Hagenau, J.); (4 Alan N. Resnik & Henry J. Sommer, Collier on Bankruptcy ¶ 523.12 (16th ed. 2009)). Prior to the Supreme Court’s decision in Kawaauhau v. Geiger, the act of conversion often triggered nondischargeability under section 523(a)(6) in the Fourth Circuit. Ocean Equity Group, Inc. v. Wooten (In re Wooten), 423 B.R. 108, 131 (Bankr. E.D. Va. 2010). Following Geiger, courts focused on “whether the conversion was an intentional one or merely a reckless or negligent conversion of property,” as Geiger required “actual intent” to cause injury, and not simply an intentional action that happened to cause an injury. Id. A finding of nondis-*508chargeability thus requires more than “negligent, grossly negligent, or reckless conduct.” Duncan v. Duncan (In re Duncan), 448 F.3d 725, 729 (4th Cir. 2006). Rather, a plaintiff must show that the conversion was both willful and malicious. Lowery, 440 B.R. at 928.
Any movant under section 523(a)(6) in this setting must thus demonstrate that three elements are present: “(1) the debt- or caused an injury; (2) the debtor’s action were willful; and (3) that the debtor’s actions were malicious.” Ocean Equity Group, Inc. v. Wooten (In re Wooten), 423 B.R. 108, 128 (Bankr. E.D. Va. 2010) (quoting E.L. Hamm & Assoc., Inc. v. Sparrow (In re Sparrow), 306 B.R. 812, 834 (Bankr. E.D. Va. 2003)). Importantly, there are decisions that specifically result in a denial of a discharge based on disposition of secured collateral. American General Finance, Inc. v. Burnside (In re Burnside), 209 B.R. 867, 871 (Bankr. N.D. Ohio 1997).
A “willful” act requires deliberate or intentional misconduct, while a “malicious” act is one that is “wrongful an’d without just cause or excessive even in the absence of personal hatred, spite, or ill will.” Kawaauhau v.Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); Nestorio v. Associates Commer. Corp. (In re Nestorio), 250 B.R. 50, 57 (D. Md. 2000) (quoting St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1008 (4th Cir. 1985)); S. REP. NO. 95-989, at 79 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5865; H.R. REP. NO. 95-595, at 365 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6320.
In evaluating “willfulness,” some courts use the ‘objective[ ] substantial certainty test’ or the ‘subjective motive, test,’ Craig v. Corbin, No. GJH-15-2656, 2016 WL 4082620, *8, 2016 U.S. Dist. LEXIS 99822 *25 (D. Md. July 28, 2016) (citing Parsons v. Parks (In re Parks), 91 Fed.Appx. 817, 819 (4th Cir. 2003)). According to that measure, “willfulness” is: “established by demonstrating that the debtor took action that caused, or was substantially certain to cause, the injury. The [subject cjourt considers the debtor’s ‘subjective state of mind’ and not whether a ‘reasonable debtor’ should have known that his act would adversely affect another’s rights.” Id. (citing Desert Palace Inc. v. Rich, No. GJH-15-0091, 2015 WL 5785822, *4, 2015 U.S. Dist. LEXIS 132580 *10 (D. Md. Sept. 30, 2015). As recently as 2003 our court of appeals held that the test under section 523(a)(6) for “willfulness” is “whether the debtor acted with substantial certainty [that] harm [would result] or [that there was] a subjective motive to cause harm.” Parsons v. Parks (In re Parks), 91 Fed.Appx. 817, 819 (4th Cir. 2003) (quoting Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 603 (5th Cir. 1998)) (internal quotation marks omitted).
“Malice” may also be defined as “causing injury without just cause or excuse,” Id.; Craig, 2016 WL 4082620 at *9, 2016 U.S. Dist. LEXIS 99822 at *25 (citing Desert Palace, 2015 WL 5785822 at *6, 2015 U.S. Dist. LEXIS 132580 at *16) or as being done “deliberately, intentionally, and with knowing disregard for [the] plaintiffs rights.” Reed v. Owens (In re Owens), 449 B.R. 239, 255 (Bankr. E.D. Va. 2011) (quoting Johnson v. Davis (In re Davis), 262 B.R. 663, 670-71 (Bankr. E.D. Va. 2001)) (internal quotation marks omitted). Some courts have held that, in cases involving conversion of property, “malicious intent must be demonstrated by evidence that the debtor had knowledge of the creditor’s rights and that, with that knowledge, proceeded to take action in violation of those rights.” Wooten, 423 B.R. at 134 (quoting In re Nelson, 67 B.R. 491, 497 (Bankr. D. Minn. 1985)) (internal quotation marks omitted). That “knowledge” can be “inferred from the debtor’s experience in *509the business, his concealment of the sale, or by his admission that he has read and understood the security agreement.” Id, No specific “ill -will” or “specific intent” against the creditor need be shown to prove malice. Wooten, 423 B.R. at 130 (citing First Nat’l Bank v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir. 1995)).
2. Analysis
Consistent with the three-element inquiry, the Court must first determine whether Mr. Adkins has caused injury to Quality Car. Quality Car loaned money to Mr. Adkins. Mr. Adkins used that money to purchase farm equipment and personal property which became collateral for the loans. Mr. Adkins defaulted on the loans. More than thirty (30) pieces of the collateral are missing, and Quality Car has not been reimbursed for its collateral, nor has it been made whole with insurance or sale proceeds. In fact, some of the collateral was sold without Quality Car’s knowledge, and funds were diverted from Quality Car to either Mr. Adkins or his son. It is difficult to conjure a more apparent injury.
Next, applying the “objectively substantial certainty” and “subjective motive” tests, the question is whether Mr. Adkins acted willfully. At varying points, Mr. Adkins sold Quality Car’s collateral without its knowledge or permission and failed to remit all of the sale proceeds to Quality Car. He has remarkably also somehow “lost track” of thirty-two pieces of equipment. Regardless of whether he sold them, hid them, lost them, or left them susceptible to theft or destruction, Mr. Adkins has faked to surrender to Quality Car either its rightful collateral or the replacement sale or insurance proceeds. In selling Quality Car’s collateral without its knowledge at auction and in random sales, Mr. Adkins demonstrably acted with substantial certainty that he was causing harm to Quality Car. In that specific instance where the Adkins used $17,000 in proceeds to purchase another vehicle at auction, Mr. Adkins sold Quality Car’s collateral and immediately purchased another vehicle with the proceeds, which was then sold to a bona fide purchaser after Mr. Adkins obtained a loan with the vehicle as collateral. As an individual who has signed and renegotiated and refinanced loan documents, Mr. Adkins plainly knew that the equipment was collateral for Quality Car and that he was depriving his creditor' of its collateral.
Similarly, with regard to the “missing” equipment, Mr. Adkins bore responsibility for securing and protecting it. He claims, however, that some of the collateral was stolen, “burned up,” was never received, or is currently in an unknown location. His inability or unwillingness to serve as a trusted custodian of the collateral ripened into a substantial certainty on his part that some harm — for example, theft or destruction — would result.
Mr. Adkins has also not proven reliable. Based upon the absence of objective proof, he has left the Court with the impression that his medical diagnoses are misstated, going so far as to claim an illness and treatment for which there is no substantiation. The Court also noted Mr. Adkins’ apparent difficulty walking when he has appeared for hearings, while there are objective medical records showing Mr. Adkins’ with a normal gait and stance, along with normal movement of his extremities. These troublesome contradictions, coupled with the illicit nature of the sales of Quality Car’s collateral and Mr. Adkins’ refusal to provide discovery responses in both this case and the prior state court action, result in the ineluctable conclusion that obfuscation is afoot. Mr. Adkins has, at a minimum, failed to protect and Quality Car’s collateral and has most likely participated *510in the active concealment or conversion of the same. As a matter of law, Mr. Adkins acted willfully.
The final element of section 534(a)(6) is the requirement that Mr. Adkins acted maliciously. The question is whether Mr. Adkins acted deliberately, intentionally, and with knowing disregard for Quality Car’s rights. In addition to the foregoing discussion, Mr. Adkins, in 2009, entered into several financing arrangements with Quality Car. He then refinanced those agreements after defaulting on them the first time. Both defaults occurred just after the financing agreements were settled. Mr. Adkins has been involved in farming, agricultural sales (both supplies and equipment), and the sale and rental of both agricultural equipment and'commercial vehicles. He is versed in sale and rental contracts. Mr. Adkins has never claimed that he misunderstood the loan documents or that he did not understand Quality Car’s interests in the collateral.
If Mr. Adkins sold the collateral, he knew that the proceeds should go to Quality Car. If Mr. Adkins had lost the collateral or had it stolen or had it “burned up,” he knew that the insurance proceeds should go to Quality Car. If Mr. Adkins defaulted on the loan from Quality Car, he knew that the collateral needed to be repossessed by Quality Car. Despite that understanding and knowledge of the agreement between Mr. Adkins and Quality Car, he did not provide all of the collateral to Quality Car upon default, did not remit any insurance proceeds for the loss of the collateral, and, of greatest concern, sold some of the equipment on his own without obtaining permission from the lender and without remitting the sale proceeds to Quality Car. The sales in which Mr. Adkins partook were concealed. Quality Car was obliged to perform its own investigation, contacting the auctioneers and auction houses directly to obtain information. These are, as a matter of law, malicious actions within the parameters of section 523(a)(6).
3. Damages
In cases of this magnitude, some courts treat the entire outstanding balance of the lender’s claim as nondischargeable, with others limiting the nondischargeability to the amount of damage caused. See Wooten, 423 B.R. at 135-36. The former approach applies here. The declaration of nondischargeability should be commensurate with the injury caused — the “fair market value of the collateral at the time of the conversion is the appropriate award of .nondischargeable damages.” Id. at 136 (quoting Oakwood Acceptance Corp. v. Coltrane (In re Coltrane), 273 B.R. 478, 480 (D.S.C. 2001)).
Quality Car asserts that the harm caused by Mr. Adkins’ amounts to $90,743. That number represents the value of the missing collateral at the time of purchase (around $80,000) plus the $10,000 diverted from Quality Car following the Joe Pyle Auction. Inasmuch as the collateral is missing or otherwise unaccounted for, appraisals cannot be performed, and no sale prices have been reported. Mr; Adkins admitted to the values of the collateral at the time of sale in late 2008/early 2009. The collateral was determined missing or concealed at some point, also, in 2009. This leaves one with the only reasonable conclusion that the value of the collateral did not decrease substantially between purchase and concealment. The sum of $90,743 represents the damage to Quality Car.
III.
This Court finds that the three elements of section 523(a)(6) are satisfied. As a matter of law, there is no genuine issue of material fact that Mr. Adkins caused an injury to Quality Car and, in doing so, *511acted both willfully and maliciously. Mr. Adkins has offered not so much as a scintilla of evidence to the contrary.
IT IS ORDERED that Quality Car and Truck Leasing, Inc.’s Motion for Partial Summary Judgment Relating to Defendant’s Entitlement to the Dischargeability of His Debt to Plaintiff Under § 523(a)(6) be, and is hereby, GRANTED.
IT IS FURTHER ORDERED that Mr. Adkins’ debt to Quality Car and Truck leasing, Inc., in the amount of $90,743 be, and is hereby, NONDISCHARGEABLE.
IT IS FURTHER ORDERED, based on the foregoing, that Quality Car and Truck Leasing, Inc.’s Motion for Partial Summary Judgment Relating to Defendant’s Entitlement to a Discharge Under § 727(a)(2) be, and is hereby, DENIED WITHOUT PREJUDICE AS MOOT, with Quality Car directed to submit a proposed judgment order for entry on or before February 27, 2016 or, instead, advise the Court whether any additional issues remain for adjudication prior to the entry of that proposed judgment order. Pending receipt of that information, trial is continued generally pending the further order of the court.
The Clerk is directed to send a copy of this written opinion and order to counsel of record and Mr. Adkins, via certified mail, return receipt requested.
. It is unclear from the Response who Mr. Adkins is referring to as "he.” It may be Mr. Adkins himself or it may be Mr. Mark Hatfield, who is referred to in the same sentence. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500482/ | ORDER
SCOTT W. DALES, United States Bankruptcy Judge
The court has reviewed the Debtors’ Motion to Defer Entry of Discharge, their third request for this relief (the “Third Motion,” ECF No. 51).
Given the strong policy favoring a prompt fresh start, and the relationship between the entry of the discharge and other provisions of the Bankruptcy Code,1 the court reads Fed. R. Bankr. P. 4004(c)(2) as authorizing only two deferral motions: the first for thirty days, arid the second “to a date certain,” provided the *512second is filed within the initial thirty-day period. Because Rule 4004(c)(2) does not expressly limit the “date certain” to a particular period, a debtor seeking a second extension would be well-advised to ask for a date certain sufficiently far into the future to accommodate the reason for the deferral.
The Debtors have exhausted their opportunity for deferral of discharge, so the court will deny the Third Motion.
Although Rule 4004(c) directs the court to enter the discharge “forthwith” after the deadlines for objecting to discharge or moving to dismiss under § 707(b), nothing in this Order should be construed as directing the Clerk to enter a discharge before satisfaction of all other prerequisites to entry, some of which, admittedly, are within a debtor’s control. See, e.g., Fed. R. Bankr. P. 4004(c)(1)(G) & (H).
NOW, THEREFORE, IT IS HEREBY ORDERED that the Third Motion (EOF No. 51) is DENIED.
IT IS FURTHER ORDERED that the Clerk shall enter the discharge immediately upon the satisfaction of the conditions prescribed in Rule 4004(c)(1).
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 Willie L. Wilson and Sylvia E. Wilson, Steven L. Rayman, Esq., Stephen L. Langeland, Esq., chapter 7 trustee, and the United States Trustee.
IT IS SO ORDERED.
. For example, the deferral of the discharge extends the duration of the automatic stay. See, e.g., 11 U.S.C. § 362(c)(2)(C). Indirectly, therefore, deferral adversely affects the rights of holders of non-dischargeable debts, such as the substantial student loans listed on the Debtors’ schedules. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500483/ | MEMORANDUM OF OPINION1
ARTHUR I. HARRIS, UNITED STATES BANKRUPTCY JUDGE
In this Chapter 7 case, the debtor, George S. Humbert, seeks a determination that a creditor and former landlord, Welcome Home of Northeast Ohio, LLC, is willfully violating the discharge injunction by pursuing a claim in state court against the debtor for postpetition rent. For the reasons that follow, the Court agrees and holds that the creditor’s action for postpe-tition rent constitutes a violation of the discharge injunction. In addition, absent a stay of this order pending postjudgment relief or appeal, the Court orders the creditor to dismiss the state court action and pay the debtor $900 within thirty days of the date of this order.
JURISDICTION
The Court has jurisdiction over this matter. A determination as to whether certain conduct violates the discharge injunction is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and (O). In re Hager, 510 B.R. 131, 133 (Bankr. W.D. Mich. 2014). This Court has jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(a) and 1334 and Local General Order No. 2012-7, entered by the United States Dis*513trict Court for the Northern District of Ohio.
PROCEDURAL HISTORY
On January 13, 2016, the debtor filed the above-captioned voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The debtor listed his residential lease of 70 Keewaydin Drive, Timberlake, Ohio, from Welcome Home of Northeast Ohio on his Schedules E/F and G. Creditor Kurt Kluznik is the owner/agent of Welcome Home of Northeast Ohio, and the debtor informed Kluznik of the debtor’s bankruptcy at some point after the petition was filed. On February 22, 2016, a meeting of creditors was held pursuant to 11 U.S.C. § 341(a), and, on February 23, 2016, the Chapter 7 trustee filed a report of no distribution (Docket No. 8).
On February 8, 2016, without filing first for relief from stay, Kluznik initiated an eviction action against the debtor in Wil-loughby Municipal Court (Willoughby Municipal Court Case No. 16CVF00182). The debtor filed a Notice of Bankruptcy Proceeding and Automatic Stay in the Wil-loughby Municipal Court on February 12, 2016, and Judge Harry E. Field stayed the eviction proceeding as to the debtor on February 19, 2016.
On March 4, 2016, Kluznik filed a Motion for Relief from Stay and Abandonment for Eviction Purposes (Docket No. 9). On April 12, 2016, the debtor objected, (Docket No. 17), and filed a motion for sanctions (Docket No. 18). After filing several motions in error, Kluznik withdrew his Motion for Relief from Stay and Abandonment on April 19, 2016 (Docket Nos. 21, 23, 24, 25, and 26). On April 27, 2016, the debtor received an order of discharge.
On August 26, 2016, this Court held that Kluznik had violated the automatic stay by filing the first eviction action and making related collection efforts against the debt- or. The Court ordered Kluznik to pay the debtor attorney’s fees in the amount of $930 (Docket No. 35). The Court denied the debtor’s request to award noneconomic and punitive damages at that time but left open the option of additional damages if Kluznik did not dismiss the eviction action within 30 days of the date of that order. In a section of the opinion entitled “FUTURE PROCEEDINGS FOR EVICTION OR TO RECOVER RENT’ the Court cautioned: “to proceed with an eviction action against the debtor, Kluznik must refile a new eviction action with proper notice to the debt- or.... Given the debtor’s discharge, any such eviction action would be limited to restitution of the premises and would not include a money judgment” (Docket No. 35 at 15).
Meanwhile, on July 19, 2016, the creditor filed another eviction action in Wil-loughby Municipal Court (Case No. 16CVG01190). The debtor vacated the premises on or before July 31, 2016, but the creditor did not dismiss the state court action. On August 1, 2016, the debtor filed his Notice of Bankruptcy Discharge and Injunction in the state court. Notwithstanding the cautionary language in this Court’s August 26, 2016, decision, and without first seeking clarification from this Court, on September 23, 2016, the creditor moved in state court for leave to file an amended complaint seeking money damages against the debtor for the time that the debtor remained on the premises after his bankruptcy discharge.
On October 28, 2016, the debtor filed a motion for contempt and to show cause to enforce the discharge injunction against the creditor (Docket No. 40). On December 20, 2016, the Court heard argument on the debtor’s motion and the creditor’s brief in opposition (Docket No. 42), first supplemental brief in opposition (Docket No. 43), and second supplemental brief in opposi*514tion (Docket No. 44). The parties agreed to file joint stipulations of fact and additional briefing, after which the matter would be ready for the Court to decide. The parties did not request an evidentiary hearing. The parties filed joint stipulations of fact on January 6, 2017 (Docket No. 47). The parties further agreed to request that the state court not proceed on the creditor’s claim for postpetition rent until this Court first determined whether such a claim survived the debtor’s discharge.
STIPULATIONS OF FACT
In this proceeding, the parties agreed to have the Court decide the claims based on the parties’ joint stipulations of fact without any witnesses. To the extent that the Court has drawn inferences based on the parties’ stipulations, any such inferences reflect the Court’s weighing of the evidence.
The parties submitted the following stipulations:
A. Debtor filed his voluntary petition under Chapter 7 of the Bankruptcy Code on January 18, 2016, Case No. 16-10148, in the United States Bankruptcy Court, Northern District of Ohio (Doc 1).
B. Prior to the filing of Debtor’s case, Debtor and Creditor had entered into a residential lease for the premises owned by the Creditor at 70 Keewaydip Drive, Timberlake, OH 44095 (the “Premises”).
C. The Statement of Intention (Official Form 108) in Debtor’s bankruptcy petition stated that he would assume his upexpired lease of the Premises with the Creditor.
D. Debtor’s 341 Meeting of Creditors was held and concluded on February 22, 2016.
E. The Chapter 7 Trustee filed a Report of No Distribution on February 28, 2P16 (Doc 8), and neither Debtor nor the Trustee assumed the residential lease of the Premises with the Creditor.
F. Debtor’s Discharge was entered on April 27, 2016 (Doc 29).
G. Debtor continued to occupy the Premises after the entry of his Discharge on April 27, 2016.
H. On July 19, 2016, the Creditor filed its Complaint for Restitution of the Premises (eviction only) against Debtor in the Wil-loughby Municipal Court.
I. On August 1, 2016, Debtor filed and served his Notice of Bankruptcy Discharge and Injunction in the Willoughby (Ohio) Municipal Court.
J. Debtor vacated the Premises on or before July 31, 2016, and filed his Notice of Change of Address with the Court on September 6, 2016 (Doc 39).
K. On August 17, 2016, the Willoughby Municipal Court entered an order for restitution of the Premises in favor of the Creditor.
L. On September 23, 2016, the Creditor filed its “Motion for Leave to Amend Complaint, Second Cause of Action, Instanter, and Reply to Notice of Bankruptcy Discharge and Injunction; Motion for Scheduling of Hearing on Damages” in the Wil-loughby Municipal Court.
M. Following a hearing held October 17, 2016 before the Willoughby Municipal Court, the Creditor’s Motion for Leave to Amend Complaint, Instanter, was granted on November 8, 2016.
N. The Creditor’s Amended Complaint seeks monetary damages for Debtor’s occupancy of the Premises from the day after his discharge (i.e., April 28, 2016) until he vacated on or before July 31, 2016.
O. Debtor filed his Motion for Contempt and to Show Cause to Enforce Discharge Injunction Against Welcome Home of Northeast Ohio, Inc. (the “Creditor”) on October 28, 2016 (Doc 40).
*515[P.] On November 22, 2016, the Creditor filed its Reply to Motion to Show Cause as to Enforce Discharge Injunction (Doc 42), and a Supplemental Brief on November 29, 2016 (Doc 43).
[Q.] On December 16, 2016, the Creditor filed its Supplemental Objection to [Motion to] Show Cause to Enforce Discharge Injunction (Doc 44).
DISCUSSION
The debtor requests that the Court: (1) find the creditor in contempt of court for willfully violating the discharge injunction under 11 U.S.C. § 524(a)(2)-(3); and (2) 'enter a monetary judgment against the creditor and in favor of the debtor for compensatory damages, punitive damages, and attorney’s fees for contempt of court. 11 U.S.C. § 524 provides in pertinent part:
(a) A discharge in a case under this title—
[[Image here]]
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived....
A debtor may bring an action in civil contempt if a party violates the discharge injunction of § 524(a)(2). See Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 421-23 (6th Cir. 2000); Lover v. Rossman & Co. (In re Lover), 337 B.R. 633 (Bankr. N.D. Ohio 2005). The debtor must prove that the creditor’s action violated the discharge injunction and that the creditor had specific knowledge of the bankruptcy discharge.
I. The Creditor’s Action for Postpetition Rent Violates the Discharge Injunction.
The creditor’s state court action for postpetition rent constitutes a violation of the discharge injunction. 11 U.S.C. § 502(g) treats a claim for postpetition damages for the breach of an unexpired prepetition lease as a prepetition claim that is discharged. See Miller v. Chateau Communities, Inc. (In re Miller), 282 F.3d 874, 876-77 (6th Cir. 2002). Any debt owed a landlord on a lease deemed rejected by the trustee pursuant to 11 U.S.C. § 365(d)(1), including postpetition rent ar-rearages, is deemed a prepetition debt under 11 U.S.C. § 365(g)(1). In re Miller, 282 F.3d at 876-77. Pursuant to section 365(g)(1), the rejection is treated as a breach of the lease that took place immediately prior to the filing of the bankruptcy petition, and the attendant claim for the breach is treated as a prepetition claim. See Jp Collier on Bankruptcy, ¶ 502.08[2] at 502-68 (Alan N. Resnick ed., 16 ed., 2016). In addition, a debtor’s discharge does not render her liable for postpetition rental payments under 11 U.S.C. § 554. In re Miller, 282 F.3d at 876 (“[W]e agree with the district court’s analysis that plaintiffs discharge did not render her liable for postpetition rental payments under 11 U.S.C. § 554.”).
Under 11 U.S.C. § 365(a), a trustee in a bankruptcy case may assume or reject any unexpired lease of the debtor. Section 365(d)(1) provides as follows:
In a case under Chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
Since the trustee did not move to assume or reject the debtor’s lease with the creditor, the lease was deemed rejected March *51613, 2016, sixty days after the petition was filed.
Although the lease was deemed rejected on March 13, 2016; 11 U.S.C. § 365(g)(1) specifically provides that the rejection is treated as a breach that took place immediately prior to the filing of the bankruptcy petition. This creates a prepetition debt on the part of the debtor that was discharged under section 727(b). Accordingly, the lessor becomes an unsecured creditor with a prepetition claim for damages due to rejection of the lease under section 365(d)(1). In re Miller, 282 F.3d at 877.
The creditor in this case seeks to fall within a possible exception that the Sixth Circuit identified in Miller but deemed inapplicable to the facts in Miller. The landlord in Miller argued that, notwithstanding the debtor’s discharge, the estate’s interest in the lease was abandoned to the debtor after discharge and the debt- or assumed the obligation on the lease by leaving her mobile home on the landlord’s lot. In re Miller, 282 F.3d at 878. The Sixth Circuit rejected this argument because the debtor did not use her mobile home or occupy the lot after the rejection of the lease. Id. Instead, the debtor moved away before filing for bankruptcy and indicated her intent to abandon the mobile home in her petition. Id. Upon filing her petition for relief, the debtor’s assets, including the mobile home, became property of the estate. Id. (citing 11 U.S.C. § 541). Therefore, the Sixth Circuit determined that the landlord could not properly look to the debtor for any obligations ássociated with the mobile home as it was no longer the debtor’s. Id. In addition, the mobile home was' sold in foreclosure before the bankruptcy case was closed and before any residual property of the estate was abandoned to the debtor under section 554(c). Id.
In the present case, the Court rejects the creditor’s argument that the debtor assumed the obligation of the lease and is liable for postdischarge rent because he remained on the premises after discharge. The Court rejects this argument for several reasons.
First, unless the property is abandoned by the trustee after notice and hearing under 11 U.S.C. § 554(a), or is abandoned on request of a party in interest and after court order under section 554(b), the property is not abandoned to the debtor until the time of closing. 11 U.S.C. § 554(c). Accord In re Thompson-Mendez, 321 B.R. 814, 819 (Bankr. D. Md. 2005). The debt- or’s case has yet to be closed, so there is no abandonment.
The creditor contends that the holding in In re Werbinski, 271 B.R. 514, 517 (Bankr. E.D. Mich. 2001) should apply to this case. There, the bankruptcy court held that the automatic rejection of a month-to-month lease pursuant to section 365(d)(1) did not terminate the lease, but rather “effected an abandonment back to the debtors of their rights in the leases.” 271 B.R. at 517. Therefore, the landlord was free to pursue remedies in state court, including eviction or the collection of pos-trejection rents. Id. Werbinski was decided before the Sixth Circuit’s decision in Miller, in which the Sixth Circuit held that a claim for postpetition damages for the breach of an unexpired prepetition lease is a prepetition claim that is discharged. To the extent that Werbinski suggests a different result, the Court respectfully disagrees. The debtor’s case has yet to be closed, so there is no abandonment of the debtor’s interest in the lease. •
Second, while there may be some circumstances where a debtor and landlord may be deemed to have entered into a postpetition agreement to assume a lease or tenancy, the facts of this case do not *517support any such postpetition assumption. See e.g., Johnson v. Manatee Bay Apartments Corp. (In re Johnson), 460 B.R. 328, 328-30 (Bankr. S.D. Fla. 2011) (debtor and landlord were deemed to have entered into a postpetition agreement to assume a lease when the debtor continued to make rental payments accepted by the landlord throughout the bankruptcy proceedings and after the discharge). If the debtor and the landlord were deemed to have entered into a postpetition agreement to assume the lease, then the damages caused by the failure to pay rent would not stem from a rejection of the lease under section 365(g)(1) and would not be deemed to have arisen prepetition. In re Johnson, 460 B.R. at 329.
In this case, the debtor was behind on rental payments before he filed for bankruptcy (Docket No. 1, Schedule E/F), did not make any rental payments during bankruptcy, and did not make any rental payments postdischarge (Docket No. 43). Nor does the creditor argue that he delayed eviction efforts because the debtor offered to make payments. Rather, the creditor asserts that the debtor assumed the lease by virtue of the debtor’s indication on his statement of intent of his intent to assume the lease. The Court rejects this argument for two reasons. First, the debt- or should not have included the real property lease on the form because the form is only for personal property leases, such as car leases. Second, the form is only an invitation to commence the procedures for assumption under 11 U.S.C. § 365(p). The creditor must agree and, arguably, a reaffirmation agreement must be filed with the Court, Compare Thompson v. Credit Union Fin. Grp., 453 B.R. 823, 828 (W.D. Mich. 2011) (reaffirmation agreement required for debtor to assume unexpired personal property lease under § 365(p)); In re Garaux, No. 12-60995, 2012 WL 5193779 (Bankr. N.D. Ohio Oct. 19, 2012) (same) with In re Perlman, 468 B.R. 437 (Bankr. S.D. Fla. 2012) (reaffirmation agreement not required). There is no indication that the creditor agreed to the debt- or’s continued use of the leased property or entered into a reaffirmation agreement. Rather, everything in the record suggests that the creditor wanted the debtor evicted. See, e.g., Docket Nos. 9 and 12 (motions for relief from stay and abandonment for eviction purposes).
This Court agrees with the line of cases that hold that holdover tenants are not liable for postpetition rent simply because they wait for landlords to take the steps to complete an eviction action. See Baxter v. Summerfield Inv. Grp., LLC (In re Baxter), No. 14-00386, 2015 WL 6122158 (Bankr. D. Md. Oct. 15, 2015) (creditor’s action for postpetition rent, including period when debtor continued to occupy premises, violated the discharge injunction). If simply remaining on the premises and awaiting eviction were sufficient to justify a postpetition judgment not subject to discharge, then section 502(g) would have little application.
In Meadows v. Hagler (In re Meadows), 428 B.R. 894, 902 (Bankr. N.D. Ga. 2010), the bankruptcy court held that a landlord violated the discharge injunction when he sought to collect a prepetition debt from a debtor who had continued to live in the rental property for fifteen months after filing the petition for bankruptcy. 428 B.R. at 902. When the debtor filed for bankruptcy, he was three-and-a-half months behind on rent, but the debtor did not schedule the landlord as an unsecured creditor and gave no indication that he intended to have the debt discharged. Id. at 899. Because assumption of the lease did not occur, the lease was automatically deemed rejected under section 365(d)(1), and the debtor did not reaffirm any obligation to the landlord under section 524(c). Id. at *518899. Still, the debtor stayed in the residence and made payments postpetition for fifteen months, which the landlord accepted. Id. The debtor never paid off the three-and-a-half month debt, so the landlord sought and obtained a state court judgment against the debtor for the rental obligation. Id. at 900. The bankruptcy court held that the landlord sought to collect a prepetition debt in violation of the discharge injunction. Id. at 902. The bankruptcy court recognized that the property remained subject to an express lease and that the landlord had not demonstrated the existence of a tenancy at will. Id. The lease was only, rejected, which constitutes a breach of the lease, not a termination. Id. (citing 11 U.S.C. § 365(g)).
A third reason for rejecting the argument that postdischarge rent survives a debtor’s discharge is the statutory cap on damages contained in section 502(b)(6). This séction, which caps damages resulting from the termination of a lease of real property, contemplates postpetition rent as part of the prepetition claim. Awarding a separate postpetition claim for rent that survives discharge would be inconsistent with section 502(b)(6).
A fourth reason for rejecting the argument that postdischarge rent survives a debtor’s discharge is the special nondis-chargeability provision for postpetition condominium fees in 11 U.S.C. § 523(a)(16). If postpetition condominium fees automatically survive discharge because they are a postpetition obligation caused by the debtor’s continued ownership interest in the premises after bankruptcy, there would be no need for this special exception to discharge. Rather, Congress added this provision in 1994 as an exception to the general rule that damages from the rejection of executory contracts and unexpired leases become pre-petition claims that are discharged under section 727. See 4 Collier on Bankruptcy, ¶ 523.24 at 523-130 (Alan N. Resnick ed., 16 ed., 2016).
Even if a creditor, under certain circumstances, might have a monetary claim against a debtor for postdischarge rent that survives the debtor’s discharge, the specific claim sought by the creditor in this case appears to be without merit. First, it appears that Ohio law does not permit a claim for quantum meruit or unjust enrichment when a written agreement already exists. Bergmoser v. Smart Document Solutions, LLC, 268 Fed.Appx. 392, 396 (6th Cir. 2008) citing Delicom Sweet Goods of Ohio, Inc. v. Mt. Perry Foods, Inc., No. 04 CA 4, 2005 WL 525185, at *4 (Ohio Ct. App. Mar. 2, 2005). Accord Coma Ins. Agency, Inc. v. Safeco Ins. Co., 2012 WL 12887707, at *5-6 (N.D. Ohio Aug. 31, 2012) citing Corbin v. Dailey, No. 08AP-802, 2009 WL 491739, at *4 (Ohio Ct. App. Feb. 26, 2009); Lehmkuhl v. ECR Corp., No. 06 CA 039, 2008 WL 5104747, at *5 (Ohio Ct. App. Dec. 2, 2008) (“Ohio law is clear that a plaintiff may not recover under the theory of unjust enrichment or quasi-contract when an express contract covers the, same subject.”). See also Main Street at Exton, L.P. v. Metro (In re Metro), 2008 WL 1348665 at *2 (Bankr, E.D. Pa. April 7, 2008) (quantum meruit claim for postpetition rent unavailable under Pennsylvania law because there was already a written agreement).
Second, the record before this Court suggests that the creditor itself is responsible for the failure to take timely action that allowed the debtor to remain on the premises beyond April 28, 2016. The creditor could have moved for relief from stay shortly after receiving notice of the debt- or’s bankruptcy. Indeed, the creditor’s agent filed a flawed motion for relief from stay and abandonment for eviction purposes on March 4,2016, but then withdrew *519it. In addition, the creditor could have sought to have the stay annulled under section 362(d), could have sought expedited relief under section 362(f), or could have sought a determination that any order granting relief from stay have immediate effect under Bankruptcy Rule 4001(a)(3).
Accordingly, the Court concludes that the creditor’s action for postpetition rent violates the discharge injunction.
II. The Creditor Had Specific Knoivl-edge of the Debtor’s Bankruptcy Discharge and Acted Willfully.
The discussion thus far establishes that the creditor’s action for postpetition rent constitutes a violation of the discharge injunction; however, the debtor also seeks sanctions in the nature of civil contempt for the creditor’s purportedly willful violation of the discharge injunction. The Sixth Circuit has established the burden of proof for civil contempt:
In order to support a motion for civil contempt, a plaintiff has the burden of establishing by clear and convincing evidence that [the defendant] violated a definite and specific order of the court requiring [the defendant] to perform or refrain fi’om performing a particular act or acts with knowledge of the court’s order.... There is no requirement to show intent beyond knowledge of the order.
CFE Racing Products, Inc. v. BMF Wheels, Inc., 793 F.3d 571, 598 (6th Cir. 2015) (internal citations and quotation marks omitted); In re Stewart, 499 B.R. 557, 573 (Bankr. E.D. Mich. 2013) (quoting Glover v. Johnson, 138 F.3d 229, 244 (6th Cir. 1998)). But see SEC v. First Choice Mgt. Servs., Inc., 678 F.3d 538, 544-45 (7th Cir. 2012) (Posner, J.) (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), and other cases) (suggesting in dicta that the large body of case law requiring clear and convincing evidence to prove civil contempt “is in tension with the Supreme Court’s insistence on a presumption in favor of the less onerous standard of preponderance of the évidence in federal civil cases”).
In order to sanction a party for violating § 524(a), a court must determine that the creditor’s actions were willful, “i.e., whether the creditor deliberately acted with [actual] knowledge of the bankruptcy case.” In re Waldo, 417 B.R. 854, 891 (Bankr. E.D. Tenn. 2009); [In re Gunter, 389 B.R. 67, 72 (Bankr. S.D. Ohio 2008) ]. “[A] willful violation [of § 524(a) ] does not require any specific intent. Rather, the question is simply whether, having knowledge of the ... discharge injunction, the creditor’s actions were intentional.” [In re McCool, 446 B.R. 819, 823 (Bankr. N.D. Ohio 2010) ]. A creditor’s mistaken belief that its actions were lawful or did not violate § 524(a) is not a defense to a contempt action. Id. (“[A] willful violation of the ... discharge injunction may still exist even though the creditor believed in good faith that its actions were lawful.”); Waldo, 417 B.R. at 892.
In re Martin, 474 B.R. 789 (table), 2012 WL 907090 at *6 (6th Cir. BAP 2012)'.
The debtor has established by clear and convincing evidence that the creditor had knowledge of the discharge injunction when the creditor, on September 23, 2016, moved in state court for leave to file an amended complaint seeking money damages against the debtor for the time that the debtor remained on the premises after his bankruptcy discharge. The creditor received notice of the discharge sent by first class mail on April 30, 2016 (Docket No. 30) and again on August 1, 2016 (Stipulation I).
The creditor also received notice of the cautionary language in the Court’s Memorandum of Opinion dated August 26, 2016: *520“Given the debtor’s discharge, any such eviction action would be limited to restitution of the premises and would not include a money judgment” (Docket No. 35 at 15). The creditor took action after notice of the discharge at its peril. A creditor subject to an injunctive order in a bankruptcy casé must obey that order, even if it has proper grounds to object to that order, until that order is modified or reversed. Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). If the creditor fails to challenge the injunction in the bankruptcy court or to appeal the bankruptcy court’s ultimate decision to the district court or Court of Appeals, the creditor must obey the order. Celotex, 514 U.S. at 306, 115 S.Ct. 1493. Nor can a state court modify a discharge injunction. Hamilton v. Herr (In re Hamilton), 540 F.3d 367, 373-74 (6th Cir. 2008) (a state-court judgment that modifies the discharge order is a legal nullity and void ab initio). The Court concedes that some case law suggests that the creditor’s action might not violate the discharge injunction. Nevertheless, the prudent step, particularly in light of the Court’s cautionary language, would have been for the creditor to seek a determination from this Court before taking action that ran counter to the language in this Court’s order.
Accordingly, the creditor acted willfully by pursuing a claim for money damages against the debtor with knowledge of the debtor’s discharge regardless whether the creditor believed in good faith that its actions were lawful. In re Martin, 474 B.R. at *6.
III. Having Established that the Creditor Acted in Contempt of the Discharge Order, the Court Awards, as a Sanction, a Portion of the Debtor Attorney’s Fees for the Creditor’s Violation of the Discharge Injunction.
“If contempt is established, the injured party may be able to recover damages as a sanction for the contempt.” In re Caravona, 347 B.R. 259, 267 (Bankr. N.D. Ohio 2006) (citing Chambers v. Greenpoint Credit (In re Chambers), 324 B.R. 326, 329 (Bankr. N.D. Ohio 2005)). Additionally, the Court may award “attorney fees to a debt- or injured by a contemptible violation of the discharge injunction.” In re Chambers, 324 B.R. at 329-30 (discussing In re Miller, 282 F.3d 874 (6th Cir. 2002)).
Generally, damages in contempt proceedings are meant to vindicate the affront to a court order, and not compensate private harm, but “[t]he modern trend in civil contempt proceedings is for courts to award actual damages for violations of § 524’s discharge injunction, and, where necessary to effectuate the purposes of the discharge injunction, a debtor may be entitled to reasonable attorney fees.” Lassiter v. Moser (In re Moser), Nos. 09-8067, 09-8068, 2010 WL 4721239, *5 (6th Cir. BAP Nov. 23, 2010) (quoting Miles v. Clarke (In re Miles), 357 B.R. 446, 450 (Bankr. W.D. Ky. 2006)). An award of damages for a violation of the discharge injunction is within the Court’s discretion. In re Perviz, 302 B.R. 357, 370 (Bankr. N.D. Ohio 2003).
Based on the totality of the circumstances, the Court orders the creditor to dismiss the state court action and pay the debtor $900 in attorney’s fees within thirty days of the date of this order. The Court acknowledges that the debtor’s attorney likely spent more than three hours of time addressing the discharge injunction issue. The Court balances this cost with the creditor’s delay in obtaining relief from stay and pursuing a timely eviction action. The creditor’s delay permitted the debtor to stay on the premises for over six months after filing for bankruptcy without paying the $1,300 per month provided for in the lease. As a result, the Court declines to *521impose monetary sanctions beyond $900 in attorney’s fees at this time. See In re Meadows, 428 B.R. at 911 (court ordered landlord to dismiss state court action to remedy the violation of discharge injunction but did not impose monetary sanctions); In re Thompson-Mendez, 321 B.R. at 820 (court declined to award damages for landlord’s violation of automatic stay because debtor remained in possession of apartment without paying rent).
If the creditor timely complies with this order to dismiss the state court action, the Court anticipates that no further sanctions will be appropriate. Should the creditor fail to timely comply with the order, however, further sanctions may be warranted, such as per day penalties to compel compliance or an award of additional attorney’s fees. Should the creditor seek to appeal this Court’s decision or seek postjudgment relief, it would be incumbent on the creditor to move this Court for a stay pending appeal. See Fed. R. Bankr. P. 8007. In such circumstances, the Court would presumably insist on the creditor posting a supersedeas bond sufficient to cover the full attorney’s fees of the debtor in defending such appeal, should the decision of this Court be affirmed.
Punitive damages are not appropriate in a civil contempt proceeding for violation of a discharge injunction. See Cox v. Zale Delaware, Inc., 239 F.3d 910, 916-17 (7th Cir. 2001). An award of punitive damages for contempt of a discharge injunction sounds in the nature of criminal contempt and therefore lies beyond the authority of a bankruptcy judge. See, e.g., Knupfer v. Lindblade, 322 F.3d 1178 (9th Cir. 2003) (bankruptcy court may not impose punitive sanctions pursuant to section 105(a) contempt authority); Griffith v. Oles (In re Hipp, Inc.), 895 F.2d 1503, 1521 (5th Cir. 1990) (bankruptcy courts have no inherent or statutory power to preside over criminal contempt trials); Holley v. Oliver (In re Holley), 473 B.R. 212, 216 (Bankr. E.D. Mich. 2012) (collecting cases).
CONCLUSION
For the reasons stated above, the Court finds that the creditor willfully violated the discharge injunction. Absent a stay of this order pending postjudgment relief or appeal, the Court orders the creditor to dismiss the state court action and pay the debtor $900 within thirty days of the date of this order.
IT IS SO ORDERED.
. This Opinion is not intended for official publication. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500484/ | MEMORANDUM OF DECISION
Mary Ann Whipple, United States Bankruptcy Judge
This adversary proceeding is before the court for decision after trial on Plaintiffs *524pro se complaint to determine discharge-ability of a debt owed to him by Defendant. Defendant is a debtor in the underlying Chapter 7 case. Plaintiffs complaint is based upon Defendant’s failure to complete construction of a pole barn on Plaintiffs property after contracting to do so and after Plaintiff paid him $36,000. According to Plaintiff, Defendant owes him a debt resulting from his fraudulent representations that should be excepted from his Chapter 7 discharge. Although not specifically identified in his complaint, Plaintiff is proceeding under 11 U.S.C. § 523(a)(2)(A).
The district court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) as a civil proceeding arising in or related to a case 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 discharge-ability of debts are core proceedings that the court may hear and decide. 28 U.S.C. § 157(b)(1) and (b)(2)(I).
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 the entire record of the case. Based upon that review, and for the reasons discussed -below, the court finds that Plaintiff is entitled to judgment that a debt owed him pursuant to a Cognovit Note signed by Defendant is nondischargeable under 11 U.S.C. § 523(a)(2)(A).
FINDINGS OF FACT
Plaintiff entered into a contract with Central Ohio Builders LLC (“the LLC”) on August 2, 2009, for the construction of a pole barn on his property. Defendant was the principal of the LLC. The contract provided for payment by Plaintiff as follows:
1. $30,000 Down — PAID TO MATERIAL-SUPPLIERS
2. $ 6,000 First Day On Job 1/3
3. $ 6,000 Framing Completion 1/3
4. $ 6,000 Upon Completion 1/3
[Def. Ex. A]. Next to “PAID TO MATERIAL SUPPLIERS” is the handwritten notation, “J & H Construction.” [Id.]. Information provided to the LLC’s customers includes a statement that it “allow[s] the customer to pay our material suppliers direct to assure the rightful property owner that NO liens can be filed.” [PI. Ex. IB, final ¶ (emphasis in original) ].
Plaintiff made a check payable to J & H Construction dated August 2, 2009, in the amount of $30,000. [PI. Ex. 3A]. The parties’ testimony regarding why the check was made payable to J & H Construction differs. According to Defendant, he began talking to Plaintiff about building a pole barn two years before the contract was executed and at a time when he was doing business as J & H Construction, Defendant testified that he had created, and was doing business as, the LLC at the time the contract was signed but Plaintiff had already made the check out to J & H Construction, allegedly the name by which Plaintiff knew the business. According to Defendant, the parties were both in a hurry at the time the contract was signed and thought it “was no big deal,” since the bank would accept a check made out to J & H Construction for deposit in the LLC’s account. Defendant testified that he therefore made the handwritten notation “J & H Construction” on the contract next to *525“PAID TO MATERIAL SUPPLIERS.” The court does not find Defendant’s testimony credible.
The court instead credits Plaintiffs testimony that he first met with Defendant in early to midsummer 2009 to discuss building the pole barn. According to Plaintiff, Defendant brought the contract to his home in the evening on August 2, 2009. Plaintiff testified that Defendant had previously told him that he would most likely be purchasing materials for the pole barn from Menards but that, at the time the contract was signed, Defendant told him that he found a supplier in southern Ohio called J & H Construction and that the check should be made payable to that company. As one of the LLC’s selling points to its customers is direct payment of material suppliers, Plaintiffs testimony comports with the written information document. And nothing about the parties’ described interactions point to a finding of fact that their relationship had commenced years earlier.
Plaintiffs $30,000 check was deposited August 6, 2009, in the LLC’s checking account at National City Bank, the account from which all of the LLC’s business expenses were paid. On August 10, 2009, Defendant purchased framing materials for the pole barn at Menards for a total amount of $14,072.40. [See PI. Ex. 4A-C]. On September 14, 2009, framing of the pole barn began, and Plaintiff made out a check payable to the LLC in the amount of $6,000 as required by the contract. [PI. Ex. 3B]. The structure of the contract tells the court that this advance was intended to cover labor needed to proceed with the job. Although a crew of four or five people worked on construction of the pole barn for approximately two weeks, in- early October work stopped. At that time, framing of the pole barn was approximately eighty-five percent complete. In addition to completing framing, remaining work included installing the doors and the exterior metal walls and roof. According to Defendant, the cost of metal to complete the job was approximately $15,000, By September 30, 2009, the balance in the LLC’s checking account was only $4,355.37.
After trying to contact Defendant multiple times, during the week of October 12, 2009, Defendant told Plaintiff that he was ill. According to Defendant he had the swine flu and was unable to work. Defendant testified that he chose not to send a work crew to Plaintiffs job site without him and that he instead had the crew work on a job at the house next door to Defendant. Plaintiff spoke to Defendant again during the last week of October. At that time, Defendant told him not to worry, that the framing would be completed the next day, and that he would order the metal for completion of the pole barn and it would be delivered by the end of the week. However, framing was not completed, and Defendant never ordered the metal required for completion. Although Defendant testified that the metal was not ordered because Plaintiff never chose the color, the court credits Plaintiffs testimony that he told Defendant the colors he had chosen in October.
Plaintiff testified that the LLC’s tool trailer had originally been at the job site each day but during October, it would be gone for a few days, then for a week at a time. At the end of October, at a time when the tool trailer was back on Plaintiffs job site, Plaintiff broke into the trailer in order to determine whether it actually contained tools to use for work on the pole barn. Plaintiff testified that he did not intend to take anything, and there is no suggestion that anything was taken from the trailer. According to Plaintiff, right after the break in, he went to Defendant’s home and apologized for doing so. Defen*526dant, on the other hand, testified that Plaintiff never told him who broke into the tool trailer.
In any event, there is no dispute that the parties’ relationship had deteriorated by early November when Plaintiff went to Defendant’s home to talk to him since, according to Plaintiff, it was apparent that Defendant was not going to finish the pole barn. At that time, Defendant told Plaintiff that he would have to put the $12,000 balance that would be owed on completion of the contract into an escrow account with Defendant’s attorney. Plaintiff refused, and Defendant caused the LLC to perform no further work on the pole barn.
As winter was approaching, Plaintiff paid another construction company to complete the pole barn at a cost of approximately $30,000. On November 20, 2012, Defendant individually signed a Cognovit Note in favor of Plaintiff in the principal amount of $15,000 with interest at 3% per annum “as settlement for an alleged default” on the contract to build the pole barn. [PI. Ex. 12A]. While Defendant has made some payments on the note, it is undisputed that the note has not been paid in full.
LAW AND ANALYSIS
I. 11 U.S.C. § 523(a)(2)(A)
Plaintiff seeks a determination that a debt owed to him by Defendant in connection with the construction of the pole barn is nondischargeable under 11 U.S.C. § 523(a)(2)(A). Exceptions to discharge are to be strictly construed against the creditor and liberally in favor of the debtor. Rembert v. AT&T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998).
Section 523(a)(2)(A) excepts from discharge a debt “for money, property, [or] services,... to the extent obtained by — (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition .... ” In order to except a debt from discharge under this section due to false pretense or false representation, a plaintiff must prove the following elements by a preponderance of the evidence: (1) the debtor obtained money, property, services or credit through a material misrepresentation, either express or implied, 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) the creditor’s reliance was the proximate cause of loss. Rembert, 141 F.3d at 280-81. A debtor’s intent to defraud a creditor is measured by a subjective standard and must be ascertained by the totality of the circumstances of the case at hand. Id. at 281-82. A finding of fraudulent intent may be made on the basis of circumstantial evidence or from the debtor’s “course of conduct,” as direct proof of intent will rarely be available. Hamo v. Wilson (In re Hamo), 233 B.R. 718, 724 (6th Cir. BAP 1999). However, “if there is room for an inference of honest intent, the question of nondischargeability must be resolved in favor of the debtor.” ITT Final Servs. v. Szczepanski (In re Szczepanski), 139 B.R. 842, 844 (Bankr. N.D. Ohio 1991).
The ' preamble to Section 523(a)(2)(A) states that the exception to discharge applies to any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by” certain specified misconduct. Defendant owes a debt to Plaintiff evidenced by the Cognovit Note, although Plaintiffs contract was with the LLC and his $30,000 check was deposited into the LLC’s bank account. The United States Court of Appeals for the Sixth Circuit *527holds that a creditor may fall within § 523(a) discharge exceptions by proving some direct or indirect tangible or intangible financial benefit to the debtor. See Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172 (6th Cir. 1996)(“We therefore reject debtor’s implication that a debt is nondischargeable under section 523(a)(2)(4) only when the creditor proves that the. debtor directly and personally received every dollar lost by the creditor.”); cf. Cohen v. de la Cruz, 523 U.S. 213, 218, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998)(“all liability arising from fraud” is nondischargeable); Marks v. Hentges (In re Hentges), 373 B.R. 709, 728-29, n.14 (Bankr. N.D. Okla. 2007)(notes an issue post-Cohen whether the ‘benefits theory’ has been abrogated and thus no proof of benefit to the debtor is required to bring a debt within an exception to discharge); First Am. Title Ins. Co. v. Speisman (In re Speisman), 495 B.R. 398, 403 (Bankr. N.D. Ill. 2013)(same). In Brady, a creditor successfully established a benefit to the debtor with proof that a corporation he controlled received $40,000 of the creditor’s money. A third party may thus be the direct beneficiary of a fraud, but if a debt- or is the perpetrator and obtains some indirect benefit, the debt owed to the injured party may be found to be nondis-chargeable. Haney v. Copeland (In re Copeland), 291 B.R. 740, 760-61 (Bankr. E.D. Tenn 2003).
As the Sixth Circuit recently declined to do, Leonard v. RDLG, LLC (In re Leonard), 644 Fed.Appx. 612, 618, 619 (6th Cir. Mar. 28, 2016), this court need not decide whether “the benefit theory” of “obtained by” applied in Brady is a required element of proving a cause of action under § 523(a)(2)(a) after Cohen. The court finds that Defendant did obtain a financial benefit from Plaintiffs payment deposited into the LLC’s bank account. Defendant was the principal of and controlled the LLC. It provided his livelihood. As the bank statements show, this payment kept the LLC going through August 2009. Also, on September 3, 2009, the sum of $2,510.00 was paid from the LLC bank account to Defendant. [PL Ex. 8R]. The court infers that it is unlikely this payment would have been possible had Plaintiffs check not bulked up the account as it did in August. Plaintiffs check was the largest deposit by a factor of two in those two months. [PI. Exs. 7A, 7D]. The court finds that Plaintiff has presented sufficient facts, if necessary as a matter of law, to show he conferred a financial benefit on Defendant within the Brady analysis, warranting the court’s further consideration of whether a debt owed by Defendant to Plaintiff arose from Defendant’s conduct of a kind proscribed by § 523(a)(2)(A).
Two representations by Defendant are at issue in this case.
Plaintiff first argues that Defendant never intended to cause the LLC to complete construction of the pole barn and that, as a result, he incurred approximately an additional $30,000 expense. While a mere breach of contract will not support a finding of fraud, “any debtor who does not intend to perform a contract from its inception has knowingly made a false representation.” Stifter v. Orsine (In re Orsine), 254 B.R. 184, 188 (Bankr. N.D. Ohio 2000). Plaintiff has not met his burden of proving that, at the time the contract was signed and he paid the $30,000, Defendant did not intend to have the LLC complete the pole barn.
The framing materials for the pole bam, as well as tools and equipment, were delivered to the job site. Defendant had a crew of four or five people working at the job site for approximately two weeks where they completed construction of eighty-five percent of the framing of the pole barn. It *528is clear that at the end of September, shortly after which work on the pole barn ceased, the LLC did not have funds in its checking account to purchase the metal required to finish to pole barn. According to Defendant, his cost for the metal would have been approximately $15,000 while the balance in the LLC’s account was only $4,355.37 on September 30, 2009. Nevertheless, it was Defendant’s position in November, in light of the deterioration in the parties’ relationship by that time, that he would still complete the pole barn if Plaintiff deposited the $12,000 balance under the contract in escrow with Defendant’s attorney. The court finds it unlikely that he would suggest such a course of action if he never intended to complete the pole barn. Whether or not Defendant was actually sick during the month of October, he did have his work crew performing another job during that time, perhaps in order to obtain funds that would be needed to buy the metal for Plaintiffs pole barn. The recoi’d is silent as to the amount of funds the LLC received during October from other customers. But together with approximately $4,000 in the LLC’s account and the $6,000 to which the LLC would have been entitled when the framing of the pole barn was complete, it is possible that the LLC would have had the funds to buy the metal to complete Plaintiffs pole barn. While Defendant’s business practices may be suspect and while he may have breached the parties’ contract, this evidence, without more, does not convince the court that Defendant , never intended to cause completion of the pole barn at the time Plaintiff paid $30,000 to the LLC.
More problematic for Defendant is his representation to Plaintiff that he found a supplier in southern Ohio, J & H Construction, from which the materials for Plaintiffs pole barn would be purchased. There was no supplier called J & H Construction in southern Ohio from which Defendant intended to have the LLC buy materials for Plaintiffs project. That the framing materials were immediately purchased from Menard’s within four days of the deposit of Plaintiffs check in the LLC’s bank account, using approximately half of the funds advanced by Plaintiff, shows the court that Defendant knew this representation was false. Nor do Plaintiffs Exhibits 7A-7F and 8A-Z1 showing activity in the LLC’s bank account through September 30, 2009, reflect any payments to a J & H Construction.
Given the fact that J & H Construction is the company name under which Defendant formerly did business and the fact that he knew he could deposit the check in the LLC’s account rather than actually use it entirely for the purchase of materials for Plaintiffs pole barn, the court finds that he made the representation with the intent to deceive Plaintiff, That deception allowed the flexibility to juggle funds in the LLC’s bank account as needed instead of using the entire $30,000 to buy materials for Plaintiffs pole barn as required by the contract. As it is, the LLC’s National City account statements for August and September 2009 show Non-Sufficient Funds Fees being charged in each month. [PI. Exs. 7C, 7E].
In making his first check payable to J & H Construction, Plaintiff relied on the information provided by Defendant as principal of the LLC. Plaintiff was justified in doing so to seize the precise protective advantage offered in the LLC’s promotional materials of paying directly for project materials. The court does not see any red flags in the parties’ described interactions up to that point that should have caused Plaintiff to dig deeper into the putative business of an entity called J & H Construction. Nor would the court expect a *529consumer like Plaintiff entering into a project like this to do so.
As a result of Plaintiffs justifiable reliance on Defendant’s misrepresentation, the LLC was able to use some of the funds advanced by Plaintiff other than for the purchase of materials for Plaintiffs pole barn. Only $14,072.40 of Plaintiffs $30,000 payment was used to purchase the required materials. The balance of those funds was never refunded to Plaintiff and, as a result, he incurred the cost of purchasing the remaining materials needed to finish the pole barn (ie. the outside metal walls and roof). Defendant estimated that cost to be $15,000. Plaintiffs reliance was thus the proximate cause of his loss of $15,000, which is the amount Defendant individually agreed to pay Plaintiff pursuant to the Cognovit Note signed by him on November 20,2012.
II. Liquidation of Debt
In the Sixth Circuit, bankruptcy courts may also enter a final money judgment on the amount of a nondischargeable claim. Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir. 1993)(pre-Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)); Hart v. Southern Heritage Bank (In re Hart), 564 Fed.Appx. 773, 776 (6th Cir. 2014)(post-Stern). The Sixth Circuit has never held, however, that a bankruptcy court must, do so. In re Leonard, 644 Fed.Appx. at 620.
The court declines to enter a money judgment in favor of Plaintiff on the non-dischargeable debt. First, the prayer for relief in Plaintiffs complaint asks only for “the Bankruptcy clerk [sic] to not allow a discharge of this debt.” [Doc. # 1]. Second, the trial record does not contain evidence allowing the court to liquidate the amount of the debt. While there is no dispute that Defendant made some payments on the Cognovit Note and that it has not been paid in full — thus Defendant owes Plaintiff a nondischargeable debt-the court lacks evidence from which it can liquidate the amount for purposes of entering a money judgment. If it is necessary to do so, a state court can liquidate the debt and enter a money judgment on the non-dischargeable debt.
CONCLUSION
For the foregoing reasons, the court finds that Plaintiff did not meet his burden of proving that Defendant never intended to complete the contract to build a pole barn for Plaintiff. The court further finds that Plaintiff did meet his burden of proving that Defendant misrepresented to whom the $30,000 check should be made payable for materials and that the debt owed by Defendant pursuant to the Cogno-vit Note is a debt for money obtained by that false representation that is nondis-chargeable under 11 U.S.C. § 523(a)(2)(A).
The court will enter a separate judgment in accordance with this Memorandum of Decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500485/ | MEMORANDUM OPINION
Marian F. Harrison, US Bankruptcy Judge
This matter is before the Court upon Paul Allen’s (“Mr. Allen”) complaint to determine the dischargeability of his claim pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(10). Mr. Allen also asserts that the debtor, Michael Ross Smith (“Mr. Smith”), violated the Tennessee Consumer Protection Act (“TCPA”) and that he is entitled to attorney fees and treble damages. For the following reasons, which represent the Court’s findings of fact and conclusions of law, pursuant to Federal Rule of Bankruptcy Procedure 7052, the Court finds that Mr. Allen’s claim is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(10) and that Mr. Smith violated the TCPA.
I. BACKGROUND
Diatherix Laboratories, Inc. (“Diatherix”) developed cutting edge medical testing technology and contracted with Diagnostic Network Alliance, LLC (“DNA”) to be the exclusive distributor of this technology in the United States. Rather than using an inside sales force, DNA set up a series of regional distributors. Paul Ketchel, a founder and chief operating officer of DNA contacted Mr. Smith about the possibility of getting involved in the distribution of Diatherix’s testing. In response, Mr. Smith began the creation of Geneosis Distributing LLC (“Geneosis”) in April 2008. Mr. Smith testified that he used his own money, including his 401k, during the startup phase of Geneosis. On July 15, 2008, Geneosis was officially formed. Initially, Mr. Smith was the 100% owner of Geneosis and retained all voting rights. He never invested any capital into Geneosis. In October 2008, Mr. Smith needed more funds and received loans from two of his acquaintances, John Scott (“Mr. Scott”) and Stephen Proctor (“Mr. Proctor”) for $100,000 each. Eventually, these loans were converted into equity in Geneosis. Mr. Scott and Mr. Proctor, as well as John Yoste (“Mr. Yoste”), became officers and voting members of Geneosis. The voting members of Geneosis, with the exception of Mr. Yoste who lived out of town, were all members of the same country club as were Mr. Allen and Jason Roberts (“Mr. Roberts”), who had been friends with Mr. Smith since childhood. At the time, Mr. Allen and Mr. Roberts worked together as certified financial planners. Talk at the country club eventually led to Mr. Allen and Mr. Roberts having a meeting with Mr. Smith about potentially investing in Geneosis. The parties went over a spreadsheet with information about Geneosis, budgets, and sales forecasts. The spreadsheet reflected that Mr. Smith in*536tended to take a salary of $15,000 per month. There was discussion regarding Mr. Smith’s potential salary but the testimony indicates that Mr. Smith told Mr. Allen and Mr. Roberts that he would not receive a salary until Geneosis started generating income. Mr. Roberts had a second meeting with Mr. Smith and the other officers of Geneosis. Afterwards, Mr. Allen and Mr. Roberts decided to invest in Gen-eosis. Mr. Allen signed a Letter of Intent to purchase the units in Geneosis from Mr. Smith on December 19,2008.1
Mr. Allen provided two checks made payable to Geneosis. The first check, dated December 22, 2008, was from Mr. Allen’s mother in the amount of $40,000. Mr. Allen testified that Mr. Smith insisted that he would need the investment immediately, so Mr. Allen asked his mother to give him the money for part of the investment. The second check, dated February 10, 2009, was written by Mr. Allen for $20,000. Both checks were endorsed by Mr. Smith and deposited into the Geneosis bank account. It was Mr. Allen’s understanding that he was investing in Geneosis and that his money would be used to further the company, grow a sales force, expand revenues, and cover salaries and expenses. Mr. Smith testified that he was selling his own shares in Geneosis and that the proceeds from the sales of units were his personally. Mr. Smith did not explain why the checks were written to Geneosis if the funds were to go directly to him.
The day prior to receipt of Mr. Allen’s $40,000 investment, December 21, 2008, Mr. Smith’s two personal bank accounts and Geneosis’ bank account had a combined negative balance of approximately $330. The $40,000 was deposited into Gen-eosis’ bank account on December 22, 2008, and that same day, Mr. Smith withdrew $10,000 ($7000 deposited into his personal bank account, $3000 taken as cash). The next day, December 23, 2008, Mr. Smith wrote himself a check for $20,000 out of the Geneosis bank account and deposited it into his personal account. One week later, Mr. Smith wrote himself a check for $9000 out of the Geneosis bank account and deposited it into his personal account. Accordingly, one week after Mr. Allen’s initial $40,000 investment, the Geneosis bank account had a balance of $975.57.
On February 12, 2008, two days after Mr. Allen’s second check was received, Mr. Smith wrote a $20,000 check to himself out of the Geneosis account and deposited it into his personal account. At that point, Mr. Smith’s bank accounts had a negative balance in the amount of $2586.57. By March 18, 2009, Mr. Smith only had a combined total of $15 in his personal bank accounts, and Geneosis had $1075 in its bank account. By April 17, 2009, Geneosis’ bank account had a balance of $75.57. From the creation of Geneosis on July 15, 2008, through March 18, 2009 (roughly eight months), Mr. Smith took a total of $305,120 out of Geneosis. Prior to May 15, 2009, Geneosis did not generate any reve*537nue. Also prior to May 15, 2009, Mr. Smith was the only individual who received any funds from Geneosis.
In the two years Geneosis existed, Mr. Smith took $611,000 out of Geneosis. The bank records reflect that Mr. Smith withdrew funds from Geneosis and put them into his personal accounts and wrote checks payable to cash and signed them. Mr. Smith asserts that any funds he received for the purchase of his stock belonged to him personally. Yet, Mr. Smith testified that “guaranteed payments were the terms that we used for salaries,” and Geneosis’ tax records reflect that Mr. Smith took $225,120 in guaranteed payments in 2008 and $277,110 in 2009. Mr. Smith’s personal tax records reflect that he only claimed $49,878 in self-employment income in 2008 and $43,613 in 2009. The $277,110 paid to Mr. Smith in 2009 was over $100,000 more than Geneosis generated in gross sales that year. In other words, the lion’s share of Geneosis’ expenses in 2009 went to Mr. Smith. The amended operating agreement, memorializing Mr. Allen’s non-voting units, was not finalized until March 19, 2009. By then, his entire investment had been spent.
There was endless testimony of the events that led to the demise of Geneosis, but most was irrelevant to the issues presented. In December 2009, DNA learned that its master distribution contract from Diatherix was being terminated. As a result, in March 2010, DNA terminated its contracts with all of its distributors, including Geneosis. Without the distribution rights, Geneosis’ operations came to an end. There was discussion of Geneosis suing DNA for unpaid commissions in the amount of $350,000, but DNA threatened to countersue for tortuous interference.. The allegations of tortuous interference revolved around emails that Mr. Proctor sent to and received from the president of Diatherix and some of DNA’s other distributors. After these allegations came to light, the members of Geneosis decided not to pursue litigation. Eventually, Geneosis paid Mr. Allen back $10,235 of his investment, leaving a balance of $49,765.
On January 14, 2011, Mr. Allen filed a complaint against Mr. Smith in state court, alleging claims against Mr. Smith for fraud and promissory fraud, breach of fiduciary duty, and violations of the TOPA. The trial was set for April 12, 2012, but it did not go forward because Mr. Smith filed a Chapter 7 bankruptcy on April 10, 2012. In his petition, Mr. Smith listed Mr. Allen as having an unsecured nonpriority claim for a business loan in an unknown amount. Mr. Allen did not file a proof of claim in that case, but he did file a complaint to determine dischargeability. The Court granted the U.S. Trustee’s motion to approve stipulation of waiver of discharge on November 28, 2012, and Mr. Allen voluntarily dismissed the adversary that same date. Mr. Smith was later charged with three counts of bankruptcy fraud and eventually pled guilty to one count of making a false statement in connection with his bankruptcy.
On October 2, 2013, Mr. Smith filed a voluntary Chapter 11 petition. A motion to convert the case to Chapter 7 was filed on behalf of Mr. Allen and Mr. Proctor. After a hearing, the Court granted the motion, and the case was converted to Chapter 7 on March 24, 2015. Mr. Allen filed this adversary complaint on January 6, 2014.
II. DISCUSSION
Generally, exceptions to discharge are to be construed strictly against the creditor. Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 59 L.Ed. 717 (1915). The burden of proof falls upon the party objecting to discharge to prove by a preponderance of the evidence that a partieu-*538lar debt is nondischargeable. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The primary purpose of bankruptcy is to grant a “fresh start to the honest but unfortunate debt- or.” Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citation and internal quotation marks -omitted). Because the bankruptcy discharge is central to a “fresh start,” discharge exceptions “are to be strictly construed against the creditor and liberally in favor of the debtor.” Risk v. Hunter (In re Hunter), 535 B.R. 203, 212 (Bankr. N.D. Ohio 2015) (citations omitted).
A. 11 U.S.C. § 523(a)(2)(A)
Under 11 U.S.C. § 523(a)(2)(A), a creditor has the burden of proving by a preponderance of the evidence five elements:
(1) a materially false representation (2) made with knowledge of its falsity and (3) with the intent to deceive, (4) reasonably relied upon by the creditor and (5) proximately resulting in the creditor’s loss.
Wilson v. Mettetal (In re Mettetal), 41 B.R. 80, 87 (Bankr. E.D. Tenn. 1984) (citation omitted); Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998) (citation omitted).
1. Material Misrepresentation with Knowledge of its Falsity
Based on the testimony, the Court believes that Mr. Smith misrepresented to Mr. Allen that his investment would be used for the express purpose of building a sales force, expanding and creating distribution channels, and creating revenue streams for Geneosis. Initially, it appeared that the issue was whether Mr. Smith informed his investors that he intended to take a substantial monthly salary from Geneosis. This, however, is irrelevant because now Mr. Smith asserts that Mr. Allen’s payments were to him personally for the purchase of his stock in Geneosis (even though the checks were written to Geneosis rather than Mr. Smith). In fact, even Mr. Roberts, who testified on behalf of Mr. Smith, did not realize until after the fact that he was buying the units from Mr. Smith personally rather than investing in Geneosis. Based on the proof, the Court finds that Mr. Smith represented to Mr. Allen that his investment would be used for the express purpose of building a sales force, expanding and creating distribution channels, and creating revenue streams for Geneosis when his intent was to use the funds to support his personal lifestyle.
2. Intent to Deceive
A debtor’s intent to defraud a creditor is measured by a subjective standard and must be ascertained by the totality of the circumstances of the case. Rembert at 281-82. A finding of fraudulent intent may be made on the basis of circumstantial evidence or from the debtor’s “course of conduct,” as direct proof of intent will rarely be available. Hamo v. Wilson (In re Hamo), 233 B.R. 718, 724 (6th Cir. B.A.P. 1999). “[A] debtor’s intent to deceive a creditor occurs when the debtor makes a false representation which the debtor knows or should have known would induce another to advance money, goods or services to the debtor.” Bernard Lumber Co. v. Patrick (In re Patrick), 265 B.R. 913, 916 (Bankr. N.D. Ohio 2001) (citation omitted).
Mr. Smith’s intent to deceive is reflected by his words and actions. Mr. Smith represented to Mr. Allen that he was investing in Geneosis, not paying Mr. Smith individually for his stock in Geneosis. Even Mr. Allen’s checks were written to' Geneosis, *539rather than Mr. Smith. Although presented as funds for Geneosis, Mr. Allen’s initial investment was essentially gone within two weeks, and his second investment was gone within two days. All of these funds went to Mr. Smith either by transfer or check written by himself. Mr. Smith’s intent is also reflected in his running of Geneosis. Mr. Smith testified that no one, including himself, invested any capital in Geneosis. Mr. Smith testified that funds received from investors were for the purchase of his stock, but he also testified that the “guaranteed payments” he received were for his salary and the reimbursement of expenses. There is no documentation to collaborate his testimony regarding either scenario. Instead, the record shows that Mr. Smith took funds from Geneosis but never documented a basis. Even when Geneosis was not generating revenue, Mr. Smith was taking large amounts of money out of Geneosis. In 2008, Mr. Smith took $310,000, in 2009, he took $277,000, and by the time Geneosis collapsed, Mr. Smith had drawn a total of $611,000.
3. Justifiable Reliance
In Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), the Supreme Court addressed the reliance element of 11 U.S.C. § 523(a)(2)(A). The question presented to the Court was the requisite “level of a creditor’s reliance on a fraudulent misrepresentation necessary to place a debt ... beyond release.” Id. at 61, 116 S.Ct. 437. On this question, the Court held that only justifiable reliance was required. Id. at 77, 116 S.Ct. 437. Justifiable reliance is based on a subjective interpretation. Frost & Co., Inc. v. Smithey (In re Smithey), 474 B.R. 830, 838 (Bankr. N.D. Ohio 2012) (citation omitted).
Under the justifiable reliance standard, a creditor is merely required to act appropriately according to his individual circumstances. Id. (citation omitted). In other words, 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.” Field v. Mans, 516 U.S. at 71, 116 S.Ct. 437 (citation omitted).
Mr. Allen justifiably relied on Mr. Smith’s statements regarding how his investment would be used. There is no question that Geneosis was a high risk investment, but there was no reason to believe that Mr. Smith planned to siphon Mr. Allen’s money out of Geneosis and into his own accounts almost immediately upon receipt.
4. Proximate Cause
“Proximate cause is something more than ‘speculation as to what the creditor might have done in hypothetical circumstances.’ ” Haney v. Copeland (In re Copeland), 291 B.R. 740, 767 (Bankr. E.D. Tenn. 2003) (citation omitted). It depends on whether “the [d]ebtor’s representations [were] the proximate cause of its losses, which depends on whether the [debtor’s] conduct has been so significant and important a cause that the [debtor] should be legally responsible.” Tweedie v. Hermoyian (In re Hermoyian), 466 B.R. 348, 370 (Bankr. E.D. Mich. 2012) (quoting WebMD Practice Servs., Inc. v. Sedlacek (In re Sedlacek), 327 B.R. 872, 888 (Bankr. E.D. Tenn. 2005)). In other words, “[t]here must be a direct link between the alleged fraud and the. creation of the debt.” Id. (internal quotation marks and citation omitted).
The proof showed that Geneosis eventually failed because it lost the distributorship agreement with DNA. It is also clear that Mr. Smith was systematically undermining Geneosis’ viability by bleeding the company dry. Any flexibility the company *540might have had to seek other streams of revenue was impossible given the intentionally engineered under-capitalization of the company. In fact, Mr. Smith testified that he never contributed any capital to Geneosis and that he never considered the funds invested as capital. Instead, he said the contributed funds were his individually from his sale of stock. Mr. Smith’s business model would not likely have succeeded. Geneosis had no capital, Mr. Smith withdrew or transferred funds to himself whenever funds were available, and the voting members agreed they should each receive significant salaries despite the lack of any significant revenue.
Accordingly, the Court finds that Mr. Allen’s claim in the amount of $49,765 is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).
B. 11 U.S.C. § 523(a)(4)
11 U.S.C. § 523(a)(4) provides that a discharge can be denied for a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” Section 523(a)(4) creates two distinct exceptions to discharge: (1) fraud or defalcation while acting in a fiduciary capacity, and (2) embezzlement or larceny whether or not acting in a fiduciary capacity. Gribble v. Carlton (In re Carlton), 26 B.R. 202, 205 (Bankr. M.D. Tenn. 1982).
“The phrase ‘while acting in a fiduciary capacity applies only to the words ‘fraud or defalcation’; embezzlement and larceny are separate grounds for non-dischargeability under § 523(a)(4) whether or not a fiduciary relationship existed.” Kilns v. Pierron (In re Pierron), 448 B.R. 228, 240 (Bankr. S.D. Ohio 2011) (citation omitted). Accordingly, “a plaintiff can prevail under § 523(a)(4) by establishing that the [debtor] committed either (1) fraud or defalcation while acting in a fiduciary capacity, or (2) embezzlement, or (3) larceny.” Id.
In order to find a debt nondis-chargeable under 11 U.S.C. § 523(a)(4) for fraud or defalcation, the Sixth Circuit requires, by a preponderance of the evidence: “(1) a pre-existing fiduciary relationship; (2) breach of that fiduciary relationship; and (3) a resulting loss.” Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386, 390 (6th Cir. 2005) (citation omitted).
In the present case, Mr. Allen asserts that Mr. Smith’s actions constitute fraud or defalcation while acting in a fiduciary capacity. Mr. Allen cites T.C.A. §§ 48-249^403 and -404 as creating a fiduciary duty of a member of a limited liability company. Unfortunately for Mr. Allen, whether a relationship falls within the scope of 11 U.S.C. § 523(a)(4) is a question of “federal, not state, law,” id. at 389 (citation omitted), and the concept of fiduciary for purposes of 11 U.S.C. § 523(a)(4) is narrower than it is under state law. Id. at 391. The “fiduciary capacity” component of 11 U.S.C. § 523(a)(4) applies only to those situations involving an express or technical trust. Establishing the existence of such a trust requires the creditor to show: “(1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary.” Ohio Carpenter’s Pension Fund v. Bucci (In re Bucci), 493 F.3d 635, 639-40 (6th Cir. 2007) (citation omitted). “[T]he requisite trust relationship must exist prior to the act creating the debt and without reference to it.” Id. at 642 (internal quotation marks and citations omitted).
There was no proof that an express or technical trust was created. Thus, Mr. Allen’s assertion that Mr. Smith committed fraud or defalcation while acting in a fiduciary capacity must fail.
C. 11 U.S.C. § 523(a)(6)
Pursuant to § 523(a)(6), a debt is nondischargeable when the debt is “for *541willful and malicious injury by the debtor to another entity or to the property of another entity.” This discharge exception requires an injury resulting from conduct that is “both willful and malicious.” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 463 (6th Cir. 1999). “[Ujnless ‘the actor desires to cause consequences of his act, or ... believes that the consequences are substantially certain to result from it,’ ... he has not committed a “willful and malicious injury’ as defined under § 523(a)(6).” Id. at 464 (internal citation omitted). It is insufficient that a reasonable debtor “should have known” that his conduct risked injury to others. Id. at 465 n.10. Instead, the debtor must “will or desire harm, or believe injury is substantially certain to occur as a result of his behavior.” Id. “The conduct ‘must be more culpable than that which is in reckless disregard of creditors’ economic interests and expectancies, as distinguished' from ... legal rights. ... [Knowledge that legal rights are being violated is insufficient to establish malice.’ ” Steier v. Best (In re Best), 109 Fed.Appx. 1, 6 (6th Cir. 2004) (citation omitted). In other words, “[l]ack of excuse or justification for the debtor’s actions will not alone make a debt nondis-chargeable under § 523(a)(6).” S. Atlanta Neurology & Pain Clinic, P.C. v. Lupo (In re Lupo), 353 B.R. 534, 550 (Bankr. N.D. Ohio 2006) (citation omitted).
While the proof of intent is strong, there was no indication that Mr. Smith’s actions were willful. Having observed Mr. Smith and listened to his testimony in several hearings, it is clear to the Court that Mr. Smith’s number one concern was himself. Mr. Smith was motivated by maintaining his lifestyle‘and making more money, and it seems unlikely that he gave any thought to the consequences of his actions in relation to Mr. Allen. Without the element of malice, Mr. Allen’s assertion that his claim is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6) must also fail.
D. 11 U.S.C. § 523(a)(10)
Pursuant to 11 U.S.C. § 523(a)(10), a debt “that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title ... in which the debtor waived discharge, or was denied a discharge under section 727(a)(2), (3), (4), (5), (6), or (7)” is non-dischargeable.
“[T]he effect of having a discharge denied is harsh: it renders all the debts/ claims which could have been included in the petition forever nondisehargeable in bankruptcy, thereby subjecting the debt- or’s assets and future income to all claims of such creditors.” United States Tr. v. Halishak (In re Halishak), 337 B.R. 620, 625 (Bankr. N.D. Ohio 2005). See also Kovacs v. Basford (In re Basford), 363 B.R. 832, 833 (Bankr. N.D. Ohio 2006) (“The effect of § 523(a)(10) is that a debtor cannot discharge a debt in a future bankruptcy proceeding [where] their discharge was previously denied.”).
The plain language of the Code makes clear that the existence of a claim turns on whether a creditor has a right to payment, not whether that-right to payment has been reduced to judgment. See Hutchison v. Birmingham (In re Hutchison), 270 B.R. 429, 441 (Bankr. E.D. Mich. 2001) (“In our view, however, the notion that the Plaintiffs debt to the Defendant would arise upon entry of a court order is incompatible with the Code. ... [A] ‘debt’ is simply ‘liability on a claim.’ 11 U.S.C. § 101(12).... [A] ‘claim’ means nothing more than a ‘right to payment, whether or not such right is reduced to judgment [or] liquidated.’ 11 U.S.C. § 101(5)(A). In light of these criteria, it is obviously incorrect to define the debt owed [the creditor], as *542coming into being if and when she obtains a judgment.”) (citation omitted).
Mr. Smith listed Mr. Allen’s claim in his first petition, and the Court has found that Mr. Allen has a right to payment. Therefore, Mr. Allen’s claim is non-dischargeable pursuant to 11 U.S.C. § 523(a)(10).2
E. Tennessee Consumer Protection Act
“The TCPA provides a private right of action for any consumer who is the victim of ‘unfair or deceptive’ acts in the course of trade or commerce.” Menuskin v. Williams, 145 F.3d 755, 767 (6th Cir. 1998).3 As an initial matter, Mr. Smith argues that TCPA does not apply because a 2011 amendment to the TCPA excluded the sale or marketing of securities from its coverage. See T.C.A. § 47-18-109(h). However, this amendment does not apply to claims accruing prior to October 1, 2011. See 2011 Tenn. Pub. Acts 510, § 24. Because Mr. Allen filed his original state court complaint in January 2011, the amendment does not apply. See Gregory v. Lane, No. 3:11-CV-132, 2012 WL 5289385, *8 (E.D. Tenn. Oct. 24, 2012) (amendment does not apply where plaintiffs filed their complaint on March 18, 2011).
In order to recover under TCPA, a plaintiff must prove: (1) that the defendant engaged in an unfair or deceptive act or practice set forth in T.C.A. § 47-18-104(b); and (2) that the defendant’s conduct caused an ascertainable loss. T.C.A. § 47-18-109(a)(l). Upon a finding that a provision of the TCPA has been violated, the court may award reasonable attorney’s fees and costs. T.C.A. § 47-18-109(e)(l). If the defendant’s conduct was willful or knowing, the court may award treble damages. T.C.A. § 47-18-109(a)(3). “Like punitive damages, treble damages are not intended to compensate an injured plaintiff but rather to punish the defendant amd to deter similar conduct in the future.” Smith Corona Corp. v. Pelikan, Inc., 784 F.Supp. 452, 483-84 (M.D. Tenn. 1992) (citation omitted). In determining whether treble damages should be awarded, a court may consider the following:
(A) The competence of the consumer or other person;
(B) The nature of the deception or coercion practiced upon the consumer or other person;
(C) The damage to the consumer or other person; and
(D) The good faith of the person found to have violated this part.
T.C.A. § 47-18-109(a)(4). All such damages are excepted from discharge under 11 U.S.C. § 523(a)(2)(A). See Cohen v. de la Cruz, 523 U.S. 213, 221, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).
The Court has already found that Mr. Smith engaged in deceptive practices and that his conduct caused an ascertainable loss to Mr. Allen. Accordingly, Mr. Smith violated the relevant version of the *543TCPA. The real question is whether treble damages should be awarded. The Court finds that treble damages are not justified in this ease. While Mr. Smith clearly acted in a deceptive manner, Mr. Allen was not the average consumer on the street. Instead, Mr. Allen was a sophisticated certified financial planner who was taken in by his friend. While the Court does not condone Mr. Smith’s actions, based on the facts of this case, the award of treble damages would not promote the policy behind treble damages,
Accordingly, in addition to Mr. Allen’s claim for $49,765, he is also entitled to reasonable attorney fees. The determination of reasonable attorneys’ fees is necessarily a discretionary inquiry by the trial court. Keith v. Howerton, 165 S.W.3d 248, 250 (Tenn. Ct. App. 2005). Based on Mr. Allen’s testimony, his attorney fees through 2015 were $45,500, and the Court finds that such amount is reasonable and also non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Mr. Allen suggested that his 2016 attorney fees could be addressed by affidavit. The Court declines to award all Mr. Allen’s attorney fees for 2016. Mr. Allen could have sought summary judgment as to his 11 U.S.C. § 523(a)(10) claim, as did his co-plaintiff, Mr. Proctor, in early 2016, and mitigated his costs. While a trial on the TCPA claim would have still been needed, the time spent would have been significantly reduced. Instead, Mr. Allen continued to pursue “scorched earth” litigation without regard for cost. Accordingly, the Court will allow counsel for Mr. Allen to submit an affidavit regarding attorney fees for the first four months of 2016. The Court finds that such fees are reasonable under the circumstances of this case.
HI- CONCLUSION
For the foregoing reasons, the Court finds that Mr. Allen’s claim for $49,765 is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(10). In addition, the Court finds that Mr. Smith violated the TCPA, and therefore, Mr. Allen is entitled to attorney fees in the amount of $45,500 plus attorney fees for January through April 2016, to be submitted by affidavit. The Court declines to award treble dam-áges.
An appropriate order will enter.
. At trial, Mr. Smith argued that the parol evidence rule prohibited any evidence concerning representations made by Mr. Smith prior to the execution of the Letter of Intent. The document in question stated that "[t]his Term Sheet contains the preliminary understanding between the parties with respect to its subject matter and supersedes any prior understandings and agreements between them with respect thereto,” By its own terms, the Letter of Intent was not the final expression of the parties' agreement, and therefore, the parol evidence rule does not apply. See Next Generation, Inc. v. Wal-Mart, Inc., 49 S.W.3d 860, 863 (Tenn. Ct. App. 2000) (citing T.C.A. § 47-2-202). Moreover, as pointed out by Mr. Allen, “the parol evidence rule does not apply to allegations of fraudulent misrepresentation inducing a party to enter a contract.” Shah v. Racetrac Petroleum Co., 338 F.3d 557, 567 (6th Cir. 2003) (citations omitted).
. Related to this issue, Mr. Allen requested that the Court take judicial notice of an arbitrator’s award attached to the complaint filed in a separate adversary. Mr. Smith objected, and the Court took it under advisement. Because the document in question was irrelevant to the issue at hand, it was not considered by the Court.
. In October 2011, T.C.A. § 47-18-104(b)(27) was amended to provide that only Tennessee’s Attorney General was vested with authority to enforce it. See 2011 Tenn. Pub. Acts 510. This amendment applies only to "liability actions for injuries, deaths and losses covered by this act which accrue on or after [October 1, 2011].” 2011 Tenn. Pub. Acts 510, § 24. Accordingly, the prior version of this statute applies in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500487/ | Kressel, Bankruptcy Judge.
David Eugene Yuska appeals from an order of the bankruptcy court1 granting the Iowa Department of Revenue’s motion *548for summary judgment and dismissing his adversary proceeding. We affirm,
BACKGROUND
Yuska filed a Chapter 13 bankruptcy petition on September 29, 2014. The case was later converted to a Chapter 7 case. On February 9, 2015, Yuska filed a complaint against the Iowa Department of Revenue, asking the bankruptcy court to set aside the department’s tax assessments for tax years 2004-2013.
The department filed an answer and asserted defenses of issue and claim preclusion among others. It also filed a motion asking the bankruptcy court to abstain from hearing the constitutional question and the legality of the department’s assessment procedure. It filed another motion asking the court to dismiss Yusuka’s claim regarding the 2007 tax assessment based on claim preclusion because on November 29, 2012, an administrative law judge already decided the issue and Yuska did not appeal that decision. It later moved for summary judgment of the entire proceeding arguing that there were no genuine issues of material fact about the amount of taxes assessed,
Yuska filed numerous responses to, the department’s motions. Yuska made general legal argument as to the constitutionality of the Iowa income tax statute. He argued that the income tax statute was unconstitutional under Article VII, Section 7 of the Iowa constitution. He argued that Iowa Code 422.5 that imposes taxes is unconstitutionally vague because it does not state the object of the tax as required by the constitution but instead another section of Chapter 422 provides the object. He also argued that the department improperly relied on information from the Internal Revenue Service' because that information doesn’t show that it was derived from the United States Internal Revenue Code and he doesn’t owe income tax under the Internal Revenue Code. He also argued that he is no longer a citizen because he renounced his U.S. citizenship and Iowa residency and appeared in court on behalf of “ens legis,” a legal entity that does not owe taxes.
After many continued hearings and extensions for submissions requested by Yuska and granted by the bankruptcy court, the court held a hearing on April 26, 2016 and took the matter under advisement. On May 12, 2016, before the court made a determination of the motion, Yuska filed a motion to file new evidence. The court denied the motion and entered an order stating that no further briefing or supplements would be considered by the court.
In its July 6, 2016 order, the bankruptcy court concluded that there were no genuine issues of material fact. Yuska resided in Iowa and received rental income, wages, salaries, interest, dividends, capital gains and other income while living in Iowa for the tax years in question, but he did not pay Iowa income taxes.
The bankruptcy court concluded that, in Iowa, an administrative determination is given the same preclusive effect as the judgment of a court. The court held that Yuska’s claim 'that he does not owe income tax liability for 2007 is barred by claim preclusion because the bankruptcy court cannot determine the taxes or the legality of the 2007 tax liability that have been decided by the administrative law judge. The court also held that Yuska’s challenge to the department’s right and authority to tax or the department’s assessment procedure is barred by issue preclusion because those arguments were also considered and rejected by the administrative law judge.
The bankruptcy court also considered and rejected Yuska’s other legal argu*549ments. The court held that Yuska’s argument that the income tax statute is unconstitutional because it does not state the object to which the tax is to be applied and required looking to multiple sections to find the tax and object, unpersuasive because Iowa income statute has been upheld by the Iowa Supreme Court as constitutional.
The court also rejected Yuska’s argument that the department did not properly calculate his tax liability because he doesn’t owe any taxes under the Internal Revenue Code. The court held that the “Iowa income tax uses the federal taxable income number to determine the amount of tax owing” and Yuska’s “Iowa tax liability is not tied to his federal tax liability.” The court also held that the fact that Yuska-declared that he renounced his U.S. citizenship does not excuse tax liability and is not an effective renunciation of citizenship. Anyway, the court found Yuska is a tax payer for the tax years in question.
The court also rejected Yuska’s argument that it was improper for the department to impose the “75% fraud penalty for tax years 2011-2013 because the department found that he had a clear pattern of intentionally and repeatedly concealing his income, continuously failing to submit income tax returns, and evading paying taxes when” assessed. The court held that the department provided clear and convincing evidence that showed the fraud penalties were proper. The court also rejected Yus-ka’s argument that the bankruptcy court did not have jurisdiction over him because he was a minor during the adversary proceeding and when the department made the assessment. The court granted the department’s summary judgment motion and dismissed the adversary proceeding.
ISSUES ON APPEAL
Yuska appeals the bankruptcy court’s order granting summary judgment to the department.2 Yuska raises three main issues on appeal. He asserts that the bankruptcy court improperly denied his motion to file newly discovered evidence. He argues that the Iowa income tax statute is unconstitutional because the statute does not have an object for the tax in the same statute as required by the Iowa constitution. He also states that the income tax statute is void for vagueness and therefore unconstitutional.
ANALYSIS
Standard of Review
' We review a bankruptcy court’s grant of summary judgment de novo. In re Farmland Indus., Inc., 408 B.R. 497, 503 (8th Cir. B.A.P. 2009) (8th Cir. 2011) (Citing Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir.2008)). The applicability of collateral estoppel is a question of law which we also review de novo. Id. (Citing United States v. Brekke, 97 F.3d 1043, 1046-47 (8th Cir.1996); Osborne v. Stage (In re Stage), 321 B.R. 486, 491 (8th Cir. BAP 2005)).
Denial of Motion to Submit New Evidence
Yuska argues that it was improper for the bankruptcy court to deny his motion to file newly discovered evidence. Because the motion would be untimely under either Fed. R. Civ. P. 52 or 59, we construe that motion as one under Fed. R. Civ. P. 60(b)(2) made applicable through Fed. R. Bank. P. 9024. The court’s denial of the motion to submit new evidence is reviewed for abuse of discretion. Harley v. Zoesch, 413 F.3d 866, 870 (8th Cir.2005); Broadway v. Norris, 193 F.3d 987, 989 *550(8th Cir.1999). A moving party must show that newly discovered evidence is material and would probably produce a different result. Greyhound Lines, Inc. v. Wade, 485 F.3d 1032, 1036 (8th Cir. 2007).
Yuska’s motion did not deal with newly discovered evidence at all, but was just an attempt to make more arguments for why the income statute was void for vagueness. The bankruptcy court did not abuse its discretion in denying the motion. Additionally, Yuska was given ample time to supplement his case. He had from November 16, 2015, when the department filed its motion and until April 26, 2016’s hearing date, to file additional documents. Yuska was afforded numerous extensions to file additional documents and rescheduled hearings. We think the bankruptcy court’s patience resembled that of Job.
Motion for Summary Judgment
“Summary judgment is appropriate only when all the evidence presented demonstrates that there is no genuine issue as of any material fact and the moving party is entitled to judgment as a matter of law.” Jafarpour v. Shahrokhi, (In re Shahrokhi), 266 B.R. 702, 706 (8th Cir. B.A.P. 2001). In a summary judgment motion, the initial burden of proof is on the moving party to demonstrate “that there is an absence of evidence to support the non-moving party’s case.” Jafarpour, 266 B.R. at 706 (Quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Once this is met, the burden then shifts to the nonmoving party “to go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.” Id. (Internal quotation omitted). The bankruptcy court carefully considered the facts asserted by both parties and determined that the facts were undisputed. We agree.
Claim Preclusion
The doctrine of res judicata, also known as claim preclusion is a question of law which we review de novo. United States v. Brekke, 97 F.3d 1043, 1046-47 (8th Cir.1996); Osborne v. Stage (In re Stage), 321 B.R. 486, 491 (8th Cir. B.A.P. 2005). Claim preclusion “provides a valid and final judgment on a claim precludes a second action on that claim or any part of it.” Spiker v. Spiker, 708 N.W.2d 347, 353 (Iowa 2006). Therefore, the rule “applies to every matter which was offered and received to sustain or defeat the claim or demand.” Id. It also applies to any other admissible matter which could have been offered for that purpose, foreclosing litigation of matters that have been litigated. Id. The party against whom preclusion is asserted had a “full and fair opportunity” to litigate the claim or issue in the first action. Id.
Thus, the party seeking to invoke the doctrine of claim preclusion must establish three elements: (1) “the parties in the first and second action were the same”; (2) “the claim in the second suit could have been fully and fairly adjudicated in the prior case”; and (3) “there was a final judgment on the merits in the first action.” Id. (Citing Arnevik v. Univ. of Minn. Bd. of Regents, 642 N.W.2d 315, 319 (Iowa 2002) (citations omitted).
We hold that the bankruptcy court did not err when it gave a res judi-cata effect to Yuska’s claim. Under Iowa law, the administrative law judge’s determinations are given the same preclusive effect as the judgment of a court. George v. D.W. Zinser Co., 762 N.W.2d 865, 868 (Iowa 2009). The court properly held that the administrative law judge’s decision was á prior judgment rendered by a court of *551competent jurisdiction that was a final judgment on the merits. Yuska raised the same cause of action as he did when he challenged the 2007 assessment in the administrative proceeding, and both parties in that action and this case were the same.
Issue Preclusion
The doctrine of collateral es-toppel or issue preclusion “prevents parties to a prior action in which judgment was entered from relitigating in a subsequent action issues raised and resolved in the previous action.” Hunter v. City of Des Moines, 300 N.W.2d 121, 123 (Iowa 1981). Therefore, “when an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Id.
The party seeking to invoke the doctrine of issue preclusion must establish the following four elements: (1) “the issue concluded must be identical”; (2) “the issue must have been raised and litigated in the prior action”; (3) “the issue must have been material and relevant to the disposition of the prior action”; and (4) “the determination made of the issue in the prior action must have been necessary and essential to the resulting judgment.” Id.
We hold that the bankruptcy court did not err when it applied collateral estoppel to Yuska’s claim regarding the constitutionality of Iowa’s income statute and the department’s assessment procedures because that same issue was litigated before and decided by the administrative law judge. The administrative law judge made a determination about the issue that was an essential decision in that action. Its determinations have the same preclusive effect as the judgment of a court. George, 762 N.W.2d at 868. Yuska’s challenge to the income statute and the department’s procedure are collaterally es-topped.
Void for Vagueness
Yuska argues that the Iowa income statute is void for vagueness and therefore unconstitutional. Yuska is making this argument for the first time on appeal. We normally do not consider new arguments on appeal. Krigel v. Sterling National Bank (In re Ward), 230 B.R. 115, 118 (8th Cir. B.A.P. 1999) (Citing Forbes v. Forbes (In re Forbes), 218 B.R. 48, 51 (8th Cir. B.A.P. 1998). However, we may consider the new argument if it merely constitutes a shift in approach. Id. (Citing Universal Title Ins. Co. v. United States, 942 F.2d 1311, 1314 (8th Cir. B.A.P.1991)). We also have discretion to consider an issue for the first time on appeal “when the argument involves a purely legal issue in which no additional evidence or argument would affect the outcome of the case.” Id.
Yuska’s argument that the Iowa income statute is not constitutional because it is void for vagueness is not merely a shift in approach. This argument requires factual support. Nevertheless his argument still fails because the Iowa Supreme Court has upheld the income statute as constitutional on numerous occasions. Hale v. Iowa Bd. of Assessment and Revenue, 223 Iowa 321, 271 N.W. 168, 174 (1937); Vilas v. Iowa State Bd. of Assessment and Review, 223 Iowa 604, 273 N.W. 338, 346 (1937). Additionally, the Rooker-Peldman doctrine prevents the bankruptcy court and us from reviewing the state supreme court’s decisions.
Other Arguments
Yuska argues that Iowa is not a state and therefore he doesn’t owe taxes. We disagree. We hold that Iowa is a state. *552He also argues that he is not a citizen of the U.S. or a resident of Iowa and therefore doesn’t owe taxes. But even if that were true, non-citizens must pay taxes, too. Yuska’s other arguments are frivolous and we reject them.
CONCLUSION
We find no error in the bankruptcy court’s legal conclusions or its decision. Accordingly, we affirm.
. The Honorable Thad J. Collins, Chief Judge, United States Bankruptcy Court for The Northern District of Iowa.
. Yuska requested an oral argument. We hold that it will not be helpful to this appeal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500488/ | SALADINO, Chief Judge.
On March 10, 2014, the bankruptcy court1 denied Starion Financial’s (“Star-ion”) motion to compel payment of Star-ion’s attorneys’ fees and expenses in accordance with the confirmed Chapter 11 plan of reorganization and granted the Debtors’ motion to disallow Starion’s attorneys’ fees and costs. Starion appealed to this panel, and we reversed the decision of the bankruptcy court and remanded the case for consideration of the issues as to timeliness and reasonableness of the requested fees and costs.2
The Debtors Stephen D. and Karen A. McCormick now appeal from the bankruptcy court’s order granting in part and denying in part Starion’s motion to compel payment of fees under the confirmed plan of reorganization, and granting in part and denying in part the Debtors’ motion to disallow attorneys’ fees and costs claimed by Starion. We have jurisdiction of this appeal from entry of the bankruptcy court’s final order pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.
BACKGROUND
Prior to bankruptcy filing, the Debtors were engaged in a variety of businesses, including construction, real estate investment, and development. The Debtors operated their businesses individually and through a number of limited liability companies that they owned and controlled, including Misty Waters, LLC; Steve and Karen McCormick, LLC; and Construction Financial Services, LLC.
Over the course of several years the Debtors, their companies, and Starion entered into a series of loan transactions that included execution by the Debtors and their companies of a number of loan documents, including promissory notes secured by mortgages encumbering various parcels of real estate. The Debtors also executed personal guarantees of the obligations owed to Starion by the entities owned by the Debtors.
Defaults under the loans resulted in a workout agreement dated July 26, 2012, among Starion, the Debtors, and their companies. As part of that agreement, Starion agreed to forbear from exercising its default remedies under certain conditions. The Debtors and their companies reaffirmed their obligations to Starion under the loan documents and the Debtors and Misty Waters, LLC executed a new mortgage encumbering a development called Misty Waters for up to $7 million.3 The Debtors also executed and delivered confessions of judgment, apparently to secure their guaranty obligations. The work*555out agreement provided that the confessions of judgment could be immediately filed with the clerk of the court and transcribed to such other jurisdictions as Star-ion desired. The judgments were entered on July 27, 2012, in Burleigh County, North Dakota, and Starion promptly transcribed them to other counties in North Dakota, thereby creating judgment liens in counties where the Debtors owned real estate.
The Debtors filed a voluntary Chapter 11 petition on August 29, 2012, and on August 9, 2013, filed a second amended plan of reorganization. Starion filed its objection to confirmation raising a number of objections, including: “Starion, as an ov-ersecured creditor is entitled to its attorney’s [flees. The Plan does not provide for payment [of] Starion Financial’s attorney’s fees claim.”
Starion, the Debtors, and their companies settled Starion’s plan objection with an addendum to the Debtors’ second amended plan dated September 10, 2013 (“Starion Addendum”).4 The Starion Addendum identified all of the obligations owed to Starion by the Debtors and their companies, and agreed that the total indebtedness owed to Starion as of July 1, 2013, included principal of $6,272,116.66, interest of $314,242.86, and interest accrual at a daily rate of $1,019.23. The parties agreed upon the plan treatment and repayment terms for that indebtedness. Among other provisions, the Starion Addendum stated:
Collection Costs. Debtors agree to pay Starion’s allowable attorney’s fees and costs associated with both Debtors’ bankruptcy proceedings including but not limited to reasonable attorneys’ fees, consulting, appraisal, filing fees, late fees, etc. (collectively referred to as “Fees”) through the Plan. The procedure for allowance of such attorneys’ fees and costs will be as provided in the Plan.
On September 13, 2013, the Debtors’ plan, incorporating the Starion Addendum, was confirmed by the bankruptcy court. Section 8.01(c) of the confirmed plan defines “Allowable Attorneys’ Fees and Costs” as “a claim against the debtors for an oversecured creditor’s attorney’s fees and costs incurred in connection with the creditor’s secured claim.” That section goes on to describe the procedure for allowance of the fees and costs as follows:
Any Allowable Fees and Costs must be approved by Debtors before payment is disbursed. At least ten days prior to the Effective Date of the Plan, the creditor and/or its counsel, shall submit an itemized statement (reflecting date, a description of the services, increments of time spent, and hourly rate being charged), to the Debtors and their counsel, for approval. If the parties cannot come to an agreement or resolution as to the amount of the Allowable Attorneys’ Fees and Costs to be paid, the matter shall be determined by the Bankruptcy Court, upon notice and hearing. No payment of Allowable Attorneys’ Fees and Costs will be due until either the agreement of the parties or a final determination by the Bankruptcy Court that those amounts are due under the Plan.
On October 3, 2013, Starion submitted an itemized statement to the Debtors for various costs including interest, late fees, real estate taxes, and appraisal and engineering fees. A few days later on October 7, 2013, Starion submitted an updated statement that included its attorneys’ fees. Taking the position that Starion was not *556entitled to these amounts based upon the plan or 11 U.S.C. § 506(b), the Debtors refused to pay the amounts requested for appraisal and engineering costs, and the attorneys’ fees and expenses.
Starion filed a motion requesting the bankruptcy court to compel payment of its fees in the amount of $125,014.64 based upon the plan and 11 U.S.C. § 506(b), On the same day, the Debtors filed a motion seeking disallowance of the fee request contending that there is no agreement for the payment of fees; the fee request was untimely; and the fees were not reasonable.
BANKRUPTCY COURT’S FIRST DECISION
On March 10, 2014, the bankruptcy court issued its order denying Starion’s motion to compel payment of attorneys’ fees and costs, and granting the Debtors’ motion seeking disallowance of Starion’s request. The court began its analysis by noting the terms of the Starion Addendum and the plan, and determined that “both Debtors and Starion agree that the Court’s analysis regarding Starion’s eligibility to recover attorney fees is confined to limits outlined in section 506 of the Bankruptcy Code.”
Since § 506 allows an oversecured creditor to recover reasonable fees and costs provided for under the agreement under which the claim arose, the bankruptcy court first looked at whether Starion’s claim was oversecured. The court noted that “Debtors do not dispute Starion’s claim that it is oversecured. In fact, in their briefs, Debtors refer to Starion’s claim as oversecured.”5 Apparently, Star-ion would not have been oversecured based solely on its mortgage liens, but became oversecured when the confessions of judgment were entered and transcribed to other counties — thereby creating liens on additional real estate owned by the Debtors.
Next, the bankruptcy court looked at whether fees and costs were allowed under an agreement under which the claim arose as required by § 506 of the Bankruptcy Code. It held that “Starion’s judicial liens ‘arose’ under the Judgments, which when entered by the clerk and recorded under North Dakota law created liens on real property. N.D.C.C. § 28-20-13. Consequently, the documents this Court looks to for an agreement giving rise to the claim for attorney fees and costs are the Judgments.” Relying upon a North Dakota statute that disfavors payment of attorney fees, the bankruptcy court concluded that the absence of “a clause or sentence [in the judgment] entitling Starion to collect attorney fees” was fatal to Starion’s request for payment. As a result of that decision, the bankruptcy court did not reach the additional issues raised by the Debtors regarding the timeliness of the fees request and the reasonableness of the fees. Accordingly, Starion’s motion to compel payment was denied and the Debtors’ motion disal-lbwing the fees was granted. Starion appealed the bankruptcy court’s ruling.
FIRST B.A.P. DECISION
On appeal, the Debtors again conceded that Starion is an oversecured creditor, but argued that it is oversecured only because of the judgment liens it obtained by virtue of the confessions of judgment on other property of the Debtors in various counties in North Dakota. Because the judgments do not state anything about attorneys’ fees, the Debtors asserted that Starion had *557no right to fees since it was oversecured only by virtue of the judgments.
In our opinion of December 24, 2014, we agreed with Starion that in addition to the confessions of judgment, its claim also “arose” under the various promissory notes, mortgages, loan agreements, workout agreement and other loan-related documents. All of those documents were still in effect and it is undisputed that they contained provisions for collection of attorneys’ fees and expenses. We rejected the Debtors’ argument that we should look only to the judgments as the agreements under which the claim arose. We reversed the decision of the bankruptcy court and remanded for further proceedings as to the remaining issues — whether the request for fees was timely and whether the fees were reasonable.
SECOND BANKRUPTCY COURT DECISION
On September 20, 2016, the bankruptcy court issued its order granting in part and denying in part Starion’s motion to compel and granting in part and denying in part the Debtors’ motion to disallow attorneys’ fees. With regard to timeliness, the court noted that Starion acknowledged its attorneys’ fee submission was three days late under the procedure set forth in the confirmed plan. The court looked to state contract law to determine whether the late submission was fatal to Starion’s right to collect fees. The court found that the untimely submission was not a material breach and would not bar Starion from collecting its fees.
The bankruptcy court then engaged in a review of the reasonableness of the fees incurred by Starion. After an analysis of the time entries and expert testimony, the bankruptcy court awarded Starion attorneys’ fees and expenses in the reduced amount of $83,122.95, and disallowed fees in the amount $27,754.00. The Debtors filed this appeal.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. First Nat’l Bank v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997) (quoting Miller v. Farmers Home Admin. (In re Miller), 16 F.3d 240, 242-43 (8th Cir. 1994)). In this case we review de novo the bankruptcy court’s interpretation and application of 11 U.S.C. § 506(b). Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987); White v. Coors Distributing, Co. (In re White), 260 B.R. 870, 874 (8th Cir. BAP 2001). Factual determinations concerning an award of attorney’s fees are reviewed under a clearly erroneous standard, while the court’s determination of the amount of the fee award is reviewed for abuse of discretion. Litton Microwave Cooking Prod. v. Leviton Mfg. Co., 15 F.3d 790, 795 (8th Cir. 1994). The bankruptcy court’s finding as to the material terms of the plan was one of fact and thus subject to the clearly erroneous standard of review. Ford v. First Mun. Leasing Corp., 838 F.2d 994, 997 (8th Cir. 1988).
DISCUSSION
The Debtors raise three issues on appeal. First, the Debtors argue that the bankruptcy court’s first order dated March 10, 2014, was correct and should not have been reversed by this panel. Second, the Debtors argue that in its second order dated September 20, 2016, the bankruptcy court erred in determining that Starion’s untimely submission of a request for fees was not a material breach of the plan. Finally, the Debtors argue that all of Star-ion’s fees should be disallowed due to egregious billing practices by its attorneys.
*558
Law of the Case.
With its first issue on appeal, the Debtors are trying to revisit the issues we decided when this case first appeared before this panel. For its part, Starion argues that this panel’s first decision is “law of the case” and should not be revisited at this time. We agree.
Under the law-of-the-case doctrine, ‘“a court should not reopen issues decided in earlier stages of the same litigation.’ ” In re Raynor, 617 F.3d 1065, 1068 (8th Cir.2010) (quoting Agostini v. Felton, 521 U.S. 203, 236, 117 S.Ct. 1997, 138 L.Ed.2d 391 (1997)). This policy of deference “prevents the relitigation of a settled issue in a case and requires courts to adhere to decisions made in earlier proceedings in order to ensure uniformity of decisions, protect the expectations of the parties, and promote judicial economy.” Id. (internal quotation marks omitted).... “[T]he doctrine does not apply if the court is convinced that [its prior decision] is clearly erroneous and would work a manifest injustice.” Pepper v. United States, 562 U.S. 476, 131 S.Ct. 1229, 1250-51, 179 L.Ed.2d 196 (2011) (second alteration in original) (internal quotation marks omitted).
Wong v. Wells Fargo Bank N.A., 789 F.3d 889, 898 (8th Cir.), cert. denied, — U.S. -, 136 S.Ct. 507, 193 L.Ed.2d 398 (2015).
We are not convinced that our prior decision was clearly erroneous or that it would work a manifest injustice in this appeal. The Debtors’ argument is, again, based on the theory that “Starion’s claim of oversecured status was only possible by virtue of the two judgment liens which arose by operation of lav/’ and were not “consensual,” and that the judgments did not contain appropriate language providing for the recovery of attorneys’ fees.6 For several reasons, we believe the Debtors’ arguments, while creative, obscure the real issue.
The Debtors’ position ignores the discussion in our prior opinion where we noted that the judgment liens were only one piece of Starion’s secured claim. Starion’s secured claim was made up of not only the indebtedness owed under the judgments, but also indebtedness owed on still-outstanding promissory notes secured by mortgages encumbering various other parcels of real estate. It is undisputed that the notes, mortgages, workout agreement, and other loan documents comprising the secured claim of Starion contained the appropriate language regarding recovery of attorneys’ fees and costs under § 506(b). Debtors seem to be saying that when a secured claim is made up of multiple documents and agreements, every single document and agreement constituting a part of that claim must contain appropriate attorney fee language. Debtors have failed to cite to any support for that position. Here, as discussed in our earlier opinion, Star-ion’s secured claim arose under a number of different agreements, many of which contain attorney fee provisions.
The Debtors further argue that the other loan documents were somehow merged into the confessions of judgment by operation of law. Again, Debtors are simply incorrect. The judgments were not entered as part of a suit on the promissory notes or foreclosure of the mortgages. Instead, the confessions of judgment were just one element of a multi-faceted workout agreement that addressed several items of indebtedness owed to Starion — much more *559than simply the debt for which judgment was confessed.7 The confessions of judgment clearly were not intended to extinguish the separate, and continuing, notes and mortgages or other obligations under the workout agreement as those documents remained in effect, payment terms were restructured and additional collateral was provided under the workout agreement — all in addition to the confessions of judgment.
Finally, we are not even convinced that it was necessary for the bankruptcy court to engage in an analysis under § 506(b). We note that when the Debtors filed their second amended plan, Starion objected for a variety of reasons, including the failure to provide for the payment of Starion’s attorneys’ fees as an oversecured creditor. Starion’s plan objections were settled by virtue of a document referred to as the “Starion Addendum” to the plan. That addendum specifically states that “Debtors agree to pay Starion’s allowable attorney’s fees and costs ...” and that the procedure for doing so is set forth in the plan. The plan clearly allows Starion to recover its fees. It is disingenuous for the Debtors to now argue that Starion is not entitled to seek fees and costs under the plan after agreeing to do so following a plan objection that specifically raised the issue. It is as if the Debtors are playing a game of “gotcha” using semantics after getting Starion to settle its plan objections.
Accordingly, our prior opinion was not clearly erroneous nor does it work a manifest injustice in this case.' Therefore, it is law of the case and will not be reopened.
Timeliness.
The Debtors’ next argument is that the bankruptcy court erred in using the materiality factors set forth in Restatement (Second) of Contracts § 241 when finding that Starion’s untimely submission of its attorneys’ fee statement was not a material breach of the plan. The Debtors assert that “the correct analysis that should have been undertaken by the Bankruptcy Court was the basic contract interpretation analysis of whether, under the Ijdan, time was of the essence in requiring Starion to submit the fee by a date certain.” If so, Debtors argue that Starion’s failure to abide by the deadline is fatal to the fee claim regardless of whether the breach was material.
Debtors’ criticism of the bankruptcy court’s analysis is astonishing since it is precisely the analysis Debtors argued (in their post-hearing brief to the bankruptcy court) that the court should use. Debtors specifically argued the materiality issue and the Restatement factors to the bankruptcy court — without mention of time being of the essence. We will not now entertain an issue that was not first raised in the bankruptcy court. Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976) (“It is the general rule, óf course, that a federal appellate court does not consider an issue not passed upon below.”); Robinson v. Steward (In re Steward), 828 F.3d 672, 683-84 (8th Cir. 2016). In any event, Debtors acknowledge that the confirmed plan does not contain a “time is of the essence” clause and we are not persuaded that any of the plan language indicates that time is of the essence regarding the attorney fee claim procedure.
As the bankruptcy court noted, a confirmed Chapter 11 plan “acts like a contract that binds the parties that participate in the plan.” Gen. Elec. Capital Corp. v. Dial Bus. Forms, Inc. (In re Dial Bus. *560Forms), 341 F.3d 738, 744 (8th Cir. 2003) (citation and internal quotation marks omitted). We review the bankruptcy court’s interpretation of a contract de novo. Arvest Bank v. Cook (In re Cook), 504 B.R. 496, 502 (8th Cir. BAP 2014). However, the bankruptcy court is, in the first instance, in the best position to interpret its own orders, including its plan confirmation order. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 542 (8th Cir. 2005) (citing In re Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 6 F.3d 1184, 1194 (7th Cir.1993)).
The bankruptcy court correctly reviewed the length of the delay and determined that no prejudice had been caused to the Debtors as a result of the delay. The Debtors’ only argument regarding timeliness appears to be that the Debtors needed to know how much to pay to the creditor on the effective date of the plan. We agree with the bankruptcy court that the relatively short delay in submitting the requests for attorneys’ fees did not prejudice the Debtors (in fact, as a result of the multiple appeals, the Debtors still have not paid the fees) and was not a material breach of the plan that should prohibit' Starion’s right to collect its fees and costs under the plan.
Reasonableness,
The Debtors’ final argument. is that Starion’s fee requests should be disallowed because of its attorneys’ “Egregious Practices of Consistently Using Two Attorneys for the Same Tasks and Rampant ‘Block Billing.’” In this argument, the Debtors actually agreed with the bankruptcy court’s conclusion that Starion’s practices of using two attorneys and block billing resulted in unreasonably high, duplicative, and unclear fee itemizations. However, the Debtors believe that such activities should “prohibit Starion from collecting any fees at all.” In support, the Debtors cite to a District of Minnesota case stating: “Where a fee application includes both allowable and nonallowable services with no reasonable means of differentiating between the two groups of services, all compensation for such services should be disallowed.” In re Daig Corp., 48 B.R. 121, 136 (Bankr. D. Minn. 1985).
However, a close reading of the Daig case reveals that it does not stand for the proposition that all compensation must be denied for block billing or for utilizing two attorneys. Instead, Daig involved a situation where there was no way to determine the reasonableness of the fees for specific services. Notably, the Debtors do not cite to a single case binding upon this panel and supporting their position. We review the bankruptcy court’s decision in determining the reasonableness of attorneys’ fees for an abuse of discretion. Pendleton v. QuikTrip Corp., 567 F.3d 988, 994 (8th Cir. 2009). Here, the bankruptcy court clearly examined the time entries, the court docket, and the work performed and appropriately made its adjustments. The bankruptcy court did not abuse its discretion by reducing the fees instead of denying all fees.
CONCLUSION
For the reasons stated, we affirm the decision of the bankruptcy court.
. The Honorable Shon K. Hastings, Chief Judge, United States Bankruptcy Court for the District of North Dakota.
. Starion Fin. v. McCormick (In re McCormick), 523 B.R. 151 (8th Cir. BAP 2014). Starion appealed that decision to the Eighth Circuit Court of Appeals, which dismissed the appeal as interlocutory as the issues on remand had not yet been decided by the bankruptcy court.
.Starion already had mortgages on this property and it appears this new mortgage was to cross-collateralize all of the debt owed to Starion with the Misty Waters property.
. The Debtors also filed a Chapter 11 case for one of their companies, Misty Waters, LLC. The Addendum was intended to resolve plan treatment in both cases.
. Based upon footnote 9 in the bankruptcy court’s order, this element is deemed to have been conceded by the parties.
. Again, Debtors have acknowledged that Starion is oversecured and that issue is not before us.
. It appears that the confessions of judgment were for the Debtors' potential personal liability on certain guaranteed obligations, but the record is less than clear on this point. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500489/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DEFENDANTS’ MOTION TO DISMISS
DENNIS MONTALI, U.S. Bankruptcy Judge
On January 25, 2017, this court held a hearing on the motion for summary judgment (“MSJ”) filed by debtor and plaintiff First Korean Christian Church of San Jose (“FKCC” or “Debtor”), a non-profit religious California corporation, and the motions of the individual defendants-Dong Wuk Kim (“DW Kim”) and Myung II Youm (collectively, “the Kim Defendants”) to dismiss this adversary proceeding (“MTD AP”) and to dismiss the counterclaim filed by Korean Evangelical Church of American (“KECA”) against them (“MTD CC”) and Debtor.1 For the reasons set forth below, the court will grant the MSJ and deny the MTD AP and the MTD CC.2
I. BACKGROUND
FKCC filed the underlying chapter 11 bankruptcy case (the “Main Case”) on September 3, 2015, and continues as debtor in possession. FKCC and KECA were co-borrowers on a loan secured by church property located in Sunnyvale, CA (the “Property”). As of the petition date, BBCN Bank held the underlying note and a valid and perfected deed of trust lien on the Property. BBCN Bank filed a motion for relief from stay (“MRS”) on February 24, 2016; the Kim Defendants, identifying themselves as the True FKCC, filed a motion to dismiss the bankruptcy case (“MTD BK”) two days later.
At a hearing on March 29, 2016, the court indicated that it would deny the MTD BK, holding that Debtor, through its current pastor, had the authority to file the chapter 11 petition and that DW Kim did not have authority to act on behalf of FKCC. The order denying the MTD BK was entered on April 4, 2016, and the Kim Defendants filed a notice of appeal on April 13, 2016 (the “Appeal”). The Appeal is currently pending in the U.S. District Court for the Northern District of California as Case No. 16-cv-01959-EJD. A motion to dismiss the Appeal as interlocutory is pending in that matter.
The court continued the hearing on BBCN Bank’s MRS to allow FKCC an opportunity to sell the Property for the benefit of the estate. FKCC thereafter obtained an order authorizing it to hire real estate brokers and, in July 2016, filed a motion to sell the Property free and clear of liens. The court entered an order on September 14, 2016, authorizing a sale of the Property for $6,650,000 and providing for payment in full of the BBCN Bank debt as well as all secured tax liens. The sale has closed.
Pursuant to the sale order, the various and conflicting interests asserted by Debt- or, the Kim Defendants and KECA in the Property were transferred to the net proceeds of the sale (the “Net Funds”). The *578Net Funds were deposited into an interest-bearing joint account, disbursement from which requires the written consent of all parties or a judicial determination of the parties’ respective rights in the funds. See Order Granting Motion to Sell Real Property Free and Clear of Interests Combined with Motion to Sell Real Property at Docket No. 117 in the Main Case.
On October 7, 2016, Debtor filed this adversary proceeding, alleging that it and KECA owned the Property and thus now own the Net Proceeds. KECA filed an answer seeking the same relief, and asserting the counterclaim against the Kim Defendants. Both parties requested that the Net Funds be released to the estate and to KECA. The Kim Defendants filed the MTD AP on December 10, 2016, and the MTD CC on December 14, 2017. Debt- or filed its MSJ on December 27, 2016. Because Debtor has established as a matter of law and undisputed fact that the estate and KECA are entitled to the Net Funds, the court is granting the MSJ and denying the MTD AP and the MTD CC.
II. JURISDICTION
The Kim Defendants erroneously contend that this court lacks jurisdiction to resolve the dispute as to the ownership of the Net Funds. This is a dispute over an identified sum of money in which the Debtor claims ownership. The court has jurisdiction and constitutional authority to determine whether identified property constitutes property of the estate under 11 U.S.C. § 541(a). See, e.g. Waldron v. F.D.I.C. (In re Venture Financial Group, Inc.), 558 B.R. 386 (Bankr. W.D. Wash. 2016); see also Velo Holdings, Inc. v. Paymentech, LLC (In re Velo Holdings, Inc.), 475 B.R. 367, 387-88 (Bankr. S.D.N.Y. 2012) (“[t]he determination whether something is property of the estate is a core matter”) (collecting cases). In addition, turnover actions are core pursuant to 28 U.S.C. § 157(b)(2)(E). Here, Debtor is seeking a determination that the Net Funds are property of the estate which must be turned over to it. This court has core jurisdiction to resolve the disputed claims to the Net Funds. Inherent in such a resolution is the issue of who controls Debtor: DW Kim or an appointed successor.
The Kim Defendants also argue that the pendency of the Appeal deprives this court of jurisdiction to decide the MSJ. They are incorrect. Even though control of Debtor is a central issue in both the Appeal and this adversary proceeding, the court can enter a judgment as to disposition of the Net Proceeds. The appealed order denying the motion to dismiss the chapter 11 case is interlocutory. In re 405 N. Bedford Dr. Corp., 778 F.2d 1374, 1379 (9th Cir. 1985). As the Ninth Circuit held in In re Rains, 428 F.3d 893, 904 (9th Cir. 2005), an appeal from an interlocutory order is premature and does not transfer jurisdiction to the appellate court absent leave of that court. Id., citing In re United States Abatement Corp., 39 F.3d 563, 568 (5th Cir. 1994) (holding that premature notice of appeal from interlocutory bankruptcy order was of no effect and the trial court retains jurisdiction to enter final judgment) and Albiero v. City of Kankakee, 122 F.3d 417, 418 (7th Cir. 1997).
The Kim Defendants have also suggested that this court lacks jurisdiction to resolve the dispute over entitlement to the Net Funds as it implicates matters of religious doctrine and practice. This court undoubtedly must “defer to the resolution of issues of religious doctrine or polity by the highest court of a hierarchical church organization.” Jones v. Wolf, 443 U.S. 595, 602, 99 S.Ct. 3020, 61 L.Ed.2d 775 (1979). Nonetheless, “the First Amendment does not dictate that a *579State must follow a particular method of resolving church property disputes. Indeed, ‘a State may adopt any one of various approaches for settling church property disputes so long as it involves no consideration of doctrinal matters, whether the ritual and liturgy of worship or the tenets of faith.’ ” Id. Thus, this court cannot review decisions to excommunicate, a religious^ matter, or matters involving religious doctrines and tenets. It can, however, apply “neutral principles of law” such as corporate governance in settling disputes as to ownership of church property as long as the analysis does not involve inquiry into religious doctrine. Id. at 602-03, 99 S.Ct. 3020.
Consequently, this court can consider the relevant by-laws as well as minutes and orders from governing bodies to determine whether a particular faction controls the Debtor and its property disposition. Such a determination does not invoke religious precepts but is instead a secular examination of documents of governance.
The Kim Defendants also assert that they are entitled to a trial by jury and thus this court cannot issue a dispositive ruling. Assuming without deciding that they are entitled to a jury trial, that entitlement does not preclude this court from ruling on the MSJ or the MTD AP. In Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504 F.3d 775 (9th Cir. 2007) the Ninth Circuit adopted the majority rule that the valid right to a jury trial does not require the bankruptcy court to cede jurisdiction and transfer the action immediately, but instead may retain jurisdiction over the action for pretrial matters (such as motions to dismiss or motions for summary judgment) until the matter is ready for trial. Id. at 788 (“allowing the bankruptcy court to retain jurisdiction over pre-trial matters, does not abridge a party’s Seventh Amendment right to a jury trial”).
IV. STANDARDS FOR SUMMARY JUDGMENT
Summary judgment is appropriate when the moving party “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), applicable here by Fed. R. Bankr. P. 7056. The moving party “initially bears the burden of proving the absence of a genuine issue of material fact.” In re Oracle Corp. Sec. Litigation, 627 F.3d 376, 387 (9th Cir. 2010). If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
“In evaluating the evidence to determine whether there is a genuine issue of fact,” the court draws “all reasonable inferences supported by the evidence in favor of the non-moving party.” Walls v. Central Contra Costa Transit Auth., 653 F.3d 963, 966 (9th Cir. 2011). It is the opposing party’s obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F.Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987). Finally, to demonstrate a genuine issue, the opposing party “must do more than simply show that there is some metaphysical doubt as to the material facts.... Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 587, 106 S.Ct. 1348 (citation omitted).
As discussed below, Debtor has established as a matter of undisputed fact that it is the governing entity entitled to recov*580ery of the Net Funds and .the Kim Defendants have not set forth any material fact that reflects a genuine dispute as that entitlement. Drawing all reasonable inferences from the evidence offered by the Kim Defendants in response to the MSJ AP, the court concludes that summary judgment in favor of Debtor is appropriate.
V. UNDISPUTED MATERIAL FACTS
On May 29, 2008, Debtor entered into a membership agreement with KECA; that agreement required that Debtor comply with the bylaws of KECA and to place KECA as a title holder of the Property. See Declaration of Chong Kon Cho (“Cho Decl.”) ¶3; Exhibit 1); Declaration of Nam W. Kim (“NW Kim Decl”) ¶6. In the same year, Debtor and KECA executed the loan documents providing Innovative Bank (subsequently taken over by BBCN) with a deed of trust lien on the Property. NW Kim Decl. ¶ 3; Exhibits 3 and 4 to Cho Decl.
KECA is nationally subdivided into multiple district conferences. The KECA district conference responsible for the Debtor is the Northern California District Conference (“NCDC”). Cho Decl. ¶6. Because KECA’s by-laws superseded the prior bylaws of Debtor, Debtor’s Board of Directors, upon deeming certain conduct of its then presiding pastor (DW Kim) were contrary to the morals of the church, requested in July 2012 that KECA (through the NCDC) suspend him from his position as senior pastor. NW Kim Decl. ¶ 10. The disciplinary proceedings were to be completed in accordance with the disciplinary laws of KECA, Cho Decl. ¶¶ 7-10, Exhibit 8. NW Kim Decl. ¶ 10.
In August 2012, the NCDC suspended DW Kim’s ministry duties until disciplinary hearings were concluded and appointed Sang Kook Lee as a temporary governing pastor. NW Kim Decl. ¶ 11; Cho Decl., Exhibits 5 and 6). On September 14, 2012, the NCDC Disciplinary Committee excommunicated DW Kim and stripped him of all ministry duties.3 NW Kim Decl, ¶ 12; Cho Decl., Exhibit 7. September 14, 2012, counsel for Debtor sent a letter to DW Kim terminating him as pastor. NW Kim Decl. ¶¶ 12-13; Exhibits 3 and 4. On September 17, 2012, NCDC issued an official notice that DW Efim was excommunicated and stripped of all powers regarding the church and that two elders Myoung I. Youm and Jin-Gook Kim were suspended from their duties. NW Kim Decl. ¶ 15; Cho Decl., Exhibit 8.
On November 1, 2012, DW Kim filed an appeal to the KECA national body. Cho Decl. ¶8. The excommunication decision remained effective pending appeal. Cho Decl. ¶ 13, Exhibit 20. On November 13, 2012, the General Assembly of KECA prepared a document entitled “The Ruling Statement of the Judgment Committee” stating:
Since there is an illegality matter on the judgment procedure and the fact that there is not evidence beyond a reasonable doubt on the criminal acts of [DW Kim], we request that you annul the ruling from the original trial and propagate [DW Kim’s] innocence.
DW Kim Decn., Exhibit 5, part 2(B). This unsigned document reflects a rec*581ommendation by the Judgment Committee that the Regional Council vacate the excommunication order in accordance with Article 5 (Paragraph 7) and Article 3 (Paragraphs 6 and 7) of the Judgment Committee Operation Regulation, and Article 20 of the Disciplinary Action Regulation. Id. at 3(b)(1) and (2).
DW Kim has offered the “Ruling Statement of the Judgment Committee” in an effort to establish a dispute as to a material fact, i.e., whether he was stripped of his position as pastor. As noted above, however, the Kim Defendants have not authenticated the report by a declaration from any member of the committee that the report was in fact adopted by the Assembly. But even if a signed, authenticated report existed, it would not have been final and would have been subject to further review of the Regional Council.
On February 19, 2013, the NCDC notified DW Kim that his appeal to the General Assembly did not overturn the termination of his services as pastor. Cho Decn., Exhibit 10. It denied DW Kim access to the Property and to the podium and dispatched Sang Kook Lee to serve as the governing pastor. Id.
Thereafter, and quite significantly to the issues before the court, the Special Judgment Committee met during the annual meeting of KECA in April 2013 to determine the appropriate disciplinary actions to be taken with respect to DW Kim. Cho Decn., Exhibit 11. On April 10, 2013, the Special Judgment Committee issued its judgment finding DW Kim guilty of the charges against him and dismissing him from his- position as a pastor, consistent with the NCDC decision to strip him of his ministry duties. Cho Decn., Exhibit 12; Decl. of Nam W. Kim at ¶¶ 20-21. Thus, regardless of the status of the “first deliberation” by the General Assembly and regardless of the status of his excommunication from membership, DW Kim was no longer the pastor of FKCC as a matter of corporate law.
Accordingly, on September 16, 2013, KECA notified its Northern California District Office of the Notice of Judgment by the Special Disciplinary Committee regarding its decision to dismiss DW Kim as pastor. Cho Decn., Exh. 14,4 The decision and order, which was sent with the Notice of Judgment, concluded:
Therefore, based on the state[d] reasons, and based on the Article 4, Section 1 of the Law of Disciplinary Punishment, [and] according to the Article 5, Section 3 (Dismissal from Office) of the Law of Disciplinary Punishment, the Special Disciplinary Committee hands down the Judgment of Dismissal from Office to the appealer, Mr. Dong Wuk Kim.
Id.
In November and December 2013, after he was stripped of his duties and rights as pastor, DW Kim and his supporters convened several meetings at which some church members voted to withdraw from membership in NCDC and KECA. Cho Decn. ¶¶ 22-23, Exhibit 16. However, as he had been formally terminated as pastor of FKCC months before these meetings, such withdrawal was ineffective and against existing regulations and rules of operation. Id. Despite the continued eviction efforts of KECA and Debtor, DW Kim and his supporters continued to occupy the Property. Cho Decn. ¶ 23, Exhibit 17. While the supporters of DW Kim (the “DW Kim Faction”) warred with KECA and Debtor, Debtor was unable to pay BBCN Bank as required by the loan documents. Declara*582tion of Kelly Cho in Support of BBCN Bank’s Motion for Relief from Stay ¶¶ 24-29, Docket 58-3 in the Main Case. Faced with a possible foreclosure, Debtor filed its chapter 11 petition. The DW Faction moved for dismissal of the case, asserting that it was the true church and that Debt- or lacked authority to commence the underlying bankruptcy case. See Motion to Dismiss Pursuant to 11 U.S.C. §§ 1109 and 1112(a), Docket No. 61 in the Main Case. The court disagreed and denied the dismissal motion for the reasons set forth on the record on March 29,2016.
VI. ANALYSIS
In support of its MSJ, Debtor has presented undisputed evidence that it and KECA share title on the Property and are both signatories to deeds of trust under which the Property secured the obligations of Debtor to BBCN Bank. Moreover, as set forth in the Undisputed Material Facts section above, Debtor has presented significant and verified evidence that DW Kim was stripped of his position as the official pastor for Debtor in 2013. In other words, Debtor met its initial burden of showing the absence of a material and triable issue of fact as to DW Kim’s ouster and its entitlement to the Net Proceeds through control of Debtor by its current pastor.
Given that Debtor met its initial burden on the MSJ, the Kim Defendants had to come forward with evidence demonstrating that there are genuine issues of material fact to be decided at trial. A fact issue is “genuine” if there is enough evidence for a reasonable trier of fact to make a finding in favor of the non-moving party. Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001). A fact is “material” if, “under the governing substantive law ... it could affect the outcome of the case.” Caneva v. Sun Cmtys. Operating Ltd. P’ship (In re Caneva), 550 F.3d 755, 760-61 (9th Cir. 2008) (quoting Thrifty Oil Co. v. Bank of Am. Nat’l Tr. & Savs. Ass’n, 322 F.3d 1039, 1046 (9th Cir. 2003) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986))).
Here, the Kim Defendants have not presented a “genuine” issue of material fact which could result in a jury reasonably finding in their favor. First, the Kim Defendants’ primary argument is that KECA reversed the disciplinary rulings of the NCDC and thus DW Kim retains his authority as the pastor of Debtor. As discussed in the Undisputed Material Facts section above, however, the document upon which the Kim Defendants rely is not signed and has not been authenticated. Moreover, in subsequent rulings, KECA upheld the disciplinary findings against DW Kim and reaffirmed his removal as pastor of Debtor. Furthermore, the Kim Defendants’ unilateral efforts to negate the excommunication order by disclaiming Debtor’s membership in KECA are ineffective and contrary to governing rules of operation and governance. The Kim Defendants have not set any other cognizable arguments that they, and not the current pastor of Debtor, D.Y. Kim, are entitled to control the Debtor and the Net Proceeds.5
VIL CONCLUSION
Because Debtor has shown that there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law, the court will enter an order granting the MSJ, orders denying the MTD AP and the MTD CC, and a judg*583ment releasing the Net Proceeds to Debt- or and KECA. Counsel for Debtor should upload orders granting the MS J and denying the MTD; KECA should submit an order denying the MTD CC. The orders should reflect that the relief is being granted (or denied) “for the reasons set forth in the Memorandum Decision entered on [Date] at {Docket Number].” Upon entry of these orders, counsel for Debtor and KECA should submit a single judgment on the complaint and the counter-complaint. When uploading the orders, counsel for Debtor and KECA should file on the docket a proof of service indicating that they have served the proposed orders and judgment on counsel for the Kim Defendants, or the orders should reflect opposing counsel’s agreement as to form.6
. Even though KECA was nominally identified as a defendant by FKCC and FKCC was nominally identified as a counter-defendant by KECA, their interests in this litigation align with each other, as discussed below.
. The court will make no ruling on the motions to remand Adv. Proc. 15-5139 and Adv. Proc. 15-5151 (the "Related APs”) that were on calendar at the same time.
. As noted in the Jurisdiction discussion above, excommunication is a matter pertaining to religion and is not appropriate for court involvement, However, the issue of whether DW Kim remained as pastor is a secular matter involving principles of corporate governance and thus falls within the scope of this court’s jurisdiction to determine who controls Debtor and what constitutes property of the estate under section 541 of the Bankruptcy Code.
. The exhibits to the Cho Declaration are out of order, with Exhibit 17 preceding Exhibit 14, Exhibit 14 can be found at Docket No. 26-9, pages 30-34.
. At the hearing on January 25, 2017, counsel for Debtor conceded the obvious, namely that if the court granted the MSJ, Debtor's disposition of the Net Proceeds would be governed by applicable bankruptcy and non-bankruptcy law.
. Based on comments by Debtor’s counsel at the hearing, the court assumes Debtor will now dismiss the Related APs, rendering the motions to remand moot. If that is not the case, counsel should set them for status conference on the court's regular San Jose calendar. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500490/ | MEMORANDUM DECISION AND ORDER GRANTING DEBTOR’S MOTION TO DISMISS INVOLUNTARY BANKRUPTCY PETITION AN RETAINING JURISDICTION UNDER 11 U.S.C. § 303(1)
Mark Houle, United States Bankruptcy Judge
BACKGROUND
On October 3, 2016, a Chapter 7 involuntary petition was filed against Roderick *585Clignett (“Debtor”) by Victor Salinas (“Salinas”). On October 13, 2016, summons service was executed. On November 2, 2016, Debtor filed a motion to (1) dismiss involuntary bankruptcy petition under FRCP 12: or in the alternative (2) set bond. On November 23, 2016, Salinas filed his opposition. On November 28, 2016, Salinas filed an addendum to the petition. On November 30, 2016, Debtor filed his reply. On December 7, 2016, the Court held a hearing and indicated that it was inclined to dismiss the petition. The Court continued the hearing, however, to allow for supplemental briefing on the topic of fees and costs pursuant to 11 U.S.C. § 303(i). On December 28, 2016, Debtor filed a brief in support of an order pursuant to 11 U.S.C. § 303(i) for damages, punitive damages, costs and attorneys fees. On January 11, 2017, Salinas filed an opposition to Debt- or’s brief and to the original motion. On January 18, 2017, Debtor filed a reply.
FACTUAL BACKGROUND
Victor Salinas is alleged to be the son-in-law of Don San Angelo (“San Angelo”). San Angelo filed a state court case against Debtor in November 2008 for fraud, conversion and violations of the Corporate Securities Act. On August 18, 2011, judgment was entered against Debtor in the amount of $253,169.84. On October 19, 2011, San Angelo recorded an abstract of judgment. In November 2012, Debtor and San Angelo worked out a settlement whereby Debtor would pay San Angelo $2250 bi-weekly, plus 75% of any net monies Debtor earned in excess of $10,000 per month. Debtor also transferred title to a time-share property in Lake Tahoe for which Debtor was credited $20,000. Debtor made payments for a short time, but lost his job and did not make any further payments.
On September 4,2013, San Angelo allegedly sold the judgment to his son-in-law for $30,000. Debtor alleges that San Angelo’s former counsel, Robert Schauer, then filed suit against San Angelo for fraudulently transferring the judgment, although no court records or case information is provided by Debtor.
San Angelo filed bankruptcy on January 31, 2014. San Angelo did not list the judgment, the sale of the judgment, or the lawsuit by his counsel in the petition. San Angelo received a discharge on May 12, 2014.
Shortly after obtaining a discharge, San Angelo allegedly reacquired the judgment from his son-in-law. According to Debtor, San Angelo attempted to sell the debt to debt collectors, but was repeatedly turned down after they discovered “San Angelo had lied on the bankruptcy schedules by failing to list the Judgment.”
On April 28, 2015, San Angelo filed another state court action against Debtor for breaching the settlement of the first judgment. This lawsuit was scheduled for a mandatory settlement conference on October 26, 2016, and for trial on November 7, 2016, in San Bernardino Superior Court, but was stayed by the commencement of the involuntary petition.
San Angelo filed a skeletal involuntary petition on October 3, 2016. Debtor filed a motion to dismiss the petition pursuant to Fed. R. Civ. P. Rule 12(b)(6), incorporated by Fed. R. Bankr. P. Rule 1011. Debtor argues that (1) petitioner lacks standing; (2) petition failed to disclose the transfer of the claim; (3) the involuntary petition requires three creditors; (4) claim is contingent as to amount; (5) petitioner’s claim is not enough to satisfy § 303(b) requirements. In the alternative, Debtor requests that the Court require petitioner to post a bond. Additionally, Debtor requests that the Court reserve jurisdiction to allow *586Debtor to file a motion pursuant to § 303(i).
DISCUSSION
I. Stcmding/Tmnsfer of Claim
11 U.S.C. § 303(b)(2) (2010) provides:
(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 title-
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of sucfy holders that hold in the aggregate at least $15,775 of such claims.
The stated claim of Salinas is a judgment for $336,179. As is evidenced by the material appended by Debtor, Salinas was not the plaintiff awarded judgment in the state court proceeding. Nevertheless, Salmas did not check the box that claimed the claim had been transferred. It thus appears that either Salmas is not a creditor of Debtor or his answer to # 12 of the involuntary petition is false (absent Salinas having a separate judgment against Debt- or). Fed. R. Bankr. P. Rule 1003(a) imposes a requirement to provide written evidence documenting any transfer of a claim to or by a petitioning creditor and this requirement has not been satisfied here. Furthermore, as Debtor notes, the fact that San Angelo was prosecuting a state court civil action against Debtor up until the filing of the involuntary proceeding indicates that it appears it was San Angelo, not Salinas, who was the holder of the claim arising from the state court judgment. In any event, it would appear that either Salinas does not have standing to bring the petition or Salmas failed to comply with Fed. R. Bankr. P. Rule 1003(a). Debtor further argues that San Angelo does not have standing to bring an involuntary proceeding either, but that issue is not properly before the Court and will not be addressed.
Salinas has attempted to correct the deficiency by filing an involuntary petition addendum on November 28, 2016, indicating that he is the transferee of the claim and attaching certain transfer documents. While the filing is titled an “addendum,” it is more properly characterized as an amendment, because the entire involuntary petition has been refiled. Nevertheless, Fed. R. Bankr. P. Rule 1018 states that Fed. R. Bankr. P. Rule 7015 (and thus Fed. R. Civ. P. 15) apply to contested involuntary petitions, and that “[rjeference in the Federal Rules of Civil Procedure to the complaint shall be read as a reference to the petition.” Fed. R. Civ. P. Rule 15, governing amendment of the Complaint, states:
(a) Amendments Before Trial.
(1) Amending as a Matter of Course. A party may amend its pleading once as a matter of course within:
(A) 21 days after serving it, or
(B) If the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.
(2) Other Amendments. In all other cases, a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.
(3) Time to Respond. Unless the court orders otherwise, any required response to an amended *587pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.
Salinas’s opposition contends that his addendum was a timely amendment. Because Debtor’s responsive pleading was served on November 2, 2016, Salinas notes that twenty-one days later is November 23, 2016. Pursuant to Fed. R. Bankr. P. Rule 9006(f), Salinas contends that three days should be added to the time allowed to extend because service occurred by electronic means.1 And because three days later is November 26, 2016, a Saturday, Salinas contends that the time to respond is extended until Monday, November 28, 2016 pursuant to Fed. R. Bankr. P. Rule 9006(a)(1)(C). Salinas filed his addendum on November 28, 2016.
Debtor points out that Fed. R. Civ. P. Rule 15(a)(1)(B) applies only to pleadings in which a responsive pleading is required. Fed. R. Bankr, P. Rule 1011 states that a debtor “may contest the petition” and 11 U.S.C. § 303(d) states a debtor “may file an answer to a petition.” This language is in contrast to the language of Fed. R. Civ. P. Rule 12, that applies to adversary proceedings, and which states that “A defendant must serve an answer,” and Fed. R. Bankr. P. Rule 7012, which states “the defendant shall serve an answer.” Notably, Fed. R. Bankr. P. Rule 1018 incorporates many of the rules governing adversary proceedings. Nevertheless, it omits Fed. R. Bankr. P. Rule 7012, presumably because responsive pleading in involuntary petitions is governed by a separate rule, Fed. R. Bankr. P. Rule 1011. Because Fed. R. Civ. P. references a requirement, yet Fed. R. Bankr. P. Rule 1011 is simply permissive, Salinas cannot rely on Fed. R. Crv. P. Rule 15(a)(1)(B). Salinas made no attempt to seek leave of the Court to amend the petition, and, therefore, the Court determines Salinas cannot rely on Fed. R. Civ. P. Rule 15(a)(2) either. Therefore, the Court will dismiss the petition because either petition lacks standard or petition has failed to comply with Fed. R. Bankr. P. Rule 1003(a).
Notwithstanding dismissal of the petition, the Court addresses the parties’ remaining arguments below.
II. Number of Creditors
11 U.S.C. § 303(b)(1) provides that an involuntary petition must be filed by three or more entities. Section '§ 303(b)(2) provides an exception, allowing a single entity to file an involuntary petition if there are fewer than twelve creditors who fit the statutory requirements to be a petitioning creditor. Debtor argues that he has twelve or more creditors, and that San Angelos’s counsel was aware of that fact.2
First of all, a debtor cannot merely state that he has more than twelve creditors in his motion to dismiss. Fed. R. Bankr. P. Rule 1003(b) states:
If the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for other creditors to join in *588the petition before a hearing is held thereon.
It is Debtor’s burden to demonstrate that he has twelve or more creditors and he has not, of yet, filed the information required by Rule 1003(b). The purpose of Rule 1003(b) is to allow time for joinder of creditors under § 303(c). Without the information provided by the rule, that opportunity is not sufficiently realizable. Therefore, Debtor cannot rely on the insufficient number of creditors defense without complying with the procedure set forth in the applicable rale.
III. Amount of Salinas’s Claim
Debtor’s next defense is that even if Salinas had standing to file the involuntary petition, the judgment debt does not satisfy the requirements of § 303(b). Debt- or misquotes and misinterprets the .meaning of § 303(b)(1), which states:
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title-
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontin-gent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.
Debtor appears to argue that that the claim must be $15,775 more than the value of all other liens on the property, which is incorrect. The statute requires that the holder of the debt be undersecured by at least $15,775. On a motion to dismiss where there is no indication of the fair market value of the property, Debtor’s burden has not been satisfied.
IV. Bona Fide Dispute
Debtor’s final defense is that the claim at issue is subject to a bona fide dispute as to value. Specifically, Debtor questions what produced the $336,179 amount, given that the judgment is for significantly less. Debtor does not seem to argue that there is a bona fide dispute as to liability.
It appears illogical to the Court that a bona fide dispute as to value could render a creditor ineligible to file an involuntary petition when the underlying, undisputed claim exceeds the statutory requirement. Nevertheless, in 2005 BAPOPA added the phrase “liability or amount” Since the amendment, courts have been split regarding whether the dispute must be material:
In making this argument, the creditors essentially ask us to read an implicit materiality requirement into the statutory language “bona fide dispute as to liability or amount.” Prior to 2005, some courts had held-as the bankruptcy court held here-that a claim to a disputed amount could nevertheless form the basis of an involuntary petition if the undisputed portion of the claim could independently qualify the creditor. In 2005, however, Congress amended section 303 to add the language “as to liability or amount.” Faced with a dearth of clarifying legislative history, courts are more or less evenly split on whether the 2005 amendment was intended to change the prevailing law by establishing that a dispute as to any portion of a claim, even if some dollar amount would be left undisputed, means there is a bona fide dispute as to the amount of the claim, or simply to reinforce the then-prevailing interpretation.
*589Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1, 9 (1st Cir. 2016) (citations omitted).The Ninth Circuit does not appear to have determined the issue yet. See In re C & C Jewelry Mfg., Inc., 2001 WL 36340326 at *7 (9th Cir. BAP 2009) (“The Ninth Circuit has not yet interpreted the new language of § 303(b) and (h); however, other courts have held that an objective legitimate dispute as to an amount owed on a petitioning creditor’s claim is sufficient to demonstrate a bona fide dispute and forestall a petitioning creditor from maintaining an involuntary petition under § 303(b).).
The Court believes that the better reasoned approach is that the bona fide dispute as to liability must affect whether the claim amount is above or below the statutory requirement. As one treatise asks:
Why would Congress want to disqualify a creditor whose claim is noncontingent and at least partially undisputed? Section 303’s requirements regarding type and number of claims are an attempt to balance a debtor’s interest in staying out of bankruptcy with the interest of creditors in putting a debtor into bankruptcy. Why shouldn’t the undisputed, noncon-tingent portion of a petitioning creditor’s claim count? Why disqualify the creditor in toto? Why effectively bar that creditor’s access to the bankruptcy forum?
2 Collier on Bankruptcy § 303.11[2] (16th ed.).
V. Damages
11 U.S.C. § 303® (2010) states:
If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment-
(1) against the petitioners and in favor of the debtor for-
(A) costs; or
(B) a reasonable attorney’s fee; or
(2) against any petitioner that filed the petition in bad faith, for-
(A) any damages proximately caused by such filing; or
(B) punitive damages.
The Court will interpret Debtor’s argument as declining to waive the right to judgment and, therefore, will retain jurisdiction to hear a claim for damages under § 803®.
At the December 7, 2016, hearing, the Court continued the hearing, in part, to permit briefing on the issue of damages under § 303(i). Salinas contends that Section 303(i) only applies after a case is dismissed. The Court agrees: “The plain language of this section requires dismissal before the alleged debtor becomes entitled to damages.” In re Corn-Pro Nonstock Co-op., Inc., 317 B.R. 56 (8th Cir. BAP 2004); see also In re S. California Sunbelt Developers, Inc., 608 F.3d 456, 462 (9th Cir. 2010) (“Fees may not be awarded unless the court dismisses a petition”) (quotation omitted); Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 705 (9th Cir. 2004) (“The plain language of the statute presents only two prerequisites for an award of fees, costs, or damages under § 303(i)(l): (1) the court must have dismissed the petition on some ground other than consent by the parties ... ”) (emphasis added). Furthermore, Fed. R. Bankr. P. Rule 1018 states that Fed. R. Bankr. P. Rule 7054 applies to adversary proceedings. Fed. R. Bankr. P. Rule 7054(b)(2)(A) incorporates Fed. R. Civ. P. Rule 54(d)(2)(A), which requires a claim for attorney’s fees to be made by motion.
CONCLUSION
The Court HEREBY ORDERS that the motion is GRANTED and the involuntary *590petition is DISMISSED. The Court retains jurisdiction to hear any request for attorney’s fees under § 303(i) upon further motion bjr Debtor.
IT IS SO ORDERED.
. Effective December 1, 2016, Fed. R. Bankr. P. Rule 9006(f) no longer includes electronic means as a service method that extends the time to respond.
. Note: In this argument, Debtor confused San Angelo with Salinas. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500491/ | ORDER DENYING CLAIM OBJECTION
Brian D. Lynch, U.S. Bankruptcy Judge
The Chapter 13 Trustee filed an Objection to the Proof of Claim (ECF No. 19) filed by creditor IQ Data International (Claim No. 1). Trustee sought disallowance of the claim in its entirety. The sole basis for disallowance cited in the claim objection was that the claim was not filed with supporting documentation and as such was not entitled to prima facie validity pursuant to Fed. R. Bankr. P. 3001(c).
Debtor commenced this case on November 4, 2016. The bar date for filing proofs of claim was March 8, 2017. Debtor filed her schedules on the petition date, and listed on her Schedule F a general unsecured debt of $626.00 to “Iq Data International,” based on “Collection Attorney, Monterra Apartments Wa.”
IQ Data International filed its claim on November 22, 2106 for $631,72. The claim consisted of the completed Form 410 Proof of Claim form and had two pages attached. The first page is identified as a “Print Debtor Work Card” and indicates a claimant of Monterra Apartments (WA) with debtor names of Sarah Ruiz1 and Danielle *598Eberly. This sheet gives dates for when the debt was assigned, last charged, last letter, and last worked. It indicates $388.05 was assigned, which is also listed as the principal amount due, plus interest calculated at 12% of $243.66 for the total claim of $631.72. The second page attached gives the address of the Monterra Apartments, identifies information related to a lease (move in date, move out date, lease start date, lease end date, monthly rental amount), again identifies Sarah Ruiz and Danielle Eberly as the debtors and indicates two charges — a nonrefundable cleaning fee incurred on September 14, 2011 and a “billback water/sewer” incurred the same date. Amounts are given for each charge, which total $388.05.
The creditor did not respond to Trustee’s objection to claim, and so Trustee submitted an order sustaining the objection as an uncontested motion pursuant to Local Rules W.D. Bankr. 9013-l(f). The Court lodged the order requesting further information from the Trustee as to why the objection was filed. Trustee’s counsel appeared at the hearing date for the objection, March 22, 2017, and explained that the concern was that the claim was based on a writing (the lease) and a copy of that writing was not provided, as Rule 3001(c)(1) requires. Trustee also expressed a systemic concern that creditors be encouraged and required to comply with the Rule 3001’s requirements when filing proofs of claim.
The Bankruptcy Appellate Panel considered this same issue in two companion cases in 2005—Heath v. American Express Travel Related Svcs. Co. (In re Heath), 331 B.R. 424 (9th Cir. BAP 2005)(consider-ing claim objections for lack of documentation in chapter 7 case) and Campbell v. Verizon Wireless S-CA (In re Campbell), 336 B.R. 430 (9th Cir. BAP 2005)(same as to chapter 13 cases). Both cases considered claims objections that solely raised issues as to the documentation provided, without any contest as to the debtor’s liability or the amount of the debt. In both cases, the BAP held that 11 U.S.C. § 502(b) identifies the exclusive bases for disallowing claims. Failure to comply with Rule 3001(c) is not included as a ground for disallowance in 11 U.SiC. § 502(b). Heath, 331 B.R. at 431-432. The Heath decision also considered equitable arguments, such as whether debtors should have to bear the costs and burden of discovery to get more information about a claim and Trustee’s argument that excusing inadequate documentation could lead to creditors abusing the system. Heath, 331 B.R. at 434. The Court was not persuaded that such arguments should override the statutory mandates of Section 502 that a claim “shall” be allowed unless one of the limited grounds in the statute for disallowance was established. Id. at 435. Nothing about the statutory scheme was found to violate either due process or equitable principles. Heath, 331 B.R. at 431-438; Campbell, 336 B.R. at 435.
Assuming for purposes of this decision that the documentation provided by IQ Data is insufficient upder Rule 3001(c), if a party raises a substantive objection to the proof of claim, at a subsequent hearing, a proof of claim lacking proper documentation is not entitled to the presumption of validity and amount, and to subject the claimant to the evidentiary sanction of being barred from presenting documents at a subsequent- evidentiary hearing on a disputed claim. See In re Richter, 478 B.R. 30, 45-46 (Bankr. D. Colo. 2012). But a failure to attach sufficient documentation is not a basis for disallowance of a claim.
While Trustee’s objection to the claim here is couched as saying he needed documentation to “determine whether a basis exists for allowing the filed claim,” no po*599tential challenge to enforceability under Section 502(b) was raised either in the pleading or identified by Trustee’s counsel at the hearing. And none seems likely where the Debtor scheduled this debt, owed to this creditor, in an almost identical amount. Heath, 331 B.R. at 431 (“bankruptcy schedules can constitute admissions under Fed. R. Evid. 801(d)(2))”).
Relying on the plain language of 11 U.S.C. § 502 and Rule 3001 and the holdings of Heath and Campbell, the Court sees no valid reason to disallow IQ Data’s claim.
Trustee’s Objection to Proof of Claim Number 1 filed by IQ Data International, Inc. is HEREBY DENIED.
It is SO ORDERED.
. Debtor’s petition (ECF No. 1) indicates that she has also used the names "Sarah Ann *598Ruiz-Sheedy” and "Sarah Ann Ruiz” in the last eight years. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500492/ | MEMORANDUM OPINION
Robert E. Nugent, United States Bankruptcy Judge
The Court “may” dismiss a chapter 13 case for “cause,” including unreasonable delay, material default under a confirmed plan, and bad faith.1 But once the debtor completes all payments under the plan, the Court “shall” grant the debtor a discharge.2 In this case, the debtors violated both their plan and confirmation order. They flouted their duties to the Trustee, the Government, and the Court throughout the case. Even after the Trustee’s and the United States’ motions to dismiss were pending, the debtors continued to run afoul of the confirmation order. Yet the debtors completed their payments before the trial on these motions. Despite there being ample cause to convert or dismiss their casé, § 1328(a) requires the Court to instead grant the debtors a discharge and deny the Trustee’s and the United States’ motions as moot.3
Facts
Shala and Nathan Holman filed this case on November 3, 2011. Nathan was and is a *601self-employed chiropractor. Shala was a physician’s assistant who dabbled in multilevel marketing on the side. They proposed a chapter 13 plan that provided for them to make 60 monthly payments of $707. Under the plan, they would surrender their late model Mercedes Benz and their boat, strip off a $212,494 second mortgage on their homestead, and retain their 2009 Volkswagen.4 On June 28, 2012, the Court entered an agreed order confirming their plan as modified (“Confirmation Order”), increasing their monthly payments to $1,517 for 57 months.5 At that time, this Division’s standard confirmation order set out a series of duties on the debtor. The evidence shows that the Holmans flouted these duties throughout the case, especially these four. The debtors were ordered to immediately notify the Trustee of any change in employment. They were directed to timely file all tax returns coming due during the case and to provide copies of those returns to the Trustee upon request. They were prohibited from incurring any new debt during the plan without the Trustee’s or the Court’s approval. And, they were prohibited from selling, encumbering, or otherwise disposing of their assets without a prior court order.6
I. Violations of Plan and Confirmation Order
A. Shala Failed to Disclose Employment Changes.
Shala Holman lost her position as a physician’s assistant in February of 2013. She applied for state unemployment compensation even though she had been working as a Rodan + Fields (“R + F”) associate or consultant since 2011 — a position she failed to disclose on either Schedule I or the statement of financial affairs.7 The debtors filed at least two motions to modify that asserted Shala was unemployed, filing amended schedules I and J that also omitted her employment. The first motion (and second modification) in October 2013 stated that Shala had lost her job in February of 2013. The amended schedule I stated that Shala was unemployed.8 Nathan was credited with receiving “income from Skin Care supplies” that Shala testified should have been attributed to her. She did disclose receiving unemployment. This second modification was granted by agreed order on November 18, 2013.9
Six months later the debtors filed their third motion to modify on May 28, 2014, again claiming that Shala was unemployed.10 This time, they filed no amended schedules I and J. Nevertheless, this motion was also granted by an agreed order.11
*602Not until April 13, 2015 when the Hol-mans filed their fourth motion to modify, was Shala’s R + F employment revealed. On the revised schedules I and J filed to support that motion, the debtors finally disclosed that Shala was involved in “direct sales,” had been for six years, and was receiving $4,558 a month in commissions.12 This modification motion went to trial in October of 2015.
B. The Holmans Failed to File Timely Tax Returns and Provide Timely Copies.
Before filing bankruptcy, the debtors established an annual pattern of filing their tax returns on extension per their accountant’s advice. At trial, Shala admitted failing to file the 2014 taxes by April 15, 2015 and failing to provide the Trustee with the returns. The trustee requested copies of the 2014 returns in an e-mail dated April 15, 2015. The e-mail made providing those returns a condition of agreeing to a post-confirmation modification that debtors were seeking.13 The Holmans’ counsel supplied the Trustee with a copy of the debtors’ 2014 return extension on May 5. Then the debtors sent the Trustee a copy of the 2014 return signed as of June 22, 2015.14
Meanwhile, the debtors had filed their fourth motion to modify on April 13, 2015.15 The Trustee contested the modification and, shortly before a hearing on that matter was to take place, the debtors filed their fifth motion to modify on October 12, 2015.16 Both modification motions were resolved by an Agreed Order entered on December 2, 2015 that provided, in part, that “to resolve the Trustee’s lack of good faith objection to confirmation of their modified Plan,” the debtors would not reduce the dividend payable to the unsecured creditors to pay any § 1305 claims, including those of the taxing authorities.17 Presumably, this Agreed Order resolved any outstanding demand for the 2014 returns. The parties stipulated that the debtors filed this return on October 9.
The Trustee requested copies of the debtors’ 2015 tax returns by emails sent March 14 and March 28,2016.18 The March 14 email requested production of the tax returns not later than May 1. Trustee’s counsel followed up on March 28 and, apparently hearing nothing, filed a formal motion to compel production of the returns on May 17.19 Trustee Williams withdrew that motion on July 13, suggesting that the returns had finally been supplied. The debtors’ 2015 return reflects that they signed and electronically filed it on June 30, 2016, but they later stipulated that this return wasn’t actually filed until September 18.20
*603G. The Holmans Incurred Unauthorized Post-Petition Debts.
The Holmans stipulated that they failed to pay federal income taxes that accrued post-petition.21 They owe at least $24,223 for 2014 and $27,746 for 2015.22 On February 16, 2017, the debtors filed their 2016 return, adding an additional liability of $23,799.23 In short, during their last three years in chapter 13, these debtors racked up over $75,000 in federal income tax liability without either the leave of the court or the Trustee.24 But these are not their only unauthorized post-confirmation debts.
D. The Holmans Acquired and Encumbered Assets without Court Approval
In June of 2014, the debtors decided to give their son a car for his sixteenth birthday. They asked Sandra Woodward, Sha-la’s mother, to borrow the money so they could buy him a 2012 Jeep Liberty. The vehicle was titled in Ms. Woodward’s and Nathan’s names. Though Ms. Woodward signed the note, Shala was responsible for making the payments and did so from her income.
As discussed at the 2015 hearing, Shala bought a new Lexus sport utility vehicle in 2015. R + F gives Shala a $750 monthly car allowance that is earmarked to pay for the car. Her father borrowed to pay for the car and she titled in his name “due to the bankruptcy.” She gives him the car allowance every month to pay the loan. Shala did not seek either the Trustee’s or the Court’s permission to get the Lexus.
On August 1, 2016, Shala incorporated a subchapter-S entity, Empowering Together, Inc. (ETI), also without Court or Trustee approval.25 She testified that she did this to better organize her business affairs and to save taxes.26 Then, on August 11, Shala and ETI applied for a residential lease agreement with Watercrest at City Center Apartments in Lenexa, Kansas, and executed the lease on September 20.27 Shala testified that this apartment was necessary for her to entertain clients and train other consultants in the course of her R + F employment. Shala agreed at trial *604that she didn’t obtain the Trustee’s permission and that this action violated the confirmation order, but excused this by stating that when she applied to get the apartment, she believed none would be available until the debtors had completed their chapter 13 case in January of 2017. Both the incorporation and the lease were done in August-September of 2016, after the Trustee moved to dismiss on July 26.28
II. Lack of Good Faith
The Trustee also argued that the Hol-mans filed and prosecuted their ease in bad faith that is cause to dismiss under § 1307(c). The Holmans have been less than forthcoming in two particular areas: their income and employment status and their bank accounts.
A, Pattern of Failure to Disclose Current Income
Twice in modification motions and their supporting income and expense schedules, Shala contended that she was unemployed and only receiving unemployment compensation. In both motions, debtors sought to temporarily reduce their monthly plan payments to $1,000 due to Shala’s alleged unemployment. She first made this claim in October of 2013 when she had been selling R + F for nearly two years — indeed before the case was filed.29 On the Schedule I filed on October 21, 2103, Nathan reports monthly income of $1,221 as “Income from Skin Care supplies [sic].”30 Sha-la only reported receiving unemployment. •Though the October Schedule I discloses no R + F income for Shala, she actually receivéd over $30,000 that year, averaging $2,500 a month.31
When the debtors filed their third modification motion in May 2014, seeking to continue the reduced plan payments, Shala again claimed unemployment.32 The debtors filed no amended schedules I and J this time, but the Trustee consented to the modification. The Court entered an agreed order modifying the plan on August 19, 2014.33 Schedule C of the debtors’ 2014 tax return reflects that Shala generated net profit that year of $38,342 or an average of $3,195 a month.34 Their contemporaneous representation that they needed another six months of payment relief to allow Shala to get work was simply false.
On April 13, 2015, debtors filed their fourth motion to modify, asking to permanently reduce their. plan, payments to $1,025 based on a “drop in income.”35 They submitted profit and loss statements and amended Schedules I and J.36 The Court opened an evidentiary hearing on this motion on October 13, 2015, one day after the debtors filed their fifth motion to modify.37 In the fifth motion, they represented that their income had changed. again and sought to increase their monthly payment *605to $3,080 for the duration of the plan.38 The April Schedule I had disclosed that Shala’s business income was $4,558 per month, and noted that Nathan’s income was down to $2,830 per month.39 By contrast, the Holmans’ 2015 tax return shows that Nathan profited from his chiropractic practice by $52,703. Shala realized' $66,072, making her average monthly net income $5,506, not the $4,558 she reported.40 Again, the Holmans understated their income.
Around the time of the October 13, 2015 hearing, the debtors filed several separate schedules I and J. The inconsistent information these documents contained unduly complicated the resolution of the fourth and fifth modifications. Before the October 13 hearing, the debtors filed an amended schedule J without a schedule I.41 There they reported combined income of $9,211. Only after they filed their fifth modifier tion did they file a schedule I. It reported their combined income as $10,788.42 Subtracting the previous schedule J expenses of $6,063 yields a disposable income amount of $3,523. After the Court reopened the evidentiary hearing to consider the fifth motion, the debtors filed another schedule J, this one showing disposable income of $3,522.43 On December 2, 2015, the Trustee and the debtors agreed to an order that granted the fifth modification motion and “resolved” the Trustee’s lack of good faith objections to the fourth and fifth motions.44
B. The Holmans Failed to Disclose Bank Accounts.
The Holmans failed to disclose bank accounts, both at the time of the initial filing and later. Based on the Trustee’s exhibits and Shala’s testimony, the following accounts were not disclosed—
• Intrust Bank x9233 — this was Nathan’s small business checking account that, according to Shala, he opened on September 12, 2011 after closing a similar business account at Commerce Bank, x4603.
• Commerce Bank x4603 — Debtors scheduled this account as having a - 0- balance at filing. If it was closed before the case was filed, that statement was at least partially accurate.
• Commerce Bank x5972 — Shala explained that this was Nathan’s son Aaron’s student checking account. They were signatories, so it should have been disclosed.
• Commerce Bank x0886 “Holman Marketing” — Nathan used this account to purchase postcards and other marketing items for his practice; Shala testified she thought the account had previously been closed.
• Intrust x5077 — Shala testified this was Nathan’s account to which she was added in February of 2012, after filing. It was not disclosed to the Trustee until the present motion was filed.
*606• Intrust x6208 — Shala testified that this was her business account for R + F work and was opened in December of 2011.
• Intrust x5612 — Shala testified that this account is hers and their son Skylar’s, opened in 2013. She testified that he, too, is an R + F consultant.
• Intrust x9342 — this was the son’s savings account, opened in August of 2013 upon which Shala was a signer. It has since been closed.
• Intrust xx 7970 — Shala stated this was an account of hers and her mother’s Ms. Woodward, opened in June of 2014 to pay the Jeep payments and in which Shala parked about $4,000 for 2016 taxes. She stated she had not used this account for her business.
• Intrust x9932 — this is ETI’s corporate account, opened on August 2, 2016.
At trial, Shala conceded that none of these accounts was ever disclosed.
C. The Holmans Indulged in Excessive Lifestyle Expenditures,
While the debtors were trying to reduce their plan payments, they underreported income and spent excessively. Some examples of this include the son’s jeep, Shala’s 2015 Lexus, trips taken by members of the Holman family, their four Kansas City Chiefs season tickets, and the Lenexa apartment ETI rented in 2016.
As discussed at the 2015 hearing and again above, Shala bought a new Lexus sport utility vehicle in 2015, but her father borrowed to pay for the car and she titled in his name “due to the bankruptcy.” She pays for the loan. Likewise, the debtors masked the acquisition of their son’s birthday Jeep by placing the car and the loan in Shala’s mother’s name. Nathan drives a Denali that Shala says they bought from Ms. Woodward. That vehicle was not listed on the schedules, suggesting it was purchased after the filing. These cars were part of the Trustee’s 2015 good faith objection that has since been resolved.
Shala and Nathan traveled to Mexico for her 40th birthday in 2013. She claimed this was also a work teip. In 2016, they visited their daughter in New York City, conducting a garage sale to raise enough to pay for airfare for one of them. This past summer, Shala attended an Adele concert in Denver — her sister gave her the tickets and the family drove there. Their son’s senior trip took him to Paris, France, but Shala testified he paid the cost of the trip himself over 15 months with odd jobs. On balance, these travels do not seem extravagant.
Much of Shala’s personal finances are bound up in her business. That includes her bulldogs’ veterinary bills; she says they feature in her R + F promotional materials. R + F also sends Shala on business trips. ETI rented the Lenexa apartment to provide her a Kansas City area platform for her R + F work which includes training the 1,400 consultants under her. Shala also hired an assistant who works out of the apartment. The apartment rents for about $1,200 per month. No doubt the apartment makes it easier for the Holmans to use their Chiefs tickets which, Nathan testified, are the least expensive tickets available and cost about $2,700 a year. At the October 2015 hearing, Nathan testified that these tickets were a business expense and that he uses them to reward other professionals for referrals and has done so since 2003. Presumably, Shala can use them in a similar fashion.
The debtors also continue to own and pay the first mortgage on their home in Wichita, having cured a default on that *607mortgage during this case.45 In May of 2015, around the same time that debtors filed their fourth modification, their mortgage lender filed a motion for relief from the automatic stay; at that time debtors had missed five mortgage payments and were in arrears over $15,000.46 The debtors agreed to make additional payments to cure the mortgage arrearage.47
D. Nathan’s Work; Division of Financial Responsibility.
Nathan and Shala both testified that while he devotes his time and attention to being a chiropractor, she is in charge of the family’s financial affairs. Chiropractic practices have suffered in the past 20 years because health insurers pay far less for chiropractic treatments than before and patients must pay more out-of-pocket for treatments that results in scheduling more infrequent treatments. Nathan said his income had dropped by some $70,000 a year by the time he filed here. Asked why he did not support selling the debtors’ home to reduce debt, Nathan testified that the family had lived there since 1997, he wanted his children to grow up there, and that he had cured the defaults through the chapter 13 plan. He testified that during the case, the Holmans sold most of their furniture to make plan payments in 2012-2013 and that they could not afford even rudimentary home repairs. As a result of a post-petition mortgage modification with Bank of America, their house payment was reduced from $4,812 to $3,099 a month and paid outside the plan. This, too, is ground that was covered at the October 2015 hearing as part of the Trustee’s now-resolved lack of good faith objection.
Shala testified that in 2016, the couple changed accountants, hiring an accounting service in Las Vegas to assist them with taxes going forward and to restructure Shala’s business into a sub-S corporation. They have also hired Polston Tax Resolution to represent them before the IRS. These professionals have proposed offers in compromise to the IRS, but those offers are in limbo pending the end of this bankruptcy case.48
Both debtors testified that they had learned and grown through the bankruptcy process. They have now structured their affairs so that they can resolve and óontinue to pay taxes on a current basis. Nathan seemed withdrawn from the family’s financial details and Shala dismissed the debtors’ many disclosure errors and misstatements, preferring to focus on the couple’s attempts to master their finances.
III. Status of the Case: Payments Completed.
In December of 2015, the Trustee agreed to resolve her objections to the proposed fourth and fifth modifications in exchange for the debtors’ agreement to make monthly payments of $3,522 from December 2015 through February 2016, increasing to $4,725 for another nine months until $109,107 had been paid under *608the plan.49 On July 26, 2016, the Trustee filed her second motion to dismiss based on the debtors having defaulted on their payment obligations and also upon their failure to pay post-petition taxes.50 The United States filed its own dismissal motion on August 23, 2016.51 Trustee Williams resigned on October 1, 2016 and Trustee Carl B. Davis entered his appearance in the case. He twice amended the prior dismissal motion to assert that the debtors had proceeded in bad faith and to ask for a conditional dismissal as § 349(a) provides.52 Debtors completed their plan payments in December 2016 by making their final payment while awaiting the hearing on these motions.53 After discovery through the end of 2016 and the beginning of this year, the parties came to trial on these motions, as supplemented by the Trustee’s bill of particulars, on March 22, 2017.54
Analysis
The United States requests that the case be dismissed for cause, asserting that debtors are funding their plan by incurring and not paying post-petition income tax liability without approval of the Court or Trustee. The Trustee asks for the same relief and asserts debtors’ bad faith as an additional basis for cause, plus a conditioned dismissal under § 349 that would not only bar the Holmans from filing another case for 180 days under § 109(g)(1), but would also bar the future discharge of any of the debts scheduled in this case. Both parties request that I dismiss this case without entering a discharge order. Given the amount of money they have paid, that would be a draconian remedy— the bankruptcy equivalent of the death penalty.
I. Dismissal for Cause under § 1307(c)(1) and (6)
There is ample cause to dismiss this case. Section 1307(c) provides an inclusive list of examples of “cause,” two of which particularly apply in this case—
(c) Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including—
(1) unreasonable delay by the debtor that is prejudicial to creditors; [or]
* * ⅜
(6) material default by the debtor with respect to a term of a confirmed plan; # ⅜ ⅝ 55
The record shows that the Holmans repeatedly violated the Confirmation Order and plan. The Confirmation Order outlines the debtors’ duties and requirements. Many courts hold that continuing violations of these “duties orders” warrant dismissal. “Failure of the debtor to comply with local rules and ‘duties orders’ that require such things as the filing of tax returns is cause for dismissal.”56 The Hol-*609mans’ duties were explicit. They were to (1) keep the court apprised of changing employment;57 (2) not incur additional debt;58 (3) not sell or dispose of any assets;59 and (4) timely file all tax returns that become due, providing a copy to the chapter 13 Trustee when filed and if requested.60 The facts reflect their utter disregard of each of these duties.
As detailed above, Shala Holman misrepresented her employment status for several years. Though she notified the Trustee that she had lost her job at the Kansas Medical Center when they filed their second motion to modify in 2013, she did not disclose her ongoing work for R+F, until 2015, when the debtors filed their amended schedules in support of the fourth motion to modify, nearly three and one-half years after the petition date.61 Her facile explanation that her R+F income was incorrectly attributed to Nathan might wash had it only happened once. It didn’t.
The Holmans incurred many post-petition debts without Trustee or Court approval, some that appear to have been actively concealed. First, there are the taxes. The Holmans concede that they owe the Internal Revenue Service federal income taxes of $24,223 for 2014, $27,746 for 2015, and $23,799 for 2016.62 Despite generating adjusted gross income in each of those years in excess of $100,000, the debtors only paid the. taxing authorities about $3,400.63 They will exit bankruptcy having paid. $109,107 into their plan, but still owing the United States over $75,000.
At least the tax debts came to light when the debtors produced their returns. Not so with the Jeep and Lexus loans that they incurred through others without getting the Trustee’s or the Court’s approval. At trial, Shala explained these actions away as being necessary “due to the bankruptcy.” Nor did the debtors ever disclose that Nathan acquired the Denali he drives *610from Shala’s mother or how that vehicle is titled.
The debtors also disposed of assets in violation of the confirmation order. Each undisclosed car loan involved encumbering assets of the estate. So did Shala’s incorporation of her business. When she formed ETI, she transferred her business and its assets to it in exchange for her equity. ETI’s 2016 Form 1120S return show Sha-la’s Lexus and the ETI lease on the depreciation schedule.64 Shala’s commission income is now attributed to the corporation. No doubt incorporating a business has many salutary tax and organizational efficiencies, but the confirmation order required Shala to get the Trustee’s permission to do it. She didn’t.
The Lenexa residential lease violated several confirmation order injunctions. The debtors didn’t seek the Trustee’s or the Court’s approval. The Holmans already have a large home in Wichita, so the apartment couldn’t be necessary “for the preservation of life, health, or property,” an exception to the requirement of Trustee or Court approval.65
Finally, the Holmans had to be prodded to comply with the duty to file and turn over their tax returns. They did neither without the Trustee going to considerable effort, including the filing of a motion to compel.
Any of these plan or confirmation order violations provide cause to dismiss this case. Here the violations are many and some appear to have been concealed from the Trustee. That alone would be sufficient cause to dismiss the case under 11 U.S.C. § 1307(c)(6).
II. Lack of Good Faith as Cause to • Dismiss under § 1307(c)
Bad faith is not included in the statutory exemplars of what constitutes cause for dismissal, but § 1307(c)’s list is inclusive, not exclusive.66 Certainly bad faith conduct amounts to unreasonable delay that would fall within § 1307(c)(l)’s ambit, too. In In re Gier, the Tenth Circuit Court of Appeals held that “the bankruptcy court must consider the ‘totality of the circumstances,’ ” when considering whether a debtor filed a chapter 13 case in bad faith.67 The Gier panel cited to Seventh Circuit authority in In re Love that invoked a “nonexclusive list of factors relevant to a § 1307(c) inquiry,” a list that is very similar to the Tenth Circuit’s Flygare factors that courts use to discern whether a debtor’s plan has been proposed in good faith under § 1325(a)(3).68 The Love list includes:
*611the nature of the debt, including the question of whether the debt would be nondischargeable in a Chapter 7 proceeding; the timing of the petition; how the debt arose; the debtor’s motive in filing the petition; how the debtor’s actions affected creditors; the debtor’s treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors.69
There are many cases dealing with dismissal of chapter 13 petitions for debt- or’s bad faith.70 Many of them address serial filings and simultaneous filings in different chapters or different courts, while others speak to in-case conduct by the debtors. The debtor’s confirmation order violations discussed above also implicate the Flygare factors. The bottom line in a lack of good faith inquiry is whether the totality of the circumstances suggests that the debtors abused the provisions, purpose, or spirit of the Code both before and after December 2, 2015, the date of the Agreed Order confirming the fifth plan modification.71
The many troubling circumstances here include the debtors’ misreporting or concealment of income, new debt, and asset acquisition and disposition from the Trustee. While the Holmans paid $109,107 into their plan by the end of their 60 month plan term, their income dramatically increased, raising the question whether they could have or should have paid more.72 Their repeated inaccurate statements concerning their debts, income, and expenses suggests something beyond inadvertence. They failed to disclose bank accounts, cars, employment, income, expenses, the lease, and the corporation “because of the bankruptcy.” Even after the fifth modification was approved, and while the Trustee’s second dismissal motion was pending, Shala organized ETI, established an ETI bank account (transferring assets into the account), leased the Lenexa apartment and spent $8,000 furnishing it.
The Holmans used chapter 13 to drastically modify their home mortgage loans. They live in a 5,100 square foot, 5 bedroom house on a half-acre lot. They scheduled this home with a value of $340,000 at a time when Sedgwick County valued it at $487,200 for ad valorem tax purposes. They leveraged that lower value to slice off Cenlar’s $212,400 second lien, then they effected a loan modification of the first mortgage in 2012 that reduced their monthly mortgage payment by $1,700. Even after obtaining substantial mortgage debt relief, they still failed to pay current three years of post-petition federal income taxes.
These actions suggest that the debtors lack motivation and sincerity.73 *612They demonstrated disregard for the bankruptcy process and the Court’s orders and abused the provisions, purpose, and spirit of chapter 13. Though this also supplies ample cause to dismiss their case, two matters prevent that.
First, the Trustee challenged most of the debtors’ bad faith conduct at the October 2015 trial. After presenting evidence concerning those objections, the parties agreed to an order that states in part—
3. To resolve the Trustee’s lack of good faith objection to confirmation of their modified Plan, Debtors herein agree that the dividend to their general unsecured creditors shall not be reduced to pay any post-petition 11 U.S.C. § 1305 claim, including that of any taxing authority.74
The Agreed Order stated that the debtors had paid $56,016 into the plan through November 20, 2015 and that they agreed to pay three monthly payments of $3,522 followed by nine monthly payments of $4,725 to complete it. They did that, paying $53,091 in twelve months’ time for a total of $109,107, the agreed base amount.
The Trustee filed a “2nd Motion to Dismiss” on July 26, 2016.75 In that motion, the Trustee alleged that the debtors were $7,804 in arrears under the Agreed Order and had failed to file their 2015 tax returns.76 In response, the debtors agreed to file their 2015 return immediately and promptly catch up their payments.77 They did both. Not until August 23, 2016 did the United States file its motion to dismiss for failure to pay their 2014 taxes and to file the 2015 return.78 In short, the debtors complied with their payment obligations under the Agreed Order, catching up the $7,804 delinquency and paying the total base of $109,107 over the life of the plan.79 They filed their 2015 tax return on September 18, 2016.80
To allow the Trustee to reopen the bad faith issues that arose before December 2, 2015 would be the equivalent of revoking the Agreed Order that confirmed the fifth modification. A court may revoke a confirmation order only if it was “procured by fraud,” and then only after a party in interest files an adversary proceeding within 180 days of the order’s entry.81 Even if the Agreed Order had been procured by fraud, the Trustee’s dismissal motion filed July 26, 2016, some 237 days after the Agreed Order. It is too late to reconsider or revoke what the parties agreed to on December 2, 2015,82 even though bad faith and other issues arising out of the ETI incorporation, the Lenexa residential lease, and the continuing pattern of nonpayment of taxes would remain in play were the plan payments not complete.
*613The completion of payments presents the second and taller barrier to dismissal. While dismissal is discretionary, the Court’s duty to enter a discharge upon payment completion is not. Section § 1307(c) states that the court “may” dismiss a case for cause, but § 1328(a) states that once payments have been completed and certain other requirements have been met, “the court shall grant the debtor a discharge... ”83 The time in which to except a debt from the Holmans’ discharge has long passed.84
In re Parffrey is a very similar case.85 That debtor failed to file tax returns or pay income tax throughout his chapter 13 ease, but when the United States filed its dismissal motion, he paid off his plan and demanded a discharge. Recognizing that at least one other judge had dismissed a case after payment completion,86 the Parffrey court concluded that it lacked discretion to deny the debtor a discharge even though the debtor had violated the “duties order.” In Parffrey, the debtor had failed to file three post-petition income tax returns despite receiving more than one million dollars in gross receipts during that period. The form confirmation order used in the Parffrey case did not provide for dismissal as a consequence of incurring post-petition debt. Like the confirmation order in our case, the Parffrey order merely warned that unauthorized post-petition debt might not be dischargeable under § 1305. The Parffrey court noted that in later cases, it had begun to issue an order that expressly provided that the debtor should file tax returns timely, just as the District of Kansas order does. The court also noted that Parffrey’s taxes were his liability alone; only if the IRS opted to seek administrative status under § 503(b) or post-petition treatment under § 1305 would the claims receive any distribution in his chapter 13 case. As in this case, the IRS did neither in Parffrey,
The Parffrey court concluded that despite having clear grounds to dismiss the debtor’s case, it lacked discretion to deny him a discharge because “Congress did not see fit to give bankruptcy judges discretion on this point.”87 The court noted that the drafters’ used the mandatory “shall” as opposed to the discretionary “may” and concluded that “the words of a statute are not to be disregarded in search of equity...”88 Indeed, as Judges Lundin and Brown have written—
Once the Chapter 13 debtor has completed payments under the plan and is entitled to discharge under § 1328(a), it will be truly unusual facts to justify dismissal with prejudice under § 349(a). It has been held that entry of discharge in the Chapter 13 case renders moot a motion to dismiss filed, but not decided, earlier in the Chapter 13 case.89
*614In our case, the Holmans continued paying while the "Trustee continued discovery. After these motions had been set for a November 15, 2016 evidentiary hearing, on November 7 the Trustee and IRS jointly requested that the hearing be continued to allow for more discovery.90 The Holmans have not yet requested a discharge, but unless they owe domestic support or are otherwise disqualified from receiving one, § 1328(a) requires me to grant them one. Had I the discretion to deny a discharge and dismiss this case, I would. As it is, the debtors completed their plan payments and I lack the discretion to dismiss this case in spite of their conduct.
That discharge will not solve all of the Holmans’ problems. For one, they will remain liable for the post-petition income taxes they’ve incurred. The IRS did not file a § 1305(a)(1) proof of claim for those taxes. They were not incurred by, nor were they payable by the estate and the taxes are excepted from administrative tax treatment by § 503(b)(l)(B)(i).91 These taxes will not be discharged. Nor will any other post-petition debts the debtors incurred and for which no § 1305(a)(2) claims were filed. They will also remain personally liable for their first mortgage debt which is excepted from their discharge under § 1328(a)(1) because their plan provided for it to be paid beyond the plan’s term under § 1322(b)(5).92 Finally, the Holmans have student loan debt that will also survive their discharge.93
Despite being deeply troubled by the debtors’ artful dodging of their duties, the Code’s express language cannot be dodged. There is no discretion for the Court to “equitably” deny their discharge, and, to some degree, that is consistent with chapter 13’s underlying theme that “rewards” plan completion with a much more expansive discharge.94 Like all hard cases, this one offers several lessons. First, the bankruptcy system runs on debtor credibility. Debtors need to present information that is complete, timely, and factually accurate. Second, the bankruptcy system runs fast. Motions like these must be investigated, filed, and prosecuted more quickly than this one was. Third, the bankruptcy system runs on finality. Once a modification motion has been resolved, unless there is fraud and a timely complaint to revoke the order, that resolution closes the book on any bad faith or other conduct *615the Trustee may have alleged in objecting to it.
The Court DENIES the Trustee’s and United States’ motions to dismiss and directs the debtors to apply for a discharge consistent with the practices of this District not later than 14 days from the date of this order. Having concluded that the debtors are entitled to a discharge because they completed their plan payments and having denied his motion to dismiss, the Trustee’s additional requests for a conditional dismissal and a discharge bar under § 349(a) and § 109(g) are moot.95
SO ORDERED.
. 11 U.S.C. § 1307(c)(1) and (c)(6). All statutory references are to the Bankruptcy Code, Title 11, U.S.C., as amended.
. § 1328(a).
. Two trials occurred in this case. The first, on October 13, 2015 was on the debtors’ fourth motion to modify their confirmed plan and the Trustee's first motion to dismiss. Doc. 168. The day before this first trial, debtors filed a fifth motion to modify. The fourth and fifth modifications were resolved by agreement and approved by the Court on December 2, 2015. Doc. 180 (Agreed Order). Then, when debtors defaulted under the Agreed Order, the Trustee filed a second motion to dismiss on July 26, 2016 and that motion, as twice amended, together with the IRs’s motion to dismiss filed August 23, 2016, came on for trial on March 22, 2017. Doc. 255. This Order is the Court's ruling on the motions presented on March 22, 2017 but will contain *601references to the first trial and the evidence that was presented. Debtors appeared in person and by their attorney Michael J. Studt-mann at both trials. Attorney Karin Amyx appeared for the Chapter 13 Trustee Laurie B. Williams at the first trial and Williams’ successor Carl Davis at the second trial. The Internal Revenue Service appeared by Emily Metzger, Assistant U.S. Attorney at the second trial.
. Doc. 5.
. Doc. 58.
. See Doc. 58, p.2.
. Rodan + Fields is a multilevel marketing business centering on the sale of skin care products. As a consultant, Shala is charged not only with selling products, but also with recruiting, training, and managing other consultants involved in the same pursuits. She receives an additional 5% commission on sales generated by other consultants under her.
. Doc. 93.
. Doc. 96 (temporarily reducing for 6 months the payment from $2,035 to $1,000).
. Doc.112.
. Doc. 118 (continuing the reduced $1,000 payment for another 6 months),
. Doc. 135.
. See Ex. O.
. See Ex. P (owing $21,693 with estimated tax penalty).
. Doc. 133.
. Doc. 165. Trial was set for October 13, 2015 and went forward on that date at the insistence of counsel for both sides.
. Doc. 180.
. Ex. V.
. Doc. 188 (Ex. W).
. See Ex. X (owing $25,391 with estimated tax penalty). Shala testified at trial they had to refile their 2015 return due to Nathan’s identity theft problem they were alerted to by the IRS. According to the Trustee, this was the first time debtors mentioned identity theft as the excuse for the delay in providing their 2015 returns.
. In addition to the evidence admitted at trial, the Holmans, the IRS, and the Trustee entered into a stipulation of facts regarding the filing of post-petition federal income tax returns, the amount of federal income tax liability, and any payments made by the Hol-mans to the IRS for tax years 2014, 2015 and 2016. See Doc, 254.
. See Doc. 254, ¶ s 3, 5 (tax liabilities as of February 13, 2017, plus interest and penalties thereafter). Prior to this, the Holmans accrued a $22,625 income tax liability for tax year 2011 that necessitated their first post-confirmation plan modification in November of 2012 and increased their plan payment to $2,035. Doc. 67.
. Doc. 254, ¶ 7.
. When Trustee Williams resolved her objection to the debtor’s fifth modified plan with the proviso that the debtors would not reduce their dividend to the general creditors by paying any post-petition taxes, she arguably acquiesced in their having incurred these taxes. That said, the spirit of the confirmation order appears to have been breached.
. Ex. QQ.
. The Court notes that, in 2016, members of Kansas sub-chapter S corporations were exempt from paying Kansas income tax on income that passed through the entity to them. See Kan. Stat. Ann. § 79-32,117(c)(xx) (2016 Supp.) (Such income is deducted from a taxpayer’s federal adjusted gross income to determine the taxpayer’s Kansas adjusted gross income).
. Ex. RR. The base rent was $1,013, plus monthly rent of a garage ($135) and a monthly pet fee for Shala's two bulldogs ($50). As part of the lease transaction, the Holmans also incurred a $170 premium for required renter’s insurance.
. Doc. 196.
. Doc. 91 (“Joint Debtor lost her job in February 2013 and has been unable to obtain employment.'').
. Doc. 93,
. Ex. NN.
. Doc. 112 ("Joint Debtor lost her job in February 2013 and has been unable to obtain employment.”).
. Doc. 118.
. Ex. P, p. 126. Likewise, Shala's R & F earnings records show she received $58,729 in 2014, or an average of $4,894 per month. See Ex. 00.
. Doc. 133.
. Doc. 135.
. The parties agreed to go forward with the hearing anyway.
. Doc. 165. Although proposing an increase of over $2,000 in the monthly plan payment, the debtors’ fifth motion recited, like the fourth motion, a "drop in income,”
. Doc. 135.
. See also, Ex. X, pp. 171, 173.
. Doc. 161.
. Doc. 172, Shala’s 2015 earnings records from R & F show that she alone grossed $126,729, or on average $10,562 per month. See Ex. OO.
. Doc. 178.
. Doc. 180 (hereafter "Agreed Order”). The resolution provided for debtors to make a $3,522 monthly plan payment for 3 months starting in December 2015 and beginning in March 2016 pay $4,725 for the remaining 9 months of their plan.
.They stripped a second lien securing a $212,400 debt on their 5,100 square foot home early in the case. Their first mortgage at the time of filing was more than $348,000. Doc, 16. The monthly payment on the first mortgage was over $4,800 at the time of filing and pursuant to a loan modification effective October 15, 2012, the principal balance was increased to $408,213 to include debtors' outstanding arrearage and the monthly payment was reduced to $3,099 payable over 480 months. Doc. 78. Debtors were making their monthly mortgage payments directly to the lender.
. Doc. 140.
. Doc. 154.
. The Court notes that the IRS is reluctant to negotiate with debtors while still in bankruptcy.
. Doc. 180, Agreed Order,
. Doc. 196.
. Doc. 200.
. Doc. 212 and 241.
. See Ex. TT and UU. The Trustee's interim report as of November 18, 2016 showed that approximately $7,804 was needed to complete the plan. Doc. 231.
. Doc.248.
. 11U.S.C. § 1307(c)(1) and (6).
. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Ed., § 334,1, at ¶ 334.1, Sec. Rev, June 16, 2004, www,Ch!3 *609online.com. See In re Nygaard, 213 B.R. 877 (Bankr. M.D. Fla. 1997) (Cause for dismissal that debtors failed to file tax returns as required by preconfirmation order concerning the filing of tax returns routinely entered in Chapter 13 cases.).
. Doc. 58, p. 2 (“IT IS FURTHER ORDERED that should the Debtor(s) change either his address or employment, the Debtor(s) shall immediately notify the Court and the Trustee of same, in writing.”).
. Id., "IT IS FURTHER ORDERED that the Debtor(s) shall not incur any additional debts during the pendency of the plan without prior approval by the Court or by the Trustee, except debts that may be necessary for the protection and preservation of the life, health or property, such as food, clothing, lodging or medical care for the Debtor(s) and family.”
. Id., “During the pendency of this case, Debtor(s) is enjoined and prohibited from selling, encumbering, or in any manner disposing of assets without prior order of the Court, except as may be required in the course of Debtor's business, if Debtor(s) is engaged-in business.”
. Id., "IT IS FURTHER ORDERED that the Debtor(s) shall timely file all tax returns that become due during the pendency of the case, and provide a copy to the Trustee at the same time the return is filed, if requested by the Chapter 13 Trustee.”
. See Docs. 91, 135.
. Doc. 254.
. Based upon the March 2017 stipulation Doc. 254 debtors have paid $1,000 on 2016 taxes (in 2017 when filed), $0 on 2015 taxes, and $1,000 on 2014 taxes (in 2016). In addition they have submitted $1,400 in 2017 under a yet-to-be-approved installment agreement with the IRS. The $1,000 payment on the 2014 taxes appears on Exhibit 2, the tax transcript. Exhibit 4 reveals that the two $700 payments made in 2017 in support of the proposed installment agreement were actually applied, one to 2014 and the other to 2015,
. Ex. XX, p. 933.
. See Doc. 58, p. 2, conditioning the proscription on new debt.
. "Cause” under § 1307(c) is not defined nor limited to the conduct enumerated therein. See Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 333.1, at ¶ 1, and § 334.1, ¶ 5, Sec. Rev. June 16, 2004, www.Chl3online.com (hereafter "Chapter 13 Bankruptcy”).
. Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326, 1329 (10th Cir. 1993).
. Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir. 1983) (citing with approval list of factors from United States v. Estus (In re Estus), 695 F.2d 311, 317 (8th Cir. 1982)), superseded by statute as stated in Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1319 n. 5 (10th Cir. 2012) (because BAPCPA specifies that social security income benefits are excluded from the calculation of disposable income, court could not consider the exclusion of social security income in the good faith analysis under § 1325(a)(3); § 1325(b) as amended subsumes the ability to pay factors and narrows the good faith inquiry). See Chapter 13 Bankruptcy, § 334.1, ¶ 6 (A bad faith dismissal under § 1307(c) employs the same analysis of good faith required for confirmation under § 1325(a)(3), except the creditor or trustee has the burden of proof.).
. In re Love, 957 F.2d 1350, 1357 (7th Cir. 1992).
. See e.g., Chapter 13 Bankruptcy, App. O, Bad Faith Dismissal, Organized by Circuit, •www.chl3online.com.
. Doc. 180. See In re Gier, 986 F.2d 1326, 1329 (totality of circumstances inquiry for § 1307(c) dismissal best assists the court’s determination whether there has been an abuse of the provisions, purpose, or spirit of chapter 13); Flygare v. Boulden, 709 F.2d 1344, 1347, quoting In re Estus, 695 F.2d at 316; In re Wareham, 553 B.R. 875, 879-80 (Bankr. D. Utah 2016).
. This question is fostered by a review of Shala's R & F earnings records that the Trustee subpoenaed in late 2016. See Ex. OO (2013) and Ex. NN (2014-2016). For 2016, through September, Shala received $169,390 in commissions in that 9-month period, or an average monthly gross of $18,821. Ex. OO.
. Flygare, 709 F.2d at 1348 (debtors’ motivation and sincerity among the factors to be considered in determining whether there is a lack of good faith).
. Doc. 180. Emphasis added.
. Doc. 196. That motion was preceded by the Trustee’s Motion to Compel'Production of debtors’ 2015 tax returns on May 17, 2016, after having requested those returns twice previously in March of 2016. See Doc. 188.
. Doc. 196.
. Doc. 199.
. Doc. 200.
. See Ex. TT and UU, showing completion of plan payments with a final payment on December 15, 2016 and a total of $109,107 paid in.
. See Doc. 254.
. § 1330(a).
. Fed. R. Bankr. P. 7001(5) requires this relief to be sought in an adversary proceeding, not a contested matter. Note, too, that Fed. R. Bankr. P. 9024 which makes Fed. R. Civ. P. 60 applicable in bankruptcy cases and proceedings expressly provides that revocation complaints must be filed within the time set out in § 1330.
. § 1328(a).
. Fed. R. Bankr. P. 4007(c).
. 264 B.R. 409, 414 (Bankr. S.D. Tex. 2001).
. In re King, 217 B.R. 623 (S.D. Cal. 1998) (Case dismissed when debtor failed to pay § 1305 tax claim even after IRS filed it).
. 264 B.R. 409, 414.
. Id., quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
. Chapter 13 Bankruptcy, § 343,1 at ¶ 37, Sec. Rev. July 22, 2004, www.Chl 3online. com. See also Forbes v. Forbes (In re Forbes), 218 B.R. 48, 52 (8th Cir. BAP 1998) (Entry of discharge renders moot motion to dismiss pending for two years but not ruled upon by the bankruptcy court. ”[T]he Bankruptcy Code required entry of the discharge and ... Grace bears some measure of the blame by failing to press her dismissal motion. Therefore, we conclude that the bankruptcy court did not abuse its discretion in refusing to vacate the discharge order.”)
. Doc. 220.
. "However, if the tax claimant chooses not to file a proof of claim under section 1305(a), the debtor cannot pay the postconfirmation income tax as an administrative expense of the estate under section 503(b)(l)(B)(i), since the taxes were not incurred by the estate.” See 4 Collier on Bankruptcy ¶ 503.07 (16th Ed. 2017).
. We note that a number of courts have held that debtors who are in default on mortgages paid outside the plan under § 1322(b)(5) cannot be deemed to have completed their "payments under the plan.” See Evans v. Stackhouse, 564 B.R. 513 (E.D. Va. 2017) (postpetition mortgage payments made directly to lender are payments under the plan); In re Tumblson, No. 12-80365-TRC, 2016 WL 889772 (Bankr. E.D. Okla. Mar. 8, 2016) (case dismissed for cause when debtor defaulted on direct mortgage payment though all other payments to trustee were made); In re Formaneck, 534 B.R. 29 (Bankr. D. Colo. 2015) (case dismissed when debtor defaulted on direct mortgage payment in 58th month of plan); In re Gonzales, 532 B.R. 828 (Bankr. D. Colo. 2015) (discharge vacated where debtor had made all payments to the trustee but not all direct payments to mortgage creditor). Based on the record before me, these debtors appear to be current on their first mortgage.
. §§ 1328(a)(2) and 523(a)(8).
. Compare the'scope of debts discharged by § 1328(a) with that of a "hardship” discharge under § 1328(b).
. When the case is closed, the debtors will be barred from seeking a discharge in chapter 13 for two years, § 1328(f)(2), and in chapter 7 for six years, § 727(a)(9). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500493/ | OPINION
Cathleen D. Parker, United States Bankruptcy Judge
This matter came before the court for trial on February 10, 2016, on Plaintiff/Debtor, Red Eagle Oil, Inc.’s complaint and the Defendant/Equitable Oil Purchasing Company’s answer and affirmative defenses. At the conclusion of the trial, the court requested the parties file findings of facts and conclusions of law. Having reviewed the record, testimony and exhibits, the court is prepared to rule.
*618Plaintiff r2 Advisors, LLC is the Plan Agent appointed by Red Eagle’s confirmed Joint Chapter 11 Plan of Liquidation.1 The court substituted r2 Advisors as Plaintiff after confirmation of the Joint Plan.2
Jurisdiction
As stated in the stipulated uncontrovert-ed facts, this court has jurisdiction under 28 U.S.C. §§ 157(b) and 1334. Venue is proper under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (H) and (0). This adversary proceeding is brought under 11 U.S.C. §§ 548, 550 and 502(d).3
Issues
Plaintiff claims Red Eagle’s transfer of its fuel supply rights to Equitable was a fraudulent transfer, arguing that it transferred the rights without receiving equivalent value. Plaintiff seeks to recover the value of the transfer for the benefit of the estate and its creditors plus pre- and post-judgment interest. Plaintiff acknowledges that Equitable assumed certain Red Eagle brand dollar repayment obligations, but disputes that this constitutes value under § 548. Additionally, r2 Advisors seeks to disallow Equitable’s proof of claim for $156,011.13.4
Equitable asserts the following defenses: (1) Red Eagle did not have supply rights to transfer as the supply rights were Exx-onMobil’s property; and (2) if Red Eagle transferred any interest, Equitable further asserts that it gave reasonably equivalent value by assuming the brand dollar repayment obligations of One Stop Market, Lander, WY ($28,702.20), Rodeo West, Cody, WY ($33,860.00) and Ron’s Exxon, Cody, WY ($20,142.00).5 Equitable argues that the assumption of the aggregate value of the brand dollar payment obligations is reasonably equivalent to the value of the transfer; and (3) Equitable argues that it is a subsequent transferee because Exxon-Mobil consented to and approved the transfer of Red Eagle’s supply rights. As Equitable is not the initial transferee, it argues r2 Advisors may not recover the value of the transfer.
Findings of facts
The following are the uncontroverted facts as established by admissions in the pleadings or by stipulation.6
1. This Court has subject matter and personal jurisdiction over all claims alleged 'in the Complaint. Venue is proper and this matter is a core proceedings under 28 U.S.C. § 157. All parties consent to final judgment entered by this Court.
2. On September 1, 2010, Debtor entered into a Branded Wholesaler PMPA Franchise Agreement with ExxonMobil (the “Red Eagle PMPA Agreement”). The Red Eagle PMPA Agreement was not the first PMPA Agreement between the parties; it was a renewal of a five-year term for 2010-2015.
3. Prior to the petition date, Debtor entered into three ExxonMobil Distributor *619Brand Incentive Program Agreements (“BIP Agreement”), as the Distributor of ExxonMobil-branded fuel, for three dealer locations: One Stop Market (Lander, WY); Rodeo West (Cody, WY); and Fast Lane (Shoshoni, WY).
4. Prior to the petition date, Debtor entered into ExxonMobil Branded Distributor Loan Agreement, as the Distributor of ExxonMobil-branded fuel, for one dealer location: Ron’s Exxon (Cody, WY).
5. Prior to the petition date, Debtor was the wholesale supplier of fuel for the following four dealer locations: (1) Lander, WY (“One Stop Market”, Store # 03340); (2) Cody, WY (“Rodeo West”, Store # 08973); (3) Cody, WY (“Ron’s Exxon”, Store # 09098); (4) Shoshoni, WY (“Fast Lane,” Store # 81328) (collectively known as the Retail Stores).
6. Debtor purchased fuel from Exxon-Mobil, which it supplied on a wholesale basis to the four dealer locations for several years. Debtor purchased the fuel from ExxonMobil at the rack rate.
7. Debtor sold its fuel to the four dealer locations at the same price it purchased from ExxonMobil, plus freight and costs, plus a price per gallon by agreement with each respective dealer.
8. Debtor’s gross profit included the price per gallon collected from the dealers.
9. Debtor also had additional sources to purchase fuel for its business. In 1997, Debtor submitted a credit application to Equitable to establish an account to purchase fuel from Equitable. On April 15 and 18, 2011, Debtor purchased five loads of fuel from Equitable on credit at a cost of $147,728.04.
10. On or around May 2011, Debtor owed ExxonMobil approximately $1.5 million. After May 11, 2011, the Debtor was required to prepay all fuel purchases from ExxonMobil.
11. On or before May 5, 2011, Debtor received an offer to purchase its assets from IPC (USA), Inc. The proposed sale to IPC did not close.
12. On May 12, 2011, Debtor’s principal, Bryan Hinze, released all four dealer locations from Debtor and authorized them to become Exxon Dealers under Equitable.
13. On May 18, 2011, Equitable filed a lawsuit against Debtor for failing to pay $147,728.04 for the fuel Equitable supplied to the Debtor on April 15 and 18, 2011.
14. On May 19, 2011, Debtor, Equitable, and ExxonMobil executed an Assumption of ExxonMobil Branded Distributor Brand Incentive Program (“BIP”) Agreement for the dealer location in Lander, WY (“One Stop Market”, Store #03340).
15. On May 19, 2011, Debtor, Equitable, and ExxonMobil executed an Assumption of ExxonMobil Branded Distributor BIP Agreement for the dealer location in Cody, WY (“Rodeo West”, Store # 08973).
16. On May 19, 2011, Debtor, Equitable, and ExxonMobil executed an Assumption of ExxonMobil Branded Distributor Loan Agreement for the dealer location in Cody, WY (“Ron’s Exxon”, Store # 09098).
17. Through the assumption documents, Equitable agreed to assume Debt- or’s repayment obligations to ExxonMobil at three dealer locations, in the following amounts: (1) $28,702.20 (One Stop Market, Lander, WY); (2) $33,860.00 (Rodeo West, Cody, WY); (3) $20,142.00 (Ron’s Exxon, Cody, WY), and ExxonMobil released the Debtor from those obligations.
18. The BIP and Loan Agreements included ExxonMobil financing for improvements at each of the dealer locations, and repayment obligations owed by the Debtor to ExxonMobil for the financing. In summary, provisions in the BIP or Loan Agreement between ExxonMobil and *620Debtor govern the repayment obligations to ExxonMobil.
19. At the time Equitable assumed the BIP and Loan Agreements, ExxonMobil had made all payments due under the respective agreement.
20. On May 18, 2011, One Stop Market (Lander, WY) executed a promissory note in favor of Equitable for $28,702.20, related to the repayment obligation Equitable assumed from Debtor for this dealer location.
21. On May 18, 2011, Rodeo West (Cody, WY) executed a promissory note in favor of Equitable for $33,860,00, related to the repayment obligation Equitable assumed from Debtor for this dealer location.
22. On May 18, 2011, Ron’s Exxon (Cody, WY) executed a promissory note in favor of Equitable for $20,142.00, related to the repayment obligation Equitable assumed from Debtor for this dealer location.
23. Like Debtor, Equitable has its own Branded Wholesaler PMPA Franchise Agreement with ExxonMobil (the “Equitable PMPA Agreement”) dated August 19, 2010.
24i Debtor did not assign the Red Eagle PMPA Agreement to Equitable.
25. On or about May 19, 2011, Equitable became the ExxonMobil-branded supplier for the dealer location in Shoshoni, WY (Fast Lane, Store # 81328).
26. On or about May 19, 2011, Debtor’s repayment obligation to ExxonMobil for the Fast Lane dealer location was $53;041.50.
27. No assumption document was executed by Debtor, Equitable, and Exxon-Mobil for the dealer location in Shoshoni, WY. Fast Lane declined to execute a promissory note in favor of Equitable for any repayment obligation, and Equitable declined to assume Debtor’s repayment obligation to ExxonMobil.-
28. In e-mails between ExxonMobil employees dated May 19, 2011, Beau Powers requested that ExxonMobil write-down the estimated repayment obligation for the dealer location in Shoshoni, WY. Mr, Powers’ request was approved.
29. Debtor authorized the release of the four dealer locations from Debtor and authorized them to become Exxon Dealers under Equitable less than two years before Debtor filed its bankruptcy petition.
30. Equitable does not contend that Debtor was solvent at the time it authorized the release of the four dealer locations from Debtor and authorized them to become Exxon Dealers under Equitable.
31. Equitable was the initial transferee of the ExxonMobil Branded Distributor Brand Incentive Program Agreement for the dealer location in Lander, WY (“One Stop Market,” Store # 03340).
32. Equitable was the initial transferee of the Branded Distributor Brand Incentive Program Agreement for the dealer location in Cody, WY (“Rodeo' West,” Store # 08973).
33. Equitable was the initial transferee of the Branded Distributor Loan Agreement for the dealer location in Cody, WY (“Ron’s Exxon,” Store # 09098).
34. Equitable did not remit any funds to Debtor at the time it release the four dealer locations from Debtor and authorized them to become Exxon Dealers under Equitable.
35. Equitable has not released or waived Debtor’s $147,728.04 debt.
36. On June 10, 2011, ExxonMobil notified Debtor that ExxonMobil was entitled to repayment for $53,041.50, the amount owing under the Shoshoni, WY (Fast *621Lane, Store # 81328) BIP, but ExxonMo-bil waived its right to seek repayment from Debtor.
37. On August 1, 2011,7 Debtor filed its voluntary petition for relief under chapter 11 of title 11 of the United States Code.
38. On October 3, 2011, Debtor requested approval to employ Matrix Private Equities, Inc. to evaluate, market, and assist in the sale of Debtor’s assets. On January 11, 2012, the court approved the employment of Matrix Private Equities, Inc.
39. On November 3, 2011, Equitable filed proof of claim no. 23-1 in Debtor’s bankruptcy case, asserting an unsecured claim for $156,011.13.
40. On December 27, 2011, Debtor requested approval to employ r2 Advisors, LLC as Debtor’s financial advisor. On January 11, 2012, the court approved the employment of r2 Advisors, LLC.
41. On June 8, 2012, Debtor moved the court for approval of its sale of real and personal property for $9,450,000 to Brad Hall & Assoc., Inc. The court approved the proposed sale on September 12,2012.
42. On July 31, 2012, Debtor moved the court for approval to assume and assign the Red Eagle PMPA Agreement and certain ExxonMobil Distributor Brand Incentive Program Agreements to Brad Hall & Assoc., Inc. The court approved the assumption and assignment on September 12, 2012.
43. Debtor’s sale of assets to Brad Hall & Assoc., Inc. closed on or about December 13, 2012. Debtor’s principal, Bryan Hinze, became an employee of Brad Hall & Assoc., Inc.
44. On July 31, 2013, Debtor timely filed its complaint against Equitable in which it alleged that Debtor’s transfers of its rights and interests in the BIP and Loan Agreements constituted fraudulent transfers, and commenced this adversary proceeding.
45. Plaintiff r2 Advisors is the Plan Agent appointed by the Joint Chapter 11 Plan of Liquidation Proposed by Debtor and the Official Committee of Unsecured Creditors, dated May 3, 2013 (the “Plan”), The court confirmed the Plan on October 10,2013.
46. On November 11, 2013, Plaintiff properly substituted for Debtor as the party in-interest pursuant to paragraph 14 of the Confirmation Order.
47. Equitable has not returned any property, or the value of property, that Plaintiff seeks to recover in this adversary proceeding.
The testimony and evidence established the following facts. Red Eagle operated convenience stores throughout Wyoming and Montana. It operated as a wholesale distributor to the four Retail Stores and others, some of which Red Eagle owned and operated. Brian Hinze, acting as Red Eagle’s vice president, testified that Red Eagle entered into the Red Eagle PMPA with ExxonMobil, the latest executed in 2010.
The PMPA Agreement is the agreement between ExxonMobil and the wholesale distributor, Red Eagle, for a five-year term that may be renewed. The PMPA established a “franchise relationship” between ExxonMobil and Red Eagle. It gave Red Eagle the right to use trade names, service marks, trademarks, logos, etc., in connection with the retail sale of Exxon-Mobil branded motor gasolines and diesel fuels at ExxonMobil-branded retail outlets operated by Red Eagle and approved inde*622pendent dealers and sub-distributor retail outlets.8
The Red Eagle PMPA Agreement expressly states:
Branded Wholesaler may use or operate at an Operated Exxon-Branded Outlet, or grant and allow use of operation at a Franchised Exxon-Branded Outlet of any motor ■ fuels business or Related Businesses ,.., only if:
(i) ExxonMobil has expressly approved the Exxon branding of that retail outlet and the operation of the motor fuels business and/or Related Business at that retail outlet; and
(ii) ExxonMobil has not:
(A) Debranded that outlet; or
(B) Withdrawn ExxonMobil’s approval for the operation of the Related Business(es) in question at that retail outlet.”9
[[Image here]]
In its sole discretion, ExxonMobil may approve or not approve the branding of any outlet or the use or operation of any Businesses proposed by Brand Wholesale. ExxonMobil is not obligated to furnish Branded Wholesale with a reason for withholding approval. Exxon-Mobil’s furnishings of a reason does not in any way limit its right to withhold for any reason any approval of that or any future branding proposal. Branded Wholesale shall comply, and cause its Franchise Dealers to comply, -with any requirement and conditions imposed by ExxonMobil in giving its approval under this section.”10
Subsequent to Red Eagle entering into the Red Eagle PMPA agreement with ExxonMobil, it entered into an Exxon Branded Distributor Loan Agreement or a Brand Incentive Program BIP Agreement, (collectively known as BIP Agreements) with ExxonMobil for the benefit of each of the four Retail Stores. Red Eagle was liable to ExxonMobil for each loan amount for the terms of the loans.11
The BIP Agreement provided that Exx-onMobil would loan Red Eagle funds to front the four Retailer Stores for construction purposes in order to comply with the ExxonMobil retail store requirements. As long as the Retail Store continued to actively market Exxon-branded fuel and not cease operating as an ExxonMobil branded station, the BIP loan balance did not become due during the term of the agreement and the loan balance decreased with time. ExxonMobil considered the loan repaid at the end of the BIP term. No loan repayment was due between Red Eagle and ExxonMobil unless the term of the BIP was prematurely terminated.
Upon becoming a branded wholesaler, Red Eagle had years of prosperity. Red Eagle purchased fuel from ExxonMobil. Prior to 2005, as a wholesaler in good standing, Red Eagle enjoyed a 1.25% “prompt pay discount” for timely made payments. As Red Eagle began to have financial difficulties, ExxonMobil reduced the prompt pay discount in April 2011, to 1% and required payment within seven days. During this time, due to unpaid debt, Red Eagle granted ExxonMobil a security *623interest in its rolling stock.12 On May 11, 2011, ExxonMobil terminated the discount rate and required Red Eagle to pay cash for fuel on delivery. ExxonMobil received some payments during this time from all credit card payments for retail fuel purchases at the four retail stations, but it did not receive full payment for the fuel Red Eagle purchased. After Red Eagle filed for bankruptcy protection, ExxonMobil filed a claim for $1,744,549.13.13
Also during this time, Red Eagle and its affiliates were attempting to sell all of their assets. There were two offers, but neither ended in the sale of the assets. During this financially difficult time, Red Eagle purchased fuel from Equitable, “pulling” five loads causing a debt of $147,728.04. Equitable began its collection action in the state district court on May 18, 2011.
! At the time Red Eagle transferred the wholesale distributor rights to Equitable on May 12, 2011, the BIP loan agreements had the following balances:
Rodeo West $33,860.00
Ron’s Exxon 20,142,00
One Stop 28,702.00
Fast Lane 53,041.50
Red Eagle sold ExxonMobil branded fuel to each Retail Store at rates individually negotiated. The agreements between Red Eagle, as the wholesale distributor and Ron’s Exxon, Rodeo West and One Stop Market as retailers, provided Red Eagle a $0.01 profit per gallon over the rack-rate purchase price. The BIP agreement between Red Eagle and Fast Lane provided it a $0.005 profit above the rack-rate.
Mr. Hinze contacted Equitable and informed it that he could not meet the needed fuel demands of the Four Retail Stores. With the “blessing of ExxonMobil,” Paul Sivertson, Equitable Oil’s manager, stated, Equitable began supplying the Retails Stores on May 13, 2011. Mr. Sivertson testified that he would not have supplied a branded station, such as the Retail Stores, without ExxonMobil’s consent to avoid violating his own PMPA Agreement with ExxonMobil. Mr. Sivertson testified that the PMPA is the “bible” according to Exx-onMobil.
Three days after Equitable began supplying the Retail Stores, Mr. Sivertson, and ExxonMobil met to discuss the BIP Agreements between Red Eagle and Exx-onMobil assignments. ExxonMobil required Equitable to assume the BIP loan agreement liability for each Retail Store; provide a letter of credit; provide collateral for a $500,000.00 line of credit; and verify volume allocations to ensure Equitable could supply the necessary amounts. Equitable assumed the BIP Agreements and required the Retail Stores to execute a promissory note in favor of Equitable for the BIP balances. Again, this did not include the Fast Lane Store, as it refused to execute a promissory note in favor of Equitable for its outstanding BIP obligation to Red Eagle. At the time of the transfers, *624ExxonMobil and Equitable had in place their own PMPA Agreement, modified in May 2011, as to volume, and providing Equitable a one-percent (1%) prompt payment discount. Mr. Sivertson stated that Equitable, having the systems and process in place agreed to supply fuel to the Retail Stores as it “fit into its business model.” After the transfers, Equitable received $.005 profit per gallon over the rack-rate from all four Retail Stores. As of the date of the hearing, all of the BIP agreements’ terms had terminated.
Kevin Bowen, an Equitable employee for 11 years, is employed in sales and branded dealer operations. Mr. Bowen testified that if the Retail Stores had not agreed to sign the promissory notes, it would not have assumed the fuel-supply rights. He also testified that he had never seen ExxonMo-bil change wholesale distributors of its own accord.
Mr. Hinze admitted he did not request forgiveness of Equitable’s claim against Red Eagle or other consideration for the transfers. He testified that he did not want to hurt the Retail Stores during the beginning of their busy tourism season and made the necessary arrangements to get the retailers fuel. In his words, “it was a rough week” and the transfers “happened quickly.”
On May 19, 2011, Equitable assumed Red Eagle’s liability for the BIP agreements with ExxonMobil for three Retail Stores: Rodeo West, Ron’s Exxon, and One Stop. Equitable assumed all of Red Eagle’s “rights and obligations.” In turn, ExxonMobil released Red Eagle from all BIP Agreement obligations. Equitable, to protect itself from liability, required each Retail Store to execute a promissory note for the assumed loan balances. Fast Lane refused to execute a promissory note for Equitable’s benefit and was temporarily de-branded. However, ExxonMobil waived the loan balance, and Equitable supplied Fast Lane branded fuel through an executed BIP agreement.
On August 1, 2011, Red Eagle filed its bankruptcy petition.14 After Red Eagle filed for bankruptcy protection, Equitable filed a claim for $156,011.13. After confirmation of the Joint Reorganization Plan, Red Eagle sold its assets to Brad Hall & Assoc., Inc., including nine retail stores, a bulk plant, and rolling stock, for the purchase price of $9,450,000.00, The sale included the assignment of the remaining PMPA agreements. Thomas Kim, managing director for r2 Advisors, testified that ExxonMobil was involved in the sale negotiations, as Red Eagle’s PMPA was a valuable asset.15 The court entered an Order Approving the Assumption and Assignment of Executory Contract and Providing *625Cure Amount,16 which allowed Hall & Associates to assume the Red Eagle PMPA and other BIP agreements (ExxonMobil Contracts).
To determine a value for Red Eagle’s transfers of the fuel-supply right to Equitable, r2 Advisors retained Josh Harrison of Harrison Advisory as an expert for business valuations. Mr. Harrison, using the income approach valued the transfer of Red Eagle’s fuel supply rights at $170,631.00 to $260,725.00. Below is a breakdown of Mr. Harrison’s valuation:
Present Value Income Residual Total
Rodeo West $35,969.00 $ 15,466.00 $ 51,435.00
Ron’s Exxon 22,835.00 15,045.00 37,880.00
One Stop 98,823.00 30,421.00 129,244.00
Fast Lane 13.004.00_ 29.162.00 42.166.00
$170,361.00 $ 90,094.00 $ 260,725.00
Mr. Harrison testified he “backed-in” to the rack-rate costs by deducting taxes and freight costs -instead of using Red Eagle’s invoices to determine the actual rack-rates. In completing his analysis, Mr. Harrison testified he amended and recalculated the prompt payment discount from 1.25% to 1.0% and corrected an error, which reduced the fuel volume sold in 2011 to reflect the May 19, 2011, transfers. Mr. Harrison testified he based the tax rates, freight cost per gallon and historical information primarily upon the information Mr. Hinze provided.
Equitable objected to Mr. Harrison’s use of the one percent (1%) prompt payment discount as ExxonMobil terminated the discount due to Red Eagle’s payment defaults. Equitable also objected that Mr. Harrison did not disclose his fuel-volume adjustment for 2011 (891,000 gallons) on his amended Exhibit 38-A. During cross-examination, Mr. Harrison admitted he had not reviewed the “dealer agreements,” or the Red Eagle PMPA Agreement, and had not based his value on the BIP agreements. Equitable argues the court should disregard his expert testimony as he assumed there were “dealer agreements” when Red Eagle did not have contracts that obligated the Retail Dealers to purchase fuel from Red Eagle in any amount or .for a specific term. Equitable challenges Mr. Harrison’s reliance upon Mr. Hinze’s disclosures instead of making independent inquiries of fuel tax reports and freight invoices. ■
Additionally, Equitable argued that the court should disregard Mr. Harrison’s residual value as speculative. Mr. Harrison explained that his residual value assumes the four Retail Stores would continue to purchase ExxonMobil branded fuel from Equitable at the same margin for an additional ten years after the current BIP and Loan Agreement obligation terminated. However, Mr. Sivertson testified it receives .05 cents over rack rate from the sale of ExxonMobil branded fuel to the Retail Stores after Equitable became their fuel supplier. This is .05 cents less than the agreements Red Eagle had with the three Retail Stores. Mr. Bailey and Mr. Powers each testified that a retail station changes wholesale suppliers if rates and terms are more beneficial to the retailer. Equitable risked losing the Retail Stores if it was not competitive.
Discussion
1) Fraudulent transfer
The Bankruptcy Code provides, as relevant:
*626The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
[[Image here]]
(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.17
The Bankruptcy Code’s fraudulent transfer statute means to protect creditors from transactions that are designed to, or have the effect, of unfairly draining the assets available to satisfy creditor claims or dilute legitimate creditor claims.18 There are two types of fraudulent transfers: (1) those made with actual intent to hinder, delay, or defraud (actual fraud); and (2) those made under circumstances that constitute constructive fraud. In this case, r2 Advisors presented a constructive fraud case.
The parties stipulated that the transfers occurred within two years of Red Eagle’s bankruptcy filing and that Red Eagle was insolvent at the time of the transfers. The two remaining factors to consider are: (1) whether Red Eagle had a property interest in the fuel supply rights transferred to Equitable; and (2) whether Red Eagle received less than a reasonably equivalent value in exchange for the transfers to provide fuel to the four Retail Stores.
A. Debtor’s interest in the property
The phrase “interest of the debt- or in the property,” in the bankruptcy fraudulent transfer statute, refers to property that would have been part of the bankruptcy estate had it not been transferred prior to commencement of bankruptcy case.19 Section 541(a)(1) provides that estate property includes “all legal or equitable interests of the debtor in property as of the commencement of the case” wherever located and by whomever held. The scope of the estate’s property interests is quite broad, and “includes any contract rights that a debtor possesses at the time of the bankruptcy filing.”20 Contractual rights fall within the reach of § 541(a).21
Prior to filing for bankruptcy protection, Red Eagle attempted to sell the fuel-supply rights of the four Retail Stores to IPC. ExxonMobil knew of the sale and that Red Eagle intended to transfer the fuel-supply rights as part of that sale. The sale failed to materialize. Ultimately, and as a part of the bankruptcy case, Red Eagle sold all its assets to Hall & Associates. The transaction included the assumption of the Red Eagle PMPA and the sale of the balance of Red Eagle’s fuel-supply rights. The inclusion of the fuel-supply rights in the sale agreements evidences Red Eagle’s property interest in the fuel supply rights. These rights would have been assets in Red Eagle’s bankruptcy case, had the transfers to Equitable not occurred.
*627Additionally, r2 Advisors alleges that Red Eagle had interest in the rights to supply the Retail Stores with fuel based on an implied-in-fact contract under Wyoming law. Under Wyoming law, an implied-in-fact contract arises from a “mutual agreement and intent to promise, which is found in the acts or conduct of the party sought to be bound.”22 The parties conduct creates an implied-in-fact contract.23 The conduct from which the inferences are drawn “must be sufficient to support the conclusion that the parties expressed a mutual manifestation of an intent to enter into an agreement.”24
Red Eagle’s longstanding history of exclusively providing fuel to the Retail Stores supports a finding of an implied contract. It is also supported by ExxonMo-bil’s inability to arbitrarily obtain or release retail stores. Instead, it must work with Red Eagle, its branded wholesale distributor. Also, ExxonMobil did not receive direct payments from the Retail Stores for fuel purchases at the pump, except through credit card transactions. Red Eagle paid for the fuel. The conduct between Red Eagle and ExxonMobil establishes an implied-in-fact contract.
The court finds that Red Eagle had a property interest in the fuel-supply rights that it transferred. The PMPA, BIP agreements and an implied-in-fact contract support this conclusion.
B. Reasonably equivalent value
The primary factor for the court to address in this adversary proceeding is r2 Advisors’ allegation that Red Eagle did not receive reasonably equivalent value in exchange for the transfer based upon a constructive fraud theory. The party seeking to avoid a constructively fraudulent transfer bears the burden of proving, that the transferor did not receive reasonably equivalent value.25 The proponent must prove the elements by a preponderance of the evidence.26
Whether a transfer is for reasonably equivalent value is principally a question of fact, and is determined as of the date of the transfer.27 Satisfaction of a present or antecedent debt constitutes value.28 However, courts do not use subsequent events as a measure of reasonably equivalent value.29 A determination of reasonably equivalent value requires a court to consider whether the “transferor’s unsecured creditors were better off before or after the transfer” by calculating the net value received from a transaction including any benefit the transferor receives.30 “An examination into reasonably equivalent value includes three inquiries: (1) whether *628value was given; (2) if given, whether it was given in exchange for the transfer; and (3) whether that transferred was reasonably equivalent to that received.”31
a.Was value given?
Value is a critical concept for § 548. Value means “property, or satisfaction or securing of a present or antecedent debt of the debtor.”32 Equitable argues that Red Eagle received value from Equitable’s assumption of Red Eagle’s liability to ExxonMobil for the balance of the BIP Agreements with the Four Retailers for $135,745.50. To the contrary, r2 Advisors asserts that Red Eagle did not receive any value because ExxonMobil would forgive the BIP Agreement liabilities as the terms expired, if there was no preceding termination or violation of the Agreements, Equitable, having assumed Red Eagle’s risk of liability, did not have to pay any amounts under the Agreements as they eventually expired; therefore, Red Eagle did not receive value for the transfers.
Had Red Eagle not pursued a transfer of the BIP Agreements and its repayment obligations to Equitable, Red Eagle would have been liable to ExxonMobil for amounts owed under the four Retailer Stores’ BIP Agreements. ExxonMobil’s filed proof of claim asserting $236,615.46 for other BIP Agreement loan debts not at issue in this adversary is evidence of such.33 Thus, ExxonMobil’s claim would have included the additional $135,745.50, but for the transfers.34 The subsequent event, Equitable not having to pay back the BIP Loan amounts to ExxonMobil does not change the fact that the assumptions relieved Red Eagle of liability at the time of the transfers. Red Eagle received a direct benefit from the transfer of its BIP obligations. This factor is satisfied.
b. Was the value given in exchange for the transfer?
The parties agreed that there was an exchange, which this court determined had value. This factor is satisfied.
c. Was the value of the fuel-supply rights reasonably equivalent to • what Red Eagle received?
After determining whether a debtor received any value, courts then inquire whether that value was reasonably equivalent to what the debtor transferred.35 Factors that bankruptcy courts consider when deciding whether a debtor received reasonably equivalent value for a challenged transfer, within the meaning of constructive fraud in bankruptcy, include: (1) the good faith of the parties; (2) disparity between the fair value of the transferred property and what the debtor received; and (3) whether the transaction *629was an arm’s length.36 In the fraudulent transfer context, the “totality of circumstances” test used to determine reasonably equivalent value is fact-intensive and may include consideration of fair , market value.37 Factors also include considering the transaction’s arms-length nature, the economic circumstances and relationship of the parties, the maturity, competitiveness and efficiency of the mai’ket, and industry standards.38
Plaintiff retained Josh Harrison to determine the value of the transferred fuel-supply rights. Mr. Harrison, using the income approach, valued the transfers from $170,631.00 to $260,725.00. The $170,361.00 represents the present value income with an additional $90,094.00 residual value for a total value of $260,725.00. Equitable argues that Red Eagle gave nothing of value, but in the alternative, Mr. Harrison overstates the value.
There are three general methods of fair market valuation — cost, income and market.39 Appraisal theory dictates that appraisers consider all methods of valuation. There is no requirement to complete all methods when there is no or unreliable data. The appraiser must use his professional judgment to determine the most appropriate methods based on the available reliable data. Mr. Harrison, in evaluating the transferred fuel-supply rights, used the income approach to arrive at value. This approach involves estimating anticipated gross income and expenses from the property.40 He did not use the cost or market approaches because of the lack of available reliable public information.
To determine the gross income, Mr. Harrison testified he “backed-in” to the rack rate costs, by deducting taxes and freight costs and used Red Eagle’s prompt payment discount of 1.0%. Red Eagle argues it was error for him to consider the prompt payment discount as ExxonMobil had revoked Red Eagle’s discount at the time of the transfer. It further argues that including a residual value was incorrect because his conclusion of automatic renewal on the same terms was contrary to industry standard.
(i) Use of prompt payment discount
“Fair market value is an objective test that relies on a hypothetical buyer and seller.”41 The buyer and seller are hypothetical persons, not specific individuals or entities, and the individual characteristics of these hypothetical persons are not automatically the same as the actual parties to the transaction.42 It is presumed that the hypothetical buyer and seller will achieve the maximum economic advantage.43
Because the value is viewed from the perspective of a hypothetical buyer, the prompt payment discount personal to Red Eagle is not controlling. A prospective buyer would consider the prompt payment *630discount potential in determining an amount to pay for the fuel-supply rights. Therefore, it was correct for Mr. Harrison to include this in the appraisal. However, Mr. Harrison admitted that he was not aware that ExxonMobil controlled the prompt payment discounts, and that he was not aware that ExxonMobil could deny Red Eagle credit per the terms of the PMPA. Mr. Harrison also admitted that he was not aware of ExxonMobil’s denial of a prompt payment discount to Red Eagle. Despite the consideration of prompt payment discounts being appropriate within appraisal theory, he admitted his misunderstanding inaccurately overvalued the prompt payment discount and thus, the value of the transfer.
(ii) Residual value
In determining the total value of the fuel-supply rights Red Eagle transferred to Equitable, Mr. Harrison included a residual value for the four transfers. He explained this is a reasonable expectation when an analyst values an agreement between parties. In his analysis, Mr. Harrison assumed a renewal of the agreements with similar terms and applied a 20% commission rate. He also assumed the Retail Stores would renew the agreements for an additional ten years based on his discussions with Mr. Hinze and an investment banker. However, he made this assumption without discussing it with representatives of the four Retail Stores.
His assumptions were rebutted in multiple ways. First, Mr. Harrison misunderstood the existence of “dealer agreements” between Red Eagle and the Retail Stores, instead relying upon implied contract and information provided by Mr. Hinze. Second, Mr. Deberg of Ron’s Exxon and Rodeo West, explained he was free to change wholesale suppliers at any time, but faced financial risk if he decided to de-brand from ExxonMobil. Third, Mr. Bailey, who has at least forty years in the industry, testified that it is routine for a retail outlet to shop around and enter new BIP’s with other brands because they can give the store new money. He explained the incumbent supplier is actually at a disadvantage because they have already provided funds. New brands can give retail stores new incentive “BIP” money. Beau Powers confirmed this explanation, and confirmed that dealers change brands “on a frequent basis.” Finally, Mr. Harrison admitted that without a contract, Retail Stores could terminate the relationship at any time.
The evidence does not support including a residual value that represents one-third of the total value. The evidence directly contradicts any substantial value in retail stores renewing for a specific ten-year period. Without an agreement, there is nothing to be extended for any specific term and in fact, the Retail Stores could terminate the supply agreement before the end-of the BIP term.
The court has additional concerns with the appraisal. First, there is no accounting of Red Eagle’s expenses associated with the fuel-supply agreements. Mr. Harrison removed the freight charge billed to the Retail Stores, but the discounted cash flow looks at net income after all expenses. The discounted cash flow analysis entails the forecasting of income and expenses over a period of time, and then discounts the net income into present value.44 A buyer would take into account expenses such as income taxes, payroll, and overhead.
The fact that a retail store can change suppliers at any time also decreases value. *631While the parties did not challenge the discount factor used, the Present Value Factor, determined through the Weighted Average Cost of Capital (WACC) approach could have been higher to account for the risk of termination that a purchaser of these agreements would incur. As Mr. Harrison explained, the higher the factor, the lower the value.
Mr. Harrison explained during testimony that the value is in the agreement to supply fuel to the dealers and not the BIP Agreements. He admitted he had not reviewed any of these agreements. However, he explained that even without written dealer agreements, there is still value in the contractual relationship between Debt- or and the Retail Stores. Unfortunately, the record does not establish the actual value of these contractual relationships is equivalent to his conclusion of value presented during the hearing.
It is not possible for the court, outside of disregarding the residual, to make a dollar reduction to the appraisal. The court agrees there is value to the transferred fuel-supply agreements transferred. It does not matter whether they are an implied contract, customer relationship or simply an income stream. Taking into consideration the reduction in value by disregarding the residual value and the potential reductions for the appraiser’s misunderstanding of the source of agreements and discount, among the other issues discussed, there is no evidence of great disparity. The transaction was arms-length. There was no evidence Red Eagle acted in bad faith. In fact, just the opposite occurred in that Red Eagle tried to ensure that it did not hurt the Retail Stores by its failure to supply fuel. Plaintiff did not meets its burden to establish that Equitable did not give reasonably equivalent value.
2. Initial transferee/conduit
Equitable presented, as a defense, that it was not the initial transferee in the transaction. It asserted as ExxonMobil had final approval, ExxonMobil was the initial transferee. Contrary to this defense, the parties’ uncontroverted facts reflect that Equitable admits to being the initial transferee.45 The court having found that r2 Advisors did not meet its burden establishing that the value received was not equitably reasonable, the court declines to address this issue.
3. Pre- and post-judgment interest
As the court rules in favor of Defendant, Plaintiff is not entitled to an award of interest, therefore, denies the request.
4. Disallowance of Equitable’s claim
Plaintiff r2 Advisors’ second cause of action is for the disallowance of Equitable’s claim under § 502(d), which states,
Notwithstanding subsection (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section ... or that is a transferee of a transfer avoidable under section .. .548 ..., 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, 550, or 553.
The court having found for Defendant Equitable, denies the request to disallow Equitable’s proof of claim.
In conclusion, the court finds Plaintiff did not satisfy its burden that a fraudulent *632transfer occurred, finding for Defendant and against the Plaintiff. Additionally, the court finds for Defendant and denies Plaintiffs requests for interest and to disallow Defendant’s claim.
This decision constitutes the court’s findings of facts and conclusions of law pursuant to Bankruptcy Rule 7052. The court shall enter a separate order.
. In re Red Eagle Oil, Inc., Case No. 11-20857 (D.E. 857 and 918, respectively).
. Adversary Proceeding Case No. 13-02024 (D.E. 8).
. Unless otherwise noted, all statutory references are to Title 11 of the United States Code.
. In re Red Eagle Oil, Inc., Case Number 11-20857, Claim No. 23-1.
. Red Eagle also had a BIP repayment obligation to ExxonMobil for the dealer location at the Fast Lane, Shoshoni, WY for $53,041.50. No assumption document was executed as Equitable declined to assume Red Eagle’s obligation, Subsequently, Exxon waived the payment obligation.
. Final Pretrial Order (D.E. 57).
. The stipulations indicate, in error, that Red Eagle filed its bankruptcy on August 31, 2011.
. Branded Wholesaler PMPA Franchise Agreement, Stipulated Exhibit 1, p. 1, ¶ 1.
. Red Eagle PMPA Agreement at Stipulated Ex. 1, p. 2, ¶ (l)(e)(l).
. Id. at p. 2, ¶ (1)(e)(2).
.The terms of the BIP loan agreements between ExxonMobil and Red Eagle for the Retail Stores, One Stop Market, Lander, WY, Rodeo West, Cody, WY, and Ron's Exxon, Cody, WY, were for ten years. The term of the BIP loan agreement for the benefit of Fast Lane, Shoshoni, Wyoming was for seven years.
. As stated earlier, Red Eagle had not paid ExxonMobil for its fuel purchases and granted ExxonMobil a security interest in its rolling stock. Equitable alleged the transfer of Red Eagle’s rolling stock as collateral for the unpaid debt was a preferential transfer. However, this matter was resolved as part of the sale of the Red Eagle assets to Hall & Associates.
. Claim No. 45-1.
. Red Eagle's shareholders, Dale Hinze, Judith Hinze, Bryan Hinze, Brad Hinze and Scott Hinze shared ownership in (1) Red Eagle, LLC, a Wyoming limited liability company, (2) Q&H, Inc., a Wyoming corporation, (3) WY-Mont Investments, LLC, a Wyoming limited liability company, (4) DMV, Inc., a Wyoming corporation and (5) Red Eagle Gaming, LLC, a Wyoming limited liability company. See In re Red Eagle Oil, Inc., Case No. 11-20857, D.E. 630, ¶ 4.
. Thomas Kim, as an employee of r2, the plan administrator for the Bankruptcy Estate of Red Eagle Oil, Inc., participated in the sale of Red Eagle’s assets to Brad Hall & Associates. Red Eagle filed a Motion for Entry of an Order Approving the Assumption and Assignment of Executory Contracts and Providing Cure Amount on July 31, 2012, Through negotiations with objecting parties, Debtor provided a settlement that allowed the Purchaser, Hall & Assoc., Inc. to assume the Red Eagle PMPA Agreement as part of the Order Authorizing and Approving the Sale of Substantially All of Debtor’s Assets Free and Clear of Liens, Claims and Interests,
. D.E. 770.
. § 548(a)(1).
. In re Brooke Corporation, et al., 541 B.R. 492, 507 (Bankr. D. Kan. 2015).
. In re Vaughan Co. Realtors, 500 B.R. 778, 794-95 (Bankr. D.N.M. 2013).
. In re Res. Tech. Corp., 254 B.R. 215, 220 (Bankr. N.D. Ill. 2000).
. Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116, 122 (2d Cir. 2008).
. Carter v. Pathfinder Energy Servs., Inc., 662 F.3d 1134, 1151 (10th Cir. 2011) (citing Trabing v. Kinko's, Inc., 57 P.3d 1248, 1252 (Wyo. 2002)).
. Birt v. Wells Fargo Home Mortg., Inc., 75 P.3d 640, 649 (Wyo. 2003).
. Birt, 75 P.3d at 649 (citing Shaw v. Smith, 964 P.2d 428, 435-36 (Wyo. 1998)).
. In re Expert South Tulsa, LLC, et al. v. Cornerstone Creek Partners, LLC, (In re Expert South Tulsa, LLC), 534 B.R. 400, 413 (10th Cir. BAP 2015), aff d in In re Expert S. Tulsa, LLC, 842 F.3d 1293 (10th Cir. 2016).
. In re Brooke Corp., 541 B.R. at 508.
. In re Adam Aircraft Indus., Inc., 510 B.R. 342, 354 (10th Cir. BAP 2014), aff'd, 805 F.3d 888 (10th Cir. 2015).
. See 11 U.S.C. § 548(d)(2)(A); In re Expert S. Tulsa, LLC, 842 F.3d at 1297; In re Villa-mont-Oxford Associates Ltd. Partnership, 236 B.R. 467, 481 (Bankr. M.D. Fla. 1999).
. In re Brooke Corp., 541 B.R. at 510-11.
. Id. In re Expert S. Tulsa, LLC, 534 B.R. at 413.
. In re Brooke Corp., 541 B.R. at 510 (citing LTF Real Estate Co., Inc. v. Expert South Tulsa, LLC (In re Expert South Tulsa, LLC), 522 B.R. 634, 652 (10th Cir. BAP 2014).
. § 548(d)(2)(A).
. Claim No. 45, p. 2 and Ex. B (Under the BIP Agreements’ terms, if, inter alia, Debtor's franchise relationship with ExxonMobil is terminated or not renewed, Red Eagle was obligated to pay a compensatory dollar amount to ExxonMobil for losses related to that termination or non-renewal, as outlined in the Reimbursement Schedules attached to each of the BIP Agreements,). For clarity sake, the court does not use the amount of the claim to determine the value of the four Retail Stores' Agreements, as these are not included in Exx-onMobil’s claim.
. While Fast Lane refused to sign a promissory note in favor of Equitable, ExxonMobil waived the requirement after the transfer occurred, so ExxonMobil could have included the Fast Lane Agreement loan amounts in its claim had no transfer occurred,
. In re Brooke Corp., 541 B.R. at 510 (citing In re Expert S. Tulsa, LLC, 522 B.R. at 652).
. In re Merrillville Surgery Ctr., LLC, No. 2:12-CV-253-TLS, 2013 WL 3338418, at *5 (N.D. Ind. July 2, 2013) (citing In re Roti, 271 B.R. 281, 295 (Bankr. N.D. Ill. 2002)).
. In re Commercial Fin. Servs., Inc., 350 B.R. 559, 576 (Bankr. N.D. Okla. 2005).
. Id. at 577.
. United States v. Certain Interests in Prop. Situate in Adams Cty., State of Colo. et al., 239 F.Supp. 822, 824 (D. Colo. 1965).
. Schwab v. C.I.R., 67 T.C.M. (CCH) 3004 (T.C. 1994).
. Estate of Kahn v. C.I.R., 125 T.C. 227, 231 (2005).
. Id.
. Id.
. In re Whitney Lane Holdings, LLC, No. 08-72076-478, 2009 WL 2045700, at *4 (Bankr. E.D.N.Y. July 6, 2009).
. See uncontroverted facts, 31, 32, and 33 and Equitable's Proposed Findings of Fact and Conclusions of Law (D.E. 57). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500494/ | *634ORDER AND FINDINGS OF FACT AND CONCLUSIONS OF LAW
Michael G. Williamson, Chief United States Bankruptcy Judge
The Debtor leased commercial space from Rubin Automobile Boulevard, LLC under a triple net lease. Rubin filed a proof of claim in this case seeking $676,713.05 for amounts allegedly due under the lease, including unpaid prepetition and postpetition rent, repairs to the leased premises, rejection damages for future rent, and breach of a purchase obligation. According to Rubin, the Debtor used a flood in a small portion of the premises as a pretext to stop paying rent for the entire premises, thwarted Rubin from repairing the flood damage, and then moved out, leaving the premises trashed.
But the evidence at trial on the Debtor’s objection to the Landlord’s proof of claim told a slightly different story. By seeking to use the casualty event as an opportunity to upgrade the building’s electrical system, it was Rubin that prevented the flood damage from being repaired. And while there was evidence the property had been damaged, Rubin was unable to prove whether the damage had been done by the Debtor or a predecessor tenant. Even if it had proven that the Debtor caused the damage, Rubin could not prove the repairs it was proposing were necessary to restore the property to its preexisting condition— or that they would ever be done at all. As for the purchase obligation, all of the evidence at trial showed that Rubin waived any right to require the Debtor to buy the leased premises. In the end, Rubin was only able to prove it was entitled to a $123,169.21 allowed claim for prepetition rent and a $6,041.40 administrative claim for postpetition rent that had been abated during the case.
Findings of Fact
The Parties
The Debtor is a commercial wholesale internet printer.1 Its customers mostly consist of other (small) printers and advertising agencies who generally insist on a short turnaround time.2 The Debtor’s principal, Jason Gabay, also owns Press Ex, Inc.,3 a separate retail internet printing company that filed for chapter 11 bankruptcy in 2009 and confirmed a chapter 11 plan on March 7, 2011. Rubin Automobile Boulevard, LLC (the “Landlord”) owns office and warehouse space located at 12910 Automobile Boulevard, Clearwater, Florida, which had previously been leased by PressEx.
The Lease
On July 25, 2011, the Debtor entered into a five-year lease with the Landlord for 38,700 square feet of office and warehouse space that PressEx had been leasing.4 According to the lease, the leased premises consisted of 10,750 air-conditioned square feet of office space and 27,950 air-conditioned square feet of production space.5 The lease term began on March 1, 2011, and was to expire on February 28, 2016. An addendum to the lease, however, provided that the Debtor would buy the leased premises from the Landlord at the end of the third lease year for $1.4 million.6
*635The Debtor’s rent under the lease for the fourth and fifth lease years, which is the relevant time period in this dispute, was $11,500 and $12,000 per month, respectively.7 But the lease expressly provided that the monthly rent would be abated if the premises were damaged:
If the Premises are damaged, either partially or totally, the Rent for the period required for the repair or restoration of damage shall be paid up to the time of the casualty and thenceforth shall be abated, in proportion to the degree to which [Debtor’s] use of the Premises is impaired, up to, but not in excess of, the proceeds received by Landlord under Landlord’s rent loss coverage.8
In the event the leased premises were partially or totally damaged, the lease also obligated the Landlord to make the proceeds from its casualty insurance policy available to the Debtor so the Debtor could restore the premises to their existing condition.9
The Flood
On November 5, 2014, a plumbing issue damaged the Debtor’s interior office space at the leased premises.10 Around 6:00 or 7:00 that night, Jason Gabay (the Debtor’s owner) noticed water flooding out of two bathrooms (either from the urinals or toilets) on the north side of the office space.11 Apparently some shop towels or paper towels had clogged the toilet.12 The water flooded about 30 feet from the northern edge of the building into the Debtor’s customer service and sales offices.13 As soon as he discovered the flood, Gabay called Level Construction, who referred him to a plumber that came out and stopped the flooding.14 After stopping the leak, the plumber referred the Debtor to Synergy Restoration & Construction to remediate the flood damage. Synergy came out and pulled up the carpet, removed wet drywall, moved furniture, and ran fans to dry out the wet areas.15
The cost of the initial remediation work was $12,127.35.16 The Debtor’s insurance policy did not cover the flood damage.17 But the Landlord’s insurance policy did. Hartford Insurance Company, the Landlord’s insurance carrier, issued the Landlord a $7,127.35 check (the $12,127.35 cost of the repair less a $5,000 deductible) to cover the remediation work.
The Dispute over the Scope of Repairs
And this is where the first dispute began: the Landlord had insurance coverage to fix the remaining damage too, but the parties could not agree on the scope of the repair work. The Landlord obtained an estimate from Synergy, which did the *636initial remediation work for the Debtor. Synergy’s estimate, prepared after a joint inspection with Hartford (the Landlord’s insurer), was for $113,592.62, which included $30,312.60 in code upgrades.18 On December 31, 2014, Hartford issued the Landlord a $74,952.02 check, which covered the total cost of the repairs less nearly $39,000 for code upgrades and building depreciation (those amounts would be paid once the code repairs were actually completed).19
But the Debtor objected to the Landlord’s proposed scope of repairs. The Debt- or believed the code upgrades were unnecessary. And it was concerned about what it perceived as unnecessary repairs, particularly the electrical upgrades, because those repairs potentially could have shut down the Debtor’s business for a substantial amount-of time.20 The Debtor feared that if it lost customers because its business was shut down, those customers would not come back.21 In short, the Debtor believed the Landlord was trying to improve its building at the expense of the Debtor’s business.22 In the Debtor’s view, the safest thing to do was to simply put the building back the way it was.23 So the Debtor obtained a $45,548.06 estimate from Level Construction & Design to ' restore the building to its previous condition.24
Suffice it to say, despite months of “negotiating,” the parties were never able to agree on the scope of repairs.25 And because the parties were unable to agree on the scope of repairs, the repair work was never done.26 In the meantime, the Debtor was forced to move its office space into unoccupied offices on the south side of the building, which had water damage from an unrelated event.27 Eventually, the Debtor sued the Landlord to obtain the insurance proceeds so it could repair the premises and have its rent abated pending the repairs.28
The Bankruptcy Case
The Landlord, however, responded by suing to evict the Debtor for unpaid rent.29 The state court in the eviction action entered an order requiring the Debtor to deposit the alleged past-due rent into the court registry.30 Rather than deposit "the alleged past-due rent into the state court registry, the Debtor filed this chapter 11 case on July 6, 2015.31
Two weeks after this case was filed, the Landlord moved for payment of $14,328.87 in stub rent for July.32 The Debtor contended it was entitled to some credit against the rent due because the plumbing damage made the entire office space uninhabitable, forcing the Debtor to move their offices to another part of the building that it could have sublet to a third party. This *637Court ruled that the Debtor was required to pay 80% of its postpetition rent and other monthly charges without prejudice to the Debtor to contest the amount of postpetition rent due.33 The Debtor paid the partially abated rent for July and August.
The Move-Out
By the end of August 2015, however, the Debtor had vacated the premises. According to the Debtor, it wanted to hire more employees and grow its business, but it did not have enough room for its employees because the flood damage had not been— and, in the Debtor’s view, was not going to be — fixed.34 The Debtor says if it wanted to keep its business going, it had no choice but to move out.35 So the Debtor vacated the premises at the end of August and moved to reject the lease on September 1, 2015.36
This is where the second dispute began: When it decided to move out, the Debtor says it had its employees move out the equipment and then clean the warehouse space.37 The Debtor says it also hired an electrical contractor to disconnect the equipment from the electrical system and Merry Maids to spend three or four days cleaning bathrooms.38 But the Landlord says the Debtor left the place trashed and that it had to spend $8,000-$9,000 cleaning up the mess,39 which it had its service technician (Dan Carter) take pictures of,40
The Landlord’s Claim
The Landlord then filed a $643,059.50 unsecured claim in this case.41 The Landlord claims it is entitled to $128,087.78 in prepetition rent;42 $172,898.55 in repairs and cleanup;43 $102,506.52 in rejection damages (i.e., future rent); and $247,793 for a rejected purchase obligation.44 The Landlord also filed a $25,427.20 administrative claim,45 which includes $6,282.65 in rent that was abated during this case.46 The Debtor, however, has objected to the Landlord’s claim and failed to include it among the estimated unsecured debt in its plan. The Court has now tried the Debtor’s objection to the Landlord’s proof of claim and the Landlord’s entitlement to an administrative expense, and enters these findings of fact and conclusions of law.47
Conclusions of Law
This Court must determine the amount of the Landlord’s claim. “When a proof of claim contains all the information required under Rule 3001, it ‘constitutes prima facie evidence of the validity and *638amount of the claim.’”48 Assuming the Landlord’s claim is prima facie valid, then the Debtor has the burden of coming forward with enough evidence to overcome the Landlord’s prima facie case.49 If the Debtor overcomes the prima facie validity of the Landlord’s proof of claim, then whichever party would bear the burden outside bankruptcy bears the burden of proof inside bankruptcy.50
Here, the Landlord bears the burden of proof on his proof of claim because it would bear that burden outside bankruptcy. The Landlord’s claims are largely for breach of the parties’ lease agreement. And under Florida law, a party suing on a contract bears the burden of proof,51 although the party defending a contract action bears the burden of proof on any affirmative defense.52 Except with respect to its prepetition and postpetition rents claims, the Landlord has faked to meet its burden of proof on each of the elements of his proof of claim.
The Landlord largely proved its prepetition claim
The Landlord seeks $128,087.78 in prepetition rent.53 The prepetition rent claim largely consists of unpaid base rent, common area maintenance, and sales tax for December 2014 through June 2015.54 It also includes rent for the first six days of July, $5,000 deductible for the remediation work, and miscellaneous other charges.55 The Debtor says it should be excused from paying rent after the date of the flood because the Landlord breached the lease agreement by failing to make the insurance proceeds available to repair the flood damage.
As a threshold matter, the Court agrees with the Debtor that the Landlord breached the parties’ lease. It is implicit in the lease that the Landlord was obligated to insure the leased premises.56 The parties’ lease specifically provided that if the premises are damaged, then the Landlord is obligated to make the insurance proceeds available to the Debtor so it can restore the premises to their preexisting condition.57 There is no dispute that the Landlord never made the insurance proceeds available to the Debtor because the parties could never agree on the scope of work necessary to bring the premises to their preexisting condition. The question whether the Landlord breached the lease, then, turns on whether the scope of repairs its contractor proposed were necessary to restore the premises to their preexisting condition — or whether the repairs were an upgrade.
This decision, in turn, hinges on whether the upgrades the Landlord was seeking were required by the local building code. *639The Court heard from contractors from both sides.58 This decision basically came down to a judgment call on which witness was more credible on that point, and on the whole, the Court is persuaded that the upgrades the Landlord was proposing were not required by the code.
The Landlord’s breach, however, was not so material that it excused the Debt- or’s performance — i.e., its obligation to pay rent — as a whole. The Landlord contends that a reasonable interpretation of a contract, even if wrong, cannot constitute a material breach. But the Court need not go that far because by the Debtor’s own admission, the flood only affected its office space, which only comprised — at most— 1,485.69 square feet (or 3.84% of the premises).59 And the Debtor continued to use the premises for another eight months. The Court is not convinced that the inability to use less than 4% of the premises constitutes a material breach.
But while the Landlord’s breach did not excuse the Debtor’s performance, the Debtor is entitled to abate a portion of its rent.60 Under paragraph 18(a) of the lease, the Debtor is entitled to abate its rent in proportion to the degree to which its use of the premises has been impaired. The Debtor conceded at trial that the flood only affected the building’s office space. That office space only comprised 1,485.69 square feet. Although the flood affected less than 4% of the total premises, the Debtor nonetheless contends it is entitled to abate all its rent because it was forced to relocate its office space to another unoccupied part of the building, thereby preventing the Debtor from subleasing that space. The problem is there was no evidence that the Debtor had any prospect of subleasing that space.61 Because the lease limits any abatement to the portion of the space affected by a casualty event, the Debtor is entitled to a 3.84% abatement of the unpaid prepetition rent.
At trial, the Landlord put on competent evidence that it was owed $128,087.78. The Debtor contends that amount (1) includes $15,865.32 in improper water and sewer charges, and (2) fails to credit the Debtor for $25,600.74. The Court can see a reference to a $25,600.74 discrepancy in the Landlord’s accounting.62 But the time peri-ód for that accounting is only a subset of the entire lease term, and in any event, the Debtor failed to put on any evidence that it actually made the $25,600.74 in payments it says were not applied. And there’s no convincing evidence that the Debtor was improperly charged for water and sewer. So the Landlord is entitled to $128,087.78 less a 3.84% abatement ($4,918.57), for a total $123,169.21.
The Landlord failed to prove its damages for repairs and clean-up.
The Landlord seeks $172,898.55 for the cost of repairing and cleaning up the premises after the Debtor moved out.63 The $172,898.55 consists of $27,810 to clean the filters on four air conditioning units, replace two 5-ton and one 10-ton air conditioning units, and dispose of four air conditioning units; $45,595 for roof and metal work; $2,132.55 to clean up chemicals; $4,566 to replace one and repair five Overhead doors; and another $92,795 in building, air conditioning, fire sprinkler, *640plumbing, electrical, and miscellaneous repairs.64
There is no question the Debtor was responsible for repairing and maintaining the premises. The lease imposed on the Debtor the obligation to keep the foundation, outer walls, roof, and buried conduits in good repair.65 The lease likewise obligated the Debtor to take good care of and maintain the premises, as well as keep the fixtures, equipment, and furnishings, in good repair.66 And under the lease, all upkeep, repairs, and replacements were to be at the Debtor’s expense.67 But Rubin’s repair and clean-up claim fails for three reasons.
For starters, the Landlord failed to prove that the Debtor was responsible for the damage to the premises. The Landlord offered into evidence a number of photos showing the substantial damage it says the Debtor caused.68 Those photos were taken by Dan Carter, who was the service technician responsible for “pretty much everything on the property.’’69 The Landlord’s owner, Les Rubin, also testified that he visited the premises after the Debtor vacated and that the Debtor did not leave the premises in “broom clean” condition, as required by the lease.70 Rubin testified that this observation of the premises was consistent with the photos Carter took.71
But neither Carter nor Rubin could testify with any certainty whether the damage ivas done by the Debtor or PressEx, which occupied the premises ■ before the Debtor. Carter conceded he did not know when PressEx’s lease ended and when the Debtor’s started.72 In fact, he thought PressEx and the Debtor were the same tenant.73 Rubin likewise believed PressEx and the Debtor were alter egos, although the Landlord never offered any evidence or made any legal argument on that point.74 And neither Carter nor Rubin had any knowledge regarding whether some or all of the damages existed at the time the Debtor took over the space.75 Rubin’s inability to prove whether PressEx or the Debtor caused the damages is enough to defeat Rubin’s damages claim.
Moreover, the Landlord failed to prove that the $172,898.55 in repairs was required to maintain the premises in or restore them to its original condition. The Landlord’s evidence on this point largely consisted of a composite exhibit that contained estimates from Total Air Conditioning & Heating ($12,370), West Coast Roofing & Contracting ($49,595), SWS Environmental Services ($2,132.55), Overhead Door ($4,566), and Commercial Interior Solutions ($98,795)76 — and testimony by Rubin that those repairs were all necessary.77
But Rubin, was unable to testify about any of the specifics when it came to the repairs or how they were necessary to restore the premises to the condition they *641were in when the Debtor took over the space. For instance, Rubin conceded he did not recollect the state of the air conditioning system when the Debtor took over the building or which tenant (PressEx or the Debtor) added certain air conditioning units to the building.78 And he was unable to point to any report by the air conditioning contractor stating that any of the new units were being added because the existing units were inoperable or unrepairable.79 Nor was he aware of whether any of the material he hired SWS Environmental Services to pick up was contaminated.80 There was no evidence about the need to repair the overhead doors, other than two pictures of cuts to the bottom of the doors,81 which Rubin could not testify were caused by the Debtor.82 Rubin simply testified that he called Overhead Door to examine the doors and “see what worked, what didn’t work, what repairs or replacements were necessary,” and that was what their estimate reflected.83 In another instance, Rubin added $3,000 for fire sprinkler repairs simply because the contractor said that is what he would estimate it would cost in the absence of an inspection (even though the estimate also includes $1,500 for an inspection). This, of course, is not an exhaustive list, but these examples go to show that the Landlord’s evidence as to the necessity of the repairs was not convincing.
Finally, very little of the repair work has been done — and the rest of it may never be done. The Landlord did pay $2,100 for SWS Environmental Services to remove liquids from the premises.84 But as of yet, the Landlord has not made any of the $12,370 in air conditioning repairs recommended by Total Air Conditioning & Heating.85 Nor has the Landlord done any of the $49,595 in roof and metal work repairs.86 And other than some clean up, very little of the $98,795 in repairs by Commercial Interior Solutions were done.87 In fact, the Landlord may not have to do any of these repairs because it is waiting to see who its next tenant is going to be.88 A new tenant may require some— or none — of these repairs. And the Landlord sometimes does build-outs or improvements for tenants.89 So the total repairs may be more or less than in the estimates the Landlord obtained.90
In short, the Landlord cannot prove which damages, if any, the Debtor caused to the premises; which repairs are necessary to bring the premises back to the condition they were in at the time the lease was entered into; or which repairs, if any, will ever be made. For those reasons, the Landlord failed to meet the burden of proof on its repair claim.
The Landlord failed to prove entitlement to rejection damages
The Landlord seeks $102,506.52 for rejection damages. There is no question *642the Debtor rejected the lease.91 Under Bankruptcy Code § 365, rejection of an unexpired lease constitutes a prepetition breach of the lease.92 Ordinarily, a landlord’s rejection damages would include future rent, subject to the limitations in Bankruptcy Code § 502(b)(6). Here, the Landlord’s $102,506.52 claim for rejection damages consists of the rent due from the date of rejection through the end of the lease term.
The Landlord’s rejection damages claim, however, overlooks its prior breach of the lease, which is discussed above. In considering prepetition damages for unpaid rent, it is one thing to say that the Court can simply abate the rent for the unusable portion of the premises. After all, the Debtor could use part of the premises during that time. It is quite another thing to say that the Landlord can refuse to repair the premises and force the Debtor to remain in a space that is no longer what they bargained for because the Debtor will otherwise be obligated for more than $100,000 in future rent if it rejects the lease.
The Debtor put on compelling evidence at trial that it was forced to reject the lease because the Landlord breached its obligation to make the insurance proceeds available. Specifically, Gabay testified that the Debtor wanted to hire more employees and grow its business, but it did not have enough room for its employees because the flood damage had not been fixed.93 The Court credits Gaba/s testimony that the Debtor had no choice but to move out if it wanted to keep its business going.94 Because the Landlord’s breach of the lease agreement essentially forced the Debtor to reject the lease, it would be inequitable to award the Landlord rejection damages in the form of future rent.
Rubin failed to prove a breach of the alleged purchase obligation
The Landlord seeks $247,793' in damages for the Debtor’s alleged breach of a purchase obligation. An addendum to the parties’ lease provided that the Debtor would buy the leased premises for $1.4 million at the end of the third lease year.95 There is no dispute the Debtor never purchased the building from Rubin. At one point, the Landlord had a contract to sell all the Debtor’s building, along with five others the Landlord owns, to Dunlop Capital for $6.7 million.96 The Landlord allocated $1,152,207 of the purchase price to the Debtor’s building.97 The $247,793 is the difference between the purchase price in the lease addendum and the amount the Landlord could have sold the building to Dunlop Capital for. The Court, however, concludes that the Landlord waived any claim for breach of the purchase obligation.
Waiver, under Florida law, is the “voluntary and intentional relinquishment of a known right.”98 A waiver occurs where a party is aware of the existence of *643a right, privilege, or advantage but'nonetheless intends to relinquish it.99 A waiver may be express or implied.100 Here, the Landlord’s conduct implied a voluntary and intentional relinquishment of a known right.
For one thing, the Landlord never made any demand that the Debtor actually purchase the premises.101 And for another, all of the discussion about the scope of repair work would have been unnecessary had the Debtor been obligated to buy the building. What interest would the Landlord have had in the scope of repairs if the Debtor was obligated to buy the premises? In fact, the Debtor attempted to resolve the dispute over the scope of repairs by offering to buy the building,102 and the Landlord’s response was telling.
The Landlord did not respond by telling the Debtor it was already obligated to buy the building. Instead, the Landlord attempted to negotiate a sale as if no purchase obligation existed at the time. The Landlord even agreed to a sale price that was $350,000 less than provided for in the lease addendum.103 But the sale did not close because the parties could not agree on other terms, such as the amount of arrearages that had to be paid at closing. The Landlord’s conduct in this case is entirely inconsistent with the notion that the Debtor was obligated to buy the-building. Nothing about the Landlord’s conduct in this case indicated it believed the Debt- or was bound by the purported purchase obligation.
The Landlord largely failed to prove its administrative expense claim
The Landlord’s administrative claim has three components: (1) $2,132.55 for the removal of environmentally sensitive materials; (2) $17, 012 worth of clean up; and (3) $6,282.65 in rent that was abated while this case was pending. The Court rejects the first two components of damages for the same reasons it rejected the Landlord’s claim for repairs and cleanup costs, above. But the Court does find the Landlord is entitled to the postpetition rent as an administrative expense — albeit reduced by the 3.84% abatement for flood damage. So the Landlord is entitled to a $6,041.40 administrative claim for postpetition rent.
Conclusion
At bottom, this case turned on the credibility of the parties’ witnesses and the weight that should be given to the parties’ evidence. Were the repairs the Landlord was proposing really required by the code? Did the Debtor or PressEx cause the damage to the premises? Were the repairs necessary? In the end, the Court largely found that, with the exception of the pre-petition and postpetition rent due under the lease, the Landlord largely failed to carry its burden on its claims. Accordingly, it is
ORDERED:
1. Debtor’s objection to Landlord’s proof of claim104 is SUSTAINED, in part, to the extent set forth in these Findings of Fact and Conclusions of Law. Landlord’s application for payment of administrative *644claim105 is APPROVED, in part.
2. Landlord shall have a $123,169.21 allowed claim for prepetition rent and a $6,041.40 administrative claim for postpetition rent that had been abated during the case.
3. Landlord’s motion to estimate its claim106 is DENIED as moot.
. Trial. Tr. at p. 187, ll. 12-20.
. Id. at p. 187, ll. 18-20; p. 210, ll. 5-8.
. Id. at p. 187, ll. 14-17.
. Landlord’s Ex. 3; Trial Tr. p. 56, ll. 4-12; p. 56, l. 25-p. 57, l. 9; p. 57, l. 20-p. 58, l. 11; p. 188, l. 13-p. 189, 1. 2.
. Landlord’s Ex. 3 atp. 2, ¶ 1.
. Id. at p. 2, ¶ 2(a) & p. 15. The lease is confusing in this respect. The Landlord is *635careful to refer to the provision in the lease addendum as a "purchase obligation” — not a purchase option. But if it is really an obligation to purchase at the end of the third lease year (or fourth lease year, if the parties extend it), what is the point of the fifth lease year?
. Id. atp. 15, Addendum.
. Id. at p. 9, ¶ 18(a).
. Id. at p. 9, ¶ 18(b).
. Trial Tr. p. 41, l. 21-p. 42, l. 4; p. 69, ll. 7-15.
. Id. at p. 203, l. 16-p. 204, l. 3.
. Id. at p. 157, ll. 14-20.
. Id. at p. 203, l. 19-p. 204, l. 3.
. Id. at p. 204, ll. 4-15.
. Id. at p. 204, l. 16-p. 206, l. 1.
. Debtor's Ex. 3.
. Trial Tr. at p. 207, ll. 9-22.
. Landlord’s Ex. 13.
. Id.; Debtor's Ex. 2,
. Deptor's Ex. 9; Trial Tr. p. 209, l. 1-p. 210, l. 3; p. 211, l. 7-p. 212, l. 5; p. 219, ll. 8-12.
. Trial Tr. p. 210, ll. 3-8.
. Debtor’s Ex. 9.
. Trial Tr. p. 209, l. 24-p. 210, l. 2.
. Debtor's Ex. 5.
. Debtor’s Exs. 7, 9 & 14.
.Trial Tr. at p. 74, ll. 4-11; p. 94, ll. 8-17; p. 134, ll. 11-15.
. Id. at p. 69, ll. 22-24; p. 190, ll. 4-13.
. Id. at p. 217, l. 20-p. 218, l. 2.
. Id. at p. 218, ll. 3-7; Landlord’s Ex. 2.
. Trial Tr. at p. 218, ll. 8-14,
. Id.
. Doc. 18.
. Doc.43.
. Trial Tr. at p. 189, l. 15-p. 190, l. 13.
. Id. at p. 189, l. 24-p. 190, l. 3.
. Doc. No. 54.
. Trial Tr. at p. 191, ll. 2-8.
. Id. at p. 191, ll. 9-20.
. Id. at 66, l. 6-p. 67, l. 17.
. Landlord’s Ex. 20; Trial Tr. at p. 20, l. 25-p. 21, l. 3; p. 67, ll. 1-16.
. Proof of Claim #14.
. Landlord's Ex. 4; Trial Tr. p. 58, l, 15-p. 60, l. 10.
. Landlord's Ex. 7.
. Landlord's Ex. 8.
. Doc. No. 99. Rubin’s administrative claim was originally for $53,381.55. Rubin later voluntarily reduced its administrative expense claim.
. Landlord’s Ex. 5; Trial Tr. p. 60, ll. 14-22.
. Rubin also moved to estimate its claim for confirmation. Doc, No. 81. But that motion is moot since the Court has tried and is ruling on Rubin’s actual proof of claim.
. In re Walston, 606 Fed.Appx. 543, 546 (11th Cir. 2015) (quoting Fed. R. Bankr. P. 300(f)).
. Id. (citing Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 701 (5th Cir. 1977).
. Id. (citing Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)).
. See Knowles v. C.I.T. Corp., 346 So.2d 1042, 1042 (Fla. 1st DCA 1977).
. Custer Med. Ctr. v. United Auto. Ins. Co., 62 So.3d 1086, 1096-97 (Fla. 2010).
. Landlord’s Ex. 4.
. Id.
. Id.
. Landlord’s Ex. 3 at p. 3, ¶ 6(b); Trial Tr. at p. 101, 1. 16-p. 102, 1. 4. The insurance, though, is paid by the Debtor as part of the CAM charges. Trial Tr. at p. 102, 11. 5-12.
. Landlord’s Ex. 3 at p. 9, ¶ 18(b).
. Trial Tr. at p. 144, l. 10-p. 166, l. 19; p. 172, l. 10-p. 186, l. 13.
. Landlord’s Ex. 12.
. Landlord's Ex. 3 at p. 9, ¶ 18(a).
. Trial Tr. at p. 189,11. 7-14.
. Landlord’s Ex. 4.
. Landlord's Ex. 7.
. Id.
. Landlord's Ex. 3, at p. 6, ¶ 10(a),
. Id.
. Id.
. Landlord's Ex. 20,
. Trial Tr. at p. 16, l. 13-p, 17, l. 4.
. Id. at p. 66, l. 15-p. 67, l.8.
. Id. at p. 67, ll. 9-11.
. Id. at p. 48, l. 24-p. 49, l 1.
. Id. at p. 49, ll. 5-9.
. Id. at 119, ll. 9-15.
. Id. at p. 49, ll. 13-16; p. 118, l. 25-p. 119, l. 7; p. 122, ll. 3-11; p. 124, ll. 6-10.
. Landlord’s Ex. 7.
. Trial Tr. at p. 62, l. 19-p. 66, l. 5.
. Id. at p. 115, l. 17-p. 116, ll. 13.
. Id. at p. 116, l. 17-p. 117, l. 23.
. Id. at p. 121, ll. 8-16.
. Landlord's Ex. 13; Trial Tr. p. 25, l. 6-p. 26, l. 6.
. Trial Tr. at p. 122, ll. 3-11.
. Id. at p. 64, ll. 18-24.
. Id. at p. 121, l. 22-p. 122, l. 2.
. Id. at p. 117, 124-p. 118, l. 5.
. Id. at p. 118, ll. 12-15.
. Id. at p. 126, ll. 18-23.
. Id. at p. 118, ll. 16-22.
. Id. at p. 126, l. 24-p. 127 l. 5.
. id. at p. 118 at ll. 23-24.
. Doc. Nos. 54 & 74,
. 11 U.S.C. § 365(g)(1).
. Trial Tr. at p. 189, l. 15-p. 190, l. 13.
. Id. at p. 189, l. 24-p. 190, l. 3.
. Landlord’s Ex. 3, at p. 15, Lease Addendum.
. Landlord’s Ex. 13.
. Rubin’s six buildings totaled 211,600 square feet. Of that, the Debtor’s building was 38,700 square feet — or 18.289% of the total ■ square footage. So Rubin allocated 18.289% of the proposed purchase price — or $1,152,-207 — to the Debtor's building.
. Raymond James Fin. Servs., Inc. v. Saldukas, 896 So.2d 707, 711 (Fla. 2005).
. Bueno v. Workman, 20 So.3d 993, 998 (Fla. 4th DCA 2009).
. Raymond James Fin. Servs., 896 So.2d at 711.
. Trial Tr. at p. 214, ll. 2-7.
. Id. at p. 213, l. 3-p. 214, ll. 11; p. 215, ll. 4-13.
. Debtor’s Ex. 12; Trial Tr. at p. 111, 1. 9-p. 112, l. 14.
. Doc. No. 83.
. Doc. No. 99.
. Doc. No. 81. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500496/ | ORDER ON PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT
Wendy L. Hagenau, U.S. Bankruptcy Court Judge
This matter is before the Court on Plaintiff Cathy L. Scarver’s (“Plaintiff’ or “Trustee”) Motion for Partial Summary Judgment (“Motion”) (Docket No. 28). The Court finds this matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K), and the Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157 and 1334.
PROCEDURAL HISTORY1
Debtor Alfonza McKeever (“Mr. McKeever”) filed a voluntary petition under Chapter 13 of the United States Bankruptcy Code on October 29,2010. The case was converted to one under Chapter 11 on July 13, 2011. The Court appointed Plaintiff as Chapter 11 Trustee on February 6, 2013. The court subsequently converted the case to one under Chapter 7 on April 25, 2013. Plaintiff continued in her role as trustee following the conversion of the case.
Trustee filed the instant adversary proceeding on August 27, 2015 against Mr. McKeever and his uncle Robert Ellis (“Ellis”), as well as McKeever Paint & Body (“MP & B”) and Viaduct Group, LLC (¡“Viaduct”). The complaint consists of eleven counts, seeking an order: 1) avoiding certain post-petition liens pursuant to 11 U.S.C. § 549 (Counts One through Three); 2) finding that the same liens are void in violation of the stay pursuant to 11 U.S.C. § 362 (Counts Four through Six); 3) awarding the Trustee damages for violation of the automatic stay related to the disposition of certain insurance proceeds (Count Seven); 4) awarding the Trustee damages for violation of the automatic stay related to Defendants’ continued occupancy of certain real property (Count Eight); 5) requiring turnover of the same property and an accounting of any monies earned from operations on the property during the case and turnover of the insurance proceeds at issue (Counts Nine and Ten); and 6) disallowing claims filed by Mr. McKeever’s family members and busi*656nesses (Count Eleven) (“Complaint”) (Docket No. 1). In response, Defendants filed one answer on behalf of all Defendants, and an amended answer shortly thereafter asking for Viaduct to be dismissed from the adversary proceeding (Docket Nos. 7 & 9). Mr. McKeever and Ellis signed both documents as individuals, and Joe Ann McKeever signed on behalf of MP & B and Viaduct, and as power of attorney for Mr. McKeever.2
The Court set down for trial Count Seven of Trustee’s Complaint in conjunction with the trial of the United States Trustee’s complaint to deny Mr. McKeever his discharge. The Court entered an order after trial denying Mr. McKeever’s discharge, and also finding that the Trustee was not entitled to damages for the stay violation related to the insurance proceeds. The Trustee now seeks summary judgment on Counts One through Six and Eight through Nine and requests the Court use its equitable powers under 11 U.S.C. § 105 to avoid a newly filed mechanic’s lien encumbering certain real property. None of the Defendants responded to the Motion.
UNDISPUTED FACTS3
At all times during his bankruptcy case, Mr. McKeever has been the owner of certain business property located at 5361 Cov-ington Highway, Decatur, Georgia (“Property”). Since its purchase, the Property has been used by Mr. McKeever and his family — a group of up to twenty-three different people — -to operate various car related businesses. Mr. McKeever purchased the Property in 1995 and used the property to operate MP & B, a family-owned body shop business.
MP & B was a corporation in existence in 1995. Mr. McKeever was the principal operator of the business until suffering a serious injury in 1998 that left him incapacitated and unable to operate MP & B. The corporate registration of MP & B lapsed and the company was administratively dissolved on July 4, 1998, after which MP & B conducted no further business. As of the* petition date, MP & B remained dissolved, was conducting no business, and had not filed tax returns in a number of years. Mr. McKeever continued to use MP & B as a trade name, and his schedules indicated that he owned 100% of MP & B. After the petition date, Mr. McKeever incorporated another MP & B in the State of Georgia on April 17, 2013 (“New MP & B”) to open a bank account for the company in order to deposit the insurance proceeds that were the subject of the previous trial. The New MP & B used the same tax identification number as the original MP & B, and opened a bank account with Wells Fargo Bank. However, the original MP & B was not properly reinstated under Georgia law and did not regain status as a separate legal entity, instead remaining a trade name used by Mr. McKeever. The New MP & B was a corporation separate from the original MP & B.
*657In addition to MP & B, Ellis and Mr. McKeever’s aunt, Delores Ellis, operated Viaduct as a body shop on the Property. Mr. McKeever stated in his Statement of Financial Affairs that he is an officer, director, self-employee or sole proprietor of Viaduct, which has been operating on the Property since at least 2004. The original and/or New MP & B and Viaduct have continued to do business on the Property throughout Mr. McKeever’s case. Since the Trustee’s appointment February 6, 2013, both MP & B (original and/or new) and Viaduct have continued to operate on the property but have not paid any rent to the Trustee since February 2014. In addition, since Trustee’s appointment the Property has been encumbered by four liens:
• Ellis executed a mechanic’s lien that was recorded'on August 28, 2013 in the amount of $225,000 (“First Ellis Mechanic’s Lien”). A document titled “Summary of Investments” is attached to the mechanic’s lien, and shows a total investment of $225,000. The dates included on the summary are handwritten and indicate work done between March 2008 and August 12, 2013. The description of the work done simply reads “Interior”.
• A deed to secure debt was executed between Mr. McKeever and Ellis (“Ellis DSD”) that stated Mr. McKeever borrowed $40,000 from Ellis and repayment was secured by a lien on the Property. The deed was filed on October 23, 2013, and contemplated a final payment date of June 15 of an illegible year. The Ellis DSD was signed by Mr. McKeever as grantor, a notary public and an unofficial witness whose signature is illegible.
• A deed to secure debt was executed between Mr. McKeever and MP & B (“MP & B DSD”) that stated Mr. McKeever borrowed $400,000 from
MP & B and repayment was secured by a lien against the Property. The deed was filed on December 26, 2013 and contemplated a final payment date of January 25,2014. The MP & B DSD was signed by Mr. McKeever as grant- or, a notary public and Delores Ellis as an unofficial witness.
•.Ellis executed a second mechanic’s lien (“Second Ellis Mechanic’s Lien”) that was recorded on May 24, 2016, only one day after the Court entered an order denying Debtor’s discharge. The amount of the Second Ellis Mechanic’s Lien is $225,000.
Since assuming her role as trustee, Plaintiff has not ordered any work done on the Property. Further, the Court has not approved any of the liens listed above or any loans to the Debtor. Defendants do not dispute that Ellis and all signatories to the Ellis DSD and the MP & B DSD were aware of Mr. McKeever’s bankruptcy case at the time the above-listed liens were executed. The Trustee argues that these liens should be avoided as unauthorized post-petition transfers or considered void in violation of the automatic stay.
CONCLUSIONS OF LAW
Summary Judgment
Summary judgment is appropriate when “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, 91 L.Ed.2d 265 (1986); Fed. R. Civ. P. 56(c); Fed. R. Bankr. P. 7056(c). “The substantive law [applicable to the ease] will identify which facts are material.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 *658L.Ed.2d 202 (1986). The party moving for summary judgment has the burden of proving there are no disputes as to any material facts. Hairston v. Gainesville Sun Pub. Co., 9 F.3d 913, 918 (11th Cir. 1993). A factual dispute is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248, 106 S.Ct. 2505.
Once this burden is met, the nonmoving party cannot merely rely on allegations or denials in its own pleadings. Fed. R. Civ. P. 56(e). Rather, the nonmoving party must present specific facts that demonstrate there is a genuine dispute over material facts. Hairston, 9 F.3d at 918. When reviewing a motion for summary judgment, a court must examine the evidence in the light most favorable to the nonmov-ing party and all reasonable doubts and inferences should be resolved in favor of the nonmoving party. Id.
Overlap between Sections 3'62 and 5⅛9
Trustee’s Complaint seeks to invalidate the First Ellis Mechanic’s Lien, the MP & B DSD and the Ellis DSD under both 11 U.S.C. § 549 and 11 U.S.C. § 362. Courts have struggled to articulate the exact degree of overlap between sections 549 and 362 when determining the validity of post-petition transfers. See 2 Collier on Bankruptcy 549.02A (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016). Some courts have found that section 549 deals only with actions taken by the debtor, while section 362(a) deals with actions taken by a creditor. See Hopkins v. Suntrust Mortgage, Inc. (In re Ellis), 441 B.R. 656 (Bankr. D. Idaho 2010); see also Slone v. Anderson (In re Anderson), 511 B.R. 481 (Bankr. S.D. Ohio 2013). Some courts, however, have found there is nothing in the language of the statute that imposes such a limitation. See, e.g., In re Howard, 391 B.R. 511 (Bankr. N.D. Ga. 2008) (stating the proposition that section 549 applies only to debtor-initiated transfers is “too broad a statement and is not found in the language of [section] 549 itself.”). Others have held that the relevant distinction is between “actions which are merely unauthorized [e.g., section 549] and actions which are specifically prohibited by the Bankruptcy Code [e.g., section 362].” War-sco v. Shaller Trucking Co. (In re R. & L. Cartage & Sons), 118 B.R. 646, 650-51 (Bankr. N.D. Ind. 1990). One court found the relevant inquiry is whether the debtor is in possession of the estate when the transfer occurs. Gonzales v. Beery (In re Beery), 452 B.R. 825 (Bankr. D.N.M. 2011).
While it is not clear to what extent -the sections overlap, the critical differences between the sections appear to be (1) transfers that fall under section 549 are avoidable by the trustee, whereas actions in violation of section 362 are void and without effect; (2) section 549 includes a defense for good faith transferees, whereas section 362 contains no such defense; and (3) section 549 includes a two year statute of limitations, whereas section 362 does not. Further indicating a distinction between the sections is the exception to the automatic stay located in 11 U.S.C. § 362(b)(24). Added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, section 362(b)(24) states that any transfer that falls under section 549 that is found to be not avoidable shall not be a violation of the automatic stay. The limitations in section 549 and the exception located in section.362(b)(24) suggest the statutes cannot be used interchangeably and there are some transfers to which one section would apply, but not the other.
In the present case, however, the Court does not need to make a determination regarding the overlap of sections 549 and 362. The facts are such that the outcome *659does not depend on which section applies; because none of the transferees involved with any of the liens in question would be able to take advantage of the good faith defense under section 549(c) and all of the transfers occurred within the limitations period provided in section 549, if the liens are improper, they will either be avoidable post-petition transfers under section 549, or if section 549 is otherwise inapplicable, the liens will be void in violation of the automatic stay.
Avoidance of Transfers under Section 5j9 — Counts One through Three
Plaintiff first seeks summary judgment on Counts One, Two and Three of the Complaint. In these counts, Plaintiff alleges that the First Ellis Mechanic’s Lien, the Ellis DSD and the MP & B DSD are subject to avoidance pursuant to 11 U.S.C. § 549. Section 549 provides in relevant part:
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of [title 11]; or
(B) that is not authorized under this title or by the court.
Put another way, section 549 permits the trustee to avoid a post-petition transfer of estate property if the transfer was made without court authorization and is not otherwise permitted by the Bankruptcy Code. The trustee’s ability to avoid such transfers is limited by certain exceptions, though. Section 549(c) states that “the trustee may not avoid a transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value.... ” 11 U.S.C. § 549(c). The rights of a trustee under section 549 are further limited by section 546, which provides in pertinent part:
(b)(1) The rights and powers of a trustee under section[ ]... 549 of [title 11] are subject to any generally applicable law that—
(A) permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection; or
(B) provides for the maintenance or continuation of perfection of an inter- ■ est in property to be effective against an entity that acquires rights in such property before the date on which action is taken to effect such maintenance or continuation.4
It is undisputed that the transfers in question occurred after the commencement of Mr. McKeever’s bankruptcy case. The earliest transfer, the First Ellis Mechanic’s Lien, occurred on August 28, 2013, nearly three years after the filing of the petition and more than six months after Trustee’s appointment. A review of the docket in both Debtor’s bankruptcy case and this adversary proceeding shows that the Court never authorized the filing of the First Ellis Mechanic’s Lien. Additionally, the First Ellis Mechanic’s Lien is not authorized by the Bankruptcy Code. After the appointment of the Trustee on February 6, 2013, Mr. McKeever was no longer a debtor-in-possession and could not transfer any interest in his property or incur debt. Once the Trustee was appointed, only the Trustee could transfer estate property or incur debt on behalf of the *660estate. See Vreugdenhil v. Hoekstra, 773 F.2d 213, 215 (8th Cir. 1985) (finding the debtor’s authority over property of the estate was extinguished upon the appointment of a trustee). The alleged construction work on the property leading to the debt evidenced by the First Ellis Mechanic’s Lien was not authorized by the Trustee.
Moreover, the transferee, Ellis, could not be considered a good faith purchaser under section 549(c) since he had knowledge of the case. In the Complaint, Plaintiff alleged that Ellis was aware of Mr. McKeever’s bankruptcy case when he filed the First Ellis Mechanic’s Lien. In Defendants’ answer, Defendants admitted that Ellis was aware of Mr. McKeever’s personal bankruptcy filing but he believed that MP & B was the owner of the property and therefore the pending bankruptcy did not matter. Further evidence of Ellis’ knowledge of the case is that he filed four proofs of claim on August 29, 2013 (which are dated August 28, 2013, the same date as the First Ellis Mechanic’s Lien) once he learned the case had been converted to Chapter 7 (Case No. 10-92243-WLH). Therefore, Ellis was aware of Mr. McKeever’s bankruptcy case and cannot be considered a good faith transferee entitled to the protection of section 549(c).
Plaintiffs right to avoid the First Ellis Mechanic’s Lien is also not limited by the relevant state law made applicable by section 546. Pursuant to O.C.G.A. § 44-14-361, an inchoate lien arises when someone performs labor or services or provides materials for the improvement of real property. O.C.G.A. § 44-14-361(a)(2). The lien will only arise under Georgia law if “the labor, services, or materials are furnished ... at the instance of the owner, contractor, or some other person acting for the owner...” O.C.G.A. § 44-14-361(b). Plaintiff took control of the Property in her role as trustee when she was appointed on February 6, 2013. At no point since assuming her duties as trustee has Plaintiff consented to any work being done by Ellis on the Property, which is required for a lien to attach. See Anatek, Inc. v. CSX Realty Development, LLC, 243 Ga. App. 552, 532 S.E.2d 115 (2000).5
Additionally, a mechanic’s lien will not be perfected unless the claimant follows all of the requirements set forth in O.C.G.A. § 44-14-361.1; if any of these requirements are not met, the lien cannot be effective or enforceable. See Ragsdale v. Chiu (In re Harbor Club, L.P.), 185 B.R. 959, 960 (Bankr. N.D. Ga. 1995). Among the many conditions listed in the statute is the requirement that the claimant file the mechanic’s lien within 90 days of completion of the work. O.C.G.A. § 44-14-361.1(a)(2). The documentation attached to the First Ellis Mechanic’s Lien indicates the work that is the basis for the claim began in 2008 and continued through August 2013, when the lien was filed. However, Trustee’s control over the Property began more than 90 days prior to the lien being filed. During that 90 day window, Trustee did not authorize any of the work listed in the First Ellis Mechanic’s Lien. As a result, the mechanic’s lien was not timely filed and would not be enforceable under Georgia law. Because no exceptions apply, the First Ellis Mechanic’s Lien is avoidable as an unauthorized post-petition transfer.
*661Both the Ellis DSD and the MP & B DSD were filed after the execution of the First Ellis Lien, in October 2013 and December 2013, respectively. Like the First Ellis Mechanic’s Lien, it is undisputed that the transfers were not authorized by either the Court or the Bankruptcy Code. A review of the docket in both the Debtor’s bankruptcy case and this adversary proceeding shows that the Court never authorized the Ellis DSD or the MP & B DSD and it is undisputed the Trustee did not execute the deeds to secure debt or authorize their execution.
The exceptions to liability mentioned above are also not applicable to either the MP & B DSD or the Ellis DSD. Section 549(c) does not apply to the MP & B DSD or the Ellis DSD because the relevant transferees had knowledge of Mr. McKeever’s bankruptcy case at the time of the transfers and therefore could not be good faith purchasers. With respect to the Ellis DSD, the Complaint alleges that Ellis was aware of the case. Defendants’ answer admits that Ellis was aware of the case but that he was only advised after the case was converted to one under Chapter 7. Additionally, Ellis filed proofs of claim for certain mechanic’s liens on August 29, 2013, nearly two months before the Ellis DSD was executed, demonstrating his actual knowledge of the case. With respect to the MP & B DSD, Defendants’ answer admits that all relevant parties were aware of Mr. McKeever’s bankruptcy case. Furthermore, Joe Ann McKeever — Mr. McKeever’s mother, who signed the MP & B DSD on behalf of MP &' B — filed proofs of claim on behalf of MP & B as early as June 11, 2013, more than six months before the MP & B DSD was executed. Therefore, both Ellis and MP & B had knowledge of Mr. McKeever’s bankruptcy case prior to the execution of the Ellis DSD and the MP & B DSD. Neither Ellis nor MP & B can be considered good faith transferees. No other exception to liability applies, and therefore the Ellis DSD and the MP & B DSD are both subject to avoidance under 11 U.S.C. § 549. Accordingly, summary judgment on Counts One through Three is warranted in favor of Plaintiff.'
Transfers Void in Violation of Automatic Stay — Counts Four through Six
Trustee next seeks summary judgment on Counts Four, Five and Six, which allege the First Ellis Mechanic’s Lien, the Ellis DSD and the MP & B DSD are void in violation of the automatic stay. The filing of a bankruptcy petition operates as a stay of “any act to create, perfect, or enforce any lien against property of the estate.” 11 U.S.C. § 362(a)(4). The purpose of the automatic stay is to provide the debtor with the ability “to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.” H.R Rep. 595, 95th Cong., 1st Sess., at 340-41 (1977), reprinted in 1978 U.S.C.C.A.N. 5693, 6296-97. The stay also serves to “protect[ ] the debtor from its pre-petition creditors by stopping all collection efforts, all harassment, and all foreclosure actions” while also “protecting] all creditors by ensuring that the estate will be preserved against attempts by other creditors to gain an unfair advantage with respect to the payment of claims.” In re Lickman, 297 B.R. 162, 188 (Bankr. M.D. Fla. 2003) (citing Martino v. First National Bank of Harvey (In re Garofalo’s Finer Foods, Inc.), 186 B.R. 414, 435 (N.D. Ill. 1995)). The Eleventh Circuit has ruled that transactions in violation of the automatic stay are void. See Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir. 1982).
It is undisputed that the transfers in ■ question occurred after Mr. McKeever filed his bankruptcy petition *662while the automatic stay was in effect. Therefoi-e the only question remaining is whether an exception applies that would mitigate the violation of the stay. Though no exceptions apply to either the MP & B DSD or the Ellis DSD, Defendants suggested a possible exception for the First Ellis Mechanic’s Lien. Specifically, Defendants’ answer raised the applicability of section 362(b)(3), which states that the stay does not apply to efforts to perfect a lien under applicable state law.6 Defendants argued that a mechanic’s lien could be validly perfected without violating the automatic stay pursuant to section 362(b)(3). For that to be true, however, the lien in question must be validly created. Although the work that is the basis for the mechanic’s lien allegedly began nearly two years pre-petition and continued through Trustee’s appointment and the subsequent conversion of the case to one under Chapter 7, it is undisputed the Trustee as owner of the property did not authorize work to be done after February 6, 2013. A lien cannot be filed on unauthorized work. Anatek, 243 Ga.App. at 553, 532 S.E.2d 115. To the extent work was authorized prior to February 6, 2013, the lien claimant did not comply with the provisions of O.C.G.A. §§ 44-14-361(b) or 361.1(a)(2) when he did not file the mechanic’s lien within 90 days of completing the work. Therefore the lien was not properly perfected and enforceable and the stay exception does not apply. Accordingly, the First Ellis Mechanic’s Lien, the Ellis DSD and the MP & B DSD are void in violation of the automatic stay, and summary judgment is warranted for Plaintiff on the portion of Counts Four through Six declaring them void.7
Post-Complaint Transfer
In addition to the First Ellis Mechanic’s Lien, the Ellis DSD and the MP & B DSD, the Trustee’s Motion asks the court to invalidate the Second Ellis Mechanic’s Lien, which was filed one day after the Court entered the order denying Debtor’s discharge. Pursuant to 28 U.S.C. § 1334(e), the bankruptcy court has “exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of [its] case, and of property of the estate.” This broad jurisdictional grant is implemented in part by 11 U.S.C. § 105, which gives the court the authority to enter any order necessary to effectuate the provisions of the Bankruptcy Code. 2 Collier on Bankruptcy 105.02[2] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016).
Section 105 however does not negate the need to comply with due process. The Second Ellis Mechanic’s Lien is not the subject of the Complaint and the Defendants have not been served with any complaint including it nor have they been provided with an opportunity to answer Plaintiffs *663new allegations. Similarly, Plaintiffs request for an injunction against the Defendants preventing any further attempts to transfer interests in the property was not included in the Complaint, and requires proper notice before any determination of its merits can be made by the Court. Accordingly, to invalidate the Second Ellis Mechanic’s Lien and grant an injunction against the Defendants, Plaintiff will need to amend the Complaint.
At this stage of the proceeding, Plaintiff requires the Court’s permission to amend the Complaint. Fed. R. Civ. P. 15, made applicable to this adversary proceeding by Fed. R. Bankr. P. 7015, provides a permissive standard for amending a complaint. “The court should freely give leave when justice so requires.” Fed. R. Civ. P. 15(a)(2). A trial court has considerable discretion when determining whether to grant leave to amend a complaint. Looney v. Owens (In re Owens), 2006 WL 6589884, at *1 (Bankr. N.D. Ga. Oct. 11, 2006) (citing Jameson v. The Arrow Co., 75 F.3d 1528, 1534-35 (11th Cir. 1996)). The Court believes that Plaintiff should have the opportunity to amend the Complaint. The repeated transfers of the Property post-petition have frustrated the Trustee’s ability to gather and administer all assets of the estate. Allowing the Trustee to amend the Complaint to resolve the Second Ellis Mechanic’s Lien and pursue an injunction against the Defendants will help the Trustee fulfill her statutory duties. Trustee’s amendment of the Complaint must be filed within thirty days of the date hereof.
Turnover of Property — Count Nine
Plaintiff seeks summary judgment on a portion of Count Nine of the Complaint, which seeks turnover of the Property against all Defendants under 11 U.S.C. § 542.8 The turnover provision of the code reads, 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 [title 11]... 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 estáte.9
11 U.S.C. § 542(a). By referring to section 363, which authorizes the trustee to “use, sell, or lease.. .property of the estate,” the drafters of section 542(a) made it clear ijhat the turnover obligation applies to property of the estate. In re Pyatt, 486 F.3d 423, 427 (8th Cir. 2007).
The turnover requirement under section 542(a) is self-executing and no demand by a trustee is required. See Hays v. Shaw (In re Shaw), 2010 WL 3397438, at *1 n.2 (Bankr. N.D. Ga. June 10, 2010) (citing Turner v. DeKalb Bank (In re Turner), 209 B.R. 558, 571 n.7 (Bankr. N.D. Ala. 1997)). However, turnover proceedings are strictly limited to actions to recover property that is indisputably part of the estate; in other words, a turnover action is not the appropriate tool for acquiring the right to use or possess property if the debtor’s right to use or possess the property is subject to dispute. See In re Sun-coast Towers South Assoc., 1999 WL *664549678, at *10 (Bankr, S.D. Fla. June 17, 1999).
In the present case, the Court is aware of the commercial lease dated July 27, 2009 between Mr. McKeever individually as landlord and “The Viaduct Group (Delores Ellis)” as tenant, with a lease term of ten years (“Viaduct Lease”), as it is attached to MP & B’s proof of claim 11-I. The Trustee has not indicated whether the Viaduct Lease has been assumed or rejected, or whether the tenant has elected to exercise any rights under 11 U.S.C. § 365(h). Therefore, the Court cannot make a determination of whether turnover as to Viaduct is proper at this time. Nothing herein prohibits the Trustee, as the landlord, from exercising her powers under state law with respect to the Viaduct Lease and any defaults thereunder.
There are no issues of fact, however, with respect to Mr. McKeever, Ellis or MP & B. Accordingly, Mr. McKeever, Ellis and MP & B’s (original and/or New MP & B) continued control over the Property warrants turnover under section 542. These Defendants have possession of and control over property of the estate, and are required by section 542(a) to turn the Property over to Plaintiff.
In the Motion, Plaintiff asks pursuant to section 542(a) that Defendants account for their use of the Property and pay fair and reasonable rent for the occupancy of the Property from the petition date through the filing of the Motion. Under section 542(a), an entity is required to “account for” property or the value of property to be returned to the estate to ensure that the estate receives everything to which it is entitled under section 541. This is true whether or not the property is in the entity’s possession at the time, see, e.g., Taub v. Taub (In re Taub), 427 B.R. 208, 222 (Bankr. E.D.N.Y. 2010) (requiring debtor’s husband to account for and deliver rental income from various rental properties that were part of the debtor’s bankruptcy estate), or whether the property has been dissipated, see, e.g., In re Pilate, 487 B.R. 345, 351 (Bankr. D.D.C. 2013) (“If the entity is no longer in possession of the property at the time of the turnover proceeding, then the entity must account for and deliver the value of the property.”) (internal quotation marks omitted). In other words, the obligation of an entity to “account for” and deliver property (or the value of the property) is meant to provide verification that the entity subject to the turnover proceeding is returning all property that belongs to the estate. In the present case, what must be turned over to the Trustee is the Property and any rents received by Mr. McKeever, MP & B or Ellis for the Property. The rent reserved under the Viaduct Lease is $1,000 per month. The rental income from this lease is property of the estate. Mr. McKeever, MP & B and Ellis are ordered to account for and deliver to the Trustee all such income received.10 Section 542(a) does not, however, require a turnover defendant to pay anything to the Trustee other than what has been received of property of the estate. Trustee’s request for payment of the fair rental value of the Property, regardless of whether rent was paid, is denied.11
In the Motion, Plaintiff also seeks an order instructing the United States Marshal Service to forcibly evict Defen*665dants from the Property. Courts have held that authority exists to order eviction from property belonging to the estate. See, e.g., Jensen-Carter v. Hedback (In re Stephens), 2012 WL 1899716, *4-5, 2012 U.S. Dist. LEXIS 72916, at *12-13 (D. Minn. 2012). The Court does not believe that an order for forcible eviction is appropriate at this time. A review of cases where courts exercise authority to evict a party from estate property shows that eviction is usually ordered as a last resort to enforce compliance with previously entered orders. See, e.g., In re Stephens, 2012 WL 1899716, *4-5, 2012 U.S. Dist. LEXIS 72916, at *13 (eviction ordered to enforce sale order); In re Searles, 70 B.R. 266, 273 (D.R.1.1987) (eviction order upheld pursuant to terms of consent order entered by bankruptcy court); In re Watson, 2016 U.S. Dist. LEXIS 77684, at *23-24 (D.V.I. 2016) (eviction ordered to enforce sale order); Ragsdale v. Michas (In re Five Star Design & Builders, LLC), Adv. Proc. 05-06626, Docket Nos. 22, 33 (Bankr. N.D. Ga. 2006) (eviction stipulated to in consent order granting temporary restraining order and later ordered following failure to comply with temporary restraining order). That not being the case here, the Court declines to order the United States Marshal Service to evict Defendants from the Property at this time. However, turnover under section 542 is proper as to Defendants Mr. McKeever, MP & B and Ellis with respect to the Property, and summary judgment on Count Nine is granted in favor of the Trustee to that extent.
Occupation in Violation of Stay — Count Eight
Finally, Plaintiff seeks summary judgment on Count Eight of the Complaint, which alleges that Defendants’ continued occupation of the property is a violation of the automatic stay. The automatic stay prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). Many courts have found that section 362(a)(3) should be read in conjunction with section 542(a); because section 542 is self-executing, the failure on the part of the Defendants other than Viaduct to turn over the Property can constitute a violation of the stay. See 2 ■ Collier on Bankruptcy 362,03[5] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016) (“The failure of an entity in possession of estate property to turn over the property to the trustee would be a violation of section 362(a)(3) except as may otherwise be provided in section 542.”) (citing Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013)). As previously mentioned, Viaduct holds a lease to use the Property and its legal right to occupy the Property until the Viaduct Lease expires or is terminated has not been determined. Thus, Viaduct’s continued possession of the Property does not warrant turnover at this time and whether it is considered a violation of the stay needs the development of additional facts. It is undisputed however that Defendants Mr. McKeever, MP & B and Ellis have maintained control over the Property by continuing to occupy the premises and operating their businesses on the Property. This continued control over property of the estate constitutes a violation of the stay under 11 U.S.C. § 362(a)(3). Accordingly, summary judgment is granted in favor of Plaintiff against Defendants Mr. McKeever, MP & B and Ellis on the portion of Count Eight finding those Defendants’ occupation of the property to be a violation of the automatic stay.12
*666CONCLUSION
For the reasons stated above, it is hereby ORDERED that Plaintiff’s Motion is GRANTED in part and DENIED in part, as provided herein:
1. Summary judgment on Count One is GRANTED in favor of the Plaintiff;
2. Summary judgment on Count Two is GRANTED in favor of the Plaintiff;
3. Summary judgment on Count Three is GRANTED in favor of the Plaintiff;
4. Summary judgment on Count Four is GRANTED in favor of the Plaintiff on the portion of that count seeking a determination that the First Ellis Mechanic’s Lien is void;
5. Summary judgment on Count Five is GRANTED in favor of the Plaintiff on the portion of that count seeking a determination that the Ellis DSD is void;
6. Summary judgment on Count Six is GRANTED in favor of the Plaintiff on the portion of that count seeking a determination that the MP & B DSD is void;
7. Summary judgment on Count Eight is GRANTED in favor of the Plaintiff with respect to Defendants Mr. McKeever, MP & B and Ellis on the portion of that count seeking a determination that the continued occupancy of the Property is a violation of the automatic stay, and DENIED without prejudice with respect to Defendant Viaduct;
8. Summary judgment on Count Nine is GRANTED in favor of the Plaintiff with respect to Defendants Mr. McKeever, MP & B and Ellis, to the limited extent that turnover of the Property and any rent received therefrom is required. No judgment is entered on the requested turnover of insurance proceeds and injunction requested in the Complaint preventing the Defendants from occupying the Property or otherwise interfering with Plaintiffs ownership of the Property. Plaintiffs Motion is DENIED without prejudice with respect to Defendant Viaduct;
9. FURTHER ORDERED under Count Nine Defendants Mr. McKeever, MP & B and Ellis are ordered to turnover any rents received under the Viaduct Lease
10. FURTHER ORDERED under Count Nine, Plaintiffs request for eviction is DENIED without prejudice to Plaintiff renewing the request at a later date.
11. FURTHER ORDERED that Plaintiff shall file an amended complaint within 30 days following entry of this order.
The clerk is directed to serve a copy of this order on Plaintiffs counsel and all Defendants.
. The history of this case is set out in detail in this Court’s Order Denying Debtor a Discharge and Denying Trustee’s Recovery Under Section 362 ("Discharge Order”) (Docket No. 26).
. Plaintiff filed motions to strike the answers of MP & B and Viaduct on the basis that both entities were improperly acting without counsel (Docket Nos. 10 & 12). On December 15, 2015, the Court entered an order, requiring MP & B and Viaduct to retain counsel by January 29, 2016, and further stating that “[i]f no appearance of counsel is made by that date, the Court may strike the Defendants' pleadings without further notice or hearing.” (Docket No. 15). To date, no appearance of counsel has been made for either MP & B or Viaduct. The Court has not granted Plaintiff’s motions to strike.
. The Court incorporates herein the facts found after trial and set out in the Discharge Order,
. In addition to the limitation's in sections 549(c) and 546, a trustee's right to avoid post-petition transfers is limited by section 549(b). However, section 549(b) only applies in involuntary bankruptcy cases and is therefore not applicable to this matter.
. To the extent Ellis argues the work was done at the behest of MP & B as a lessee of the Property, “[a] contract for improvements between a lessee and a materialman does not subject the interest of the lessor to a lien unless a contractual relationship exists between the lessor and the materialman as well.” Nunley Contracting Co., Inc. v. Four Taylors, Inc., 192 Ga.App. 253, 254, 384 S.E.2d 216 (1989).
. As mentioned previously, another exception that frequently arises in the context of post-petition transfers is section 362(b)(24), which states that the stay under section 362(a) does not apply to any transfer that falls within the scope of section 549 but is otherwise determined to not be avoidable as an unauthorized post-petition transfer. See, e.g., In re Howard, 391 B.R. 511, 515 (Bankr. N.D. Ga. 2008). Because the Court determined in the previous section that to the extent section 549 applies the First Ellis Mechanic’s Lien is avoidable, there is no reason to address section 362(b)(24). To the extent section 549 does not apply to the First Ellis Mechanic’s Lien, the stay exception in section 362(b)(24) is not applicable.
. In Counts Four, Five and Six of the Complaint, Trustee also sought damages pursuant to section 362(lc), arguing that the post-petition transfers were willful violations of the automatic stay. However, Trustee did not request damages in the Motion; therefore, this Order shall be limited to the determination of whether the transfers are void in violation of the automatic stay.
. In the Complaint, Count Nine also seeks a turnover of the insurance check or its proceeds, as well as an injunction preventing the Defendants from occupying the Property or otherwise interfering with Trustee’s ownership of the Property. These requests were not included in the Motion and are therefore not within the scope of this Order.
. Under 11 U.S.C. § 101(15), an entity includes a “person”, therefore section 542(a) includes Mr. McKeever and Ellis in addition to MP & B and Viaduct.
. Of course, the Trustee has a claim against Viaduct for any rent not paid under the lease.
. To the extent Trustee has some equitable claim for fair and reasonable rent for Defendants' continued occupation of the Property, for example a claim in quantum meruit, such claim is not resolved in this Order.
. In Count Eight of the Complaint, as in Counts Four through Six, Plaintiff sought damages pursuant to section 362(k). However, Plaintiff did not request damages for *666Count Eight in the Motion; therefore, this Order shall be limited to the determination of whether the occupation of the Property is a violation of the automatic stay. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500497/ | *671MEMORANDUM OPINION
J. Michael Deasy, Bankruptcy Judge
I. INTRODUCTION
Randall and Sharon Todt (the “Debtors”) filed for chapter 7 bankruptcy relief in 2011 and received their bankruptcy discharges in 2012. After their bankruptcy case was closed, the Debtors continued to receive monthly statements from their mortgage servicer indicating their mortgage was past due. The mortgage on their home was eventually foreclosed in 2013. The Debtors received several additional communications from the mortgage servi-cer in 2014. The Debtors reopened then-bankruptcy case in 2015 and filed this adversary proceeding against Saxon Mortgage Services, Inc. (“Saxon”), Ocwen Loan Servicing, LLC (“Ocwen”), and The Bank of New York Mellon FKA The Bank of New York, as Successor Trustee for JPMorgan Chase Bank, N.A., as Trustee for Novastar Mortgage Funding Trust, Series 2005-3, Series 2005-3 Novastar Home Equity Loan Asset-Backed Certificates, Series 2005-3 (“BONY” and collectively with Ocwen, the “Defendants”), alleging they willfully violated the discharge injunction set forth in 11 U.S.C. § 524(a)(2). The Court entered a default against Saxon on August 4, 2015. On summary judgment, the Court ruled that certain actions taken by Ocwen violated the discharge injunction and did not fall within the safe harbor provision of 11 U.S.C. § 524(j). The Court held a trial on the outstanding issues on March 9, 2017, and took the matter under advisement. This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and Local Rule 77.4(a) of the United States District Court for the District of New Hampshire. This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. FACTS
The Debtors filed a chapter 7 bankruptcy petition on July 1, 2011. On Schedule A they listed their residence located at 136 Chauncey Street, Manchester, New Hampshire (the “Property”) and indicated it was worth $250,000.00. On Schedule D they listed both BONY and Saxon as creditors holding a security interest in the Property with Saxon being owed $338,000.00 and BONY being owed $0. Saxon apparently serviced the loan held by BONY. The Debtors did not reaffirm the debt secured by the Property.1
Mrs. Todt testified at trial that the Debtors had no intention of keeping their house. At the time of the Debtors’ bankruptcy filing, Mr. Todt had been unemployed for ten years due to medical issues and Mrs, Todt had been re-employed only for a few months, having been laid off in 2010 from an administrative position with a financial services company. By 2011, the Debtors had been unable to keep up with their mortgage payments for several years. Back in 2007, the Debtors tried to sell the Property but Saxon would not agree to a sale. In 2008, they attempted to refinance their mortgage with a local bank but Saxon was unwilling to write-off $10,000.00 to permit the refinance to take place. In 2009, the Debtors attempted a short sale but Saxon ignored their requests for approval. Mrs. Todt testified that the Debtors repeatedly asked Saxon for help but they did not receive it. Instead, Saxon scheduled several foreclosure sales, which never took place.
*672Over time, the Debtors realized they would not be able to keep the Property and so they sought bankruptcy relief. Mrs. Todt testified that, by filing bankruptcy, she and her husband would ho longer owe any money on the mortgage debt. While the mortgage would still exist, they would not owe any money to the mortgagee, i.e., there would be a “zero balance” as they would be giving up their financial responsibility for it. She understood that eventually the Property would be foreclosed. Mrs. Todt testified that, in the Debtors’ view, the Property was “really gone” once their bankruptcy discharges entered: they understood that they no longer had any ownership interest in the house once they filed bankruptcy as “bankruptcy took the house away from them.”
The Debtors received bankruptcy discharges on January 26, 2012. The Court served Saxon and BONY2 with notice of the Debtors’ discharges on or about January 28, 2012. Ex. 9. Shortly, thereafter, on or about March 12, 2012, Saxon sent the Debtors a notice advising them that the servicing of their mortgage would be transferred from Saxon to Ocwen effective April 2, 2012, Ex. 13.
From April 12, 2012, through December 17, 2013, Ocwen sent the Debtors twenty-one monthly statements indicating their mortgage with BONY was past due. Exs. 15-24, 26, 29, 31, 34, 36, 39-41, 43, 45-46. The statements were nearly identical, except the total amount due increased from $140,574.80 on the first statement to $199,872.83 on the last statement. Each statement listed a “Current Amount Due,” which consisted of principal, interest, and escrow for the current month and ranged from $2,745.91 on the first statement to $2,745.92 on the last statement. Each statement also listed “Past Due Amounts DUE IMMEDIATELY,” which also consisted of principal, interest, and escrow and ranged from $118,074.13 on the first statement to $172,992.37 on the last statement. Each statement further contained an amount for “Total Fees/Expenses Outstanding,” which consisted of late charges, prior servicer fees, property inspection fees, and foreclosure and other miscellaneous fees and ranged from $19,754.76 on the first statement to $24,134.54 on the last statement. Each statement also contained a detachable payment coupon that listed the “AMOUNT DUE” as the total amount due consisting of both the current amount due and the past amount due, which ranged from $140,574.80 to $199,872.83, as noted above.
Each of the statements contained bankruptcy disclaimer language on the front in a section labeled, “Important Messages,” which provided:
If you are currently in bankruptcy or if you have filed for bankruptcy since obtaining this loan, please read the bankruptcy information provided on the back of this statement.
On the back of the statement, in a section labeled, “IMPORTANT BANRKUPTCY INFORMATION,” it provided:
If you or your account are subject to a pending, bankruptcy or the obligation referenced in this statement has been discharged in bankruptcy, this statement is for informational purposes only and is not an attempt to collect a debt.
If you have questions regarding this statement, or do not want Ocwen to send you monthly statements in the future, please contact us at 1-888-554-6599. Bankruptcy payments from the Trustee should be mailed to Ocwen Loan Servicing, LLC, P.O. Box 24781, West Palm Beach, FL 33416-4781.
*673See, e.g., Ex. 15. The monthly statements further noted in the “Important Messages” section that “Our records indicate that your loan is in foreclosure. Accordingly, this statement may be for informational purposes only.” See id.
Mrs. Todt testified that she called Oewen to question why they were receiving monthly statements. A representative told her that he could see the Debtors’ bankruptcy filing and the bankruptcy discharge in Ocwen’s records; the representative told Mrs. Todt that the Debtors should “just ignore” the statements. Mrs. Todt testified that it was upsetting to receive these statements each month since Oewen had “no right” to send them these bills. She stated that she was constantly worried whether Oewen would come after them for money, including the difference between what was owed and what Oewen might receive at a foreclosure sale. At trial, Mrs. Todt indicated that she never read the bankruptcy disclaimer language contained in the statements, focusing instead on the amounts set forth in the statements.
On March 16, 2013, the Debtors received a letter from Oewen indicating a foreclosure sale had been scheduled on the Property. Ex. 27. It encouraged the Debtors to. contact Oewen to discuss possible alternatives to save their home. Shortly thereafter, the Debtors received an official “Notice of Mortgage Foreclosure Sale,” from BONY’S attorneys, which was sent in accordance with the provisions of NH RSA 479:25 and which advised the Debtors that their home would be sold at a public auction on April 10, 2013, at 3:00 p.m.
For reasons that are not clear from the record, the Property was not foreclosed on April 10, 2013. Instead, Oewen continued to send the Debtors monthly statements showing more than $148,000.00 “past due” as well as letters indicating it “may not be too late-to save [their home],” and notices advising the Debtors of an interest rate/payment change. Exs. 32-34, 36, 37, and 38-43. Mrs. Todt testified that she was worried that Oewen would come after them for the money listed in the statements. She indicated her husband was just as upset as she was by the statements.
The Debtors were sent a second “Notice of Mortgage Foreclosure Sale” on or about November 14, 2013. Ex. 44. This notice informed the Debtors that a foreclosure auction would take place on December 16, 2013, at 12:00 p.m. Within a few days, on November 18, 2013, Oewen sent the Debt: ors another monthly statement. Éx. 45.
The mortgage on the Debtors’ home was foreclosed on December 16,2013. Nonetheless, Oewen sent the Debtors another monthly statement on December 17, 2013. Ex. 46. A foreclosure deed was executed on January 14, 2014; it shows that BONY bought the property for $285,000.00. Ex. 47. Another foreclosure deed was executed on March 26, 2014; it too indicates that BONY bought the property for $285,000.00. Ex. 50. A third foreclosure deed was executed on November 7, 2014, also showing a sale to BONY for $285,000.00. Ex. 58. This third foreclosure deed was the one recorded with the Hills-borough County Registry of Deeds on December 8,2014.3 Id.
*674The Debtors received several additional communications from Ocwen after the foreclosure sale. Specifically, the Debtors received a letter from Ocwen dated September 9, 2014, notifying them thqt a relationship manager had been assigned to them and would be “assisting in identifying solutions for their mortgage.” The letter expressly stated that “[t]his communication is from a debt collector attempting to collect a debt.” Ex. 53. On September 26, 2014, Ocwen sent the Debtors a letter informing them that their hazard insurance policy had expired and that Ocwen would be buying insurance for the Property for which the Debtors “must pay5’ Ocwen. Ex. 54. Mrs. Todt was upset by this as she believed legally she could not insure a house she did not own. She called her insurance company and asked them to contact Ocwen and inform Ocwen that they no longer owned the Property.
On October 16, 2014, Ocwen sent the Debtors an annual escrow account disclosure statement detailing actual and scheduled activity in the Debtors’ escrow account between October 2008 and November 2014. Ex. 55. This statement also indicated that “[t]his communication is from a debt collector attempting to collect a debt.” The statement also included an “Escrow Shortage Payment” coupon seeking a payment of $2,435.66 from the Debtors. On October 26, 2014, Ocwen sent the Debtors a second letter informing them that if they failed to provide proof of insurance to Ocwen, it would purchase a policy and the Debtors would be responsible for reimbursing Ocwen for its cost, which Ocwen estimated to be $2,413.00. Ex. 56. On December 23, 2014, Ocwen sent another escrow analysis statement notification to the Debtors informing them that the earlier escrow analysis was sent in error and that “[c]urrent monthly payments should continue to be made-until Ocwen provides a new escrow analysis.” Ex. 59.
Apparently in an attempt to stop Ocwen’s continuing communications and requests for payment, the Debtors reached out to the New Hampshire Banking Department, who in turn contacted Ocwen on their behalf. Ocwen acknowledged in a letter to the New Hampshire Banking Department dated November 17, 2014, that “[u]nfortunately, Ocwen inadvertently failed to update the loan records accordingly” after the foreclosure sale took place on December 16,2013, “and as a result the loan was reflecting in active status, which in turn caused the system to issue modification solicitation letters to the Todt’s.” Ex. 57. It advised that “Ocwen has updated their records accordingly.” Id. Notwithstanding Ocwen’s statement that it had updated its records, Ocwen sent the Debtors the escrow analysis statement notification dated December 23, 2014. Ex. 59.
On April 24, 2014, Mrs. Todt obtained her credit report from two different credit reporting agencies. Both reports reflected a balance of $0 being owed on the mortgage and further indicated that the debt was “included in bankruptcy” and “Discharged through Bankruptcy Chapter 7.” Exs. 51 and 52. On March 27, 2015, Mr. Todt obtained his credit report from a credit reporting agency and it reflected a balance of $0 on the mortgage. Ex. 60. On March 28, 2015, Mrs. Todt obtained a credit report from a personal finance website (not one of the three major credit reporting agencies, i.e,, Equifax, Experian, and TransUnion), and it showed a balance of $313,432.00 being owed to Ocwen on the mortgage. Ex. 61.
On June 19, 2015, the Debtors reopened their bankruptcy case and filed this adver*675sary proceeding. Saxon did not appear or file an answer and so it was defaulted on August 8, 2015. The Court declined to enter default judgment against Saxon at that time because the complaint and the motion for default judgment did “not establish that Saxon violated the discharge injunction and [did] not establish any basis for awarding damages [since] [t]he communications and activities about which the Debtors complain appear to have taken place after Saxon transferred its servicing rights to Ocwen.”
On June 8, 2016, the Court granted in part and denied in part the Debtors’ motion for summary judgment, ruling specifically that the letters and statements sent between September 9, 2014, and December 23, 2014, described above, “violated the discharge injunction of 11 U.S.C. § 524(a)(2) and did not fall within the safe harbor provision of 11 U.S.C. § 524(j) as these actions all occurred after the mortgage on the Debtors’ residence was foreclosed on December 16, 2013.” See Exs. 53-56 and 59.
The Court held a trial on March 9, 2017, in order to determine whether any other actions by Ocwen and BONY violated the discharge injunction and whether the Debtors are entitled to damages. Mr. Todt was unable to testify due to his ongoing medical issues. Mrs. Todt testified as did one of her health care providers and a former co-worker.
The health care provider testified that she has seen Mrs. Todt on an annual basis since 2005 and that starting three or four years ago (so starting in 2013 or 2014) Mrs. Todt reported that she was feeling stressed, was teary, and was having difficulty sleeping. She further told her provider that her husband was ill, that she was the only one working, and that the Debtors were having financial issues and were concerned about losing their home and being out on the street.
Mrs. Todt’s co-worker testified that she and the Debtor worked together, speaking on a daily basis, for a five-year period from 2011 through 2016. She observed that Mrs. Todt was emotionally upset and cried often at work. The co-worker indicated that the crying started gradually over time, probably starting in 2014 and 2015, and that she (and other co-workers) noticed it, with consistent crying occurring during the last six months of 2016. She testified that Mrs. Todt was often distraught at work and that her issues escalated over time. She indicated that Mrs. Todt informed her that she was experiencing financial difficulties, had filed bankruptcy, and was feeling pressure from her mortgagee. She testified that Mrs. Todt was afraid someone would come to her home and lock her out.
Ocwen and BONY did not present any witness testimony at trial, the Court having granted the Debtors’ motion in limine prior to trial barring testimony by Ocwen’s only proposed witness.
III. DISCUSSION
A. Legal Analysis
Generally a bankruptcy discharge relieves a debtor from all personal liability for prepetition debt. Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir. 2000). Section 524(a)(2) of the Bankruptcy Code acts as an injunction prohibiting acts “to collect, recover or offset” debts that were discharged in a bankruptcy proceeding personally from the debtor. 11 U.S.C. § 524(a)(2); see Bates v. CitiMortgage, Inc., 844 F.3d 300, 304 (1st Cir. 2016) (citing Canning v. Beneficial Me., Inc. (In re Canning), 706 F.3d 64, 69 (1st Cir. 2013)). “The discharge injunction embodies the fresh start policy of the Bankruptcy Code, by which honest but unfortunate debtors are relieved of person*676al liability for their discharged debts.” Best v. Nationstar Mortg., LLC (In re Best), 540 B.R. 1, 8 (1st Cir. BAP 2015) (internal quotations and citations omitted). The discharge injunction does not prohibit every communication between a creditor and a debtor; “demands for payment of discharged debts are prohibited.” In re Brown, 481 B.R. 351, 368 n.10 (Bankr. W.D. Pa. 2012) (quoted in Best, 540 B.R. at 10); see also In re Gill, 529 B.R. 31, 37 (Bankr. W.D.N.Y. 2015) (cited in Best, 540 B.R. at 9).
“To prove a discharge injunction violation, a debtor must establish that the creditor ‘(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.’ ” Bates, 844 F.3d at 304 (quoting Lumb v. Cimenian (In re Lumb), 401 B.R. 1, 6 (1st Cir. BAP 2009)). The scope of the discharge injunction is “broad,” Canning, 706 F.3d at 69, and bankruptcy courts may enforce it through their “statutory contempt powers” under 11 U.S.C. § 105(a), which “inherently include the ability to sanction a party,” see Ameriquest Mortg. Co. v. Nosek (In re Nosek), 544 F.3d 34, 43-44 (1st Cir. 2008); Bessette, 230 F.3d at 445 (1st Cir. 2000) (“[A] bankruptcy court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and order damages ... if the merits so require.”). Monetary sanctions for violation of the discharge injunction include “actual damages, attorney’s fees, or even punitive damages.” Robbins v. Walter E. Jock Oil, Co., Inc. (In re Robbins), Bk. No. 14-11166-BAH, 2017 WL 946282, at *2 (Bankr. D.N.H. Mar. 9, 2017) (citing Bessette, 230 F.3d at 445). ' And, actual damages may include compensation for “sustained emotional injury” that is attributable to a violation of the discharge injunction. United States v. Rivera Torres, 309 B.R. 643, 649-50 (1st Cir. BAP 2004), rev’d and remanded on other grounds, 432 F.3d 20 (1st Cir. 2005) (holding the United States was immune pursuant to 11 U.S.C. § 106(a) from an award of emotional distress damages as a contempt sanction under 11 U.S.C. § 105 for violation of the discharge injunction); see also In re A.G. Wassem, 456 B.R. 566, 572 (Bankr. M.D. Fla. 2009) (“Emotional distress constitutes actual damages.”). Sanctions imposed for violation of the discharge injunction are in the nature of civil contempt. Canning, 706 F.3d at 69.
When deciding whether the discharge injunction has been violated, courts must decide “whether conduct is improperly coercive or harassing under an objective standard — the debtor’s subjective feeling of coercion or harassment is not enough.” Bates, 844 F.3d at 304 (citing Lumb, 401 B.R. at 6; Pratt v. Gen. Motors Acceptance Corp. (In re Pratt), 462 F.3d 14, 19 (1st Cir. 2006)). Courts do not employ a “specific test” to determine whether a creditor’s conduct meets this objective standard; rather, courts must consider “the facts and circumstances of each case, including factors such as the ‘immediateness of any threatened action and the context in which a statement is made.’ ” Bates, 844 F.3d at 304 (quoting Diamond v. Premier Capital, Inc. (In re Diamond), 346 F.3d 224, 227 (1st Cir. 2003)). “[A] Creditor violates the discharge injunction only if it acts to collect or enforce a prepetition debt; bad acts that do not have a coercive effect on the debtor do not violate the discharge.” Lumb, 401 B.R. at 7 (quoted in Bates, 844 F.3d at 304). Statements that are informational in nature, even if they include a payoff amount, generally are not actionable if they do not demand payment. Bates, 844 F.3d at 304 (citing Best, 540 B.R. at 11). In addition, letters that mention potential foreclosure after bankruptcy *677also are not actionable if they do not threaten any immediate action against the debtors. Bates, 844 F.3d at 304 (citing Jamo v. Katahdin Fed. Credit Union (In re Jamo), 283 F.3d 392, 402 (1st Cir. 2002)). The burden of proof is on the debtor to establish by clear and convincing evidence that the creditor violated the discharge injunction. Best, 540 B.R. at 9 (citing Manning v. CitiMortgage, Inc. (In re Manning), 505 B.R. 383, 386 (Bankr. D.N.H. 2014)); In re Zine, 521 B.R. 31, 38 (Bankr. D. Mass. 2014).
It is worth noting that “the discharge injunction does not prohibit a secured creditor from enforcing a valid prepetition mortgage lien.” Best, 540 B.R, at 9. “[A] discharge merely releases a debtor from personal liability on the discharged debt; when a creditor holds a mortgage hen or other interest to secure the debt, the creditor’s rights in the 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) (quoted in Best, 540 B.R. at 9). Thus, secured creditors may take appropriate action to enforce a valid hen surviving discharge, as long as the creditor does not seek to hold the debtor personally hable for the debt. Best, 540 B.R. at 9.
“In addition, § 524(j) [of the Bankruptcy Code] 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.” Id. Specifically, 11 U.S.C. § 524(j) 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.
11 U.S.C. § 524(j). The requirements are conjunctive, meaning that all must be satisfied for the exception to apply. Best, 540 B.R. at 10.
B. Analysis
1. Violations
Ocwen and BONY4 do not challenge the first and second findings that the Court must make in determining whether they have violated the discharge injunction, i.e., they do not dispute that (1) they had notice of the Debtors’ bankruptcy discharge; *678and (2) they intended the actions that constitute the alleged violations, i.e., that Ocwen sent various statements and letters to the Debtors. At issue then is whether the actions taken by Ocwen satisfy the third element, i.e., whether they were “objectively coercive creditor collection actions.” Bates, 844 F.3d at 305.
a. Monthly Statements
Ocwen began sending the Debtors monthly statements in April 2012, a few months after the Debtors received their discharges. Unlike some statements sent by mortgage companies, Ocwen’s statements clearly demand payment from the Debtors.5,6 As the Court has previously indicated, “[a]cts in the ordinary course of business in furtherance of collection of periodic payments associated with a valid mortgage on a personal residence are expressly permitted under the Bankruptcy Code.” In re Bates, 517 B.R. 395, 399 (Bankr. D.N.H. 2014) (citing 11 U.S.C. § 524(3)), 550 B.R. 12 (D.N.H. 2016), affd, 844 F.3d 300 (1st Cir. 2016). However, § 524(j)(3) requires that (1) the request be for “periodic payments,” and (2) be “in lieu of pursuit of in rem relief to enforce the lien.” 11 U.S.C. § 524(j)(3). The record in this case shows that Ocwen’s statements did not satisfy these requirements and therefore Ocwen was not protected by § 524(j)’s exception to the discharge injunction.
First, the monthly statements indicate, from the time that Ocwen first started sending statements in April 2012, that the Debtors’ loan was “in foreclosure.” For that reason, it would appear that Ocwen and BONY were pursuing in rem relief from as early as April 2012. There is no doubt that by March 2013, when BONY’s attorneys sent the Debtors the statutorily required “Notice of Foreclosure Sale,” Ex. 28, they were seeking in rem relief. Accordingly, the monthly statements could not have been sent in “in lieu of pursuit of in rem relief.”
Second, the monthly statements do not show that Ocwen was seeking only “periodic payments” from the Debtors but instead they show that Ocwen was seeking payment of all past due amounts. Between April 12, 2012, and March 18, 2013, Ocwen sent the Debtors twelve monthly statements. Each of those statements was substantively identical except for the total *679amount due, which increased incrementally with each successive statement. These statements did not reflect that the Debtors had received a bankruptcy discharge on January 26, 2012, a fact that Ocwen does not dispute and admitted to the Debtors in one or more telephone communications. Instead, the statements only contain a boilerplate notice on the front indicating that the recipient should read a provision on the back if the recipient were in bankruptcy. The back of the monthly statements included a sentence noting that if the recipient were in bankruptcy, or had been discharged in bankruptcy, the monthly statement was for informational purposes only and was not an attempt to collect a debt. Thus, Ocwen’s monthly statements did not reflect any real recognition by Ocwen that the Debtors’ bankruptcy discharges had entered and that, accordingly, both the content of Ocwen’s monthly statements and the demands that Ocwen could make therein should have been affected.
In addition, after Ocwen noticed the foreclosure sale in March 2013 (and clearly began pursuing in rem rights under BONY’s mortgage), Ocwen continued to send the same form of notice demanding payment. After the foreclosure on December 16, 2013, Ocwen sent an additional monthly statement as well as letters regarding hazard insurance for the property, an offer to attempt to resolve mortgage problems, and annual escrow statements. Not all of the post-foreclosure communications contained prominent bankruptcy disclaimer language.
Ocwen defends its actions on the grounds that the monthly statements sent post-discharge include bankruptcy disclaimer language; however, this elevates form over substance. The totality of Ocwen’s communications on and after April 12, 2012, with the exception of communications in connection with the enforcement of its in rem rights under the mortgage, reflected no recognition of the issuance of the bankruptcy discharge. All such communications expressly and implicitly reflect attempts to collect discharged obligations from the Debtors. No pro for-ma bankruptcy disclaimer can overcome iShe effects of repeated and continuous communications in which Ocwen took the position that these obligations were collectible. The use of a pro forma bankruptcy disclaimer is not a “get out of jail free” card that can absolve a creditor of liability for a pattern of conduct that is inconsistent with the terms of the disclaimer itself. Accordingly, the Court finds that the twenty-one monthly statements sent between April 2012 and December 2013 improperly coerced and harassed the Debtors in violation of the discharge injunction.
b. Post-Foreclosure Letters
The Court previously ruled on summary judgment that Ocwen’s post-foreclosure communications were not protected by § 524(j) and violated the discharge injunction. Thus, Ocwen’s and ÉONY’s argument in their post-trial memorandum that these communications were not coercive is misplaced; the Court has already concluded that they were coercive and harassing. The letters Ocwen sent to the Debtors informed them that (1) they needed to provide Ocwen with evidence of hazard insurance or they would be required to reimburse Ocwen approximately $2,413.00 for its purchase of a hazard insurance policy;7 and (2) an updated escrow analysis had been completed and an escrow shortage payment of $2,436.66 should be made and current monthly payments should continue. The last of the five eom-*680munications informed the Debtors that they had a relationship manager who would help them identify “solutions for their mortgage,” a mortgage which already had been extinguished,
At the time Ocwen sent these five communications to the Debtors, the Debtors had no personal liability on the note, and BONY had already obtained ownership of the Property through foreclosure. The Bankruptcy Code prohibits a party that has “no contractual or in rem relationship with a discharged debtor” from sending the debtor letters based on a relationship that no longer exists,8 Collins v. Wealthbridge Mortg. Corp. (In re Collins), 474 B.R. 317, 321 (Bankr. D. Me. 2012). “[P]urposeless letters relating to past debts and obligations constitute harassment proscribed by the discharge injunction.” Id.
c. Credit Reporting
“Reporting false or outdated information to a credit agency in an attempt to coerce payment on a discharged debt can violate the discharge injunction .... The reason: negative credit reports have consequences — like reducing creditworthiness, and with it the debtor’s ability to get loans in the future — and so a false report might coerce a debtor into paying a discharged debt to avoid those consequences.... Evidence that a creditor refused to change a false or outdated report can give rise to an inference that the creditor intended to coerce the debtor into paying the discharged debt.” Bates, 844 F.3d at 306 (citing Zine, 521 B.R. at 40; Torres v. Chase Bank USA N.A. (In re Torres), '367 B.R. 478, 486 (Bankr. S.D.N.Y. 2007)).
The Debtors state that the credit reporting on their mortgage was accurate in 2014, but in 2015, that reporting was negative. Upon review by the Court, it appears that Mr. Todt’s credit report accurately reflected a balance of $0 being owed on the mortgage in 2015 but Mrs. Todt’s report inaccurately reflected a balance of $313,432.00 being owed to Ocwen. The Court notes that the inaccurate report was not generated by one of the three major credit reporting agencies but instead by a different online company. The Debtors did not provide any evidence that would prove that Ocwen was the source of this inaccurate information. Furthermore, the Debtors have not demonstrated that false information was given in an attempt to coerce the Debtors into making payment on a discharged debt. For these reasons, the Court cannot find that negative credit reporting constituted a violation of the discharge injunction by the Defendants.
2. Damages
Sanctions for violating the discharge injunction may include the payment of actual damages, including those for emotional distress, attorney’s fees, and punitive damages, Robbins, 2017 WL 946282, at *2. The Debtors contend all three should be awarded in this case.
a. Actual Damages
The Debtors did not present evidence that they suffered any 'out-of-pocket expenses related to Ocwen’s violation of the discharge injunction. Instead; the Debtors focus on the emotional distress they suffered on account of their receipt of the *681monthly statements and post-foreclosure communications from Ocwen. At trial, Mrs. Todt testified- about the impact that Ocwen’s post-discharge communications had on her and her husband. She testified that she and her husband were each “a wreck” and they worried that the Defendants “were going to come after [them] because [they] kept getting these statements.” Mrs. Todt indicated that she lost sleep and received a prescription for “anti-anxiety medication.” She stated she was crying at work and looked “stupid” for crying at work “in front of co-workers.” She felt she could not explain what was happening because she did not want to have to “tell everybody in the world” about the bankruptcy. Mrs. Todt further indicated that she was stressed, losing work, and was having difficulty concentrating, especially with respect to “details,” which was important in her job as an administrative assistant. Mrs. Todt further testified that “every single month for years this went on.”
Mrs. Todt’s testimony was corroborated by the testimony of her health care provider who indicated that Mrs. Todt was feeling stressed, was teary, and was having difficulty sleeping back in 2013 and 2014, which was during the time Ocwen improperly was sending the Debtors statements and letters concerning the debt on the Property. She testified that Mrs. Todt informed her that she was having financial issues and was concerned about losing her home and being out on the street.
Mrs. Todt’s testimony was also corroborated by the testimony of a co-worker who also observed Mrs. Todt being upset at work during 2014. The co-worker testified that Mrs. Todt informed her that she was experiencing financial difficulties, had filed bankruptcy, and was feeling pressure from her mortgagee.
Emotional distress or anxiety arising from a debtor’s financial condition, or the filing of a bankruptcy petition, is not grounds for an award of damages where there is a violation of the discharge injunction. “Damages for emotional distress are proper where the debtor clearly establishes that he or she suffered significant harm and demonstrates a causal connection between that significant harm and the willful violation of the discharge injunction.” McLean v. Greenpoint Credit LLC, 515 B.R. 841, 848 (M.D. Ala. 2014). “Emotional harm must be significant; fleeting or trivial anxiety or distress is not sufficient.” Id. at 849. “There are several ways a debtor can clearly establish significant emotional harm, including but not limited to offering corroborating medical evidence, offering corroborating non-expert testimony, showing the violator engaged in egregious conduct, or testifying (without corroboration) about circumstances in which a reasonable person would obviously suffer significant emotional harm.” Id.
The Debtors have presented sufficient evidence that they suffered severe emotional distress due to Ocwen’s post-discharge coercion and harassment of them, seeking payments from the Debtors after their personal liability was discharged and their home was foreclosed. Accordingly, the Court will award $500.00 in damages for each violation of the discharge injunction to compensate the Debtors for the real emotional distress they suffered that negatively affected their quality of life from April 2012 through the date of their last communication with the Debtors in December 2014. Those communications include twenty-one monthly statements, the offer to solve “mortgage problems” dated September 9, 2014, the demand for insurance dated September 26, 2014, the annual escrow statement and “Escrow Shortage Payment” coupon dated *682October 16, 2014, the second demand for hazard insurance dated October 26, 2014, and the escrow analysis statement dated December 23, 2014. The total damages awarded for these twenty-six communications shall be $13,000.00 ($500.00 x 26).
b. Attorney’s Pees
“Bankruptcy courts have routinely awarded attorneys’ fees as a sanction against a party that violates the discharge injunction upon a finding of contempt.” In re Meyers, 344 B.R. 61, 68 (Bankr. E.D. Pa. 2006). In awarding attorney’s fees, the Court applies a lodestar analysis, which requires the Court to take the product of a reasonable hourly rate and the number of hours productively spent. Robbins, 2017 WL 946282, at *3 (citing Berliner v. Pappa-lardo (In re Sullivan), 674 F.3d 65, 69 (1st Cir. 2012)). Then, the Court may adjust this amount based on a number of factors including: (1) the time and labor .required, (2) the novelty and difficulty of the questions, (3) the skill requisite to perform the legal service properly, (4) the preclusion of other employment by the attorney due to acceptance of the case, (5) the customary fee, (6) whether the fee is fixed or contingent, (7) time limitations imposed by the client or the circumstances, (8) the amount involved and the results obtained, (9) the experience, reputation, and ability of the attorneys, (10) the “undesirability” of the case, (11) the nature and length of the professional relationship with the client, and (12) awards in similar cases. Robbins, 2017 WL 946282, at *3 n.6 (citing Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 718 (5th Cir. 1974)).
The Debtors’ law firm has performed services for the Debtors for a total fee of $45,254.75, which consists of 317.89 hours at an average rate of $142.36 per hour.9 In addition, due to Debtors’ counsel’s illness, the Debtors were required to obtain the services of another law firm to cover a hearing on the Debtors’ motion in limine. That attorney’s fees total $4,195.00; the Court has not been provided any breakdown for that amount in terms of hours or rate. In total, the Debtors seek to recover $49,449.75 in attorney’s fees.
The Court finds that the rates charged by the Debtors’ law firm are reasonable. However, the Court cannot find that all of the hours spent by Debtors’ counsel to pursue this action were productive or reasonable. For example, upon a review of the invoice provided to the Court, it appears counsel spent nearly forty hours on the complaint in this adversary proceeding, both conferencing with the Debtors in connection with the complaint and preparing and filing the actual pleading. The Court finds those hours to be excessive. In addition, counsel spent nearly eight hours on a three page motion for default judgment, both discussing the matter with the Debtors and drafting and filing the motion. Again, the Court finds those hours to be excessive. Overall, counsel spent nearly forty hours conferencing with the Debtors, not including time spent preparing for depositions or trial testimony. The Court notes further that for most of these meetings both the Debtors’ attorney and his paralegal attended, essentially duplicating effort.
Because the Court cannot assess the fees of substitute counsel under the lodestar method given the record before it and because, additionally, the Court finds that *683the Defendants should not have to pay for time spent getting additional counsel up to speed due to Debtors’ counsel’s illness, the Court will not award the Debtors the fees charged by substitute counsel. Further, because the billing records show a lot of duplicative effort between Debtors’ counsel and his paralegals and because the billing records show that overall excessive time was spent on routine tasks, the Court shall award fees for 200 hours at $150.00 per hour, or $30,000.00, as reasonable and necessary.
The billing records reflect that $1,077.07 was incurred in expenses, mostly for photocopies and travel expenses. The Court finds this amount reasonable and necessary and will include it as part of the damage award for the Defendants’ violation of the discharge injunction.
c. Punitive Damages
The Court has explained in the context of stay violation cases thaj; an award of punitive damages is “within the sound discretion of the court” and may be awarded when a defendant’s conduct is “malicious, wanton, or oppressive.” Mosher v. Evergreen Mgmt., Inc. (In re Mosher), 432 B.R. 472, 477 (Bankr. D.N.H. 2010); Sherkanowski v. GMAC Mortg. Corp. (In re Sherkanowski), Bk. No. 99-12204-JMD, 2000 WL 33679425, at *8 (Bankr. D.N.H. Aug. 15, 2000). While the Court is concerned that Ocwen pursued the Debtors after it commenced foreclosure proceedings and even after the foreclosure sale took place, the Court concludes that punitive damages are not necessary under the circumstances of this case. In making that determination the Court considers the fact that the Debtors did not pay any expenses related to the Property from the date they filed bankruptcy through the date they vacated the premises. Accordingly, from July 1, 2011, through September 1, 2015, they did not make any mortgage payments, they did not pay for any home insurance, they did not pay any real estate taxes, and they did not pay any rent for use of the Property. Thus, for a period of fifty-one months, the Debtors had no housing expenses other than the payments for their utilities. This amounted to an incredible savings for the Debtors, probably on the magnitude of more than $100,000.00.10 Instead, the Defendants had to pay some of these expenses. To order the Defendants to pay punitive damages would result in an additional benefit to the Debtors that is not warranted under the facts of this case.
IV. CONCLUSION
The Debtors deserved “a fresh start without being harassed by their former creditor.” Collins, 474 B.R. at 322. Unfortunately, that did not happen in this case. Instead, the Debtors continued to receive monthly statements requesting payment even after the Defendants commenced foreclosure proceedings to recover the Property. Even more surprising is that Ocwen continued to contact the Debtors requesting payment of escrow shortage amounts and reimbursement for the hazard insurance premiums after the foreclosure took place.
Based on Ocwen’s violations of the discharge injunction, for which BONY is also *684liable as principal for its agent Ocwen, the Court will enter a separate judgment holding the Defendants jointly and severally liable to pay damages of $44,077.07 to the Debtors, consisting of $13,000.00 for emotional distress and $31,077.07 for attorney’s fees and expenses. The Court will not enter a default judgment against Saxon as the trial record does not establish any grounds for entering a judgment against it. This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
. The Debtors did not list the Property on the Chapter 7 Individual Debtor’s Statement of Intention filed in their bankruptcy case. Accordingly, they did not indicate any intent to "surrender" or "retain” the Property.
. Service on BONY was in care of its attorneys.
. The parties did not explain during trial why three separate foreclosure deeds were executed or why there was such a delay in recording the foreclosure deed. While the deed was recorded in December 2014, Mrs. Todt testified that the Debtors did not vacate the Property until September 2015, Mrs. Todt further testified that the Debtors paid nothing for the Property from the date they filed bankruptcy on July 1, 2011, through September 1, 2015, i.e., they did not make any payments to Oewen, they did not pay for any home insurance, and they did not pay any real estate *674taxes (which amounted to about $6,000.00/ year).
. The parties did not make any distinction between BONY and Ocwen at trial. From the record, it appears that BONY held the claim against the Debtors in the form of a promissory note secured by a mortgage on the Property and Ocwen serviced BONY’s note and mortgage. The record shows that BONY took no direct action against the Debtors; rather, all letters and statements were sent by Ocwen, its agent. BONY has not challenged the notion that it can be held liable for damages based on its agent’s violation of the discharge injunction. See Pague v. Harshman (In re Pa-gue), Bk. No. 3:01-bk-32061, Adv. No. 3:09-ap-00071, 2010 WL 1416120, *6 (Bankr. N.D. W. Va. Apr. 5, 2010) ("The general rule of respondeat superior .,, provides that a principal is liable for the wrongful acts of its agent within the scope of the agent’s authority. The agent and principal may be held jointly and severally liable for the wrongful acts of the-agent. No requirement exists that an [agent] must also be a creditor for that [agent] to be held accountable for violations of the discharge injunction.” (citations omitted)).
. For example, in the case of Lemieux v. America's Servicing Co. (In re Lemieux), 520 B.R. 361, 366 (Bankr. D. Mass. 2014), the monthly statements sent to the debtors omitted "the word 'due,' a word that indicates an attempt to collect a debt” and the detachable coupon had "blank lines that a borrower might fill in to indicate a monthly payment amount, additional principal, late charges and additional escrow.” The payment coupons also included additional language stating: "If you are currently a party in a bankruptcy case, and you choose to make a voluntary payment, detach and return the remittance coupon with your payment." Id. at 365 (emphasis in original). In McConnie Navarro v. Banco Popular de Puerto Rico (In re McConnie Navarro), 563 B.R. 127, 146-47 (Bankr. D.P.R. 2017), the "mortgage statements did not include the amount of payment, a due date, a late charge if not received by a date certain, or a past due amount and included a disclaimer.” In addition, the monthly payment coupon did not include amounts for "the monthly payment, additional principal, additional escrow, late fees and other” but rather they were "all left blank.”
. Ocwen argues that its statements contain bankruptcy disclaimer language that indicates the statements were being sent for "informational purposes only.” In the Court’s view, "[a] creditor cannot avoid the consequences of violating the automatic stay or discharge injunction simply by burying an alternative explanation for a clear demand for payment in fine print.” Zine, 521 B.R. at 40. “[D]is-claimer language may not be used to shield an improper demand for payment should there be one.” McConnie Navarro, 563 B.R. at 149.
. As a result of their discharge, the Debtors had no obligation to obtain hazard insurance on the Property. Lemieux, 520 B.R. at 367 n.5.
. The Court notes that the letters Ocwen sent to the Debtors relate to obligations that arose under the note and mortgage documents, i.e„ expenses for insurance and escrow related to preserving the Property. They did not relate to the Debtors’ continued occupation of the Property for which it may have been appropriate for Ocwen and/or BONY to contact the Debtors.
. Counsel bills his services at the rate of $250.00 per hour and his paralegals’ services at the rate of $100.00 per hour.
. Assuming a monthly rent of $1,500.00 for the Property (which is probably low for the Property but not if the rent does not include insurance and real estate tax payments), the Debtors may have expended $76,500.00 ($1,500.00/mo. X 51 mos.) in rent. Assuming annual insurance payments of $500.00, the Debtors may have expended $2,125.00 ($500.00/yr. x 4.25 yrs.) for insurance. With real estate taxes for the Property accruing at $6,000.00 per year, the Debtors may have expended $25,500.00 ($6,000.00/yr. x 4.25 yrs.) for real estate taxes. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500498/ | DECISION DENYING CONSTRUCTIVE TRUST AND AUTHORIZING SALE
NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE
Before the Court is a rather narrow question: whether a third party’s claim of an equitable interest in two pieces of real property, in which a debtor holds legal title, is sufficient to impose a constructive trust, thereby excluding the parcels from a debtor’s bankruptcy estate. The question arises in the context of the Chapter 7 Trustee’s (“the Trustee”) motion pursuant to 11 U.S.C. § 363 and Federal Rules of Bankruptcy Procedure 2002 and 6004 for an order approving bidding procedures for the sale of two properties titled to Jacob fetman (“the Debtor”), and authorizing their sale free and clear of all liens (“the Trustee’s Sale Motion”). See Trustee’s Sale Mot., ECF No. 33. In their objection to the Trustee’s Sale Motion, the Debtor’s parents, Moshe and Yafa Fetman (“the Fet-mans”), allege that they are the true owners of the properties, and that the Debtor was merely holding the same “as nominee and in constructive trust.” Fetmans Obj. to Mot. 2, ECF No. 47. For that reason, the Fetmans ask the Court to impose a constructive trust and deny the Trustee’s Sale Motion. Id. at 5; Memo of Law in Opp., ECF No. 79. As set forth below, the Court *704overrules the Fetmans’ objection, and grants the Trustee’s Sale Motion.1
JURISDICTION
This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The following are the Court’s findings of fact and conclusions of law to the extent required by Rule 52 of the Federal Rules of Civil Procedure, as made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure.
BACKGROUND
On August 11, 2015, the Fetmans filed an involuntary petition under chapter 7 of Title 11 of the United States Code against their son, the Debtor.2 The Trustee was appointed as interim trustee on October 26, 2015, and later became the trustee in the case after an Order for Relief under Chapter 7 was entered on November 21, 2015. See ECF No. 25. By Order dated November 15, 2015, the Trustee was authorized to retain MYC & Associates, Inc. to market and procure purchasers for real property, located at 4301 and 4305 Tenth Avenue, Brooklyn, New York (“4301” and “4305,” respectively, and collectively “the Properties”).
The Trustee’s Sale Motion asserts that the Debtor owns the Properties subject to two judgment liens — one held by Aish Ha-torah New York, Inc. in the amount of $21,430,641.99, and the other by the Fet-mans in the amount of $2,300,000.00. Should the sale of the Properties be approved, the liens, to the extent they are valid, would attach to the proceeds.
In the Fetmans’ objection to the Trustee’s Sale Motion, they contend that the sale cannot be approved because they, and not the Debtor, are the owners of the Properties, and that the Debtor merely holds legal title. They describe the following events that led to this arrangement. In or around the mid-1980s, the Fetmans emigrated from Israel. Obj. to Mot. 3, ECF No. 47. In 1986, using funds brought with him when he entered the United States, Moshe Fetman purchased 4305 in the name of 4305 Tenth Avenue Corp. (“the Corporation”), a corporation that he claims to have owned. Id. at 4-5. The Fetmans further claim that, in 1992, they purchased 4301 in the Debtor’s name because they had not yet become citizens. Id. at 1, 4. Later, in 2011, 4305 was transferred from the Corporation to the Debtor. Id. at 4. The purpose of the transfer, according to their account, was to enable the Debtor to obtain a loan secured by 4305, the proceeds of which the Fetmans used to purchase other property. Id. 4-5.
Thus, the Fetmans contend that, despite their son having title, they have been the actual owners for over thirty *705years,3 having provided all purchase funds for the Properties, having received all income that the Properties generated, and having paid all associated expenses. Id. at 1, 4. They further allege that the Debtor promised to convey the Properties to them at their “direction, upon request.” Id. at 4. Accordingly, they allege that the Debtor is merely holding the Properties “as nominee and in constructive trust,” and now ask this Court to give effect to that understanding. Id. at 2.
DISCUSSION
Section 363(b) of the Bankruptcy Code permits a trustee, after notice and a hearing, to “use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11 U.S.C. § 363(b)(1). 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). One notable exception to this rule, however, is that the “estate does not include property of others in which the debtor has some minor interest such as a lien or bare legal title.” In re Balgobin, 490 B.R. 13, 20 (Bankr. E.D.N.Y. 2013) (quoting In re Howard’s Appliance Corp., 874 F.2d 88, 93 (2d Cir. 1989)); see 11 U.S.C. § 541(d) (“Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest ... becomes property of the estate only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”).
The imposition of a constructive trust would thwart the Trustee’s Sale Motion precisely for that reason. The effect of imposing a constructive trust would, be to afford the Debtor only bare legal title to the Properties, subject to a duty to recon-vey them to their rightful owners; a limitation that would exclude the Properties from the estate, and in turn exclude them from sale here. See Balgobin, 490 B.R. at 20 (“Where the debtor’s conduct gives rise to the imposition of a constructive trust, so that the debtor holds only bare legal title to the property, subject' to a duty to recon-vey it to the rightful owner, the estate will generally hold the property subject to the same restrictions.” (quoting Howard’s Appliance Corp., 874 F.2d at 93)); see also In re Flanagan, 503 F.3d 171, 180 (2d Cir. 2007) (“[A]ny property that the debtor holds in constructive trust for another is excluded from the estate pursuant to § 541(d)'....”).
This result — effectively depriving the Debtor’s estate of the Properties at the expense of the Debtor’s other creditors— highlights an inherent tension between constructive trust law and bankruptcy law that requires the Court to proceed with caution in considering the Fetmans’ claim. *706In re First Cent. Fin. Corp., 377 F.3d 209, 217 (2d Cir. 2004) (citing In re Omegas Grp., Inc., 16 F.3d 1443, 1451 (6th Cir. 1994) (“[A] constructive trust is fundamentally at odds with the general goals of the Bankruptcy Code.”)); Balgobin, 490 B.R. at 21. As the Second Circuit has explained, the goals of the bankruptcy laws are to “secure a prompt and effectual administration and settlement of the estate of all bankrupts within a limited period, to place the property of the bankrupt, wherever found, under the control of the court, for equal distribution among creditors, and to protect the creditors from one another.” Id. (citations and quotations omitted). Constructive trust law, on the other hand, provides a “mechanism outside the scope” of that system; and one that would, as noted, take directly from competing creditors rather than from the debtor. First Cent., 377 F.3d at 217; In re Commodore Bus. Machs., Inc., 180 B.R. 72, 83 (Bankr. S.D.N.Y. 1995) (“[C]onstructive trusts are anathema to the equities of bankruptcy since they take from the estate, and thus directly from competing creditors, and not from the offending debtor.” (quoting Omegas, 16 F.3d at 1452)); see also Flanagan, 503 F.3d at 180 (noting that the effect of a constructive trust within bankruptcy is “profound”). In order to minimize this conflict, a constructive trust should be imposed only if there is “a substantial reason to do so.” Balgobin, 490 B.R. at 21 (quoting First Cent., 377 F.3d at 209); see also In re Ades & Berg Grp. Invests., 550 F.3d 240, 244-45 (2d Cir. 2008).
With those overarching considerations in mind, the Court looks to state law to determine whether a constructive trust may be imposed. See First Cent., 377 F.3d at 212; Howard’s Appliance Corp., 874 F.2d at 93; Balgobin, 490 B.R, at 21. New York law generally requires four elements for a constructive trust: “(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the subject res made in reliance on that promise; and (4) unjust enrichment.” First Cent., 377 F.3d at 212 (quoting United States v. Coluccio, 51 F.3d 337, 340 (2d Cir. 1995)). These four criteria are regarded as “guideposts,” and, given the equitable nature of a constructive trust, are not to be rigidly applied. Id. Nevertheless, the fourth criterion, “unjust enrichment,” has been deemed to be the most important, as “the purpose of the constructive trust is prevention of unjust enrichment.” Id.
The Fetmans allege that each of the four elements are satisfied here. They point out that the Debtor is holding the Properties for them pursuant to an agreement — a contention that the Debtor echoes — and that they have paid for, and received the income from, the Properties for thirty years. They further argue that the Debtor would be unjustly enriched if the Properties were sold for the benefit of creditors that are solely his own. Memo of Law in Opp. 7, ECF No. 79.
The Fetmans’ argument overlooks both the significance and contours of the unjust enrichment criterion, and must fail for that reason. Within this Circuit, a constructive trust has been imposed against a bankruptcy estate only where a court has found some pre-petition unjust conduct by the debtor relating to the subject property. See Balgobin, 490 B.R. at 23 (reviewing constructive trust cases within the Second Circuit and elsewhere). The reason for this apparent limitation is that, under New York law, a constructive trust is meant to be “fraud-rectifying,” rather than “intent-enforcing.” See First Cent., 377 F.3d at 216. That is, a constructive trust should not be imposed merely to give effect to a prior agreement, but instead should be reserved for situations in which a party’s misconduct gives rise to his unjust enrich*707ment. Id.; see also Plotnikoff v. Finkelstein, 105 A.D.2d 10, 482 N.Y.S.2d 730, 732-33 (1st Dep’t 1984).
Here, the Fetmans do not assert any misconduct by the Debtor. Though they allege an agreement with the Debtor by which he would return the Properties at the Fetmans’ direction, they do not claim to have exercised this reserved right; nor, for that matter, do they claim that the Debtor failed to abide by any such direction. To the contrary, they allege,-and the Debtor agrees, only that the Properties “belong to” the Fetmans. See Debtor’s Obj. 3, ECF No. 50. This allegation alone, however, falls short of attributing any act to the Debtor that requires redress. If anything, the parties’ consensus suggests that the Debtor would have voluntarily turned over the Properties had he been asked to do so; but it is not the Court’s role to give effect to this expectation using a constructive trust. See Balgobin, 490 B.R. at 22-23 (“Although the facts may reveal a case of unrealized expectations, [the court] may not, without more, fashion a constructive trust.” (quoting Binenfeld v. Binenfeld, 146 A.D.2d 663, 537 N.Y.S.2d 41, 42 (2d Dep’t 1989))). Absent an allegation that the Debtor acted in a manner contrary to the agreement, and at the Fet-mans’ expense, the imposition of a constructive trust over the Properties would be an act of enforcing the parties’ intent, rather than rectifying an alleged fraud. See First Cent., 377 F.3d at 215 (declining to impose a constructive trust absent the “suggestion ... of bad faith or malfeasance of any kind”).
Far from any malfeasance on the Debt- or’s part, the arrangement described by the Fetmans suggests that, thus far, the Debtor’s consent to the agreement has afforded them a considerable benefit. Putting aside the potential contradiction between the Fetmans’ claims that they could form a corporation in 1986, but could not purchase property in 1992, and taking them at their word that they could not purchase property in their own names, the Debtor’s title ownership has afforded them income since at least 1992 to which they would not have otherwise been entitled, and permitted them to use the proceeds of a mortgage to purchase additional property. See Obj. to Mot. 4, ECF No. 47
A similar finding led Chief Judge Carla E. Craig of this Court to refrain from imposing a constructive trust in In re Bal-gobin, a case cited by both parties here. Memo, in Opp. 5, ECF No. 79; Trustee’s Memo in Supp. 5, ECF No. 83. There, a debtor’s son, unable to purchase a vehicle in his own name, entered into an agreement with the debtor. They agreed that the debtor would hold title to the vehicle, while the son “would retain possession of it, own all equitable interest in it, and make all payments towards it purchase, maintenance, and insurance.” Balgobin, 490 B.R. at 17. The son therefore claimed that the debtor held title to the vehicle subject to a constructive trust for the son’s benefit. Id. at 18. The Court declined to impose a constructive trust in the son’s favor, in part citing the fact that the son had derived a substantial benefit from the arrangement, and that such a benefit undermined any claim of inequity in requiring that the car be surrendered for the benefit of the debtor’s creditors. Id. at 24.
The son in Balgobin held a position largely equivalent to the Fetmans’ position here. Each derived a substantial benefit from their alleged agreement. It is that benefit that undermines the Fetmans’ claims of inequity, and justifies the Properties’ sale for the benefit of the Debtor’s creditors. While the Debtor and the estate might be enriched by the sale, the facts presented do not show that such enrichment would be unjust. See First Central, *708377 B.R. at 218 (“Enrichment alone will not suffice to invoke the remedial powers of a court of equity.” (quoting McGrath v. Hilding, 41 N.Y.2d 625, 629, 394 N.Y.S.2d 603, 363 N.E.2d 328 (1977))).
CONCLUSION
By reason of the foregoing, the Court declines to impose a 'constructive trust in the Fetmans’ favor, and consequently overrules the Fetmans’ and the Debtor’s objections to the Trustee’s Sale Motion. The Trustee’s Sale Motion is hereby granted, subject to the outcome of the adversary proceeding to determine the extent of Tamar Fetman’s ownership of 4305. A separate order will issue.
. The Debtor filed his own objection to the Trustee’s Sale Motion that did not independently raise the issue of a constructive trust, but claimed to join the Fetmans’ objection. See Debtor’s Obj. to Mot. 4, ECF No. 50. The Debtor’s objection will therefore not be given independent treatment, but instead treated as a part of the Fetmans’ objection.
Further, the Debtor’s wife filed a declaration in response to the Trustee's Sale Motion alleging that she was part owner of the properties. See Dec. of Tamar Fetman, ECF No. 64. As an adversary proceeding has been commenced to address the issues raised in that declaration, and because those contentions do not directly impact the constructive trust issue, her claims will not be addressed here.
. Title 11 of the United States' Code may be referred to throughout as "the Bankruptcy Code.”
. The Fetmans initially support their claim of ownership by pointing to a New York State Supreme Court decision affirming a July 25, 2015 Rabbinical Court determination that the Fetmans were the actual owners of the Properties. See Obj. to Mot. 3, ECF No. 47; Obj. to Mot. Ex. O, ECF No. 47-10. Indeed, they go so far as to say that, because of that decision, Rooker-Feldman bars this Court from considering the question of ownership. Obj. to Mot. 3, ECF No. 47, However, this decision would appear to be the result of a stay violation, and it will not be afforded any weight here. It is dated October 21, 2015 — roughly two months after the Fetmans filed the involuntary petition, and therefore two months after a stay went into effect under 11 U.S.C, § 362(a), The Fetmans later move away from this claim, and in their Memorandum of Law suggest only that the Court take judicial notice of the Rabbinical Court’s determination. Memo of Law in Opp. 7, ECF No. 79. The Court takes notice of the fact of the determination. See Spiegel v. Berkowies, No. 14 Civ. 3045(LGS), 2015 WL 3429107, at *1 n.l (S.D.N.Y. May 27, 2015), aff’d on other grounds, 669 Fed. Appx. 38 (2d Cir. 2016). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500500/ | MEMORANDUM. OPINION ON PLAINTIFF’S ORIGINAL COMPLAINT TO DENY DISCHARGEABILITY OF DEBT PURSUANT TO 11 U.S.C. § 523
[Adv. Doc. No. 1]
Jeff Bohm, United States Bankruptcy Judge
I. Introduction
Prosecution of complaints to determine dischargeability under 11 U.S.C. *720§ 523(a)(2)(A)1 are quite common in the bankruptcy system. However, prosecution of the complaint to determine discharge-ability in the case at bar has been quite uncommon. In 2011, this Court, after holding a trial, issued a memorandum opinion explaining why it denied the plaintiffs request for a judgment of non-dischargeability. In re Ritz, 459 B.R. 623 (Bankr. S.D.Tex. 2011), rev’d and remanded sub nom. Matter of Ritz, 832 F.3d 560 (5th Cir. 2016). The plaintiff appealed, and in 2014, the District Court issued a memorandum opinion explaining its affirmance of this Court’s ruling. In re Ritz, 513 B.R. 510 (S.D. Tex. 2014), rev’d and remanded sub nom. Matter of Ritz, 832 F.3d 560 (5th Cir. 2016). The plaintiff then appealed to the Fifth Circuit, and in 2015, that Court issued a memorandum opinion explaining its affirmance of the District Court’s ruling. In re Ritz, 787 F.3d 312 (5th Cir. 2015), rev’d and remanded sub nom, Husky Int’l. Elecs., Inc. v. Ritz, — U.S. —, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016). Undeterred, the plaintiff sought relief from the Supreme Court, and in 2016, the highest court in the land issued an opinion that reversed the Fifth Circuit’s ruling and remanded the matter for further proceedings consistent with its decision. Husky Int’l. Elecs., Inc. v. Ritz, — U.S. —, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016). On remand, the Fifth Circuit issued another memorandum opinion and, in doing so, remanded the matter to this Court for further findings of fact and conclusions, of law. Matter of Ritz, 832 F.3d 560 (5th Cir. 2016). This Court now issues this Memorandum Opinion — the sixth one overall for this dispute — explaining why it has now decided to grant the plaintiffs request for a judgment of non-dischargeability.
II. Factual Background and Procedural History op this Adversary Proceeding
Husky International Electronics, Inc. (“Husky”) is a supplier of components used in electronic devices. Between 2003 and 2007, Husky sold its products to Chrysalis Manufacturing Corp. (“Chrysalis”), and Chrysalis accumulated a debt to Husky totaling $163,999,38. [Pi’s Ex. No. 3, p. 25 of 252]. During this 4-year period, Daniel Lee Ritz, Jr. (the “Debtor”) served as a director of Chrysalis and owned at least 30% of the company’s stock. [Feb. 2, 2011 Tr. 68:13-69:2, 78:17-22].
Between 2006 and 2007, the Debtor orchestrated transfers of cash out of Chrysalis’s accounts into the accounts of several other entities in which the Debtor had an interest. [Pi’s Ex. No. 5]. Meanwhile, Chrysalis did not pay the debt of $163,999.38 it owed to Husky (the “$163,999.38 Debt”). Indeed, Chrysalis filed a Chapter 7 petition in 2008. [Case No. 08-33793, Doc. No. 1]; [Defs Ex. No. 563].
*721Following Chrysalis’s lead, the Debtor filed his own Chapter 7- petition in this Court in 2009. [Main Case No. 09-39895, Doc. No. 1]. Husky thereafter timely filed a complaint to determine dischargeability against the Debtor, seeking a judgment that the $163,999.38 Debt is a personal obligation of the Debtor that is non-dis-chargeable under § 523(a)(2)(A) (the “Adversary Proceeding”).4 [Adv. Doc. No. 1]. Husky based its § 523(a)(2)(A) claim on § 21.223(b) of the Texas Business Organization Code5 (the “TBOC”). [Id. at p. 6, ¶ 13]. This section allows a creditor of a corporation to pierce the corporate veil and impose liability on an officer, director, or shareholder of the company if the creditor can prove that the individual “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.” Tex. Bus. Org. Code Ann. § 21.223(b) (West-lawNext 2015). This Court held a trial and-, on August 4, 2011, issued a memorandum opinion explaining why Husky could not prevail under its § 523(a)(2)(A) claim. See Ritz, 459 B.R. 623.
Specifically, this Court explained that the “actual fraud” element of § 21.223(b) requires that the defendant make a representation to the plaintiff; and since the Debtor made' no representation to Husky, no actual fraud could'be proven — which in turn meant that Chrysalis’s corporate veil could not be pierced to allow Husky to impose personal liability on the Debtor for the $163,999.38 Debt. Id. at 633, Additionally, this Court held that the test for proving “actual fraud” under § 21.223 was the same for proving “actual fraud” under § 523(a)(2)(A): namely, proof of a representation by the defendant to the plaintiff; and since the Debtor made no representation to Husky, there was no way that this Court could hold that the $163,999.38 Debt was a non-dischargeable personal obligation of the Debtor. Id.
Husky appealed to the District Court. [Adv. Doc. No. 97]. On July 14, 2014, the District Court issued a memorandum opinion affirming this Court’s ruling. Ritz, 513 B.R. 510. However, in doing so, the District Court disagreed with this Court’s view that the “actual-fraud” element of § 21.223 requires a misrepresentation by the Debtor to Husky. Id. at 537. Citing a Fifth Circuit opinion on § 21.223 issued two years after this Court’s original 2011 opinion — Spring Street Partners-IV L.P. v. Lam, 730 F.3d 427 (5th Cir. 2013) — the District Court held that the “actual fraud” element of § 21.223 does not require any representation.6 Ritz, 513 B.R. at 537. Rather, the District Court held that actual fraud under § 21.223 can be established by proving that the defendant (here, the Debtor) committed “actual fraud” under Texas Business and Commerce Code § 24.005.7 Id. at 537-38. In the context of *722this suit, the District Court held that the transfers of funds effectuated by the Debt- or out of Chrysalis’s account could constitute “actual fraud” if Husky could prove the existence of a sufficient number of so-called “badges of fraud.” Id. at 538. The District Court then held that this Court, in its memorandum opinion, had found the existence of four badges of fraud. Id. Based on the presence of these badges of fraud, the District Court held that the Debtor had committed actual fraud under TUFTA and therefore had established the “actual fraud” component required by § 21.223. Id.
Despite this holding, the District Court affirmed this Court’s ruling that Husky could not prevail because the District Court agreed with this Court that “actual fraud” under § 523(a)(2)(A) — unlike “actual fraud” under § 21.223 — does require a misrepresentation from the defendant (here, the Debtor) to the plaintiff (here, Husky); and the District Court emphasized that the Debtor never made any representation to Husky. Id.
Husky appealed to the Fifth Circuit. [Adv. Doc. No. 115], On May 22, 2015, the Fifth Circuit issued a memorandum opinion affirming the District Court’s ruling. Ritz, 787 F.3d 312. In doing so, the Fifth Circuit did not address the District Court’s holding about the ability to establish “actual fraud” under § 21.223 through badges of fraud and without a representation. Rather, the Fifth Circuit focused solely on the District Court’s affirmance of this Court’s ruling that “actual fraud” under § 523(a)(2)(A) requires a representation by the defendant and that Husky could not prevail because the Debtor made no representation. Id. at 316-17. Much of the Fifth Circuit’s opinion was spent explaining why it disagreed with the -Seventh Circuit’s holding in McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), that “actual fraud” under § 523(a)(2)(A) does not require a representation. Id. at 317-19. By the end of its discussion, the Fifth Circuit slammed the door shut on Husky’s § 523(a)(2)(A) claim:
For all of these reasons, we conclude that a representation is a necessary prerequisite for a showing of “actual fraud” under Section 523(a)(2)(A). Because the parties agree that the record contains no evidence of such a representation [by the Debtor to Husky], discharge of the debt at issue is not barred under this provision.
Id. at 321.
Husky thereafter filed a writ of certiora-ri with the Supreme Court. [Adv. Doc. No. 115]. Noting that there is a split among the circuit courts over whether “actual fraud” under § 523(a)(2)(A) requires a representation from the debtor “or whether it encompasses other traditional forms of fraud that can be accomplished without a false representation,. such as a fraudulent conveyance of property made to evade payment to creditors,” the Supreme Court granted certiorari to resolve the split. Ritz, 136 S.Ct. at 1585. On May 16, 2016, the Supreme Court issued an opinion that reversed the Fifth Circuit’s judgment and remanded the matter for further proceedings consistent with the opinion. Id. The Supreme Court reviewed the history of the phrase “actual fraud” and concluded that no misrepresentation is required to successfully object to the discharge of a specific debt under § 523(a)(2)(A):
• Because we must give the phrase “actual fraud” in § 523(a)(2)(A) the meaning it has long held, we interpret “actual fraud” to encompass fraudulent conveyance schemes, even when those schemes do not involve a false representation. We therefore reverse the judgment of the Fifth Circuit and remand the case for *723further proceedings consistent with this opinion.
Id. at 1590.
In the wake of .the Supreme Court’s decision, on August 10, 2016, the Fifth Circuit issued a memorandum opinion explaining what further steps need to be taken that are consistent with the Supreme Court’s ruling. Matter of Ritz, 832 F.3d 560.
The Fifth Circuit began with this observation: “While the [Supreme] Court clarified the meaning of actual fraud in § 523(a)(2)(A), it did not specifically hold that actual fraud had occurred here or determine whether Husky could ultimately prevail in its attempt to deny [the Debtor] a discharge of the relevant debt. Rather, following its holding as to actual fraud, [the Supreme Court] ‘remand[ed] the case for further proceedings consistent with [its] opinion.’ ” Matter of Ritz, 832 F.3d at 565 (emphasis in original (citations omitted). Given this instruction from the Supreme Court, the Fifth Circuit then stated:
The Supreme Court instructed this court to address specific issues with respect to § 523(a)(2)(A) on remand. Accordingly, we now specifically address' the issue pretermitted in our ill-fated opinion: whether Ritz is liable to Husky under Texas state law. Ritz’s liability to Husky under Texas law is a threshold question with respect to whether Ritz may be denied a discharge under § 523(a)(2)(A) because, if Ritz is not liable under Texas law, then he owes no debt to Husky. Because, as we explain below, we cannot resolve the state law issue without further fact finding by the bankruptcy court, we do not address the denial of a discharge under § 523(a)(2)(A) here and leave this determination to be made in the first instance by the bankruptcy court, after the necessary fact finding, in light of the standard articulated by the Supreme Court.
To succeed in denying Ritz a discharge under § 523(a)(2)(A), Husky must first show that Ritz is liable for the debt owed by Chrysalis to Husky. To show that Ritz is liable for the debt, Husky relies on Texas Business Organizations Code §. 21.223(b), which allows a plaintiff to pierce the corporate veil and hold a shareholder, such as Ritz, liable for the debts of a corporation. The district court held that Husky could pierce the corporate veil to hold Ritz liable. In our previous opinion, we did not address whether Ritz could be held liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute, but we do so here. We hold that the district court erred in concluding that Ritz was liable to Husky under the Texas veil-piercing statute because, in so concluding, it relied on a fact finding that the bankruptcy court did not actually make. However, we agree with the district court that Husky’s theory that Ritz is liable for the debt owed by Chrysalis to Husky under Texas law is legally viable and therefore remand for further factual findings on this theory.
Matter of Ritz, 832 F.3d at 565-66. In remanding the matter to this Court,8 the Fifth Circuit made it eminently clear that:
*724[E]stablishing that a transfer is fraudulent under the actual fraud prong of TUFTA is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made with the actual intent to hinder, delay, or defraud any creditor, necessarily involves dishonesty of purpose or intent to deceive. Given this holding, if Husky can show that Ritz’s transfers in this case satisfy the actual fraud prong of TUFTA, then it can also show that Ritz’s conduct constitutes actual fraud for the purposes of veil-piercing. As direct evidence of actual fraud is often scarce, TUFTA supplies a non-exclusive list of eleven factors, commonly known as badges of fraud, that courts may consider in determining whether a debtor actually intended to defraud creditors under TUFTA.
Id. at 567 (internal quotation marks and footnote omitted).
Having set forth that a “badge of fraud” analysis is appropriate for proving “actual fraud,” the Fifth Circuit stated that:
If the bankruptcy court concludes on remand that Ritz’s conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for Ritz’s “direct personal benefit,” Ritz is liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute and the bankruptcy court must then address whether Ritz should be denied a discharge under 11 U.S.C. § 523(a)(2)(A), consistent with the Supreme Court’s opinion in this case. If, however, the bankruptcy court concludes that Ritz’s conduct does not amount to actual fraud under Texas state law, then there is no debt to discharge, and the question of deniability under § 523(a)(2)(A) becomes moot.
Id. at 569.
Thus, it is now incumbent on this Court to undertake, at most, a three-step analysis. The first two steps are required by § 21.223 for determining whether Husky can pierce Chrysalis’s corporate veil to impose personal liability on the Debtor for the $163,999.38 Debt. These two steps are as follows: (1) Are there sufficient badges of fraud for this Court to find that the Debtor committed “actual fraud”?; and (2) If so, was the Debtor’s “actual fraud” for his direct personal benefit? If, after undertaking these steps, the Court concludes that the Debtor committed actual fraud for his direct personal benefit, then under § 21.223, the Debtor becomes personally liable to Husky for the $163,999.38 Debt. The third step then requires the Court to determine if the Debtor’s personal liability for the $163,999.38 Debt is a non-dis-chargeable obligation under § 523(a)(2)(A). Stated differently, just because Husky is able to pierce Chrysalis’s corporate veil to impose personal liability on the Debtor for the $163,999.38 Debt, it does not automatically follow that the $163,999.38 Debt is a non-dischargeable obligation. This Court must still inquire whether the Debtor’s personal obligation for the $163,999.38 Debt is — to use the language of § 523(a)(2)(A) — a “debt for money [or] property to the extent obtained by ... actual fraud.”
After receiving these instructions from the Fifth Circuit, this Court, on October 7, 2016, held a status conference with counsel for Husky and counsel for the Debtor. [Adv. Doc. Nos. 117, 119, & 124]. The Court inquired whether the parties wanted this Court to reopen the record so that they could introduce additional evidence. Both attorneys responded that they did not want to do so; rather, they wanted to make oral arguments based upon the existing record and submit additional briefing. [Tape Recording, Oct. 7, 2016 Hr’g at 1:34:56-1:36:40 P.M.; 1:40:39-1:41:22 P.M.]. Accordingly, the Court gave the parties approximately sixty days to prepare for oral arguments and to submit *725briefs. [Id. at 1:47:01-1:49:00 P.M.]. On December 2, 2016, Husky and the Debtor each filed their respective briefs. [Adv. Doc. Nos. 120 & 121]. On December 16, 2016, the Court held a hearing and listened to oral arguments of counsel based upon the evidence introduced at the trial held in 2011 and the legal principles articulated by the Supreme Court and the Fifth Circuit thereafter. [Tape Recording, Dec. 16, 2016 Hearing at 1:50:28-1:51:20 P.M.]. The Court then continued the hearing until February 3, 2017 to allow the parties to submit additional briefs while the Court reflected upon the arguments made and the exhibits cited in support thereof. [Id. at 2:59:30-3:01:59 P.M.]. On January 26, 2017, the Debtor filed another brief, [Adv. Doc. No. 128], and Husky filed an additional brief on January 27, 2017, [Adv. Doc. No. 129], On February 3, 2017, further arguments were made and then the Court took the matter under advisement. [Feb. 3, 2017 Tr. 5:24-6:9]
The Court now makes the following Findings of Fact and Conclusions of Law pursuant to Rules 7052 and 9014. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such; and to the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. Further, this Court reserves the right to make additional findings and conclusions as it deems necessary.
III. Findings of Fact9
A. History of Chrysalis Manufacturing Corporation
1.In 2002, the Debtor formed Chrysalis. Chrysalis was in the business of manufacturing components of products for various companies that, once the products were fully assembled, distributed them in the marketplace. [Feb. 10, 2011 Tr. 58:12-14]; [Adv. Doc, No. 94, Feb. 11, 2011 Tr. 67:5-10, 67:23-68:2], The Debtor held and continues to hold a 30% interest in Chrysalis stock. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 68:13-69:2]; [Finding of Fact No. 4 in the 2011 Opinion]; [Adv. Doc. No. 1, pp. 2-3, ¶ 6]; [Adv. Doc. No. 8, p. 2, ¶6]. At all relevant times, the Debtor was in financial control of Chrysalis. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 101:18-19]; [Defs Ex. Nos. 63.1-64.18].
2. In 2003, through Chrysalis, the Debtor acquired a company called Link World, which was operated as Altatron EMC (“Altatron”). [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 66:10-24], Chrysalis then became known as “Chrysalis Altatron.” [Id. at 15:16-18]. It is undisputed that references to “Altatron” refer to the entity known as “Chrysalis.” [Id.]-, [Feb. 2, 2011 Tr. 12:8-10].
3. The Debtor also testified that “Chrysalis needed capital the entire time that I [i.e., the Debtor] was involved with it.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 70:22-23], Indeed, . at all relevant times, Chrysalis was unable to pay its debts as they became due. [Finding of Fact No. 5 in the 2011 Opinion]; [Feb. 3, 2011 Tr. *72612:13-13:13]; [Pi’s Ex. No. 171]. Moreover, at all relevant times, the sum of Chrysalis’s debts was greater than all of Chrysalis’s assets at a fair valuation. [Finding of Fact No. 6 in the 2011 Opinion]. Further evidence of Chrysalis’s constant woeful financial condition is as follows:
a. The Debtor testified that “the company’s [i.e., Chrysalis’s] assets were less than what was owed.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 91:22-92:4]. He gave further testimony that he was not aware of any time when the assets were greater than the liabilities. [Id. at 92:11-16].
b. Chrysalis was unable to make payroll, so the Debtor would use his wholly-owned company, Institutional Insurance Management, to make cash infusions as necessary. [Defs Ex. Nos. 26.1 & 26.2]; [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 39:1-7; 121:6-24]. In total, the Debtor estimates that, using this particular entity, he infused capital of approximately $2.4 million into Chrysalis in 2005 and 2006, with roughly $2.3 million of these funds being infused in 2005. [Pl’s Ex. No. 169]; [Feb. 3, 2011 Tr. 45:20-24].
c. As of March 31, 2006, Chrysalis had assets of approximately $2.4 million and liabilities of about $5.6 million. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 72:6-21]. Thus, at this time, Chrysalis had a net negative equity of $3.2 million. [Id],
d. As of April 21, 2006, Chrysalis had accounts payable of $640,031.54 that were more than 90 days past due. [Pi’s Ex. No. 171, p. 3 of 3]. Around April or May 2007, EmlinQ purchased Chrysalis’s assets for $600,000.00, [Feb. 10, 2011 Tr. 94:3-7] — a number lower than Chrysalis’s accounts payable. [Feb. 3, 2011 Tr. 89:20-90:1]; [Defs Ex. Nos. 45-48]; [Pi’s Ex. No. 171].
e. On July 7, 2006, Chrysalis executed a UCC Financing Statement with Virtra Manufacturing Corporation as the secured party. [Defs Ex. No. 1]. The Debtor testified that this was necessary so Chrysalis could receive some “intercom-pany advances” of half a million dollars. [Adv. Doc. No. 94, Feb. 11,2011 Tr. 82:11 — 13]. Stated differently, for Chrysalis to obtain financing from Virtra Manufacturing Corporation, the loan had to be secured with assets of Chrysalis. The UCC Financing Statement reflects that VirTra Manufacturing Corporation perfected its lien on virtually all of Chrysalis’s assets, including, but not limited to, accounts of Chrysalis. [Defs Ex. No. 1].10
f. As of March 2007, Chrysalis had assets valued at $2.1 million and liabilities of $7.68 million. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 72:22-73:13], Thus, at this time, Chrysalis had a negative net equity of $5.36 million. [Id.].
*727g. The Debtor personally guaranteed $177,000.00 of debt owed by Chrysalis to Arrow Electronics, Inc. [Defs Ex. No. 43]. The Debt- or never personally guaranteed any debt that Chrysalis owed to Husky.
h. The Debtor testified that Chrysalis was never able to pay its bills at any point in time. [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 71:8-10].
4. On June 12, 2008, Chrysalis filed a voluntary Chapter 7 bankruptcy petition in the Southern District of Texas.11 [Case No. 08-33793, Doc. No. 1]; [Defs Ex. No. 56]. The Debtor signed Chrysalis’s petition as “Daniel L. Ritz, Jr., Director.” [Case No. 08-33793, Doc. No. 1, p. 7 of 7]. In the statement of financial affairs (“SOFA”), section 10, entitled “other transfers,” the Debtor, in his capacity as director of Chrysalis, represented that Chrysalis had not transferred any of its property outside the ordinary course of its business within two years preceding the filing of its bankruptcy petition. [Case No. 08-33793, Doc. No. 3, p. 47 of 54].12 This representation was false, as Chrysalis (through the Debtor’s actions), within two years of the filing of its bankruptcy petition, transferred a total amount of $1,161,279.90 out of Chrysalis’s account into the accounts of entities that the Debtor controlled. [See infra Findings of Fact Nos. 23-29]. Further, in Schedule B, which describes the non-real estate assets of a debtor, the Debtor, in his capacity as the director of Chrysalis, represented that Chrysalis had no claims of any kind when, in fact, Chrysalis had a claim against the Debtor for the $1,161,279.90 of funds that the Debtor transferred out of Chrysalis’s account into the accounts of entities which the Debtor controlled.
5. In Chrysalis’s Schedule F (entitled “Creditors Holding Unsecured Nonpriority Claims”), the Debtor, in his capacity as director of Chrysalis, represented that Chrysalis had the following non-insider unsecured debts as of the date of the filing of its Chapter 7 petition:
a. Ninety debts under $5,000.00, [Case No. 08-33793, Doc. No. 3, pp. 10-40 of 54];
b. Twelve debts more than $5,000.00 but less than $10,000.00, [id];
c. Twenty-four debts between $10,000.00 and $50,000.00, [id.];
d. Six debts more than $50,000.00 but less than $150,000, [id];
e. Two debts more than $150,000.00, specifically: (1) $162,487.65 to Husky, [id at p. 22 of 54] and (2) *728$228,000.00 to Arrow Electronics, [id. at p. 13 of 54]. In its Schedule F, Chrysalis, through the Debtor as its director, represented that Chrysalis did not dispute the debt that it owed to Husky.
B. History of the Relationship Between Husky and Chrysalis/the Debtor
6. On December 17, 2003, Altatron EMS (i.e., Chrysalis, [see Finding of Fact No, 2 supra]) entered into a Master Credit and Sales Agreement with Husky. [Pi’s Ex. No. 1], From 2003 to 2007, Husky sold and delivered electronic components to Chrysalis pursuant to this contract. [Finding of Fact No. 2 in the 2011 Opinion]; [Pi’s Ex. Nos. 1, 2, & 3]. Further, this agreement included language requiring Chrysalis to pay Husky’s attorneys’ fees under the following circumstances: “If Seller [i.e., Husky] engages legal counsel to enforce Seller’s rights under this Master Credit and Sales Agreement, Buyer [i.e., Chrysalis] shall pay Seller’s reasonable attorneys [sic] fees and costs incurred by Seller in connection with such efforts, whether or not litigation is commenced.” [Pi’s. Ex. No. 1, p. 2, ¶ 13].
7. Chrysalis failed to pay for goods sold and delivered to Chrysalis by Husky in the amount of $163,999.38. [Finding of Fact No. 3 in the 2011 Opinion]; [Pi’s Ex. No. 3, p. 25 of 25]; [Feb. 2, 2011 Tr. 35:1-7]. From October 2006 to January 2007, Husky accrued approximately ninety unpaid Chrysalis invoices. [Pi’s Ex. No. 7].
8. On or around January 9, 2007, Husky became aware that checks received from Chrysalis totaling approximately $90,000.00 had not cleared, [Pi’s Ex. No. 4]; [Feb. 2, 2011 Tr. 24:1-17].
9. On or around January 12, 2007, i.e., after certain cheeks from Chrysalis bounced, Nick Davis (“Davis”), the President and CEO of Husky, spoke with the Debtor by telephone. [Feb. 2, 2011 Tr. 26:17-28:10]. Davis credibly testified that he told the Debtor that if money was not immediately wired to pay for the products that Husky had delivered to Chrysalis, then Husky “would have to pursue litigation.” [Id. at 26:17-28:6]. Davis did not specify if Husky would pursue litigation against Chrysalis or the Debtor personally.
10. On June 1, 2007, Chrysalis prepared an A/P [Accounts Payable] Aging Summary indicating that it owed $162,487.65 to Husky among other creditors. [Pi’s Ex. No. 6, p. ¾.
11. At some point in 2007, Husky filed suit against Chrysalis in the 280th District Court of Harris County, Texas styled, Husky International Electronics, Inc. v. Chrysalis Manufacturing Corporation, Cause No. 2007-39059. [Case No. 09-39895, Doc. No. 1, p. 32 of 54]; [Pi’s Ex. No. 169, p. 3], Depositions were taken on March 27, 2008. [Pi’s Ex. No. 169],
12. On May 20, 2009, Husky filed suit against the Debtor, in its individual capacity, in the Southern District of Texas styled Husky International Electronics, Inc. v. Ritz. [Civ. Case No. 4:09-cv-01532, Doc. No. 1].
13. On December 31, 2009, the Debtor filed his Chapter 7 petition in this Court, [Main Case No. 09-39895, Doc. No. 1]. On June 4, 2010, the Debtor received a discharge under *729§ 727. [Main Case No. 09-39898, Doc. No. 32].13
14. In his Schedule F (entitled “Creditors Holding Unsecured Non-Priority Claims”), the Debtor did not schedule either Chrysalis or the trustee of Chrysalis’s Chapter 7 estate as a creditor holding a claim against the Debtor for the amount of the funds that the Debtor transferred out of Chrysalis’s account into the several entities that he controlled. [See infra Findings of Fact Nos. 15-23]; [Main Case No. 09-39895, Doc. No. 8-1].
C. History of the Debtor’s Transfers from Chrysalis to Other Companies that he Controlled
15. Between November 2006 and May 2007,14 the Debtor caused $677,622.00 of Chrysalis’s funds to be transferred to ComCon Manufacturing Services, Inc., a/k/a Vir-Tra Merger Corporation (“Com-Con”), without Chrysalis receiving reasonably equivalent value for the transfer.15 [Finding of Fact No. 7 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Additionally, on September 19, 2006, the Debtor personally guaranteed a $1.0 million financing facility extended to ComCon by a financing company named Charter Capital. [Pi’s Ex. No. 168, p. 3 of 5]; [Feb. 3, 2011 Tr. 64:12-20]. At trial, under cross-examination, the Debt- or admitted that “it would be a good idea then to do anything [he] could to make sure the corporation pays that debt.” [Feb. 3, 2011 Tr. 65:19-21]. The Debtor further admitted that the transfers of $677,622.00 from Chrysalis’s account to ComCon’s account would be a personal benefit to him because it would enable ComCon to pay the loan that the Debtor had personally guaranteed. [Id. at 66:4-8].
16. Between November 2006 and May 2007, the Debtor caused $121,831.00 of Chrysalis’s funds to be transferred to CapNet Securities Corporation, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 8 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debt- or admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11].
17. Between November 2006 and May 2007, the Debtor caused $52,600.00 of Chrysalis’s funds to be transferred to CapNet Risk Management, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact *730No. 9 in the 2011 Opinion]; [Pi’s Ex. No. 5].
18. Between November 2006 and May-2007, the Debtor caused $172,100.00 of Chrysalis’s funds to be transferred to Institutional Capital Management, Inc., and Institutional Insurance Management, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No, 10 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debtor admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11],
19. Between November 2006 and May 2007, the Debtor caused $99,386.90 of Chrysalis’s funds to be transferred to Dynalyst Manufacturing Corporation, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 11 in the 2011 Opinion]; [Pi’s Ex, No. 5].
20. Between November 2006 and May 2007, the Debtor caused $26,500.00 of Chrysalis’s funds to be transferred to Clean Fuel International Corp., a/k/a Gulf Coast Fuels, Inc., without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 12 in the 2011 Opinion]; [Feb. 2, 2011 Tr. 136:19-21],
21. Between November 2006 and May 2007, the Debtor caused $11,240.00 of Chrysalis’s funds to be transferred to CapNet Advisors Incorporated, without Chrysalis receiving reasonably equivalent value for the transfer. [Finding of Fact No. 13 in the 2011 Opinion]; [Pi’s Ex. No. 5]. Indeed, in the Joint Pretrial Statement, the Debtor admits that he caused this transfer. [Adv. Doc. No. 61, p. 5 of 11].
22. During all of the transfers to the entities referred to above (the “Debtor-Controlled Entities”), Chrysalis was still operational. [Finding of Fact No. 13 in the 2011 Opinion].
23. In total, the Debtor made approximately 176 transfers to the Debt- or-Controlled Entities for an aggregate amount of $1,161,279.90. [Pi’s Ex. No. 5]. The Debtor “does not dispute that the transfers were made to insiders.” [Adv. Doc. No. 121, p. 1, ¶ 1]. Further, the Debtor admitted that “Chrysalis had been threatened with suit at the time [ ] some of the transfers were made.” [M], Before the threat of a lawsuit, the Debtor orchestrated transfers totaling approximately $414,322.00; and after the threat, the Debtor orchestrated transfers totaling approximately $720,458.00 — thereby resulting in a total amount of $1,134,780.00.16 [Pi’s Ex. No. 5].
24. During the trial, counsel for Husky asked the Debtor the following question: “It would have personally benefitted you for all of the entities that you owned an interest in to get $1.2 million, collectively, *731from Chrysalis; would it not?” [Feb. 3, 2011 Tr. 67:11-13]. In response, the Debtor admitted: “[I]t would have benefitted me, yes, sir.” [Id. at 67:14-15].
25. The Debtor testified that he believed the transfers- of $1,161,279.90 were made to cover the “operational cash flow needs of Chrysalis” and to cover repayment of Chrysalis’s loans. [Feb. 2, 2011 Tr. 101:14-16, 101:25-102:1]. However, the Debtor openly admitted, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 138:4-139:20], as did his former employee, Nancy K. Finney (“Finney”), [Feb. 3, 2011 Tr. 132:18-24], that there was absolutely no evidence to substantiate this testimony.
26. Finney, a comptroller for the Debt- or-Controlled Entities, credibly testified that the Debtor himself controlled all of these transfers and authorized every single one, [Id. at 127:12-17]. The Debtor also admitted that he was responsible for initiating and authorizing many of the transfers. [Id. at 27:1-7]. The Court finds that the Debtor in fact initiated and authorized all of the transfers.
27. At all relevant times, the Debtor owned:
a. 30% of Chrysalis, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Docket No. 8, p. 4„ ¶ 9(c) ];
b. 85% of CapNet Securities Corporation, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4;, ¶ 9(c) ], (to which he transferred $121,831.00);
c. 100% of CapNet Risk Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4„ ¶ 9(c) ], (to which he transferred $52,600.00);
d. 100% of Institutional Insurance Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $172,100.00, or a portion thereof, -with the other portion going .to Institutional Capital Management, Inc.);
e. 40% of Institutional Capital Management, Inc., [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $172,100.00, or a portion thereof, with the other portion going to Institutional Insurance-Management, Inc.);
f. 25% of Dynalyst Manufacturing Corporation, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No.-8, p. 4, ¶9(0)], (to which he transferred $99,386.90);
g. 20% of Clean Fuel International Corp., a/k/a Gulf Coast Fuels, [Finding of Fact No. 14 in the 2011 Opinion], [Adv. Doc. No. 8, p. 4, ¶ 9(c) ], (to which he transferred $26,500.00);
h. 10% of ComCon, [Feb.'2, 2011 Tr. 129:16-131:2], (to which he transferred $677,622.00); and
i. No interest in CapNet Advisors Incorporated (to which he transferred $11,240.00), although he was a director, [id. at 79:11-15].
28.The Debtor’s positions with the above-listed entities are as follows:
a. He served as a director for Chrysalis, [id. at 79:17-19];
b. From 2001 until the trial held in 2011, he held the title of Chief Executive Officer for CapNet Securities Corporation, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 53:20-21];
*732c. He served as a director of CapNet Risk Management, Inc., [Feb. 2, 2011 Tr. 80:3-7];
d. From 1996 to the date trial of the Adversary Proceeding was held in 2011, he served as president of Institutional Insurance Management, Inc., [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 47:16-17];
e. From 1996 to the date trial of the Adversary Proceeding was held in 2011, he served as president of Institutional Capital Management, Inc., [Id. at 45:9-10];
f. From approximately 2002 to 2009, he served as a director of Dynalyst Manufacturing Corporation, [Feb. 10, 2011 Tr. 109:21-110:2];
g. He did not serve as a director or officer of Clean Fuel International Corp., a/k/a Gulf Coast Fuels; .
h. From 2006 to the date trial of the Adversary Proceeding was held in 2011, he served as a director of CapNet Advisors, Incorporated, ' [Feb. 2, 2011 Tr. 79:11-15]; [Adv. Doc. No. 94, Feb. 11 Tr. 62:8-17]; and
i. At some point, he also served as an officer and director of ComCon, [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 79:8-14].
29.The Debtor retained signatory authority over the accounts of the following entities: (1) Institutional Capital Management, Inc.; (2) Cap-Net Securities Corporation; (3) CapNet Risk Management, Inc.; (4) CapNet Advisors, Incorporated; (5) Chrysalis; (6) Institutional Insurance Management, Inc.; and (7) Clean Fuel International Corp., a/k/a Gulf Coast Fuels. [Pi’s Ex. No. 169].
D. The Adversary Proceeding
30. As a result of the Debtor’s orchestration of the transfers of funds out of Chrysalis’s account to the Debt- or-Controlled Entities, Husky suffered damages in the amount of $163,999.38 — which represents the amount owed to Husky by Chrysalis for the goods that Husky delivered to Chrysalis (already defined as the $163,999.38 Debt). [Finding of Fact No. 15 in the 2011 Opinion]; [Pi’s Ex. No. 2].
31. On March 31, 2010, Husky filed Plaintiffs Original Complaint to Deny Dischargeability of Debt Pursuant to 11 U.S.C, § 523 (the “Complaint”), which initiated the Adversary Proceeding. [Finding of Fact No. 1 in the 2011 Opinion]; [Adv. Doc. No. 1],
32. On January 13, 2011, the Debtor submitted answers to Husky's interrogatories. [Pi’s Ex. No. 172]. Interrogatory No. 8(i) reads as follows:
[i]dentify (by name, address, and telephone number) every Person who caused any transfer of money to be made in any amount between November 2006 and May 2007 from Chrysalis to: (i) ComCon Manufacturing Services, Inc. ... and state the exact Dates and amounts of each such transfer of money each such Person made to the forgoing.
[Id.]. In response, the Debtor asserted that Marlin Williford made these transfers in his capacity as CFO for ComCon and Chrysalis and that he (i.e., the Debtor) “did not initiate nor authorize any of these transfers.” [Id. at p. 4],
33. At trial, no exhibits were introduced and no testimony was adduced indicating that the Debtor made any oral or written represen*733tations to Husky inducing Husky to enter into the Master Credit and Sales Agreement. [Finding of Fact No. 16 in the 2011 Opinion]. The only communication that the Debt- or ever had with Husky was a telephone conversation between Husky’s founder and president, Davis, and the Debtor after the parties had entered into the Master Credit and Sales Agreement and Husky had already shipped components to Chrysalis. [/&]; [see supra Finding of Fact No. 9],
IV. Credibility 17
A. Husky’s Witnesses
1. Daniel Lee Ritz, Jr.
The Court finds that the Debtor is not a credible witness. During his testimony at trial, he gave answers which directly contradicted answers he had previously given in discovery. These contradictory statements relate to material issues. For example, his answer to Interrogatory No. 8(i) contradicts his testimony at trial on a very important issue. Interrogatory No. 8(i) reads as follows:
[i]dentify (by name, address, and telephone number) every Person who caused any transfer of money to be made in any amount between November 2006 and May 2007 from Chrysalis to: (i) ComCon Manufacturing Services, Inc.... and state the exact Dates and amounts of each such transfer of money each such Person made to the forgoing.
[Finding of Fact No. 32], The Debtor’s answer was as follows: “Marlin Williford was the primary person who managed these accounts. Defendant did not initiate nor authorize any of these transfers.” [Id,,]; [Pi’s Ex. No. 172].
The language immediately above reflects a Shermanesque statement by the Debtor that he never initiated or authorized any transfers. Yet, at trial, under examination by Husky’s counsel, the Debtor unequivocally admitted that he did authorize such transfers, [Feb. 2, 2011 Tr. 132:2-8]. Moreover, he could not offer any reasonable explanation as to why his answers were blatantly contradictory. [Feb. 3, 2011 Tr. 25:15-26:4]. On the witness stand, he claimed that he interpreted the interrogatory to mean that Husky wanted to know whether the Debtor personally transferred the funds — and the Debtor testified that he did not. [Feb. 2, 2011 Tr. 3-19]. This explanation is weak because the Debtor conceded that he authorized certain individuals to make transfers without the need for them to obtain his approval for each and every transfer. [Id. at 132:2-5]. Thus, his explanation is disingenuous, if not downright misleading.
. And there is plenty more. For example, at trial, the Debtor testified that he disputes that Chrysalis owes any debt to Husky. [Id. at 91:1-3]. The Debtor then conceded he signed an affidavit on October 24, 2007 representing that Chrysalis did in fact owe a debt to Husky. [Id. at 96:21-23]; [Pi’s Ex. No. 167] (“I entered into good faith negotiations, on behalf of Defendant Chrysalis, to settle all claims, avoid litigation and obtain a reduction from Plaintiff for any debts Defendant Chrysalis may *734owe.... Unfortunately, anticipated funds to satisfy that debt were not received and Chrysalis was unable to make it’s [sic] timely payment.”) (emphasis added). He later testified that he believes the debt is a little over $100,000.00. [Feb. 2, 2011 Tr. 97:9-16], Within a few minutes, the Debtor went from completely disputing the debt, to representing that a debt is owed, to representing that the debt is in a fairly specific amount. This shell game underscores his lack of credibility.18
All in all, the record is replete with the Debtor’s contradictions on several very germane issues in this suit. Additionally, his frequent inability to recall certain information was not coincidental. His ability to recollect was selective. Finally, the Debtor frequently gave non-responsive answers to questions which were unambiguous. His evasiveness and obfuscation further undermines his credibility. For all of the reasons set forth above, this Court finds the Debtor not to be a credible witness. The Court gives very little weight to his testimony.19
2.Nicolas C. Davis
Davis was the president of Husky. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony.
3. Nancy K. Finney
Finney worked as a comptroller for several of the Debtor-Controlled Entities for approximately four years. The Court finds that her testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, she testified that the Debtor made the decisions to transfer large sums of cash out of Chrysalis’s operating account and into the accounts of other companies controlled by the Debtor. [Feb. 3, 2011 Tr. 127:2-19]; [Finding of Fact No, 26].
4. James D. Rogers
James D. Rogers (“Rogers”) was Vice-President of Corporate Finance of CapNet Securities Corporation for approximately two and a half years. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, he testified that the Debtor ran all of the operations of the various companies in which he had an interest. [Feb. 3, 2011 Tr. 158:1-13]. He also testified that he did not participate in, or have knowledge about, any transfers of funds from Chrysalis to the Debtor-Controlled Entities, [id. at 162:10-19] — which is contrary to the testimony given by the Debtor. The Court believes *735that Rogers told the truth and that the Debtor did not.
5. Richard Hollan
Richard Hollan (“Hollan”), at one time, owned shares of Institutional Capital Management, Inc. — which is an entity owned 40% by the Debtor. The Court finds that his testimony is very credible, and the Court gives substantial weight to this testimony. Of particular significance, Hollan testified that he has known the Debtor for approximately twenty-five years and does not have a high opinion of him. [Id, at 187:5-18]. Indeed, he testified that the Debtor is not trustworthy. [Id. at 187:15-16]. Finally, he testified that he is familiar with the Debtor’s business practices, and that the Debtor controls all of the flow of money relating to corporations which he controls. [Id. at 185:1-186:2]
B. The Debtor’s Witnesses
1. Heather Cheaney
The Court finds Ms. Cheaney to be credible, but does not find her testimony to be significant on any important points. Therefore, the Court gives Ms. Cheaney’s testimony little weight.
2. Daniel Lee Ritz, Sr.
While the Court finds Daniel Lee Ritz, Sr. to be a credible witness, the Court gives less weight to his testimony because it recognizes that many of his statements were — not unsurprisingly — aimed at helping his son’s case.
3. Craig Takacs
The Court finds Mr. Takacs to be a bit evasive in his responses to the questions posed to him. Accordingly, the Court gives little weight to his testimony.
4. L. Andrew Wells
The Court does not find ML Wells to be a credible witness and, therefore, gives his testimony little weight.
5. Marlin R. Williford
The Court finds Mr. Williford to be direct and forthcoming in his testimony. Accordingly, the Court finds Mr. Williford to be a credible witness and gives his testimony significant weight. However, his testimony did not concern the transfers of cash that the Debtor orchestrated out of Chrysalis’s operating account into the accounts of the Debtor-Controlled Entities.
V. Conclusions op Law
A. Jurisdiction, Venue, and Constitutional Authority to Enter a Final Judgment
1. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). Section 1334(b) provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Code], or arising in or related to cases under title 11.” District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
The matter at bar is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) because the Court must determine whether the $163,999.38 Debt is a personal obligation that the Debtor owes to Husky that is non-dischargeable. Additionally, it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(0) because a determination of whether the $163,999.38 Debt is a non-dischargeable personal obligation of the Debtor necessarily affects the debtor-cred*736itor relationship between Husky and the Debtor. Finally, the issue at bar is a core proceeding under 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 § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”); De Montaigu v. Ginther (In re Ginther Trusts), Adv. No. 06-3556, 2006 WL 3805670, at *19 (Bankr. S.D. Tex. Dec. 22, 2006) (holding that 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, a suit over whether a particular debt is non-dischargeable can arise only in a bankruptcy.
2. Venue
Venue is proper under 28 U.S.C. § 1409(a) because the Adversary Proceeding arises under title 11 in that Husky seeks a .judgment of non-dischargeability pursuant to an express provision of the Code: namely, § 523(a)(2)(A). Alternatively, venue is proper because the Adversary Proceeding is related to the Debtor’s main Chapter 7 case.
3. Constitutional Authority to Enter a Final Judgment
In the wake of the Supreme Court’s issuance of Stern v. Marshall, 564 U.S. 462, 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 pending 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 503, 131 S.Ct. 2594. The pending dispute before this Court concerning whether the $163,999.38 Debt is a personal obligation of the Debtor that is non-dischargeable is a core proceeding pursuant' to 28 U.S.C. §§ 157(b)(2)(I) and (O). See also In re Brabham, 184 B.R. 476, 482 (Bankr. D.S.C. 1995) (“[A] Bankruptcy Court should exercise its jurisdiction to determine issues of dischargeability of debts which are brought before it and must consider issues related to enforcement of the discharge injunction of § 524.”); In re Tulloch, 373 B.R. 370, 375 (Bankr. D.N.J. 2007) (“Exception-to-discharge adversary proceedings are ‘core proceedings’ arising under title 11 and, as such, bankruptcy judges may ‘hear and determine’ such matters and ‘enter appropriate orders and judgments’ therein.”). Because Stem is replete with language emphasizing that the ruling is limited to the one specific type of core proceeding involved in that dispute, this Court concludes that the limitation imposed by Stem does not prohibit this Court from entering a final judgment here. A core proceeding under 28 U.S.C. §§ 157(b)(2)(I) and (O) is entirely different than a core proceeding under 28 U.S.C. § 157(b)(2)(C), See, e.g., Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (8th Cir. BAP 2012) (“Unless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional.”); see also In re Davis, 538 Fed.Appx. 440, 443 (5th Cir. 2013) cert, denied sub nom. Tanguy v. W., — U.S.-, 134 S.Ct. 1002, 187 L.Ed.2d 851 (2014) (“[W]hile it is true that Stem invalidated 28 U.S.C. § 157(b)(2)(C) with respect to ‘counterclaims by the estate *737against persons filing claims against the estate,’ Stem expressly provides that its limited holding applies only in that ‘one isolated respect.’ ... We decline to extend Stem’s limited holding herein.”).
Alternatively, even if Stem applies to all of the categories of core proceedings brought under 28 U.S.C. § 157(b)(2), see In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d 285, 294 n.12 (5th Cir. 2013) (“Stem’s ‘in one isolated respect’ language may understate the totality of the encroachment upon the Judicial Branch posed by Section 157(b)(2) .,..”), this Court still concludes that the limitation imposed by Stem does not prohibit this Court from entering a final judgment in the dispute at bar. In Stem, the debtor filed a counterclaim based solely on state law; whereas, here, the claim brought by Husky is based not only on state law (i.e. § 21.223 of the TBOC and § 24.005 of TUFTA), but also on an express provision of the Code — i.e., § 523(a)(2)(A) and judicially-created bankruptcy law interpreting this provision. This Court is therefore constitutionally authorized to enter a final judgment on the Complaint.
Finally, in the alternative, this Court has the constitutional authority to enter a final judgment in the Adversary Proceeding because Husky and the Debtor have consented, impliedly if not explicitly, to adjudication of this dispute by this Court. Wellness Int'l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) (“Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent must be expressed. We disagree. Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be expressed. Nor does the relevant statute, 28 U.S.C. § 157, mandate express consent .... ”). Indeed, Husky and the Debtor participated in a trial before this Court in 2011, [Findings of Fact Nos. 31-33]; participated in numerous appeals all the way up to the Supreme Court; filed post-hearing briefs in this Court after remand from the Fifth Circuit; and proceeded to make oral arguments at post-remand hearings— all without ever objecting to this Court’s constitutional authority to enter a final judgment in this Adversary Proceeding. This Court finds that these circumstances constitute consent to this Court now entering a final judgment in this dispute.
B. Pursuant to the Fifth Circuit’s Remand Opinion, This Court Must Undertake a Three-Step Analysis to Determine if the $163,999.38 Debt is a Personal Obligation That the Debtor Owes to Husky That is Non-. Dischargeable
. In this § 523(a)(2)(A) action, Husky “must show its entitlement to relief by a preponderance of the evidence.” In re Ryan, 443 B.R. 395, 408 (Bankr. N.D. Tex. 2010) (citing Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). “A fact is proven by preponderance of the evidence if the finder of fact, here the court, finds it more likely than not, based on the evidence, that the fact is true.” Id.
To prevail in this lawsuit, Husky must first prove that the Debtor is personally hable for the $163,999.38 Debt under applicable state law.20 Matter of Ritz, 832 *738F.3d at 566. Husky seeks to do this through § 21.223(b), “which allows a plaintiff to pierce the corporate veil and hold a shareholder, such as [the Debtor], liable for the debts of a corporation.”21 Id. To *739pierce the corporate veil and hold a shareholder personally hable requires a showing that the shareholder “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the [plaintiff/creditor] primarily for the direct personal benefit of the [shareholder].” Id. (emphasis in original) (citing Tex. Bus. & Org. Code § 21.223(b)). Indeed, in its remand opinion, the Fifth Circuit stated that “if Husky can show that Ritz perpetrated an actual fraud for his direct personal benefit, then Ritz is liable for Chrysalis’s debt to Husky under Texas law.” Id. Thus, Husky has the burden to satisfy two elements: (1) actual fraud by the Debtor (2) perpetrated for the Debtor’s personal benefit. TransPecos, 487 S.W.3d at 731 (“[T]he Legislature expressly placed the burden of proof on the corporate obligee to demonstrate that a corporate affiliate used the corporation to perpetrate an actual fraud on the oblige for his direct personal benefit.”). If Husky can hurdle over these two requirements, then the $163,999.38 Debt becomes a personal obligation of the Debtor under state law. Husky will then need to jump over a third hurdle: namely, to prove that the Debtor’s personal obligation to Husky under state law falls within the universe of debts that are non-dischargeable under § 523(a)(2)(A).
C. Piercing Chrysalis’s Veil Under State Law to Impose Personal Liability on the Debtor for the
$163,999.38 Debt
1. Step No. 1: Did the Debtor Commit “Actual Fraud” Under § 21.223?
a. The Two Avenues for Proving “Actual Fraud"
In its remand opinion, the Fifth Circuit held that a plaintiff may satisfy the “actual fraud” prong of § 21.223 by showing that the Defendant effectuated fraudulent transfers under TUFTA. Matter of Ritz, 832 F.3d at 567-68. In the suit at bar, there is no doubt that the Debtor orchestrated numerous transfers out of Chrysalis’s account into the accounts of the Debt- or-Controlled Entities. [Findings of Fact Nos. 15-23]. Thus, there were certainly transfers, and now the question is whether they were fraudulent.
To prove that these transfers were fraudulent, Husky must show that the Debtor “made the transferís] ... with actual intent to hinder, delay, or defraud [Husky].” Tex. Bus. & Com. Code Ann. § 24.005(a)-(a)(l)' (WestlawNext 2015). How can Husky do so? There are two separate and distinct avenues available. One is to introduce direct evidence that the Debtor actually intended to hinder, delay, or defraud Husky when he made the transfers of $1,161,279.90 to the Debtor-Controlled Entities. For example, adducing testimony from the Debtor himself admitting that he intended to hinder, delay, *740or defraud Husky when he was orchestrating the transfers would definitely prove “actual fraud.”' Of course, adducing such testimony from the Debtor — or, for that matter, from anyone — is virtually impossible. “Rarely will a person who is guilty of fraudulent conduct admit his guilt. Thus, direct proof of fraudulent intent is rarely available.” In re Golchin, 175 B.R. 366, 367-68 (Bankr. S.D. Cal. 1993) (internal citation and quotation omitted); see also In re Rembert, 141 F.3d 277, 282 (6th Cir. 1998) (“[A] subjective analysis of a debtor’s fraudulent intent is extremely difficult to establish. Clearly, debtors have an incentive to make self-serving statements and will rarely admit an intent not to repay.”); In re Darby, 376 B.R. 534, 540-41 (Bankr. E.D. Tex. 2007) (“Proving that actions by an individual are taken knowingly and with a fraudulent intent is not a simple matter, for rare will be the debtor who willingly provides direct evidence of a fraudulent intent.”). Here, not surprisingly, the Debt- or gave no testimony admitting that he intended to hinder, delay, or defraud Husky. Thus, Husky cannot satisfy this first element through the “direct evidence” approach.
The second approach for meeting this element is to introduce circumstantial evidence showing the defendant’s intent to hinder, delay, or defraud. In re 1701 Commerce, LLC, 511 B.R. 812, 835-36 (Bankr. N.D. Tex. 2014) (“Direct evidence of actual fraud is seldom available, so Texas law allows a plaintiff to rely on circumstantial evidence to prove actual intent.”). The Fifth Circuit, along with many other courts, allows this approach to be accomplished by a “badge of fraud” analysis. Matter of Ritz, 832 F.3d at 567-68; Spring Street, 730 F.3d at 437; In re Soza, 542 F.3d 1060, 1066-67 (5th Cir. 2008); In re Acequia, Inc., 34 F.3d 800, 805-06 (9th Cir. 1994); Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1st Cir. 1991); In re Sherman, 67 F.3d 1348, 1353-54 (8th Cir. 1995). The specific badges of fraud set forth in TUF-TA include the following:
(1) the transfer was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer was concealed;
(4) before the transfer was made 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;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made;
(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
Tex. Bus. & Com. Code Ann. § 24.005(b); Matter of Ritz, 832 F.3d at 568.
In order to find the requisite intent, “several of these ‘badges of fraud’” must be present. Mladenka v. Mladenka, 130 S.W.3d 397, 405 (Tex. App.-Houston [14th Dist.] 2004, no pet.) (finding that four badges of fraud are sufficient); see also Tel. Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 609 (Tex. App.Houston [1st Dist.] 2002, no pet.) (finding that five badges of fraud are sufficient); In re SMTC Mfg. of Tex., 421 B.R. 251, *741300 (Bankr. W.D. Tex. 2009) (finding that four or five badges of fraud are sufficient). However, the Fifth Circuit has held that “[n]ot all, or even a majority of the ‘badges of fraud’ must exist to find actual fraud.” In re Soza, 542 F.3d at 1066; see also Roland v. U.S., 838 F.2d 1400, 1402-03 (5th Cir. 1988) (interpreting TUFTA and finding “several” badges to be sufficient to find fraudulent intent). The evaluation of these badges to ascertain the Debtor’s intent to hinder, delay, or defraud Husky necessarily involves an analysis of “all the facts and circumstances of [the] case.” Matter of Chastant, 873 F.2d 89, 91 (5th Cir. 1989) (internal citation and quotation omitted).
Because “several” is far from specific, this Court, at the hearing held on December 16, 2016, addressed the meaning of this word and stated that Merriam-Webster’s Dictionary defined “several” as “being more than two but fewer than many.” [Tape Recording, Dec. 16, 2016 Hr’g at 2:06:44-2:07:30 P.M.]. Having determined that the dictionary definition is “more than two,” this Court then stated on the record that three would be sufficient. [Id. at 2:07:30-2:07:33 P.MJ. Indeed, the District Court of the Southern District of Texas has held as follows: “But there is no bright-line rule that more than two badges of fraud must be found. See Williams v. Houston Plants & Garden World, Inc., No. Civ. A. H-11-2545, 2014 WL 3665764, at-- 7-8 [sic] (S.D. Tex. July 22, 2014) (analyzing the cases Speer relies on and finding that they do not stand for a “bright-line” rule that three or fewer badges of fraud is insufficient). Courts and juries must consider all the factors and the “totality” of the circumstance.” Toiv v. Speer, No. H-ll-3700,2015 WL 1058080, at *11 (S.D. Tex, Mar. 10, 2015). As discussed below, because at least six badges that have been expressly raised by Husky are present here, this threshold is definitely met in the suit at bar.22
It is unclear whether the Court may only consider badges affirmatively and specifically pled by Husky or if the Court may 'sua sponte consider other badges that are present based upon the evidence before the Court. Compare Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857, 862-63 (8th Cir. 2015) (“Courts may consider any factors they deem relevant to the issue of fraudulent intent.”); and In re Tronox, Inc., 429 B.R. 73, 94 (Bankr. S.D. N.Y. 2010) (“Defendants’ argument rests on the flawed contention that badges of fraud must be pled to satisfy Rule 9(b). While courts often allow parties to rely on badges of fraud because mf the difficulty of proving intent, this is not a requirement.”); Kipperman v. Onex Corp., 411 B.R. 805, 853 (N.D. Ga. 2009) (“In determining whether the circumstantial evidence supports an inference of fraudulent intent, courts may look to a number of badges of fraud.”) with In re Lockwood Auto Group, Inc., 450 B.R. 557, 571 (Bankr. W.D. Pa. 2011) (only considering badges raised by the party accusing the debtor of fraudulent intent) and DWS Int’l, Inc. v. Job, No. 3:12-cv-339, 2013 WL 1438035, at *4 (S.D. Ohio Apr. 9, 2013) (refusing to consider a badge that was not affirmatively pled). Therefore, out of an abundance of caution, the Court first will consider only those badges raised by Husky. In doing so, this Court finds that’ there are a sufficient number of badges present to establish the Debtor’s intent to hinder, delay, or defraud Husky when he was transferring the $1,161,279.90 out of Chrysalis’s account *742into the accounts of the Debtor-Controlled Entities. Thereafter, the Court will consider the additional badges not raised by-Husky.23
In assessing each badge of fraud, it is necessary to ask this question: To which “debtor” does the particular badge refer? Given the circumstances in the dispute at bar, when this Court assesses whether each specific badge is present, the Court, in some instances, will be undertaking the analysis as if the “debtor” referred to in the particular badge is Chrysalis — as opposed to the Debtor himself; and in other instances, the Court will be undertaking the analysis as if the “debtor” referred to in the particular badge is the Debtor himself.
Finally, case law is clear that “[t]he Bankruptcy Court maintains full discretion to determine whether actual fraud existed in this matter and to assign a particular weight to each badge of fraud as it sees fit.” In re Piceinini, 439 B.R. 100, 106 (E.D. Mich. 2010); In re Zambrano Corp., 478 B.R. 670, 694 (Bankr. W.D. Penn. 2012) (“... [T]he significance of each existing badge of fraud must be considered.”); see also In re Cohen, 142 B.R. 720, 729 (Bankr. E.D. Penn. 1992) (giving more weight to the badges of “‘adequacy of consideration’ and the effect of the transfer on the transferor’s financial condition”). In the suit at bar, the Court does give substantial weight to certain badges of fraud that it analyzes.
b. Husky has raised six of the eleven enumerated badges set forth in TUF-TA, and this Court finds that five of these badges are present
Husky argues that the following badges are present: (1) the transfers were to an insider, [Adv. Doc. No. 80, Feb. 11, 2011 Tr. 6:23-7:1]; (2) the Debtor retained possession or control of the property transferred after the transfers were made, [Adv. Doc. No. 1, pp. 3-5]; (3) before the transfers were made, the Debtor had been sued or threatened with suit, [Adv. Doc. No. 80, Feb. 11, 2011 Tr. 7:21-8:2]; (4) the transfers were of substantially all of Chrysalis’s assets, [id. at 8:22-9:3]; (5) the value of the consideration received by Chrysalis was not reasonably equivalent to the value of the funds transferred, [id. at 9:4-16]; and (6) Chrysalis was insolvent or *743became insolvent after the transfers were made, [id. at 8:3-21],
The Court addresses each of these badges in turn.
1) The Transfers were to an Insider
This first badge considers transfers to an insider. This badge “is so significant that in some cases an insolvent debtor’s transfer to an insider has caused the court to make a finding of actual fraud in the absence of any other badges of fraud.” In re Toy King Dists., Inc., 256 B.R. 1, 129 (Bankr. M.D. Fla. 2000) (citing Acequia, 34 F.3d at 806).
First, TUFTA defines “transfer” as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a hen or other encumbrance.” Tex. Bus. & Com. Code § 24.002(12) (WestlawNext 2015). Second, TUFTA defines “insider”— in pertinent part — as “a corporation of which the debtor is a director, officer, or person in control.” Tex. Bus. & Com. Code § 24.002(7)(A)(iv).
There is no doubt that the Debtor orchestrated transfers of assets (in the form of funds on deposit in Chrysalis’s account) from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. [Findings of Fact Nos. 15-23]; Matter of Smiley, 864 F.2d 562, 565 (7th Cir. 1989) (noting that “any transfer of an interest in property is a transfer ... [and a] deposit in a bank account or similar account is a transfer”) (internal citation omitted). The total amount of the transfers was $1,161,279.90. [Finding of Fact No. 23]. Aside Jrom effectuating these transfers, the Debtor was a director, officer, or person in control of the Debtor-Controlled Entities at the time he orchestrated these transfers. [Findings of Fact Nos. 1, 27, & 28]. Therefore, the Debtor-Controlled Entities are “insiders.” Indeed, the Debtor “does not dispute that the transfers were made to insiders.” [Finding of Fact No. 23]. On these facts alone, the Court finds that a total of $1,161,279.90 was transferred to insiders, and therefore, this badge is present.
Moreover, “ ‘[t]he cases which have considered whether insider status exists generally have focused on two factors in making that determination: (1) the closeness of the relationship between the transferee and the debtor; and (2) whether the transactions between the transferee and the debtor were conducted at arm’s length.’ ” Williams v. Houston Plants & Garden World, Inc., 508 B.R. 11, 17 (S.D. Tex. 2014) (quoting Matter of Holloway, 955 F.2d 1008, 1011 (5th Cir.1992)) (discussing insider transfers under TUFTA). It is obvious that the Debtor had an extremely close relationship with the Debtor-Controlled Entities: he owned 30% of, founded, and was a director and president of . Chrysalis; he owned 100% of Institutional Insurance Management, Inc.; he owned 85% of and served as CEO for CapNet Securities Corporation; he owned 100% of and served as a director for CapNet Risk Management, Inc.; he owned 100% of and was president of Institutional Insurance Management, Inc.; he owned 40% of and was president of Institutional Capital Management; he owned 25% of and served as a director for Dynalyst Manufacturing Corporation; he owned 20% of Clean Fuel International Management, Inc.; and he owned 10% of and served as a director/officer for ComCon; and he was director of CapNet Advisors, Incorporated. [Findings of Fact Nos. 1,27, &28].
, Further, the transfers orchestrated by the Debtor were hardly transactions conducted at arm’s length. See Williams, 508 B.R. at 17; see also Holloway, 955 F.2d at 1011 (stating that when insiders are involved in transactions with one another, *744they cannot be characterized as arm’s-length transactions) (internal citation and quotation omitted). Also, the Debtor retained signatory authority over both the transferee and transferor companies. [Finding of Fact No. 29]; see Nwokedi v. Unlimited Restoration Specialists, Inc., 428 S.W.3d 191, 206 (Tex. App.-Houston [14th Dist.] 2014, no pet.) (finding this badge to weigh against the defendant when the defendant “was a signatory on both accounts”). Indeed, Finney, the former comptroller of most of the Debtor-Controlled Entities, credibly testified that the Debtor was in control 'of all of these transfers and authorized every single one of them. [Finding of Fact No. 26].
In sum, there is no denying that the transfers of $1,161;279.90 from Chrysalis to the Debtor-Controlled Entities were transfers to insiders. See Williams, 508 B.R. at 17 (finding that the transfers were to “insiders” when the debtor owned the transferor and transferee companies). Thus, this badge is present and weighs heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
2). The Debtor Retained Possession or Control of the Property Transferred After the Transfer
There is no question that the Debtor orchestrated transfers totaling $1,161,279.90 from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 23]. There is also no question that the Debtor had substantial control of each of the Debtor-Controlled Entities: he was the majority shareholder in most of the entities, held various director and officer positions at each of the entities, maintained signatory authority over these various accounts, and even wholly owned some of the companies. [Findings of Fact Nos. 27-29]. Under these circumstances, this Court finds that the Debtor retained possession or control of the $1,161,279.90 even after these funds were transferred out of Chrysalis’s account. See Nwokedi, 428 S.W.3d at 206 (finding retention of possession when the transferor was the signatory on both the transferee and transferor accounts). Thus, this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
3) Before the Transfers were Made, the Debtor had been Sued or Threatened with Suit
In 1701 Commerce, LLC, the court found this badge present when the creditors made demands on the debtor for payment before the debtor made transfers. 511 B.R. at 838-39. Specifically, the court found that such demands “were sufficient threats of suit for the purposes of fraud evidence.” Id. at 838; see also In re The Heritage Organization, L.L.C., 413 B.R. 438, 473-74 (Bankr. N.D. Tex. 2009) (finding demands for repayment sufficient to satisfy this badge). In another case, Daniels v. Keenen, the court held that: “The transfer after collection demands, even though those demands may not have explicitly threatened suit, may reasonably be considered as part of the evidence tending to prove an intent to hinder, delay, and defraud creditors.” 19 B.R. 724, 731 n.30 (Bankr. W.D. Mo. 1982).
Here, Davis, the President and CEO of Husky, credibly testified that on or around January 12, 2007, i.e., after certain checks from Chrysalis bounced, he spoke with the Debtor. [Finding of Fact No. 9]. In that conversation, Davis not only demanded payment, but also actually threatened to sue: he informed the Debtor that if money was not wired immediately to pay for the products that Husky had delivered to Chrysalis, then Husky “would have to pursue litigation.” [Id.]. Davis did not specify *745that he intended to sue the Debtor individually or Chrysalis, but ultimately Husky filed lawsuits against both the Debtor and Chrysalis. [Finding of Fact No. 9, 11, & 12]. Further, the Debtor admits that “Chrysalis had been threatened with suit at the time [ ] some of the transfers were made.” [Finding of Fact No. 23].
After the demand for payment and the threat of a lawsuit, the Debtor continued to make transfers out of Chrysalis’s accounts to the accounts of the Debtor-Controlled Entities. In total, the Debtor effectuated transfers of $720,458.00 to the Debtor-Controlled Entities after the threat. [Finding of Fact No. 23]. The Court finds that this is ample evidence to prove that transfers were' made after Husky threatened to file suit. 1701 Commerce, LLC, 511 B.R. at 838-39. Thus, this badge of fraud is present and weighs heavily in favor of a finding of the Debt- or’s actual intent to hinder, delay, or defraud Husky.
4) The Transfer was of Substantially All the Debtor’s Assets
Numerous courts have found that for this badge to be present, a significant percentage of the debtor’s assets must have been transferred. For example, in 1701 Commerce, LLC, the court held that this badge was present because the property transferred was “six or seven times the combined value of [the debtor’s] remaining assets.” 511 B.R. at 839. In Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55, 64 (Minn. 2014), the Court held that his badge was present because the property that was transferred was approximately 95% of the debtor’s total assets.
Here, as of March 31, 2006, Chrysalis had assets of approximately $2.4 million. [Finding of Fact No. 3(c) ]. Further, from January to March 2007, Chrysalis had assets valued at $2.1 million. [Finding of Fact No. 3(f) ]. Meanwhile, between November of 2006 and May of 2007, the Debt- or caused $1,161,279.90 to be transferred from Chrysalis to the Debtor-Controlled Entities. [Finding of Fact No. 23]. $1.13 million is approximately one-half of Chrysalis’s assets, but is not — like the cases cited above — 85% or 95% of total assets. Stated differently, 50% of total assets is not substantially all of Chrysalis’s assets. See ASARCO, 396 B.R. at 373-74 (refusing to find that a transfer was substantially all of the assets when the transferred asset was the most valuable, but not enough to be “substantially all” of the assets); Bank of Am., N.A. v. Fulcrum Enters., LLC, 20 F.Supp.3d 594, 605 (S.D. Tex. 2014) (finding that the badge is present where the judgment debtor admitted that the transferred assets “represented all or substantially all of [defendant’s] assets”), contra In re Vaso Active Pharms., Inc., Adv. No. 11-52005 (CSS), 2012 WL 4793241, at *14 (Bankr. D. Del. Oct. 9, 2012) (“Defendants argue that transfer of anything less than 50% of Debtor’s assets is not substantially all of those assets. That cannot be the case.... One can easily imagine substantially all of a company’s asset being less than a majority .... ”).
Under these circumstances, the Court finds that this badge of fraud is not present in the suit at bar.
5) The Value of the Consideration Received was Reasonably Equivalent to the Value of the Asset Transferred
“The test for ‘reasonably equivalent value’ is whether the net economic effect of the transfer was a dissipation of the debtor’s estate.” In re WRT Energy Corp., 282 B.R. 343, 405 (Bankr. W.D. La. 2001). Further, “the fair market value of what the debtor gave and received must be valued objectively and from the perspective of the debtor’s creditors, without regard to the subjective needs or perspec*746tives of the debtor or transferee.” Id. at 407.
There is no evidence whatsoever that Chrysalis received any consideration from the Debtor-Controlled Entities; the transfers of $1,161,279.90 simply dissipated Chrysalis’s estate. The Debtor testified that he believed these transfers occurred to cover the “operational cash flow needs of Chrysalis” and to cover repayment of various loans that the Debtor-Controlled Entities had extended to Chrysalis. [Finding of Fact No. 25]. Stated differently, the Debtor wants this Court to believe that Chrysalis owed debts (both loans and trade debt) to the Debtor-Controlled Entities and that therefore the transfers of $1,161,279.90 effectuated by the Debtor were done to pay off debts incurred by Chrysalis in the ordinary course of its business. However, there was no documentation introduced into evidence to substantiate that the Debtor-Controlled Entities extended any loans or provided any goods or services to Chrysalis, [id.] and given the Debtor’s very poor credibility, the Court gives no weight to this particular testimony. Thus, given that the record here is much like the record and the holdings in Williams and Porras, this Court holds that Chrysalis received no value in exchange for the $1,161,279.90 transfers that the Debtor made to the Debtor-Controlled Entities. See Williams v. Houston Plants & Garden World, Inc., 508 B.R. 19, 27 (S.D. Tex. 2014) (finding this badge present when there was no evidence to show consideration); see also In re Porras, 312 B.R. 81, 102, 105 (Bankr. W.D. Tex. 2004) (finding this badge present when the debtors only made self-serving statements about value and did not describe consideration in a way that was colorable). Indeed, this Court heard no persuasive argument from the Debtor’s counsel at the post-remand hearing that would lead this Court to change its original finding that the various transfers had occurred “without Chrysalis receiving equivalent value for the transfer.” Ritz, 459 B.R. at 628. Thus, this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, 6r defraud Husky.
6) The Debtor was Insolvent or Became Insolvent Shortly After the Transfers were Made
Under TUFTA, a debtor is insolvent if “the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair' valuation,” and a debtor is presumed to be insolvent if the debtor does not pay its debts as they become due. Tex. Bus. & Com. Code. § 24.003(a)-(b) (WestlawNext 2015); see also ASARCO, 396 B.R. at 373 (finding that the debtor corporation was insolvent when it lacked the ability to pay its debts and had “unreasonably small assets”). There is no doubt that Chrysalis was insolvent at the time the Debtor transferred the $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 3]. Indeed, in the 2011 memorandum opinion, this Court previously found that “[a]t all relevant times, the sum of Chrysalis’s debts were greater than all of Chrysalis’s assets at a fair valuation.” Ritz, 459 B.R. at 628. It did so — and does so now — because, among other reasons, the Debtor himself admitted that: (1) he was not aware of any time when the assets were greater than the liabilities, [Finding of Fact No. 3(a) ]; (2) in March 2006, Chrysalis had assets of $2.4 million and liabilities of $5.6 million, a net negative equity of $3,2 million, [Finding of Fact No. 3(c) ]; (3) as of March 2007, the numbers were even worse: $7.68 million in liabilities and only $2.1 million in assets, for a net negative equity of $5.36 million, [Finding of Fact No. 3(f)]; (4) Chrysalis was never able to pay its bills at any point in time, *747[Finding of Fact No. 3(h) ]; and (5) around April or May 2007, EmlinQ purchased Chrysalis’s assets for $600,000.00 — a number lower than Chrysalis’s accounts payable. [Finding of Fact No. 3(d) ].
Indeed, there is sufficient evidence proving that Chrysalis was insolvent before the Debtor ever began making the numerous transfers to the Debtor-Controlled Entities in the fall of 2006. [See Findings of Fact Nos. 3(a)~(h) ]. First, Finney credibly testified that on or around October 2006, Chrysalis became unable to pay its hills and obligations as they became due. [Feb. 3, 2011 Tr. 130:10-17]. Second, she testified that Chrysalis was unable to pay its payroll taxes to the government. [Id. at 134:9-19], Third, Chrysalis had accounts payable of $640,031.54 that were more than 90 days past due as of April 21, 2006. [Finding of Fact 3(d) ]. Fourth, the Debtor conceded that “Chrysalis was having some pretty serious problems and was unable to pay its bills, at least some of them, as and when they became due as far back as April 21, 2006” and that the situation never improved. [Finding of Fact No.'3(h) ]; [Feb. 3, 2011 Tr. 22:20-23:23].
Fifth, the Debtor himself testified that “the company’s [i.e., Chrysalis’s] assets were less than what was owed.” [Adv. Doc. No. 94, Feb. 11, 2011 Tr. 91:22-92:4]. Sixth, as already noted, he testified that he was not aware of any time when the assets were greater than the liabilities. [Id. at 92:11-16]; [Finding of Fact No. 3(a) ]. Seventh, as elicited by his attorney, the Debt- or testified that Chrysalis “needed capital” the entire time he was involved with the company. [Adv. Doc. No. 94, Feb. 11, 2011 70:22-71:6].
Because the evidence overwhelmingly shows that Chrysalis’s debts always exceeded its assets, this Court finds that Chrysalis was insolvent before any of the transfers of $1,161,279.90 were made, was insolvent during the time when all of the transfers were made, and remained insolvent after all of the transfers were made. Further, there is a presumption of Chrysalis’s insolvency because the evidence demonstrates convincingly that it was unable to pay its debts as they came due; and the Debtor certainly has not overcome this presumption based upon the record made at trial. For all of these reasons, this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
In sum, out of the eleven enumerated badges of fraud set forth in TUFTA, Husky has raised six of these badges, and this Court finds that five of them are present. As already noted previously, the presence of five badges of fraud is sufficient, see In re Soza, 542 F.3d at 1066 n.5; Roland, 838 F.2d at 1402-03; and here, taken together, the five badges of fraud that are present weigh heavily in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky. Under these circumstances, this Court finds that Husky has met its burden under TUFTA to prove the Debtor’s actual intent to hinder, delay, or defraud Husky, and therefore, Husky has satisfied the “actual fraud” element of § 21.223.
c. With respect to the five enumerated badges of fraud under TUFTA that Husky did not raise, the Court, sua sponte, now considers these badges and finds that four of them are present
Husky did not raise the other five badges of fraud expressly set forth in § 24.005(b) of TUFTA, but the Court will address them sua sponte.24 These badges *748include: (1) the transfer was concealed; (2) the debtor absconded; (3) the debtor removed or concealed assets; (4) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (5) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. Out of these additional fíve badges, the Court finds that four are present, thus further establishing the Debtor’s actual intent to hinder, delay, or defraud Husky.
1) The Transfers Were Concealed
Black’s Law Dictionary defines “conceal” as “the act of refraining from disclosures; ... an act by which one prevents or hinders the discovery of something.” Black’s Law dictionary 282 (7th ed. 1999). In In re Adeeb, the court found that there was no concealment when a debtor attempted to undo all the transfers made before he filed his bankruptcy petition. 787 F.2d 1339, 1345 (9th Cir. 1986). In another case, a bankruptcy court found that a “debtor who fully discloses his property transactions at the first meeting of creditors is not fraudulently concealing property.” In re Waddle, 29 B.R. 100, 103 (Bankr. W.D. Ky. 1983) (citing In re Doody, 92 F.2d 653 (7th Cir. 1937)). By contrast, in Smiley, the court found concealment when the debtor had made various pre-petition transfers but failed to reverse the transfers before filing bankruptcy. Matter of Smiley, 864 F.2d at 566.
Here, when Chrysalis filed its Chapter 7 petition on June 12, 2008, the Debtor, in his capacity as Chrysalis’s director, signed the SOFA, thereby representing under oath that all representations made therein were accurate. [Finding of Fact No. 4]. Yet, they were not. This is so because section 10 of the SOFA, entitled “other transfers,” required Chrysalis (through its director, the Debtor) to do the following: “List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.” [Case No. 08-33793, Doc. No. 3, p. 47 of 54]. The sworn answer given by the Debt- or was that Chrysalis had not transferred any property within two years preceding the filing of its bankruptcy petition (i.e., within the two years prior to June 12, 2008). [Finding of Fact No. 4]. The Debtor thus completely failed to disclose that Chrysalis had transferred cash totaling $1,161,279.90 to the Debtor-Controlled Entities for the seven-month period between November 2006 and May 2007— which is within the two-year window of June 12, 2008. [Findings of Fact Nos. 15-23]. These transfers were definitely not within the ordinary course of Chrysalis’s business or financial affairs; there is absolutely no documentation evidencing that these transfers were payments made by Chrysalis in the ordinary course of its business to retire loans or trade debt extended by the Debtor-Controlled Entities. [Finding of Fact No. 25].
Thus, Chrysalis’s SOFA reflects that the Debtor was concealing from Chrysalis’s creditors (including Husky) the transfers of $1,161,279.90 that the Debtor had orchestrated from Chrysalis’s account into the accounts of the Debtor-Controlled Entities. The Court likens this to: (1) the debtors’ failure to disclose at the first meeting of creditors in Waddle the transfers that they had made there; and (2) the debtor’s failure in Smiley to reverse the transfers. Further, the Debtor made no attempt to reverse the transfers like in Adeeb; nor did the Debtor, in his capacity as director of Chrysalis, take it upon himself to file an amended SOFA disclosing the transfers totaling $1,161,279,90. Compare Williams, 508 B.R. at 16 (“The sec*749ond amended financial statement discloses the transfers that [the Chapter 7 trustee] seeks to avoid. On the present record, [the Chapter 7 Trustee] has not established that, as a matter of law, the transfers were concealed.”). Further, the Debtor, in his capacity of director of Chrysalis, did not list on Chrysalis’s Schedule B any claim that Chrysalis might have against him, individually, for his transferring the $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 4].
Under all of these circumstances, this Court finds that that the Debtor concealed from Husky the transfers of $1,161,279.90 to the Debtor-Controlled Entities when he failed to disclose them on Chrysalis’s SOFA and when he failed to disclose on Chrysalis’s Schedule B that the company might have a cause of action against him, personally. Thus, this badge of fraud is present and weighs in favor of a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky. The Court gives this badge significant weight in no small part because the Debtor made material misrepresentations under oath on Chrysalis’s SOFA and Schedule B. His failure to disclose the transfers of $1,161,279.90 and the cause of action against himself are not “Matters so trivial in nature as to have but little effect upon the estate and upon creditors .... ” Waddle, 29 B.R. at 103.
2) The Debtor Absconded
There is no evidence that the Debtor absconded. This badge is not present.
3) The Debtor Removed or Concealed Assets
In Vaso Active Pharmaceuticals, Inc., the court found this badge present when the defendants received payments from the debtor that the debtor failed to disclose to creditors. 2012 WL 4793241, at *12-14. As a result of a third-party settlement, the debtor received the funds to make certain payments, the proceeds of which should have gone first to a secured creditor; instead, the funds were funneled to insiders of the debtor, which then failed to inform the creditors of the transfer. Id. at *5-6, 12. The court found these actions to constitute concealment of assets when the defendants failed to disclose to the creditors the “basis for and the amount of • the payments from the Debtor’s assets to [the defendants].” Id. at *14; see also In re Womble, 289 B.R. 836, 855 (Bankr. N.D. Tex. 2003) (finding “a classic badge of fraud” when the debtor transferred funds to a wholly-owned corporation on the eve of bankruptcy because it was clear the transfers were done to diminish the debt- or’s personal estate knowing he was about to file for bankruptcy).
Here, the Debtor did not disclose to Husky or any other creditors the amounts of and reasons for the transfers of $1,161,279.90 to the Debtor-Controlled Entities. Husky was entitled to payment for providing products to Chrysalis, and like the creditor in Vaso, was kept in the dark by the Debtor about his transfers of $1,161,279.90 to the Debtor-Controlled Entities. This is sufficient evidence for this Court to find that the Debtor concealed Chrysalis’s assets. Indeed, the evidence presented at trial also leads this Court to find that the Debtor, by transferring the $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities, removed assets of Chrysalis— “which is sufficient proof of this badge of fraud even without a finding of concealment.” See Tow, 2015 WL 1058080, at *12. Further, the Debtor here, just like the defendant in Tow, does not dispute the evidence that he removed $1,161,279.90 from Chrysalis’s account. [Finding of Fact No. 23]. Therefore, this badge is present and favors a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
*7504) The Transfer Occurred Shortly Before or Shortly After a Substantial Debt was Incurred
The last invoice Chrysalis received from Husky was on January 9, 2007. [See Findings of Fact Nos. 7 & 8]. And, there is no question that Chrysalis owed Husky the amount of $163,999.38 on or about this date. [Findings of Fact Nos. 7 & 30]. Under § 24.002(5), debt “means a liability on a claim” and under § 24.002(3), claim “means a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Here, the $163,999.38 Debt is a right to payment that Husky holds against Chrysalis that is liquidated. Thus, there is no question that the $163,999.38 Debt is a “debt” under TUFTA. The question is whether the $163,999.38 Debt is a “substantial debt.”
The Court finds that this is a substantial debt. The Court makes this finding because a review of the schedules of non-insider unsecured creditors that Chrysalis filed in its Chapter 7 case reflects that Chrysalis represented that the debt owed to Husky was $162,487.65 — which is by far and away one the largest debts of the numerous unsecured debts set forth in Chrysalis’s schedules. [Finding of Fact No, 5(e) ]. Most of the unsecured debts scheduled by Chrysalis are under $5,000.00; there are some debts in the $10,000.00 to $50,000.00 range; one debt totals $141,070.68; and only one debt exceeds the amount owed to Husky, and that is the debt for $228,000.00 to Arrow Electronics. [Id.]. Thus, Husky is the holder of the second largest non-insider unsecured debt in Chrysalis’s case, and this debt (amounting to $163,999.38) represents approximately 10% of the total amount of non-insider unsecured debts. Under these circumstances, this Court finds that the debt owed by Chrysalis to Husky was a “substantial debt” as of January 9,2007.25
So, the question is now whether the transfers orchestrated by the Debtor out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities took place “shortly before” or “shortly after” January 9, 2007. The evidence reflects that many of these transfers occurred from November 10, 2006 up to January 9, 2007 — with the total amount of these transfers coming to $414,322.00. [Pi’s Ex. No. 5]; [Finding of Fact No. 23]. The evidence also reflects that many of these transfers occurred from January 9, 2007 to May 11, 2007— with the total amount of these transfers coming to approximately $720,458.00. [Pi’s Ex. No. 5]; [Finding of Fact No. 23]. The Court finds that the transfers that occurred for the two months prior to January 9, 2007 occurred sufficiently “shortly before” the substantial debt was incurred that this badge is satisfied. The Court further finds that the transfers that occurred for the four months immediately after January 9, 2007 occurred sufficiently “shortly after” the substantial debt was incurred; and that therefore, this badge is also satisfied in this respect.
*751■ Case law supports this Court’s finding that the temporal element of this particular badge is satisfied. In In re Hill, 342 B.R. 183, 202 (Bankr. D.N.J. 2006), the court held that a transfer that occurred four months after the creation of a substantial debt was sufficiently “shortly after” the debt’s creation that the badge was present in that suit. See also Tex. Custom Pools, Inc. v. Clayton, 293 S.W.3d 299, 313-14 (Tex. App.-El Paso 2009, no pet.) (finding three months to come within the “shortly after” time period). In those cases where the temporal element has not been satisfied, it is because the transfer took place nine months after the debt arose, SMTC, 421 B.R. at 313; two years after a loan was made, In re CRCGP LLC, Adv. No. 07-3117, 2008 WL 4107490, at *19 (Bankr. S.D. Tex. Aug. 28, 2008); and fourteen years after a contractual debt was incurred, Waste Mgmt. v. Danis Indus. Corp., No. 3:00-cv-256, 2009 WL 347773, at *17 (S.D. Ohio Feb. 10,2009).
For all of these reasons, the Court finds that this badge of fraud is present and weighs heavily in favor of a finding of the Debtor’s actual, intent to hinder, delay, or defraud Husky.
5) The Debtor Transferred the Essential Assets of the Business to a Lienor Who Transferred the Assets to an Insider of the Debtor
One of the Debtor-Controlled Entities— ComCon — was a lienor by virtue of the fact that it held a security interest on virtually all of Chrysalis’s assets. [Finding of Fact No. 3(e) ]. The Debtor oversaw the transfer of $677,622.00 from Chrysalis’s account to the account of ComCon, [id]; therefore, the Debtor transferred essential assets of Chrysalis to a lienholder (i.e., ComCon). The Debtor was both an officer and director, as well as a 10% shareholder, of ComCon, [Findings of Fact Nos. 27(h) & 28(i) ] — which means that the funds that the Debtor transferred from Chrysalis’s account to ComCon’s account was in fact a transfer of assets to an insider of the Debtor. See Tex. Bus. & Com. Code § 24.002(7)(A)(iv) (defining “insider” — in pertinent part — as “a corporation of which the debtor is a director, officer, or person in control.”); see also § 101(31)(A)(iv) (Code section defining “insider” as a “corporation of which the debtor is a director, officer, or person in control”). Thus, Chrysalis transferred essential assets out of its business to a lienholder (ComCon), a company on whose account the Debtor had signature authority and therefore could ensure that its funds could be used to pay down this corporation’s debt that the Debtor himself had personally guaranteed — circumstances that effectively constitute ComCon’s transferring the funds to the Debtor himself. Under these circumstances, the Court finds that this badge of fraud is present and favors a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
d. There Are Two Additional Badges Not Expressly Enumerated in § 21.005(b) of TUFTA that Reveal the Debtor’s Intent to Hinder, Delay, or Defraud Husky
TUFTA states that when determining whether a transfer was fraudulent, “consideration may be given, among other factors, to” the eleven enumerated badges of fraud. Tex. Bus. & Com. Code § 24.005(b) (emphasis added). Further, the Fifth' Circuit has held that the eleven factors set out in TUFTA are “non-exclusive.” In re Soza, 542 F.3d at 1066. Stated differently, the “list is not exhaustive, [and] a court may also consider other suspicious facts suggesting that a transfer was made with actual fraudulent intent.” 1701 Commerce, LLC, 511 B.R. at 836. Therefore, this Court will consider additional “suspicious facts” to aid in the finding that the Debtor *752intended to hinder, delay, or defraud Husky from collecting the $163,999.38 Debt. Husky has raised one set of these “suspicious facts,” and this Court, sua sponte, has focused on a different set of “suspicious facts.”
1) The Debtor’s Lack of Credibility
•At the hearing held in this Court on December 16, 2016, counsel for Husky argued that because the list of badges is “non-exclusive,” an additional “badge of fraud” could be the Debtor’s lack of personal credibility. [Tape Recording, Dec. 16, 2016 Hr’g at 1:56:40-1:57:52 P.M.]; See e.g„ CRCGP, 2008 WL 4107490, at *20 (considering as an additional badge of fraud “the Defendants’ lies to federal banks”). He argued that it was evidence of the Debtor’s fraudulent intent for the Debtor to have represented hundreds of transfers as loan repayments without any documentation and that it was' “pretty vague, and pretty conclusory and pretty thin” for the Debtor to ask the Court to just accept this proposition without any evidence. [Tape Recording, Dec. 16, 2016 Hr’g at 1:58:40-1:58:53 P.M.]. The Court agrees.
The Fifth Circuit has found that “debtors with business acumen ... are to be held to a higher standard.” In re Jordan, 927 F.2d 221, 226 (5th Cir. 1991), overruled on other grounds, Coston v. Bank of Mal-vern (In re Coston), 991 F.2d 257 (5th Cir. 1993); In re Mutschler, 45 B.R. 482, 492 (Bankr. D. N.D. 1984) (“Where the debtor is an individual of intelligence and experience in financial matters, courts have been more inclined to hold him responsible for uttering a false financial statement.”). Here, the Debtor has held himself out as an experienced businessman; in fact, the Debtor testified that he was very experienced about securities and corporations, stock options, and supervising businesses that deal with trading. [Feb. 2, 2011 Tr. 69:1-73:10]. He also .testified that he founded, or helped found, and had various supervisory roles at, different companies since at least 2002. [Finding of Fact. No. 28]; [Feb. 2, 2011 Tr. 76:16-81:13].
Thus, the Debtor, as an experienced businessman, should know that when there are approximately 176 intercompany transfers between entities in which he holds interests, [Finding of Fact No. 23], for such transfers to be considered “repayment of loans,” there must be supporting documentation. Bartley Tex. Builders Hardware, Inc. v. Swor, No. 07-03280, 2008 WL 5378068, at *4 (S.D. Tex. Dec. 24, 2008), rev’d on other grounds, In re Swor, 347 Fed.Appx. 113 (5th Cir. 2009) (“A loan is a capital contribution when payments correlate with the debtor’s sense of his financial situation and the debtor repays the money at his own discretion.”). For him to ask this Court to rely on the proposition that such transfers were loans without a shred of documentary evidence is, at the very least, a “suspicious fact.” Therefore, this Court finds that the Debtor’s lack of credibility is an additional badge of fraud. This presence of this additional badge favors a finding of the Debtor’s actual intent to hinder, delay, or defraud Husky.
2) The Debtor Lied on Chrysalis’s SOFA and Schedule B
Deceit committed in bankruptcy schedules and SOFAs comes with grave consequences. In one case, the Fifth Circuit vacated a confirmation order and an order authorizing conversion from Chapter 7 to Chapter 13 when the debtor committed fi-aud because he was fully aware of two judgments against him exceeding $500,-000.00 — but failed to list them on his schedules. In re Nikoloutsos, 199 F.3d 233, 238 (5th Cir. 2000). In another case, fraud under § 24.005(b) of TUFTA was found when, among other reasons, the debtor *753failed to list a $73,500.00 loan on his schedules. In re Schmidt, Adv. No. 07-03068, 2007 WL 2456959, at *9 (Bankr. N.D. Tex. Aug. 24, 2007); see also In re Dereve, 381 B.R. 309, 331 (Bankr. N.D. Fla. 2007) (finding a badge of fraud when the debtor failed to list assets on' her schedules).
Here, the Debtor lied on Chrysalis’s SOFA As stated previously, the Debtor had a duty to disclose the transfers Chrysalis made in the two years preceding its petition date of June 12, 2008. [Finding of Fact No. 4], The transfers of $1,161,279.90 made to the Debtor-Controlled Entities from November 2006 through May 2007 were within this two-year window. The Debtor admitted that these transfers occurred, [Findings of Fact Nos. 15-23], and therefore, knew they happened during that time, but he nevertheless failed to disclose them on Chrysalis’s SOFA. [Case No. OS-33793, Doe. No. 3, p. 47 of 54]. Moreover, on Chrysalis’s Schedule B, the Debtor, in his capacity as the director of Chrysalis completing and filing this schedule, failed to set forth that Chrysalis had a claim against him personally for his orchestration of the transfers of $1,161,279.90 out of Chrysalis’s account into the account of the Debtor-Controlled Entities. Therefore, the Court concludes that the omissions on Chrysalis’s SOFA and Scheduled are additional “suspicious facts” that weigh against the Debtor and evidences his actual intent to hinder, delay, or defraud Husky.
e. Summary of All Thirteen of the Badges of Fraud Analyzed Above
This Court has reviewed thirteen badges of fraud — the eleven enumerated badges set forth in TUFTA, plus two other badges that are particularly germane to the suit at bar. Of these thirteen badges of fraud, Husky raised seven of them, six of which are present. This Court, sua sponte, has reviewed six other badges, five of which are present. Thus, a total of eleven badges of fraud are present. The chart set forth below summarizes the badge of fraud analysis that this Court has undertaken:
*754[[Image here]]
[Editor’s Note The preceding image contains the references for footnote26]
Eleven badges are more than sufficient to find that the Debtor intended to hinder or delay Husky’s collection of the $163,999.38 Debt, or to defraud Husky out of recovering the $163,999.38 Debt. See Mladenka, 130 S.W.3d at 405 (finding that four badges of fraud is sufficient); see also Tel. Equip. Network, 80 S.W.3d at 609 (finding that five badges of fraud is sufficient); SMTC, 421 B.R. at 300 (finding that four or five badges of fraud is sufficient). Indeed, the Fifth Circuit has held that “[n]ot all, or even a majority of the ‘badges of fraud’ must exist to find actual *755fraud.” In re Soza, 542 F.3d at 1066 (interpreting TUFTA); see also Roland, 838 F.2d at 1402-03 (interpreting TUFTA and finding “several” badges to be sufficient to find fraudulent intent). And, even if this Court only considers the seven badges raised by Husky, six of those badges are present, and this number is also sufficient to establish that the Debtor intended to hinder or delay Husky’s collection of the $163,999.38 Debt, or to defraud Husky out of recovering the $163,999.38 Debt.
In its remand opinion, the Fifth Circuit stated that in this Court’s original opinion, this Court “never drew the inference from its factual findings that [the Debtor’s] transfers here were made ‘with actual intent to hinder, delay, or defraud any creditor.’ ” Matter of Ritz, 832 F.3d at 568. The Fifth Circuit therefore remanded this dispute “for additional fact finding as to whether [the Debtor’s] conduct satisfies the actual fraud prong of TUFTA.” Id. at 569. Given the badge of fraud analysis set forth above, this Court now unequivocally makes a finding that the Debtor’s transfers of the $1,161,279.90 were made with the actual intent to hinder, delay, or defraud Husky under TUFTA.
f The Debtor Has Failed to Rebut the Presumption of Fraud Raised by the Presence of the Eleven Badges Referenced Above
A finding of fraud raised by the presence of multiple badges “may be rebutted if a legitimate purpose exists for the transfers.” 1701 Commerce, LLC, 511 B.R. at 841-42; Sugarman Funeral, 926 F.2d at 1254-55 (holding that “the confluence of several [badges of fraud] can constitute conclusive evidence of an actual intent to defraud, absent ‘significantly clear’ evidence of a legitimate supervening purpose”); In re Stanley, 384 B.R. 788, 800 (Bankr. S.D. Ohio 2008). The court in 1701 Commerce noted'that:
Courts have accepted a number of purposes as legitimate, including raising capital, restructuring financial obligations, releasing guaranties, seizing upon good investment opportunities, and encouraging management’s financial commitment to an enterprise. In comparison, other courts have rejected purported purposes as illegitimate when the transfers deviated from standard business practices, were poorly documented, were intended to convert non-exempt assets into exempt property, or were supported only by the testimony of a witness found not to be credible. Four factors identified by the Fifth Circuit to gauge whether a transfer’s alleged purpose was legitimate include whether the transfer was: (1) pursuant to a standard business practice; (2) an arm’s-length transaction; (3) voluntary or effectively forced upon the debtor; and (4) for proper consideration
1701 Commerce, LLC, 511 B.R. at 841-42 (citing In re Moreno, 892 F.2d 417, 420-21 (5th Cir. 1990)).
Set forth below is a discussion of various arguments articulated by the Debtor in an effort to rebut the presumption of fraud raised by the numerous badges that are present. The Court finds that none of the Debtor’s arguments fall within the “legitimate purpose” categories articulated by the Fifth Circuit and other courts.
1) Even if the Debtor Infused Funds into Chrysalis He Cannot Overcome this Court’s Conclusion that He Hindered, Delayed, or Defrauded Husky under TUFTA
The Debtor argues that he has rebutted Husky’s evidence on “actual fraud” by introducing evidence that the Debtor, although he orchestrated withdrawals of $1,161,279.90 out of Chrysalis’s account, also saw to it that cash was infused into Chrysalis. Indeed, at the post remand *756hearing, the Debtor’s counsel argued that his client infused approximately. $2.4 million within the six-month period prior to Chrysalis shutting down its operations in the summer of 2007, and thus argued that even though his client effectuated cash outflows of $1,161,279.90, he effectuated cash infusions of $2.4 million — and thus “actually put a million dollars more between this four month time period into the company than he took out.” [Tape Recording Dec. 16, 2016 Hr’g at 2:03:50-2:04:24 P.M.]. How, asks the Debtor, could he possibly have intended to defraud Husky when he was infusing more funds into Chrysalis than he was withdrawing? Stated differently, the Debtor’s argument is that he was making every effort to keep Chrysalis’s operations alive — eventually hoping to achieve profitability — so that Chrysalis could repay all of its debts, including the $163,999.38 Debt; and, therefore, he could not possibly have had the intent required to establish that he defrauded Husky.
The Court rejects this argument. It does so because there is no proof of any infusion of $2.4 million into Chrysalis during the first half of 2007 — i.e., when much of the $1,161,279.90 transfers orchestrated by the Debtor took place. Indeed, the Debtor himself testified that the $2.4 million infusion occurred in 2005 and 2006, with approximately $2.3 million of this total being infused in 2005. [Finding of Fact No. 3(b) ]. Thus, during the first half of 2007, the Debtor was draining Chrysalis of cash, and he has offered no acceptable explanation of why he orchestrated these transfers. The Debtor has failed to prove “by a preponderance of the evidence[ ] that [he] had a legitimate purpose in making the transfer.” SMTC, 421 B.R. at 299 (citing Kelly v. Armstrong, 141 F.3d 799, 802-03 (8th Cir. 1998)).
Even assuming, however, that the Debt- or did infuse $2.4 million of cash into Chrysalis during the first half of 2007, he cites no case law that these circumstances overcome the presumption of fraudulent intent relating to his orchestration of the transfers of $1,161,279.90 to the Debtor-Controlled Entities. Nonetheless, this Court has found one case where a bankruptcy court addressed the issue in a somewhat similar fact pattern.
In In re Scarpello, 272 B.R. 691 (Bankr. N.D. Ill. 2002), a creditor prosecuted a complaint to determine dischargeability against a debtor pursuant to §§ 523(a)(2)(A), (a)(4), and (a)(6). Id. at 697. The court denied the § 523(a)(2)(A) claim by holding that the creditor had failed to demonstrate that the debtor possessed the requisite intent to deceive her. Id. at 701. The court also denied the § 523(a)(4) claim on the grounds that the debtor’s breach of contract “is not functionally equivalent to fiduciary fraud, defalcation, embezzlement, or larceny.” Id. at 703. The court then addressed the § 623(a)(6) claim. In finding that the creditor had failed to prove that the debtor’s conduct had been “willful and malicious,” the court stated the following:
The Creditor’s strongest argument lies under § 523(a)(6) because unquestion-, ably the actions of the Debtor caused the Creditor an injury in her property interest in the proceeds. The Debtor’s actions were the effective conversion of the account proceeds for the Debtor’s benefit and use. It is clear that the Debtor’s wrongful conduct in converting the proceeds was an intentional act, but the evidence failed to demonstrate that the Debtor, at all times, intended to cause the Creditor the requisite injury. The Debtor’s replenishing of the account through subsequent deposits of proceeds from severance pay and retirement funds, after she had made some initial *757withdraivals, is more probative of her intent not to cause the Debtor injury. Moreover, her subsequent offers to make installment payments and utilize the perceived equity from the sale of her home in satisfaction of the debt, negates the 'requisite showing of subjective intent to injure the Creditor. The Debtor’s loss of employment, dissolution of her marriage and the attendant loss of benefits from her former spouse, effectively precluded her from performing her stated intent to reimburse the Creditor. The Court finds the Debtor’s testimony that she always intended to and still intends to reimburse the Creditor for her .conversion of the account proceeds credible. Therefore, the Creditor failed to establish all of the requisite elements. Accordingly, the Court finds the debt owed by the Debtor to the Creditor dischargea-ble under § 523(a)(6).
Id. at 704-05 (emphasis added).
There is no question that the bankruptcy court in Scarpello found that the debt- or’s replenishing her account through subsequent deposits tended to prove that she did not intend to cause injury to the creditor. If the Scarpello court had stopped there, this Court would find this case fairly persuasive support for the argument lodged by the Debtor here. However, the Court in Scarpello went on to observe that the debtor offered to pay back the debt that was the subject of the lawsuit, not only by making installment payments but by selling her homestead and using the sale proceeds to pay the creditor. Id. It was this offer made by the debtor that seemed to convince the Scarpello court of the debtor’s lack of intent to defraud the creditor. In the suit at bar, there is no evidence whatsoever that the Debtor himself has ever offered to pay the $163,999.38 Debt or to sell any of his personal assets to help pay a portion of this debt. In this Court’s view, the distinction is material; and therefore, this Court does not find the Debtor’s argument persuasive.
There is a further point. The statute requires a plaintiff to prove that the defendant, through his actions, intended to “hinder, delay, or defraud” the plaintiff. Tex. Bus. & Com. Code § 24.005(a)(1) (emphasis added). The court in In re Brentwood Lexford Partners, LLC, 292 B.R. 255 (Bankr. N.D. Tex. 2003), held that
Under both the Bankruptcy Code and Texas law, the intent to hinder or delay or defraud are three separate elements. Each one on its own may make a transfer fraudulent. Thus, an intent merely to delay, but not ultimately prevent, a creditor from being repaid is generally sufficient to trigger the requisite culpability required by the statute.
Id. at 262-63; see also Matter of Perez, 954 F.2d 1026, 1028 (5th Cir. 1992) (upholding lower court finding that under § 727(a)(2)(A) debtor had “transferred property .., with the intent to, if not defraud his creditors, at least hinder or delay their discovery of and access to certain assets.”) (internal quotation and citation omitted). This Court would be remiss to interpret this language any other way “in light of the ‘plain meaning1 of the words, which the Supreme Court has cautioned ‘should be conclusive, except in cases where the literal interpretation produces a result demonstrably at odds with the intention of the drafters.’ ” In re Wiggains, Adv. Case. No. 14-03064, 2015 WL 1954438, at *16 (Bankr. N.D. Tex. Apr. 27, 2015) (quoting United States v. Ron Pair Enterps., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). In extrapolating on this phrase, the Wiggains court found that:
The Bankruptcy Code does not define an intent to “hinder” or an intent to “delay.” According to the Oxford English *758Dictionary, the term “hinder” means to “keep back, delay; impede; obstruct; prevent.” It defines “delay” as “put off to a later time; postpone, defer/’ In keeping with this plain meaning, courts have held that a debtor acts with an intent to “hinder” if he or she acts with “... an intent to impede or obstruct” creditors and an intent to “delay” if he or she acts with “... an intent to slow or postpone creditors.” Others have stated more generally that in order to act with “intent to hinder or delay” is to “act improperly to make it more difficult for a creditor to collect a debt.” Whether a debtor acts with “actual intent to hinder, delay, or defraud” is a fact-specific inquiry.
Id. at *17 (internal citations omitted).
Here, Husky has argued that even if this Court does not find that the Debtor defrauded Husky by making the transfers of $1,161,279.90 to the Debtor-Controlled Entities, the Debtor’s actions certainly hindered or delayed Husky’s ability to collect the $163,999.38 Debt. [Adv. Doc. No. 129, pp. 6-8]. The Court agrees. It is without doubt that by orchestrating the transfers of the $1,161,279.90 from Chrysalis to the Debtor-Controlled Entities, -the Debtor hindered Husky because such actions “ke[pt] back, delay[ed], impede[d], obstructed], and prevent[ed]” Husky’s collection efforts. Wiggains, 2015 WL 1954438, at *17. Alternatively, the actions also delayed Husky by forcing Husky to wait over six years since the $163,999.38 Debt originally arose, thereby postponing Husky’s collection of the $163,999.38 Debt. Id. Indeed, if the Debtor had really wanted to ensure that Chrysalis paid. the $163,999.38 Debt, he could have directed Chrysalis to use some of the alleged $2.4 million cash infusions to pay this obligation; or, rather than orchestrating cash transfers of $1,161,279.90 out of Chrysalis, he could have transferred a lesser amount' and used the difference to pay the $163,999.38 Debt.
Thus, even if this Court accepted the Debtor’s argument that his infusion of funds totaling $2.4 million into Chrysalis negates any intent to defraud Husky — and the Court most certainly does not accept this argument — the Court would still find that the infusion of the $2.4 million does not negate the hindering and delaying of Husky’s ability to collect the $163,999.38 Debt by the Debtor’s transferring of $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities.
2) The Debtor Failed to Prove that the Transfers to the DebttevControIIed Entities were Repayments of Loans
The Debtor also attempts to justify the transfers to the Debtor-Controlled Entities as “repayment of loans.” [Finding of Fact No. 25]. This argument woefully fails. To prove such a defense, the Debtor must have done so by a preponderance of the evidence and shown this Court that he “had a legitimate purpose in making the transferfe].” SMTC, 421 B.R. at 251. Further, “[t]he absence of either documentation of the loan or interest payments indicates capital rather than debt.” In re Swor, 347 Fed.Appx. 113, 116 (5th Cir. 2009) (internal citation and quotation omitted). While a repayment of a loan would be a legitimate purpose if supported by evidence, the Debtor openly admitted, as did his former employee, Finney, that there was absolutely no evidence to prove any loans. [Finding of Fact No. 25]. Therefore, this argument fails.
3) The Debtor’s Personally Guaranteeing One of Chrysalis’s Debts in 2007 Does Not Overcome this Court’s Conclusion that that He Hindered, Delayed, or Defrauded Husky under TUFTA
Another argument that the Debt- or raises to justify the transfers to the *759Debtor-Controlled Entities is that he made personal guaranties for Chrysalis in order to keep the business running and pay all creditors, so how could he possibly possess the intent to defraud Husky? [Adv. Doc. No. 121, p. 10 of 13]. Husky argues that this is not a logical defense because the Debtor only personally guaranteed Chrysalis’s debt of $177,000.00 to Arrow Electronics, Inc. [Finding of Fact No. 3(g) ]. This guaranty, Husky argues, is de minimus compared to the amount of personal liability that the Debtor put himself in the position of eliminating when he made the transfers of $677,622.00 to Com-Con, one of the Debtor-Controlled Entities whose loan of $1.0 million the Debtor had personally guaranteed. [Finding of Fact No. 15].
The Court agrees with Husky. The Court is required to evaluate all the facts and circumstances surrounding the transfers, see Chastant, 873 F.2d at 91, and by doing so, in the above scenario, the Debtor put himself in the position of gaining a net personal benefit of $823,000.00 (i.e., $1.0 million minus $177,000.00). The Debtor is not as benevolent as he would have this Court believe. It is clear that he personally guaranteed one of Chrysalis’s debts but he obviously did not put his neck on the line for the company by transferring $1,161,279.90 to the Debtor-Controlled Entities; rather, he utilized Chrysalis to funnel money into the Debtor-Controlled Entities, some of which he held a 100% ownership interest in — thereby effectively putting money into his own pocket.
Thus, the Debtor’s arguments do not overcome the presumption of fraud raised by the eleven badges of fraud already discussed herein. The presence of these eleven badges of fraud establishes the Debt- or’s intent to delay, hinder, or defraud Husky under TUFTA; and, because Husky has met its burden under TUFTA, Husky has therefore proven that the Debt- or committed “actual fraud” under § 21.223. Husky has therefore satisfied the first test of § 21.223.
2. Step No. 2: Was the Debtor’s “actual fraud” for his direct personal benefit?
The second part of the test to consider in order for the Court to find that Husky may pierce Chrysalis’s corporate veil under § 21.223(b) requires the Debtor to have derived a personal benefit from the transfers that he orchestrated to the Debt- or-Controlled Entities. Tex. Bus. & Org. Code § 21.223(b); Matter of Ritz, 832 F.3d at 569. In its remand opinion, the Fifth Circuit did not provide this Court with guidance of what constitutes a “personal benefit,” but rather simply held that “[i]f the bankruptcy court concludes on remand that Ritz’s conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for Ritz’s ‘personal benefit,’ ... then Ritz is liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute.... ” Id. at 569.
In the first instance, this Court does not need to worry about the definition of “personal benefit.” This is so because the Debt- or himself specifically testified that the transfers he made to the Debtor-Controlled Entities were for his personal benefit. [Finding of Fact No. 24]. Specifically, counsel for Husky asked: “It would have personally benefitted you for all of the entities that you owned an interest in to get $1.2 million, collectively, from Chrysalis; would it not?” [Id.]. In response, the Debtor admitted that: “[I]t would have benefitted me, yes, sir.” [Id.].
Further, the Debtor testified that it would have been a personal benefit to him for Chrysalis’s funds to be paid to the company for which he had a personal guaranty. [Id]. And, indeed, the Debtor saw to it that of the $1,161,279.90 that Chrysalis *760transferred to the Debtor-Controlled Entities, the amount of $677,622.00 went into the account of ComCon, [Finding of Fact No. 16]; by doing so, the Debtor ensured that ComCon was put in a much better position to pay the $1.0 million loan that it owed for which the Debtor had personally executed a guaranty. [M]. There is therefore no doubt that the transfers from Chrysalis to ComCon personally — and directly — benefited the Debtor. Compare TransPecos, 487 S.W.3d at 736 (finding that no personal benefit was shown because the defendant “never distributed any of the Corporation’s capital assets to herself or anyone else”) with In re Morrison, 361 B.R. 107, 120 (Bankr. W.D. Tex. 2007) (“However, [the debtor] was the majority stockholder and President of [the company]. He alone ran the company and made all the decision regarding its operation. Any benefit to [the company] was a personal benefit to [the debtor].”).
Even if the Debtor had not conceded that the transfers of $1,161,279.90 personally benefitted him, this Court would still hold that he did receive a personal benefit. Although the Fifth Circuit did not elaborate on what constitutes “personal benefit” in Ritz, it has issued rulings on this concept in other cases. Perhaps most analogous to the suit at bar is Thrift v. Estate of Hubbard. In that case, the veil was pierced to reach the shareholders when they used funds that should have been used to make payments to the corporation’s lender and instead were used to make payments to one of the shareholders. Thrift v. Estate of Hubbard, 44 F.3d 348, 354-65 (5th Cir. 1995) (interpreting Tex. Bus. Corp. Act Ann. Arte. 2.21(A), which has since been replaced with § 21.223(b)); see also Spring Street, 730 F.3d at 445 (finding that there was a personal benefit when there were fraudulent transfers made to “evade individual liability”).
In another case, In re Morrison, the majority stockholder and president of the company received a personal benefit when he knew of the “dire financial condition of his company,” made all the decisions regarding the company’s operations, and made a misrepresentation on financial statements in order to draw in business. 361 B.R. at 120. Further, in In re JNS Aviation, LLC, 376 B.R. 500, 531 (Bankr. N.D. Tex. 2007), the court found that sole owners of both the transferor company and transferee company received a personal benefit when they transferred the company assets in order to continue business instead of paying the lender of the trans-feror company. The court in JNS Aviation further found that the actions must have been for the owners’ personal benefit because “[n]o other shareholders (members) existed. They had no other interest to serve.” Id.
There are various circumstances when courts have found that an individual has not derived a personal benefit under § 21.223(b). For example, when the record fails to show whether the defendant deposited the funds in his own personal account or used them to purchase personal items or pay personal debts, there will be no finding of personal benefit. Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237 S.W.3d 379, 388 (Tex. App.Houston [14th Dist.] 2007, no pet.). Another example is when there were transfers, but the accused shareholder ceased drawing a salary, paid pass-through shareholder taxes, and lost money; moreover, the accused shareholder did not himself have any interest in the entity to which the assets were conveyed. Rimade Ltd. v. Hubbard Enterprises, Inc., 388 F.3d 138, 146 (5th Cir. 2004). On the other hand, a Texas court has held that there was a personal benefit where an operator of a company who made the transfers also had a direct ownership and financial interest in *761the transferee companies. McCarthy v. Wani Venture, AS., 251 S.W.3d 573, 591 (Tex. App.-Houston [1st Dist.] 2007, pet. denied).
In the suit at bar, the Debtor’s behavior is more comparable to the cases in Hubbard, Spring Street, Morrison, JNS Aviation, and McCarthy. First, similar to Hubbard, the Debtor transferred funds from Chrysalis to ComCon, a corporation whose $1.0 million loan the Debtor had personally guaranteed, [Finding of Fact No. 15]; and by effectuating these transfers to ComCon, the Debtor put ComCon in a much better position to pay off the loan that the Debtor had personally guaranteed, [id]. Meanwhile, the transfers of these funds out of Chrysalis’s account resulted in Chrysalis not paying the debt it owed to Husky, a debt the Debtor had not personally guaranteed. [Finding of Fact No. 3(g)]. Second, similar to JNS Aviation, the Debtor used the funds to continue the businesses of his other companies instead of paying creditors of Chrysalis. [See Findings of Fact Nos. 15-25]. Third, all of the funds that were transferred out of Chrysalis’s account went into the accounts of the Debtor-Controlled Entities, and the Debt- or had a close connection to these entities, as he served as the only shareholder or the majority shareholder in most of these entities. [Finding of Fact No. 27]. This is remarkably similar to JNS Aviation and McCarthy, and the holdings there ring true here: if there were no other interested parties in these companies, how could any of these transfers not be for the Debt- or’s personal benefit? Finally, even if the transfers provided some benefit to the Debtor-Controlled Entities themselves, it must be remembered that § 21.223(b) requires only that Husky show that the transfers were “primarily for the' direct personal benefit” of the Debtor.” (emphasis added).
Under all of the circumstances described above, this Court finds that Husky has proven that the transfers from Chrysalis to the Debtor-Controlled Entities were made primarily for the Debtor’s personal benefit. Therefore, Husky has met its burden to prove both prongs of § 21.223 — i.e., actual fraud and personal benefit. In its remand opinion, the Fifth Circuit stated that “[i]f the bankruptcy court concludes on remand that [the Debtor’s] conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for [the Debtor’s] ‘direct personal benefit,’ ... then [the Debtor] is liable for Chrysalis’s debt, to Husky under Texas’s veil-piercing statute .... ” Matter of Ritz, 832 F.3d at 569. Thus, the trade debt of $163,999.38 owed to Husky by Chrysalis (i.e., the $163,999.38 Debt) is, by virtue of the successful piercing of Chrysalis’s veil, now also owed to Husky by the Debtor, in his individual capacity.
However, the analysis does not stop here. In its remand opinion, the Fifth Circuit made it clear that even if this Court finds that the Debtor personally owes the $163,999.38 Debt by virtue of Husky’s successful veil-piercing, this Court “must then address whether [the Debtor] should be denied a discharge under § 523(a)(2)(A), consistent with the Supreme Court’s opinion in this case.” Matter of Ritz, 832 F.3d at 569. The Court now examines this issue.
3. Step'No. 3: Is the Debtor’s Personal Liability for the $163,999.38 Debt a Non-Disehargeable Obligation Under § 523(a)(2)(A)?
Section 523(a)(2)(A) states, in pertinent part for this suit, that a debtor will not receive a discharge “from any debt for money ... to the extent obtained by ... actual fraud.” The Supreme Court has declared that the phrase “to the extent obtained by” modifies “money,” not “any debt,” Cohen v. De La Cruz, 523 U.S. 213, *762218, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). Therefore, in the suit at bar, in order for Husky to establish that the Debtor’s personal liability for the $163,999.38 Debt is non-dischargeable, Husky must show the following: (1) money was obtained; (2) obtaining the money was done through the Debtor’s actual fraud; and (3) as a result of these circumstances, a personal debt of the Debtor was created.
First, the record reflects that money was obtained. Specifically, the Debtor transferred $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 23]. Thus, the Debtor-Controlled Entities obtained money from Chrysalis. Indeed, as discussed in more detail below, the Debtor himself effectively obtained these monies from Chrysalis, as he made sure that a substantial portion of these funds were deposited into the account of ComCon, who had obtained a $1.0 million loan that the Debtor had personally guaranteed; and by moving funds from Chrysalis’s account into ComCon’s account, the Debtor put Com-Con into a much better position to pay off the large debt that the Debtor had personally guaranteed. Additionally, he ensured that a significant amount of the proceeds went into the account of IIM — which was one of the few companies in which he held a 100% interest. [Findings of Fact Nos. 18 & 27(d) ].
Second, the Debtor committed actual fraud when he transferred the $1,161,279.90 from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. The badge of fraud analysis that this Court has already undertaken demonstrates that this is so. [See supra Part V.C.I.a.]. Indeed, the evidence reflects that the transfers of $1,161,279.90 from Chrysalis’s account to the accounts of the Debt- or-Controlled Entities all resulted from the Debtor’s actions. He — and he alone— was responsible for effectuating these transfers. [Finding of Fact No. 26],
Third, a personal debt of the Debtor arose due to the Debtor-Controlled Entities obtaining funds from the Debtor’s fraudulent conduct. This is so because of the veil-piercing statute of § 21.223(b). This statute imposes personal liability on the Debtor for the $163,999.38 -Debt. [See supra Part V.C.2]. There is no question that the creation of this personal obligation is directly traceable to — i.e., resulted from — the Debtor’s fraudulent actions in orchestrating the transfers of $1,161,279.90 out of Chrysalis’s account and into the accounts of the Debtor-Controlled Entities. Husky Inti. Elees., Inc., 136 S.Ct. at 1589 (“If that recipient [here, the Debtor] later files for bankruptcy, any debts ‘traceable to’ the fraudulent conveyance, will be nondischargeable under § 523(a)(2)(A).”).
The fact that the creation of the $163,999.38 Debt itself — i.e., the obligation owed by Chrysalis to Husky — was not due to any fraud (but rather due to the fact that Chrysalis failed to pay the obligations that it owed to Husky under the Master Credit and Sales Agreement) does not change this conclusion. Moreover, the fact that Chrysalis — or, more precisely, the trustee of Chrysalis’s Chapter 7 estate— may have a non-dischargeable claim against the Debtor in the amount of $1,161,279.90 also does not change this conclusion.27 The personal debt that Husky *763seeks to collect from the Debtor, and to prevent him from discharging, arises by operation of Texas law from his actual fraud; and to characterize this debt as non-dischargeable is entirely consistent with the Supreme Court’s holding in Archer v. Warner, that “all debts arising opt of fraud are excepted from discharge no matter what their form,” 538 U.S. 314, 321, 123 S.Ct. 1462, 155 L.Ed.2d 454 (2003) (ihter-nal quotations omitted) (emphasis added), as “it is unlikely that Congress ... would have favored the interest in giving perpetrators of fraud a fresh start,” Cohen, 523 U.S. at 223, 118 S.Ct. 1212 (internal quotations omitted).
There is one final point: for the Debt- or’s personal liability on the $163,999.38 Debt to be non-dischargeable under § 523(a)(2)(A), does the Debtor himself have to have personally received the cash of $1,161,279.90 that he transferred out of Chrysalis’s account — or is it sufficient to show that it was the Debtor himself who committed the fraud regardless of who actually received the money?
The Supreme Court has not expressly ruled on this issue. Several bankruptcy courts have, however, articulated three views as to whether a debtor must personally receive the money before allowing the exception to discharge under § 523(a)(2)(A). See, e.g., In re Wade, 43 B.R. 976, 980-81 (Bankr. D. Colo. 1984); In re Mones, 169 B.R. 246, 251 (Bankr. D.D.C. 1994). The court in Mones succinctly described these views:
The first view, which is that set forth hy the defendant, requires that the debtor personally receive the money that he obtained by fraud. The second approach, characterized as the “receipt of benefits theory,” requires only that the debtor derive a benefit from the money that the debtor obtained by fraud; whom the money was obtained for is irrelevant. Finally, the third approach holds that the exception applies whenever the debt- or fraudulently obtains money, irrespective of whether it is for himself and whether the debtor received any benefit.
In re Mones, 169 B.R. at 251.
There- are no circuit courts that have adopted the first view. See, e.g., In re Brady, 101 F.3d 1165, 1172 (6th Cir. 1996) (“We therefore reject debtor’s implication that a debt is non-dischargeable under section 523(a)(2)(A) only when the creditor proves that the debtor directly and personally received every dollar lost by the creditor.”).28 Rather, those circuit courts that *764have faced this issue have either adopted the second view or the third view. The Eleventh Circuit and the Ninth Circuit have expressly adopted the second view. In re Bilzerian, 100 F.3d 886, 890 (11th Cir. 1996) (“We agree with our sister circuits that the ‘receipt of benefits’ theory is the more well-reasoned approach.”); In re Arm, 87 F.3d 1046, 1049 (9th Cir. 1996) (“We make clear, what we have not held before, that the indirect benefit to the debtor from a fraud in which he participates is sufficient to prevent the debtor from receiving the benefits that the bankruptcy law accords the honest person.”). The Fifth Circuit has adopted the third view. In re M.M. Winkler & Assocs., 239 F.3d 746, 749 (5th Cir. 2001) (“The language of [§ 523(a)(2)(A) ] includes no ‘receipt of benefit’ requirement.”); In re Pryor, 992 F.2d 324, 324 n.4 (5th Cir. 1993) (“... [I]t is not necessary under section 523(a)(2) that the property be actually procured by the debtor.”) (citing In re Gitelman, 74 B.R. 492, 496 (Bankr. S.D. Fla. 1987)) (unpublished). The Eleventh Circuit has aptly stated that the third view takes the broadest perspective because it “requires simply that a debtor obtain money by fraudulent means such that a debtor does not necessarily have to receive money personally or receive any benefit at all.” In re Bilzerian, 100 F.3d at 890.
This Court is bound by Fifth Circuit precedent, and therefore does not need to make a finding that the Debtor directly received the $1,161,279.90 that he transferred out of Chrysalis’s account; or, alternatively, make a finding that he indirectly benefitted from his transferring these monies out of Chrysalis’s account. Rather, this Court need only make a finding the $1,161,279.90 transferred from Chrysalis’s account to the accounts of the Debtor-Controlled Entities was done fraudulently by the Debtor — and this, the Court has already done.
Assuming, however, that this Court did have to make a finding that the Debtor benefitted from these transfers, the record demonstrates that he definitely did so.29 Here, the Debtor himself admitted under oath that he received a personal benefit from the transfers that he orchestrated from Chrysalis’s account to the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 24]. Moreover, once the funds were transferred, the Debtor put himself in a much better position, as ComCon had much more cash to pay off the $1.0 million loan that the Debtor had personally guaranteed; and, further, he also benefitted, either directly or indirectly, through his tunneling of approximately $172,100.00 into the account of Institutional Insurance Management, one of the companies in which he holds a 100% interest. [Findings of Fact Nos. 18 & 27(d) ].
In sum, the Debtor’s testimony that he received a personal benefit from the transfers of the $1,161,279.90 to the Debtor-Controlled Entities, combined with the stark fact that he had guaranteed a $1.0 million loan of ComCon and owned 100% of Institutional Insurance Management, is more than sufficient for this Court to hold that the Debtor was the recipient, either directly or indirectly, of the funds that he transferred out of Chrysalis’s account. *765Thus, the circumstances here fit within the fact pattern that the Supreme Court in Ritz described as follows:
It is of course true that the transferor does not ‘obtai[n]’ debts in a fraudulent conveyance. But the recipient of the transfer — who, with the requisite intent, also commits fraud — can obtain assets by his or her participation in the fraud. If that recipient later files for bankruptcy, any debts ‘traceable to’ the fraudulent conveyance, will be nondischargeable under § 523(a)(2)(A). Thus, at least ‘’sometimes a debt ‘obtained by' a fraudulent conveyance scheme could be nondis-chargeable under § 523(a)(2)(A). Such circumstances may be rare because a person who receives fraudulent conveyed assets is not necessarily (or even likely to be) a debtor on the verge of bankruptcy, but they make clear that fraudulent conveyances are not wholly incompatible with the ‘obtained by' requirement.
Husky Int’l Elecs., Inc., 136 S.Ct. at 1589 (internal citations and quotations omitted).
Rare though these circumstances may be, they do exist here; and, therefore, this Court concludes that the Debtor’s personal obligation to Husky in the amount of $163,999.38 is a non-dischargeable debt under § 523(a)(2)(A).
The question now is whether the total amount of the non-dischargeable obligation that the Debtor owes to Husky is simply $163,999.38 — or an amount that is higher. The Court now addresses this issue.
4. Relief to be Awarded to Husky
a. Introduction
In the Complaint, Husky prayed for the following relief:
(i) Actual damages; (ii) Avoidance of all fraudulent transfers to the extent necessary to satisfy [Husky’s] claims; (iii) Exemplary damages; (iv) Prejudgment and post judgment interest at the maximum lawful rate; (v) Attorneys’ fees; (vi) Court costs; and (vii) All other relief to which [Husky] shall show itself to be justly entitled; together with a determination that the judgment entered may not be discharged by Defendant’s bankruptcy pursuant to 11 U.S.C. § 523(a).
[Adv. Doc. No. 1, p. 10, ¶ 26].
This Court will not grant the second category of relief sought by Husky because Husky did not plead for this relief in the Pre-Trial Statement; it did not reference § 550 in the Pre-Trial Statement; nor did it sue the Debtor-Controlled Entities (i.e., the recipients of the fraudulently transferred funds). See e.g., In re Hansen, 341 B.R. 638 (Bankr, N.D. Ill 2006); In re Pace, 456 B.R. 253 (Bankr. W.D. Tex. 2011); In re Lacina, 451 B.R. 485 (Bankr. D. Minn. 2011) (all cases where the defendants named were the individual recipients and their corporate egos). Nor will this Court award exemplary damages or costs because Husky did not plead for these two types of relief in the Joint Pretrial Statement. See Prise v. Alderwoods Grp., Inc., No. 06-1470, 2011 WL 2532870, at *8 (W.D. Pa. 2011); see also Winmar, Inc. v. Al Jazeera Int’l, 741 F.Supp.2d 165, 185 (D.D.C. 2010) (“A party’s failure to advance a theory of recovery in a pretrial statement issued following discovery conference constitutes a waiver of that theory.”). Indeed, Husky did not request this relief in its post-remand oral argument or briefs.
With respect to the remaining categories of specific relief requested by Husky, the Court grants this relief as discussed in greater detail below.
b, The Components of the Judgment to be Awarded to Husky
In In re Morrison, 555 F.3d 473 (5th Cir. 2009), the Fifth Circuit held that *766a bankruptcy court has “jurisdiction to enter judgment against [a debtor] for the debt owed to [a plaintiff] after it found the debt nondisehargeable.” Id. at 479-80. In the suit at bar, this Court has concluded that the personal obligation that the Debt- or owes to Husky is a non-dischargeable debt. Now, this Court will determine the exact amount of this non-dischargeable obligation and enter judgment for this amount. To do so it is necessary to add up the following categories after determining the specific amount for each respective category: (1) actual damages; (2) prejudgment on the amount of actual damages; and (3) reasonable attorneys’ fees. Once this specific amount is determined, it will then bear post-judgment interest, and the post-judgment interest will also be a non-dischargeable obligation. All of these components are non-dischargeable based upon the Supreme Court’s holding in Cohen that the determination of non-dis-chargeability for “any debt ... for money ... to the extent obtained by fraud encompasses any liability arising from money ..., that is fraudulently obtained, including .., attorney’s fees, and other relief that may exceed the value obtained by the debtor.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212 (emphasis added).
1) Actual Damages Incurred by Husky
In its remand opinion, the Fifth Circuit issued the following holding: “If the bankruptcy court concludes on remand that Rita’s conduct satisfies the actual fraud prong of TUFTA and that the actual fraud was for Ritz’s ‘direct personal benefit,’ Tex. Bus. Orgs. Code Ann. 21.223(b), then Ritz is liable for Chrysalis’s debt to Husky under Texas’s veil-piercing statute .... ” Matter of Ritz, 832 F.3d at 569. This Court, on remand, has in fact concluded that the Debtor’s conduct falls within § 21.223(b); therefore, pursuant to the Fifth Circuit’s holding, this Court finds that the Debtor is personally liable for Chrysalis’s debt to Husky — i.e., he is liable for the $163,999.38 Debt. The figure of $163,999.38 is the measure of Husky’s actual damages, as this amount represents the sum of the invoices that Husky sent to Chrysalis but which Chrysalis failed to pay. [Finding of Fact No. 7]; see also Nwokedi, 428 S.W.3d at 203 (“The creditor may also recover a judgment for the value of the asset transferred or in the amount necessary to satisfy the creditors claim, whichever is less.”). This failure to pay would not have occurred but for the Debt- or’s draining of Chrysalis’s cash by orchestrating transfers of $1,161,279.90 into the accounts of the Debtor-Controlled. Entities. [Finding of Fact No. 23]. McCarthy, 251 S.W.3d at 593 (“The test for cause in fact is whether an ‘act or omission was a substantial factor in bringing about injury,’ without which the harm would not have occurred.”) (quoting Doe v. Boys Clubs of Greater Dallas, Inc., 907 S.W.2d 472, 477 (Tex. 1995)).
In its remand opinion, the Fifth Circuit also stated that if this Court concluded that the Debtor is personally liable for the $163,999.38 Debt under § 21.223(b), then this Court must address whether the Debtor’s obligation is non-dischargeable under § 523(a)(2)(A). Matter of Ritz, 832 F.3d at 569. This Court has now concluded, as already discussed herein, that the Debt- or’s personal liability for the $163,999.38 Debt is non-dischargeable.
Thus, this Court grants Husky’s request for actual damages, with the specific amount being $163,999.38; and, moreover, this Court grants Husky’s request that the Debtor’s obligation for this amount be declared as non-dischargeable.
2) Pre- and Post-Judgment Interest
i. Pre-Judgment Interest
This Court has discretion to impose pre-judgment interest. See Williams *767v. Trader Pub. Co., 218 F.3d 481, 488 (5th Cir. 2000). However, in exercising its discretion on this issue, the Fifth Circuit has held as follows:
The determination for whether prejudgment interest should be awarded requires a two-step analysis: does the federal act creating the cause of action preclude an award of prejudgment interest, and if not, does an award of prejudgment interest further the congressional policies of the federal act. If prejudgment interest can be awarded under the two-prong test, whether such interest is awarded in any given case is within the court’s discretion.
Carpenters Dist. Council of New Orleans & Vicinity v. Dillard Dept. Stores, Inc., 15 F.3d 1275, 1288 (5th Cir. 1994) (internal citations omitted).
In the suit at bar, there is no provision of the Bankruptcy Code in general, or § 523 in particular, precluding an award of pre-judgment interest. Moreover, the Fifth Circuit has held that pre-judgment interest may be awarded in cases involving fraudulent transfers because it “furthers the congressional policies of the Bankruptcy Code” and “compensates the estate for the time it was without use of the transferred funds.” In re Tex. Gen. Petroleum Corp., 52 F.3d 1330, 1339-40 (5th Cir. 1995);. see In re Kovler, 253 B.R. 592, 602-03 (Bankr. S.D.N.Y. 2000) (awarding pre-judgment interest to creditor who was successful in fraudulent conveyance adversary proceeding). Granted, Texas General involved a bankruptcy trustee recovering fraudulent transfers for the estate; whereas, in the suit at bar, the plaintiff is not a trustee, but rather an individual creditor recovering a judgment solely for itself. Nevertheless, this is a watershed case that has led the Supreme Court to hold that a § 523(a)(2)(A) action can be successful based upon fraudulent transfers; and here, Husky has in fact prevailed by showing that the Debtor orchestrated fraudulent transfers. Moreover, the Supreme Court has held that § 523(a)(2)(A) should not be construed in favor of “giving perpetrators of fraud a fresh start over the. interest in protecting victims of fraud.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212 (internal citation and quotation omitted). Here, to allow the Debtor to escape paying pre-judgment interest would be to “allow the malefic debtor [to] hoist the Bankruptcy Code as protection from the full consequences of fraudulent conduct.” In re Bilzerian, 100 F.3d at 891 (internal quotation and citation omitted).
Awarding pre-judgment interest also furthers the congressional purpose that the Code provide a discharge to only honest debtors. Grogan, 498 U.S. at 286-87, 111 S.Ct. 654; White v. Brown Shoe Co., 30 F.2d 674, 674-75 (5th Cir. 1929); In re Gartner, 326 B.R. 357, 378 (Bankr. S.D. Tex. 2005). Here, the Debtor, who was not a credible witness, who made material misrepresentations in Chrysalis’s SOFA, and who committed actual fraud, but who nev-értheless received a discharge from all his debts in his main Chapter 7 case (except the personal obligation to Husky and the possible obligation to the Chapter 7 trustee in the Chrysalis case), [Findings of Fact Nos. 4, 13, & 26], should not be allowed to walk away with only having to pay the amount of $163,999.38. Indeed, “[t]he purpose of prejudgment interest is to ‘make a plaintiff whole’ ..., not reward or punish a party for its litigation conduct.” Tow, 2015 WL 1058080, at *14 (quoting Williams, 218 F.3d at 488). It would be grossly inequitable for the Debt- or to escape without having to pay the time-value of money.
Therefore, for all the reasons set forth above, this Court, exercising its discretion, *768awards pre-judgment interest to Husky. The next question is at what rate?.
Because no federal statute' sets the pre-judgment interest rate, the Court must look to state law. ASARCO LLC v. Americas Mining Corp., 404 B.R. 150, 164 (S.D. Tex. 2009) (holding that for “fraudulent-transfer actions ... courts may look to the laws of the state under which a similar fraudulent-transfer action could have been brought for such guidance”); see also In re Zohdi, 234 B.R. 371, 385 (Bankr. M.D. La. 1999) (holding that the court should look to state law for the prejudgment interest rate). Under Texas law, the rate of pre-judgment interest “accrue[s] at the same rate as postjudgment interest.” Int’l Turbine Servs., Inc. v. VASP Brazilian Airlines, 278 F.3d 494, 500 (5th Cir. 2002); see also Bob Anderson v. Mega Lift Sys., L.L.C. (In re Mega Sys., L.L.C.), No. 04-6085, 2007 WL 1643182, at *10-11 (Bankr. E.D. Tex. 2007). The post-judgment rate is statutorily set at the “prime rate as published by the Board of Governors of the Federal Reserve System on the date of computation.” The current prime rate is 4.0%. Selected Interest Rates (Daily) — H.15, Board op Governors op the Federal Reserve Sys. (April 14, 2017), https://www.federalreserve.gOv/releases/h 15/. Section 304.003(c)(2) of the Texas Finance Code Annotated states that the judgment rate shall be set at 5.0% if the current prime rate is less than 5.0%. Therefore, pursuant to § 304.003(c)(2)' of the Texas Finance Code Annotated, the Court will award Husky pre-judgment interest at a rate of 5% per annum. See Int’l Turbine Servs., Inc., 278 F.3d at 500 (holding that the rate of pre-judgment interest accrues at the same rate as post-judgment interest); see also In re Mega Sys., L.L.C., 2007 WL 1643182, at *10-11 (holding same).
An award of pre-judgment interest will accrue from the “time demand is made or an adversary proceeding is instituted.” Floyd v. Dunson (In re Rodriguez), 209 B.R. 424, 434 (Bankr. S.D. Tex. 1997). Therefore, here, the Court finds that the pre-judgment interest rate of 5.0% accrues as of the date of Husky's initiation of the Adversary Proceeding— i.e., March 31, 2010, [Finding of Fact No. 31]. Thus, the amount of this pre-judgment interest is $57,766.62.30 Further, the Court *769concludes that all pre-judgment interest is non-dischargeable; the Court does so based upon the Supreme Court’s language in Cohen that the non-dischargeable debt includes “other relief.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212; In re Ayesh, 465 B.R. 443, 449-50 (Bankr. S.D. Tex. 2011) (applying Cohen to find legal fees, interest, and other costs from the breach of contract to be non-dischargeable); Miller v. Lewis, 391 B.R. 380, 385 (E.D. Tex. 2008) (applying Cohen and find that the entirety of a judgment was an “obvious outgrowth” of the “fraudulent scheme”). The sum of $163,999.38 plus $57,766.62 equals $221,766.00, and this amount will bear postjudgment interest, as discussed below.
ii. Post-Judgment Interest
28 U.S.C. § 1961(a) sets forth that interests “shall be. allowed on any money judgment in a civil case recovered in a district court.” This statute also “applies to judgments entered by a bankruptcy court.” Ocasek v. Manville Corp. Asbestos Disease Comp. Fund, 956 F.2d 152, 154 (7th Cir. 1992). Further, the statute sets forth that the interest will be at the rate of the “weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment.” 28 U.S.C. § 1961(a). For the week of April 17 to April 23, 2017, the post-judgment interest rate for federal judgments is 1.05% per annum. United States District & Bankruptcy Court Southern District of Texas, Post-Judgment Interest Rates, http:// www.txs.uscourts.gov/page/post-judgment-interest-rates (last accessed April 19, 2017). Accordingly, the Court will grant Husky’s' request for post-judgment interest and will impose a rate of 1.03% per annum. In re Beveridge, 416 B.R. 552, 581-82 (Bankr. N.D. Tex. 2009); In re Haler, Adv. No. 10-4217, 2016 WL 825668, at *14-15 (Bankr. E.D. Tex. Mar, 2, 2016); In re Mascio, No. 03-1482 MER, 2014 WL 2621201, at *9 (Bankr. D. Colo. June 12, 2014) (all courts awarding post-judgment interest on debts that were declared non-dischargeable pursuant to § 523(a)(2)(A)).
This Court’s award of post-judgment interest will accrue during the period from the date the judgment is rendered until the date the judgment is satisfied. La. Power & Light Co. v. Kellstrom, 50 F.3d 319, 331-32 (5th Cir. 1995). Further, the Court concludes that all post-judgment interest is non-dischargeable, once again relying upon the language in Cohen that the *770non-dischargeable debt includes “other relief.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212; Ayesh, 465 B.R. at 449-50; Miller, 391 B.R. at 385.
3) Reasonable Attorneys’ Fees
With respect to Husky’s request for attorneys’ fees, the holding in Cohen is that a non-dischargeable debt in a § 523(a)(2)(A) encompasses not only the debt created by the fraud, but also an award of attorneys’ fees, among other damages. Stated differently, the word “debt” in § 523(a)(2)(A) encompasses any form of damage that can be causally linked to the conduct that gives rise to the non-dischargeable debt. Cohen, 523 U.S. at 220, 118 S.Ct. 1212; In re Whittington, 530 B.R. 360, 386-88 (Bankr. W.D. Tex. 2014). Here, the Court concludes that the attorneys’ fees incurred by Husky for the prosecution of the Adversary Proceeding are directly linked to the Debtor’s conduct that gave rise to the non-dischargeable obligation owed by the Debtor to Husky. Husky Int’l Elecs., Inc., 136 S.Ct. at 1589 (holding that “any debts ‘traceable to’ the fraudulent conveyance ... will be nondis-chargeable under § .523(a)(2)(A)”). The link is this: but for the Debtor’s fraudulent transfer of the $1,161,279.90 from Chrysalis’s account to the accounts of the Debtor-Controlled Entities, there could be no non-dischargeable obligation owed by the Debtor to Husky.
Of course, under the so-called “American Rule,” each party pays its own attorneys’ fees arising out of litigation except when specific authority granted by statute or contract states otherwise “Since the Bankruptcy Code does not address whether creditors can recover attorney’s fees in non-dischargeability cases, they can do so if allowed by another statute or by contract.” In re Kirk, 525 B.R. 325, 330 (Bankr. W.D. Tex. 2015) (footnote omitted). Indeed, the Fifth Circuit has held that creditors can recover attorneys’ fees only if there is a contractual or statutory right to fees under state law. Jordan, 927 F.2d at 226-27; In re Luce, 960 F.2d 1277, 1285-86 (5th Cir. 1992).
The Court finds that there is a contractual basis for awarding attorneys’ fees to Husky. Paragraph 13 of the Master Credit and Sales Agreement reads as follows: “If Seller [i.e., Husky] engages legal counsel to enforce Seller’s rights under this Master Credit and Sales Agreement, Buyer [i.e., Chrysalis] shall pay Seller’s reasonable attorneys [sic] fees and costs incurred by Seller in connection with such efforts, whether or not litigation is commenced.” [Finding of Fact No. 6]. While the Master Credit and Sales Agreement is between Husky and Chrysalis, this Court nevertheless concludes that because Husky has pierced the corporate veil to impose the $163,999.38 Debt on the Debtor personally, the Debtor is also liable for the attorneys’ fees incurred by Husky in prosecuting the Adversary Proceeding. See Wachovia Secs., LLC v. Jahelka, 586 F.Supp.2d 972, 1014 (N.D. Ill. 2008), aff'd in part and vacated in part by Wachovia Secs., LLC v. Banco Panamericano, Inc., 674 F.3d 743 (7th Cir. 2012) (piercing the defendant’s corporate veil to hold the individual defendants liable for the judgment, including the contractually obligated attorneys’ fees); Menetti v. Chavers, 974 S.W.2d 168, 171 n.5 (Tex. App.-San Antonio 1998, no pet.) (“If the corporate veil is pierced, the shareholders are considered the equivalent of the corporation .... The corporation’s liability becomes the shareholder’s liability absolutely.”).31
*771The Court also finds that there is a statutory basis for awarding fees to Husky. Specifically, Husky had to successfully invoke § 24.005 of TUFTA to be able to pierce the corporate veil of Chrysalis under § 21.228(b). To do this, Husky had to allege and prove that several badges of fraud existed under § 24.005(b). Section 24.008(a)(3)(C) of TUFTA sets forth that “[i]n an action for relief against a transfer ... under this chapter, a creditor ... may obtain ... any other relief the circumstances may require.” And, § 24.013 of TUFTA sets forth that “[i]n any proceeding under this chapter, the court may award costs and reasonable attorney’s fees as are equitable and just.” Here, the Court finds that the suit at bar constitutes a “proceeding under this chapter” because it necessarily involves TUFTA: Husky had to prove up the badges of fraud as set forth in TUFTA in order to prove that the Debtor’s orchestration of transfers of $1,161,279.90 constituted “actual fraud.” Matter of Ritz, 832 F.3d at 568-69. Because this suit is a proceeding under TUF-TA, this Court is authorized to award “any other relief the circumstances may require.” And here, this Court finds that such circumstances include awarding Husky its reasonable attorneys’ fees as allowed by § 24.013 of'TUFTA. There is ample case law supporting such an award when the plaintiff has proven fraudulent transfers. See e.g., Tow, 2015 WL 1058080, at *16 (“TUFTA permits a court to award costs and reasonable attorney’s fees as are equitable and just.”) (internal citation and quotation omitted); Walker v. Anderson, 232 S.W.3d 899, 919-20 (Tex. App.-Dallas 2007, no, pet.). Indeed, it would be inequitable to require Husky to prove actual fraud under TUFTA without compensation for the arguments therein. Thus, the Court concludes that Husky is entitled to its reasonable attorneys’ fees for prosecuting the Adversary Proceeding.
A key question is just exactly how much does prosecuting the Adversary Proceeding encompass? Does it mean that Husky should just recover its attorneys’ fees for trying the Adversary Proceeding in this Court in 2011? Or, does it mean that Husky should recover its attorneys’ fees for not only prosecuting the complaint at the trial in 2011, but also for prosecuting its appeals up to the Supreme Court and, additionally, for making post-remand arguments in this Court?
The term “adversary proceeding” is equivalent to the term “action”: both refer to a lawsuit. The term “action” is ambiguous, as it does not articulate whether the “action” is the first lawsuit or if it includes appeals. In Nigh v. Koons Buick Pontiac GMC, Inc., 478 F.3d 183 (4th Cir. 2007), the Fourth Circuit determined that “action encompasses each stage of [the plaintiffs] litigation, including the Supreme Court appeal and all the proceedings that followed.” Id. at 185 (emphasis in original). Further, the Fourth Circuit found that “[a]n action constitutes more than an individual appearance before one particular tribunal. In ordinary usage, an action — a civil action, at least — begins with the filing of a complaint and ends when no party may any longer obtain review of the final disposition of the case, encompassing all steps necessary in between.” Id. at 186. Thus, the Nigh court determined that:
[Defining action in this way means it is possible for a ... plaintiff to obtain attorney’s fees for a state of litigation at *772which she does not prevail. If a plaintiff does not prevail before the district court, but later is determined to have successfully demonstrated a defendant’s liability, her actions are successful, and she may recover fees for work done at trial level.
Id. While the Nigh court made this analysis using TILA (Truth in Lending Act), this Court sees no reason why this same logic would not equally apply to the suit at bar.
Here, the Court finds that Husky has prevailed in proving that the Debtor committed actual fraud primarily for his personal benefit. Proving this was no simple task — Husky fervently argued its case all the way up to the Supreme Court and then continued making post-remand arguments in this Court. Similar to the plaintiff in Nigh, Husky should be compensated for this work. See, e.g., Coston v. Plitt Theaters, Inc., 727 F.Supp. 385, 390 (N.D. Ill. 1989) (finding that “because [the plaintiff] has ultimately won the war, we will award him the cost of defending ... even though he lost some skirmishes along the way”); Snider v. Am. Family Mut. Ins. Co., 297 Kan. 157, 175, 298 P.3d 1120 (2013) (excluding fees for litigation when the applicant did not prevail). Here, Husky, while having “lost some skirmishes along the way,” was successful before the Supreme Court and is now successful in this Court on remand; therefore, reasonable attorneys’ fees for all of Husky’s efforts are warranted.
Further, this Court has the authority to determine what amount of fees are reasonable. Rule 7054(b)(2); Perkins v. Standard Oil Co., 399 U.S. 222, 223, 90 S.Ct. 1989, 26 L.Ed.2d 534 (1970) (per curiam) (mandating the district court to determine reasonable attorneys’ fees for litigation, including various appeals); see also Dague v. City of Burlington, 976 F.2d 801, 804 (2d Cir. 1991) (holding that “determination of a reasonable attorney’s fee ... should normally be decided by the district court in the first instance”). Indeed, this Court, rather than an appellate court, is best situated to review and analyze the evidence presented on a fee application. In re ASARCO, L.L.C., 751 F.3d 291, 294 (5th Cir. 2014) (“A bankruptcy court has ‘broad discretion’ to determine reasonable attorneys’ fees, as the ‘bankruptcy court is more familiar with the actual services performed and has far better means of knowing what is just and reasonable than an appellate court can have.’”) (quoting In re Lawler, 807 F.2d 1207, 1211 (5th Cir. 1987)); Dague, 976 F.2d at 804. The evidence presented to prove reasonable attorneys’ fees “may include voluminous and detailed records of attorney and staff hours spent on various projects, affidavits regarding reasonable billing rates in the relevant communities at various times during the pendency of the suit, as well as data and argument concerning whether, under the overall circumstances of the case, a claimed fee is reasonable.” Dague, 976 F.2d at 804; see also Citizens Against Rent Control v. City of Berkeley, Cali., 181 Cal.App.3d 213, 277, 226 Cal.Rptr. 265 (1986) (upholding fees for arguments in state court, appeals, and before the Supreme Court when there were detailed summaries of time expended for staff). This Court, in due course, will make a determination on the exact amount of attorneys’ fees to be awarded to Husky.
Additionally, the Court will also order the Debtor to pay Husky post-judgment interest on the total amount of attorneys’ fees ultimately awarded. The Fifth Circuit has held that interest on attorneys’ fees begins to accrue on the date of the judgment allowing recovery of attorneys’ fees and runs until the date the fees are paid in full. See Copper Liquor, Inc. v. Adolph *773Coors Co., 701 F.2d 542, 544-45 (5th Cir. 1983) (en banc), overruled in part on other grounds by J.T. Gibbons, Inc. v. Crawford Fitting Co., 790 F.2d 1193, 1195 (5th Cir. 1986), aff'd 482 U.S. 437, 107 S.Ct. 2494, 96 L.Ed.2d 385 (1987) (holding that the prevailing party is entitled to interest on attorneys’ fees, at the same interest rate as that applied to the judgment on the merits). The Fifth Circuit allows this interest on attorneys’ fees because it “better serve[s] the purpose of awarding these expenses to the prevailing party since it ... more nearly compensate^] the victor for the expenses of the litigation.” Id. at 644. Further, just as the post-judgment interest that will accrue on the principal amount of $163,999.38 plus the pre-judgment interest amount of $57,766.62 is non-dischargeable, the post-judgment interest that accrues on the attorneys’ fees is also a non-dischargeable obligation. Once again, in making this conclusion, the Court relies upon the language in Cohen that the non-dischargeable debt imposed upon the Debtor includes “other relief.” Cohen, 523 U.S. at 223, 118 S.Ct. 1212; Ayesh, 465 B.R. at 449-50 (finding legal fees to be nondischargeable); In re Lutgen, No. 98-CV-0764E(SC), 1999 WL 222605, at *3 (W.D.N.Y. Apr. 5, 1999) (same).
VI. Conclusion
During trial, the Debtor once stated that “you begin your entrepreneurial career with your dreams in full bloom and your integrity intact. Be sure that you finish you career with your dreams realized and your integrity still intact.” [Feb. 2, 2011 Tr. 73:22-74:4]. The Debtor further testified that he still lived his professional business life by this motto. [Id. at 74:7-8]. The Debtor’s actions here are wholly inconsistent with his highly cherished “integrity” — indeed, he will be finishing this part of his life with little integrity'at all.
The Debtor lost his integrity when he utilized Chrysalis as an entity to funnel money away from its creditors, such as Husky. He will now bear the consequences of his actions. Because the Debtor committed actual fraud for his personal benefit when he made the transfers of $1,161,279.90 from Chrysalis to the Debt- or-Controlled Entities, the Debtor became personally liable to Husky by virtue of the Texas veil-piercing statute, i.e., § 21.223(b). And, because the Debtor’s personál obligation to Husky is non-dis-chargeable under § 523(a)(2)(A), he is now liable for the following non-dischargeable amounts: (1) $163,999.38; (2) pre-judgment interest on the $163,999.38 Debt, which totals $57,766,62; (3) post-judgment interest of 1.05% per annum on the amount of $221,766.00 (representing the sum of $163,999.38 plus the pre-judgment interest amount of $57,766.62); (4) reasonable attorneys’ fees incurred by Husky (with the specific amount to be subsequently determined); and (5) post-judgment interest of 1.05% per annum on the amount of the reasonable attorneys’ fees incurred by Husky.
A judgment consistent with this Memorandum Opinion will be entered on the docket as soon as this Court makes a determination regarding the amount of reasonable attorneys’ fees to be awarded to Husky.
. Hereinafter, any reference to any section (i.e., §), unless otherwise noted, refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, and any reference to "the Code” refers to the United States Bankruptcy Code. Further, any reference to a "Rule” is a reference to the Federal Rules of Bankruptcy Procedure.
. Husky's exhibits (i.e., "Pi’s Ex.”) were admitted throughout the trial. Specifically, Husky’s exhibit numbers 1 through 4, 6, 7, and 167 through 169 were admitted on February 2, 2011. Husky’s exhibit numbers 171, 172, 174, and 175 were admitted on February 3, 2011. Finally, Husky's exhibit number 5 was admitted on February 10, 2011.
.The Debtor’s exhibits (i.e., "Def’s Ex.”) were admitted throughout the trial. Specifically, the Debtor’s exhibits 38, 39, 42, 43, 55a, and 69 were admitted on February 10, 2011. The Debtor’s exhibits 1 through 11, 25.1 through 32.4, 45 through 49, 56, 57, 59.1, 59.2, 60, 61.1 through 61.3, 62.1 through 64,18, 65, 66, 67, and 68 through 68.18 were admitted on February 11, 2011.
. The Complaint also sought, in the alternative, a judgment of non-dischargeability based upon 11 U.S.C. § 523(a)(4) and § 523(a)(6). This Court disposed of these claims in the Debtor's favor; these rulings were upheld upon appeal; and the only claim now still at issue is Husky’s § 523(a)(2)(A) claim.
. Hereinafter, any reference to § 21.223(b) refers to this specific section of the TBOC.
. In finding that the “actual fraud” element of § 21.223(b) does not require a representation by the defendant, the District Court also cited a Texas appellate court opinion issued in 2012; Tryco Enters., Inc. v. Robinson, 390 S.W.3d 497, 508, 510 (Tex. App.-Houston [1st Dist.] 2012, pet. dism’d)..
.This section of the Texas Business and Commerce Code is often referred to as “TUFTA,” i,e„ the Texas Uniform Fraudulent Transfer Act, and will frequently be referred to as such herein. Hereinafter, any reference to “§ 24.005” refers to this specific section of TUFTA.
. The language from the remand opinion is as follows: "Accordingly, we must remand this case to the district court (and thence to the bankruptcy court) for additional fact finding as to whether Ritz’s conduct satisfies the actual fraud prong of TUFTA. This is so because, under Texas law, " ‘[i]ntent is a fact question uniquely within the realm of, the trier of fact.’ ” Matter of Ritz, 832 F.3d at 569. After the Fifth Circuit issued its remand opinion, the District Court did, in fact, issue an order remanding the matter to this Court. [Civ. Case No. 4-.11-CV-03020, Doc. No. 29],
. In this Court’s memorandum opinion of August 4, 2011, this Court made a total of sixteen findings of fact. Ritz, 459 B.R. at 627-28. All of these sixteen findings of fact are incorporated in the memorandum opinion that this Court is now issuing, and this Court cites to these particular findings by denoting them as "Finding of Fact No in the 2011 Opinion.” Because the Fifth Circuit’s 2016 memorandum opinion remands the matter to this Court for additional findings, this Court has also made further findings of fact, and they (together with the original findings) are set forth in this section III,
. While the UCC Financing Agreement was introduced into evidence, there was no security agreement put into the record evidencing that Chrysalis expressly gave a security interest in its assets to Virtra Manufacturing Corporation. Nevertheless, based upon the testimony adduced at the trial, it is clear to this Court that the Debtor believes that Chrysalis gave a lien to Virtra Manufacturing Corporation when it received “intercompany advances” from this entity.
. Despite the parties’ failure to introduce Chrysalis's schedules and statement of financial affairs into evidence, the Debtor did introduce into evidence the docket sheet for the Chrysalis case, and this Court has the right to take judicial notice of pleadings filed in the Southern District of Texas. SEC v. First Fin. Grp. of Tex., 645 F.2d 429, 433 (5th Cir. 1981); In re Arhens, 120 B.R. 852, 854 (Bankr. S.D. Tex, 1990) (holding that "a court may take judicial notice of its own records.”). After this Court heard post-remand arguments from counsel for Husky and the Debt- or, this Court reviewed Chrysalis’s schedules and statement of financial affairs, and in now issuing its ruling, the Court refers to certain information contained in these documents.
. Item 10 of the statement of financial affairs reads as follows: “List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.” [Case No. 08-33793, Doc. No. 3, p. 47 of 54],
. The order discharging the Debtor expressly set forth that certain debts are not discharged, including the following: "Debts that the bankruptcy court specifically has decided or will decide in this bankruptcy case are not discharged” as well as "Some debts which were not properly listed by the debtor.” [Main Case No. 09-39895, Doc. No. 32, p. 2 of 2],
. The Court focuses on this seven-month period because this is the relevant period when Chrysalis’s checks to Husky that bounced were being written. [Feb. 2, 2011 Tr. 11:8— 12].
,Previously, the Debtor had given sworn answers to interrogatories that he did not initiate the transfers, but that the transfers were initiated by Marlin Williford, who was chief financial officer for ComCon and Chrysalis. [Finding of Fact No. 32]. However, at trial, the Debtor testified that his answers to these interrogatories were incorrect and that it was in fact he who made the transfers, not Mr. Williford. [Feb. 3, 2011 Tr. 33:16-21],
. There is a difference of $26,500.00 between the figure of $1,161,279.90 (which represents the total amount of the transfers) and the figure of $1,134,780,00 (which represents the sum of $414,322.00 and $720,458.00). There is no question that the Debtor made transfers of $26,500.00 to Clean Fuel International Corp., a/k/a Gulf Coast Fuels, Inc. However, the record is unclear as to whether these transfers were made before Husky's threat of a lawsuit or after Husky’s threat of a lawsuit. Therefore, the Court has not included the figure of $26,500,00 in the “before and after the threat of a lawsuit” badge of fraud analysis. [See infra Part V.C.l.b.3].
. After the Fifth Circuit remanded the matter to this Court in August 2016, a status hearing was held, at which time the Court inquired of counsel for the parties as to whether they wanted to adduce additional testimony or introduce additional exhibits. They both declined. Accordingly, this Court has no reason to change its credibility findings from the findings made in the 2011 memorandum opinion. Hence, the credibility findings set forth herein are the same findings — with some additional citations to sources and footnotes.
. Since the Court made its credibility findings in its memorandum opinion of August 4, 2011, the Court has reviewed the schedules that Chrysalis filed in its Chapter 7 case. The Debtor, in his capacity as a director of Chrysalis, submitted these schedules under oath. In schedule F, the Debtor, on behalf of Chrysalis, represented that Chrysalis owed Husky a debt of $162,487.65 and this Schedule F further represented that Chrysalis did not dispute this amount. [Finding of Fact No. 5(e) ]. Thus, as of June 12, 2008, the date that the Schedule F was filed, the Debtor did not dispute that Chrysalis owed Husky a debt, a representation that directly contradicts his answer at trial that he disputes that Chrysalis owes any debt to Husky. This is additional evidence reflecting the Debtor's poor credibility.
. In making its findings of fact, this Court, even though it finds the Debtor not to be a credible witness, nevertheless cites his testimony, in some instances, as a basis for certain findings. The Court does so because the Debtor has been challenged on cross-examination and has owned up to the truth or, alternatively, the Debtor's testimony concerns a non-controversial point (at least in the Debt- or’s mind) about which he has no reason to obfuscate; or, alternatively, it is an admission against interest.
. The Master Credit and Sales Agreement between Husky and Chrysalis includes a choice of law provision stating that it is governed by Colorado law. [Pi's Ex. No. 1], However, in all of the hearings since 2011, neither party has ever asserted that Colorado law governs the Adversary Proceeding. Moreover, the Joint Pretrial Statement references solely Texas law and leaves no doubt that Husky seeks to pierce Chrysalis’s corporate veil to *738impose personal liability on the Debtor through § 21.223(b) of the TBOC. Thus, the Court finds that the parties have waived the Colorado choice of law provision. See ARM Offshore Co., Ltd. v. Con-Dive, L.L.C., No. H-09-0944, 2012 WL 176322, at *6 (S.D. Tex. Jan. 20, 2012) (holding that a choice of law provision was waived when the issue was first raised in post-trial briefing and was not in the joint pretrial statement); Meyer v. Callahan, No. 09-cv-106-PB, 2010 WL 4916563, at *1 n.3 (D.N.H. Nov. 29, 2010) (finding that failure to brief on another state’s law constituted a waiver of the right to use that law).
. This Court notes that Chrysalis filed a Chapter 7 petition and that the Debtor, who signed Chrysalis’s SOFA in his capacity as its director, failed to disclose the transfers of $1,161,'279.90 that he withdrew from Chrysalis’s account and transferred to the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 4], Additionally, in Chrysalis’s Schedule B, no disclosure was made in item 21 of any claim that Chrysalis has against the Debtor for his transferring the amount of $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Id,]. Thus, the Chapter 7 trustee of Chrysalis's estate could have a cause of action on behalf of this estate against the Debtor for ' the amount of $1,161,279.90. In re Moore, 608 F.3d 253, 259-60 (5th Cir. 2010) (holding that state fraudulent transfer actions belong to the trustee); see also Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153 (5th Cir. 1987) (holding that the creditor’s "alter ego action is a right of action belonging to [the corporate debtor] and, as such, is 'property of the estate’ within the meaning of section 541(a)(1)” and thus may not be prosecuted by the individual creditor); In re Mortgage America Corp., 714 F.2d 1266, 1277-78 (5th Cir. 1983) (holding that "a cause of action under the trust fund (denuding) theory is in the right of the corporation and, as such, is 'property of the estate’ within the meaning of section 541(a)(1) of the Code” and thus, cannot be prosecuted by the individual creditor but rather can only be prosecuted by the Chapter 7 trustee). Indeed, because the disclosure of these transfers was not made, this Court will hold a hearing in Chrysalis's case to inquire of the trustee if he wants to bring suit against the Debtor for the amount of these transfers. Chrysalis’s case was closed on February 23, 2009, [Case No. 08-33793, Doc. No. 15], and the docket sheet reflects that the trustee made no distribution of any property to Chrysalis’s creditors. Nevertheless, a Chapter 7 case can be reopened when an asset that was' not listed in the debt- or’s schedules comes to light. In re Miller, 347 B.R. 48, 53-54 (Bankr. S.D. Tex. 2006). Moreover, even though the Debtor has received a general discharge in his Chapter 7 case, [Main Case No. 09-39895, Doc. No. 32], this discharge does not necessarily give him a discharge from debts that he failed to disclose, Matter of Stone, 10 F.3d 285, 290-91 (5th Cir. 1994), and in his main case, the Debtor failed to schedule Chrysalis or the Chapter 7 trustee of the Chrysalis estate as a creditor holding a claim against him for his transferring the $1,161,279.90 out of Chrysalis’s account into the accounts of the Debtor-Controlled Entities. [Finding of Fact No. 14], Thus, the Trustee of Chrysalis’s estate may want to pursue the Debtor, in his individual capacity.
Regardless of whatever cause of action the Chrysalis Chapter 7 trustee might have and might bring against the Debtor, Husky is in no way deprived from standing to sue the Debtor on a veil-piercing theory under § 21.223(b) to recover the $163,999.38 Debt that Chrysalis owes to Husky. The Fifth Circuit made this clear in its remand opinion. Matter of Ritz, 832 F.3d at 566 (“However, we agree with the district court that Husky’s theory that Ritz is liable for the debt owed by Chrysalis to Husky under Texas law is legally viable and therefore remand for further factual findings on this theory.”); see also Estate of Vasquez-Ortiz v. Zurich Compania De Suguros, No. H-11-2413, 2013 WL 105005, at *4 (S.D. Tex. 2013) ("Texas courts have recognized that a corporate form and an individual are mere alter egos ‘when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding on the corporation liable would result in injustice.’ ” In such instances, parties may bring claims directly against the corporation’s owners instead of proceeding against the corporation alone.”) (quoting Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986) superseded by Tex. Bus. Org. Code § 21.223); TransPecos Banks v. Strobach, 487 *739S.W.3d 722, 731 (Tex. App.-El Paso 2016, no pet.) ("We have also recognized that in adopting Section 21.223(b), the Legislature expressly placed the burden of proof on the corporate obligee to demonstrate that a corporate affiliate used the corporation to perpetrate an actual fraud on the oblige for his direct personal benefit.”); Morgan v. Fuller, No. 07-15-00314-CV, 2016 WL 2766106, at *2 (Tex. App.Amarillo May 11, 2016, no pet.) (holding that: “Normally, a shareholder may not be liable for corporate obligations or debts ... This general rule, though, has its exception. That exception arises where the creditor demonstrates that the shareholder caused the corporation to be used for the purpose of perpetrating and did perpetrate actual fraud on the creditor primarily for the direct personal benefit of the shareholder, beneficial owner, subscriber, or affiliate”) (internal quotations omitted) (citing § 21.223(b)) (emphasis added).
. For a concise look of which badges of fraud are present in the suit at bar, see the chart included in the section entitled: “Sum-maty of All Thirteen of the Badges of Fraud Analyzed Above." See infra Part V.C.l.e.
. The undersigned judge has held that a bankruptcy court is bound by rulings issued by the district court in the district where the bankruptcy judge sits. In re DePugh, 409 B,R. 125, 131, 131 n.5 (Bankr. S.D. Tex. 2009). In ASARCO, the District Court for the Southern District of Texas issued an opinion containing one sentence that could be construed to mean that a plaintiff must actually plead a specific badge of fraud for the Court to consider it: "Lastly, there is not even a suggestion of the eleventh badge .... ” ASARCO v. Americas Mining Corp., 396 B.R. 278, 373-74 (S.D. Tex. 2008). Conversely, in the same opinion, there is language suggesting that the court sua sponte may consider any badge of fraud in making its decision: "... the statute provides only a non-exclusive list and the Court may look to other evidence in its efforts to determine [the defendant’s] intent .... [The plaintiff] presented a number of additional facts that provide circumstantial evidence that the Court may. consider in determining whether [the defendant] had the requisite intent for Plaintiff to prevail on is actual-intent fraudulent transfer claim.” Id. at 374. Because this Court believes it is bound by the District Court's ruling in ASARCO, but is not sure which principle to apply, this Court will proceed to sua sponte analyze those badges of fraud not raised by Husky. If this Court’s ruling is appealed once more, the appellate court can decide which principle applies and then either discard this Court’s sua sponte analysis or include it in its ruling. If the former, this Court nevertheless emphasizes that of the seven badges expressly raised by Husky, six are present — and this Court concludes that based upon existing precedent, the presence of six badges is sufficient to establish the Debtor’s intent to hinder, delay, or defraud Husky.
. See supra note 23.
. Chrysalis, through the Debtor as its director, also scheduled debts owed to insiders, including a debt of $866,511.65 to ComCon and a debt of $1,620,912.53 to Institutional Capital Management, Inc. [Case No. OS-33793, Doc, No. 3, pp. 15 & 23 of 54], However, as already discussed herein, there is no documentary evidence that these entities extended loans to Chrysalis, and this Court gives no weight to the Debtor's testimony that such loans existed. The Court therefore does not take into account these alleged loans when making its determination that the bona fide debt of $163,999,38 that Chrysalis owes to Husky constitutes a "substantial debt” for purposes of evaluating this particular badge of fraud.
. For reference, the first eleven badges of fraud are enumerated in § 24.005(b) of TUF-TA. The twelfth and thirteenth badges (in italics) are additional badges not expressly enumerated in TUFTA that this Court finds appropriate to analyze because the TUFTA list is not exhaustive and these badges further suggest the transfers were made with fraudulent intent. 1701 Commerce, LLC, 511 B.R. at 836.
. The Debtor orchestrated transfers of $1,161,279.90 out of Chrysalis's account, and . Chrysalis received no consideration in exchange for these transfers. [Findings of Fact Nos. 15-21]. And, when the Debtor signed Chrysalis's SOFA, there was no disclosure made of these transfers, which were clearly not in the ordinary course of Chrysalis’s business. [Finding of Fact No. 4], Further, when the Debtor signed Chrysalis's schedules, there was no disclosure in item 21 of any claim that Chrysalis might have against the Debtor for *763orchestrating the transfer of $1,161,279.90 to the accounts of the Debtor-Controlled Entities. [Id.]. As noted In supra note 21, these circumstances may provide a basis for the Chapter 7 trustee in the Chrysalis case to file suit against the Debtor under an alter ego/fraudulent conveyance theory seeking a judgment for the amount of $1,161,279.90, and further seeking a judgment declaring that this amount is non-dischargeable under § 523(a)(2)(A). The major difference between Husky’s claim here and the trustee's putative claim in Chrysalis’s case is that the non-dis-chargeable obligation here is only $163,999.38 and it benefits solely Husky; whereas, the non-dischargeable obligation possibly to be sought by the trustee in the Chrysalis case would be $1,161,279.90, and recovery of this amount would benefit all of Chrysalis’s creditors, not just Husky.
. A cursory review of the Fourth Circuit’s decision in In re Rountree, 478 F.3d 215 (4th Cir. 2007) might lead one to conclude that the Fourth Circuit has adopted the first view. Indeed, at the end of the opinion, the Fourth Circuit states that ”[b]oth the plain language of the statute and the Supreme Court’s interpretation of that language lead us to require for exception to discharge that the debtor have fraudulently obtained money, property, services, or credit.” Id. at 222. However, a careful reading of this opinion indicates that the debtor in that case received nothing through her fraud. Indeed, the Fourth Circuit, in responding to one of the creditor's arguments, stated that: "The key in Cohen is that *764the debtor obtained something through his fraud.” Id. Thus, it appears that the Fourth Circuit, although it did not expressly so state, would adopt the second view — namely, that so long as the debtor received some benefit from his or her fraud, a judgment of non-dischargeability is required.
. Even if no Fifth Circuit precedent existed, leaving this Court to decide whether to adopt the first view or the second view, this Court would reject the first view and adopt the second view.
. The calculation is done for the period of March 31, 2010 through April 18, 2017 (i.e., up to the date that this Memorandum Opinion is entered on the docket). The calculation is done using 5% simple interest. Arete Partners, L.P. v. Gunnerman, 643 F.3d 410, 415 (5th Cir. 2011) (citing Johnson & Higgins on Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 532 (Tex. 1998)); Huggins v. Royalty Clearinghouse, Ltd., 121 F.Supp.3d 646, 660 (W.D. *769Tex. 2015). This calculation is shown on the following chart:
[[Image here]]
. In addressing this issue, the Fifth Circuit has found that it is inappropriate to uphold an award of attorneys' fees when the corporate veil is not pierced or when the alter ego *771theory fails. See e.g., Fidelity & Deposit Co. of Md. v. Commercial Cas. Consultants, 976 F.2d 272, 277 (5th Cir. 1992); Gibraltar Savings v. LDBrinkman Corp., 860 F.2d 1275, 1295 (5th Cir. 1988). Thus, inferentially, if there is a successful piercing of the corporate veil to find personal liability of the debtor, then the attorneys’ fee award would likewise stand. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500501/ | MEMORANDUM OPINION ON THE TRUSTEE'S APPLICATION TO COMPROMISE
CONTROVERSY UNDER BANKRUPTCY RULE 9019
[Doc. No. 306]
Jeff Bohm, United States Bankruptcy Judge
I. Brief Introduction
This case was initiated on May 7, 2009 (the “Petition Date”), and has been anything but a typical Chapter 7 proceeding. Now pending before this Court is the application (the “Application”) of the Chapter 7 trustee, Eva S. Engelhart (the “Trustee”), to approve a settlement that she has negotiated with Tony DeRosa-Grund,. the debtor (the “Debtor”). New Line Productions, Inc. (“New Line”), a party-in-interest, vigorously objects to the proposed settlement. For the reasons set forth herein, this Court approves the Application. The Court does so, however, with misgivings, as it has little doubt that the Debtor, who has already made material misrepresentations under oath to this Court, will foment further frivolous litigation once the order approving the Application becomes final.
II. Factual and Procedural Background
On September 23, 2015, the Debtor filed a motion to reopen his Chapter 7 case (the “Motion to Reopen”). [Doc. No. 92]. In the Motion to Reopen, the Debtor requested this Court to reopen his case so that he could amend his schedules to disclose an asset that he claimed to have inadvertently left off his original schedules. On October 14, 2015, New Line lodged an objection to the Motion to Reopen. [Adv. Doe. No. 94]. This Court held a multi-day hearing on December 1, 2, 3, and 7, 2015, and the Court took the matter under advisement.
On January 22, 2016, this Court issued a Memorandum Opinion (the “Opinion”). [Doc. No. 122], and an order corresponding to the Opinion (the “First Order”), [Doc. No. 123]. A true and correct copy of the Opinion and the First Order are attached hereto as Exhibits A and B and incorporated herein for all purposes. The First Order ordered that this Chapter 7 case, which was closed in 2014, be reopened so that the Trustee could administer certain previously undisclosed assets. The Opinion discusses in detail how the Debtor deliberately failed to disclose certain assets on his original schedules; and then, after he received his discharge of a substantial amount of debt, attempted to collect hundreds of thousands of dollars for these assets and, when unsuccessful, then prosecuted numerous unsuccessful lawsuits against New Line (among others) seeking to obtain judgments for huge amounts.
The Opinion describes the two key assets that the Debtor failed to disclose. One is the so-called “Treatment,” and the other is an entity called Silverbird Media Group *777LLC (“Silverbird”). The latter is a company owned by the Debtor as of the Petition Date. The former is an abridged script for what subsequently became the screenplay for a blockbuster movie entitled “The Conjuring.” This movie generated revenues of over $300 million in 2013, and a sequel has since been made.
The Opinion also explains why the Court reopened the Debtor’s case and the conditions that the Court imposed in doing so. Specifically, the Court required the Debtor to schedule the Treatment and Silverbird so that the Trustee could administer these assets for the benefit of the estate — i.e., for those creditors whose allowed claims had not been paid when the case was initially closed in 2014. The Opinion also set forth that if, after the Trustee administered these previously undisclosed assets, any excess funds remained in the estate, they would not be distributed to the Debt- or. The Court issued this particular ruling on the grounds that the Debtor’s skullduggery should, as a matter of equity, bar him from receiving any distribution. The Debt- or has appealed this ruling, and the Trustee is defending this holding.
To the Trustee’s credit, she has been able to sell the estate’s interest in the Treatment, plus take certain other actions, such that more than enough cash has been generated to pay all allowed unsecured claims and all allowed administrative claims. [Doc. No. 371]. Indeed, the holders of unsecured claims have received interest on their claims. [Id.\. This result is exceptional, and the Trustee deserves much credit for her efforts.
And, also to her credit, the Trustee is trying to comply with the Opinion and the First Order by not distributing any excess funds to the Debtor. Specifically, after she paid off all allowed unsecured claims, and set aside what she believes is a sufficient amount of funds to pay off all allowed administrative claims, the Trustee calculated that there are excess funds in the estate. On February 1, 2017, she filed a motion requesting this Court’s approval to pay a portion of these excess monies to two charitable organizations as.follows: (1) to the Ronald McDonald House of Houston, Inc., the sum of $35,000,00; and (2) to the Covenant House Texas, the sum of $35,000.00. [Doc. No. 287], The Court approved this request in an order dated February 9, 2017 (the “Second Order”), and the Debtor timely appealed this ruling. [Doc. No. 289], As with the Debtor’s appeal of the First Order, the Trustee is defending the Second Order. Both appeals are presently pending before the Honorable Sim Lake, United States District Judge for the Southern District of Texas (“Judge Lake”). [Doc. No. 290 & 303]; [Civ. Act. No. 4:17cv591].
At a status conference before Judge Lake, the following exchange, in pertinent part, occurred among Judge Lake, counsel for the Trustee, and counsel for the Debt- or:
The Court: Is there a chance that this matter can be resolved? I mean, I hate to spend — let me just talk a second. I hate to spend money when the creditors have been paid. Of course, it benefits your law firm, that’s great. I have also been skeptical of awarding money to a charity from a party. That’s like forced contributions. It’s just not something that, I don’t think courts — who’s going to decide which charity?
Trustee’s Attorney: The trustee. Judge Bohm has ordered the trustee should decide what charity they go to. I would say this about settlement. I believe that if Mr. Patterson and I in a different context had this pool of money and these issues we would settle it. In bankruptcy court, any settlement *778that we would reach would have to be approved by Judge Bohm. And I am very confident, given that opinion you read and the record so far, he is not going to approve any settlement whereby I let Mr. Patterson’s client walk away with any money.
The Court: Well, he might if the reference were withdrawn and I were going to approve it.
Debtor’s Attorney: If that were to happen, Judge, I feel like there is probably an 80 percent chance we could resolve everything.
The Court: I am not saying I am going to do that, but I am looking at the specter of writing three |ong opinions and I am looking at the specter — and nothing more do I love than writing bankruptcy opinions. That’s the reason I wanted to become a federal judge. But seriously, it’s just if we’re spending a huge amount of attorney and judge time on an issue that could be resolved, I would seriously consider any reasonable relief you could suggest.
Trustee’s Attorney: I appreciate that, Your Honor.
The Court: That’s all I am going to say.
[[Image here]]
Debtor’s Attorney: Quite frankly, as far as settlement, we haven’t. I mean, all of us work here, work together. We work in that little environment downstairs in bankruptcy court all the time. And so, this is something that can be resolved. It’s not something that can be resolved and approved by Judge Bohm at this stage, quite frankly. I mean, that’s just—
The Court: Well, Judge Bohm is a fine judge, but the appeal is to me. The way the courts work, sometimes the Fifth Circuit does things that I didn’t think would be a good idea, but that’s the way the system works.
[Trustee’s Ex. 18, 28:9-24:17, 25:2-12].
After reflecting upon Judge Lake’s comments, the Trustee became concerned that she would not prevail in the appeals, and that therefore the Debtor — not the two charities — would end up receiving all of the surplus funds in this case. [Mar. 10, 2017 Tr. 4:15-24]. Accordingly, she entered into settlement discussions with the Debt- or, and has negotiated a compromise that, if approved, results in the two charities still each receiving $35,000.00. [Mar. 10, 2017 Tr. 28:3 — 11]; [Doc. No. 306, p. 8 ¶ 33]. The terms of the proposed settlement (the “Proposed Settlement”) are set forth in the Application, which the Trustee filed on February 24, 2017. [Doc. No. 306]. The material terms are as follows:
(1) The Debtor will dismiss his appeal of the First Order with prejudice;
(2) The Debtor will dismiss his appeal of the Second Order with prejudice;
(3) The Trustee will proceed to pay $35,000.00 to each of the two charitable organizations as set forth in the Second Order;
(4) Upon closing this Chapter 7 case, the Trustee will abandon the estate’s interest in two entities: Sil-verbird and Evergreen Media Group LLC (“EMG”). The former is the entity that the Debtor did not initially disclose in his schedules, but, as required by the First Order, did subsequently disclose, representing that the value of his interest in this corporation is $0.00. The latter is an entity that the Debtor did initially disclose — representing that his interest in this corporation has a value of $1,000.00;
(5) The Trustee will disclaim any right that she has to receive any portion *779of future payments relating to “The Conjuring”;
(6) The Trustee will exchange mutual releases with the Debtor, Silver-bird, EMG, and Evergreen Media Holdings LLC (“Holdings”). The latter entity is a corporation that has never been property of the estate, but that has been the party to litigation over the Treatment; the Debtor is the manager and the executive chairman of this entity, [Doc. No. 122, p. 6 ¶ 5].
[Id. at p. 8 of 15].
On March 7, 2017, New Line filed an objection to the Application. [Doc. No. 318]. New Line is a subsidiary and an affiliate of Warner Brothers Entertainment, Inc. and it is this entity, among others, that the Debtor has frequently sued to recover what he has alleged are his damages from the use of the Treatment by New Line and its affiliates. The gravamen of New Line’s objection is this: Pursuant to an order of this Court on December 16, 2016 approving a compromise between New Line and the Trustee (the “New Line/Trustee Settlement”), New Line paid $200,000.00 to the Trustee for all of the estate’s interest in the Treatment; the Debtor now takes the position that EMG has actually owned the Treatment since February 9, 2009;1 the Debtor also takes the position that Silverbird has an interest in the Treatment, , [see Doc. No. 275]; and if the Trustee abandons the estate’s interests in EMG and Silverbird to the Debtor, he will use these two entities to orchestrate further litigation against New Line seeking damages for New Line’s alleged misappropriation of the Treatment. Stated differently, New Line complains that if this Court approves the Proposed Settlement, New Line will be deprived of the benefit of the bargain that it negotiated with the Trustee and will once again find itself spending attorneys’ fees and time fending off frivolous lawsuits initiated by the Debtor.
On March 10, 2017, this Court held a hearing on the Application and New Line’s objection thereto. Only one witness testified at this hearing: the Trustee herself. The Court finds that her testimony was very credible and the Court gives it substantial weight. Additionally, both the Trustee and New Line introduced several exhibits. The Trustee introduced Exhibits 1 through 20, and New Line introduced Exhibits A through W. After admitting exhibits, hearing testimony, and listening to closing arguments of counsel, the Court took the matter under advisement.
Then, on April 11, 2017, New Line filed an emergency motion to reopen the evidence and allow additional discovery. [Doc. No. 359]. On May 2,2017, the Court held a hearing on this motion, and granted New Line’s request in part. [Doc. No. 382]. Specifically, the Court admitted five additional exhibits from New Line, all of which were documents produced by the attorney for Silverbird, EMG, and Holdings at a hearing held on March 31, 2017. The Court admitted these additional exhibits as New Line exhibits A, B, D, E, and F, but they have since been re-lettered as New Line *780exhibits X, Y, Z, AA, and BB. [Doc. No. 393, pp. 3^4 of 6]. Accordingly, this Court’s ruling on the Application is based upon: (1) the record made at the March 10, 2017 hearing (the “Hearing”); (2) the. five exhibits admitted during the May 2, 2017; and (3) certain testimony given at a “show cause” hearing on March 31, 2017 by David Lake, the attorney for Silverbird, EMG, and Holdings, together with a stipulation by Debtor’s counsel, all of which concern the Debtor’s status as the corporate representative of Silverbird, EMG, and Holdings, and his giving authorization to Mr. Lake to file pleadings in Judge Lake’s court and in this Court, [see infra note 21].2
Pursuant to Federal Bankruptcy Rules 9014 and 7052, this Court now issues the following Findings of Fact and Conclusions of Law.3 To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.
III. Conclusions of Law
A. Jurisdiction, Venue, and Constitutional Authority to Enter a Final Order
1. Jurisdiction
' The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). Section 1334(b) provides that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Bankruptcy Code], or arising in or related to cases under title 11.” District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because its resolution affects the administration of the Debtor’s bankruptcy estate. Additionally, this dispute is a core proceeding under 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 § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”); In re Ginther Trusts, No. 06-3556, 2006 WL 3805670, at *19 (Bankr. S.D. Tex. Dec. 22, 2006) (holding that a matter may constitute a core proceeding under 28 U.S.C. § 157(b)(2) “even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance”). Here, the dispute between the Trustee and New Line is a core pro*781ceeding because it is governed by Rule 9019, which expressly allows the Trustee to seek approval of the compromise that she has negotiated with the Debtor (i.e., the Proposed Settlement), Stated differently, the dispute between New Line and the Trustee over the Proposed Settlement could arise only in the context of a bankruptcy case.
2. Venue
Venue is proper pursuant to 28 U.S.C. § 1408(1) because the Debtor resided in the Southern District of Texas for the 180 days preceding the Petition Date.
3. Constitutional Authority to Enter a Final Order on the Application
Approval of any compromise proposed under Rule 9019 is a final order. In re Nutraquest, Inc., 434 F.3d 639, 643-44 (3d Cir. 2006) (“Because the Court’s order approving the settlement agreement is a final order, "we have appellate jurisdiction under 28 U.S.C. § 1291). In the wake of the Supreme Court’s issuance of Stern v. Marshall, 564 U.S. 462, 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 matter 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 503, 131 S.Ct. 2594. As already noted above, the pending matter before this Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). Because Stem is replete with language emphasizing that the ruling is limited to the one specific type of core proceeding involved in that dispute, this Court concludes that the limitation imposed by Stem does not prohibit this Court from entering final orders here. A core proceeding under, 28 U.S.C. § 157(b)(2)(A) is entirely different than a core proceeding under 28 U.S.C. § 157(b)(2)(C). See, e.g., Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (8th Cir. BAP 2012) (“Unless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional.”). See also In re Davis, 538 Fed.Appx. 440, 443 (5th Cir. 2013) cert. denied sub nom. Tanguy v. W., — U.S. —, 134 S.Ct. 1002, 187 L.Ed.2d 851 (2014) (“[Wjhile it is true that Stern invalidated 28 U.S.C. § 157(b)(2)(C) with respect to ‘counterclaims by the. estate against persons filing claims against the estate,’ Stem expressly provides that its limited holding applies only in that ‘one isolated respect.’ ... We decline to extend Stem’s limited holding herein.”).
Alternatively, even if Stem applies to all of the categories of core proceedings brought under 28 U.S.C. § 157(b)(2), see In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d 285, 294 n.12 (5th Cir. 2013) (“Stem’s ‘in one isolated respect’ language may understate the totality of the encroachment upon the Judicial Branch posed by Section 157(b)(2) ....”), this Court still concludes that the limitation imposed by Stem does not prohibit this Court from entering a final order in the dispute at bar. In Stem, the debtor filed a counterclaim based solely on state law; whereas, here, the dispute between the Trustee and New Line arises from the Trustee’s request for this Court to approve the Proposed Settlement, which is governed by an express Bankruptcy Rule— namely, Rule 9019 — as well as judicially-created law from federal courts as to how *782this rule should be applied. Stated differently, the matter before the Court does not involve solely state law, but rather heavily involves bankruptcy law. For all of these reasons, the Court concludes that it has the constitutional authority to enter a final order on the Application. In re Junk, Case No. 13-55139, 566 B.R. 897, 904 (S.D. Ohio 2017) (“For even after Stem v. Marshall, bankruptcy courts have the constitutional authority to enter final orders approving settlements under Rule 9019(a)....”) (citations omitted).
Finally, in the alternative, this Court has the constitutional authority to enter a final order because the parties have consented, impliedly if not explicitly, to adjudication of this dispute by this Court. Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct 1932, 1947, 191 L.Ed.2d 911 (2015) (“Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent must be expressed. We disagree. Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be expressed. Nor does the relevant statute, 28 U.S.C. § 157, mandate express consent .... ”). Indeed, the Trustee filed the Application; New Line filed its objection thereto; this Court held a hearing on March 10, 2017; this Court held a further hearing on May 2, 2017; and at no time did the Trustee or New Line ever object to this Court’s constitutional authority to enter a final order on the Application. If these circumstances do not constitute consent, nothing does.
B. Standing of New Line to Object to the Application
At. the Hearing, counsel for the Debtor asserted that New Line has no standing to object to the Proposed Settlement. [Mar. 10, 2017 Tr. 28:20-30:25]. This Court disagrees.4 In In re A.P.I., Inc., the court aptly articulated the requirements that an entity must satisfy to achieve “party in interest” status for lodging an objection:
Over several decades of jurisprudence, the Supreme Court has formulated a two-component test to enable the federal courts to determine the standing of corn-*783plainants before them. Such parties must demonstrate both constitutional and prudential standing ... “To meet the requirement of constitutional standing, [a party] must show that it has suffered an injury in fact that is: concrete and particularized and actual or imminent; fairly traceable to the challenged action of the [opposing party]; and likely to be redressed by a favorable decision.” The party must have such a personal stake in the outcome of the controversy as to assure .., concrete adverseness. The injury-in-fact must be palpable, though this requirement is not onerous. The injury need not be current; even a threatened injury tvill suffice. Once a party has met these constitutional requirements, its standing may yet be challenged on three “prudential” grounds ... A complainant’s bid for standing, may be defeated if: (a) it is asserting a third party’s rights; (b) it alleges a generalized grievance rather than an injury particular to it; or (c) it asserts an injury outside the zone of interest the statute was designed to protect.
331 B.R. 828, 857-58 (Bankr. D. Minn. 2005) (second emphasis added) (internal citations and quotations omitted).
Here, New Line is threatened with an injury: if the Debtor regains his interest in Silverbird and/or EMG, he will have the opportunity to use these entities to seek to recover damages from New Line on the grounds that New Line has allegedly misappropriated the Treatment at the expense of Silverbird and/or EMG; thus, New Line will have to expend more time and attorneys’ fees litigating over who owns the Treatment, thereby depriving New Line of the benefit of its bargain when it paid the Trustee $200,000.00 for the Treatment pursuant to the New Line/Trustee Settlement. These future litigation costs sufficiently constitute a “threatened injury” for New Line to be a party-in-interest with standing to object to the Application.5
And, any challenge to New Line’s standing on “prudential”' grounds fails. This is so because New Line is not asserting any third-party rights; it is asserting its own rights to the Treatment pursuant to the New Line/Trustee Settlement that it negotiated with the Trustee in late 2016. Nor is New Line asserting a generalized grievance in opposing the Proposed Settlement; rather, New Line is alleging that if this Court approves the Proposed Settlement, New Line itself will suffer a specific injury: namely, deprivation of the benefit of *784its bargain in that the $200,000.00 that it paid to the Trustee will have gone for naught, and that the Debtor will drag New Line into further litigation seeking damages for what the Debtor asserts is New Line’s misappropriation of the Treatment. Finally, the particular injury about which New Line is concerned is not outside the zone of interest that Rule 9019 is designed to protect. Rule 9019(a) expressly requires that notice and a hearing be held whenever a trustee seeks court approval of a compromise. Here, having received and reviewed the Application, New Line has objected on the grounds that the Proposed Settlement undermines- the New Line/Trustee Settlement that this Court previously approved, the terms of which have already been fully effectuated pursuant to a final, non-appealable order.
For all of these reasons, this Court finds that New Line is a party-in-interest that has standing to object to the Application.
C. Analysis of the Proposed Settlement Between the Trustee and the Debtor Under Rule 9019 and Applicable Case Law
Rule 9019 authorizes bankruptcy courts to approve compromises and settlements submitted by a trustee. Ultimately, a compromise must be “fair, equitable and in the best interest of the estate.” In re Jackson Brewing Co., 624 F.2d 599, 605 (5th Cir. 1980).
When considering whether a compromise is “fair, equitable and in the best interest of the estate,” id., the Court must weigh the “terms of the compromise with the likely rewards of litigation,” id. at 602 (quoting Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)). Courts must consider the following factors:
(1) The probabilities of ultimate success should the claim or claims be litigated;
(2) The complexity, expense, and likely duration of litigating the claims;
(3) The difficulties of collecting a judgment rendered from such litigation; and
(4) All other factors relevant to a full and fair assessment of the wisdom of the compromise.
TMT Trailer Ferry, 390 U.S. at 424, 88 S.Ct. 1157.
With respect to the fourth factor, the Fifth Circuit, and other courts, have elaborated on what issues this Court should consider in assessing the wisdom of the compromise:
(1) The paramount interest of creditors with proper deference to them reasonable views. Matter of Cajun Elec. Power Coop., Inc., 119 F.3d 349, 356 (5th Cir. 1997); In re Foster Mortg. Corp., 68 F.3d 914, 917 (5th Cir. 1996); In re Justice Oaks II, Ltd., 898 F.2d 1544, 1549 (11th Cir. 1990); In re Flight Transp. Corp. Sec. Litig., 730 F.2d 1128, 1135 (8th Cir. 1984).
(2) The extent to which the proposed settlement is the product of arms-length negotiations. Matter of Cajun, 119 F.3d at 356; In re Foster Mortg. Corp., 68 F.3d at 918; D’Amato v. Deutsche Bank, 236 F.3d 78, 85 (2d Cir. 2001).
(3) Whether the proposed settlement is with an insider. In re Foster Mortg. Corp., 68 F.3d at 919; In re Dow Corning Corp., 192 B.R. 415, 422 (Bankr. E.D. Mich. 1996).
(4) Whether the proposed settlement promotes the integrity of the judicial system. In re Kallstrom, 298 B.R. 753, 761 (10th Cir. BAP 2003); *785In re Lakeland Dev. Corp., 48 B.R. 85, 90 (Bankr. D. Minn. 1985).
“The trustee bears the burden of establishing that the balance of the above factors supports a finding that the compromise is fair, equitable, and in the best interest of the estate.” In re Roqumore, 393 B.R. at 480. See also In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 785 (3d Cir. 1995); In re A & C Props., 784 F.2d 1377, 1381 (9th Cir. 1986). “[T]he Trustee’s burden is not high. The Trustee need only show that his decision falls within the range of reasonable litigation alternatives.” In re Roqumore, 393 B.R. at 480 (internal citations omitted). The decision to approve a “compromise lies within the discretion of the trial judge.” Matter of Aweco, Inc., 725 F.2d 293, 297 (5th Cir. 1984). Indeed, in exercising its discretion, this Court can give more weight to one or more of the above-referenced factors than to the other factors. In re Bard, 49 Fed.Appx. 528, 532-33 (6th Cir. 2002) (affirming bankruptcy court’s ruling even though the bankruptcy court stated that: “While the Court does consider the Debtors’ interest as a legitimate factor, the Court gives it less weight than the other factors.”); In re Adelphia Commc’ns. Corp., 327 B.R. 143, 160-65 (Bankr. S.D.N.Y. 2005) (giving certain factors “some weight,” “no weight,” or “moderate weight”). The Court now addresses each of the above-referenced factors.
1. The Probabilities of Ultimate Success on the Claim or Claims to be Litigated
At the Hearing, the Trustee testified that based upon Judge Lake’s comments, she does not believe she can prevail on the Debtor’s appeal of the First Order (ordering that no surplus funds are to be distributed to the Debtor) or the Debtor’s appeal of the Second Order (authorizing the Trustee to distribute a portion of the existing surplus funds, i.e., $70,000.00, to the two charities). [Mar. 10, 2017 Tr. 10:13-12:13], Granted, Judge Lake did not definitively state that he would hold that the Trustee may not distribute the $70,000.00 to the charities; and it might well be after hearing oral argument and reviewing the entire record and the briefs filed by the parties, he would approve distribution to the charities. Or, as New Line has suggested, it might be that Judge Lake would hold that the $70,000.00 may not be paid to charity, but instead can be distributed to some third party other than the Debtor — such as the Clerk of Court.6 [Mar. 10, 2017 Tr. 90:11-25]. Nevertheless, Judge Lake’s words are fairly adamant and have caused legitimate concern for the Trustee, and this Court finds eminently ■reasonable her belief that she will probably lose on this issue in his court and that he will rule that the Trustee must distribute all excess funds (including the $70,000.00 presently earmarked for the charities) to the Debtor,
*786Arguably, the analysis of this first factor stops right here with this Court finding that the first factor weighs in favor of approving the Proposed Settlement. Yet, an argument can be made that the analysis should also focus on what rulings might emanate from higher appellate courts. After all, the first factor is entitled the “probabilities of ultimate success” on the claim to be litigated, and the word “ultimate” suggests that the Trustee should look beyond the district court level — at least to the level of the Fifth Circuit. Here, the Trustee has done so. In the Application, she acknowledges that the Fifth Circuit, in In re Jackson, 574 Fed.Appx. 317 (5th Cir. 2014), seems to endorse a trustee giving excess funds to charity when the debtor has failed to disclose an asset.7 However, the Trustee also points to language from the Fifth Circuit in Kane v. Nat’l Union Fire Ins., in which the Fifth Circuit, in issuing a ruling about a debtor in Chapter 7 who failed to disclose an asset, stated the following: “Moreover, the Kanes [i.e., the debtors] stand to benefit only in the event that there is a surplus after all debts and fees have been paid.” 535 F.3d 380, 387 (5th Cir. 2008). This sentence suggests that the Fifth Circuit believes that even if a debtor fails to disclose an asset, he is nevertheless entitled to distribution of any excess funds after all claims are paid in full. The language from Kane is admittedly incongruéht with the language in Jackson, and therefore the Trustee has shown that she is reasonable in her belief that if this issue ends up before the Fifth Circuit, she might not prevail.
. Although the Trustee gave no testimony about her concerns of losing if the issue were ever before the Supreme Court, there are three cases from the Supreme Court germane to the issue of whether a bankruptcy court can invoke its inherent powers and its equitable powers under § 105 to bar a dishonest debtor from receiving any surplus funds.8 In Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), the Supreme Court was confronted with the issue of whether a debtor who tries to hide assets has the unfettered right to convert his Chapter 7 ease to a Chapter 13 case and retain ownership of those assets by confirming a Chapter 13 plan. While the plain language of § 706(a) permitted the debtor to convert his case to Chapter 13 without any limitations, the bankruptcy court and appellate courts construed this provision to include a bad faith exception and therefore these lower courts prohibited the debtor from converting. The Supreme Court affirmed this decision by holding that the bankruptcy court’s equitable powers of § 105(a) and the inherent power of every federal court could be used to stop abusive litigation practices. Id. at *787375, 127 S.Ct. 1105. And, in applying that principle, the Supreme Court telegraphed to bankruptcy courts that they have the power to bar a dishonest debtor from converting his case from Chapter 7 to Chapter 13 despite the plain language of the statute. Application of Mart'ama to the case at bar supports the undersigned judge’s invocation of § 105 and the doctrine of judicial estoppel to prevent the Debtor, who failed to disclose his ownership of the Treatment and of Silverbird, from receiving any distribution of excess proceeds in the estate.
However, in Law v. Siegel, the Supreme Court held that the bankruptcy court could not utilize its equitable powers under § 105(a) to allow a Chapter 7 trustee to surcharge the debtor’s exempt property because of the debtor’s misconduct. — U.S. -, 134 S.Ct. 1188, 1198, 188 L.Ed.2d 146 (2014). In fact, the Supreme Court stated that: “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.” Id. at 1197. There is no question that § 726(a)(6) expressly states that after all allowed claims are paid in full, “any excess property of the estate shall be distributed ... to the debtor.” There is no language in § 726(a)(6) that expressly bars distribution of excess funds to a debtor if he has misbehaved in some respect (such as failing to disclose assets). Under the “plain meaning” rule articulated by the Supreme Court in U.S. v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), the Debtor here would receive all of the excess funds held by the Trustee. Thus, application of Siegel and Ron Pair to the case at bar, contrary to the application of Marrama, do not support the undersigned judge's invocation of § 105 to prevent the Debtor from receiving any distribution of excess proceeds from the estate.
In sum, given Judge Lake’s comments, the difficulty in reconciling the Fifth Circuit’s language in Jackson with its language in Kane, and the difficulty in reconciling the Supreme Court’s holdings in Marrama with its holdings in Siegel and Ron Pair, this Court finds that the probability of the Trustee ultimately prevailing on the Debtor’s appeals of the First Order and the Second Order is less than fifty percent. Stated differently, this Court finds that there is a greater probability of failure than success with respect to the Trustee ultimately prevailing on the issues of whether the Debtor can be barred from receiving all excess proceeds of the estate and whether some of the excess proceeds can be paid to the two charities. Under these circumstances, the Court finds that this first factor weighs heavily in favor of approving the Proposed Settlement. See In re Myers, Case No. 11-61426, 2015 WL 5254954, at *11 (Bankr. N.D. Ohio Sept. 8, 2015) (court approved a trustee’s proposed compromise where the probability of success on the merits was less than fifty percent).
2. The Complexity, Expense, and Likely Duration of Litigating the Claims
The Trustee testified at the Hearing that approval of the Proposed Settlement would result in the estate not having to involve itself in any further litigation— including not only the two appeals presenting pending before Judge Lake, but also the interpleader lawsuit that is presently pending in this Court9 [Mar. 10, 2017 Tr. *78820:2-13]. Moreover, approval of the Proposed Settlement would mean that the Trustee would have nothing else to do but to pay the administrative claims and file her final report so that this case may be closed. Thus, approval of the Proposed Settlement would certainly mean that the estate would incur no further expense, be involved in no further litigation, and be fully administered. Such circumstances accord with § 704(a)(Z )’s language that the Trustee shall “collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.” In re Hutchinson, 5 F.3d 750, 753-54 (4th Cir. 1993) (“[T]he duty to close the estate expeditiously is the trustee’s ‘main dut/ and ‘overriding responsibility.’ ”) (internal citations omitted).
Additionally, at the status conference that Judge Lake held, he stated that if the parties did not settle, he was “looking at the specter of writing three long opinions ...” [Trustee’s Ex. No. 18, p. 24, Ins. 8-9]. Judge Lake’s remarks are telling. It is no mean point that with respect to the Debt- or’s appeal of the First Order, the Debtor has designated nine issues in his “Statement of the Issues” filed pursuant to Rule 8009(a)(1)(A). [Doc. No. 155]. Not surprisingly, one of the issues is whether the undersigned judge erred in barring the Debtor from receiving any benefits from the Trustee’s administration of the assets of the estate (i.e., whether the Debtor is entitled to receive any excess proceeds from sale of estate assets), but there are several other issues that the Debtor has designated that will require Judge Lake to spend substantial time analyzing and issuing rulings thereon. For example, the first issue that the Debtor has designated is whether the undersigned judge’s finding that the Debtor intentionally failed to schedule the Treatment and Silverbird is erroneous, [Id.]. Another issue is whether the undersigned judge erred in barring the Debtor from amending his Schedule C to claim any type of exemption relating to any assets that he did not initially disclose on his original Schedule B. [M], These issues, and the other issues designated by the Debtor, will definitely require substantial time for the parties to brief and for Judge Lake to analyze.10 Moreover, some of the issues fall outside of the “garden variety” bankruptcy issues that are appealed — including, for example, whether the undersigned judge can bar the Debtor from ever receiving a distribution of excess proceeds. Stated differently, some of the issues are relatively complex.
Thus, not only would approval of the Proposed Settlement allow the Trustee to expeditiously finish fulfilling her duties so that this case may be closed, but it would also free up Judge Lake to handle other pressing matters pending in his court. Additionally, the Trustee does not have unlimited excess funds, and there is no question that if the appeals proceed to the *789Fifth Circuit — which they assuredly will if the Proposed Settlement is not approved— further substantial attorneys’ fees will be incurred by the estate, and there is no guarantee that the estate will have sufficient funds to pay the Trustee’s law firm in full under this scenario. After all, the Trustee does not have any more assets to administer that would generate large sums of money like the Treatment did in 2016.11
The above-referenced circumstances, taken together, weigh heavily in favor of approval of the Proposed Settlement. See Depoister v. Mary M. Holloway Found., 36 F.3d 582, 587-88 (7th Cir. 1994) (discussing the bankruptcy court’s analysis of the “complexity, expense, and likely duration of litigation” factor and holding that the bankruptcy court did not abuse its discretion in approving the proposed compromise by finding that this factor provided the “most compelling argument for approving the compromise”).
3. The Difficulty of Collecting a Judgment Rendered From Such Litigation
Here, the Trustee is not attempting to collect a judgment against the Debtor. Rather, she is attempting to ensure that the First Order and the Second Order are affirmed — thus ensuring that the Debtor does not receive any of the $70,000.00 or, for that matter, any other excess funds in the estate. Thus, this third factor is inapplicable for the analysis of approving or denying the Proposed Settlement.
4. All Other Factors Bearing on the ■ Wisdom of the Compromise
- As noted above, this fourth category encompasses four .separate factors. This Court now addresses each in turn,
a. The paramount Merest of creditors with proper deference to their reasonable views
At first blush, this factor appears to be inapplicable, as no creditors filed any responses to the Application. Indeed, no unsecured creditors have voiced any opinion. — one way or the other — because they have now all been paid in full. [See Doc. Nos. 232, 371, & 306, p. 5 ¶ 20], Moreover, no administrative claimants have expressed their views because they know that they their claims will be paid in full due to the substantial amount of funds still held by the Trustee. [See Doc. No. 371]. Only New Line has filed a response, but New'Line is not a creditor in this case, as it has not filed a proof of claim or any application seeking to establish an administrative claim.12
*790However, New Line is a party-in-interest, and case law is clear that in assessing whether to approve a proposed compromise, a bankruptcy court should consider not only the paramount interest of the creditors, but also “whether other parties in interest support the settlement.” In re Iridium Operating LLC, 478 F.3d 452, 462 (2d Cir. 2007); In re Sabine Oil & Gas Corp., 555 B.R. 180, 187 (Bankr. S.D.N.Y. 2016). Thus, the “paramount interest” factor does come into play in this case and this Court now considers New Line’s position that the Proposed Settlement should be denied.
New Line’s arguments opposing the Proposed Settlement have some merit— although not to the extent that New Line contends. First, it points out that it paid the Trustee the sum of $200,000.00 in exchange for the Trustee’s conveyance to New Line of the estate’s interest in the Treatment. Now, if this Court approves the Proposed Settlement, the Debtor will unquestionably own and be in control of EMG and Silverbird. Then, according to New Line, the Debtor will invariably take the position that these two entities, or one of them, own the Treatment, which, in turn, will lead the Debtor, on their behalf, to initiate one of more lawsuits against New Line seeking damages for its alleged misappropriation of the Treatment. Indeed, New Line emphasizes that the Debt- or has, in recent months, taken the position that there is more than one version of the Treatment, and he is now contending that EMG owns a different version of the Treatment — thereby setting the stage for more lawsuits to be orchestrated by the Debtor. [See Mar. 10, 2017 Tr. 15:1-9, 53:20-54:21]. New Line rightfully suspects that it will find itself expending more time and attorneys’ fees defending against these claims, thereby depriving New Line of the benefit of the bargain that it negotiated in 2016 with the Trustee when it paid $200,000.00 for the estate’s interest in the Treatment. New Line’s point is particularly well taken given that: (1) the Debtor emphatically testified in this Court in 2015 that he — and he alone — owned the Treatment prior to his bankruptcy filing, [New Line Ex. M, p. 50]; and (2) the Debtor filed numerous lawsuits in the United State District Court for the Southern District of Texas alleging that he personally owned the Treatment, [id. at p. 56]. Under these circumstances, New Line’s assertion that this Court should not approve the Proposed Settlement — thus giving the Debtor the opportunity to use EMG and Silverbird as vehicles for filing more suits *791over the Treatment — is a reasonable position, and the Court finds merit to this argument.13
The Court finds less merit in New Line’s second point. New Line asserts that as part of the New Line/Trustee Settlement, not only did New Line pay $200,000.00 for the estate’s interest in the Treatment, it also paid for the Trustee’s release, on behalf of the estate, of “any and all claims or causes of action the estate may possess against New Line.” [Doc. No. 263, p. 1 ¶ 2]. New Line’s position is that this release includes any claims that Silverbird and EMG might have against New Line. New Line contends that because the estate owns Silverbird and EMG, it follows that the Trustee owns any claims held by these entities and therefore had the power and authority to release these claims and, in fact, did so as part of the New Line/Trustee Settlement in 2016. So, New Line asserts that this Court should not approve the Proposed Settlement because to do so would give the Debtor the opportunity to use EMG and Silverbird as vehicles for filing claims over the Treatment when these claims — to the extent that they have ever existed — have already been released.14
The weakness in New Line’s argument is that it is by no means clear that the Trustee released any claims held by Sil-verbird and EMG as part of the New Line/Trustee Settlement for which New Line paid $200,000.00 to the estate. This is so for two reasons.
First, case law suggests that the release actually given by the Trustee does not encompass any claims held by either Silverbird or EMG. It is black-letter law that settlements are construed according to state law, In re Mahan, 373 B.R. 177, 182 (Bankr. M.D. Fla. 2007); therefore, this Court applies Texas law. The Texas Supreme Court has held that “general categorical release clauses are narrowly construed.” Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 938 (Tex. 1991); Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 422 (Tex. 1984); McCullough v. Scarbrough, Medlin & Assocs., Inc., 435 S.W.3d 871, 885 (Tex. App.—Dallas 2014). The release that the Trustee gave to New Line, which is set forth solely in this Court’s order of December 16, 2016 approving the New Line/Trustee Settlement, reads as follows: “Immediately and automatically upon receipt of the Settlement Payment [i.e., the $200,000.00], the Trustee, on behalf of the Debtor’s estate, releases and discharges any and all claims or causes of actions the estate may possess against New Line.” [Doc. No. 263, p. 1 ¶ 2].
There is no question that this language constitutes a general categorical release and therefore must be narrowly construed. A reasonable argument exists that a narrow construction of the Trustee’s release precludes any claims not held by the estate directly — i.e., this release encompasses claims held by the Debtor himself as of the Petition Date, but not claims held by the *792corporations owned by the Debtor on the Petition Date. Granted, a plausible argument exists that because the Trustee owns the membership interests of any entities owned by the Debtor as of the Petition Date, she had the authority in 2016 to release any claims held by these entities. See In re Am. Housing Found., 518 B.R. 386, 391 (Bankr. N.D. Tex. 2014) (holding that the release that was actually executed did not release the asserted claims because the release was not signed by the person who had the authority to do so). Nevertheless, the “narrow construction” rule is long established in Texas, and therefore it is quite possible that the Trustee’s release of New Line did not encompass any claims held by Silverbird and EMG. This possibility undermines New Line’s argument that approval of the Proposed Settlement would allow the Debtor, using Silverbird and/or EMG, to bring claims that the Trustee has already released.
There is a second point that calls into question the strength of New Line’s argument. It is highly questionable that the Trustee had the power to release any claims of EMG for a very simple reason: she did not own any interest in EMG when the Trustee’s release became effective in December of 2016. Rather, the estate’s interest in EMG revested in the Debtor when this Court initially closed this case on May 8, 2014. This is so because the initial trustee (David Askanase) never administered the estate’s interest in EMG prior to the entry of the order closing the case, and therefore the Debtor automatically reacquired his interest in EMG by operation of law pursuant to § 554(c). The Court discusses this section in greater detail below. [See infra Part III.C.4.d].
In sum, New Line has one — but only one — meritorious argument that it will be harmed if this Court approves the Proposed Settlement; namely, that the approval will generate more lawsuits orchestrated by the Debtor. Because only New Line filed a response opposing the Proposed Settlement, and because it has at least one meritorious argument as to why this Court should not approve the Proposed Settlement, the Court finds that the “paramount interests” factor weighs against approval. While the Court finds that this factor disfavors approval, the Court does not give as much weight to this factor as the weight that the Court gives to the two factors already discussed above that favor approval of the Proposed Settlement. This is because, as discussed below, the Court believes that New Line will be able to prevail relatively quickly in any lawsuits filed by Silverbird and/or EMG (orchestrated by the Debtor) in the future. Stated differently, this Court believes that the ultimate harm to New Line from having to deal with frivolous suits from the Debtor in the future will probably be de minimis.
b. The extent to which the proposed settlement is the product of arms-length negotiations
Based upon the credible testimony that the Trustee gave at the hearing, this Court has no doubt that the Trustee, through her attorney, negotiated at arms-length with the Debtor, through his attorney. This factor therefore weighs in favor of approval of the Proposed Settlement. In re Charter Commc’ns, 419 B.R. 221, 260 (Bankr. S.D.N.Y. 2009); In re Enron Corp., Case No. 01-16034 (AJG), 2004 Bankr. LEXIS 2549, at *80 (Bankr. S.D.N.Y. July 15, 2004) (confirming plan and finding good faith requirement satisfied in part because plan resulted from “extensive arm's-length discussions”).
c. Whether the proposed settlement is with an insider
There is no question that the Debtor is an “insider.” Therefore, because the Pro*793posed Settlement is with an insider, this factor weighs against approval of the agreement. See In re HyLoft, Inc., 451 B.R. 104, 113 (Bankr. D. Nev. 2011) (denying the trustee’s proposed settlement after reviewing several factors and noting that the “parties to the Proposed Settlement Agreement, excluding the Trustee, are insiders of the Debtor”).
d. Whether the proposed settlement promotes the integrity of the judicial system
Whether the Proposed Settlement promotes the integrity of the judicial system requires more than passing discussion. In one significant sense, it does. By approving the Proposed Settlement, the Debtor will receive no excess funds held by the Trustee and, moreover, $70,000.00 that would normally be distributed to the Debtor under § 726(a)(6) will instead go to two charitable organizations. This result substantially promotes the integrity of the judicial system because it demonstrates to all future debtors and their attorneys that any debtor who fails to disclose all of his assets can suffer material adverse consequences. This is no mean point, as complete disclosure is a crucial requirement for the proper functioning of the bankruptcy system. In re Coastal Plains, Inc., 179 F.3d 197, 207-08 (5th Cir. 1999) (“It goes without saying that the Bankruptcy Code and Rules impose upon bankruptcy debtors an express, affirmative duty to disclose all assets, including contingent and unliqui-dated claims. The duty of disclosure in a bankruptcy proceeding is a continuing one, and a debtor is required to disclose all potential causes of action.”) (internal quotation marks, emphasis, and citations omitted); see United States v. Beard, 913 F.2d 193, 197 (5th Cir. 1990) (explaining that debtors have a “duty to disclose to the court the existence of assets whose immediate status in the bankruptcy is uncertain, even if that asset is ultimately determined to be outside of the bankruptcy estate”).
Conversely, by approving the Proposed Settlement, this Court will unquestionably be allowing the Debtor to regain all of his interest in an asset that he failed to disclose (i.e., Silverbird) — an outcome that, at first blush, is inconsistent with the First Order. This is so because the First Order sets forth that “the Debtor is barred from receiving any benefits, monetary or otherwise, from the Chapter 7 trustee’s administration of the Treatment or any other asset that the Debtor did not disclose.” [Doc. No. 123, p. 2], However, if this Court approves the Proposed Settlement, it does not necessarily follow that the Debtor will receive any benefits in the future, monetary or otherwise, through regaining his ownership interest in Silverbird. This is so because after this Court issued the First Order requiring the Debtor to schedule undisclosed assets, he proceeded to schedule this interest in Silverbird, and he represented that the value of this interest is $0.00. He made this representation under oath, and case law is clear that he is bound by this representation. Sovran Bank, N.A. v. Anderson, 743 F.2d 223, 225 n.1 (4th Cir. 1984) (“Thus, the Schedules have not been corrected and are binding on [the Debtor].”); In re Keen, No. 13-71705, 2014 WL 6871867, at *6 n.6 (Bankr. W.D. Va. Dec. 3, 2014) (“This is troubling, in that it is well established that statements contained in the schedules of a bankruptcy debtor can constitute binding admissions of the factual matters set forth in such schedules, especially when they have not been amended.”).
Hence, after regaining his interest in Silverbird, if the Debtor authorizes the filing of a lawsuit in Silverbird’s name seeking damages for New Line’s alleged misappropriation of the Treatment, the Debtor will have to explain just exactly *794how he can reconcile stating under oath that Silverbird is worth nothing but nevertheless has a claim for damages for several hundred thousand dollars.15 He might also have to explain why he asserted the Fifth Amendment when he represented in his amended Schedule B that Silverbird has no value. [New Line Ex. E, which is the Debtor’s amended Schedule B filed on May 13, .2016 (Doc. No. 199) ]. He will also have to explain how Silverbird is entitled to any damages for New Line’s alleged use of the Treatment when he has already testified that he — and he alone — has always owned the Treatment. [See Dec. 1, 2015 Tr. 124:19-23, 153:14-154:3]. This, he will be unable to do as a matter of law, and the suit should be dismissed as a frivolous filing. Stated differently, the suit should be dismissed because the Debtor scheduled his interest in Silverbird to have no value and testified that he personally owned the Treatment, and he will be bound by what he has represented under oath in his schedules and in open court. See, e.g., Cannon-Stokes v. Potter, 453 F.3d 446, 449 (7th Cir. 2006) (“[A] debtor in bankruptcy is bound by her own representations, no matter why they were made ”). See also In re Miller, 403 B.R. 804, 810 (Bankr. W.D. Mo. 2009) (“Statements and representations made by a debtor in his schedules have the force and effect of oaths under § 727(a)(4).”). Thus, the probability is very low that the Debtor will be able to benefit from reacquiring his ownership interest in Silverbird. Therefore, New Line’s argument that approval of the Proposed Settlement will undermine the integrity of the Opinion and the First Order is not as compelling as New Line would have this Court believe.
New Line’s argument regarding EMG is even weaker. This is so because unlike Silverbird, the Debtor did in fact originally schedule his ownership interest in EMG, and he valued his interest at $1,000.00. [Mar. 10, 2017 Tr. 22:7-16]. Hence, the initial trustee (David Askanase) and the Debtor’s creditors were fully aware of EMG’s existence.16 The initial trustee did not, however, administer this asset, and it was therefore simply part of the estate at the time this case was initially closed on May 8, 2014. [See Doc. No. 90, which is the order closing the case]. Under these circumstances, the Debtor reacquired his interest in EMG on May 8, 2014 pursuant to § 554(c), which reads as follows: “Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.” Thus, as of May 8, 2014, the Debtor reacquired EMG by operation of law. Stated differently, the Debtor reacquired the estate’s interest in EMG under the rule of irrevocable abandonment. Kane, 535 F.3d at 385 (“Property abandoned under [§ ] 554 reverts to the debtor, and the debtor’s rights to the property are treated as if no bank*795ruptcy petition was filed.”); In re Brio Refining Inc., 86 B.R. 487, 490 (N.D. Tex. 1988) (“[o]nce the abandonment is final, the abandonment is irrevocable .... ”). Therefore, New Line’s position that this Court’s approval of the Proposed Settlement is harmful to New Line because it would allow the Debtor to regain his interest in EMG is incorrect. The Debtor already owns this asset. Thus, with respect to EMG, New Line’s argument that approving the Proposed Settlement would undermine the judicial process by contradicting the Opinion and the First Order is simply wrong.17
New Line’s argument would only have merit if it could overcome the general rule of irrevocable abandonment embodied in § 544(c). The Fifth Circuit has stated that “limited exceptions, allowing revocation [of the abandonment, of the property in dispute], exist where the property was concealed or where the trustee lacks knowledge or sufficient means of knowledge, of its existence.” In re Killebrew, 888 F.2d 1516, 1520 n.10 (5th Cir. 1989) (internal citations and quotations omitted). In the case at bar, the Debtor, despite representing that EMG had a value of $1,000.00 as of the Petition Date, is now taking the position that EMG obtained ownership of the Treatment prior to the Petition Date; and there is no doubt that the Debtor will orchestrate the filing of a suit by EMG and contend that the Treatment is worth hundreds of thousands of dollars — which makes his representation that EMG is worth $1,000.00 to essentially constitute a concealment of this entity’s true value. Are circumstances sufficient for this *796Court to invoke the exception to the general rule of irrevocable abandonment and hold that when it reopened the case in January of 2016, the abandonment of EMG’s interest to the Debtor that occurred on May 8, 2014 was revoked — ■ thereby reinstating the estate’s interest in EMG? If they are, then New Line’s argument that the Proposed Settlement should not be approved is a legally viable argument.18
However, this Court concludes that the facts in the case at bar do not allow for this Court to invoke the exception to the rule of irrevocable abandonment. This is so because of the Fifth Circuit’s language in Killebrew:
The notion of easily revocable abandonment is not in accord with case law on abandonment. See, e.g., In re Hunter, 76 B.R. 117, 118 (Bankr. S.D. Ohio 1987) (“The general rule in this area is well settled-once a trustee abandons property, . the abandonment is irrevocable.”); In re Enriquez, 22 B.R. [934,] 935-36 [(Bankr. D. Neb. 1982)] (abandonment held irrevocable, even when property is subsequently found to have greater value than previously believed); In re Sutton, 10 B.R. 737, 739-40 (Bankr. E.D. Va. 1981); (abandonment irrevocable, irrespective of later discovery that property had greater value than originally realized).
Id. at 1520. The Fifth Circuit has telegraphed that the exception to the general rule is very narrow and that even if the abandoned property is found to have greater value than previously believed, such circumstances still do not justify revoking the abandonment. Thus, even if EMG’s value is not the $1,000.00 value that the Debtor originally scheduled it to have but rather is valued at hundreds of thousands of dollars due to EMG’s alleged ownership of the Treatment, nevertheless the estate’s interest in EMG is not reinstated. The Debtor reacquired his interest in EMG on May 8, 2014 — when this case was initially closed — and he has owned this entity ever since. Thus, New Line’s argument that approval of the Proposed Settlement contradicts the Opinion and the First Order because the Debtor will reacquire EMG simply fails as a matter of law. Therefore, with respect to EMG, approval of the Proposed Settlement does not undermine the judicial process, as New Line would have this Court believe.
Even if reopening the case on January 22, 2016 did result in revocable abandonment of EMG — i.e., even if the estate did reacquire the interest in EMG — New Line’s argument that the Trustee’s proposed abandonment to the Debtor of this interest deprives New Line of the benefit of its bargain in the New Line/Trustee Agreement still does not carry the day. New Line’s argument is that if the Debtor reacquires EMG, he will then, authorize EMG to sue New Line for damages on the grounds that EMG all along has owned the Treatment and has suffered damages through New Line’s alleged misappropriation of the Treatment. Yet, assuming that *797the Debtor does take such action — and this Court shares New Line’s belief that he will — New Line has such strong defenses that it should be able to both prevail and obtain sanctions, including attorneys’ fees, against the Debtor and any attorney who represents EMG in filing and prosecuting such a suit.19 This is so because of the doctrines of collateral estoppel and judicial estoppel.
The doctrine of collateral es-toppel concerns issue preclusion and prevents a party from litigating an issue that has already been litigated. The requirements for issue preclusion, as recognized by the Fifth Circuit, are as follows: “(1) the parties must be identical; (2) the issue to be precluded must be identical to that involved in the prior action; (3) the issue must have been actually litigated; and (4) the determination of the issue in the prior action must have been necessary to the resulting judgment.” In re Keaty, 397 F.3d 264, 270-71 (5th Cir. 2005). '
When the Debtor sought to reopen this case in 2015, he took the position in his Motion to Reopen that he — and he alone — owned the Treatment as of the Petition Date, and had simply inadvertently failed to disclose it in his initial schedules, [Dec. 1, 2015 Tr. 63:1-15, 124:19-23, 153:14-154:3]; and he based his request for this Court to reopen the case exclusively on the grounds that he owned the Treatment on the Petition Date and therefore it was property of the estate that the Trustee needed to administer, [Doc. No. 92, p. 2 ¶¶ 5-11]. New Line opposed the Motion to Reopen on the grounds that it, not the Debtor, owned the Treatment.20 [Doc. No. 94, pp. 6-7 ¶ 25]. This Court held a hearing on the Motion to Reopen and the Debtor testified definitively that he owned the Treatment. [Dec. 1, 2015 Tr. 124:19-23, 153:14-154:3]. New Line adduced testimony from its witness to the effect that New Line owned the Treatment. [See Dec. 1, 2015 Tr. 170:1-173:18]. The Court thereafter gave its ruling through its issuance of the Opinion, and expressly found that the Debtor owned the Treatment and that therefore it was property of the estate, [Opinion (Doc. No. 122, pp. 41 — 43 of 72)] — which, in turn, led to this Court reopening the case so that the Trustee could administer the Treatment, [id. at p. 44 of 72]. And, the Trustee did so by selling the estate’s interest in the Treatment to New Line' in exchange for $200,000.00. [Doc. No. 263], So, there is no doubt whatsoever that there is one — and only one — Treatment. The Debtor’s position presently — namely, that EMG has actually owned the Treatment since February 9, 2009 because the Debtor conveyed it to EMG by executing an assignment to that effect — is untenable as a matter of law because of the doctrine of collateral estoppel: in 2015, the Debtor and New Line actually litigated the issue of who owned the Treatment during the hearing on the Debtor’s Motion to Reopen; the issue of whether the Debtor owned the Treatment was necessary to this Court making its decision on whether to grant the Motion to Reopen; this Court found that the Debtor owned the Treatment as of the Petition Date, and therefore found that *798the Treatment was property of the estate and that the case needed to be reopened so that the Trustee could administer the Treatment; and the Debtor cannot now relitigate this issue in an effort to prove that EMG owns the Treatment.21
The Debtor’s position that Sil-verbird and/or EMG own the Treatment is also untenable because of the doctrine of judicial estoppel. This doctrine prevents a party from asserting a position in a legal proceeding that is inconsistent with a position taken by that party in a previous proceeding. In re Reed, 650 F.3d 571, 573-74 (5th Cir. 2011). “In assessing whether judicial estoppel should apply, [courts] look to see whether the following elements are present: (1) the party against whom judicial estoppel is sought has asserted a legal position that is plainly inconsistent with a prior position; (2) a court accepted the prior position; (3) the party did not act inadvertently.” Id. at 574. At the hearing in 2015 on the Motion to Reopen, the Debtor took the position that he — and he alone — owned the Treatment as of the Petition Date, and in taking this position he argued that this Court should reopen his case so that he could schedule the Treatment in order for the Trustee to administer this asset. This Court, after holding an evidentiary hearing, accepted the Debtor’s position and reopened the case because this Court expressly found that the Debtor owned the Treatment as of the Petition Date and that the Treatment needed to be administered. And, there is no question that the Debtor did not act inadvertently when he took this position. He was clear and unequivocal in both the Motion to Reopen22 and in his testimony that he, and he alone, owned the Treatment:
*799Q: You always believed that you owned [the Treatment] even at the time at that you filled out the Bankruptcy Schedules, right?
A: I would say yes, I didn’t think about it, but I would say that I believed I’ve always owned it.
[Dec. 1,2015 Tr. 124:19-23] (emphasis added).
Q: Okay. So you told us that, to summarize here, you never let go of ownership of “The Conjuring” rights is what you testified, and the Perron rights and the Warren rights were transferred to my client after you filed your Bankruptcy Schedules, right? Yes or no?
A: If I can parse it out.
Q: Yes or no?
A: I always owned “The Conjuring” treatment rights. When you conflate “The Conjuring” rights to include everything, it can’t include everything, because they’re separate and discreet bun-dies of rights. You [i.e., New Line] got— never got the treatment,
your client never got the treatment rights. They got the rights from the Perron family under the bankruptcy agreement, and they got the Warren’s rights under the Option Quitclaim Agreement, and that’s the correct statement.
[Id. at 153:14-154:3] (emphasis added).23
Thus, after this Court approves the Proposed Settlement, if the Debtor uses EMG to sue New Line on the grounds that EMG owns the Treatment and that New Line has misappropriated the Treatment to EMG’s detriment, New Line can rely upon not only the collateral estoppel doctrine but also the doctrine of judicial estoppel to prevail in this suit and, additionally, to obtain sanctions against the Debtor and his chosen attorney (including attorneys’ fees).24 New Line’s chances of doing so are extremely good *800based upon the judicially-created law governing sanctions (including, for example, the Supreme Court’s holding in Chambers v. NASCO, 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), that federal courts have the inherent power to police the conduct of the litigants and attorneys who appear in court). Rule 9011, Federal Rule 11, and District Judge Bennett’s admonishment that if the Debtor continues his litigious conduct, then “sanctions would likely be appropriate.” DeRosa-Grund, 2015 WL 12806619, at *2.
Granted, if the Debtor takes this course of action, New Line will initially have to spend time and money defending against the suit, but given this Court’s belief that New Line will easily prevail and also recover its attorneys’ fees and costs, this Court finds that, on balance, approving the Proposed Settlement serves to promote judicial integrity because one of its terms is that the Debtor receives none of the excess funds held by the Trustee — and the overriding objective of this Court in issuing the Opinion, the First Order, and the Second Order has been to prevent the Debtor from recovering any excess cash from the estate.
Finally, this Court addresses New Line’s argument that the First Order and the Opinion imposed a permanent bar against any asset that the Debtor failed to initially disclose from being abandoned such that the Debtor is able to reacquire his interest in the asset. In fact, the First Order reads as follows: “None of the assets that the Debtor failed to initially disclose (but which he is now required to disclose in his amended Schedule B) may be abandoned without an order from this Court.” [Doc. No. 123, p. 3] (emphasis added). This language shows that this Court left open the door that initially undisclosed assets could be abandoned but only if this Court signed an order approving such abandonment. Here, the Trustee has come to this Court and requested as part of the Proposed Settlement that this Court approve abandonment of the estate’s interest in Silverbird — which is the one asset remaining in the estate that the Debtor failed to initially disclose. By approving the Proposed Settlement, this Court is not contradicting the First Order or, stated differently, undermining the integrity of the judicial system. The First Order’s language expressly leaves open the possibility that abandonment of any undisclosed asset — such as Silverbird — could take place. Here, the Court is willing to approve the Trustee’s abandonment of Silverbird— thereby allowing the Debtor to regain his interest in this entity — because in giving such approval, the Debtor is giving up any claim he has to excess proceeds held by the Trustee; and one overriding objective of this Court in issuing the Opinion, the First Order, and the Second Order was to prevent the Debtor from obtaining any excess proceeds held by the estate.
IY. Conclusion
Pursuant to the case law that governs the evaluation of a proposed compromise, this Court has analyzed seven factors. One of the factors — the difficulties of collecting a judgment — is inapplicable in this case. Another factor — the paramount interest of creditors and parties-in-interest with proper deference to their reasonable views— weighs against approval. A third factor— whether the proposed settlement is with an insider — also weighs against approval. The other four factors weigh in favor of approval. An analysis of three of these factors reflects that: (1) the Trustee negotiated with the Debtor at arm’s length; (2) that there is more than a fifty percent *801probability that the Trustee will ultimately lose on the issue of whether the Debtor can be completely barred from receiving excess proceeds; and (3) if the appeals go forward, they will involve certain issues that are complex, will require extensive briefing that will substantially increase attorneys’ fees, and will require an abundance of time and effort from Judge Lake to issue rulings. Finally, an analysis of the last factor — whether the Proposed Settlement promotes the integrity of the judicial system — weighs in favor of approval because under the terms of the Proposed Settlement, the Debtor will receive none of the excess proceeds. This is a result that, more than any other aspect of this dispute, achieves justice because it prevents the Debtor — who has repeatedly lied under oath and cheated the bankruptcy system— from receiving an immediate and substantial distribution of cash. All in all, four factors favor approval of the Proposed Settlement; two factors weigh against approval; and one factor is inapplicable. Of all of these factors, the Court places particularly significant weight op the last factor (promoting the integrity of the judicial system) and the “probability of ultimate success” factor — both of which weigh in favor of approving the Proposed Settlement. See In re Adelphia Commc’m. Corp., 327 B.R. at 160-65 (giving certain factors “some weight,” “no weight,” or “moderate weight”).
Accordingly, keeping in mind that the Trustee’s burden is not high in establishing that the balance of factors supports a finding that the Proposed Settlement is fair and equitable, In re Roqumore, 393 B.R. at 480, and also keeping in mind that this Court has discretion to give different weight to each of the factors, In re Adelphia Commc’ns. Corp., 327 B.R. at 160-65, the Court finds that the Trustee has met her burden of establishing that the balance of the factors weighs in favor of approving the Proposed Settlement.
This Court is acutely aware of New Line’s argument that by approving the Proposed Settlement, the Debtor gains unquestionable and complete control of Sil-verbird, and that given the sordid history of his playing fast and loose with the truth and his willingness to sue New Line anywhere at any time, approval of the Proposed Settlement will generate more litigation between the Debtor and New Line. The Court acknowledges that its decision will give the Debtor — to use the words of New Line’s own counsel — “more arrows in his quiver.” [Mar. 10,2017 Tr. 89:17], However, as discussed herein, approval only gives the Debtor one more arrow in his quiver, as he already owns EMG and will only be regaining his interest in Silverbird as a result of this Court’s, approval of the Proposed Settlement. Moreover, if the Debtor, using these two entities, orchestrates more litigation against New Line, this Court believes that the probability of New Line quickly obtaining dismissals of these lawsuits, as well as obtaining sanctions against the Debtors and his surrogates (including attorneys’ fees), is high. Thus, while approval of the Proposed Settlement does not insulate New Line from further attacks by the Debtor, any future attacks that he orchestrates will, as a matter of law, have no basis and should not tie up New Line in expensive and protracted litigation. To the extent that New Line is tied up in some litigation, this Court is willing to tolerate such a result in exchange for ensuring that the Debtor does not receive one red cent of the excess proceeds presently held by the Trustee.
In closing, this Court notes that in Matter ofAweco, the Fifth Circuit stated that:
*802The decision of whether to approve a particular compromise lies within the discretion of the trial judge; an appellate court will reverse only when that discretion has been abused. The exercise of judicial discretion always carries with it responsibility. The term “discretion” denotes the absence of a hard and fast rule. When invoked, as a guide to judicial action, it means a sound discretion, that is to say, a discretion exercised not arbitrarily or [willfully], but with regard to what is right and equitable under the circumstances and the law, and directed by the reason and conscience of the judge to a just result.
725 F.2d at 297-98 (emphasis added) (internal citations and quotations omitted).
Ultimately, this Court believes that “what is right and equitable under the circumstances and law” in the case at bar is for the Debtor to receive nonp of the excess proceeds associated with this case. The Court holds this belief because the Debtor has abused the judicial system and, as discussed in the Opinion, because the Debtor may have committed crimes under 18 U.S.C. that could be worthy of prosecution. Preventing him from receiving any of the excess funds by approving the Proposed Settlement is the most “fair and equitable” result in this Court’s view.
An order granting the Application will be entered on the docket simultaneously herewith.
. One of the documents introduced by New Line (obtained through an order from this Court) purports to be a pre-petition assignment (dated February 9, 2009) of the Treatment from the Debtor to EMG. [New Line Ex. Y, p. 2], The first page of New Line Ex. Y reflects that the Debtor allegedly discovered the existence of this assignment on November 22, 2016. Thus, the Debtor, who testified in 2015 that he, and he alone, owned the Treatment, but who assuredly became unhappy with the Opinion and the First Order when they were issued on January 22, 2016, just happened to locate a document several months later showing — Surprise, Surprise!— that he did not own the Treatment on the Petition Date after all.
. Cf. In re Acequia, Inc., 787 F.2d 1352, 1358-59 (9th Cir. 1986) (holding that a bankruptcy court is not precluded ‘‘from considering evidence presented by the parties at prior evi-dentiary hearings ... [and that] [t]o require the bankruptcy court to ignore prior evidence would impose a harsh and unnecessary administrative burden.”); Credit Alliance Corp. v. Idaho Asphalt Supply, Inc. (In re Blumer), 95 B.R. 143, 146 (9th Cir. BAP 1988) (acknowledging that "a bankruptcy judge may, but need not, consider evidence from a prior hearing in the same case”).
. Hereinafter, any reference to a "Rule” is a reference to the Federal Rules of Bankruptcy Procedure. Further, any reference to "the Code” refers to the United States Bankruptcy Code, and reference to any section (i.e., § ) refers to a section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted.
. The Court notes that at the Hearing, after counsel for the Debtor asserted that New Line had no standing to object to the Proposed Settlement, this Court ruled that the Debtor had no standing to participate at the hearing on the Application. [Mar. 10, 2017 Tr. 28:20-30:25]. Counsel for the Debtor argued that the Application seeking approval of the Proposed Settlement is a joint application and that therefore the Debtor did have standing to participate at the Hearing. [Id. at 6:13-23], This Court disagreed on the grounds that Rule 9019(a) only allows a trustee to file a motion seeking dpproval of a compromise. (“On motion by the trustee and after notice and hearing, the court may approve a compromise or a settlement.”) (emphasis added); [Mar. 10, 2017 Tr. 30:10-23], Moreover, the Court noted that only counsel for the Trustee signed the Application, [Mar. 10, 2017 Tr. 7:1-7]; the pleading is not styled as a "joint application.” Finally, the Court noted that pursuant to the applicable local bankruptcy rules, New Line had filed a written response opposing the Application as well as witness and exhibit lists, thus giving proper notice of its position. [Id. at 30:20 — 23]; [Doc. No. 320], Additionally, the Trustee also filed witness and exhibit lists. [Doc. No. 321], The Debtor could have filed a response supporting the Application as well as exhibit and witness lists, but did not do so. Under these circumstances, the Court held that the Debtor had no standing to participate at the hearing, [id. at 7:6-25; 30:10-25], because to do so would sandbag New Line; indeed, New Line’s counsel objected to the Debtor’s participation, [id. at 29:7-10]. Nevertheless, the Court believes that it should address whether New Line has standing to object to the Proposed Settlement because the Court has an independent duty to review the merits of the Application, and such a review necessarily includes whether the party opposing the Application has standing. In re Roqumore, 393 B.R. 474, 480 (Bankr. S.D. Tex. 2008).
. This Court issued the Opinion after hearing extensive testimony in 2015 about who owned the Treatment, including definitive testimony from the Debtor himself that he — and he alone — has always owned the Treatment. [Dec. 1, 2015 Tr. 124:19-23, 153:14-154:3], After hearing this testimony, the Court, in the Opinion, made an express finding that the Debtor owns the Treatment. Therefore, the Court wants to emphasize here and now that: (1) it does not believe that either EMG or Silverbird — or any other entity with which the Debtor is affiliated — owns the Treatment; and (2) any future lawsuits that the Debtor instructs be filed on behalf of EMG or Silver-bird — or any other entity with which the Debtor is' affiliated — seeking damages for New Line's alleged misappropriation of the Treatment would be a frivolous lawsuit. Nevertheless, it is the very threat of such lawsuits — however frivolous they may be — and New Line’s need to pay attorneys’ fees to defend against any suits that are actually filed, that constitute the "threatened injury" here for purposes of analyzing whether New Line has demonstrated constitutional standing to challenge the Application. And, given the Debtor’s history of filing numerous suits against New Line — the Opinion reviews in detail the four lawsuits that he filed in 2014/2015 in the Southern District of Texas alone — there is no question that there is a palpable threat that he will use Silverbird and EMG to file more suits against New Line in the future.
. Such a ruling would certainly accord with the Opinion and the First Order because the Debtor would not receive a dime. This Court is not wedded to the notion that the funds have to be paid to charity. Indeed, in the Opinion, this Court stated the following: "This Court wants to emphasize to the Debtor here and now that if any excess proceeds remain after the Trustee administers the Treatment and completely pays off all claims and his own fee, then this Court will direct that these excess proceeds go not to the Debt- or, but rather to the United States or be made available to public interest, charitable, educational, and other public service organizations.” In re DeRosa-Grund, 544 B.R. 339, 383 (Bankr. S.D. Tex. 2016) (emphasis in original). Thus, it would be completely consistent with the Opinion and the First Order if the excess proceeds were distributed to the Clerk of Court.
. Specifically, the Fifth Circuit stated the following: “The estate can pursue the claims [the debtor] asserted,, and if successful, the bankruptcy court ordered that any recovery exceeding the $40,538.00 in remaining claims would either escheat to the United States or be ‘made available to public interest, charitable, educational, and other public service organizations.’ ” In re Jackson, 574 Fed.Appx. at 320.
. Even though the Trustee did not address the probability of success at the Supreme Court level, this Court may do so sua sponte, as it has an independent duty to assess the Proposed Settlement. Indeed, in assessing a proposed compromise, "[t]he Court [cannot] simply accept the trustee’s word that the settlement is reasonable, nor may he merely ‘rubber-stamp’ the trustee’s proposal.” In re Roqumore, 393 B.R. at 480 (internal citations omitted). Rather, "a judge in bankruptcy must make a well-informed decision." Matter of Cajun, 119 F.3d at 356. Included in the process at arriving at a well-informed decision is an analysis of any applicable Supreme Court opinions.
. The style of this interpleader is New Line Productions, Inc. v. Tony DeRosa-Grund, Evergreen Media Holdings, LLC, Evergreen Media Group, LLC, Silverbird Media Group, LLC, and Eva S. Engelhart, Adv. Proc. No. 16-03137. New Line filed this suit on June 14, 2016 in order to deposit the sum of $750,000.00 into the registry of the Court. [Adv. Proc. No. 16-*78803137, Adv. Doc. No. 1], This sum represented what is referred to in the complaint initiating this interpleader as the “Sequel Payment.” [Id. at p. 2 ¶ 1]. New Line has recently filed another motion in this adversary proceeding seeking approval to deposit additional funds into the registry of the Court. [Adv. Proc. No. 16-3137, Adv. Doc. No. 23]. If this Court approves the Proposed Settlement, then the Trustee will no longer need to be a defendant in this interpleader action.
. In order for the reader to gain an appreciation of the amount of time that Judge Lake will have to spend on the appeal of the First Order, attached hereto as Exhibit C is a true and correct copy of the Statement of Issues that the Debtor filed with respect to this appeal. The nine issues that the Debtor has set forth are on pages two and three of Exhibit C.
. New Line has. offered to pay the Trustee the sums of $9,000.00 and $10,000.00 for the estate's interest in Silverbird and EMG, respectively. [New Line Exs. 1 & J], The sum of $19,000.00 is a de minimis amount compared to the $200,000.00 that New Line paid for the estate’s interest in the Treatment, and the $19,000.00 will assuredly not go a long way in helping the Trustee pay her attorneys’ fees if she finds herself dealing with the two appeals before the Fifth Circuit, and perhaps the Supreme Court thereafter.
. From time to time, at hearings in this Court, New Line’s counsel has stated that New Line is a creditor because it has a claim against the estate for reimbursement of its attorneys' fees associated with showing this Court the skullduggery that the Debtor has committed. [See, e.g„ Mar, 10, 2017 Tr. 29:24-30:7]. There is no doubt that New Line’s efforts have exposed the Debtor’s lies and deception to this Court. Indeed, it was New Line who opposed the Motion to Reopen this case; and while New Line did not prevail in convincing this Court to deny the Debtor’s motion, it did introduce the testimony and exhibits at that hearing to convince this Court to invoke the doctrine of judicial estoppel and its § 105 powers to issue an order that the Debt- or could not benefit from the Trustee’s administration of any assets that the Debtor failed to disclose (i.e., the Treatment and Silverbird) and also could not amend his Schedule C to exempt any proceeds from the Trustee’s administration of these assets. And, since this *790Court has reopened the case, New Line has introduced evidence further demonstrating that the Debtor continues to play fast and loose with the judicial process. Nevertheless, this Court fails to see at this time how New Line has a claim against the estate. It has never filed a proof of claim for any pre-petition amounts owed to it by the Debtor, nor has it filed any application seeking to establish an administrative claim. Indeed, there does not appear to be a statutory vehicle for New Line to obtain an administrative claim. Section 503(b)(3) provides an avenue for obtaining an administrative claim by making a "substantial contribution” to a case, but this section only applies to Chapter 9 cases and Chapter 11 cases, and only a "creditor” has standing to file such an application. See In re Hackney, 351 B.R. 179, 201 (Bankr. N.D. Ala. 2006) ("Congress knew how to create a 'substantial contribution’ administrative expense for cases it believed were appropriate for that benefit. It did that in section 503(b)(3)(D) for Chapter 9 and Chapter 11 cases. It could have done the same in Chapter 7 cases. It did not.”). The case at bar is a Chapter 7 case, and New Line is simply not a creditor; hence, although this Court believes that New Line has made a substantial contribution insofar as it has exposed the Debtor’s pernicious and persistent perfidy throughout his case, the Court does not see how it can award an administrative claim to New Line. Therefore, this Court disagrees with New Line's position that it is a creditor in this case.
. The • Court subsequently discusses herein its finding that the Debtor, not the Trustee, already owns EMG; therefore, to the extent that New Line is arguing that approval of the Proposed Settlement would effectively result in the Trustee conveying the estate’s interest in EMG to the Debtor, New Line is incorrect. However, New Line is correct in asserting that approval of the Proposed Settlement would effectively result in the Trustee conveying the estate’s interest in Silverbird to the Debtor, and this is why the Court finds merit to New Line’s argument that the Debtor, once he regains his interest in Silverbird, will use Silverbird as a vehicle for suing New Line for allegedly misappropriating the Treatment.
. The Court wants to emphasize once again that it believes that no such claims exist. See supra note 5.
. The Court cannot predict how much in damages the Debtor will have Silverbird seek to recover from New Line. Whatever the amount, it will assuredly not be de minimis. Indeed, the Debtor would not be willing to give up his chance to receive the excess funds from the estate unless he believes that he can use Silverbird as a vehicle for suing New Line to recover substantially more money than the amount of excess funds presently in the estate.
. David Askanase was the initial trustee who administered the case between the Petition Date and the date that this Court initially closed the case. He retired prior to the date that this Court reopened the case, and Eva Engelhart was appointed the successor Trustee. However, upon her appointment, she assuredly reviewed the Debtor’s schedules and became aware that he had initially disclosed his interest in EMG.
. At the Hearing, counsel for the Trustee informed the Court that the Debtor has told the Trustee that his position is that he verbally disclosed his interest in Silverbird to the initial trustee (i.e., David Askanase), [Mar. 10, 2017 Tr. 70:24-71:7], and that therefore, even though the Debtor did not disclose this interest in his schedules, his verbal disclosure to Mr. Askanase constitutes sufficient disclosure for purposes of abandonment. That is to say, the Debtor's position is apparently that because he made oral disclosure of Silverbird to the initial trustee, when this Court first closed the case on May 8, 2014, the Debtor’s interest in Silverbird, just like the Debtor’s interest'in EMG, was abandoned to the Debtor. If the Debtor’s position is meritorious, then New Line's argument that approval of the Proposed Settlement violates the Opinion and the First Order is incorrect.
However, the Debtor’s position has no merit. First, § 554(c) sets forth that the only property that is abandoned is "property scheduled under section 521(a)(1) of this title,” and § 521(a)(1) sets forth that "[t]he debtor shall — (1) file ... a schedule of assets .... ” Thus, the only property that could have been abandoned to the Debtor on May 8, 2014 in the case at bar are assets that he actually scheduled in his initial Schedule B. Because he did not schedule his interest in Silverbird on his initial Schedule B, this interest was not abandoned to him when this Court first closed this case on May 8, 2014. Case law also supports this conclusion. Guay v. Burack, 677 F.3d 10, 20 (1st Cir. 2012) ("[The debt- or] argues that the fact that the claims were discussed during the August 2009 meeting with the bankruptcy Trustee and creditors is proof that he did not attempt to conceal the claims. However, even if we were to accept that he attempted to disclose the existence of the claims at this meeting (and, for reasons discussed below, we do not), oral disclosure does not meet the requirements of the bankruptcy code. In Jeffrey v. Desmond, 70 F.3d 183 (1st Cir. 1995), we explained the importance of formally scheduling claims and the insufficiency of oral notification.”); In re Summers, 320 B.R. 630, 643 (Bankr. E.D. Mich. 2005) ("The Debtor apparently still believes that it is enough that he answered questions in the Rule 2004 examination. Aside from the fact that this does not comply with the certification on the schedules themselves, the Debt- or's reply also does not satisfy due process. There are other parties in interest to a bankruptcy case other than the trustee. A verbal response to one-on-one questioning by a trustee during a Rule 2004 examination is not the same as service of amendments on all entities affected .... ”).
. The Court wants to emphasize once again that merely because EMG might sue New Line on the grounds that EMG allegedly owns the Treatment and has been damaged by NewLine’s alleged misappropriation of the Treatment does not mean that this Court believes that EMG will have a meritorious lawsuit. Just the contrary: this Court believes that such a lawsuit would be frivolous, as the Debtor has already testified that he — and he alone — has always owned the Treatment. See supra note 1. The Debtor’s alleged discovery of a written document showing that he made a pre-petition assignment of the Treatment to EMG is of no avail. Indeed, at the hearing on the Motion to Reopen, the Debtor expressly testified that he had not transferred the Treatment to any third party. [Dec. 1, 2015 Tr. 52:11-21].
. Indeed, in the last District Court lawsuit that the Debtor filed, in the order dismissing this suit, District Judge Alfred H. Bennett found that the Debtor's litigious conduct "might suggest an abuse of the judicial process” and warned that if such behavior continued, "sanctions would likely be appropriate." DeRosa-Grund v. Time Warner Inc., No. 4:15-cv-02763, 2015 WL 12806619, at *2 (S.D. Tex. Dec. 22, 2015) (Bennett, J.).
. New Line took the position that it had previously purchased the Treatment. [Opinion (Doc. No. 122, p. 40 of 72)]; [Dec. 2, 2015 Tr. 30:7-31:19].
. The Court notes that while the party who will doubtless be suing New Line in the future — either EMG or Silverbird, or both — is not the same parly as the Debtor himself, the doctrine of collateral estoppel will still apply. The Fifth Circuit has expressly held that there are instances where a party to the first suit (here, New Line) can use issue preclusion against a plaintiff who was not a party to the first suit (here, Silverbird and/or EMG). Terrell v. DeConna, 877 F.2d 1267, 1270 (5th Cir. 1989). Specifically, "federal courts will bind a nonparty whose interests were represented adequately by a party in the original suit.” Id. The Fifth Circuit has found that adequate representation exists between a party and a non-party "where a party to the original suit is so closely aligned to the non-party's interests as to be his virtual representative,” Id. (quoting Aerojet-General Corp. v. Askew, 511 F.2d 710, 719 (5th Cir. 1975)). Stated differently, "[l]iteral identity of the parties is not required as part of the res judicata and collateral estoppel analysis so long as the party against whom enforcement is sought was in privity with a party involved in the initial decision.” In re Pace, 456 B.R. 253, 268 (Bankr. W.D. Tex. 2011). Here, there is no question that the Debtor and Silverbird, as well as the Debtor and EMG, have always been in privity with one another. Indeed, even during the pendency of this reopened case when the Trustee has owned the membership interest in Silverbird, the Debtor, on behalf of Silverbird (as well as EMG and Holdings), has instructed an attorney, David Lake, who represents these three entities, to file pleadings on behalf of Silverbird, EMG, and Holdings, many of which have opposed relief sought by the Trustee — including the Trustee's sale of the Treatment to New Line. [Mar. 31, 2017 Tr. 11:25-15:23, 57:19-59:1, 69:14-20, 92:4-8], Moreover, the Debtor is the managing member of Silverbird, [Opinion (Doc. No. 122, p. 7 IT 8) ], the managing member of EMG, [New Line Ex. Y], and the manager/executive chairman of Holdings, [Mar. 31, 2017 Tr. 54:22-24]; [Opinion, (Doc. No. 122, p. 6 ¶ 5) ]. If these circumstances do not constitute privity, then nothing does. Thus, EMG and Silverbird, if and when they sue New Line in the future for New Line's alleged misappropriation of the Treatment, will be unable to escape New Line’s defense of collateral estop-pel.
. On September 23, 2015, the Debtor’s counsel filed the Motion to Reopen,, and expressly set forth that the Debtor wanted this Court to reopen this case "so that he may amend his Schedule B to disclose an addition*799al asset that is property of his estate. The additional asset is a copyright to a motion picture treatment that was written prior to his petition date ...." [Doc. No. 92, p. 2 of 3],
. The Debtor's testimony that he has always owned the Treatment is borne out by the documentation introduced by New Line into the record at the Hearing. Specifically, Exhibits Q, R, S, and U are all documents that, although not verbatim the same, are nevertheless so similar that that this Court finds that they each represent the very Treatment that this Court found was owned by the Debtor and that the Trustee proceeded to administer, culminating with her sale of this asset to New Line in 2016 for $200,000.00 pursuant to the New Line/Trustee Settlement. [Doc. No. 263]. The Debtor’s position now that there were multiple treatments — and that EMG owns one of them — is legally untenable and, if the Debt- or makes such an allegation subsequently (through use of EMG, Silverbird, or some other entity that he owns and controls), he will have initiated a frivolous lawsuit deserving of sanctions — as suggested by District Judge Bennett. See supra note 19.
. As with the doctrine of collateral estoppel, those in privity with a prior order are also barred by the doctrine of judicial estoppel in a subsequent action. Feuerbacher v. Wells Fargo Bank, No. 4:15-CV-59, 2016 WL 3669744, at *9 n.2 (E.D. Tex. July 11, 2016), appeal docketed, No. 16-41343 (5th Cir. Sept. 27, 2016). Indeed, some circuits, including the Fifth Circuit, "have held that privity, though often present in judicial estoppel cases, is not required.” Austin v. McNamara, No. 6:05-CV-247, 2007 WL 5787498, at *3 (E.D. Tex. Mar. 30, 2007) (citations omitted); In re Coastal Plains, Inc., 179 F.3d at 205 n.3. See also Total Petroleum, Inc. v. Davis, 822 F.2d 734, 737 n.6 (8th Cir. 1987) (judicial estoppel does not require reliance or prejudice because it seeks to protect the courts). Thus, EMG and Silverbird, if and when they sue New Line in the future for New Line's alleged misappropriation of the Treatment, will be unable to escape New Line's defense of judicial estop-pel. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500502/ | DECISION
Catherine J. Furay, U.S. Bankruptcy Judge
I. Statement of Procedural History
The Debtor, Sondra K. Lisse (“Lisse” or <fDebtor”), filed a voluntary Chapter 13 petition on July 23, 2016. On December 30, ¿016, Lisse moved under Fed. R. Bankr. P. 9011 and 28 U.S.C. § 1927 to impose sanctions against Attorney Kenneth W. Bach (“Bach”) for “unreasonably and vexatiously *816multiplying these proceedings by the conduct” of Select Portfolio Servicing, Inc. (“SPS”) (“Sanctions Motion”). The Court held a telephonic hearing on a variety of motions, including the Sanctions Motion, and took the Sanctions Motion under advisement.
II. Statement of Facts
The Debtor requests sanctions against Bach under Fed. R. Bankr. P. 9011(b)(2) and 9011(c)(1)(A) arguing that he knows “ACE Securities Corp. Home Equity Loan Trust, Series 2006-NC3, Asset Backed Pass-Through Certificates ‘does not exist.’ ” She further argues Bach has deliberately misidentified the capacity of HSBC in an effort to “conceal the authority under which Bach and the law firm of Johnson Blumberg are purporting to engage in litigation activities against Ms. Lisse ....” In essence, the Debtor contends Bach’s naming HSBC and the failure to designate SPS as the party seeking relief in these proceedings warrants sanctions. The pleadings identified by Lisse as violating Rule 9011 are:
(1) Objection to Confirmation [Doc. 42];
(2) Motion to Dismiss Debtor’s Chapter 13 Petition [Doc. 56];
(3) Motion for Relief from Stay [Doc. 57].
The Court has already entered an Order granting HSBC relief from the automatic stay. The Debtor also requests sanctions under 28 U.S.C. § 1927. HSBC Bank USA was granted summary judgment of foreclosure against Lisse and her husband. HSBC Bank USA ex rel. Ace Secs. Corp. v. Lisse, 2016 WI App 26, ¶ 3, 367 Wis.2d 749, 877 N.W.2d 650 (2016). SPS was a sub-servicer for Bank of America, N.A. (“BANA”), which was HSBC’s servicing agent for the Lisses’ loan. Id.
Ill, Discussion .
A. Jurisdiction
This Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334. In accordance with section 157(a), the District Court for the Western District of Wisconsin has referred all of its bankruptcy cases to the Bankruptcy Court for the Western District of Wisconsin. W.D. Wis. Admin. Order 161 (July 12, 1984). A motion for sanctions under Bankruptcy Rule 9011 is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). Baermann v. Ryan (In re Ryan), 411 B.R. 609, 613 (Bankr. N.D. Ill. 2009).
B. Rule 9011
Rule 9011 is modeled after Fed. R. Civ. P. 11, and is “essentially identical” to Rule 11. In re Park Place Assoc., 118 B.R. 613, 616 (Bankr. N.D. Ill. 1990). At its core, Rule 11 imposes sanctions to deter abusive litigation practices. In re Ryan, 411 B.R. at 613 (citing Corley v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990, 1013 (7th Cir. 2004)). “ ‘Rule 11 sanctions are only to be granted sparingly, and should not be imposed lightly.’” Id. at 613-14 (quoting Lefkovitz v. Wagner, 219 F.R.D. 592, 592-93 (N.D. Ill. 2004), aff'd. 395 F.3d 773 (7th Cir. 2005)).
Rule 9011 provides 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 ... 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;
*817(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.
(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
Fed. R. Bankr. P. 9011(b) and (c).
First, the Court must address the “separate and apart” issue of the Debt- or’s Sanctions Motion as it relates to Rule 9011(c)(l)(A)’s safe harbor provision. In re Ryan, 411 B.R. at 616. When a party moves for sanctions under Rule 9011, two criteria must be met: “(1) the motion must be made separate and apart from other motions or requests and ‘[must] describe the specific conduct alleged to violate’ representations to the court, and (2) ‘the motion may not be presented to the court unless, within twenty-one days of service, the non-movant has not withdrawn or corrected the challenged behavior.’ ” See In re Ryan, 411 B.R. at 616. “A court abuses its discretion if it permits a motion for sanction to be made in conjunction with another motion.” Id. at 616 (citing Corley v. Rosewood Care Ctr., Inc., 142 F.3d 1041, 1058 (7th Cir. 1998)).
With respect to Rule 9011(c)(l)(A)’s first prong, the caption of Debtor’s motion reads, “Notice of Motion and Motion to Sanctions Pursuant to 28 U.S.C. § 1927 and Fed. R. Bankr. P. 9011 (Rule 9011).” While at first blush it would appear as if the Sanctions Motion violates the separateness requirement, the Sixth Circuit explained in Ridder v. City of Springfield, 109 F.3d 288, 294 n.7 (6th Cir. 1997), “The [separateness] requirement does not foreclose combining a Rule 11 request with other provisions regulating attorney behavior, such as ... § 1927.” Id. Thus, the inclusion of a request for costs from Baeh under 28 U.S.C. § 1927 does not violate the separateness requirement.
Turning to the second prong, Rule 9011(c)(1)(A) creates a 21-day grace period “between the time of service and the time for filing ...” to permit the non-moving party an opportunity to correct or withdraw the offending document. 10 Collier on Bankruptcy ¶ 9011.05[l][b] (16th ed.); see also In re Ryan, 411 B.R. 609, 616 (Bankr. N.D. Ill. 2009). “A court that imposes sanctions by motion without adhering to the twenty-one day ‘safe harbor’ provision abuses its discretion.” In re Ryan, 411 B.R. at 616.
The Debtor moved for sanctions on December 30, 2016. According to Debtor’s counsel’s “Unsworn Declaration of Service Under Penalty of Perjury,” she served Bach with the Motion for Sanctions on December 6, 2016. HSBC did not attempt to withdraw or correct the challenged pleadings. Thus, both threshold prongs of Rule 9011(c)(1)(A) are met.
The subdivisions of Rule 9011(b) are divided into two general categories: the “frivolousness clauses” and the “improper purpose” clauses. In re Ryan, 411 *818B.R. at 615. Rule 9011(b)(1) falls within the ambit of the improper purpose clause, and is directed at preventing abusive litigation practices in relation to papers filed to cause unnecessary delay to increase litigation costs, or filed to harass. Id.
In reviewing HSBC’s pleadings, Rule 9011 sanctions are not warranted. With respect to HSBC’s Plan objection, creditors routinely object to a debtor’s plan in bankruptcy where, as here, it im-permissibly modifies a mortgage creditor’s rights. See, e.g., In re Wilson, 321 B.R. 222 (Bankr. N.D. Ill. 2005). HSBC argues that the Debtor’s Plan runs afoul of 11 U.S.C. § 1322(b)(2)’s anti-modification provisions. Specifically, HSBC contends the Debtor’s proposed Plan impermissibly alters its rights under the Note and Mortgage by not addressing HSBC’s arrearage claim of approximately $100,288.52. Whether the provisions of the Debtor’s Plan violate section 1322(b)(2) is a matter to be determined at a hearing on confirmation. However, HSBC holds a judgment of foreclosure with respect to the Note and Mortgage that are the subject of that judgment and thus has standing to raise the issue of objection to confirmation.
As the Court described in its Decision on the Debtor’s Motion to Compel, HSBC has demonstrated a colorable claim to its right to payment under the Mortgage in HSBC Bank USA, Nat’l Ass’n for the Benefit of ACE Securities Corp. Home Equity Loan Trust, Series 2006 NC3, Asset Backed Pass-Through Certificates v. Steven R. Lisse, et. al., Case No. 10-CV-2642, aff'd, HSBC Bank USA ex rel. Ace Secs. Corp. v. Lisse, 2016 WI App 26, ¶ 8, 367 Wis.2d 749, 877 N.W.2d 650 (Unpublished). As the judgment holder, HSBC also had standing to file a Motion for Relief from Stay. These pleadings do not represent “a persistent pattern of clearly abusive litigation.” See Aetna Life Ins. Co. v. Alla Med. Servs., Inc., 855 F.2d 1470, 1476 (9th Cir. 1988). To the contrary, these filings appear to be nothing more than a creditor attempting to protect its security interest in collateral. Further, as noted in prior decisions of the Court, whether SPS or BANA were owners of the Note and Mortgage or should have been parties in the state foreclosure action were raised in that proceeding, and the Debtor may elect to pursue her continued arguments in that regard in state court. Thus, sanctions are not warranted under Rule 9011(b)(1).
Turning to the “frivolousness clauses,” Rules 9011(b)(2)-(4), the relevant analysis has two prongs: (1) whether the attorney made a reasonable inquiry into the facts, and (2) whether the attorney made a reasonable investigation of the law. In re Ryan, 411 B.R. at 615.
In HSBC Bank USA ex rel. Ace Secs. Corp. v. Lisse, the Wisconsin Court of Appeals found the state court “correctly concluded that the undisputed facts established HSBC had physical possession of the original note.” 2016 WI App at ¶ 8. Under Wis. Stat. §§ 401.201(2)(km) and 403.301, the holder of an instrument is entitled to enforce the terms and provisions of such instrument. See PNC Bank, N.A. v. Bierbrauer, 2013 WI App 11, ¶ 10, 346 Wis.2d 1, 827 N.W.2d 124 (2012); see also Bank of New York Mellon v. Carson, 2015 WI 15, ¶ 51, 361 Wis.2d 23, 859 N.W.2d 422 (2015) (Prosser, J. concurring) (“In simple terms, a ‘mortgage conveys an interest in the real estate to the lender as security for the debt, while the mortgage note is a promise to repay the debt.’ ”) (citation omitted).
Under Wisconsin law, HSBC has demonstrated its right to payment under the Debtor’s Mortgage and Note pursuant to a state court judgment. As a result, its pleadings in the Debtor’s bankruptcy *819merely represent an effort to enforce its rights thereunder. Accordingly, sanctions under Rule 9011’s frivolousness clauses (Rules 9011(b)(2)-(4)) are not warranted for HSBC’s objection to the Debtor’s Plan or the Motion for Relief from Stay.
Turning to HSBC’s Motion to Dismiss, Debtor Sondra Lisse filed this Chapter 13 case only five days after Judge Martin dismissed her husband Steven Lisse’s Chapter 13 case concluding sua sponte that Steven Lisse filed his plan in bad faith. In comparing the Debtor’s Chapter 13 Plan with her husband’s, both contain a similar mortgage payment structure whereby monthly mortgage payments are to be deposited into Attorney Nora’s trust account “pending further order of the Court in an adversary proceeding.” Case No. 16-10935, ECF No. 44, p. 3. Judge Martin concluded Steven Lisse’s plan ran afoul of In re Schaitz, 913 F.2d 452, 453 (7th Cir. 1990), because the purpose of his plan was to “thwart paying the creditor.” Doc. 56, Ex. J., pp 50-53. In addition, Judge Martin concluded Mr. Lisse’s plan contained flaws because “the mortgage debt will be treated by being made subject to an adversary proceeding .... ” Doc. 56, Ex. J., at 51. Similarly, the Debtor’s Plan reads:
Trustee shall not pay allowed claims for arrearages, but Debtor shall pay regular postpetition breached loan modification payments to the IOLTA Trust Account of Debtor’s Attorney commencing on or before October 23, 2016 to be held in the IOLTA Trust Account of Debtor’s Attorney during the pendency adversary proceeding to be commenced, in part, for the determination of the identity of the real party in interest entitled to the payment ....
HSBC argues that under In re Shaitz the Debtor’s petition was not filed in good faith. The Debtor’s Plan contains nearly identical language as her husband’s plan, and HSBC has simply proposed a legal theory in its Motion to Dismiss grounded on the same theory and facts. See In re Ryan, 411 B.R. at 615. Thus, HSBC has proposed at least a prima facie case as to why this case should be dismissed. As a result, this Court should not sanction Bach under Rule 9011.
Section 1927 provides that “[a]ny attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927. Imposing sanctions under section 1927 requires the Court to find Bach has “(1) multiplied proceedings; (2) in an unreasonable and vexatious manner; (3) thereby increasing the cost of the proceedings; and (4) doing so in bad faith or by intentional misconduct.” In re Jazz Photo Corp., 312 B.R. 524, 540-41 (Bankr. D.N.J. 2004).
For the reasons explained above, there is no basis to assess statutory sanctions in this case. HSBC’s pleadings have support in fact and law. Pursuing motions, claims, and objections based on rights under a state court judgment do not demonstrate any of the indicia of conduct covered by section 1927.
IV. Conclusion
For the reasons set forth above, sanctions under either Rule 9011 or section 1927 are not warranted.
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.
*820A separate order consistent with this decision will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500503/ | MEMORANDUM OF DECISION FINDING THAT THE DEBTOR IS NOT REQUIRED TO OBTAIN THE CONSENT OF THE CALIFORNIA ATTORNEY GENERAL TO SELL THE ASSETS OF A CLOSED HOSPITAL
Ernest M. Robles, United States Bankruptcy Judge
At issue is whether the Debtor, a nonprofit entity, is required to obtain the consent of the California Attorney General to sell certain assets of a closed hospital.1 Under the relevant California statutes, a non-profit entity operating a “health facility” that wishes to sell a material amount of its assets must obtain the consent of the California Attorney General. Because a closed hospital does not qualify as a “health facility” under California law, the *823Court finds that the Debtor is not required to obtain the California Attorney General’s consent prior to selling a material amount of its assets.
I. Facts
Gardens Regional Hospital and Medical Center, Inc. (the “Debtor”) commenced a voluntary Chapter 11 petition on June 6, 2016. As of the petition date, the Debtor operated a 137-bed acute care hospital located in Hawaiian Gardens, California (the “Hospital”). The Hospital contained an intensive care unit, a cardiac unit, and an eight-bed Emergency Department. In 2015, more than 8,500 patients visited the Emergency Department, and the Hospital had a total of more than 2,850 admissions. The Hospital served a high number of indigent patients and was designated as a Disproportionate Share Hospital by the United States Department of Health and Human Services in connection with the Medicaid program. Disproportionate Share Hospitals receive payments from the Centers for Medicaid and Medicare Services to cover the costs of providing care to uninsured patients. The Debtor operated the Hospital as a non-profit entity.
On July 28, 2016, the Court approved the sale of the operating Hospital to Strategic Global Management, Inc. (“Strategic”), a for-profit entity, for consideration of approximately $19.5 million. Strategic assigned its rights under the Asset Purchase Agreement (the “APA”) to KPC Global Management, LLC (“KPC”). Pursuant to Cal. Corp. Code § 5914(a) (West 2017), which requires a non-profit entity operating a health facility to obtain approval from the California Attorney General (the “Attorney General”) when selling a material amount of its assets to a for-profit entity, the Debtor requested that the Attorney General authorize the sale. On November 18, 2016, the Attorney General approved the sale, but only on the conditions that Strategic and KPC (1) provide $2.25 million per year in charitable care for six years, (2) provide approximately $860,000 in community benefit services per year for six years, and (3) assume at least $2.4 million in liability under the Hospitality Quality Assurance Fee Program (“HQAF”). The $2.25 million charity care condition was particularly challenging for Strategic and KPC, as the Hospital had provided only approximately $500,000 in charity care in 2015. The conditions imposed by the Attorney General increased Strategic and KPC’s acquisition cost by approximately $21 million.
' On December 5, 2016, Strategic, the Debtor, and representatives of two unions representing the Debtor’s employees met with representatives of the Attorney General to request modification of the conditions. On December 16, 2016, the Attorney General’s office issued a letter stating that the conditions would not be modified. On January 9, 2017, after negotiating with Strategic, the Debtor proposed to the Attorney General a modified transaction, under which Strategic and KPC would continue operating the hospital and would assume at least $2.4 million in HQAF liability, but only if the charity care requirement was reduced to $500,000 annually. On January 11, 2017, the Attorney General’s office issued a letter stating that it lacked the authority to modify the ¿haritable care condition that it had imposed. On January 6, 2017, Strategic and KPC provided the Debtor formal notice that, in view of the conditions imposed by the Attorney General, they were exercising their option under the APA to terminate the transaction.
By this point in the case, the Debtor had nearly exhausted the $3.13 million in debt- or-in-possession financing it had obtained, and the lack of unencumbered assets made *824it impossible for the Debtor to obtain additional financing. The Hospital continued to operate at a loss, and the Debtor was on the verge of running out of cash. In view of these circumstances, on January 20, 2017, the Court granted the Debtor’s emergency motion to close the Hospital. The Court found that in voting to close the Hospital, the Debtor’s Board of Directors had acted in accordance with the Debtor’s mission of sustaining public health and welfare, as health and welfare would be jeopardized if the Hospital continued to admit new patients when it lacked the funds to adequately sustain operations. As of February 2, 2017, all patients in the Hospital had been discharged or relocated, and the Hospital was completely closed.
After the Hospital closed, the Debtor caused its general acute care hospital license to be placed in suspense, pursuant to Cal. Health & Safety Code § 1300(a) (West 2017).2 A license placed in suspense may be reinstated, but only if the applicant demonstrates compliance with the requirements of Cal. Health & Safety Code § 1265. Reinstatement requires the applicant to submit, among other things, satisfactory evidence of its reputable character and its ability to comply with applicable health and safety regulations. See Cal. Health & Safety Code § 1265(e)-(f).
The Debtor now moves to sell the following assets of the closed Hospital (collectively, the “Assets”):
• The below-market lease to the building in which the Hospital formerly operated (the “Hospital Lease”).
• The suspended hospital license, and licenses and permits relating to the pharmacy and laboratory.
• Any furniture, fixtures, and equipment at the premises that are not owned by the landlord under the Hospital Lease.
• Inventory and supplies (which have negligible value).
• Books and records.
The sale does not include the Debtor’s cash and cash equivalents, accounts receivable, Medicare and Medi-Cal provider agreements, real property leases other than the Hospital Lease, or claims and causes of action against third parties. The purchaser, American Specialty Management Group (“American Specialty”), intends to seek reinstatement of the Hospital’s suspended license, and open a new general acute care hospital on the premises.
The Debtor asserts that it is not required to obtain the consent of the Attorney General to sell the Assets. The Debt- or’s theory is that because the Hospital has closed, the Assets no longer qualify as á “health facility.” As a result, the Debtor asserts, the Attorney General lacks authority to review the sale under Cal. Corp. Code § 5914(a). The Attorney General disagrees, maintaining that the Assets still constitute a “health facility” even though the Hospital is not operating. According to the Attorney General, a finding that Cal. Corp. Code § 5914(a) does not apply would enable other non-profit entities to temporarily cease operations for the purpose of selling their assets free of the Attorney General’s review and consent. Such sales, the Attorney General contends, would jeopardize public welfare by allowing assets intended for charitable purposes to be acquired by for-profit entities without proper oversight.
*825II. Discussion
Section 363(d)(1)3 authorizes nonprofit entities, such as the Debtor, to sell estate assets only if the sale is “in accordance with nonbankruptcy law applicable to the transfer of property by” a non-profit entity. Section 541(f) similarly provides that property held by debtors that are § 501(c)(3) corporations under the Internal Revenue Code may be transferred, but “only under the same conditions as would apply if the debtor had not filed a case under this title.” Section 363(b) permits the debtor to sell estate property out of the ordinary course of business, subject to court approval. The debtor must articulate a business justification for the sale. In re Walter, 83 B.R. 14, 19-20 (9th Cir. BAP 1988), Whether the articulated business justification is sufficient “depends on the case,” in view of “all salient factors pertaining to the proceeding.” Id. at 19-20. Section 363(f)(1) provides that a sale of estate property may be “free and clear of any interest in such property of an entity other than the estate, only if applicable nonbankruptcy law permits sale of such property free and clear of such interest
A. The Attorney General’s Alleged Authority to Review the Sale is an “Interest in Property,” and the Assets May Be Sold Free and Clear of That Interest
Pursuant to § 363(b) and (f)(1), the Court approves the sale of the Assets free and clear of the Attorney General’s claim that he may impose conditions upon the terms of the sale or the use of the Assets after the sale. Applicable nonbankruptcy law permits the sale of the Assets absent the consent or review of the Attorney General. As explained below, because the Assets do not qualify as a “health facility” under California law, the Debtor is not required to obtain the Attorney General’s consent to sell the Assets. In addition, the Attorney General’s contention that he is entitled to impose conditions upon the sale, including monetary conditions, constitutes an “interest in ... property” of which the Assets may be sold free and clear.
The Bankruptcy Code does not define the phrase “interest in ,.. property” for purposes of § 363(f). The Third Circuit has held that the phrase “interest in .,, property” is “intended to refer to obligations that are connected to, or arise from, the property being sold.” Folger Adam Sec., Inc. v. DeMatteis/MacGregor JV, 209 F.3d 252, 259 (3d Cir. 2000). That conclusion is echoed by Collier on Bankruptcy, which observes a trend in caselaw “in favor of a broader definition [of the phrase] that encompasses other obligations that may flow from ownership of.the property.” 3 Alan N. Resnick & Henry J. Som-mer, Collier on Bankruptcy ¶363.06[1] (16th ed. 2017).
Courts have held that interests in property include monetary obligations arising from the ownership of property, even when those obligations are imposed by statute. For example, in Mass. Dep’t of Unemployment Assistance v. OPK Biotech, LLC (In re PBBPC, Inc.), 484 B.R. 860 (1st Cir. BAP 2013), the court held that taxes assessed by Massachusetts under, its unemployment insurance statutes constituted an “interest in ... property.” The taxes were computed based on the Debtor’s “experience rating,” which was determined by the number of employees it had terminated in the past. Id. at 862. *826Because the Debtor had terminated most of its employees prior to selling its assets, its experiencing rating, and corresponding unemployment insurance tax liabilities, were very high. Id. The PBBPC court held that the experience rating was an interest in property that could be cut off under § 363(f). Id. at 869-70. Similarly, in United Mine Workers of Am. Combined Benefit Fund v. Leckie Smokeless Coal Co. (In re Leckie Smokeless Coal Co.), 99 F.3d 573, 581, the court held that monetary obligations imposed by the Coal Industry Retiree Health Benefit Act of 1992 constituted an “interest in ... property” within the meaning of § 363(f).
Here, the Attorney General takes the position that California law empowers him to require the purchaser of the Assets to agree to certain monetary obligations, such as furnishing a specified amount of charitable care. The charitable care obligations are connected to and arise from the Assets being sold. Had the Assets not originally been earmarked for charitable purposes,, the Attorney General could not seek to impose continuing charitable care obligations. The Attorney General’s claim to regulatory authority is similar to the regulatory interests asserted in PBBPC and Leckie Smokeless Coal, and therefore constitutes an “interest in ... property” for purposes of § 363(f).
B. Applicable Nonbankruptcy Law Does Not Require the Debtor to Obtain the Attorney General’s Consent to Sell the Assets
Cal. Corp. Code § 5914(a) provides in relevant part:
Any nonprofit corporation that ... operates or controls a health facility, as defined in Section 1250 of the Health and Safety Code, or operates or controls a facility that provides similar health care, shall be required to provide written notice to, and to obtain the written consent of, the Attorney General prior to entering into any agreement or transaction to ... [s]ell ... its assets to a for-profit corporation or entity ... when a material amount of the assets of the nonprofit corporation are involved in the agreement or transaction.
Cal. Health & Safety Code § 1250 defines a “health facility” as
a facility, place, or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, for one or more persons, to which the persons are admitted for a 24-hour stay or longer ....
The parties have not identified, and the Court has been unable to locate, any decisions by California courts addressing the applicability of Cal. Corp. Code § 5914(a) and Cal. Health & Safety Code § 1250 to a closed hospital. Accordingly, the Court is required to interpret these statutes applying California’s rules of statutory construction. See Fed. Sav. & Loan Ins. Corp. v. Butler, 904 F.2d 505, 510 (9th Cir. 1990) (applying California’s rules of statutory construction to interpret Cal. Civ. Proc. Code § 877).
Under California law, the “ultimate task” in statutory interpretation “is to ascertain the Legislature’s intent.” People v. Massie, 19 Cal.4th 550, 569, 79 Cal.Rptr.2d 816, 967 P.2d 29 (1998). “Ordinarily, the words of the statute provide the most reliable indication of legislative intent.” Pac. Gas & Elec. Co. v. Cty. of Stanislaus, 16 Cal.4th 1143, 1152, 69 Cal.Rptr.2d 329, 947 P.2d 291 (1997). Only where the statutory language is ambiguous may the Court consider “evidence of the Legislature’s intent beyond the words of *827the statute,” such as the “statutory scheme of which the provision is a part, the history and background of the statute, the apparent purpose, and any considerations of constitutionality ...Hughes v. Bd. of Architectural Examiners, 17 Cal.4th 763, 776, 952 P.2d 641, 72 Cal.Rptr.2d 624 (1998). “When statutory language is ... clear and unambiguous there is no need for construction, and courts should not indulge in it.” Delaney v. Superior Court, 50 Cal.3d 785, 800, 268 Cal.Rptr. 753, 789 P.2d 934 (1990) (emphasis in original). However, the “language of a statute should not be given a literal meaning if doing so would result in absurd consequences which the Legislature did not intend.” Younger v. Superior Court, 21 Cal.3d 102, 113, 145 Cal.Rptr. 674, 577 P.2d 1014 (1978).
Applying these principles of statutory construction, the Court finds that the Assets being sold do not qualify as a “health facility” within the meaning of Cal. Corp. Code § 5914(a) or Cal. Health & Safety Code § 1250. All patients were transferred out of the Hospital by 4:00 p.m. on February 1, 2017. As of that date, the Hospital was completely closed. All signage was covered and the doors were locked. The Hospital has not, and cannot, receive new patients. The plain language of Cal. Health & Safety Code § 1250 establishes that a facility qualifies as a “health facility” only if it is operating and receiving patients. The statutes specifies the characteristics of a “health facility” in the present tense — a facility qualifies only if it “is ... operated for the diagnosis, care, prevention, and treatment of human illness” (emphasis added). Cal. Health & Safety Code § 1250. “In construing statutes, the use of verb tense by the Legislature is considered significant.” Hughes, supra, 17 Cal.4th at 776, 72 Cal.Rptr.2d 624, 952 P.2d 641. The statute does not say that it applies to a facility that “is or previously ivas operated for the ... treatment of human illness.” In addition, a facility that is closed cannot meet the other requirements of the statute’s definition — a closed facility cannot diagnose or care for patients, or admit patients for a 24-hour stay or longer. In sum, the statute clearly and unambiguously applies only to health facilities that are operating. Because the Assets being sold do not include an operating hospital, they do not constitute a “health facility,” Cal. Corp. Code § 5914(a) does not apply, and the Debtor is not required to obtain the approval of the Attorney General to sell the Assets.
The Attorney General maintains that Cal. Corp. Code § 5914(a) applies because the Debtor “controls” the Assets being sold, notwithstanding the fact that the Hospital is closed. That argument misses the mark. No one disputes that the Debtor controls the Assets in question, but that is not the issue. The issue is whether the Assets qualify as a “health facility” within the meaning of Cal. Health & Safety Code § 1250 — and as explained above, they do not.
The possibility that the purchaser may be able to reinstate the suspended license once the transaction closes does not change this fact. If the purchaser reinstates the license and opens a new general acute care hospital, the Assets may meet the definition of a “health facility’ at some point in the future. But the future status of the Assets is irrelevant. All that matters is whether the Assets are a “health facility” now.
In this regard, the Court notes that reinstatement of the license is by no means an automatic process. To obtain reinstatement the applicant must submit satisfactory evidence of its reputable character and its- ability to comply with all applicable health and safety regulations. See Cal. Health & Safety Code § 1265. Therefore, *828the Court’s determination that Cal. Corp. Code § 5914(a) does not apply will not allow the purchaser to operate a health facility without adequate oversight.
The Attorney General next argues that permitting the sale to proceed without his consent will subvert Cal. Corp. Code § 5914’s purpose of protecting public health, safety, and welfare, by encouraging other health facilities to temporarily cease operations in order to circumvent the Attorney General’s review of a sale of those facilities’ assets. According to the Attorney General, allowing the Assets to be sold free of his review, when the Assets may be used as a health facility in the future, is an absurd result that requires the Court to depart from the literal language of the statute. The Court’s construction, the Attorney General maintains, would defeat the legislation’s purpose of ensuring that charitable healthcare assets could not be transferred from non-profit to for-profit entities absent regulatory oversight.
The Court does not agree that enforcing the literal language of the statute produces an absurd result demonstrably at odds with legislative intent. The Legislature enacted Cal. Corp. Code § 5914 to ensure that the public was not deprived of the benefits of charitable health facilities as a result of the transfer of those facilities’ assets to for-profit entities. In enacting § 5914, the Legislature found:
Charitable, nonprofit health facilities have a substantial and beneficial effect on the provision of health care to the people of California, providing as part of their charitable mission uncompensated care to uninsured low-income families and under-compensated care to the poor, elderly, and disabled.
Transfers of the assets of nonprofit, charitable health facilities to the for-profit sector, such as by sale, joint venture, or other sharing of assets, directly affect the charitable use of those assets and may affect the availability of community health care services....
It is in the best interests of the public to ensure that the public interest is fully protected whenever the assets of a charitable nonprofit health facility are transferred out of the charitable trust and to a for-profit or mutual benefit entity.
1996 Cal. Legis. Serv. Ch. 1105 (A.B. 3101) (West).
Here, the Hospital was not operating at the time of the sale and thus was providing no healthcare services to uninsured low-income families. As a result, the Legislature’s objective of preserving charitable health facilities for the benefit of the uninsured is not implicated by the sale of the former Hospital’s Assets. In addition, the Assets are fully encumbered by the claims of secured creditors, leaving no remaining equity that could be devoted to charitable purposes. With the charitable assets having been exhausted, nothing remains to be protected by the Attorney General.
The Attorney General’s concern that health facilities will deliberately close in order to sell their Assets free of the Attorney General’s review is belied by the history of this case. Now that the Hospital has closed, the value the estate will receive on account of the sale has plunged from approximately $19.5 million to approximately $6.6 million. It is true that the present sale allows the Debtor to retain accounts receivable, which was not the case in the previous sale. But even after adjusting for this difference, the loss in value attributable to the closure of the Hospital is in the neighborhood of $8 million. It defies credulity to assume that other non-profit hospitals would voluntarily close to escape the Attorney General’s review of a sale, when closure results in such significant value destruction.
*829Nor is there any indication here that the Debtor closed the Hospital for the purpose of evading the Attorney General’s review of a sale. The Debtor initially attempted to sell the Hospital as an operating entity, and applied to the Attorney General for review of the sale. After the Attorney General imposed onerous and unrealistic financial conditions on the transaction, the Debtor, the proposed buyer, and representatives of the Debtor’s employee unions met with the Attorney General in a good-faith effort to obtain amendments to the conditions that would allow the sale to close. The Attorney General refused to modify the conditions. Only after it became impossible for the Debtor to sell the Hospital as an operating entity did the Debtor close the Hospital and seek to sell the Assets free of the Attorney General’s review.
The Attorney General’s assertion that health facilities will strategically close to circumvent oversight also ignores the reality that closing a hospital is time-consuming, costly, and requires fastidious planning. It is not a matter of simply locking the doors and putting up a “Gone Out of Business” sign. The reports prepared by the Patient Care Ombudsman appointed in this case illustrate the extent of the work performed by the Debtor to close the Hospital. The Debtor was required to insure that all patients were either discharged or relocated to suitable alternative facilities. Patient relocation provided particularly difficult, as many hospitals refused to accept certain patients because they lacked sufficient insurance coverage.4 The Debtor was required to terminate over 100 remaining staff members.5 The Debtor was required to arrange for medication remaining in its pharmacy to be returned to suppliers.6 Arrangements for suppliers to retrieve expensive and fragile leased medical equipment had to be made.7 The Debt- or was required to comply with health and safety regulations, which were enforced by a daily on-site surveyor from the California Department of Public Health.8
Finally, the Attorney General argues that sale of the Assets free of the Attorney General’s review and consent is a violation of 28 U.S.C. § 959(b). Section 959(b) requires the Debtor to “manage and operate the property” in its possession “according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.” The Attorney General’s argument lacks merit. First, § 959(b) applies only when the Debtor continues to operate its business, and does not apply where, as here, the Debtor is liquidating its assets. See, e.g., S.E.C. v. Wealth Mgmt. LLC, 628 F.3d 323, 334 (7th Cir. 2010) (“Modern courts have ... concluded that § 959(b) does not apply to liquidations”); Alabama Surface Min. Comm’n v. N.P. Min. Co. (In re N.P. Min. Co., Inc.), 963 F.2d 1449, 1460 (11th Cir. 1992) (“A number of courts have held that section 959(b) does not apply when a business’s operations have ceased and its assets are being liquidated”); Saravia v. 1736 18th St., N.W., Ltd. P’ship, 844 F.2d 823, 827 (D.C. Cir. 1988) (viewing § 959(b) *830“as applying only to operating businesses, not ones that were in the process of being liquidated”). Second, even if § 959(b) did apply to the Debtor, the sale- of the Assets free of the Attorney General’s review and consent does not violate applicable state law, 'as explained above.
C. The Attorney General’s Application for a Stay Pending Appeal of the Order Approving the Sale is Denied
The Attorney General’s application for a stay pending appeal of the order approving the sale (the “Sale Order”) is denied. Pursuant to Fed. R. Bankr. P. 8007(a)(1), the Court may issue a stay of a judgment, order, or decree pending appeal. In determining whether to grant a stay pending appeal, the Court considers the following four factors:
(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.
Nken v. Holder, 556 U.S. 418, 426, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009).
As the Supreme Court has explained, a stay pending appeal
“is not a matter of right, even if irreparable injury might otherwise result.” Virginian R. Co. [v. U.S.], 272 U.S. [658] at 672, 47 S.Ct. 222 [71 L.Ed. 463 (1926)]. It is instead “an exercise of judicial discretion,” and “[t]he propriety of its issue is dependent upon the circumstances of the particular case.” Id., at 672-673, 47 S.Ct. 222; see Hilton [v. Braunskill], supra, [481 U.S. 770] at 777, 107 S.Ct. 2113[, 95 L.Ed.2d 724 (1987)] (“[T]he traditional stay factors contemplate individualized judgments in each case”). The party requesting a stay bears the burden of showing that the circumstances justify an exercise of that discretion....
The first two factors of the traditional standard are the most critical. It is not enough that the chance of success on the merits be “better than negligible.” ... By the same token, simply showing some “possibility of irreparable injury,” Abbassi v. INS, 143 F.3d 513, 514 (9th Cir. 1998), fails to satisfy the second factor.
Id. at 433-35.
To be entitled to a stay pending appeal, the moving party must make a “minimum permissible showing” with respect to each of the four factors. Leiva-Perez v. Holder, 640 F.3d 962, 965 (9th Cir. 2011). Provided the moving party meets a minimum threshold as to each factor, the Court may “balance the various stay factors once they are established.” Id. at 965. Under this balancing approach, a stronger showing of irreparable harm can offset a weaker showing of likelihood of success on the merits, and vice versa— provided that the minimum threshold with respect to each factor has been established. Id. at 965-66; see also id. at 964 (“Petitioner must show either a probability of success on the merits and the possibility of irreparable injury, or that serious legal questions are raised and the balance of hardships tips sharply in petitioner’s favor. These standards represent the outer extremes of a continuum, with the relative hardships to the parties providing the critical element in determining at what point on the continuum a stay pending review is justified.”).
1. Likelihood of Success on the Merits
As the Ninth Circuit has explained:
*831The first showing a stay petitioner must make is “a strong showing that he is likely to succeed on the merits.” Id. at 966 (quoting Hilton, 481 U.S. at 776, 107 S.Ct. 2113) (quotation marks omitted). There is some uncertainty as to the exact degree of likely success that stay petitioners must show, due principally to the fact that courts routinely use different formulations to describe this element of the stay test. What is clear, however, is that to justify a stay, petitioners need not demonstrate that it is more likely than not that they will win on the merits....
There are many ways to articulate the minimum quantum of likely success necessary to justify a stay — be it a “reasonable probability” or “fair prospect,” as Hollingsworth, [558 U.S. 183] 130 S.Ct. [705] at 710 [175 L.Ed.2d 657 (2010) ], suggests; “a substantial case on the merits,” in Hilton’s words, 481 U.S. at 778, 107 S.Ct. 2113; or, as articulated in Abbassi, 143 F.3d at 514, that “serious legal questions are raised.” We think these formulations are essentially interchangeable, and that none of them demand a showing that success is more likely than not. Regardless of how one expresses the requirement, the idea is that in order to justify a stay, a petitioner must show, at a minimum, that she has a substantial case for relief on the merits.
Leiva-Perez, 640 F.3d at 967-68.
The Attorney General has failed to demonstrate that he is likely to succeed on the merits. As discussed above, accepting the Attorney General’s argument that the closed Hospital qualifies as a “health facility” under Cal. Health & Safety Code § 1250 would require the Court to read into the statute language that is not there. No absurd result flows from applying the statute’s plain language, which means that • the Court is required to enforce the statute according to its terms.
2. Irreparable Injury
The Attorney General argues that he will be irreparably injured absént a stay because the closing of the sale, in conjunction with the Court’s finding that American Specialty is a good-faith purchaser within the meaning of § 363(m), will render an appeal moot. As a result, the Attorney General argues, he will be unable to obtain appellate review of an important issue affecting the welfare of the people of California.
Outside the bankruptcy context, the Ninth Circuit has held that the certainty that an appeal will become moot is enough to constitute irreparable injury. See Artukovic v. Rison, 784 F.2d 1354, 1356 (9th Cir.1986). However, within bankruptcy, a majority of courts have concluded that mootness does not demonstrate irreparable injury. See, e.g., Ohanian v. Irwin (In re Irwin), 338 B.R. 839, 853 (E.D. Cal. 2006) (“It is well settled that an appeal being rendered moot does not itself constitute irreparable harm”); In re Red Mountain Mach. Co., 451 B.R. 897, 908-09 (Bankr. D. Ariz. 2011) (internal citations omitted) (“[T]he law is clear in the Ninth Circuit that irreparable injury cannot be shown solely from the possibility that an appeal may be moot”); In re Convenience USA Inc., 290 B.R. 558, 563 (Bankr. M.D.N.C. 2003) (stating that “a majority of the cases which have considered the issue have found that the risk that an appeal piay become moot does not, standing alone, constitute irreparable injury” and citing cases).
The inquiry is complicated in this case by the fact that the Attorney General seeks review of an important issue of state law that will likely recur in future bankruptcy cases. Therefore, although the *832question is a close one, the Court finds that under the circumstances of this case the likelihood of mootness does amount to irreparable harm. However, a stay pending appeal is not a matter of right “even if irreparable injury might otherwise result.” Nken, 556 U.S. at 427, 129 S.Ct. 1749. Given that the three other factors weigh strongly against a stay, the Court declines to issue a stay notwithstanding the Attorney General’s showing of irreparable injury.
3. Balance of the Hardships
The injury to the Debtor resulting from issuance of a stay will be substantially greater than the injury to the Attorney General from denial of a stay. The estate is in a precarious financial position and is desperately in need of the funds from the sale. As discussed above, the collapse of the previous sale has already caused the estate’s financial position to deteriorate significantly. Issuance of a stay could cause the present sale to collapse, depriving the estate of much-needed funds. By contrast, denial of a stay will most likely result in the Attorney General being unable to obtain appellate review of the Court’s decision. This injury is less severe than the financial injury the Debtor would likely suffer were a stay issued, because the Court has found that the Attorney General’s appeal is unlikely to succeed and does not raise serious legal questions.
4. Public Interest
“There is a great public interest in the efficient administration of the bankruptcy system.” Adelson v. Smith (In re Smith), 397 B.R. 134, 148 (Bankr. D. Nev. 2008). As noted, a stay could cause the sale to collapse, seriously injuring the estate. Here, the public’s interest in the Attorney General’s ability to obtain appellate review •with respect to an important state law issue is outweighed by the public’s interest in efficient administration of the bankruptcy system, particularly in view of the Court’s determination that the Attorney General’s appeal is unlikely to succeed.
D. American Specialty is a Good-Faith Purchaser Pursuant, to Bankruptcy Code § 363(m)
Section 363(m) provides that the “reversal or modification on appeal of an authorization ... of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.” Based on the testimony of Dr. Gurpreet Singh, American Specialty’s principal, the Court finds that American Specialty is a good-faith purchaser within the meaning of § 363(m).
In one of the more bizarre objections to a § 363(m) determination that this Court has encountered, Promise Hospital of East Los Angeles, L.P. (“Promise”), the disgruntled stalking-horse bidder who lost to American Specialty, maintains that American Specialty is not a good-faith purchaser, on the grounds that Dr. Singh failed to disclose to the Court the extent of his due diligence discussions with the Debtor prior to the auction. Before American Specialty’s overbid, the Debtor intended to sell the Assets to Promise for $4.5 million. American Specialty’s bidding increased the sale price to $6.7 million. The purpose of § 363(m) is to discourage bidders from .colluding for the purpose of driving down the sales prices at bankruptcy auctions. See Ewell v. Diebert (In re Ewell), 958 F.2d 276, 281 (9th Cir. 1992) (“Typically, lack of good faith is shown by fraud, collusion between the purchaser and other bidders or the trustee, or an attempt *833to take grossly unfair advantage of other bidders”). Here, American Specialty’s bidding increased the value received by the estate on account of the sale by $2.1 million. Promise’s objections are nothing more than a last-ditch attempt to scuttle the sale to American Specialty so that it may buy the Assets on the cheap.
E. Promise’s Other Objections to American Specialty’s Bid are Overruled
Promise argues that the Court’s determination to allow American Specialty to bid at the sale hearing violated its due process rights, since the Debtor noticed the hearing as a private sale not subject to overbids. Promise cites In re Northern Star Indus., Inc., 38 B.R. 1019 (E.D.N.Y. 1984) in support of its position. In Northern Star, the Trustee sought approval of a sale of real property to Wardam Steel Corporation (“Wardam Steel”). Id. at 1020. Because no objections were filed to the sale motion, Wardam did not attend the sale hearing. Id. At the sale hearing, Sydney Bletter appeared and presented a purchaser offer superior to Wardam Steel’s. Id. The bankruptcy court approved the sale to Mr. Bletter. Id. Wardam objected to the bankruptcy court’s ruling, stating that it had already made substantial improvements to the property in reliance upon the fact that no objections had been filed to the original proposed sale. Id. at 1021. The district court overturned the bankruptcy court’s ruling, finding that the bankruptcy court’s decision to accept Mr. Bletter’s increased offer, without notice to Wardam Steel, violated Wardam Steel’s due process rights. Id.
Unlike the losing bidder in Northern Star, Promise both participated in the sale hearing and had advance notice that the Court was likely to consider overbids at the sale hearing. The day prior to the sale hearing, the Court made available to the parties its tentative ruling, which stated that the Court was inclined to approve American Specialty’s bid over Promise’s. Likely because of the distinct possibility of an auction, Promise appeared at the hearing via counsel and with its CEO, Peter Baranoff, and CFO, James Hopwood. As bidding progressed, the Court granted Promise a one-hour recess to allow it to further consider its bidding position. Thus, Promise had a full opportunity to participate in the auction, and there was no violation of its due process rights. In addition, contrary to the situation in Northern Star, Promise has not made capital improvements to the Assets. Northern Star is inapposite, and Promise’s objections to the Court’s decision to allow American Specialty to bid are overruled.
III. Conclusion
For the foregoing reasons, the Assets of the closed Hospital are not a “health facility” within the meaning of Cal. Corp. Code § 5914(a). Consequently, the Debtor is not required to obtain the consent of the Attorney General prior to selling those Assets. The Attorney General’s contention that he has the authority to review the sale is an “interest in ... property” within the meaning of Bankruptcy Code § 363(f). The Assets may be sold free and clear of that interest pursuant to Bankruptcy Code § 363(f)(1).
. This Court has jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334 and General Order No. 13-05 of the U.S. District Court for the Central District of California.
. Cal, Health & Safety Code § 1300(a) provides in relevant part: “Any licensee or holder of a special permit may, with the approval of the state department, surrender his or her license or special permit for suspension or cancellation by the state department.”
. Unless otherwise indicated, all statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
. See Second Interim Report of Patient Care Ombudsman Pursuant to 11 U.S.C. § 333(b)(2) [Doc No. 657] at 10-16 (describing the .difficulties the Hospital encountered in relocating patients).
. Id. at 13.
. Id. at 12.
. Id. at 15.
. Id. at 11-13 (describing daily visits by the California Department of Public Health to monitor the Hospital’s orderly shutdown). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500504/ | MEMORANDUM OF DECISION
Honorable Benjamin P. Hursh, U.S. Bankruptcy Judge
At Butte in said District this 27th day of February, 2017.
In the above-captioned Chapter 7 bankruptcy case, after due notice a hearing was held at Missoula on February 16, 2017, on the Motion to Modify Stay (Document No. 24) (“Motion”) filed by creditors KS Ventures, LLC (“KS Ventures”) and Merry Moose. Investment, LLC (“Merry Moose”) (together “Movants”). Movants filed their Motion on January 12, 2017, just before the case was converted from. Chapter 13. The Debtor William M. Russell (“Russell” or “Debtor”) filed an objection, appeared, testified, and was represented by attorney Jon R. Binney of Missoula. Movants were represented by attorney Martin S. King of Missoula. Karen Smith (“Smith”), who owns membership interests in KS Ventures and Merry Moose, appeared and testified, represented by attorney James H. Cossitt of Kalispell.1 The Chapter 7 Trustee Richard J. Samson (“Samson”) appeared and testified and filed a consent to the Motion. Appraiser William R. Frazier testified. Exhibits (“Ex.”) 1 through 40 were admitted into evidence by stipulation of counsel.
At the conclusion of the parties’ cases-in-chief the Court took the Motion under advisement. After review of the Motion, Debtor’s objection, the record and applicable law, the Motion will be granted and the stay modified to authorize Movants to seek foreclosure and liquidation of the property identified in the Motion and described as follows:
LOTS 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 13,14,-15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38 AND 39 OF SWEETGRASS RANCH, ACCORDING TO THE MAP OR PLAT THEREOF ON FILE AND OF RECORD IN THE OFFICE OF THE CLERK AND RECORDER OF FLATHEAD COUNTY, MONTANA.
AND
ALL OPEN SPACES, COMMON AREA AND PRIVATE ROADWAYS OF SWEETGRASS RANCH, ALL LOCATED IN THE NE1/4 OF SECTION 33, TOWNSHIP 29 NORTH, RANGE 20 WEST, ACCORDING TO THE OFFICIAL MAP OR PLAT THEREOF ON FILE AND OF RECORD IN THE OFFICE OF THE CLERK AND RECORDER OF FLATHEAD COUNTY, MONTANA.
(the “Property”).2
This Court has jurisdiction of this Chapter 7 bankruptcy case under 28 U.S.C. § 1334(a). Movants’ Motion to Modify Stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G). This Memorandum of Decision includes the Court’s findings of fact and conclusions of law.
FACTS
Russell has been engaged in several business ventures, including real estate development and the purchase and sale of machinery, equipment, and scrap. Russell and Smith were married until Smith initiated an action in Arizona state court to annul the marriage. Smith prevailed in the *836annulment action and the marriage was annulled. Before the marriage was annulled, Russell conducted business using Smith’s bank account.
The Property is a residential subdivision located 6 miles east of Kalispell, Montana, consisting of 38 residential lots on approximately 120 acres, including 30 acres of common area, known as the “Sweetgrass Ranch3.” Smith testified that during their marriage she spent one summer in a house on the Property with her horses.
Russell testified that he purchased the Property from Glacier Bank for $1.3 million six years ago. He testified that he bought the Property at the bottom of the market, after the original developers had invested $5 million into the project. He testified that he took out three loans from Glacier Bank to finance his purchase of the Property. Russell testified that he used his money which was in Smith’s bank account for the purchase.
The Property is encumbered by liens arising from various instruments described as follows: (1) Deed of Trust dated December 21, 2011, to secure an original indebtedness of $336,727.00 owed to Glacier Bank as beneficiary, and recorded on December 23, 2011 as Document No. ending 26781 (“Deed of Trust 81”); Deed of Trust dated December 21, 2011, to secure an original indebtedness of $325,000.00 owed to Glacier Bank as beneficiary, and recorded on December 23, 2011 as Document No. ending 26782 (“Deed of Trust 82”); and, Deed of Trust dated December 21, 2011, to secure an original indebtedness of $325,000.00 owed to Glacier Bank as beneficiary, and recorded on December 23, 2011 as Document No. ending 26783 (“Deed of Trust 83”) (“collectively, Deed of Trust 81, Deed of Trust 82, and Deed of Trust 83 are referred to as the “Merry Moose Liens”).4
Smith testified that she formed Merry Moose for the purpose of acquiring the loans secured by the Merry Moose Liens. As a result of 3 separate Assignments of Deeds of Trust and Promissory Notes from Glacier Bank to Merry Moose, Merry Moose is the beneficiary under each of these instruments.5
Deed of Trust 81 specifically encumbers Lots 1, 2, 3, 6, 7, 8, 9, 10, 12, 13 and 14 of the Property, and as of the petition date Debtor owed a balance of $353,304.60. Deed of Trust 82 specifically encumbers Lots 4, 5, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36 and 38 of the Property, and as of the petition date Debtor owed a balance of $350,170.80. Deed of Trust 83 specifically encumbers Lots 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 37 and 39 of the Property and as of the petition date, Debtor owed a balance of $362,308.00.
Each of the Merry Moose Promissory Notes that correspond to the Merry Moose Liens includes the following language, “a default on any one of these loans constitutes a default of all loans, and collateral for each of these loans serves as collateral for all loans.” Under direct examination by Movants’ counsel Debtor testified that he is in default under the notes held by Merry Moose, and that Merry Moose gave him notices of foreclosure sales of the Property. Ex. 10, 11, 12.
*837In addition to the Merry Moose Liens, the Property is subject to a lien in favor of KS Ventures as a result of a Deed of Trust dated June 14, 2013, to secure an original indebtedness of $5,000,000.00 owed to KS Ventures LLC, as beneficiary, and recorded on June 25, 2013 as Document No. ending 15492 (“KS Deed of Trust”). KS Ventures filed Proof of Claim 5 (the “KS Proof of Claim”). KS Ventures calculated the debt owed to it and secured by the Deed of Trust as of the petition date to be $1,258,126.00. Debtor filed objections to the KS Proof of Claim at docket nos. 47 and 51.6
Finally, the Property is encumbered by a Federal Tax Lien recorded January 4, 2016, and is subject to unpaid real estate taxes. According to the IRS, its lien secures $613,791.45. Debtor testified that he disputed the amount of the lien, but he has not objected to the IRS Proof of Claim. Smith testified that she or entities she controlled have paid the real estate taxes owed on the Property since 2011. Her or her entities paid another $42,000 in real estate taxes owed on the Property in October 2016. Debtor admitted that he has not paid the real estate taxes. There may be additional judgment liens that have attached to the Property, subsequent to the issuance of Ex. 13, a Litigation Guarantee, issued on October 20, 2016. Along with unpaid taxes, Smith testified that Debtor never insured the Property, so she purchased forced place insurance for the Property. Debtor admits that Smith has paid the property taxes and insurance.
William Frazier (“Frazier”) is a Montana-certified general appraiser. Frazier testified that he performs mostly complex commercial appraisals in Flathead County and surrounding counties. Merry Moose hired Frazier to perform an appraisal of the Property. Frazier testified that he arrived at a value for the Property in the amount of $1,180,000 in 2015. In Ex. 33, Frazier adjusted his opinion of the value of the Property to $1,350,000 as of November 9, 2016, if sold by bulk sale.
Although the Appraisal contains an appraised retail value finding of “the Aggregate Sum of Retail sales to $2,736,000,” Frazier explained that the $2,736,000 retail figure was prior to costs and expenses of bringing the lots on line for sale.7 Frazier characterized this as a real concern. Frazier testified that he used a 6 year absorption rate which he believes would be required to sell all the lots at 5 lots per year. As for the real estate market around Kalispell, Frazier testified that the market operates at a 5 or 6 year cycle of price increases. Frazier does not expect the value of real estate to continue to rise, but instead sales and value will remain steady with the present value.
This case was filed on December 5,2016, in order to prevent Merry Moose from conducting its non-judicial foreclosure pursuant to Montana’s Small Tract Financing Act. Debtor filed his’Schedules and Statement of Financial Affairs, Ex. 37, on December 23, 2016. Russell responded to lengthy questioning about innumerable inaccuracies in his schedules by acknowledging that he made “lots of mistakes” in his petition and Schedules because it was an emergency filing to stop the trustee’s *838sale. Along with these acknowledgments, Debtor admitted that he failed to list other assets on his Schedules, including real property in Arizona and a right of redemption. He also failed to list several judgments that were entered against him in various lawsuits.
On January 12, 2017, the Chapter 13 Trustee filed a notice of Debtor’s failure to appear at the 341 meeting of creditors and requested that the case be converted to Chapter 7. The Court converted the case to Chapter 7 on January 12, 2017. Chapter 7 Trustee Samson filed his consent to Mov-ants’ Motion on February 15, 2017. Samson testified that he investigated before filing his consent, and decided it was clear to him that there is no equity for the estate in the Property after consideration of the Movants’ liens, the IRS lien and judgments.
DISCUSSION
The Motion is based on §§ 362(d)(1) and (d)(2). Section 362(g) provides that a party seeking relief from the stay has the burden of proof on the issue of debtor’s equity in property, and the party opposing relief has the burden of proof on all other issues.
Cause exists under 11 U.S.C. § 362(d)(1) to grant stay relief. Section 362(d)(1) allows for the granting of relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property of such party in interest[.]” This Court explained the standard for modifying the stay for “cause” under § 362(d)(1) in In re Westco Energy, Inc., 18 Mont. B.R. 199, 211-12 (Bankr. D. Mont. 2000):
Section 362(d), however, provides that, “[on request of a party in interest and after notice and a hearing, the court shall grant relief from the [automatic] stay” in three instances. The subsection relevant to these proceedings is § 362(d)(1), which allows for the granting of relief from the' automatic stay “for cause”. What constitutes cause for purposes of § 362(d) “has no clear definition and is determined on a case-by-case basis.” [In re] Tucson Estates, [Inc.,] 912 F.2d [1162] at 1166 [(9th Cir. 1990)]. See also Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In the Matter of Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986) (Relief from the automatic stay may “be granted ‘for cause,’ a term not defined in the statute so as to afford flexibility to the bankruptcy courts.”),
Section 362 vests this Court with wide latitude in granting appropriate relief from the automatic stay, and a decision to lift the automatic stay is within a bankruptcy court’s discretion, and subject to review for an abuse of discretion. In re Delaney-Morin, 304 B.R. 365, 369-70 (9th Cir. BAP 2003); In re Leisure Corp., 234 B.R. 916, 920 (9th Cir. BAP 1999); In re Plummer, 20 Mont. B.R. 468, 477-78 (Bankr. D. Mont. 2003); Mataya v. Kissinger (In re Kissinger), 72 F.3d 107, 108-109 (9th Cir. 1995).
Cause under § 362(d)(1) includes a lack of adequate protection. This Court discussed the concept of adequate protection in In re WRB West Associates Joint Venture, 106 B.R. 215, 219-20 (Bankr. D. Mont. 1989):
In a classic sense, adequate protection payments should be applied to compensate a secured creditor for any diminution in the value of collateral as a result of use, depreciation, destruction or other caused reduction in value. 11 U.S.C. § 361; 11 U.S.C. § 363(e); United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., (In re Timbers of Inwood Forest Assocs., Ltd.), 793 F.2d 1380, 1412 n. 57 (5th Cir.1986) (collecting support*839ing cases), aff'd, United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., [484] U.S. [365], 108 S.Ct. 626, 98 L.Ed.2d 740 (1988); General Elec. Mortgage Corp. v. South Village, Inc. (In re South Village, Inc.), 25 B.R. 987, 994 (Bkrtcy. D.Utah 1982) (‘adequate protection was protection ... against depreciation of the collateral when it erodes the allowed secured claim.’).”
[Matter of Kain, 86 B.R. 506, 511, 513 (Bankr. W.D. Mich. 1988)]
On the issue of adequate protection required by § 363(d) and (e), In re O’Connor, 808 F.2d 1393, 1396 (10th Cir.1987) holds:
“[2, 3] In recognition of the powers created in bankruptcy law to adjust debts and creditors’ interest, Congress realized the need to protect creditors from unfair treatment. Hence, it codified the concept of adequate protection into the several aggressive remedies available to debtors and bankruptcy trustees. See 2 Collier on Bankruptcy ¶1361.01[1] (15th ed. 1979). The whole purpose in providing adequate protection for a creditor is to insure that the creditor receives the value for which the creditor bargained prebankruptcy. House Rep. No. 95-595, 95 Cong., 2d Sess. 53, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6295. In determining these values, the courts have considered ‘adequate protection’ a concept which is to be decided flexibly on the proverbial ‘case-by-case’ basis. In re Martin, 761 F.2d 472 (8th Cir.1985); In re Monroe Park, 17 B.R. 934 (D.C.Del.1982). Since ‘value’ is the linchpin of adequate protection, and since value is a function of many factual variables, it logically follows that adequate protection is a question of fact. In re Martin, 761 F.2d at 472; In re George Ruggiere Chrysler-Plymouth, Inc., 727 F.2d 1017 (11th Cir.1984); In re Bank Hapoalim B.M., Chicago Branch v. E.L.I., Ltd., 42 B.R. 376 (D.C.N.D.Ill.1984); Brookfield Production Credit Association v. Borron, 36 B.R. 445 (D.C.E.D.Mo.1983), aff'd, 738 F.2d 951 (8th Cir.1984).”
In re Mellor, 734 F.2d 1396, 1400 (9th Cir.1984) addressed the issue on a basis of “equity cushion” as adequate protection in holding:
“While the term ‘adequate protection’ is not defined in the code, 11 U.S.C. § 361 sets forth three non-exclusive examples of what may constitute adequate protection: 1) periodic cash payments equivalent to decrease in value, 2) an additional or replacement lien on other property, or 3) other relief that provides the indubitable equivalent. In re Curtis, 9 B.R. 110, 111-112 (B.Ct.E.D.Penn.1981).
An equity cushion is the classic form of protection for a secured debt, and its existence, standing alone, can provide adequate protection under the code. In re Interstate Distributing Co., Inc., 13 Mont. B.R. 86, 89-90 (D. Mont. 1993) (citing In re Mellor, 734 F.2d 1396, 1400 (9th Cir. 1984)).
Movants have the burden of establishing there is no equity in the Property. 11 U.S.C. § 362(g)(1). The testimony of Frazier and his appraisal satisfy this burden. According to Frazier it was his opinion that the Property had a bulk sale value of $1,350,000.00. Although Frazier also opined that after improvements the Property could be sold for $2,736,000.00 in “Aggregate Sum of Retail Sales”, this outcome would require capital investment.8 And, in *840addition to the capital investment, the final outcome would not be realized for 5-6 years.9
Debtor’s testimony regarding valuation was at odds with Frazier. For purposes of valuation, an owner is competent to give his or her opinion on the value of his or her property, most often simply by stating the conclusion without stating a reason. See Hon. Barry Russell, Bankruptcy Evidence Manual, 2016-2017 ed. § 701:2; South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Tex., 614 F.2d 1056, 1061 (5th Cir. 1980). While a debtor’s estimate of value may be acceptable in certain cases, the Court may give little weight to an opinion if not based upon sufficient facts. In re Plummer, 20 Mont. B.R. 468, 478 (Bankr. D. Mont. 2003); In re Hungerford, 19 Mont. B.R. 103, 118-19 (Bankr. D. Mont. 2001).
Debtor testified that he could sell every lot for $50,000, and that some lots are worth $100,000. He did not testify as to how many lots he could sell for $100,000. Without considering the costs of sale, which Frazier testified was a concern, if the Court were to accept Debtor’s testimony that all 38 lots could be sold for $50,000, the gross proceeds would be $1,900,000. Here, the Court finds this testimony to be less than credible. Merry Moose’s counsel questioned Debtor at length about the accuracy of his schedules, values included on those schedules, and a host of other omissions and inaccuracies. This questioning and Debtor’s responses, combined with the lack of cogent detail offered by Debtor in support of his valuation testimony leave this Court with no alternative but to adopt Frazier’s bulk sale opinion of value, $1,350,000.00, for purposes of determining whether there is equity in the Property.
As of the petition date, the Merry Moose liens secured approximately $1,065,783.00 owed to Merry Moose by Debtor. After deducting the Merry Moose debt from the value of the Property, there remains approximately, $284,217.00. However, as discussed earlier, KS Ventures and the IRS have junior liens against the Property. Setting aside the KS Ventures lien in light of the pending objection, the remaining $284,217.00 will be eliminated by the lien of the IRS, any other junior liens, or real estate taxes, and any costs of sale. Mov-ants satisfied their burden of proof under § 362(g)(1) and§ 362(d)(1) to show that the Debtor does not have any equity in Mov-ants’ security.10
Debtor admits that he is in default in payments to Merry Moose, that he has neither paid property taxes, nor insurance premiums on the Property, and that he has not objected to Merry Moose’s Proofs of Claim, or otherwise offered any evidence to support his Objection filed January 26, 2017, at docket no. 35, that he disputes the Merry Moose Liens or obligations they secure. The Court has already concluded Debtor does not have any equity in the Property. In addition, Debtor offers Movants no other form of adequate protection. Based upon the forging, and the Court’s conclusion that there is no equity in the Property, the Court finds that Mov-ants’ have established cause for modification of the stay. Debtor’s testimony fails to *841convince the Court that stay relief is not warranted. To the contrary, Debtor’s own testimony established cause exists for modifying the stay under § 362(d)(1) as requested by Movants.
Stay relief is also appropriate under 11 U.S.C. § 362(d)(2). Section 362(d)(2) provides for the granting of relief from the stay if “(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.” The Court has already concluded that Debtor has no equity in the Property and the issue of whether the Property is necessary to an effective reorganization is moot, because a reorganization is not contemplated in a Chapter 7 liquidation.
Having concluded that Movants satisfied their burden, this Court exercises its discretion to grant Movants’ Motion to Modify Stay under §§ 362(d)(1) and (d)(2)(A). Mataya v. Kissinger, 72 F.3d at 108-109. Granting relief from the automatic stay returns the parties to the legal position which they enjoyed prior to the imposition of the stay. In re Johnson, 17 Mont. B.R. 318, 319 (Bankr. D. Mont. 1999); Estate of B.J. McAdams v. Ralston Purina Co., 154 B.R. 809, 812 (N.D. Ga. 1993). Although, the Court has flexibility in determining whether to grant Movants’ Motion, and has elected to exercise that discretion and grant the Motion, the Debtor retains whatever claims, defenses and remedies he may have against Movants’ in this or a non-bankruptcy forum.11
CONCLUSIONS OF LAW
1.This Court has original and exclusive jurisdiction of this Chapter 7 bankruptcy case under 28 U.S.C. § 1334(a).
2. Movants’ Motion to Modify Stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
3. Movants’ satisfied their burden of proof under 11 U.S.C. § 362(d)(1), § 362(d)(2)(A) and § 362(g)(1) to show that cause exists to grant them relief from the stay and that the Debtor does not have an equity in the Property.
4. Debtor failed to satisfy his burden of proof to show that relief from the automatic stay should not be granted.
IT IS ORDERED a separate Order shall be entered, in in conformity with the above, overruling Debtor’s objection and granting Movants’ Motion to Modify Stay.
. Although Mr. Cossitt appeared on behalf of Ms. Smith, Mr. King conducted the hearing for the Movants.
. Debtor owns additional property in Flathead County, but that property is not subject to the Motion to Modify Stay.
. The property is described on the third page of Ex. 33 as: “Lots 1 through 39, excepting Lot 11, of the Final Subdivision Plat of Sweet-grass Ranch Subdivision located in NE1/4 of Section 33, Township 39N, Range 20W, Principle Meridian Montana, Flathead County.”
. Beyond these 3 items, there are additional liens encumbering the Property, but those are discussed later in the Memorandum.
. See Merry Moose Proof of Claims Nos. 6, 7, and 8 in the Claims Register.
. The proof of claim objections will be heard and resolved in a separate proceeding and nothing herein shall be construed as an adjudication of Debtor’s objection as to the amount of the KS Proof of Claim.
. Frazier's testimony as to projected retail sales is of little use to the Court because this case has been converted to Chapter 7, and administration of the assets by the Trustee would require a bulk sale, not retail sale of the lots after costly improvements over 6 years,
. According to Frazier, "the cost to bring lots on-line for sale is a real concern.In my *840final analysis, the risks to recover a $2.5 million [+/-] investment appear to be high.” Appraisal at Dkt. 46-33 page 2 of 17,
. "Total sellout of lots is estimated at 6 years based on the available sales data.” Appraisal at Dkt. 46-33 page 10 of 17.
. The Court notes that the Chapter 7 Trustee also did his own analysis and reached the same conclusion as the Court, that after the Merry Moose liens are satisfied, any equity that might remain will be eliminated by the remaining liens.
. If indeed the Debtor has a friend, creditor, or investor waiting in the wings, prepared to extend funds equal to or greater than the Merry Moose debt as Debtor testified in Court, nothing prevents Debtor and this third party from attending, participating or bidding as a prospective purchaser at any trustee’s sale of the Property. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500505/ | ORDER GRANTING PARTIAL SUMMARY JUDGMENT
Brian D. Lynch, U.S. Bankruptcy Judge
Plaintiffs Michael Gray and Nicole Hart filed a Motion for Partial Summary Judgment (ECF No. 27) in this adversary seeking to have the Court determine that the Defendants to this action, ZB, N.A. and Bailey & Busey PLLC, committed a willful violation of the automatic stay under 11 U.S.C. § 362(k)(l) when the Defendants failed to have bench warrants for the arrest of the Plaintiffs quashed after Defendants learned of Plaintiffs’ bankruptcy filing.
Both Defendants filed responses to the motion (ECF Nos. 35, 36) contending that the events that allegedly constituted a stay violation were not subject to the stay as they were within the government regulatory exemption to the stay of Section 362(b)(4) as proceedings for contempt of court, and also that if there was a stay violation it was not willful. Plaintiffs filed a reply brief (ECF No. 42) and counsel for all parties appeared at the hearing on the motion for partial summary judgment on April 26, 2017 and provided argument.
At the conclusion of the April 26, 2017 hearing, the Court made findings of fact and conclusions of law on the record, per Fed. R. Bankr. P. 7052, which are incorporated herein by reference. By this Order, Plaintiffs’ Motion is hereby GRANTED.
Background
The facts are largely uncontested. Plaintiffs obtained a vehicle loan from defendant ZB, N.A. dba Zions National Bank (hereinafter “ZBNA”) to purchase a pickup truck. Plaintiffs somehow defaulted on the loan, and ZBNA repossessed the truck. In 2011, ZBNA retained defendant Bailey & Busey PLLLC (hereinafter “Bailey & Busey”) to pursue collection of the deficiency balance on the car loan. Bailey & Busey obtained a default judgment against Plaintiffs in June 2012. Bailey & Busey then began garnishment proceedings, and entered into various negotiations with Plaintiffs to resolve the debt. Unable to reach an agreed resolution, Bailey & Bu-sey commenced a supplemental proceedings action against Plaintiffs in Cowlitz County Superior Court in February 2016. During the garnishment period, Plaintiffs had told ZBNA once that they might file bankruptcy, but had not filed by the time the supplemental proceedings were commenced.
Defendants obtained an order on February 17, 2016 setting a hearing in the supplemental proceeding for March 16, 2016. The order was served on Plaintiffs at their residence, but they did not appear at the March 16th hearing. On March 23, 2016, Bailey & Busey mailed to the Cowl-itz Superior Court a motion to issue bench warrants, orders granting the motion and proposed bench warrants. The Court received the pleadings on March 25, 2016 and the orders granting the motion (one order as to each Plaintiff) were entered on March 28, 2016. Bailey & Busey received the signed orders back from the Court on or about March 31, 2016. Bailey & Busey believed they had received back the “original” bench warrants, but what was produced in response to the motion for summary judgment are just copies of *844the “Order Granting Bench Warrant” with a stamped name for the judge’s signature, and which directed the clerk of court to issue a bench warrant to the Cowlitz County Sheriff, and copies of Bailey & Busey’s proposed bench warrants, with the same stamped name. (Busey Dec, Ex. F, ECF No. 33). However, the bench warrants ultimately used by the sheriff in Plaintiffs’ later arrests are of a different format than the version sent in by Bailey & Busey. (Henry Dee. Ex, AA, ECF No. 30). The bench warrants used were issued directly by the Cowlitz County Superior Court, were issued March 28, 2016, and were signed under seal, by the Cowlitz County Clerk. Id.
Neither the motion for bench warrants nor the orders granting bench warrants were served on Plaintiffs.
Unbeknownst to the Cowlitz Court or apparently to either Defendant at the time of these actions, Plaintiffs had filed Chapter 7 bankruptcy on March 25, 2016. Plaintiffs did not schedule Bailey & Busey as a creditor, but they did schedule “Zion’s Bank.” (In re Gray, Case No. 16-41279, ECF No. 1). ZBNA received notice of Plaintiffs’ bankruptcy filing on or before April 4, 2016 as on April 4th a ZBNA representative called Bailey & Busey to inform them about the bankruptcy. Bailey & Busey put a “hold” on their file, but took no action to inform the Cowlitz County Superior Court about the filing and took no affirmative action to quash the court orders for issuance of bench warrants or the bench warrants. According to Bailey & Busey they believed they had the original documents, and nothing else would happen with the warrants without Bailey & Busey taking affirmative action.
Instead, with the bench warrants outstanding, Plaintiffs were arrested by the Cowlitz County Sheriff on May 24, 2016.
Summary Judgment Standard
As the parties agree, summary judgment is appropriate under Fed. R. Bankr. P. 7056 and Fed. R. Civ. P. 56 if “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, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Id. at 323, 106 S.Ct. 2548. Once the initial burden is met, the opposing party must then set forth specific facts showing that there is a genuine issue of fact for trial in order to defeat the motion. Anderson v. Liberty Lobby, 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Facts must be viewed in the light most favorable to the non-moving party where there is a genuine dispute to those facts. Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007).
Exemption from the Automatic Stay under Section 362(b)(4)
Upon filing bankruptcy, the automatic stay of 11 U.S.C. § 362 goes into effect and stays, in general, any actions to recover claims against the debtor, among other things. But certain actions are not subject to the stay, per Section 362(b). These include actions or proceeding by governmental units to enforce their police or regulatory powers. 11 U.S.C. § 362(b)(4). The bench warrants issued by the Cowlitz County Clerk include wording that Plaintiffs were to be brought before the court to answer “to the State of Washington charging the individual with contempt of court.” Bailey & Busey’s original motion for bench warrants does mention the word contempt, but it was clearly not a *845motion for contempt and solely sought the issuance of bench warrants. And the order granting the bench warrants does not reference contempt at all. (Busey Dec., Exs. E, F; ECF No. 82).
Defendants rely on the recent Ninth Circuit case of In re Dingley (Dingley v. Yellow Logistics, LLC), 852 F.3d 1143 (9th Cir. 2017) which found that a creditor’s attempt to recover state court issued discovery sanctions for failure to appear at a deposition did not violate the automatic stay as it came within the government regulatory exemption of Section 362(b)(4) as an attempt to effectuate the state court’s public policy interest in deterring litigation misconduct. As the Court stated at the April 26th hearing, the Defendants read too much into Dingley, which this Court concludes is more limited both in terms of the ambit of the automatic stay and the government regulatory exemption.
Here, after the Plaintiffs failed to appear for supplemental proceedings and Defendants shortly thereafter sought, by ex parte motion, the issuance of an order directing the Clerk of the Court to issue bench warrants to the Sheriff of Cowlitz County to seize Plaintiffs. Although Defendants suggest that this was some sort of civil contempt proceeding, in fact their motion for issuance of the bench warrants did not seek a finding of contempt, it posited that the Plaintiffs were already in contempt, without allowing them the opportunity to explain why they did not attend the supplemental proceedings. Moreover, Defendants did not serve such motion on Plaintiff and the orders granting the bench warrants make no mention of contempt, either as a finding or in the order. Plaintiffs had filed bankruptcy by the time that the Cowlitz County Superior Court had issued the order directing the Clerk to issue the bench warrants.
Even if the actions of Defendants could be characterized as a sort of quasi-civil contempt proceeding, the actions here do not fit into the holding of Dingley. It focused on the Court’s public policy interest in deterring litigation misconduct, and distinguished the government’s interest from adjudicating private rights. The acts of these Defendants were nothing more than efforts to collect on their judgment against Plaintiffs. They did not even attempt to notify Plaintiffs of their efforts to obtain bench warrants, which gives greater force to the argument that this was just an aggressive collection activity. If Dingley, and the related holding in In re Berg, 230 F.3d 1165 (9th Cir. 2000)(finding stay did not apply to attempt to liquidate claim based on sanctions imposed for filing frivolous appeal), are not so limited to cases clearly involving government regulatory actions, the risks increase of more actions similar to those here, i.e., aggressive use of sanctions and bench warrants, without notice, to collect debts. And potential continuation of that practice post-bankruptcy, which is exactly what the automatic stay is designed to prohibit. As the debt in issue would presumably be discharged in Plaintiffs’ bankruptcy, there was no purpose in having Plaintiffs seized so that they could be subjected to supplemental proceedings. The Court holds that the acts and omissions of Defendants do not come within the government regulatory exception to the automatic stay.
Willful Violation of the Stay
Defendants argued secondarily that they took no action to affirmatively enforce the warrants upon learning of Plaintiffs bankruptcy filing, did not ask the sheriff to execute the warrants and that Bailey & Busey “believed” nothing further would happen since they held the documents in their files. As such, Defendants contend that the violation of the stay by Plaintiffs’ *846arrest was not a willful violation of the' stay on their part.
A violation of the stay is willful if (1) the defendants knew of the stay, and (2) the defendant’s actions which violated the stay were intentional. In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). A specific, subjective intent to violate the stay is not necessary. Id. at 227. The Ninth Circuit has held that non-debtor parties have an affirmative duty to ensure they are in compliance with the automatic stay. See Sternberg v. Johnston, 595 F.3d 937, 943-44 (9th Cir. 2010); Eskanos & Adler, P.C. v. Leetien, 309 F.3d 1210, 1212 (9th Cir. 2002). Failure to take affirmative action to stay or vacate a state court order, entered without knowledge of the stay or even without the request of the creditor, can be a willful violation of the stay. Sternberg, at 944. In Sternberg, the court did not fault the creditor for the entry of an order by the state court post-bankruptcy filing that the creditor had not requested, but the court held that “[w]ithin a reasonable time after that, however, the law required [creditor] to take corrective action.” Id. at 944. The creditor needed to do what he could do to relieve the violation, he could not “simply rely on the normal adversarial process,” at a minimum “alert[ing] the state court to the conflicts between the order and the automatic stay.” Id. at 944-45.
Assuming as the Court must on summary judgment, that Bailey & Busey did believe they held the original bench warrants in their possession, there were still orders on the state court docket directing issuance of warrants to the Cowlitz County Sheriff, and those orders had been entered after the automatic stay of the Plaintiffs’ bankruptcy filing had gone into effect. The Court concludes that Defendants had an affirmative duty, upon learning of Plaintiffs’ bankruptcy filing, to contact the Cowlitz County Superior Court and inform them of the bankruptcy filing and ensure the orders issuing bench warrants and the bench warrants themselves were quashed. It is not enough, as the Ninth Circuit held in Eskanos, to assert that Defendants “did not carry forward or persist” in their collection activities, putting the matter on “hold” for “future determination.” Eskanos, 309 F.3d at 1214. The fact that Defendants left the supplement proceedings pending, and left the bench warrants and related orders pending “does nothing if not carry forward or persist against a debtor.” Id. “Active state filings exist as more than placeholders— the risk of default judgment looms over the debtor throughout.” Id. Here, the risk was even greater than default judgment, the risk of physical bodily apprehension loomed over these Plaintiffs — without them being aware of it since they weren’t served with the motion or orders for bench warrants — so long as Defendant left the supplemental proceedings pending and did not quash the offending orders and the bench warrants themselves. Section 362(a)(1) imposes an affirmative duty to halt post-petition collection actions. Id. at 1215. Fifty days passed from when Defendants became aware of the bankruptcy filing, and the arrest of the Plaintiffs at their home on the bench warrants. Defendants’ failure to affirmatively act until after learning that Plaintiffs had been seized by the county sheriff was a willful violation of the stay.
Joint and Several Liability
Plaintiffs’ motion also requested that Defendants be found jointly and severally liable for the willful stay violation. In re Johnson, 253 B.R. 857, 861 (Bankr. S.D.Ohio 2000)(“courts have imposed joint and several liability against creditors and their counsel for willful stay violations”); Vazquez v. Sears, Roebuck & Co. (In re *847Vazquez), 221 B.R. 222, 231 (Bankr. N.D.Ill.1998) (“A creditor and its attorney are jointly and severally liable for their violations of the discharge injunction because under general principles of agency law, an agent whose tortious conduct renders the principal liable is also liable for his own tortious acts.”)- Neither Defendant provided briefing or argument opposing such a finding, or establishing that one party or the other bears responsibility for the stay violation. In re Salov, 510 B.R. 720, 733 (Bankr. S.D.N.Y. 2014) (finding joint and several liability appropriate where there was no way for the court to determine who was ultimately liable). The Court concludes that ZBNA and Bailey & Busey are jointly and severally liable for the willful violation of the stay. See Eskanos, 309 F.3d at 1213.
Conclusion
Based on the foregoing, and the Court’s findings and conclusions on the record at the April 26, 2017 hearing, Plaintiffs’ Motion for Partial Summary Judgment is HEREBY GRANTED. Defendants ZBNA and Bailey & Busey PLLC are found to have willfully violated the automatic stay, and are jointly and severally liable for that violation.
Issues as to Plaintiffs’ damages and the scope and extent of awardable damages, as well as final judgment in this case, are reserved for further hearing. Trial is set in this matter for November 8,2017.
It is SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500507/ | Finkle, U.S. Bankruptcy Appellate Panel Judge.
Auberto Nieves Guzmán and Annette Nazario Rodríguez (“Debtors”) appeal from the bankruptcy court’s order denying their motion for reconsideration of the court’s order sustaining the chapter 7 trustee’s (the “Trustee”) objection to certain claimed exemptions. Because we find no abuse of discretion, we AFFIRM the bankruptcy court’s order.
BACKGROUND
The muddled procedural history of this case results from the Debtors’ multiple amendments to their asset and exemptions schedules, the Trustee’s objections to such amendments, the Debtors’ failure to timely *858respond to those objections, and delays by the parties.1
The Debtors originally filed a voluntary chapter 11 petition in May 2013 and, at their request, the case was converted to chapter 7 a little over two years later. For purposes of this appeal it is sufficient to note that during the chapter 11 case they filed their first amendment to Schedule C-Property Claimed as Exempt (“Schedule C”). Shortly after the case conversion, on July 9, 2015, the Debtors again amended Schedule C (“Second Amended Exemption Schedule”) to add to their claimed exemptions under § 522(d)(5)2 the funds that had been held in the chapter 11 debtor-in-possession bank accounts (“DIP Accounts”).
Within 30 days of the filing of the Second Amended Exemption Schedule,3 the Trustee filed an objection to the Debtors’ claimed exemptions to the DIP Accounts (“First Exemption Objection”). She asserted that the Debtors were not entitled to claim exemptions for those, accounts because they were funds earned or acquired post-petition, and as such, were property of the estate to be administered by the Trustee. The objection contained a notice provision incorrectly advising parties in interest, including the Debtors, of a 30-day period in which to object or otherwise respond, or the objection would be deemed unopposed and possibly granted by the court without a hearing.4 Nineteen days later, the bankruptcy court entered an order sustaining the Trustee’s objection as unopposed (“First Exemption Order”).
Shortly thereafter, the Debtors filed a motion requesting reconsideration of the First Exemption Order and also presenting their opposition to the First Exemption Objection. As grounds for reconsideration, the Debtors asserted that the 30-day response period provided by the Trustee in the objection was misleading and led to their admittedly “erroneous” belief that they had 30 days to respond when, in fact, the appropriate response period was only 14 days. As to the merits of their claimed exemption, they maintained that the First Exemption Objection should not be sustained because the funds in the DIP Accounts were property of the estate in *859which they can properly claim an exemption under § 522(d)(5). The Trustee did not file any opposition to the reconsideration motion.
On September 9, 2015, before the court acted on this motion, the Debtors filed their third amended Schedule C (“Third Amended Exemption Schedule”). The pertinent change to the schedule updated the balance in the DIP Accounts claimed as exempt. Without conducting a hearing (or referencing the reconsideration motion), by order entered on October 1, 2015, the bankruptcy court vacated the First' Exemption Order (“Vacating Order”) as “improvidently entered.” On that same day, the court also entered a separate order overruling the Trustee’s First Exemption Objection (“Order Overruling First Exemption Objection”). No explanation for the court’s ruling was given. The Trustee did not appeal either of these orders, but a few days after their entry, she filed a motion requesting a 30-day extension of time to seek reconsideration of the orders. The bankruptcy court did not rule on the extension request for many months and, for unexplained reasons, the Trustee did not file a motion for reconsideration of the orders until almost six months later— March 29, 2016. As grounds she argued that the Order Overruling First Exemption Objection was a manifest error of law. On May 3, 2016, again without explanation, the bankruptcy court denied the Trustee’s extension request filed months earlier (“Order Denying Extension”), but it did not acknowledge or rule on the Trustee’s motion for reconsideration.
Meanwhile, on April 4, 2016, the Debtors amended Schedule C for the fourth time (“Fourth Amended Exemption Schedule”), to include an exemption for an apartment they owned. The Debtors made no other additions or changes to their other claimed exemptions. Within 30 days of the filing of this amendment, the Trustee filed a “Second Objection to Claimed Exemption and, in the Alternative for Turnover of Property of the Estate” (“Second Exemption Objection”). She maintained that the Vacating Order and the Order Overruling First Exemption Objection only related to the First and Second Amended Exemption Schedules, and the Debtors’ subsequent filings of the Third and Fourth Amended Exemption Schedules rendered those prior orders moot. She asserted that this objection was timely because it was filed within the 30-day period for objection to the Fourth Amended Exemption Schedule. As to the merits, the Trustee primarily pressed her position that as a matter of law the Debtors were not entitled to claim an exemption in the DIP Accounts upon conversion of the case to chapter 7.
Adding to the procedural mishmash of this case, the Trustee’s Second Exemption Objection contained the same notice error as the First Exemption Objection, stating a 30-day response period. The bankruptcy case docket, however, reflected that the actual response period was 14 days. Once again the bankruptcy court acted on this objection prior to the expiration of the incorrectly stated response period, treating it as “unopposed,” and on May 20, 2016, entered an order sustaining the Trustee’s objection (“Order Sustaining Second Exemption Objection”).
This time the Debtors reacted swiftly and on that same date filed a motion seeking reconsideration of that order and also opposing the Second Exemption Objection (“Debtors’ Second Reconsideration Motion”).5 First, they asserted that the Trustee misled them by providing “inadequate and improper notice” of the appropriate response period for the Second Exemption *860Objection, and, because they filed their opposition within the 30-day period stated in the objection, the court should consider their opposition on the merits. Second, they challenged this objection as “unwarranted as a matter of law” because: (1) the 30-day time frame for objections to the Fourth Amended Exemption Schedule only applied to newly listed exemptions not previously claimed, and thus, did not apply to the DIP Accounts which were not modified by the Fourth Exemption Schedule; and (2) the Trustee could not reassert her objection to the exemption in the DIP Accounts because the bankruptcy court had already overruled the First Exemption Objection which had raised the same objection, and the court “ended the discussion” when it entered the Order Denying Extension.
The Trustee filed an opposition to the Debtors’ Second Reconsideration Motion (“Trustee’s Opposition”), contending that: (1) the Debtors knew of the appropriate response date, which was clearly noted in the bankruptcy court’s docket as a 14-day response period, and they had previously acknowledged this time frame as the appropriate response period in connection with the First Exemption Objection; (2) the Second Exemption Objection was timely because a new 30-day objection period as to all listed exemptions arose upon the filing of the Fourth Amended Exemption Schedule; and (3) the Order Overruling First Exemption Objection and the Order Denying Extension only pertained to the First and Second Amended Exemption Schedules, and the subsequent filings of the Third and Fourth Amended Exemption Schedules rendered those previous orders moot. Finally, the Trustee reasserted her substantive argument that as a matter of law the Debtors could not claim an exemption in the funds in the DIP Accounts.
On July 13, 2016, the bankruptcy court entered an order denying the Debtors’ Second Reconsideration Motion (“July 13 Order Denying Reconsideration”), noting only: “for the reasons state[d] in the Chapter 7 Trustee’s Opposition.” The Debtors then timely filed their notice of appeal of the July 13 Order Denying Reconsideration, and only that order.
JURISDICTION
A bankruptcy appellate panel is “duty-bound” to determine its jurisdiction before proceeding to the merits, even if not raised by the litigants. Rivera Siaca v. DCC Operating, Inc. (In re Olympic Mills Corp.), 333 B.R. 540, 546-47 (1st Cir. B.A.P. 2005) (citing Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 725-26 (1st Cir. B.A.P. 1998)). In order to assess our jurisdiction, we must first identify the order or orders on appeal.
I. Scope of Appeal
In their notice of appeal, the Debtors only identified the July 13 Order Denying Reconsideration. An appeal from an order denying reconsideration is “generally not considered to be an appeal from the underlying judgment.” Batiz Chamorro v. Puerto Rican Cars, Inc., 304 F.3d 1, 3 (1st Cir. 2002) (citation omitted). Notwithstanding this general rule, we have, on occasion, reviewed both the order denying reconsideration and the underlying judgment itself where two conditions have been met. First, both orders may be reviewed when the appeal involves a post-judgment motion filed within 14 days of the judgment, thereby tolling the appeal period for the underlying order by operation of Bankruptcy Rule 8002(b)(1). See Ross v. Garcia (In re Garcia), 532 B.R. 173, 180 (1st Cir. B.A.P. 2015) (citing Municipality of Carolina v. Baker González (In re Baker *861González), 490 B.R. 642, 646 (1st Cir. B.A.P. 2013)); see also Haddock Rivera v. ASUME (In re Haddock Rivera), 486 B.R. 574, 577 n.4 (1st Cir. B.A.P. 2013). Here, the Debtors’ Second Reconsideration Motion was filed within 14 days of the entry of the Order Sustaining Second Exemption Objection, and tolled the appeal period. Hence, this timeliness requirement is satisfied.
Second, both orders may be reviewed only “when it is clear that the appellant intended to appeal both orders, and where both parties brief issues relating to the underlying judgment.” In re Baker González, 490 B.R. at 646 (citing Bellas Pavers, LLC v. Stewart (In re Stewart), No. MB 12-017, 2012 WL 5189048, at *4-5 (1st Cir. B.A.P. Oct. 18, 2012); Vicenty v. San Miguel Sandoval (In re San Miguel Sandoval), 327 B.R. 493, 504 (1st Cir. B.A.P. 2005). “Where the appellant’s intent to appeal the underlying judgment is clear, appellate courts in this circuit generally treat the appeal as encompassing both orders.” In re Stewart, 2012 WL 5189048, at *4 (citing Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 8 (1st Cir. 2005); Wilson v. Wells Fargo Bank, N.A. (In re Wilson), 402 B.R. 66, 69 (1st Cir. B.A.P. 2009); In re San Miguel Sandoval, 327 B.R. at 504).
Here, the Debtors’ intent is unequivocal and plainly limited to an appeal from the July 13 Order Denying Reconsideration. Not only was this the sole order identified in their notice of appeal and in their statement of the issues on appeal, they posed each of the stated issues solely in the context of whether the bankruptcy court erred in denying the Debtors’ Second Reconsideration Motion. Precluding any doubts of their intention, at oral argument the Debtors’ counsel confirmed that the appeal is only from the July 13 Order Denying Reconsideration. Our review then is confined to that order, and for reasons elucidated below, this limitation significantly impacts the appeal.
II. Finality
We have jurisdiction to hear appeals from final judgments, orders and decrees of the bankruptcy court. See 28 U.S.C. § 158(a)(1), (b)(1). “ ‘[A]n order denying reconsideration is final if the underlying order is final and together the orders end the litigation on the merits.’ ” United States v. Monahan (In re Monahan), 497 B.R. 642, 646 (1st Cir. B.A.P. 2013) (quoting Garcia Matos v. Oliveras Rivera (In re Garcia Matos), 478 B.R. 506, 511 (1st Cir. B.A.P. 2012)). A bankruptcy court’s order sustaining an objection to a debtor’s claimed exemption is a final, appealable order. Massey v. Pappalardo (In re Massey), 465 B.R. 720, 723 (1st Cir. B.A.P. 2012) (citations omitted); Newman v. White (In re Newman), 428 B.R. 257, 261 (1st Cir. B.A.P. 2010) (citations omitted). Accordingly, the July 13 Order Denying Reconsideration is also a final order, and we have jurisdiction to hear this appeal.
STANDARD OF REVIEW
We review a bankruptcy court’s findings of fact for clear error and its conclusions of law de novo. Jeffrey P. White & Assocs., P.C. v. Fessenden (In re Wheaton), 547 B.R. 490, 496 (1st Cir. B.A.P. 2016) (citation omitted). If the underlying Order Sustaining Second Exemption Objection were before us, we would conduct a de novo review on the merits of the legal issues raised by that order, including whether a new objection period arises as to all claimed exemptions with any amendment of the exemption schedule and whether the DIP Accounts were subject to exemption under § 522(c)(5). But it is not, so our review of the July 13 Order Denying Reconsideration is limited to the abuse of *862discretion standard. See Rodriguez v. Banco Popular de Puerto Rico (In re Rodriguez), 516 B.R. 177, 183 (1st Cir. B.A.P. 2014) (“We review a bankruptcy court’s order denying a motion for reconsideration of a previous judgment for manifest abuse of discretion.”). “The abuse of discretion standard is quite deferential[.]” Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 68 (1st Cir. 2012). The First Circuit’s explanation of the implications of this type of limited review is instructive:
On appeal from a denial of a [reconsideration] motion, the movant faces a further hurdle. The [bankruptcy] court typically has an intimate, first-hand knowledge of the case, and, thus, is best positioned to determine whether the justification proffered in support of a [reconsideration] motion should serve to override the opposing party’s rights and the law’s institutional interest in finality. Consequently, we defer broadly to the [bankruptcy] court’s informed discretion in granting or denying relief from judgment, and we review its ruling solely for abuse of that discretion.
Karak v. Bursaw Oil Corp., 288 F.3d 15, 19 (1st Cir. 2002) (citations omitted).
We may set aside a bankruptcy court’s discretionary ruling only if it appears the court “‘relie[d] upon an improper factor, neglect[ed] a factor entitled to substantial weight, or considered] the correct mix of factors but ma[de] a clear error of judgment in weighing them.’ ” Mercado v. Combined Invs., LLC (In re Mercado), 523 B.R. 755, 761 (1st Cir. B.A.P. 2015) (quoting Bacardí Int’l Ltd. v. V. Suárez & Co., 719 F.3d 1, 9 (1st Cir. 2013)). “Material” errors of law may constitute an abuse of discretion. See Charbono v. Sumski (In re Charbono), 790 F.3d 80, 85 (1st Cir. 2015) (citing In re Sullivan, 674 F.3d at 68). “A manifest error of law is [a]n error that is plain and indisputable, and that amounts to a complete disregard of the controlling law.” Venegas-Hernandez v. Sonolux Records, 370 F.3d 183, 195 (1st Cir. 2004) (quoting Black’s Law Dictionary 563 (7th ed. 1999)) (internal quotations omitted).
DISCUSSION
I. Legal Framework of Motions for Reconsideration
We think it appropriate to discuss at some length the rule-based underpinnings of motions for reconsideration. There appears to be confusion by many practitioners about such motions, as they frequently omit any reference to their predicate authority. In fact, such motions are a misnomer.
As a starting point, motions for reconsideration are not recognized by the Federal Rules of Civil Procedure or the Federal Rules of Bankruptcy Procedure. In re Ortiz Arroyo, 544 B.R. 751, 756 (Bankr. D.P.R. 2015) (citation omitted). Bankruptcy courts usually treat a motion for reconsideration as either a motion to alter or amend a judgment under Rule 59(e), made applicable in bankruptcy by Bankruptcy Rule 9023, or as a motion for relief from judgment under Rule 60(b), made applicable in bankruptcy by Bankruptcy Rule 9024. See Surita Acosta v. Reparto Saman Inc. (In re Surita Acosta), 497 B.R. 25, 31 (Bankr. D.P.R. 2013) (citations omitted) (noting motion for reconsideration implicates either Rule 59(e) or 60(b)). “ ‘These two rules are distinct; they serve different purposes and produce different consequences.’ ” In re Ortiz Arroyo, 544 B.R. at 756 (quoting Lopez Jimenez v. Pabon Rodriguez (In re Pabon Rodriguez), 233 B.R. 212, 219 (Bankr. D.P.R. 1999), aff'd, 17 Fed.Appx. 5 (1st Cir. 2001)).
Where no rule is designated, the applicable rule often depends on the time such motion is filed. See Ramirez *863Rosado v. Banco Popular de P.R. (In re Ramirez Rosado), 561 B.R. 598, 607 (1st Cir. B.A.P.2017). A motion under Rule 59(e) must be filed within 14 days of the entry of the judgment or order.6 A Rule 60(b) motion may also be filed within 14 days of the entry of the judgment or order, but if a motion is filed after the 14-day period, and within one year of the entry of the judgment or order, the motion is usually construed under Rule 60(b). Nonetheless, even where the movant designates a particular rule, “[t]he substance of the motion, not the nomenclature used or labels placed on motions, is controlling.” In re Lozada Rivera, 470 B.R. 109, 113 (Bankr. D.P.R. 2012). Under either rule, “the granting of a motion for reconsideration is ‘an extraordinary remedy whieh should be used sparingly.’ ” Palmer v. Champion Mortg., 465 F.3d 24, 30 (1st Cir. 2006) (citations omitted); see also In re Lozada Rivera, 470 B.R. at 112.
Rule 59(e) does not state the grounds on which relief may be granted, and courts have “considerable discretion” in deciding whether to grant or deny a motion under the rule. ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 55 (1st Cir. 2008). It is well settled in the First Circuit that to meet the threshold requirements of Rule 59(e), the motion “must demonstrate the ‘reason why the court should reconsider its prior decision’ and ‘must set forth facts or law of a strongly convincing nature’ to induce the court to reverse its earlier decision.” In re Arroyo, 544 B.R. at 756-57 (quoting In re Pabon Rodriguez, 233 B.R. at 219). The movant must either clearly establish a manifest error of law or fact or must present newly discovered evidence that could not have been discovered during the case. See Banco Bilbao Vizcaya Argentaria P.R. v. Santiago Vázquez (In re Santiago Vázquez), 471 B.R. 752, 760 (1st Cir. B.A.P. 2012) (citing Aybar v. Crispin-Reyes, 118 F.3d 10, 16 (1st Cir. 1997)); see also Marie, 402 F.3d at 7 n.2 (citations omitted). “A motion for reconsideration is not the venue to undo procedural snafus or permit a party to advance arguments it should have developed prior to judgment, nor is it a mechanism to regurgitate old arguments previously considered and rejected.” Biltcliffe v. CitiMortgage, Inc., 772 F.3d 925, 930 (1st Cir. 2014) (citations omitted) (internal quotations omitted). “In practice, [Rule] 59(e) motions are typically denied because of the narrow purposes for which they are intended.” In re Arroyo, 544 B.R. at 757 (citation omitted).
Rule 60(b) “seeks to balance the importance of finality against the desirability of resolving disputes on the merits.” Farm Credit Bank of Baltimore v. Ferrera-Goitia, 316 F.3d 62, 66 (1st Cir. 2003) (citation omitted). In contrast to Rule 59(e), it sets forth the grounds for relief, providing that the bankruptcy court may relieve a party from a final judgment, order or proceeding if the movant successfully establishes any of the following:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
*864(6) any other reason that justifies relief.
Fed. R. Civ. P. 60(b).
The Debtors’ Second Reconsideration Motion did not refer to the underlying authority for the motion, let alone specify under which of the two potentially applicable rules they were proceeding. In the absence of such specification, because the motion was filed within 14 days of the entry of the Order Sustaining Second Exemption Objection, we deem it a motion under Rule 59(e).7 To prevail on their motion then, the Debtors needed to either present to the bankruptcy court newly discovered evidence unavailable prior to the entry of the order, or demonstrate that the bankruptcy court made a manifest error of law or fact in sustaining the Trustee’s objection.
II. Debtors’ Arguments
The Debtors urge the Panel to reverse the bankruptcy court’s denial of reconsideration on the following grounds: (1) the 30-day response period in the Second Exemption Objection was misleading, resulting in their failure to file an opposition within the applicable 14-day period and the entry of the order sustaining the Trustee’s objection by default; (2) the Trustee’s Second Exemption Objection was time-barred and should not have been considered by the court; and (3) the Trustee’s objection to their claimed exemption in the DIP Accounts was unwarranted as a matter of law. We consider each in turn.
A. Trustee’s Erroneous Notice of Response Period
Puerto Rico Local Bankruptcy Rule (“Local Rule”) 9013-1(c) provides, in relevant part:
(c) Required Response Time Language Must be Included on All Papers.
(1) Usual Papers. Adequate notice must be given to interested parties of the time to respond to every motion, application, or objection to exemption. Motions with a different response time are set forth in paragraph (2) below.
This notice may be in single or double space, must be in at least 11 point type, and must contain language substantially similar to the following:
NOTICE
Within fourteen (14) days after service as evidenced by the certification, and an additional three (3) days pursuant to Fed. R. Bank[r]. P. 9006(f) if you were served by mail, any party against whom this paper has been served, or any other party to the action who objects to the relief sought herein, shall serve and file an objection or other appropriate response to this paper with the clerk’s office of the United States Bankruptcy Court for the District of Puerto Rico. If no objection or other response is filed within the time allowed herein, the paper will be deemed unopposed and may be granted unless: (i) the requested relief is forbidden by law; (ii) the requested relief is against public policy; or (iii) in the opinion of the court, the interest of justice requires otherwise.
P.R. LBR 9013-1(c)(1).
Subsection (2) of the rule enumerates various motions and applications for which *865a different response time is applied from the “usual papers” under subsection (1). An opposition to an objection to claimed exemptions is not included among these and the 14-day period is the applicable one here. See P.R. LBR 9013-1(c)(2).
Local Rule 9013-1 “implements [Bankruptcy Rule] 9013 and the ‘after notice and a hearing' concept established in [§ ] 102(1)(A) of the Bankruptcy Code, which affords an opportunity to be heard ‘as is appropriate in the particular circumstances.’ ” In re MJS Las Croabas Props., Inc., 530 B.R. 25, 34 (Bankr. D.P.R. 2015) (quoting 11 U.S.C. § 102(1)(A)), aff'd, Castellanos Grp. Law Firm, L.L.C. v. F.D.I.C. (In re MJS Las Croabas Props., Inc.), 545 B.R. 401 (1st Cir. B.A.P. 2016).
The parties agree that the correct response period for the Debtors’ objection to both the First Exemption Objection and the Second Exemption Objection was 14 days, even though the Trustee recited the wrong time period of 30 days. After the Debtors moved for reconsideration of the order sustaining the Trustee’s First Exemption Objection on the basis of the Trustee’s incorrect and longer response notice by which they complained they were misled, the bankruptcy court vacated the order as “improvidently entered.” When the same notice defect occurred with the Trustee’s second objection, however, the bankruptcy court denied the Debtors’ reconsideration request. They urge the Panel to reverse, because the erroneous notice misled them and, although they did not file their opposition until after the 14-day period, they filed it well within the erroneously stated 30-day response period.
Although the bankruptcy court did not specifically explain its rationale in denying the Debtors’ Second Reconsideration Motion as to this contention, it denied the motion “for the reasons stated in the Trustee’s Opposition” to the Debtors’ Second Reconsideration Motion. Challenging the Debtors’ assertion, the Trustee conceded that once again she “inadvertently” provided the wrong response period, but argued that this time around the Debtors could not have been misled or confused where the docket entry for the Second Exemption Objection stated the correct 14-day response deadline and the Debtors’ counsel received such notification through the CM/ECF system. She also emphasized that the Debtors were already on notice of the appropriate shorter deadline by virtue of the earlier proceedings relating to the First Exemption Objection and, in fact, had previously acknowledged the 14-day period as the correct deadline.
It is undisputed that although the Trustee attempted to comply with Local Rule 9013-1(c)’s notice provision, she failed to provide the correct response period. Local Rule 1001-1(f) sets forth the consequences for a party’s failure to comply with the Local Rules:
(f) Failure to Comply with Local Rules. The court, sua sponte or on the motion of any interested party, may impose sanctions for failure to comply with these rules. Sanctions may include but are not limited to: the imposition of monetary sanctions; non-monetary sanctions; dismissal of the case or proceeding; striking of papers filed with the court; or denial of the relief sought, as the court in its discretion deems appropriate.
P.R. LBR 1001-1(f) (emphasis added).
While the bankruptcy court had discretion to deny the Trustee the relief requested and alter or vacate the Order Sustaining Second Exemption Objection, it declined to do so “for the reasons set forth in the Trustee’s Opposition.” One of those reasons was the Debtors’ prior knowledge *866of the applicable, shorter response period and the clear notice of a 14-day response time on the' bankruptcy court’s docket.8 The bankruptcy court’s adoption of this reasoning is supported by case law. See, e.g., In re Hartman, No. 08-41100-JDP, 2009 WL 4263503 (Bankr. D. Idaho Nov. 24, 2009) (citation omitted) (holding that a debtor’s conduct is “culpable” if he has received actual or constructive notice of the trustee’s objections to his claimed ex-emptioris, yet failed to respond timely). The Debtors have simply not demonstrated that the bankruptcy court committed a manifest error of law and abused its discretion.
It also bears noting, as discussed earlier, that a motion for reconsideration is not a vehicle by which a party may attempt to overcome its own procedural failures and does not permit the Debtors to advance arguments they could have, or should have, presented to the bankruptcy court prior to the entry of the July 13 Order Denying Reconsideration.9
B. Timeliness of Trustee’s Second Exemption Objection
The commencement of a bankruptcy case creates an estate comprised of property in which the debtor holds an interest. See 11 U.S.C. § 541. Section 522 allows debtors to exempt certain property from the bankruptcy estate that would otherwise be available for distribution to creditors; § 522(b) allows debtors to choose between the federal bankruptcy exemptions listed in § 522(d) and the exemptions provided by their state of residence, together with those provided by federal non-bankruptcy law. See 11 U.S.C. § 522. A debtor may amend the list of property claimed as exempt “as a matter of course at any time before the case is closed.” Fed. R. Bankr. P. 1009(a).
Under § 522(l), a debtor’s claimed exemptions are presumed valid in the absence of a timely objection. Bankruptcy Rule 4003(b)(1) governs the deadline within which a party in interest may object to a claim of exemption:
*867[A] party in interest may file an objection to the list of property claimed as exempt within 30 days after the meeting of creditors held under § 341(a) is concluded or within 30 days after any amendment to the list or supplemental schedules is filed, whichever is later. The court may, for cause, extend the time for filing objections if, before the time to object expires, a party in interest files a request for an extension.
Fed. R. Bankr. P. 4003(b)(1). Bankruptcy Rule 1019(2)(B), with some exceptions not applicable here, provides in relevant part that “[a] new time period for filing an objection to a claim of exemptions shall commence under [Bankruptcy] Rule 4003(b) after conversion of a case to chapter 7[.]” Fed. R. Bankr. P. 1019(2)(B).
“Strict adherence to the deadline, .unless extended by the [bankruptcy e]ourt on a request made before expiration of that deadline, is critical. “If no timely objection to an unambiguously-described and duly-listed exemption is filed, the property claimed as exempt is deemed exempt, regardless of whether the debtor had a color-able basis for claiming the exemption in the first place.” In re Vierstra, 490 B.R. 146, 149 (Bankr. D. Mass. 2013) (citing Taylor v. Freeland & Kronz, 503 U.S. 638, 642-44, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992); Mercer v. Monzack, 53 F.3d 1, 3 (1st Cir. 1995) (distinguishing Taylor on other grounds)) (emphasis added).
In this case, the bankruptcy court converted the case from chapter 11 to chapter 7 on June 29, 2015 (after the filing of the First Amended Exemption Schedule), and a new time period for filing an objection to the Debtors’ claimed exemptions commenced. See Fed. R. Bankr. P. 1019(2)(B). This new deadline was the later of 30 days after the conclusion of the post-conversion meeting of creditors (§ 341 meeting) or any amendments to the schedules. See Fed. R. Bankr. P. 4003(b)(1). The Debtors filed the Second Amended Exemption Schedule on July 9, 2015, and the post-conversion meeting of creditors concluded on September 14, 2015. Consequently, the deadline for objections to these amended exemptions would have been October 14, 2015. The Debtors, however, filed their Third Amended Exemption Schedule on September 9, 2015, and the Fourth Amended Exemption Schedule on April 4, 2016.
In the Trustee’s Opposition, she contended that under Bankruptcy Rule 4003(b)(1), each of the Debtors’ amendments to their claimed exemptions started a new 30-day objection period for any exemptions listed in such Amended Exemption Schedules, regardless of whether or not a particular claimed exemption was actually added or modified by the amended schedule. Following this line of reasoning, she argued that the Second Exemption Objection filed on May 3, 2016 was timely, having been filed within 30 days of the filing of the Fourth Amended Exemption Schedule. The bankruptcy court adopted the Trustee’s position when it denied the Debtors’ Second Reconsideration Motion “for the reasons state[d] in the Chapter 7 Trustee’s Opposition.” The Debtors advanced a narrower approach, arguing that the bankruptcy court abused its discretion because an amendment starts a new. objection period only for those specific exemptions that were added or amended. They contended that because the Fourth Amended Exemption Schedule only added a claimed homestead exemption with respect to the apartment and did not alter or affect the other exemptions which were listed in the prior Amended Exemption Schedules, any objection had to be limited to that specific exemption claim and the Trustee’s Second Exemption Objection was untimely.
*868Neither the Supreme Court nor the First Circuit has addressed this precise issue, and courts are not in agreement. The majority of courts that have considered it have concluded that the filing of an amendment to the list of exemptions “ ‘does not reopen the time to object to original exemptions not affected by the amendment.’ ” In re Walker, 505 B.R. 217, 219 (Bankr. E.D. Tenn. 2014) (quoting In re Larson, No. 12-30913, 2013 WL 4525214, at *4 (Bankr. D.N.D., Aug. 27, 2013), and citing Bernard v. Coyne (In re Bernard), 40 F.3d 1028, 1032 (9th Cir. 1994); In re Kazi, 985 F.2d 318, 323 (7th Cir. 1993); Grueneich v. Doeling (In re Grueneich), 400 B.R. 680, 684 (8th Cir. B.A.P. 2009); In re Payton, 73 B.R. 31, 33 (Bankr. W.D. Tex. 1987); In re Gullickson, 39 B.R. 922, 923 (Bankr. W.D. Wis. 1984)); see also Alan N. Resnick & Henry J. Sommer, 9 Collier on Bankruptcy ¶ 4003.03[1][a] (16th ed. 2013). The rationale behind this conclusion is primarily the need for prompt action and finality in bankruptcy proceedings. See, e.g., In re Bernard, 40 F.3d at 1032; In re Kazi, 985 F.2d at 323; In re Grueneich, 400 B.R. at 684.
Other courts have adopted a literal reading of Bankruptcy Rule 4003(b)(1) and determined that a party in interest may object to any claimed exemption even if the challenged exemption was not itself the subject of an amendment. See, e.g., In re Woerner, 483 B.R. 106, 110 (Bankr. W.D. Tex. 2012); In re Allen, 454 B.R. 894, 896 (Bankr. S.D. Fla. 2011); In re Ronk, No. 05-42552-DML-7, 2006 WL 2385240, at *4 (Bankr. N.D. Tex. June 19, 2006). These courts look to the plain language of the Bankruptcy Rule which refers to a 30-day objection deadline to “any amendment to the list or supplemental schedules filed,” opining that it is broad and does not limit what exemptions may be objected to after an amendment to Schedule C.
Some of these courts also find support, as the Trustee argued, in “the interdependence of exemption schemes,” which they conclude logically opens the door for objections to any claimed exemptions within 30 days following an amendment to the exemption schedule. In re Woerner, 483 B.R. at 110. The rationale is that any exemption amendment may impact the other claimed but unaltered exemptions, and once an exemption scheme has been approved, any modification of the scheme could affect the rest of the exemptions previously claimed, particularly exemptions under claimed under § 522(d)(1) and § 522(d)(5) (the so-called “wild card” exemption).
But we need not, and should not, in this case decide the issue on its merits because of the limited standard of review we must apply to the bankruptcy court’s denial of the Debtors’ Second Reconsideration Motion. There is no controlling appellate decision on this issue, but as indicated above, there are lower court cases supporting the Trustee’s position. Consequently, the bankruptcy court’s adoption of the Trustee’s position was not a “plain and indisputable” error “that amounted] to a complete disregard of the controlling law.” Venegas-Hernandez, 370 F.3d at 195 (citation omitted) (internal quotations omitted). Simply stated, there was no manifest error of law.
Alternatively, the Debtors maintain that the Trustee’s renewed objection to exemption of the DIP Accounts was precluded by the earlier final order of the bankruptcy court overruling the Trustee’s First Exemption Objection, which order was not appealed. In the Trustee’s Opposition, relying on the cases applying a literal construction of Bankruptcy Rule 4003(b)(1), she countered that this prior ruling applied only to the First Exemption Objection and became moot upon the Debtors’ subse*869quent amendments to Schedule C. Once again, under our limited review standard here, the bankruptcy court’s ruling did not constitute a manifest error of law and there was no abuse of discretion in denying reconsideration on this ground.
C. Objection to Exemption of DIP Accounts
Lastly, the Debtors seek reversal of the bankruptcy court’s denial of their Second Reconsideration Motion on the basis that they are permitted to exempt the funds in the DIP Accounts and the Trustee’s contrary position is wrong as a matter of law. According to the Debtors, post-petition earnings in the DIP Accounts are property of their chapter 7 estate which they are- entitled to claim as exempt under the wild card exemption of § 522(d)(5). They raise this issue for the first time on appeal, having failed to squarely present this argument in Debtors’ Second Reconsideration Motion. It is axiomatic that issues not raised below cannot be raised on appeal and such arguments are deemed waived.10 Benoit v. Deutsche Bank Nat’l Trust Co. (In re Benoit), 564 B.R. 799, 805-06 (1st Cir. B.A.P. 2017) (stating that failure to raise argument in proceedings below constitutes waiver of the argument on appeal) (citation omitted); see also Above-All Transp., Inc. v. Fraher (In re Fraher), No. MB 16-026, 2017 WL 715059, at *4 (1st Cir. B.A.P. Feb.21, 2017) (“Absent extraordinary circumstances, it is apodictic that legal theories not squarely addressed and litigated below cannot be raised for the first time on appeal.”) (citations omitted).
CONCLUSION
In short, the Debtors did not demonstrate that the bankruptcy court abused its discretion in denying Debtors’ Second Reconsideration Motion. The July 13 Order Denying Reconsideration is AFFIRMED.
. Unfortunately, the bankruptcy court did not provide much explanation of its rulings in the orders entered on the various amendments, objections, and related filings. Perhaps if it had, the proceedings might not have been quite as protracted.
. Unless expressly stated otherwise, all references to "Bankruptcy Code” or to specific statutory sections are to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq. All references to "Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure, and all references to "Rule” are to the Federal Rules of Civil Procedure.
. See discussion of Bankruptcy Rule 4003(b)(1) (setting forth 30-day deadline for objecting to claimed exemptions), infra.
. Attempting (but failing) to follow the applicable notice requirements set forth in the local rules of the Puerto Rico Bankruptcy Court, the Trustee in the First Exemption Objection stated:
Within thirty (30) days after service as evidenced by the certification, and an additional 3 days pursuant to F.R.B.P. 9006(f) if you were served by mail, any party against whom this paper has been served, or any other party to the action who objects to the relief sought herein, shall serve and file an objection or other appropriate response to this paper with the Clerk's office of the U.S. Bankruptcy Court for the District of Puerto Rico. If no objection or other response is filed within the time allowed herein, the objection will be deemed unopposed and may be granted unless: (1) the requested relief is forbidden by law; (2) the requested relief is against public policy; or (3) in the opinion of the court, the interest of justice requires otherwise. If you file a timely response, the court may, in its discretion, schedule a hearing.
. The order on the Debtors' Second Reconsideration Motion is the subject of this appeal.
. Bankruptcy Rule 9023 expressly alters the 28-day tíme frame set forth in Rule 59(e).
. When questioned at oral argument the Debtors' counsel initially indicated that the reconsideration motion was based on Rule 60(b). However, when asked to identify the particular subsection of Rule 60(b) which justified his request for relief, he stated (erroneously) that neither Rule 60(b) nor Rule 59(e) were applicable.
. P.R. LBR 9036-1(a)(2) provides, in relevant part:
Filing users of CM/ECF consent to notice and service by electronic transmission upon registration as filing users. A Notice of Electronic Filing ("NEF”) is automatically generated by CM/ECF and sent electronically to filing users. Service of the NEF constitutes notice and service pursuant to the Fed. R. Civ. P., Fed. R. Bankr. P., and these rules for all persons and entities that have consented to electronic service.
P.R. LBR 9036-l(a)(2). Thus, as a CM/ECF user, the Debtors' counsel received notice of the bankruptcy court’s docket entry.
. The Debtors did not argue below, and do not argue on appeal, that their failure to timely respond was a result of "excusable neglect,” nor do they address the factors for "excusable neglect” set forth in Pioneer Inv. Servs. Co. v. Brunswick Assocs. L.P., 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). See, e.g., In re Becker, 393 B.R. 233, 239 (Bankr. D. Idaho 2008) (determining debtor’s failure to respond to creditor's objection to her claimed exemption was the result of excusable neglect under Pioneer). In Pioneer, the Supreme Court held that a determination of excusable neglect is an equitable determination, which takes into account all relevant circumstances surrounding a party’s omission, including: (1) danger of prejudice to the non-moving party; (2) the length of the delay; (3) the reason for the delay, including whether it was in the reasonable control of the movant; and (4) whether tee movant acted in good faith. 507 U.S. at 395, 113 S.Ct. 1489. Under the circumstances presented here, it is highly unlikely that the Debtors would have prevailed under tee excusable neglect test in light of their constructive notice of tee appropriate response date and their prior acknowledgement of the correct, shorter response deadline. As tee adage goes: "Fool me once, shame on you; fool me twice, shame on me.”
. Although the Debtors asserted this substantive argument in their first motion for reconsideration of the order sustaining the Trustee’s First Exemption Objection, they did not raise it as a basis on which the bankruptcy court should reconsider the Order Sustaining Trustee's Second Exemption Objection. Therefore, it was not before the bankruptcy court at the relevant time in the proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500508/ | *879{Nature of Proceeding: Objection to Proof of Claim No. 14 (Doc. # 37) }
{Nature of Proceeding: Objection to Proof of Claim No. 15 (Doc. # 45)}
OPINION
John J. Thomas, Bankruptcy Judge
The above captioned matters set forth two separate cases raising similar issues of law that will be disposed of in this one Opinion.
The Debtors, James Pangaro and Brenda Rivera, filed a Chapter 13 bankruptcy in this district on September 15, 2015. The proof of claim deadline was set for January 17, 2016. Unlisted as a creditor was Vito’s Towing, Inc. Subsequently, on January 16, 2017, Vito’s filed a proof of claim as an unsecured creditor for $7,477.88. Thereafter, the Chapter 13 Trustee, Charles J. DeHart, III, filed an objection to the claim alleging its untimely filing. While a response was filed, the Claimant indicated that it would not be attending the hearing on the objection but would submit “the matter on the papers.” Docs. ##38 and 39.
The Debtors, Peter M. Luzzo and Lucy Ann Luzzo, filed a Chapter 13 bankruptcy in this district on March 31, 2016. The proof of claim deadline was set for July 31, 2016. Unlisted as a creditor was Thomas A. Potts, Esq. Subsequently, on February 15, 2017, Attorney Potts filed a proof of claim as an unsecured creditor for $800.00. Thereafter, the Chapter 13 Trustee, Charles J. DeHart, III, filed an objection to the claim alleging its untimely filing. No response was filed by the Claimant although the Claimant attended the hearing.
The issue in both cases is whether the lack of scheduling in the bankruptcy and the subsequent notice of proof of claims deadlines excuses the Claimants from abiding by the claims deadline. At the time of the hearing, Claimants’ allegations that they were not aware of Debtors’ bankruptcy in time to file a timely claim were not challenged by the Objector.
The majority of appellate cases to consider this issue have held that the deadline applies to those creditors scheduled and unscheduled. In re Gardenhire, 209 F.3d 1145 (9th Cir. 2000); Matter of Greenig, 152 F.3d 631, 634-35 (7th Cir. 1998); Jones v. Arross, 9 F.3d 79 (10th Cir. 1993). The reasoning of these cases begins with the text of Federal Rule of Bankruptcy Procedure 3002(c), which reads as follows:
(c) Time for filing
In a chapter 7 liquidation, chapter 12 family farmer’s debt adjustment, or chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code, except as follows:
(1) A proof of claim filed by a governmental unit, other than for a claim resulting from a tax return filed under § 1308, is timely filed if it is filed not later than 180 days after the date of the order for relief. A proof of claim filed by a governmental unit for a claim resulting from a tax return filed under § 1308 is timely filed if it is filed no later than 180 days after the date of the order for relief or 60 days after the date of the filing of the tax return. The court may, for cause, enlarge the time for a governmental unit to file a proof of claim only upon motion of the governmental unit made before expiration of the period for filing a timely proof of claim.
(2) In the interest of justice and if it will not unduly delay the administration of the case, the court may extend *880the time for filing a proof of claim by an infant or incompetent person or the representative of either.
(3) An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity’s interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.
(4) A claim arising from the rejection of an executory contract or unexpired lease of the debtor may be filed within such time as the court may direct.
(5) If notice of insufficient assets to pay a dividend was given to creditors under Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall give at least 90 days’ notice by mail to creditors of that fact and of the date by which proofs of claim must be filed.
(6) If notice of the time to file a proof of claim has been mailed to a creditor at a foreign address, on motion filed by the creditor before or after the expiration of the time, the court may extend the time by not more than 60 days if the court finds that the notice was insufficient under the circumstances to give the creditor a reasonable time to file a proof of claim.
As. can be seen, there is indicated a 90 day deadline applicable to Chapter 13 cases that allows for no exception where a creditor is not scheduled.
Federal Rule of Bankruptcy Procedure 9006 allows for extensions in certain circumstances. My review of that Rule finds an explicit limitation of extensions under Rule 3002(c) to those articulated in the referenced Rule. Rule 9006(b)(3).
My conclusion is that neither Rules 3002 nor 9006 allow for late claims to be deemed timely by reason of not being scheduled in a Chapter 13 filing. “The Rules are binding and courts must abide by them unless there is an irreconcilable conflict with the Bankruptcy Code.” In re Mansaray-Ruffin, 530 F.3d 230, 235 (3rd car. 2008).
Having said that, I do have concerns whether disallowance of these claims works a deprivation of property without due process'of law in violation of our constitution,
Certainly, if the Chapter 13 discharge was applicable to an unscheduled creditor, the creditor’s property rights would be lost without the opportunity to participate in a plan. It is fairly clear, however, that a 13 discharge only applies to scheduled creditors inasmuch as § 1328(a) extends the discharge only to creditors “ provided for by the plan” and an unscheduled debt and creditor can not be provided for. In re Henneghan, 2009 WL 2855835 at *4 (Bankr. D.C., June 15, 2009); In re Plummer, 378 B.R. 569, 572 (Bankr. C.D.Ill. 2007).1 Accordingly, in the absence of a discharge, the due process rights of the creditors are not compromised, and the objections to proofs of claim must be sustained and the claims deemed untimely filed.
My Order will follow.
*881ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY
ORDERED that the Trustee’s Objection to Proof of Claim No. 14 is sustained, and the Proof of Claim of Vito’s Towing, Inc. is deemed untimely filed.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY
ORDERED that the Trustee’s Objection to Proof of Claim No. 15 is sustained, and the Proof of Claim of Thomas A. Potts, Esquire, is deemed untimely filed.
. Contrast the provisions of a Chapter 13 discharge in § 1328(a) with those provided in Chapter 7 (§ 727(b)), which allows for the possibility that an unscheduled creditor may be discharged. Judd v. Wolfe, 78 F.3d 110 (3d Cir. 1996). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500510/ | *894ORDER
Appellant Zeljko Situm (Creditor) filed a Petition for Rehearing (Motion), asking us to rehear and reconsider our decision made on April 27, 2017 that affirmed the bankruptcy court’s order confirming the Chapter 13 bankruptcy plan (Plan) of Douglas J. Coppess (Debtor).
The Creditor raised two issues on appeal, one concerning the Debtor’s failure to provide tax returns and the other complaining that the Debtor’s real property was undervalued. Although the confirmation order stated that the court made her findings of fact and conclusions of law on the record at the confirmation hearing, the Creditor provided no transcript of the confirmation hearing. In addition, the disks provided to the court did not include a recording of the second portion of the confirmation hearing during which the court made such findings of fact and conclusions of law. The second of the two disks contained no content. Together with his Motion, the Creditor submitted an additional disk that contains (among other things) the bankruptcy court’s complete confirmation hearing including findings of fact and conclusions. of law made on the record. Consideration of the content contained on the new disk does not change our ruling.1
We address only the two issues that were originally presented to us. We do not discuss any arguments that were not presented to us in the notice of appeal or that were not made before the bankruptcy court. See Forbes v. Forbes (In re Forbes), 218 B.R. 48, 51 (8th Cir. BAP 1998) (citing Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976)) (citation omitted) (Generally, an appellate court does not consider arguments raised for the first time on appeal).
The Creditor’s first argument concerning why the Debtor’s Plan should not have been confirmed is that the Debtor failed to provide his tax returns. In the Motion, the Creditor complains that in our April 27 opinion we misunderstood his position when we stated that the Creditor argued that the Debtor failed to provide the Creditor with his tax returns. The Creditor states that his argument is that the Debtor failed to provide the court with his tax returns. This is a distinction without a difference for the purposes of this appeal.
The Creditor complains that the Debtor did not provide tax returns for the several years prior to his bankruptcy filing. Bankruptcy Code § 521 (e)(2)(A)(i) states that:
(e) ... (2)(A) The debtor shall provide— (i) not later than 7 days before the date first set for the first meeting of creditors, to the trustee a copy of the Federal income tax return required under applicable law (or at the election of the debt- or, a transcript of such return) for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed; ...
*89511 U.S.C. § 521(e)(2)(A)(i) (emphasis added). The record shows that the Debtor satisfied his statutory obligation by providing to the Chapter 13 trustee his tax return “for the most recent tax year ending immediately before the commencement of the case and for which a Federal income tax return was filed.” 11 U.S.C. § 521(e)(2)(A)(i). The Chapter 13 trustee acknowledged receipt of the Debtor’s 2015 Federal return at the § 341 meeting. The bankruptcy judge also found the Debtor had complied with the cited Bankruptcy Code requirement. As the bankruptcy court aptly stated, the Creditor failed to request through discovery the Debtor’s tax returns for prior years. The bankruptcy court adjourned the confirmation hearing for two months and advised the Creditor on several occasions to seek the advice of counsel. The court also appropriately pointed out that the Debtor’s Statement of Financial Affairs set forth the Debtor’s income for previous years.
The Creditor’s second argument is that the Plan confirmation was improper because the values of the Debtor’s real property located on Iglehart Avenue and Hague Avenue were undervalued. The court found the appraiser who testified on behalf of the Debtor to be credible. The Creditor provided no valuation evidence. In addition, the court looked to the value for the properties listed by the Debtor on his schedules (noting that in Minnesota a debtor is qualified to testify about the value of his real property) and compared those values to the undisputed amount of debt owed to the banks and taxing authorities to find that there was no equity.
Accordingly, it is hereby ORDERED that the Motion is DENIED.
. Due to the Creditor’s failure to comply with the requirement to provide to us a transcript, we listened to hours of proceedings. See Fed. R. Bankr. P. 8009(a)(4) and (b)(1)(A) (the record on appeal must include any transcript ordered under Rule 8009(b) and "the appellant must ... order in writing from the reporter, ..., a transcript of such parts of the proceedings not already on file as the appellant considers necessary for the appeal .... ”); Internal Operating Procedure 111(B)(1) ("If a transcript of proceedings before the bankruptcy court is required for the appeal, appellant’s counsel must order the transcript within 14 days of filing the notice of appeal.”) (citing Fed. R. Bankr. P. 8009). From the recordings, we were not able to hear every comment by every participant. Filing audio disks instead of written transcripts of proceedings is not a practice that we encourage and going forward we are not likely to allow an exception to the requirement for written transcripts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500512/ | DECISION & ORDER
Hon. Carl L. Bucki, Chief U.S.B.J., W.D.N.Y.
Lawyers must proceed with great caution whenever they propose to represent both a corporation and its principal owner in Chapter 11. Proper representation becomes even more challenging when such cases are jointly administered. In these situations, the attorney implicitly promises to provide complete and undivided assistance to each client. In the context of the final fee application presented in this case, outstanding issues include the impact of this commitment on a small portion of counsel’s request.
Select Tree Farms, Inc., filed a petition for relief under Chapter 11 of the Bankruptcy Code on March 7, 2012. As reported on a Statement of Financial Affairs filed on behalf of that debtor, George A. Schichtel was the sole director, president and owner of Select Tree Farms. Moments after the filing of the petition for Select Tree Farms, Inc., George A. Schichtel and his wife, Debra G. Schichtel, filed their own personal joint petition for relief under Chapter 11.
On the same day as their bankruptcy filings, the Schichtels and Select Tree Farms filed several motions, including a motion for the joint administration of the two cases without substantive consolidation. The debtors further reported that they intended to bring a motion for the appointment of the law firm of Damon Morey LLP to serve as attorneys for both of the bankruptcy estates. Claiming an expectation of difficulty in allocating legal time, the proposed counsel filed papers asserting that the order for joint administration should include “authority for Damon Morey to post and to bill its time in these matters jointly, without allocation.” Although the court granted the motion for *3joint administration,1 we denied the request for consolidated time entries. Instead, the court explicitly directed that in maintaining time records, counsel was to segregate its work on behalf of the corporation from any services provided to the corporate principal and his wife. Thereafter, Damon Morey moved for its appointment to serve as counsel in both cases. After warning the firm of the risks associated with such joint representation, the court granted this later request.
On August 30, 2012, Damon Morey filed a first interim application for the allowance of compensation for services rendered and the reimbursement of expenses incurred through July 31, 2012, in the cases of Select Tree Farms and of George and Debra Schichtel. Although submitted as a single document, the application segregated the time and expenses associated with each case. Specifically, in the corporate case, the firm claimed outstanding fees for services in the amount of $106,936.50, and disbursements in the amount of $6,207.57. The firm claimed fees for services to Mr. and Mrs. Schichtel in the amount of $4,171. Upon giving due consideration to counsel’s application, the court approved the requested reimbursement of expenses in full, but allowed interim payments on account of services in amounts equal to eighty percent of the value of documented time. Thus, with regard to compensation for services, we authorized Select Tree Farms to pay $85,549.20 to Damon Morey, and deferred consideration of the balance of the firm’s request in the amount of $21,387.30.2 Meanwhile, the court authorized George and Debra Schichtel to pay $3,336.80 and deferred consideration of a remaining balance in the amount of $834.20. As to all debtors, any deferred request would be subject to review upon submission of a final fee application.
Eventually, both the corporate and individual debtors would voluntarily convert their cases to Chapter 7. On December 23, 2016, with regard to Select Tree Farms only, Damon Morey filed a final application for reimbursement of expenses and compensation for legal services. Specifically, the firm requested an allowance for additional expenses in the amount of $2,083.55; an allowance in the amount of $21,387.30, on account of the deferred portion of fees sought from' the corporate debtor in the first interim application; and an allowance in the amount of $126,325.75, as compensation for services rendered subsequent to the time described in the first interim application. Both the Office of the United States Trustee and the Chapter 7 trustee objected to the allowance of various services rendered after the conversion of the case. To address this concern, at the hearing on its application, Damon Morey orally agreed to reduce its claim by $9,837.25. Consequently, for services not included in the first fee application, the firm now seeks compensation in the reduced amount of $116,488.50.
*4Section 330 of the Bankruptcy Code establishes standards for the determination of compensation. Subdivision (a)(1) of this section recites the general rule:
“After notice to the parties in interest and the United States Trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to ... a professional person employed under section 327 or 1103—(A) reasonable compensation for actual, necessary services rendered by the trustee, examiner, ombudsman, professional person, or attorney and by any paraprofessional person employed by any such person; and (B) reimbursement for actual, necessary expenses.”
Subdivisions (a)(3) and (a)(4) recite particular considerations for the determination of compensation. Pursuant to 11 U.S.C. § 330(a)(2), “[t]he court may, on its own motion... award compensation that is less than the amount of compensation that is requested.” Also, in those instances where it has awarded interim compensation, the court may order the recipient to return the amount by which “such interim compensation exceeds the amount of compensation awarded” under section 330. 11 U.S.C. § 330(a)(5).
As requested in Damon Morey’s final application, the court approves reimbursement of the firm’s itemized disbursements. With regard to services rendered, as permitted under 11 U.S.C. § 330(a)(2) and (5), we have examined the firm’s entire request for compensation, including charges for time entries listed in both the first interim application and the final application. Based on this review, we have identified three issues that compel a downward adjustment of compensation. ■
First, in its listing of services on behalf of the corporation, Damon Morey has posted 20 entries that relate to the individual case of George and Debra Schi-chtel. Five entries involve the preparation of monthly operating reports for these individuals; two entries involve a question concerning domestic support obligations; three entries involve an application for stay relief to foreclose on the Schichtel’s personal residence; and ten entries involve an application for stay relief to repossess a boat that the Schichtel’s owned personally. Altogether, these items represent services having a stated value of $1,645.50. We must therefore reduce the requested allowance in the corporate case by this amount.
The second but more troublesome issue relates to a response to the application of American Honda Finance Corporation for relief from the automatic stay. In December of 2008, Select Tree Farms and Debra Schichtel jointly purchased a Honda Pilot sports utility vehicle, apparently for use by Mrs. Schichtel. In connection with this purchase, Debra Schichtel signed a retail installment sales contract both individually and as a vice-president of Select Tree Farms. Sometime thereafter but pri- or to the bankruptcy filing, Mrs. Schichtel terminated her affiliation with Select Tree Farms. With its bankruptcy petition, the corporation filed a Statement of Financial Affairs which indicates that Debra Schi-chtel was not then an officer or director. Meanwhile, Mrs. Schichtel submitted schedules indicating that she was not employed.
By the time that the debtors filed their bankruptcy petitions in March of 2012, Debra Schichtel and Select Tree Farms had defaulted in their payments to American Honda Finance Corporation, the holder of the purchase money security interest in the Honda Pilot. Consequently, on April 3, 2012, the secured creditor filed a motion for stay relief. In this application, American Honda Finance Corporation represented that in March of 2012, the vehicle had a wholesale value that was almost $9,000 *5greater than the outstanding secured indebtedness, In the context of representing the corporation, Damon Morey should have urged a liquidation of the vehicle and recovery of its equity for the benefit of the estate. Instead, it negotiated frequent adjournments that allowed Mrs. Schichtel to retain possession and use. When the Court finally lifted the stay more than two years after the initial application for relief, the vehicle’s equity had almost fully dissipated. In responding to the motion, Damon Mor-ey performed work listed on 46 time entries.- Collectively, these services have an asserted value of $3,383, a sum that Damon Morey now seeks to collect from the estate of Select Tree Farms, Inc.
In representing both a corporation and related individuals, attorneys face special challenges, including a duty to exercise independent judgment on behalf of each client separately. From the perspective of Select Tree Farms, no benefit derived from the defense of the motion of American Honda Finance Corporation for stay relief. The vehicle was used not by the corporation, but by an individual who was no longer associated with Select Tree Farms. Subject to exceptions not here relevant, section 330(a)(4)(a)(ii) of the Bankruptcy Code provides that the court shall not allow compensation for “services that were not—(I) reasonably likely to benefit the debtor’s estate.” Here, the efforts of counsel may have enabled Mrs. Schichtel to enjoy use of the Honda, but her interests are not necessarily the interests of the corporation. We need not now discuss how Damon Morey might have resolved the conflict caused by representing two parties with conflicting interests. Nonetheless, because the corporation derived no benefit from the firm’s efforts, we must deny the request for compensation related to the Honda motion for stay relief.
The final area of concern relates to time spent in negotiating a further third-party guarantee of legal fees. After approving several temporary authorizations for Damon Morey to serve as counsel for the debtors, this court granted a final order approving the firm’s employment on June 18, 2012. However, less than eight months later, as indicated on time records submitted with its most recent fee application, Damon Morey was attempting to secure a third party’s guarantee of its fees. The firm spent 4.2 hours of time on these negotiations. For this, Damon Morey now seeks compensation of $953.
On March 27, 2012, Select Tree Farms and George and Debra Schichtel filed their joint motion for authority to employ Damon Morey LLP as general counsel. In their motion, the debtors stated that they “anticipate that Damon Morey will render general legal services as counsel to the Debtors as needed throughout the course of these Chapter 11 cases, including bankruptcy and restructuring, corporate and litigation.” The motion then recited a comprehensive list of 13 areas of legal services that Damon Morey had agreed to perform. Further, the motion referenced no contingency regarding the continuation of legal services. Notably, the motion was signed not only by the debtors, but also by Damon Morey. By its signature, the firm confirmed its agreement to render complete services throughout the bankruptcy. Consequently, Select Tree Farms already enjoyed the benefit of Damon Morey’s promise of legal representation, even without regard to the outcome of any negotiations for a further guarantee of payment.
We appreciate that in complex cases, actual time expenditures may quickly exceed projections. When management wishes to explore reorganization options despite counsel’s skepticism, circumstances may cause the attorneys to seek further assurances of payment. Nonetheless, when counsel here had fully committed to repre*6sent the debtor for the duration of the case, the guarantee of legal fees really inured to the benefit of the attorneys, and not to the benefit of the bankruptcy estate. Accordingly, no' compensation will be allowed for the time devoted to securing the additional guarantee of fees.
Conclusion
In its first interim application, Damon Morey LLP sought payment for services rendered and disbursements incurred for the benefit of Select Tree Farms, Inc., in the combined amount of $113,144.07. In a final application for allowances, the attorneys then requested reimbursements and compensation, after adjustments to which the firm has consented, in the further amount of $118,572.05. Together, the two fee applications now seek allowances totaling $231,716.12 on account of expenses incurred and services rendered on behalf of the corporation. For the reasons stated herein, the court will disallow portions of these requests in the amount of $5,981.50. Accordingly, on a final basis, Damon Mor-ey LLP is allowed the sum of $225,734.62. By reason of the prior award of an interim allowance, the applicant has already received $66,826.91. Additionally, the firm holds the sum of $108.41, on account for the benefit of the debtor. Both of these later sums are properly now applied and credited against the allowed fees. Accordingly, Damon Morey LLP is now owed an outstanding balance of $158,799.30.3 To the extent that it is unable to recover this sum from a guarantor, Damon Morey LLP may file a proof of claim for the remaining balance.
So ordered.
. The problems addressed in this decision have prompted the court to reconsider its views on joint administration of the separate cases of a corporation and its principal. When a law firm undertakes to represent both debtors, joint administration may lull some attorneys into overlooking their separate and distinct obligations to each client. Meanwhile, in hindsight, the court can identify no major benefit from the joint administration that it allowed in the present instance. In future cases, therefore, the court will allow joint administration of a corporate case with that of its principal only in the most compelling of circumstances. ,
. Although the Court authorized the debtor to pay Damon Morey the sum of $91,756.77 (interim fees totaling $85,549.20- plus disbursements of $6,207.56), the firm received only $66,826.91 as of the date of its final fee application.
. This sum incorporates and does not enhance the court’s prior order of February 17, 2017, which granted partial approval of the fee request. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500513/ | MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FIRST AMENDED COMPLAINT
STUART M. BERNSTEIN, United States Bankruptcy Judge
Charlie Mills a/k/a Charles Mills (“Mills”) and Salera Capital Management, LLC (“Salera,” and collectively with Mills, the “Plaintiffs”), through their First Amended Complaint, dated Aug. 12, 2016 (“FAC”) (ECF Doc. # 16),1 seek money *9judgments on their claims and a declaration that the debts are nondischargeable. Bryan Caisse, the defendant and debtor, has moved to dismiss the FAC for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure made applicable to this adversary proceeding by Rule 7012 of the Federal Rules of Bankruptcy Procedure. (Memorandum of Law in Support of Defendant Bryan Caisse’s Motion to Dismiss Plaintiffs’ First Amended Complaint, dated Aug. 26, 2016 (the “Motion”), at 1-2 (ECF Doc. # 19).) For the reasons that follow, the Motion is granted in part and denied in part, and Salera is granted leave to replead the dismissed claims.
BACKGROUND
Mills and Caisse attended the United States Naval Academy, and subsequently served in the Marine Corps and Navy, respectively. (¶¶ 12-16, 23.)2 After Mills left the Marine Corps, he joined Bear Stearns & Company and subsequently founded Salera, an entity that made short-term secured and unsecured loans mostly to Government contractors. (¶¶ 17-20.) After Caisse left the Navy, he worked in the financial industry. (¶ 25.) He remained active in the extensive network of Naval Academy alumni, which included Mills, and they maintained a close personal relationship largely based on their shared college and military experiences. (¶¶ 24,26.)
A. The Loans
In March 2009, Caisse contacted Mills to borrow money. (¶32.) According to the FAC, Caisse made two false statements to induce Mills or Salera to make a loan. First, he told Mills that he needed the funds for a venture, Huxley Capital Management (“Huxley”). (¶ 33.) Second, he claimed that he was due a significant tax refund and would send the refund directly to Salera as payment for the loan. (¶ 36.) To bolster this representation, Caisse sent Mills a copy of his 2008 tax return, under cover of a letter from Bloom CPA, PLLC, and an IRS Form 8822—a change of address form—dated April 4, 2006. (¶ 36.) Together, they purported to show that Caisse was due a tax refund of $175,144, and the refund would be sent directly to Mills. (¶ 37.) Relying on these representations, Salera made a loan to Caisse or Huxley in April 2009 (the “April Loan”), but the FAC does not state the amount of the loan. (¶ 38.)
By August 2009, Caisse had defaulted on the April Loan, and sought to refinance it. (¶41.) To induce a second loan, Caisse made further representations to Mills, including that the IRS refund had not been received but was imminent. (¶ 41.) On or about August 5 and 6, 2009, Caisse and Salera entered into an agreement to loan Caisse $150,000, to be repaid within ninety days, Caisse signed two promissory notes, and Salera disbursed $150,000 to Caisse (the “August Loan”). (¶¶ 42-44.) The April 2009 loan was eventually repaid, (¶ 38), apparently from another source of funds.
The due date for the repayment of the August Loan was November 3, 2009, but Caisse defaulted. (¶ 47.) Following the default, Caisse made several false statements to Mills to the effect that repayment would be forthcoming, and as a result, Mills and Salera did not take legal action. (¶¶ 48-53.) On January 21, 2010, Mills sent Caisse a demand letter advising him of his default, (¶ 55; FAC, Ex. A), but Caisse and a person purporting to be Caisse’s attorney *10continued to indicate that Caisse would repay the August Loan, and Mills and Salera continued to forebear. (¶¶ 56-68.)
On February 6, 2012, Mills sued Caisse in Virginia state court. (¶ 69.) Following a one-day trial at which both Mills and Caisse testified, the court found in Salera’s favor and entered a judgment on March 12, 2013 in the amount of $694,910, plus post-judgment interest at the judgment rate (the “Judgment”). (¶¶ 76-77.) Of that amount, $150,000 represented the unpaid August Loan. On May 31, 2013, the Judgment was domesticated as a New York judgment.3 (¶ 78.)
B. The Criminal Proceedings
Around the same time, the New York District Attorney (the “DA”) began a criminal investigation of Caisse. (¶¶ 79-81.) On October 9, 2013, Caisse’s attorney asked the DA to return Caisse’s passport, which had been seized during the execution of a search warrant, stating that Caisse had to travel on business and would return to face any proceedings. (¶¶ 82-83.) In addition, the DA was assured that Caisse would not abandon his young daughter. (¶84.) The DA returned the passport, but Caisse fled to Colombia. (¶¶ 84-89.)
Sometime thereafter, the DA indicted Caisse on eleven counts. (FAC, Ex. C.) Counts III and IV charged Caisse with Grand Larceny in the Second Degree against “INDIVIDUAL #3” during the periods August 6 to August 26, 2009 and April 7, 2009 to May 8, 2009, respectively. “INDIVIDUAL #3” referred to Mills. (¶94.) Count XI charged Caisse with a Scheme to Defraud in the First Degree, alleging that between April 2008 and October 25, 2013, he “engaged in a scheme constituting a systematic ongoing course of conduct with intent to defraud more than one person and to obtain property from more than one person by false and fraudulent pretenses, representations and promises.”
Caisse was subsequently arrested in Bogota, Colombia on January 18, 2014, and returned to the United States. (¶ 89.) The DA’s Office issued a press release a few days later announcing the indictment. (¶ 99.) The press release stated that Caisse had run a Ponzi scheme through Huxley, had defrauded friends and Naval Academy classmates of over $1 million and had made additional fraudulent representations to evade his victims’ efforts to collect their money. (Id.; accord ¶ 101.)
Caisse pleaded guilty on August 11, 2014 in the Supreme Court of the State of New York to Counts VIII and XI, (¶ 103; FAC, Ex. D), and was sentenced to 1 ½ to 4 ½ years in prison. (¶ 107.) The Supreme Court issued an Order, dated November 12, 2015 (the “Restitution Order”), (FAC, Ex. E, at pp. 1-5), as part of the plea agreement. Among other things,, the Restitution Order required Caisse to pay restitution to Safe Horizon which was designated pursuant to New York Criminal Procedure Law § 420.10(1) as the restitution agency. (Restitution Order at p. 1 II2.) Safe Horizon would receive the payments, establish a restitution fund, and distribute the payments to the individuals listed on the annexed Exhibit A. (Id. at pp. 1-3 ¶¶ 2, 5.) Exhibit A included Mills and indicated that he was due restitution in the amount of $119,000.00. In addition, Caisse signed an Affidavit of Confession of Judgment, sworn to October 8, 2014 (the “Confession”) in favor, inter alia, of Mills *11for the same amount. (FAC, Ex. E at p. 7 ¶ 2.)
C. The Bankruptcy
After his release from prison, Caisse filed a chapter 7 petition on October 14, 2015. (¶¶ 108-09.) Salera thereafter filed the Salera Claim in the amount of $854,434.68, (¶ 110), apparently representing the amount of the Judgment plus accrued post-judgment interest. In addition, Mills filed a proof of claim in the amount of the Restitution Order, $119,000 (the “Mills Claim”). (¶ 111.)
The Plaintiffs filed this adversary proceeding on December 30, 2015, and filed the FAC on August 12, 2016. The FAC asserts four claims for relief. Salera seeks a declaration of non-dischargeability of the Salera Claim in the First, Second and Third Claims under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B) and 523(a)(4), respectively. In the Fourth Claim, Mills seeks a declaration of non-dischargeability of the Mills Claim, which is based on the Restitution Order, under 11 U.S.C. § 523(a)(7). The Plaintiffs also seek a money judgment in the amount of the Salera Claim acknowledging that it subsumes the Mills Claim. (FAC at pp. 21-22.) Caisse filed the Motion to dismiss all of the claims for failure to state a claims on which relief ean be granted.
DISCUSSION
To state a legally sufficient claim, “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) (citation omitted); accord Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; accord Twombly, 550 U.S. at 556, 127 S.Ct. 1955. In deciding the motion, “courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). A complaint is deemed to include any written instrument attached to it as an exhibit, documents incorporated in it by reference, and other documents “integral” to the complaint. Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002) (quotations and citations omitted); accord Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992).
If the complaint alleges fraud, the plaintiff must also satisfy Rule 9(b) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Federal Bankruptcy Rule 7009. Federal Civil Rule 9(b) requires the plaintiff to plead fraud with particularity.4 Although scienter may be pleaded generally, the pleader must “allege facts that give rise to a strong inference of fraudulent intent.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (citations *12omitted). Finally, even when fraud is not an element of the claim, the allegations must satisfy Fed. R, Civ. P. 9(b) if the claim sounds in fraud. See Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004) (“Rule 9(b) ... is not limited to allegations styled or denominated as fraud or expressed in terms of the constituent elements of a fraud cause of action.”). “Generally, a non-fraud claim will ‘sound in fraud’ if the claim arose out of events that the pleading describes in terms of fraud or the pleading includes a claim based on fraud, and the non-fraud claim incorporates the fraud allegations.” Official Committee of Unsecured Creditors of Grumman Olson Indus., Inc. v. McConnell (In re Grumman Olson Indus., Inc.), 329 B.R. 411, 429 (Bankr. S.D.N.Y. 2005); accord Levy v. Young Adult Inst., Inc., 103 F.Supp.3d 426, 442 (S.D.N.Y. 2015); see Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F.Supp.2d 258, 269 (S.D.N.Y.2004) (“A claim sounds in fraud when, although not an essential element of the claim, the plaintiff alleges fraud as an integral part of the conduct giving rise to the claim.”).
Before turning to the claims some preliminary observations are in order. First, the April Loan was repaid and is not included in the Judgment. Thus, there is no debt arising from the April Loan that can be non-dischargeable. Second, the Plaintiffs seek a money judgment in the amount of the Salera Claim, but already have a judgment plus interest in that amount. The Court may declare a “debt” non-discharge-able, and that includes a debt merged into a judgment. The Plaintiffs do not explain why another money judgment is appropriate or necessary. Third, the amount of the Judgment far exceeds the amount of the $150,000 August Loan. The Plaintiffs have not explained why the entire Judgment, which is subsumed in the Salera Claim, should be declared non-dischargeable.
A. First Claim—11 U.S.C. § 523(a)(2)(A)
Bankruptcy Code § 523(a)(2)(A) excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” The Supreme Court has historically given the terms in § 523(a)(2)(A) their common law meaning. Husky Int’l Elec., Inc. v. Ritz, — U.S. —, 136 S.Ct. 1581, 1586, 194 L.Ed.2d 655 (2016) (citing Field v. Mans, 516 U.S. 59, 69, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)). The parties agree that under § 523(a)(2)(A), the plaintiff must allege that the defendant knowingly made a misrepresentation with the intent to deceive the plaintiff, and the plaintiff justifiably relied on the misrepresentation and suffered damages as a result. (Compare Motion at 7 with Plaintiffs Memorandum of Law in Opposition to Defendant’s Motion to Dismiss Amended Complaint, dated Sept. 20, 2016, at 3-4 (“Opposition”) (ECF Doc. # 21).) Whether a debtor intended to defraud a creditor within the scope of Section 523 depends on the debtor’s “actual state of mind ... at the time the charges were incurred,” Fleet Credit Card Servs. v. Macias (In re Macias), 324 B.R. 181, 188 (Bankr. E.D.N.Y. 2004) (quoting MBNA Am. v. Parkhurst (In re Parkhurst), 202 B.R. 816, 822 (Bankr. N.D.N.Y. 1996)), and allegations that Caisse failed to perform promises he made at the time the debt was incurred do not imply that he did not intend to fulfill those promises at the time they were made. Citibank (South Dakota), N.A. v. Spradley (In re Johnson), 313 B.R. 119, 129 (Bankr. E.D.N.Y. 2004) (citing Colonial Nat’l Bank v. Leventhal (In re Leventhal), 194 B.R. 26, 31 (Bankr. *13S.D.N.Y. 1996) (quoting Chase Manhattan Bank v. Murphy (In re Murphy), 190 B.R. 327, 333-34 (Bankr. N.D. Ill. 1996))). Otherwise, every breach of contract claim would also sound in fraud.
The FAC alleges that Salera was induced to make the August Loan based upon the representation that the IRS payment had not yet been received but was imminent, (¶ 41), and perhaps by implication carried over from the April Loan, that the refund would be paid directly to Sal-era. The FAC also alleges that Caisse made “further representations,” (see ¶ 41), but does not set them out as required by Federal Civil Rule 9(b).
Finally, the FAC alleges that Caisse and a person purporting to be his attorney made additional false representations when Salera demanded repayment, (¶¶ 48, 51, 57, 60, 63, 66), but does not allege that Salera obtained any additional money, property or services after the August Loan. Salera does allege that it “extended” the August Loan as a result of the misrepresentations, (¶¶ 49, 52, 58, 61, 64, 67), but confuses an extension with forbearance. An “extension agreement” is “[a]n agreement providing additional time for the basic agreement to be performed.” Black’s Law Dictionary 703 (10th ed. 2014). “Forbearance” refers to “[t]he act of refraining from enforcing a right, obligation, or debt.” Id. at 760.
The FAC does not allege that Salera extended the due date for the August Loan. Instead, it alleges that Salera “de-clin[ed] to take legal action” based on the allegedly false representations. (¶¶ 49, 52, 58, 61, 64, 67.) A creditor cannot predicate a non-dischargeability claim based on fraudulently induced forbearance in the absence of a separate injury, and Caisse’s subsequent fraudulent conduct is irrelevant to the non-dischargeability claim. Wright v. Minardi (In re Minardi), 536 B.R. 171, 188 (Bankr. E.D. Tex. 2015) (“[Fraudulent conduct occurring subsequent to the time that an indebtedness is created is generally irrelevant to the issue of whether the debt was ‘obtained by false pretenses, a false representation, or actual fraud’ within the meaning of § 523(a)(2)(A) of the Bankruptcy Code.”); Standard Bank & Trust Co. v. Iaquinta (In re Iaquinta), 95 B.R. 576, 578 (Bankr. N.D. Ill. 1989) (“Subsequent misrepresentations or fraud will, have no effect upon the discharge of the debtor.”) Consequently, the only representation that the FAC specifically identifies as inducing the August Loan is the one. regarding the imminent receipt of the tax refund.
Caisse contends that the FAC fails to allege falsity, intent to deceive or damages, (Motion at 7-8), and Plaintiffs concede that the FAC does not include “boilerplate” allegations of knowledge of falsity and intent to defraud. (Opposition at 5.) Mere “boilerplate” allegations, however, are not sufficient. Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (“[A]' plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of a cause of action’s elements will not do.”). Salera must allege facts that support a claim under § 523(a)(2)(A).5
*14Furthermore, the FAC’s incorporation of the indictment and reiteration of the allocution and the DA’s statements do not cure the deficiencies because they do not identify any knowingly false statements that Caisse made to induce the August Loan. The Third Count of the Indictment accused Caisse of Grand Larceny in the Second Degree by stealing property exceeding $50,000 in value from Mills in violation of N.Y. Penal Law § 155.40(1). (FAC, Ex. C, at p. 2.) “Larceny” includes common larceny by trespassory taking and by acquiring lost property, which do not require fraudulent statements, as well as common law larceny by trick, obtaining property by false pretenses and false promise, which do. See N.Y. Penal Law § 155.05(2)(a), (b), (d). Thus, the mere charge of larceny does not satisfy the elements of common law fraud, and in this case, does not include facts detailing a connection between the crime charged and the allegations needed to plead a legally sufficient fraud claim. The Eleventh Count alleges an ongoing systematic course of fraudulent conduct involving false and fraudulent pretenses, representation and promises, but does not identify a specific pretense, representation or promise made by Caisse to Mills or imply that Caisse knowingly misrepresented the imminence of a tax refund. Caisse’s allocution is no more specific and merely recites the allegations in the Indictment. (¶ 103.)
The DA’s statements amplify the criminal charges but still fall short. They include assertions that Caisse operated a Ponzi scheme, and induced friends and acquaintances through false representations to invest in Huxley, the vehicle for his fraud. In addition, Caisse continued to make false statements and engage in fraudulent conduct to cover up his crimes. The DA’s statements, like the Indictment, do not identify any specific representation that Caisse made to Mills. They highlight a pattern of dishonesty relating to Caisse’s solicitation of money from acquaintances, but do not say or imply that everything that Caisse said to Mills, particularly regarding the imminence of the tax refund, was false or made with the intent to deceive. In fact, the FAC does not allege that Caisse told Mills that the August Loan was for Huxley or his ventures; instead, it alleges that it was solicited to refinance the April Loan which was eventually repaid although apparently from other sources.
In short, the FAC does not plausibly imply that Caisse told Mills the August Loan would be used to fund Huxley, that Caisse knew that a refund was not actually imminent or that Caisse lied when he told Mills that he had directed the IRS to pay the imminent refund to Salera. Instead, the FAC alleges that Caisse was a fraudster and a convicted felon, (e.g., ¶¶ 1-6), but it is not enough, that Caisse is a bad person. The allegations of a fraudulent scheme that do not identify with sufficient particularity how Caisse defrauded Salera do not fill the vacuum.
B. Second Claim—11 U.S.C. § 523(a)(2)(B)
Bankruptcy Code § 523(a)(2)(B), in relevant part, excepts from discharge any debt “for money, property or services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... use of a statement in writing ... that is materially false; ... respecting the debtor’s ... financial condition; ... on which the creditor ... reasonably relied; and ... that the *15debtor caused to be made or published •with intent to deceive.” The Second Claim does not identify the written statement of financial condition that Caisse showed the Plaintiffs to induce the August Loan. Assuming that it is referring to the tax return shown to induce the April Loan, and without deciding whether a tax return is a statement of financial condition within the meaning of § 523(a)(2)(B), the Second Claim suffers from the same pleading deficiencies as the First.6 The FAC fails to allege facts supporting the inference that the tax return was false, that Caisse knew it was false or that he showed it to the Plaintiffs to induce the August Loan with the intent to deceive them.
C. Third Claim—11 U.S.C. § 523(a)(4)
Bankruptcy Code § 523(a)(4) excepts from discharge debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny,” “The meaning of the words in § 523(a)(4) is a question of federal law.” McGee v. Mitchell (In re McGee), 353 F.3d 537, 540 (7th Cir. 2003); Adamo v. Scheller (In re Scheller), 265 B.R. 39, 53 (Bankr. S.D.N.Y. 2001) (citing cases). The Third Claim invokes the “larceny” exception, which, contrary to Caisse’s argument, (see Motion at 9-10), does not require a fiduciary relationship. Bullock v. BankChampaign, N.A, 569 U.S. 267, 133 S.Ct. 1754, 1760, 185 L.Ed.2d 922 (2013) (Section 523(a)(4) “makes clear that [larceny and embezzlement] apply outside of the fiduciary context.”); 4 Alan N. Res-nick & Henry J. Sommer, Collier on Bankruptcy ¶523.10[2], at 523-76 (16th ed. 2016) (“In section 523(a)(4), the term ‘while acting in a fiduciary capacity’ does not qualify the words ‘embezzlement’ or ‘larceny.’ Therefore, any debt resulting from embezzlement or larceny falls within the exception of clause (4).”) (footnote omitted).
“Larceny is the (1) wrongful taking of (2) property (3) of another (4) without the owner’s consent (5) with intent to convert the property,” Scheller, 265 B.R. at 53, and requires proof that the debtor fraudulently intended to take the creditor’s property. New York v. Sokol (In re Sokol), 170 B.R. 556, 560 (Bankr. S.D.N.Y. 1994), aff'd, 181 B.R. 27 (S.D.N.Y. 1995), aff'd and remanded, 113 F.3d 303 (2d Cir. 1997); see Bullock, 133 S.Ct. at 1760 (“‘larceny’ requires taking and carrying away another’s property.”) Larceny and embezzlement are substantially similar, but differ in one important respect. “Larceny is the fraudulent and wrongful taking and carrying away of the property of another with intent to convert the property to the taker’s use without the consent of the owner. As distinguished from embezzlement, the original taking of the property must be unlawful.” 4 Collier ¶523.10[2], at 523-77 (footnote omitted); accord Scheller, 265 B.R. at 54.
Salera essentially contends that Caisse obtained title to and possession of its funds by misrepresenting a past or present fact (ie,, larceny by false pretenses) or his future intention to perform (ie., larceny by false promise). See People v. Norman, 85 N.Y.2d 609, 627 N.Y.S.2d 302, 650 N.E.2d 1303, 1307-08 (1995) (explaining the distinctions between the common law crimes of larceny). In either case, the discharge exception depends on prooí inter alia, that Caisse knowingly made a false statement or promise with the intent to induce Salera and/or Mills to loan him *16money. Federal Civil Rule 9(b) applies because the claim is based on Caisse’s fraud, but the FAC fails to plead fraud with the particularity for the reasons stated.
Accordingly, the First, Second and Third Claims are dismissed. However, it appears that Salera may be able to cure the pleading deficiencies, and the Court grants leave to replead these claims.
D. Fourth Claim—11 U.S.C. § 523(a)(7)
Bankruptcy Code § 523(a)(7), in relevant part, excepts a debt from discharge “to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.” To be non-dischargeable, the debt must satisfy three elements: (1) the debt must be for a fine, penalty or forfeiture, (2) it must be payable to and for the benefit of a governmental unit and (3) it must not be compensation for actual pecuniary loss. The last two elements are referred to as the qualifying clauses. Whether a debt is the type excepted from discharge under § 523(a)(7) is a question of federal law. Caisse contends that Mills has not shown that Caisse owes him any money and his inclusion in the Restitution Order was improper, that the restitution was not for the benefit of a governmental unit and the restitution was compensation for actual pecuniary loss. (Motion at 8-10)
Caisse’s first argument deserves short shrift. The Restitution Order was part of the plea and sentence agreement, (Restitution Order at p. 1 ¶ 1), required Caisse to pay Mills (among others) $119,000, (id. at p. 1 ¶1 and p. 5) and provided that the failure to make the restitution payments would subject’ Caisse to prosecution for criminal contempt or other crimes. (Id. at ¶ 7.) Caisse signed the Restitution Order acknowledging his obligation, inter alia, to Mills, and the possible consequence if he failed to comply. In addition, Caisse signed the Confession in favor of Mills for the same amount, (FAC, Ex. E at p. 7 ¶2.), and acknowledged that the Confession was a condition of his negotiated guilty plea. (FAC, Ex. E, at p. 8 ¶ 4). Even if Caisse did not owe a debt to Mills before the guilty plea, he voluntarily assumed a debt directly to Mills as a condition to his guilty plea.
Caisse’s second and third points focus on the qualifying clauses in § 523(a)(7): the restitution must be payable to and for the benefit of a governmental unit and cannot be compensatory.7 Essentially, he contends that the restitution was payable 'to Mills, not a governmental unit, and was intended to compensate him for his actual pecuniary loss, even though Caisse argues that Mills did not suffer an actual' pecuniary loss.
In any event, the Supreme Court rejected Caisse’s interpretation of § 523(a)(7) in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). There, the debtor pleaded guilty to larceny involving the receipt of welfare benefits. The state court placed the debtor on probation, and as a condition of probation, ordered her to make restitution payments in the exact amount of the impropeiiy obtained welfare benefits to the Connecticut Office of Adult Probation. Id. at 38-39, 107 S.Ct. 353. After she filed for bankruptcy and received a discharge, the Connecticut Probation Office sought to collect the restitution, and the debtor commenced an adversary proceeding seeking a declaration that the obligation was discharged. Id. at 39-40, 107 S.Ct 353.
Relying on the longstanding judicially-created exception to discharging criminal restitution judgments and principles of *17federalism, id. at 47-49, 107 S.Ct. 353, the Supreme Court ruled that § 523(a)(7) excepts from discharge “any condition a state criminal court imposes as part of a criminal sentence.” Id. at 50, 107 S.Ct. 353. Furthermore, neither of the qualifying clauses allowed the discharge of a state criminal judgment that took the form of restitution. First, the criminal justice system is operated to benefit society as a whole and not just the victim. Although restitution resembles a judgment for the benefit of the victim, that conclusion is undermined by the fact that the victim has no control over the amount of restitution or whether it will be awarded, and the decision to impose restitution turns on the penal goals of the state and the defendant’s situation rather than on the victim’s injury. Id. at 52, 107 S.Ct. 353; accord United States v. Gelb (In re Gelb), No. 95-CV-4725 (FB), 1998 WL 221366, at *2 (E.D.N.Y. Apr. 29,1998). In short, a criminal judgment that includes restitution is always for the benefit of a governmental unit because it vindicates the governmental unit’s interest in the punishment and the rehabilitation of the defendant. See Kelly v. Robinson, 479 U.S. at 53, 107 S.Ct. 353. Second, because restitution is imposed for the benefit of the governmental unit to advance its. rehabilitative and penal goals, it is not assessed for the compensation of the victim. Id.; Gelb, 1998 WL 221366, at *3.
The Restitution Order falls squarely within the broad rule established in Kelly because it was imposed as part of .a state criminal sentence. Furthermore, New York law recognizes that restitution serves the dual purpose of compensating the victim and advancing the state’s penal goals. People v. Horne, 97 N.Y.2d 404, 740 N.Y.S.2d 675, 767 N.E.2d 132, 136 (2002) (The sponsors of the 1983 amendments to N.Y. Penal Law § 60.27 recognized that “restitution serves the dual, salutary purposes of easing the victim’s financial burden while reinforcing the offender’s sense of responsibility for the offense and providing a constructive opportunity for the offender to pay his or her debt to society.”); People v. Kim, 91 N.Y.2d 407, 671 N.Y.S.2d 420, 694 N.E.2d 421, 423 (1998) (The goals of restitution “are to insure, to the maximum extent possible, that victims will be made whole and offenders will be rehabilitated and deterred, by requiring all defendants to confront concretely, and take responsibility for, the entire harm resulting from their acts.”); People v, Hall-Wilson, 69 N.Y.2d 154, 513 N.Y.S.2d 73, 505 N.E.2d 584, 585 (1987) (“Viewed from the perspective of punishing a defendant, restitution is recognized as an effective rehabilitative penalty because it forces defendants to confront concretely—and take responsibility for—the harm they have inflicted, and it appears to offer a greater potential for deterrence.”) (citing Kelly, 479 U.S. at 49 n.10, 107 S.Ct. 353). And because it serves the state’s penal goals, the restitution payment is for the benefit of the state.8
Caisse’s alternative, narrow interpretation of § 523(a)(7), which seeks to limit Kelly’s holding to its facts, “the wrongful receipt of welfare benefits” from a governmental unit, (Motion at 11-12), is unconvincing. He relies on two cases originating *18within the Sixth Circuit. In Hughes v. Sanders, 469 F.3d 475 (6th Cir. 2006), cert. denied, 549 U.S. 1341, 127 S.Ct. 2051, 167 L.Ed.2d 768 (2007), the Court of Appeals concluded that Kelly applied narrowly to criminal restitution payable to a governmental unit, id. at 478, and did not except from discharge a punitive monetary sanction entered in civil litigation because it was payable to a private litigant to compensate him for his injuries. Id. at 479. The Bankruptcy Court in Heitmanis v. Rayes (In re Rayes), 496 B.R. 449 (Bankr. E.D. Mich. 2013) followed Hughes and ruled that a criminal restitution judgment initially payable to the Probation Department for ultimate payment to the victims was dischargeable. Id. at 454, 456. Construing Kelly narrowly, the Rayes court criticized the Supreme Court’s decision as going “materially and unnecessarily beyond its facts, and to that extent at least, may well be seen as dicta.” Id. at 454.
The Rayes court’s reasoning was rejected three years later by its own District Court in Auto-Owners Ins. Co. v. Smith (In re Smith), 547 B.R. 774 (E.D. Mich. 2016). There, the debtor pleaded guilty to assault and battery arising from a “road rage” incident. The criminal judgment included a restitution order payable to the county clerk, who would in turn distribute funds to the victim and her insurer as compensation for losses they had incurred. Id. at 775-76. The debtor filed for bankruptcy and sought a declaration that the restitution judgment was discharged. The Bankruptcy Court denied the insurer’s motion for summary judgment because the judgment was not payable for the benefit of a governmental unit and was compensation for a pecuniary loss. Id. at 776-77.
The District Court reversed. After reviewing the Kelly decision and its grounding in the historic judicial exception to discharging criminal restitution and the principles of federalism, the District Court first concluded that Hughes v. Sanders was “neither applicable nor instructive” because it dealt with civil rather than criminal restitution. Id. at 778. Furthermore, under Kelly, a state criminal restitution judgment is not dischargeable even if it is ultimately payable to a non-governmental victim and is intended to compensate the victim for her pecuniary loss. See id. at 778-79. Kelly means that all state criminal restitution judgments are non-dischargea-ble. See id. at 779; accord Colton v. Verola (In re Verola), 446 F.3d 1206, 1209 (11th Cir.), cert. denied, 549 U.S. 885, 127 S.Ct. 248, 166 L.Ed.2d 149 (2006); Sokol, 170 B.R. at 559 (“The import of Kelly v. Robinson is that the Bankruptcy Code’s dis-chargeability provisions are not intended to interfere with state criminal sentencing procedures. Judgments of restitution, regardless of how they are computed, are penal and not dischargeable under 11 U.S.C. § 523(a)(7).”).
The continuing vitality of Kelly’s broad holding is also apparent from Congress’s failure to change it. “If Congress wants to supersede the Supreme Court’s decisions, it must amend the statute the Court has construed; continuity of text equals continuity of meaning.” In re Towers, 162 F.3d 952, 954 (7th Cir. 1998), cert. denied, 527 U.S. 1004, 119 S.Ct. 2340, 144 L.Ed.2d 237 (1999).
Finally, Caisse’s argument essentially advocates the minority decision in Kelly that was rejected by the majority. The minority criticized the Court’s decision because the restitution judgment was intended, in part, to compensate the victim for its actual damage. Kelly, 479 U.S. at 55, 107 S.Ct. 353 (Marshall, J., dissenting). The minority also pointed out that the other qualifying exception did not apply because the restitution was payable to the state for its own injury, and criticized the majority opinion as broad enough to mean that any fine, penalty or forfeiture would be for the *19benefit of a governmental unit, making § 523(a)(7) superfluous. Id. at 55 n.3, 107 S.Ct. 353. Despite these criticisms, the Supreme Court “went out of its way to engage this qualifying, .clause and to stress that it posed no serious threat to criminal restitution orders imposed by a state.” In re Thompson, 418 F.3d 362, 366 (3d Cir. 2005). While the Rayes court criticized certain parts of the Kelly decision as dicta to support its narrow reading, “[w]e are to give great weight to the Supreme Court’s considered dicta in limning the breadth of situations its decisions govern.” M; accord McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 612 (3d Cir.) (“[W]e should not idly ignore considered statements the Supreme Court makes in dicta. The Supreme Court uses dicta to help control and influence the many issues it cannot decide because of its limited docket.”), cert. denied, 531 U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000).
Accordingly, the motion to dismiss the Fourth Claim is denied, and the First, Seeond and Third Claims are dismissed with leave to replead within thirty days of the date of the order reflecting the disposition of the Motion. Submit order.
. "ECF Doc. #-" refers to documents filed on the docket in this adversary proceeding.
. “¶¶-” refers to the paragraphs in the FAC.
. The Judgment and the order domesticating the Judgment are attached to Salera’s Proof of Claim, dated Nov. 9, 2015 (the "Salera Claim”). The Court takes judicial notice of the contents of the Claim which is referred to in the FAC. (See ¶ 110.)
. Federal Civil Rule 9(b) states:
In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.
. The FAC alleges that the statements relating to the refund were false, and "upon information and belief, that Caisse was due and received no refund,” (¶40.) A plaintiff may plead facts alleged on information and belief "where the facts are peculiarly within the possession and control of the defendant.. .or where the belief is particularly based on factual information that makes the inference of culpability plausible,” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (citations omitted). However, allegations pled on information and belief "must be ‘accompanied by a statement of the facts upon which *14the belief is founded.’" Munoz-Nagel v. Guess, Inc., No. 12-CV-1312 ER, 2013 WL 1809772, at *3 (S.D.N.Y. Apr. 30, 2013) (quoting Prince v. Madison Square Garden, 427 F.Supp.2d 372, 385 (S.D.N.Y. 2006)). The FAC includes no such factual allegations.
. The Plaintiffs may also be relying on the accountant’s letter and IRS Form 8822 given to Mills at the same time. The FAC does not disclose the contents of the accountant's letter, and hence, fails to show that it related to Caisse’s financial condition. Similarly,' the change of address form does not appear to relate to Caisse’s financial condition.
. Caisse does not dispute that the restitution obligation qualifies as a "fine, penalty or forfeiture.”
. Further, the restitution was payable to a governmental unit in the first instance. The restitution was payable to Safe Horizon, which was designated pursuant to N.Y. Crim, Proc. Law § 420.10(1) as the restitution agency. Section 420.10(1) directs the sentencing court to designate an official or organization other than the district attorney to receive the payments. In New York City, the mayor designates the official or organization eligible for selection by the court. Id,, § 420,10(8)(a). Thus, Safe Horizon was selected and is controlled by New York City and the selecting court, and receives restitution payments as the agent for the government. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500514/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF’S ' ORIGINAL COMPLAINT
Harlin DeWayne Hale, United States Bankruptcy Judge
On February 9, 2017, the Court held a trial to consider Nathan Kelly’s (the “Plaintiff’) Original Complaint [Docket No. 1] (the “Complaint”), filed in this adversary proceeding on November 14, 2016. The ultimate issue before the Court is whether the Plaintiff is an “owner” under the Texas Property Code and thus has a right to redeem property after a tax sale when he claims that right as an adverse possessor. The following are the Court’s Findings of Fact and Conclusions of Law.1 Based upon these Findings of Fact and Conclusions of Law, the Court has determined that the Plaintiff has established his right of redemption under Texas law.
I. JURISDICTION AND VENUE
This Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1334, This Adversary Proceeding involves non-core matters under 28 U.S.C. *21§ 157(c). Both parties have consented to entry of a final judgment by this Court. See Docket No. 1 at ¶ 4; Docket No. 5 at ¶ 1; see also Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). Venue for this Adversary Proceeding is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
II. FINDINGS OF FACT
The Complaint seeks, inter alia, a declaratory judgment that the Plaintiff is entitled to redeem the property located at 2107 South Harwood Street, Dallas, Texas 75215 (the “Subject Property”) following a 2014 tax sale.
The parties entered into detailed stipulations (the “Stipulation”) prior to trial. [Docket No. 10]. The Stipulation is incorporated into these Findings of Fact and Conclusions of Law as if set out herein.
D Realty Investments, Inc. (the “Defendant”) purchased the Subject Property at a tax sale held on September 2,. 2014.
The parties were involved in litigation in state court before this bankruptcy case was filed. The state court action ended in a dismissal without prejudice. That judgment has no preclusive effect in the instant proceeding.
According to the Complaint, the Plaintiff is a 74-year old motor vehicle mechanic who has had limited elementary level education, very little ability to read or write and no real understanding of contracts or real estate. The Plaintiff has had his principal place of business at the Subject Property since 1972 and has resided exclusively at the Subject Property since before December 1994.
The statute giving rise to Plaintiffs right of redemption is Texas Tax Code section 34.21, which provides in relevant part:
(a) The owner of real property sold at a tax sale to a purchaser other than a taxing unit that was used as the residence homestead of the owner ... may redeem the property on or before the second anniversary of the date on which the purchaser’s deed is filed for record by paying the purchaser the amount the purchaser bid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed during the second year of the redemption period.
Thus, there are five elements under section 34.21(a) for a person to redeem a residence homestead property from a tax sale: 1) the person must be the “owner” of property “sold at a tax sale,” 2) the tax sale purchaser must not be “a taxing unit,” 3) the property must have been the residence homestead of the owner, 4) the redemption must occur “on or before the second anniversary of the date on which the purchaser’s deed is filed for record,” and 5) the person redeeming the property must pay the tax sale purchaser “the amount the purchaser bid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 60 percent of the aggregate total if the property is redeemed during the second year of the redemption period.” Id.
Each of the foregoing elements have been met in the instant case, except for the requirement that to redeem, the Plaintiff *22must be the “owner” of the Subject Property under the redemption statute.2 First, the Defendant is not a “taxing unit.” Second, the Stipulation and the testimony of Wade Masterson, the Debtor’s only witness at trial, established that the Subject Property is the Plaintiffs residence homestead. Third, the Plaintiff tendered the amounts necessary to redeem the Subject Property within two years of the date the Sheriffs Deed for the tax sale was recorded.3 Fourth, as explained in the Stipulation, the Plaintiff tendered to the Defendant the sum of $117,643.05, representing 150% of the sums paid by the Defendant for the acquisition and holding of the Subject Property. The Defendant refused this tender but has acknowledged that the amount of the tender correctly calculated the amount due to the Defendant in accordance with Texas Tax Code § 34.21. The only remaining issues are those of law.
III. CONCLUSIONS OF LAW
There were two issues at trial, one procedural and the other substantive. The first issue concerns whether the Plaintiff has improperly chosen to pursue his claim through declaratory judgment, rather than through a trespass to try title claim. The second concerns whether Plaintiffs status as the holder of title-by-limitations to the Subject Property vests the Plaintiff with the rights of an “owner” under Texas Tax Code § 34.21.
A. A TRESPASS TO TRY TITLE SUIT IS NOT THE PROPER PROCEDURAL VEHICLE IN THE CASE AT BAR.
Plaintiff does not, by this suit, challenge the fact that the Defendant acquired title to the Subject Property at the tax sale. Rather, Plaintiff seeks to assert his rights as the holder of title-by-limitations at the time of the tax sale over two years ago-a moment in time when the Defendant undisputedly held no title to the Subject Property. Thus, this is not a case of two competing claims of current title to the Subject Property. It is a case in which Plaintiff seeks 1) a declaration that he, as the prior owner-by-limitations of the Subject Property, is entitled to assert the attendant rights and privileges of his prior ownership by redeeming the Subject Property from the tax sale purchaser (i.e. the Defendant); and 2) an Order requiring the Defendant to convey the Subject Property to the Plaintiff as required by the Texas Tax Code in exchange for the statutory redemption amount. The declaratory judgment action filed by the Plaintiff is the proper procedure for the Court’s determination.
B. PLAINTIFF IS AN “OWNER” FOR PURPOSES OF THE REDEMPTION STATUTE
The central and substantive issue in this lawsuit is whether the Plaintiff, as *23the holder of title-by-limitations, is an “owner” of the Subject Property and thus entitled to redeem the Subject Property. The Defendant argues that the Plaintiff cannot be considered an “owner” because, by virtue of his title-by-limitations, he does not have a “perfected” title to the Subject Property.
The adverse possession statutes— whether three years, five years, ten years, or twenty-five years—are found in Texas Civil Practice and Remedies Code §§ 16.021 et seq. Following these statutes is Texas Civil Practice and Remedies Code § 16.030(a), which states, “[i]f an action for the recovery of real property is barred under this chapter, the person who holds the property in peaceable and adverse possession has full title, precluding all claims.” (Emphasis added).
Section 16.030(a) thus contemplates full title, not inchoate title, partial title, contingent title, or anything other than absolute title, once a competing (e.g. record) title holder has allowed the prescribed limitations period to lapse and the adverse possessor has met any other requirements.
Section 16.030’s predecessor dates back to at least 1879 in Texas. Since then, beginning in 1888, courts have almost uniformly held that the “full title” held by an adverse possessor means exactly what it says: it is indefeasible, complete, and absolute, and not dependent on any further action by the adverse possessor including recordation, notice, or a judgment. For instance, in Bridges v. Johnson, one of the earliest cases to address this issue, the Texas Supreme Court held:
Naked possession for the length of time, and with the incidents, enumerated in the statute, invest the possessor with title to the land as fully and effectually as if the title had been acquired by patent; and a party who has had such possession for 10 years may maintain an action founded on the title thus acquired. [The adverse possessor] having perfect title to the land ....
69 Tex. 714, 7 S.W. 506, 506 (1888).
Fifteen years later, the Texas Supreme Court reaffirmed this proposition in Burton’s Heirs v. Carroll:
By the plain terms of [the adverse possession] statute the continuous, peaceable, adverse possession of the land for 10 years, claiming title thereto, conferred upon the defendants in error ‘full title’; that is, all of the title which had emanated from the state vested in defendants in error as against the claim of any and all persons. E. Texas Land & Improvement Co. v. Shelby, 17 Tex.Civ.App. 685, 41 S.W. 542 (1897), writ refused; Grayson v. Peyton, 67 S.W. 1074 (Tex. Civ. App. 1902); Branch v. Baker, 70 Tex. 190, 7 S.W. 808 (1888). The decisions of our court here cited, as well as others, uniformly hold that the effect of the above-quoted statute is to vest in the possessor, who has complied with the statute of limitation, a full and complete title to the land.
96 Tex. 320,72 S.W. 581, 582 (1903).
Since the Texas Supreme Court’s decision in Burton’s Heirs, there are numerous cases, an almost unbroken line, reaffirming the proposition that an adverse possessor’s claim to full title depends on nothing else. See, e.g. White v. Pingenot, 49 Tex.Civ.App. 641, 90 S.W. 672 (1905), writ refused; Grayson v. Peyton, 67 S.W. 1074 (Tex. App. 1902); Latta v. Wiley, 92 S.W. 433 (Tex, Civ. App. 1905), writ refused; Bowles v. Bryan, 277 S.W. 760, 763-65 (Tex. Civ. App. 1925), writ dismissed w.o.j (Jan. 27, 1926); Brohlin v. McMinn, 161 Tex. 319, 341 S.W.2d 420, 422 (1960); Mitchell v. Schofield, 140 S.W. 254 (Tex. Civ. App. 1911), aff'd, 106 Tex. 512, 171 S.W. 1121 (1915).
*24Accordingly, in light of the foregoing cases, it seems beyond dispute that nothing other than the passage of time need occur in order for a qualified adverse possessor to “perfect” his title to real property. Thus, when case law refers to “perfection” of an adverse possession claim, the cases mean simply that the elements of the adverse possession claim have been established for the requisite three-, five-, ten-, or twenty-five-year period. It does not mean that a suit has been initiated, that adverse possession title has been recorded, or that innocent third parties are protected from the claims of an unknown adverse possessor.
Defendant relies heavily on Session v. Woods, 206 S.W.3d 772 (Tex. App.-Texarkana, 2006), but that case appears to be an outlier and inconsistent with the holdings of the Texas Supreme Court. Session, in dicta, and without citation to the cases listed above, states that adverse possession merely “allows a person to claim title to real property presently titled in another.” Session, 206 S.W.3d at 777. This case is contrary to the statute and the line of cases as mentioned above.
Session is also distinguishable on the facts. First, Session was in the context of an attempt to void a tax sale. Session, 206 S.W. 3d at. 774. In the instant case, as previously mentioned, the Plaintiff does not dispute the validity of the tax sale or the Defendant’s current title to the Subject Property. Second, the plaintiff in Session did not seek to invalidate the tax sale until three years after the sale, which was after the statute of limitations had run. Id. The court did not opine as to whether, had the plaintiff sought to redeem the property within two years of the tax sale, he would have been able to do so.
Furthermore, even if the Plaintiff was not the “owner” of the Subject Property under the redemption statute, he would arguably have the right to redeem the Subject Property by virtue of his possession. Texas Civil Practice and Remedies Code section 34.22(a) states,
A person asserting ownership of real property sold for taxes is entitled to redeem the property if he had title to the property or he was in possession of the property in person or by tenant either at the time suit to foreclose the tax lien on the property was instituted or at the time the property was sold. A defect in the chain of title to the property does not defeat an offer to redeem.
(emphasis added). It is undisputed that the Plaintiff was in possession of the Subject Property at the time of the tax sale,
Redemption statutes should be construed broadly because inter alia, a purchaser at a tax sale takes title with the knowledge that it can be challenged for the next two years. See Bodin v. Gulf Oil Corp., 707 F.Supp. 875 (E.D. Tex. 1988), appeal dismissed, 877 F.2d 438 (5th Cir. 1989); Rogers v. Yarborough, 923 S.W.2d 667, 669 (Tex. App. 1996); Jackson v. Maddox, 53 Tex.Civ.App. 478, 117 S.W. 185 (1909); McGuire v. Bond, 271 S.W.2d 508, 511 (Tex. Civ. App.-El Paso 1954) writ refused NRE (Feb. 22,1955).
In sum, the Court finds that the declaratory judgment action was the appropriate method to determine the Plaintiffs redemption rights. The Court also finds that the Plaintiff has established his right to redemption under Texas law.
Within fourteen days, counsel for the Plaintiff shall submit a judgment to the Court consistent with these Findings of Fact and Conclusions of Law.
. The following are the Court’s Findings of Fact and Conclusions of Law, issued pursuant to Rule 52 of the Federal Rules of Civil Procedure, as made applicable in adversary proceedings, pursuant to Federal Rule of Bankruptcy Procedure 7052. Any Finding of Fact that more properly should be construed as a Conclusion of Law shall be considered as such, and vice versa.
. As that is more of a legal issue, it is addressed in the Conclusions of Law.
. The Sheriffs Deed for the tax sale was recorded on September 12, 2014. Accordingly, absent the bankruptcy filing, the two year anniversary provided for under Texas Tax Code § 34.21(a) would have expired on September 12, 2016. However, Plaintiff filed for bankruptcy protection on September 12, 2016, thus affording him an additional 60 days to satisfy the redemption criteria. The parties have stipulated that the Plaintiff tendered funds to the Defendant, and later to the Dallas County Tax Assessor Collector (together with the necessary affidavit required by Texas Tax Code 34.21(f) and (f-1)), on November 9, 2016 and November 11, 2016 respectively. Accordingly, the Plaintiff completed the redemption prior to the second anniversary of the date on which the purchaser's deed is filed for record” as extended by 11 U.S.C. § 108(b), Timing is not an issue in this adversary proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500515/ | MEMORANDUM OPINION REGARDING MOTION TO COMPEL ARBITRATION
Kay Woods, United States Bankruptcy Judge
Before the Court is Defendant’s Motion to Compel Arbitration and Stay Related Contested Matter (“Arbitration Motion”) (Doc. 44) filed by Célico Partnership d/b/a Verizon Wireless (“Verizon”) on April 24, 2017. Verizon seeks an order staying this Court’s further consideration of the Motion for Contempt (Doc. 29) filed by Debtors David A. Jorge, Jr. and Natasha D. Jorge on October 27, 2016 and compelling the Debtors to arbitrate the Motion for Contempt. On May 18, 2017, the Debtors filed Debtors’ Response in Opposition to Verizon Wireless’ [sic] Motion to Compel Arbitration (“Debtors’ Response”) (Doc. 45), in which the Debtors oppose arbitration of the Motion for Contempt.
This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 2012-7 entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408, and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The following constitutes the Court’s findings of fact and conclusions of law pursuant to *27Federal Rule of Bankruptcy Procedure 7052.
For the reasons set forth below, the Court will deny the Arbitration Motion.
I. BACKGROUND
On October 23, 2015 (“Petition Date”), the Debtors filed a voluntary petition pursuant to chapter 7 of Title 11 of the United States Code (“Bankruptcy Code”). The filing of a bankruptcy petition operates as an automatic stay against specified collection efforts pursuant to 11 U.S.C. § 362.
The Debtors listed “Verizon” as a creditor with a pre-petition general unsecured claim of $797.39. (Doc. 1 at 32.) On March 4, 2016, the Court entered Order of Discharge (Doc. 24), which granted the Debtors a discharge pursuant to 11 U.S.C. § 727. A discharge in bankruptcy provides a debtor with an automatic injunction against specified collection efforts pursuant to 11 U.S.C. § 524.
In the Motion for Contempt, the Debtors allege that Verizon violated the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524, as set forth below.
The Motion for Contempt contains the following allegations regarding Verizon’s violations of the automatic stay in 11 U.S.C. § 362. On or around around January 28, 2016, Verizon sent correspondence to the Debtors seeking payment of $497.89 because the Debtors’ wireless services account was past due. Approximately one month later, on or about February 24, 2016, Verizon sent correspondence to the Debtors seeking payment in excess of $1,000.00. Verizon sent no less than four letters to the Debtors seeking collection of a pre-petition debt. In addition to sending these letters to the Debtors, Verizon called the Debtors no less than 27 times between January 28, 2016 and February 13, 2016. The Debtors informed Verizon about their bankruptcy filing and that the Verizon claim was included therein. In order to cease receiving collection calls from Verizon, the Debtors changed to a different wireless services provider in February 2016.
The Motion for Contempt contains the following allegations regarding Verizon’s violations of the discharge injunction in 11 U.S.C. § 524. Between April 4, 2016 and June 6, 2016, Verizon utilized two separate collection agencies—The CBE Group, Inc. (“CBE”) and Convergent Outsourcing, Inc. (“Convergent”)—to attempt to collect the discharged debt. CBE, as agent for Verizon, sent the Debtors correspondence dated April 4, 2016 seeking payment of a past due balance of $1,104.55. Convergent, as agent for Verizon, sent the Debtors correspondence dated June 6, 2016 stating that the Debtors owed $1,203.95, but Convergent would accept $963.16 in settlement of the claim. Because CBE and Convergent sent correspondence to the Debtors after entry of the Order of Discharge, the Debtors assert that Verizon’s conduct in utilizing these collection agencies violated the discharge injunction.
On February 9, 2017, Verizon filed Response. of Célico Partnership d/b/a Verizon Wireless to Debtors’ Motion for Contempt (“Verizon’s Response”) (Doe. 35), which includes the following allegations. Prior to the Petition Date, the Debtors entered into two contracts with Verizon: (i) a wireless services agreement, which covered four lines; and (ii) a separate agreement for wireless devices. Prior to the Petition Date, the Debtors removed two lines from the wireless services agreement, leaving two lines with Verizon. Verizon did not receive proper notice of the Debtors’ bankruptcy filing because the Debtors sent notice to Verizon at a payment lock box. Despite the Debtors’ improper notice, on November 12, 2015, Verizon issued the *28Debtors a credit of $834.97 for pre-petition charges, leaving an account balance of $0.00 as of that date.
Beginning with the invoice dated December 7, 2015, all charges invoiced to the Debtors were incurred post-petition. The Debtors never terminated their account with Verizon and never indicated that they wanted to stop receiving wireless services from Verizon after the Petition. Date. Based on 11 U.S.C. § 365(d)(1), Verizon could not terminate the Debtors’ contract until 60 days after the Petition Date.1 Notwithstanding 11 U.S.C. § 365(d)(1), Verizon “believ[ed] that the Debtors intended to maintain their post-petition services.” (Verizon’s Resp. ¶ 12.) Verizon admits that it attempted to collect from the Debtors beginning in January 2016, but it asserts that such collection efforts were only for charges that the Debtors incurred post-petition.
The Court held a hearing on the Motion for Contempt on April 20, 2017, at which appeared Ashley R. Hall, Esq. on behalf of the Debtors and Anthony J. DeGirolamo, Esq. on behalf of Verizon. At the hearing, it became apparent that the Motion for Contempt could not be resolved without the presentation of evidence. Accordingly, the Court scheduled the issues of whether Verizon willfúlly violated the automatic stay and the discharge injunction for an evidentiary hearing on July 19, 2017. (See Doc. 42.) The Court also set June 22, 2017 as the deadline for the completion of all discovery.
II. ARGUMENTS OF THE PARTIES
A, Verizon’s Argument for Arbitration
Verizon alleges that, prior to the Petition Date, Debtor David A. Jorge entered into a contract with Verizon for multiple lines of wireless telecommunications services (“Contract”). Verizon further alleges that the Contract “contained a valid and binding agreement to arbitrate claims ‘arising out of or relating to’ the contract.” (Arbitration Mot. at 2.)
In addition to filing the Motion for Contempt, Verizon asserts that the Debtors also filed an action in the Court of Common Pleas for Mahoning County, Ohio, Case No. 2016 CV 03347 (“State Court Action”). The State Court Action seeks monetary damages from Verizon for violations of the Telephone Consumer Protection Act and invasion of privacy by intrusion upon seclusion. Verizon asserts that the claims in the State Court Action are based on the same conduct set forth in the Motion for Contempt and come within the scope of the arbitration clause in the Contract. Verizon states that it has served a written demand upon the Debtors’ counsel to arbitrate the disputes in the State Court Action.
Verizon’s arguments for compelling arbitration, as set forth in the Arbitration Motion, can be summarized as follows:
1. The Contract between Verizon and Mr. Jorge is supported by sufficient consideration;
2. The Contract contains an arbitration clause that covers any dispute that in any way relates to or arises out of the Contract or from any services Mr. Jorge receives from Verizon;
3. The arbitration clause is valid and enforceable;
*294. The Contract is for wireless telecommunications services;
5. Wireless telecommunications services involve interstate commerce;
6. The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., applies to contracts involving interstate commerce;
7. The Debtors’ claims for violations of the automatic stay and the discharge injunction fall within the scope of the arbitration clause; and
8. The Debtors’ claims for violations of the automatic stay and the discharge injunction are core proceedings, but this Court should exercise its discretion to compel arbitration because (i) the automatic stay is no longer in effect; and (ii) the discharge injunction remains in effect.
B. The Debtors’ Argument Against Arbitration
The Debtors make no arguments concerning the validity of the pre-petition Contract, but argue that the arbitration clause in not valid because (i) the arbitration clause was rendered unenforceable after the Debtors received their discharge; and (ii) they did not sign a reaffirmation agreement to reaffirm the Contract. The Debtors also contend that, even if the arbitration clause is enforceable, the Arbitration Motion should be denied because this Court is the most appropriate forum to determine whether Verizon violated the automatic stay and the discharge injunction because (i) the discharge injunction is a court order; and (ii) Mrs. Jorge is not a party to the Contract with Verizon, so her claims cannot be subject to the arbitration clause. In addition, the Debtors state that, on April 27, 2017, they voluntarily dismissed the State Court Action without prejudice.
III. ANALYSIS
In cases where the FAA applies, Verizon argues that a court must determine if arbitration of the particular dispute is appropriate.
First, the Court must decide whether the agreement, by its terms, reaches Mr. Jorge’s claims. This step involves two separate inquiries: (1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of the agreement. Second, the Court must determine whether any “legal constraints external to the parties’ agreement foreclosed the arbitration of those claims” such as statutes identifying categories of claims for which arbitration agreements should be rendered unenforceable.
(Arbitration Mot. at 5-6 (citations omitted).) Based on the above criteria, the Court finds that compelling arbitration of the Debtors’ claims is not appropriate.
A. The Arbitration Clause Cannot Apply to Mrs. Jorge’s Claims
First, the Court will address what is not in dispute. The Debtors do not dispute that there is a valid arbitration clause in the Contract. However, the Debtors assert that the Contract cannot govern any conduct by Verizon involving Mrs. Jorge because she did not execute the Contract. Verizon acknowledges that only Mr. Jorge is a party to the Contract.
The FAA cannot apply to any claims asserted by Mrs. Jorge because she has not agreed to arbitrate any claims she may possess. The policy for favoring arbitration, as set forth in the FAA, is based entirely on arbitration being a matter of contract, making an arbitration clause enforceable to the same extent as any other contract provision. Here, Verizon concedes that Mrs. Jorge is not a party to the *30Contract or any contract that provides for arbitration and, thus, cannot be forced to submit her claims to arbitration. Instead, Verizon states:
[Mr. Jorge] agreed to the arbitration provision by both signing the document which agreed to arbitration and incorporated specific terms by reference and by [sic] activating his phone. Accordingly, the Contract was accepted and became effective between the parties,
* * *
.., Further, permitting Ms. Jorge’s claims to continue herein while Mr. Jorge’s claims are subject to arbitration would be unnecessarily expensive, dupli-cative, and expose the parties to inconsistent outcomes from different forums.
(Arbitration Mot. at 4.) Expense, duplication of effort, and the possibility for inconsistent outcomes, however, have no bearing on the applicability of the FAA when— as here—a litigant such as Mrs. Jorge has never agreed to arbitration. Verizon cannot compel Mrs. Jorge to arbitrate her claims because she has never agreed to submit to arbitration.
Accordingly, this Court finds that there is no valid arbitration clause that applies to any claims asserted by Mrs. Jorge because she was not a party to the Contract. Mrs. Jorge has neither voluntarily nor contractually agreed to submit any claims to arbitration. Thus, an arbitrator has no authority over any claims asserted by Mrs. Jorge. The Court will deny the Arbitration Motion with respect to any claims asserted by Mrs. Jorge.
B, The Arbitration Clause Is No Longer Enforceable
Verizon postulates that it is “well established that the ‘rejection of a contract, or even breach of it, will not void an arbitration clause.’ ” (Arbitration Mot. at 6 (citing Madison Foods, Inc. v. Fleming Cos. (In re Fleming Cos.), 325 B.R. 687, 693-94 (Bankr. D. Del. 2005)).) However, this is not a universal conclusion. Indeed, Jernstad v. Green Tree Servicing, LLC (In re Jernstad), No. 11 C 7974, 2012 WL 8169889 (N.D. Ill. Aug. 2, 2012) reached the opposite conclusion. In Jemstad, the district court held:
The Court finds that Plaintiffs’ bankruptcy discharge rendered the parties’ Arbitration Agreement unenforceable. “What is discharged is a claim to payment.” Bethea v. Robert J. Adams & Assocs., 352 F.3d 1125, 1128 (7th Cir. 2003). Indeed, “one of the central purposes of the Bankruptcy Code ... is to give debtors a fresh start.” United States v. Johns, 686 F.3d 438, 451 (7th Cir. 2012) (citations omitted). Necessarily then, the pre-bankruptcy Arbitration Agreement—entered into in consideration of the mortgage loan (outlining the borrower’s promise to pay)—is unenforceable. Additionally, as Plaintiffs’ point out, the parties did not sign a reaffirmation agreement. See In re Turner, 156 F.3d 713, 718 (7th Cir. 1998) (“A reaffirmation agreement is the only vehicle through which a dischargeable debt can survive a Chapter 7 discharge.” (citations omitted)). Accordingly, the Court concludes that the Arbitration Agreement is not applicable to Plaintiffs claim under the FDCPA. Defendant’s motion to compel arbitration is therefore denied.
Id. at *2 (emphasis added).
The lack of a reaffirmation agreement is not the only matter a court must consider when an arbitration clause is embedded in a contract that has been rejected by the debtor. A court must determine if the debtor is attempting to obtain some benefit that flows from the rejected agreement—i.e., whether the debtor is attempting to use the rejected agreement as a *31weapon. In Harrier v. Verizon Wireless Pers. Commc’ns, LP (In re Harrier), 903 F.Supp.2d 1281 (M.D. Fla. 2012), a former customer brought an action against the wireless carrier alleging violations of the Florida Consumer Collection Practices Act and the Telephone Consumer Protection Act. The district court denied the wireless carrier’s motion to compel arbitration. In ruling on the wireless carrier’s motion for reconsideration, the district court held that the asserted claims were statutory and related to the wireless carrier’s alleged conduct that occurred two years after entry of the former customer’s bankruptcy discharge.
In sum, this Court stands by its original holding that it would be inappropriate to compel arbitration under the facts of this case, which is consistent with the court’s holding in Jemstad, that, under 11 U.S.C. § 524(c), the agreement between a ‘holder of a claim and the debt- or’ is enforceable only to the extent that certain conditions, such as reaffirmation of the agreement, are met. Importantly, [the former customer] is not using the agreement as a ‘weapon’ in this case.
Id. at 1284 (emphasis added).
In a similar case, Green Tree Servicing, L.L.C. v. Fisher, 162 P.3d 944 (Okla. Ct. App. 2007), the state court found that a dispute for alleged violations of the Oklahoma Consumer Protection Act and orders of the bankruptcy court did not fall within the scope of the arbitration clause. In that case, the borrower alleged that the creditor made numerous telephone calls to his home and place of business, post-discharge, regarding a manufactured home in which the creditor had a security interest. The state court held:
Here, acts giving rise to [the borrower's cause of action , are not based upon duties imposed by contract or statute that are brought into play by virtue of the contract or financing agreement as in Conseco [Fin. Serv. Corp. v. Wilder, 47 S.W.3d 335 (Ky. Ct. App. 2001)]. [The creditorj’s alleged attempt to improperly collect money or property that was no longer due from [the borrower] or in his possession occurred after the contractual relationship had been terminated by discharge in bankruptcy. Just as in Gitgood [v. Howard Pontiac-GMC, Inc., 57 P.3d 875 (Okla. Ct. App. 2002) ], the acts giving rise to the cause of action did not have their roots in the former contract, but in alleged behavior that occurred subsequent to the contract’s termination, and which did not arise as a natural consequence of the contract.
Id. ¶ 17 (emphasis added).
The facts currently before, this Court are similar to the facts in the cases cited above. Mr. Jorge neither assumed the Contract nor entered into a reaffirmation agreement with respect thereto. Furthermore, Mr. Jorge is not attempting to take advantage of the Contract while simultaneously seeking not to honor his agreement to arbitrate. Indeed, the Debtors’ Motion for Contempt does not rely on any term of the Contract, but instead alleges violations of the automatic stay and the discharge injunction. These allegations have nothing to do with the terms of the Contract. The subject of the Contract is the provision of wireless services. Mr. Jorge and Verizon’s agreement to arbitrate claims arising out of or relating to the Contract is wholly inapplicable to Mr. Jorge’s claims for violation of the automatic stay and the discharge injunction. Like the Jemstad and Harrier courts, this Court finds that, under the circumstances, the arbitration clause is not enforceable with respect to the claims in the Motion for Contempt. Moreover, unenforceability of the arbitration clause is the only conclusion that this Court can reach regarding *32the claims asserted by Mrs. Jorge in the Motion for Contempt because she is not a party to the Contract and she never agreed to arbitrate any claims. Accordingly, the Court will deny the Arbitration Motion.
C. The Claims for Violations of the Automatic Stay and the Discharge Injunction Are Core and Arise Exclusively From the Bankruptcy Code
There is no dispute that the claims for violations of the automatic stay and the discharge injunction contained in the Motion for Contempt constitute core proceedings as defined in 28 U.S.C. § 157(b)(2). (See Arbitration Mot. at 7-8 and Debtor’s Resp. at 4.) Although Verizon concedes that the claims in the Motion for Contempt are “core” proceedings, that does not mean that the arbitration clause may not be applicable to the claims asserted by Mr. Jorge in the Motion for Contempt.
The seminal case regarding how to determine whether claims should be arbitrated is Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). Although “the [PAA], standing alone, ... mandates enforcement of agreements to arbitrate[,]” the United States Supreme Court has observed, “the [FAA] ’s mandate may be overridden by a contrary congressional command.” Id. at 226, 107 S.Ct. 2332. In McMahon, the Supreme Court promulgated a three-factor test to determine the intent of Congress: (i) the text of the statute; (ii) the statute’s legislative history; and (iii) whether there exists an inherent conflict between arbitration and the underlying purposes of the statute. See id. at 227, 107 S.Ct. 2332.
The Bankruptcy Code does not mention arbitration and there is nothing in the legislative history of the Bankruptcy Code that indicates a Congressional intent concerning arbitration in the bankruptcy context. “Thus, in the bankruptcy context, the third factor [of the McMahon test] becomes dispositive: ‘[W]hether an inherent conflict exists between arbitration and the underlying purposes of the Bankruptcy Code.’” Hooks v. Acceptance Loan Co., No. 2:10-CV-999-WKW, 2011 WL 2746238, at *3 (M.D. Ala. July 14, 2011) (quoting The Whiting-Turner Contracting Co. v. Elec. Mach. Enters., Inc. (In re Elec. Mach. Enters., Inc.), 479 F.3d 791, 796 (11th Cir. 2007)).
To this court’s knowledge, no court of appeals has ever concluded that arbitration of a non-core proceeding would produce an inherent conflict between the FAA and the Bankruptcy Code. At the same time, both the Fifth and Eleventh Circuits have indicated a willingness to compel arbitration over core proceedings when the party opposing arbitration fails to meet its burden of showing that arbitration of the core proceeding inherently conflicts with the Bankruptcy Code. See In re Nat’l Gypsum Co., 118 F.3d 1056, 1067 (5th Cir. 1997) (conceding that the core/non-core distinction is practical, but finding that it is “too broad” and stating that “[i]t is doubtful that ‘core’ proceedings, categorically, meet the [McMahon] standard”); In re Elec. Mach. Enter., Inc., 479 F.3d at 798-99 (“[E]ven if we were to find that EME’s claim against Whiting-Turner constitutes a core proceeding, we find that EME did not sustain its burden under McMahon to demonstrate that Congress intended to limit or prohibit waiver of a judicial forum for the type of claim that EME brought against Whiting-Turner. ... Therefore, even if this dispute is in fact core, it is still subject to arbitration.”).
Id.
Verizon asserts, “Arbitration of the claims raised in the Motion [for Contempt] *33is especially appropriate in this instance, where a core proceeding [—ie., the claims for violations of the automatic stay and the discharge injunction—] is coupled with a non-core state court action involving a different federal statute and state law claims, and resolution of the core proceeding through arbitration will not interfere with the purposes of the Bankruptcy Code.” (Arbitration Mot. at 9.)
The Debtors voluntarily dismissed the State Court Action on April 27, 2017. (Debtors’ Resp. at 2.) Since the State Court Action is no longer pending, Verizon’s arguments regarding the applicability of the arbitration clause to the allegations in the State Court Action are now moot. Moreover, Verizon’s argument that arbitration of the claims in the Motion for Contempt is especially appropriate because these claims “are coupled” with the State Court Action no longer has any factual basis. Because the Debtors have dismissed the State Court Action, there is no longer any possibility for inconsistent outcomes by different tribunals in determining this Motion for Contempt and the State Court Action. Nor will “such parallel litigation ... increase costs and the burden on the courts.” (Arbitration Mot. at 9.) Thus, the Court finds that Verizon’s arguments concerning the State Court Action are moot.
The Court will next focus on whether the Debtors’ claims in the Motion for Contempt fall within the scope of the arbitration clause. Verizon states:
By its terms, the Contract arbitration provision covers “ANY DISPUTE THAT IN ANY WAY RELATES TO OR ARISES OUT OF THIS AGREEMENT OR FROM ANY ... SERVICES YOU RECEIVE FROM US.” Exhibit 1. The arbitration agreement is therefore a “broadly-worded” clause including all disputes between the parties. The claims made by Mr. Jorge all arise out of and relate to the Contract because they are based on allegations of letters or calls made in connection with the service provided by Verizon Wireless under the contract. See Motion {for Contempt], Pages 1-2. The Claims in the Motion [for Contempt] are therefore within the scope of the arbitration provision contained in the Contract.
(Id, at 7.)
As set forth above, Verizon acknowledges that only Mr. Jorge executed the Contract. Thus, only Mr. Jorge’s claims can arise out of or relate to the provision of services under the Contract. Consequently, all of Verizon’s arguments concerning the enforceability of the arbitration clause cannot, as a matter of law, apply to the claims asserted by Mrs. Jorge.
Because the arbitration clause is broadly worded, it may encompass the claims asserted by Mr. Jorge in the Motion for Contempt. Mr. Jorge’s claims can be said to “relate to” the Contract because the pre-petition relationship between Verizon and Mr. Jorge is based on the Contract. However, the claims in the Motion for Contempt do not “arise out of’ the Contract, Even if Mr. Jorge’s claims “relate to” the Contract, this Court has the discretion not to compel arbitration because there is an inherent conflict between the FAA and the underlying purposes of the Bankruptcy Code in enforcing the automatic stay and the discharge injunction.
Verizon mischaracterizes the nature of the claims in the Motion for Contempt. The Debtors do not allege that the correspondence and calls from Verizon and its agents to collect the pre-petition debt violated the Contract. Instead, the Debtors seek an order of this Court holding Verizon in contempt of court based on conduct *34that allegedly violated the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524. The Motion for Contempt does not seek damages because Verizon and its agents breached the Contract. Indeed, the Contract does not have any bearing on whether Verizon violated the Bankruptcy Code when it sent correspondence to and called the Debtors.
Verizon acknowledges that the Debtors’ Motion for Contempt is based on alleged violations of the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524 and that “these provisions are unique to bankruptcy matters.” (Id. at 8 (emphasis added).) Despite recognizing that the Debtors’ claims are based on the Bankruptcy Code, Verizon goes on to assert that “there is no conflict in allowing Mr. Jorge’s claims to be determined in arbitration.” (Id.) This statement, however, is not correct; there is an inherent conflict.
As noted by the bankruptcy court in In re Transp. Assocs., Inc., 263 B.R. 531 (Bankr. W.D. Ky. 2001), “The Sixth Circuit has not addressed the precise issue of arbitration in the context of a bankruptcy case.” Id. at 535. Accordingly, the bankruptcy court adopted the analysis of the Fifth Circuit Court of Appeals in Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Nat’l Gypsum Co.), 118 F.3d 1056 (5th Cir. 1997), in which the Fifth Circuit held that there was not an inherent conflict between the Bankruptcy Code and the FAA and stated:
Cognizant of the Supreme Court’s admonition that, in the absence of an inherent conflict with the purpose of another federal statute, the Federal Arbitration Act mandates enforcement of contractual arbitration provisions, [Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) ], we refuse to find such an inherent conflict based solely on the jurisdictional nature of a bankruptcy proceeding. Rather, as did the Third Circuit in Hays [& Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir. 1989) ], we believe that nonenforcement of an otherwise applicable arbitration provision turns on the underlying nature of the proceeding, i.e., whether the proceeding derives exclusively from the provisions of the Bankruptcy Code and, if so, whether arbitration of the proceeding would conflict with the purposes of the Code.
Transp. Assocs., 263 B.R. at 535 (quoting Nat’l Gypsum, 118 F.3d at-1067) (emphasis added). In Transport Associates, the bankruptcy court was not dealing with violations of the automatic stay and the discharge injunction, but rather was concerned with the trustee’s objection to a proof of claim filed by the debtor’s insurance company. Under those very different circumstances, the bankruptcy court found that the claim objection concerned contract interpretation and accounting principles. The bankruptcy court stated, “Although procedurally these question [sic] arise by virtue of the ‘claims allowance process,’ the arbitration of this contractual dispute does not directly conflict with the Bankruptcy Code.” Id. Consequently, the bankruptcy court required the trustee, in accordance with the arbitration clause in the debtor’s insurance policy, to submit his objection to the proof of claim to arbitration because doing so would not conflict with any underlying purpose of the Bankruptcy Code. The bankruptcy court did not, however, compel arbitration of the trustee’s claims for equitable subordination against the insurer because those claims did not involve contract interpretation.
*35In the instant case, the claims in the Motion for Contempt “derive exclusively” from the provisions of the Bankruptcy Code and would “conflict with the purposes of the Code.” Verizon, itself, acknowledges that the claims in the Motion for Contempt are unique to the Bankruptcy Code. In contrast to the claim objection in Transport Associates, the Debtors’ claims for violations of the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524 do not involve contract interpretation and/or accounting. Instead, the Debtors seek a finding of contempt from this Court for Verizon’s actions. Relief from creditors and receipt of a discharge are the quintessential purposes of chapter 7 of the Bankruptcy Code. Violations of the discharge injunction go to the heart of whether a debtor receives the “fresh start” to which he or she is entitled by virtue of that discharge. Therefore, arbitration of alleged violations of the automatic stay and the discharge injunction would conflict with the basic, underlying purposes of the Bankruptcy Code.
In Ackerman v. Eber (In re Eber), 687 F.3d 1123 (9th Cir. 2012), the Ninth Circuit Court of Appeals affirmed denial of a motion to compel arbitration by an insurance company. The creditors in Eber had filed an adversary proceeding to determine the dischargeability of a debt under 11 U.S.C. § 523(a)(2), (4), and (6); however, they asserted that an arbitrator should determine liability and the amount of damages by attempting to characterize such claims as state law breach of contract, fraud, and breach of fiduciary, duty claims—ie., non-core claims. The Ninth Circuit noted that bankruptcy courts have exclusive jurisdiction to determine dis-chargeability of debts under 11 U.S.C. § 523(a)(2), (4), and (6). Despite finding no blanket exception to arbitration in the FAA for Bankruptcy Code issues, the Ninth Circuit held:
We agree with the district court’s conclusion that implicit in the bankruptcy court’s reasoning is the conclusion that allowing an arbitrator to decide issues that are so closely intertwined with dis-chargeability would “conflict with the underlying purposes of the Bankruptcy Code.” ... When a bankruptcy court considers conflicting policies as the bankruptcy court did here, we acknowledge its exercise of discretion and defer to its determinations that arbitration will jeopardize a core bankruptcy proceeding.
Id. at 1130-31 (citations omitted) (emphasis added).
This Court finds that the claims for violations of the automatic stay and the discharge injunction in the Motion for Contempt derive exclusively from the provisions of the Bankruptcy Code and arbitration of those claims would conflict with the purposes of the Bankruptcy Code. Thus, this Court has the discretion not to compel arbitration of Mr. Jorge’s claims where, as here, there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.
D. The Discharge Injunction in 11 U.S.C. § 524 Is No Different From an Injunction Issued by Specific Court Order
Even though the discharge injunction is statutory, it is the same as an injunction entered by order of this Court and, thus, this Court can and should determine if there has been a violation of the discharge injunction. Congress has made it clear that 11 U.S.C. § 524 has actual in-junctive force. The discharge injunction protects the Debtors because this Court *36entered the Order of Discharge.2 The Order of Discharge is a “decree[ ] of a federal court of bankruptcy entered in the exercise of a jurisdiction essentially federal and exclusive in character.” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (emphasis added).
The discharge injunction in 11 U.S.C. § 524 automatically became effective upon the entry of the Order of Discharge, but could not be effective before the entry of such order. The remedy to enforce an injunction is a contempt citation. Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir. 2002) (citations and parenthetical omitted) (For a violation of the discharge injunction, “contempt is the appropriate remedy and no further remedy is necessary.”); accord Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 422 (6th Cir. 2000) (finding no private right of action for violations of 11 U.S.C. § 524 because “Congress knew that courts were enforcing § 524 through contempt proceedings, and Congress knew how to create a private right of action when it wished to do so, but in this instance it elected to do nothing,”). By filing the Motion for Contempt, the Debtors have properly invoked the jurisdiction of this Court to obtain the appropriate remedy for the alleged violations of the discharge injunction. The parties, whether through a pre-dispute arbitration agreement or any other agreement, cannot strip a court of its inherent power and certainly not the inherent power to enforce its own orders. Violations of the discharge injunction are inherently non-arbitrable because the discharge injunction vindicates a federal right that this Court previously awarded the Debtors—i.e., the bankruptcy discharge.
In Hooks v. Acceptance Loan Company, No. 2:10-CV-999-WKW, 2011 WL 2746238 (M.D. Ala. July 14, 2011), the district court denied a motion to compel arbitration of claims for violations of the discharge injunction. The court noted, “[A]ctions to enforce the discharge injunction are core proceedings because they call on a bankruptcy court to construe and enforce its own orders.” Id. at *4 (citations and paren-theticals omitted). The district court held:
And, although being a core proceeding does not automatically foreclose arbitration, it would seem anomalous to allow an arbitrator to construe a court’s order in a contempt setting. As a general matter, allowing arbitration of contempt proceedings would effectively strip the courts of their primary enforcement mechanism. The contempt power of a court has been described by the Supreme Court as “[indispensable], because [it] [is] necessary to the exercise of all other [powers].” More specifically, arbitration of § 105(a) contempt proceedings would inherently conflict with the Bankruptcy Code, undermining the bankruptcy court’s authority to enforce its orders. Even though these causes of action are not § 105 contempt proceedings, granting the motions to compel arbitration would nevertheless send to arbitration a dispute that, on its merits, squarely implicates the court’s contempt power.
Id. at *5 (internal citations omitted); see also Credit One Fin. v. Anderson (In re Anderson), 553 B.R. 221, 232-33 (Bankr, S.D.N.Y. 2016), aff'd 550 B.R. 228 *37(S.D.N.Y. 2016) (citations, parentheticals, and n.9 omitted) (“This objective [of a fresh start] is predominantly achieved through the discharge, and, therefore, the question of whether a discharge injunction has been violated is essential to proper functioning of the Bankruptcy Code, and arbitration is inadequate to protect such core, substantive rights granted by the Code.”).3
Thus, this Court finds that violations of the discharge injunction are not appropriate for arbitration.
E. Violations of the Automatic Stay Are Substantive Bankruptcy Rights and Are Not Appropriate for Arbitration
Likewise, violations of the automatic stay are within the substantive rights granted by the Bankruptcy Court and should not be sent to arbitration. In Walker v. Got’cha Towing & Recovery, LLC (In re Walker), 551 B.R. 679 (Bankr. M.D. Ga. 2016), the bankruptcy court found that “any rights arising from a violation of the automatic stay are substantive rights created by the Bankruptcy Code and are thus quintessentially core matters.” Id. at 686 (citations and parentheti-cals omitted). The court held:
Congress has tasked this Court with administering the protections of the automatic stay.
* * *
... In evaluating a tension between the procedures established by these two bodies of law, courts must be careful not to use a broad brush favoring arbitration to paint over the intricate bankruptcy process crafted by Congress. To require arbitration in the stay violation context does just that.
The automatic stay serves a multiplicity of interests. “[A] stay violation is not just a private injury. It strikes at the entire bankruptcy system and all parties for whom it was designed.” On the other hand, “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” ... Because the bankruptcy system implicates interests far broader than the private rights of the two parties to the contract in question, it is not unusual for prepetition contractual obligations, particularly those dictating forum or waiving the protections of the automatic stay, to be modified or even ignored in a bankruptcy case. Accordingly, to require arbitration of a stay violation does not serve the core purpose of the FAA and runs roughshod over the considerations that influence bankruptcy courts not to enforce similar prepetition contractual provisions.
Id. at 689-91 (citations, parentheticals, and n.21-22 omitted).
Indeed, a violation of the automatic stay is so important to the authority of bankruptcy courts that such courts have the power to raise the issue sua sponte without a motion from a party in interest. See Elder-Beerman Stores Corp. v. Thomasville Furniture Indus. (In re Elder-Beerman Stores Corp.), 195 B.R. 1019, 1023 (Bankr. S.D. Ohio 1996) (internal citations and parentheticals omitted) (“Had the parties not raised the issue of the automatic stay, the court would still be empowered to address stay violations sua sponte. Bankruptcy courts then have the power, whether on the request of a party in interest or sua sponte, to consider both *38what acts constitute a violation of the stay and whether or not relief from stay is appropriate.”).
For the reasons set forth above, the Court finds that violations of the automatic stay are not appropriate for arbitration.
F. The Cases Cited by Verizon Are Distinguishable
Although Verizon cites many cases in its Arbitration Motion, few deal with arbitration of violations of the automatic stay or the discharge injunction. Verizon cites MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2nd Cir. 2006) for the proposition that “post-discharge arbitration of alleged stay violations would not necessarily jeopardize or inherently conflict with the Bankruptcy Code.” (Arbitration Mot. at 8.) That case involved a chapter 7 debtor who filed a putative class action against the creditor bank alleging that the creditor’s post-petition monthly withdrawals from the debtor’s bank account were willful violations of the automatic stay. The bankruptcy court denied the motion to arbitrate on the basis that the bankruptcy court was the most appropriate forum to adjudicate the debtor’s claim because an 11 U.S.C. § 362 cause of action is strictly a product of the Bankruptcy Code, the debtor’s case was still open, and the debtor required the protection of the automatic stay. The district court affirmed, finding that allowing arbitration to go forward would seriously jeopardize the objectives of the Bankruptcy Code because the automatic stay serves the same function as an injunction. The Second Circuit Court of Appeals reversed, finding, among other things:
[A]s a purported class action, [the debt- or’s claims lack the direct connection to her own bankruptcy case that would weigh in favor of refusing to compel arbitration[.]
... [T]he fact that [the debtor] filed her § 362(h) claim as a putative class action further demonstrates that the claim is not integral to her individual bankruptcy proceeding. By tying her claim to a class of allegedly similarly situated individuals, many of whom are no longer in bankruptcy proceedings, she demonstrates the lack of close connection between the claim and her own underlying bankruptcy case.
Id. at 109-10 (emphasis added).
The two other cases cited by Verizon—Belton v. GE Capital Consumer Lending, Inc. (In re Belton), Nos. 15 CV 1934(VB), 15 CV 3311(VB), 2015 WL 6163083 (S.D.N.Y. Oct. 14, 2015) and Williams v. Navient Solutions, LLC (In re Williams), 564 B.R. 770 (Bankr. S.D. Fla. 2017)—also involved motions to compel arbitration of putative class action violations in the context of violations of the discharge injunction. In contrast, in the instant case, the Debtors have not filed a putative class action and seek only to i’edress their own rights for Verizon’s alleged violations of the automatic stay and the discharge injunction. See Merrill v. MBNA Am. Bank, N.A. (In re Merrill), 343 B.R. 1, 8-9 (Bankr. D. Me. 2006) (denying a motion to arbitrate violations of the automatic stay and noting that one of the three factors relied on by the court in Hill was the debtor’s attempt to seek class certification of allegedly similar individuals, many of whom were no longer in bankruptcy proceedings).
IV. CONCLUSION
Because Mrs. Jorge is not a party to the Contract, the arbitration clause is inapplicable to all claims asserted by Mrs. Jorge. Because the Contract was rejected pursuant to 11 U.S.C. § 365(d)(1) and the Debtors did not reaffirm the Contract, the arbitration clause is unenforceable with *39respect to any claims for violations of the automatic stay and the discharge injunction. The claims for violations of the automatic stay and the discharge injunction are core bankruptcy proceedings and do not implicate interpretation of the Contract; instead, such claims are unique to bankruptcy proceedings (as Verizon acknowledges). Even if Mr. Jorge’s claims “relate to” the Contract and fall within the broad scope of the arbitration clause, this Court will exercise its discretion not to compel arbitration of the Motion for Contempt because, in this case, there is an inherent conflict between the FAA and the underlying purposes of the Bankruptcy Code. Any violation of the discharge injunction is a violation of the Order of Discharge. This Court—not an arbitrator—has the right to enforce its own orders. For these reasons, compelling arbitration of the Motion for Contempt is not appropriate. Accordingly, the Court will deny the Arbitration Motion.
An appropriate order will follow.
ORDER DENYING MOTION TO COMPEL ARBITRATION
Before the Court is Defendant’s Motion to Compel Arbitration and Stay Related Contested Matter (“Arbitration Motion”) (Doc. 44) filed by Célico Partnership d/b/a Verizon Wireless (“Verizon”) on April 24, 2017. Verizon seeks an order staying this Court’s further consideration of the Motion for Contempt (Doc. 29) filed by Debtors David A. Jorge, Jr. and Natasha D. Jorge on October 27, 2016 and compelling the Debtors to arbitrate the Motion for Contempt. On May 18, 2017, the Debtors filed Debtors’ Response in Opposition to Verizon Wireless’ [sic] Motion to Compel Arbitration (Doc. 45), in which the Debtors oppose arbitration of the Motion for Contempt.
For the reasons set forth in the Court’s Memorandum Opinion Regarding Motion to Compel Arbitration entered on this date, the Court hereby finds:
1. Only Mr. Jorge signed the Contract. Because Mrs. Jorge is not a party to the Contract, the arbitration clause is inapplicable to all claims asserted by Mrs. Jorge;
2. Verizon cannot compel Mrs. Jorge to arbitrate any claims she may possess;
3. Because the Contract was rejected pursuant to 11 U.S.C. § 365(d)(1) and the Debtors did not reaffirm the Contract, the arbitration clause is unenforceable with respect to any claims for violations of the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524;
4. The claims for violations of the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524 are core bankruptcy proceedings, which Verizon acknowledges are unique to bankruptcy proceedings;
5. The claims for violations of the automatic stay in 11 U.S.C. § 362 and the discharge injunction in 11 U.S.C. § 524 do not implicate interpretation of the Contract;
6. In this case, there is an inherent conflict among the FAA and the underlying purposes of the Bankruptcy Code;
7. This Court has the right to enforce its own orders, including the Order of Discharge; and
8. Compelling arbitration of the Motion for Contempt is not appropriate.
Accordingly, the Court hereby denies the Arbitration Motion.
IT IS SO ORDERED.
. Pursuant to 11 U.S.C. § 365(d)(1), in a chapter 7 case, "if the trustee does not assume or reject an executory contract ... of personal property of the debtor within 60 days after the [petition date] ,.., then such contract ... is deemed rejected." 11 U.S.C. § 365(d)(1) (2017). Neither the Chapter 7 Trustee nor the Debtors assumed any executo-ry contracts.
. Only this Court could grant the Debtors a discharge; the Debtors could not file an action seeking a discharge order in another tribunal based on their bankruptcy case filed in this Court. The only way to receive a discharge is to be a “debtor” (as defined in 11 U.S.C. § 101(13)), which requires commencing a bankruptcy case in the United States Bankruptcy Court.
. The district court decision in Anderson is currently on appeal to the Second Circuit Court of Appeals. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500516/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW
Jack B. Schmetterer, United States Bankruptcy Judge
This adversary proceeding, related to a voluntary Chapter 11 bankruptcy case, is before the court for decision after trial. The debtor in the bankruptcy case, Settlers’ Housing Service, Inc. (“Settlers’” or the “Debtor”), is an Illinois nonprofit corporation organized and operated to fulfill the housing needs of recently arrived legal immigrants. After incurring large amounts of debt to acquire properties in August of 2008, the properties failed to generate enough revenue to pay the loans and Settlers’ failed to pay the debt. In the meantime, the original bank lender failed and the Federal Deposit Insurance Corporation (“FDIC”), as receiver for the defunct lender, transferred its interests in Settlers’ loans to Schaumburg Bank and Trust, N.A. (“Schaumburg Bank” or the “Bank”). When Schaumburg Bank sued Settlers’ to foreclose on properties then asserted to be collateral for the loans, Settlers’ responded by filing the bankruptcy case and this proceeding, which contests the right to foreclose and the claim filed in bankruptcy by the Bank.
The adversary proceeding was brought on behalf of the Chapter 11 estate. The complaint alleges that one of the mortgages on property claimed as collateral for all loans was obtained by the Bank’s predecessor through fraud, without Settlers’ actual knowledge or authorization. Among other things, the complaint seeks determination that the mortgage on the Washington-Taylor Property (as defined in the Findings of Fact below) is void and unenforceable against Settlers’ and its estate for fraud in the execution or other illegality. Equitable subordination of the Bank’s claim and other relief is also sought.
Trial was held over the course of twelve afternoons. At the conclusion of trial, all parties having rested, the court directed the parties to submit written proposed findings of fact and conclusions of law in lieu of final oral argument. This was done, and the resulting argument has been reviewed. Findings of Fact and Conclusions of Law will now be made and entered below. It is held therein that Settlers’ met its burden of proof in disputing the validity and enforceability of a mortgage claimed by the Bank on the Washington-Taylor Property, and Settlers’ objection to the Bank’s claim will be sustained in that respect. Other factual allegations in the complaint were also established, but Settlers’ is not entitled to all the relief sought. Judgment will be separately entered in favor of Settlers’ as to some, but not all counts tried. An order and judgment disallowing part of the Bank’s claim, in part, and protecting the Washington-Taylor Property from foreclosure will be entered.
*45CONCLUSIONS OF LAW AS TO JURISDICTION
Under 28 U.S.C. § 1334, federal district courts have original and exclusive jurisdiction of all cases under the Bankruptcy Code (title 11, U.S.C.), and original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11. The district courts may refer these cases and proceedings to the bankruptcy judges for their districts pursuant to 28 U.S.C. § 157(a), and the District Court for the Northern District of Illinois has made such reference through Internal Operating Procedure 15(a).
After a case is referred to a bankruptcy judge, 28 U.S.C. § 157(b)(1) authorizes the judge to issue final judgments in “core proceedings” arising under the Bankruptcy Code, or arising in a bankruptcy case, and § 157(b)(2) gives several examples of core proceedings. However, unless the parties consent, related proceedings may only be treated by a bankruptcy judge through the issuance of proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1), with judgment entered by the district court after de novo review. Exec. Benefits Ins. Agency v. Arkison, — U.S. —, 134 S.Ct. 2165, 2173-74, 189 L.Ed.2d 83 (2014).
This adversary proceeding deals with the objection of Settlers’ estate to the claim filed by Schaumburg Bank in the bankruptcy case, as well as a request to equitably subordinate the Bank’s claim and other affirmative relief. By prior Opinion, it was held that despite certain protections given to banks taking from the FDIC as receiver, subject matter jurisdiction lies here to consider defenses to the validity and enforceability of the Bank’s claim, equitable subordination, and counterclaims relating to some asserted actions or omissions by Schaumburg Bank. See Settlers’ Hous. Serv., Inc. v. Schaumburg Bank & Trust Co., N.A. (In re Settlers’ Hous. Serv., Inc.), 540 B.R. 624, 634-35 and 636-37 (Bankr. N.D. Ill. 2015). The Bank’s motion to dismiss the Third Amended Complaint for lack of subject matter jurisdiction was therefore denied with respect to Counts 1, 3, 6, 8, 9 and 11. Id. at 637. The reasoning and ruling in that Opinion, as well as two prior Opinions on motions to dismiss filed by the Bank in this adversary case, see 520 B.R. 253 (Bankr. N.D. Ill. 2014); 514 B.R. 258 (Bankr. N.D. Ill. 2014), are incorporated into the Conclusions of Law by this reference.
Counts 3, 6, 9: Objections to Claim Relating to Fraud in the Execution
Schaumburg Bank still maintains that subject matter jurisdiction is lacking as to Counts 1 (Equitable Subordination), 3 (Fraudulent Misrepresentation related to Fraud in the Execution), 6 (Fraud, Illegality and Unenforceability of the Washington-Taylor Mortgage), 8 (Setoff) and 9 (Unjust Enrichment related to Fraud in the Execution) because those claims relate to purported acts or omissions of its predecessor in interest prior to appointment of the FDIC as receiver. (See Def.’s Proposed Findings of Fact and Conclusions of Law, Dkt. No. 327 [“Def.’s FFCL”], at 2.)
With respect to Counts 3 (Fraudulent Misrepresentation related to Fraud in the Execution), 6 (Fraud, Illegality and Unen-forceability of Washington-Taylor Mortgage) and 9 (Unjust Enrichment related to retention of Washington-Taylor Mortgage), it was earlier held that available relief is “limited to that which is needed to dispute the validity of Schaumburg Bank’s claim against the estate or otherwise disallow the bank’s claim.” Settlers’, 540 B.R. at 637. Defendant maintains that consideration of defensive theories identified in these counts is barred by the FDIC ad*46ministrative exhaustion requirement, see 12 U.S.C. § 1821(d)(18)(P). The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183, limits judicial review of claims against the FDIC and its successors. The statutory provision limiting court jurisdiction to review those claims provides as follows:
Except as otherwise provided in this subsection, no court shall have jurisdiction over-
(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the Corporation has been appointed receiver, including assets which the Corporation may acquire from itself as such receiver; or
(ii) any claim relating to any act or omission of such institution or the Corporation as receiver.
12 U.S.C. § 1821(d)(13)(D). See also Settlers’, 540 B.R. at 630-31.
The Bank cites Farnik v. F.D.I.C., 707 F.3d 717 (7th Cir. 2013), which held that claims brought against the successor bank that related to pre-FDIC receivership acts of the predecessor bank were subject to FIRREA’s administrative claims process exhaustion requirement, see id. at 722-23 (citing 12 U.S.C. § 1821(d)(13)(D)(ii)); See also Settlers’, 540 B.R. at 631-32. However, for reasons discussed in the prior Opinion, defenses to enforcement of rights raised after a FDIC receivership are not subject to FIRREA’s administrative exhaustion requirement. Settlers’, 540 B.R. at 633-34; see also Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. City Sav. F.S.B., 28 F.3d 376, 393 (3d Cir. 1994); Am. First Fed., Inc. v. Lake Forest Park, Inc., 198 F.3d 1259, 1264 (11th Cir. 1999). Nothing in Famik compels a different result.
In Famik, the plaintiffs had instituted a class action suit alleging that the predecessor bank had breached loan agreements and violated various state laws regulating interest rates. Such claims were asserted before the FDIC stepped in as receiver, and the plaintiffs later substituted the successor bank as defendant. The complaint there set forth claims “for violations of the Illinois Interest Act, 815 ILCS 205/1 et seq., and the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1 et seq., as well as for contract reformation and fraud.” Farnik, 707 F.3d at 720. The Famik opinion held that such claims were subject to FIRREA’s administrative exhaustion requirement, id. at 722-23, a requirement that was not met.
In contrast, consideration of Counts 3, 6, and 9 in this case is limited to defensive theories challenging the validity and enforceability of the Bank’s claim in the bankruptcy case. See reasoning at Settlers’, 540 B.R. at 635 (holding that while requests for damages are jurisdictionally barred, defensive theories challenging the enforceability of the Bank’s claim are not barred). Those counts seek a holding that the mortgage on the Washington-Taylor Property is void for fraud in the execution or other theories and is therefore unenforceable against Settlers’ and the estate.
Unlike the claims at issue in Famik, unenforceability based on fraud and other grounds pleaded here are affirmative defenses, • see Fed. R. Civ. P. 8(c) (made applicable by Fed. R. Bankr. P. 7008), generally interposed by way of defense to a suit to enforce a contract rather than an independent right to relief. See Cohen v. Orthalliance New Image, Inc., 252 F.Supp.2d 761, 766 (N.D. Ind. 2003) (collecting cases); Cf. Cox v. Zale Delaware, Inc., 239 F.3d 910, 914 (7th Cir. 2001) (“A statute regulating purely private rights that makes a contract void makes the con*47tract rescindable by. a party to it, especially when the other party to the contract is trying to enforce it, so that the contract's illegality is interposed by way of defense, rather than as the basis for an independent suit” (citation omitted)).
In fact, absent actual - or imminent breach of contractual obligations, unen-forceability is a hypothetical, defense to a potential claim, the type óf hypothetical question that courts will not generally consider. See Textron Lycoming Reciprocating Eng. Div. v. United Auto., Aerospace, Agric. Implement Workers of. Am., Int'l Union, 523 U.S. 653, 660-61, 118 S.Ct. 1626, 140 L.Ed.2d 863 (1998) (declaratory relief is unavailable until an "actual controversy” is shown); Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 711-12 (7th Cir. 2002) (same). While the right to relief claimed by ‘the plaintiffs in Famik arose before the FDIC took over as receiver, Settlers’ was not entitled to challenge enforcement of the rights claimed by Schaumburg Bank until default was declared by the Bank years after the FDIC receivership. Such rights could not be disputed by it prior to or at the time the FDIC took over as receive^. Famik did not deal with a party’s ability to challenge the validity arid enforceability of contractual rights asserted by the successor in interest of a failed bank. Schaumburg Bank’s reliance on Far-nik iri this case is therefore misplaced.
Accordingly,. for reasons discussed at length in the prior Opinion, jurisdiction, lies here to consider and adjudicate defenses to the Bank’s claim contained in Counts 3, 6 and 9. Schaumburg Bank does not dispute this court’s statutory and constitutional authority to determine the validity and extent of its claim, see 28 U.S.C. § 157(b)(2)(B); Peterson v. Somers Dublin Ltd., 729 F.3d 741, 747 (7th Cir. 2013), and final judgment may therefore be entered to adjudicate defenses to that claim to determine the validity and extent of the claim filed by Schaumburg Bank in the bankruptcy case.
Count 1: Equitable Subordination
With respect to Count 1 (Equitable Subordination), subject matter jurisdiction is held to exist, notwithstanding FIRREA, because the right to relief asserted thereunder did not exist before Settlers’ bankruptcy case was filed. Equitable subordination proceedings arise under the Bankruptcy Code, see 11 U.S.C. § 510(c), and concern the priority of distribution scheme set forth thereunder, see, e.g., 11 U.S.C. §§ 507, 1123, 1129. Like defensive theories earlier discussed, the right to relief asserted in Count 1 did not arise until the bankruptcy case was filed. Therefore, it is not the type of claim that would have been brought before the FDIC as part of its administrative claims process. See reasoning in Settlers’, 540 B.R. at 636.
Schaumburg Bank contends that equitable subordination claims cannot proceed against the FDIC or its successor when ■ such claims are based on alleged wrongful conduct of a failed, predecessor bank. (See Def.’s FFCL, at 43.) In support, the Bank cites Holt v. FDIC (In re CTS Truss, Inc.), 868 F.2d 146 (5th Cir. 1989), which held ■that the equitable subordination based on claims or defenses of a debtor that are .barred by the FDIC’s federal statutory and common law protections, see 12 U.S.C. .§ 1823(e) (codifying doctrine in D’Oench, Duhme & Co. v. Fed. Deposit Ins. Corp., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942)), could not be established. See CTS Truss, 868 F.2d at 150. However, CTS Tmss relied on § 1823(e) and the D’Oench doctrine; it did not hold that equitable subordination claims in bankruptcy were jurisdictionally barred.
So long as claims or defenses on which the claim for equitable subordination is *48based are not barred by the FDIC’s recognized federal defenses, see 12 U.S.C. § 1823(e), and provided the misconduct shown would warrant equitable subordination under bankruptcy law, no basis for exempting the FDIC from the remedy of equitable subordination permitted under the Bankruptcy Code has been recognized by other courts facing this issue. See In re 604 Columbus Ave. Realty Trust, 968 F.2d 1332, 1354-57 (1st Cir. 1992) (discussing CTS Truss) (holding that the FDIC in its receivership capacity was not exempted from the remedy of equitable subordination in bankruptcy where the underlying claims were not barred by § 1823(e) and D’Oench). Schaumburg Bank points to no relevant case supporting a different conclusion.
In this case, claims predicated on an alleged fiduciary relationship or sounding in fraud in the inducement have already been dismissed as barred by D’Oench and § 1823(e). See Settlers’, 514 B.R. at 277-78 (holding that “Counts 1 and 4-9 of the Complaint cannot be pursued except to the extent the facts pleaded therein could be relevant to an assertion of fraud in the execution or illegality”); Settlers’, 520 B.R. at 261 (dismissing Counts 4 and 7 alleging fraudulent concealment and constructive fraud because D’Oench and § 1823(e) precluded Settlers’ from relying on an alleged fiduciary relationship with the predecessor bank) and 266 (dismissing Count 12 claiming breach of fiduciary duty arising from fraud in the execution because Settlers’ could not plead breach of fiduciary duty). Claims based on an asserted fiduciary duty or fraud in the inducement cannot be pursued because D’Oench and § 1823(e) preclude Settlers’ from relying on unwritten agreements or obligations tied to the assets transferred to Schaumburg Bank by the FDIC. See D’Oench, 315 U.S. 447, 62 S.Ct, 676 and its progeny, as discussed in the prior opinions, Settlers’ 514 B.R. at 270 and 277-78; Settlers’, 520 B.R. at 261 and 266.
However, claims and defenses that are not barred against the FDIC and its successors—including fraud in the execution and illegality—could amount to misconduct sufficient to warrant equitable subordination under bankruptcy law. See 604 Columbus Ave. Realty Trust, 968 F.2d at 1359-63; Settlers’, 514 B.R. at 277. Accordingly, this court has jurisdiction to consider and determine Settlers’ equitable subordination claim (Count 1), notwithstanding the jurisdictional bar under FIRREA, see 12 U.S.C. § 1821(d)(13)(D).
Schaumburg Bank does not dispute this court’s statutory and constitutional authority to hear and determine equitable subordination claims against creditors who have filed claims against the estate. See 28 U.S.C. § 157(b)(C). A proceeding to equitably subordinate a creditor’s claim is a core proceeding that arises under the Bankruptcy Code and does not determine creditor rights outside of bankruptcy; it affects only the creditor’s entitlement to distributions under the Bankruptcy Code on account of an otherwise valid and enforceable claim. As such, it “stems from the bankruptcy itself’ and may constitutionally be decided by a bankruptcy judge. See Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Therefore, final judgment may be entered by this court on Count 1.
Counts 8 and 11: Post-Receivership Claims
Subject matter jurisdiction over remaining Counts 8 and 11, as they have been allowed in this case, is not disputed by the Bank. See Def.’s FFCL, at 2. Count 11 alleges intentional interference with contract based on post-receivership conduct by the Bank, and Count 8 seeks setoff *49of any damages awarded to Settlers’ against the Bank’s claim in the bankruptcy case. Because damages have been limited to claims arising from post-receivership conduct by the Bank, setoff under Count 8 is only available to the extent damages are awarded to Settlers’ under Count 11. See Settlers’, 540 B.R. at 636-37.
Although claims for damages based on post-receivership conduct originate from non-bankruptcy law, “related-to” jurisdiction exists for the primary purpose of determining all claims for and against the Debtor in the same forum, and because these actions may benefit the estate. See Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 161-162 (7th Cir. 1994).
Pursuant to 28 U.S.C. § 157(c)(2), parties may consent to adjudication of related, non-core matters in the bankruptcy court. See Wellness Int’l Network, Ltd. v. Sharif, — U.S. —, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) (“Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge”). In this case,- both parties have sought entry of final judgment in their favor, and have thereby implicitly consented to adjudication by this court,' or at least forfeited any objection to adjudication of Settlers’ tortious interference claim by this court. See Richer v. Morehead, 798 F.3d 487, 490 (7th Cir. 2015) (citing Wellness ).
Accordingly, final judgment may be entered by this court on Counts 8 and 11.
FINDINGS OF FACT
On February 13, 1992, Settlers’ incorporated in Illinois as a non-profit corporation and ’ § 501(c)(3) charitable organization. (See Stipulated Facts, Dkt. No. 249 at 5-11, [“Stip.”] ¶2; Joint Trial Ex. [“JX”] 1.) Its primary mission is to provide adequate, affordable housing to foreign refugees with United States resident alien status who are seeking homes in the Chicago metropolitan area. (Trial Tr., vol. IV, 6:5-10 (Keo-Jye Lodico [“KJ”] test.); see also JX 1, at 4 and 9 of 9; JX 2, at 4 of 22.)
Joseph Lodico (“Joe Lodico” or “Joe”) started Settlers’. At the time, Joe was married to Keo-Jye Lodico (“KJ”), who initially worked for Settlers’ as Director of Program Development and Rehabilitation from 1992 to 2000. In that capacity, KJ administered Settlers’ programs, work which included writing grants, collecting rents, paying bills, and working with the families by helping them take English classes, enroll their children into school, obtain public aid, and serving as interpreter. Joe Lodico originally served as director and officer of Settlers’, and was in charge of repairing and rehabilitating properties managed or owned by Settlers’. (See Stip. ¶¶ 1, 4, 5; Trial Tr., vol. I, 83:8-84:9 (Joe Lodico [“J.L.”] test.), vol. IV, 10:3-17, 17:24-18:12 (KJ test.).)
Between 1992 and 1993, Settlers’ focused on rehabilitating properties owned by the U.S. Department of Housing and Urban Development (“HUD”) and then arranging for sale of those properties to low income families. Settlers’ participated in the rehabilitation of and placement of families in as many as forty HUD properties that were in foreclosure. (Trial Tr., vol. IV, 10:21-11:12 (KJ test.).)
In 1993 and 1994, Settlers’ participated in community development block grant programs administered by state and local agencies providing funds to rehabilitate properties in foreclosure to Section 8 housing standards for housing low-income families. (Trial Tr., vol. IV, 11:10-25 (KJ test.).)
The Washington-Taylor Property
On March 31, 1994, Settlers’ obtained legal title to properties commonly known as 101-103 W. Washington Blvd. and 409-411 S. Taylor Ave., Oak Park, Illinois, a *5013-unit structure comprised of two buildings side by side (the “Washington-Taylor Property”). The purchase price for the Washington-Taylor Property was $635,000, which was funded through a $231,310 forgivable loan and a $500,000 conditional grant from the Illinois Housing Development Authority (“IHDA”) under the HOME Investment Partnership Program (the “HOME Program”), a federal block grant program administered by IHDA. (See Stip. ¶¶ 6-8; JX 10-12; Trial Tr., vol. IV, 11:18-12:21 (KJ test.).)
Also on March 31,1994, Settlers’ executed a number of documents in favor of IHDA including a Regulatory and Land Use Restriction Agreement (the “IHDA Use Agreement”) and a Mortgage, Security Agreement and Collateral Assignment of Rents and Leases (the “IHDA Mortgage”). (Stip. ¶ 9; JX 11, 12.) Pursuant to these documents, IHDA provided Settlers’ with the $500,000 grant and the $231,310 loan, which was structured as a 15-year forgivable loan. Under the loan, if Settlers’ maintained the Washington-Taylor Property in accordance with rules and regulations described in the IHDA Use Agreement for 15 years, the entire loan would be forgiven and the IHDA Mortgage would be released. (Trial Tr., vol. IV, 12:1-21 (KJ test.).)
The IHDA Use Agreement described all management, rent limitations and reporting requirements imposed by IHDA’s regulatory authority. Compliance with the regulations and requirements set forth in the IHDA Use Agreement, and the loan and grant documents referenced and incorporated therein, was required by IHDA during the period until the loan was forgiven. (See JX12; Trial Tr., vol. XI, 35:4-9, 40:10-23 (Williams test.).)
As relevant here, Section 4 of the IHDA Use Agreement prohibited Settlers’ from, among other things, conveying, transferring or encumbering any part of the Washington-Taylor Property without prior IHDA approval. (See JX 12, at 5 of 23.) The IHDA Mortgage further provided that “Mortgagor shall not, without the prior written consent of Mortgagee, creates, effect, consent to, suffer or permit any ‘Prohibited Transfer,’” defined therein as including “any sale or other conveyance, transfer, lease or sublease, mortgage, refinancing, assignment, pledge, grant of a security interest, grant of any easement, license or right of way affecting the Project, hypothecation or other encumbrance of the Project ....” (JX 11, at 7 of 22.)
Under the IHDA Use Agreement, Settlers’ was also required to rent at least four of the thirteen units to “Very Low-Income Families,” and the remainder to “Low Income Families,” both defined in accordance with IHDA regulations. (See JX12, sec. 3(a), at 3 of 23.) Settlers’ was also required to comply with rent limitations specified in the' IHDA Use Agreement, and to manage the Washington-Taylor Project in accordance with IHDA rales and regulations. (See JX12, sec. 3(b)-(n), at 3-5 of 23.) These and other conditions and limitations were listed in the IHDA Use Agreement and incorporated by reference into the IHDA Mortgage.
In 1994, Settlers’ also owned five single-family townhouses in DuPage County, Illinois. One of the townhouses was acquired through the HOME Program and the other four from community development block grants administered by the DuPage County Community Development. (Trial Tr., vol. IV, 17:4-23 (KJ test.).)
After purchase of the Washington-Taylor Property in 1994, Settlers’ did not undertake any further projects with HUD. (Trial Tr., vol. IV, 13:1-12 (KJ test.).)
Joe Lodico Joins the BOC Board of Directors
In 1997, The Bank of Commerce (the “BOC”) was founded as a privately owned *51commercial bank with its principal place of business in Wood Dale, Illinois. (See Stip. ¶¶ 16, 17.) Joe Lodico first learned about the BOC through his accountant, Ken Peterson (“Peterson”), who was a member of the BOC Board of Directors. Peterson had prepared Joe and KJ’s tax returns since the early 90s, and became the auditor for Settlers’ from the beginning. (See Trial Tr., vol. I, 91:10-93:6 (J.L. test.), vol. IV, 24:22-26:16 (KJ test.), vol. X, 9:25-10:6 (Markay test.).)
In or about 1997, Joe Lodico invested approximately $1,000,000 of his funds in the BOC and joined the BOC Board of Directors as a member. (Trial Tr., vol. I, 93:9-15 (J.L. test.), vol. TV, 24:11-21 (KJ test.).) As a result of his board membership with the BOC, Joe Lodico developed a friendship with Robert Markay (“Mar-kay”), another BOC board member and a licensed realtor. Markay was a director of the BOC from its inception until it was closed in 2011. (See Trial Tr., vol. X, 5:23-6:5, 7:23-9:24 (Markay test.).)
Joe Lodico Resigns as Executive Director of Settlers’
Joe Lodico resigned as Executive Director of Settlers’ in 1998 or 1999. He had been spending a lot of time in California after his parents fell ill, and he would eventually relocate to California. (See Trial Tr., vol. I, 95:3-96:7 (J.L. test.).)
In December 1999, KJ moved her residence to California. (Stip. ¶ 12.) She remained involved with Settlers’ but primarily focused on the accounting side of Settlers’ operations, including entering rents, making deposits, paying bills. Day-to-day administrative tasks like collecting rents and paying bills were handed over to another individual hired by Settlers’. (Trial Tr., vol. IV, 19:13-20 (KJ test.).)
From 2000 to 2006, KJ was awarded' compensation of around $40,000 to $60,000 per year from Settlers’ but she deferred that compensation and collected no salary for those years. (Trial Tr., vol. IV, 20:18-25 (KJ test.).)
Joe Resigns from Settlers’ Board and the BOC Board, and KJ Becomes Settlers’ Executive Director
In 2005, Joe Lodico resigned from Settlers’ Board of Directors and from the Board of Directors of the BOC. (Stip. ¶ 13.) But later from time to time he performed various services for the BOC regarding properties securing loans extended by the bank.
Joe Lodico and KJ’s marriage deteriorated and they separated in 2005. According to KJ, their separation was prompted by Joe’s heavy drinking and infidelity. Joe’s resignation from Settlers’ the BOC’s Boards of Directors was also precipitated by his heavy drinking and unreliability. (Trial Tr., vol. IV, 21:10-22 (KJ test.).) He was asked to resign from the BOC’s Board of Directors because he was disruptive, unreliable and drinking too much. (Trial Tr., vol. I, 93:22-94:20 (J.L. test.).)
In 2006, KJ became the Interim Executive Director of Settlers’, and subsequently became the Executive Director of Settlers’. (Stip. ¶ 14.) In that role, KJ continued to prepare and maintain Settlers’ financial statements for Peterson, who prepared Settlers’ audits; she also coordinated all communications with government agencies and administered Settlers’ programs, worked with the families on any lease issues, except as to needed repairs or similar day-to-day issues which she could not attend to in California. (Trial Tr., vol. IV, 22:1-24 (KJ test.).)
KJ and Joe Lodico received a decree of divorce in 2007. (Stip. ¶ 15.)
The Faulkner Properties
In July, 2008, Settlers’ owned the five single family townhouses in DuPage Coun*52ty and the thirteen unit buildings known as the Washington-Taylor Property. In July, 2008, Setters’ acquired additional properties (the “Faulkner Properties”) through the BOC in exchange for assuming $3.4 million in loans. The loans had been made to another customer of the BOC by the name of Jan Faulkner (“Faulkner”). Faulkner was a real estate developer who had several loans with BOC, secured by properties which he held in trust. Faulkner’s loans fell into default due to his inability to make the loan payments. Before foreclosing on the properties, the officers and directors of the BOC began looking for buyers to acquire the properties and assume the debt owed by Faulkner in order to minimize loss to the BOC. (See Trial Tr., vol. X, 17-18, 20-21 (Markay test.), vol. VIII, 9:14-16, 13:5-8 (Gahan test.).)
On or about July 17, 2008, Joe Lodico was approached by Markay—a director and Chairman of the Board of the BOC— concerning an opportunity to purchase the properties then owned by Faulkner, which were at risk of foreclosure. Markay forwarded a list of the properties available for purchase to Joe Lodico via email, which included a description of each property, and for each its purported appraised values, the loan amounts due, gross income, taxes, other expenditures, and the net operating income (“NOI”). (See JX 124; Trial Tr., vol. I, 108:5-109:6, 116:21-117:7 (J.L. test.).) The list of properties included the following seven properties, known herein as the Faulkner Properties:
1. 6631-6635 W. 23rd Street, Berwyn, Illinois;
2. 7121 Maple Avenue, Berwyn, Illinois;
3.1921 S. Harlem, Berwyn, Illinois;
4. 1915 S. Harlem Avenue, Berwyn, Illinois;
5. 2306 S. 17th Avenue, North Riverside, Illinois;
6.1518 N. Harlem Avenue, Unit 1W, River Forest, Illinois;
7.1111 N. Harlem, Unit 1-B, Oak Park, Illinois.
The appraisals shared by Markay with Joe Lodico showed high values of the Faulkner Properties, each exceeding the outstanding loan amounts. The total valuation of the Faulkner Properties shown was approximately $4.3 million, and the loans due totaled about $3.4 million. (See JX 24, at 2 of 2; PX 23, at 36.) Most of the appraisals shown were two to three years old, earlier that the 2007-2008 financial crisis which brought about sharp collapse in the nation’s property values beginning in the later half of 2007. (See PX 23, at 36.)
The opportunity to purchase the Faulkner Properties was related to KJ by Joe Lodico, based on his discussions with Mar-kay and other BOC board members. The BOC offered to transfer the Faulkner Properties to Settlers’ in exchange for Settlers’ assuming the bank debt covering each property, which the bank would fully finance on interest only terms. KJ received all information she reviewed about the Faulkner Properties through Joe Lodico, who related the information he received from Markay and others at the BOC. She did not deal directly with any employee, or speak to officers or directors of the BOC about the properties, until she appeared at the BOC offices to close on the transactions on August 1, 2008. (See Trial Tr., vol. I, 134:18-138:20 (J.L. test.), vol. IV, 151:18-155:23 (KJ test.).)
KJ relied on Joe Lodico’s oral representations regarding terms of the transaction by which Settlers’ could acquire the Faulkner Properties, and his belief as to' the value and the condition of the properties. Joe Lodico told KJ that the properties had approximately $1 million -in equity, and that acquiring the properties was a good *53opportunity for Settlers’. (See Trial Tr., vol. I, 129:4-135:11 (J.L. test.), vol. IV, 28:5-24 (KJ test.).) While protecting his million dollar investment in the BOC, Joe also testified at trial that he “was helping the Bank of Commerce, and ... manipulated Settlers’ Housing Service to take those properties.” (Trial Tr., vol. II, 126:19-21) According to Joe, he believed that the sale of the Faulkner Properties to Settlers’ would help the BOC and also benefit Settlers’. (Trial Tr., vol. II, 129:17-18.) However, he testified at trial as to his belief that “I was being manipulated by the Bank of Commerce. And I ended'up manipulating K.J.” (Trial Tr., vol. II, 132:20-21.)
On July 20, 2008, a special meeting of Settlers’ Board of Directors was held via telephone with the participation of four of five of Settlers’ directors, including KJ, as Secretary of the Board, who prepared the minutes of the meeting:
At this special meeting KJ informed the Board of an opportunity presented by The Bank of Commerce regarding several properties for sale. The Bank is requesting a 10% equity down payment of the Washington-Village Apartments. The Board voted and approved to pursue the purchase and to request written approval for the 10% equity from IHDA. KJ abstained from voting.
(JX 117; see Trial Tr., vol. V, 121:23-122:11 (KJ test.).)
On July 23, 2008, KJ sent a letter to IHDA seeking approval by IHDA “of an opportunity that has come upon Settlers’ which will benefit low-income families,” describes as follows:
Terms & Proposal
The Bank is requiring 10% equity as down payment, which is approximately $400,000. Settlers’ is requesting permission to use [the Washington-Taylor Property] to cross-eollateralize this transaction. [The Washington-Taylor Property] has been successfully manages for 14 years, 4 months, with only 8 months left to completion and contract compliance. The current market value of [the Washington-Taylor Property] is approximately 1.5 million dollars. If approved by IHDA, the Bank of Commerce will take second position as lien holder to IHDA’s zero-percent interest, forgivable loan....
(JX 119, at 2 of 2; see also PX 59, at 1 of 9.) The letter was sent to and received by Patricia Williams, manager of the asset management division at IHDA and IHDA employee for 10 years, and was forwarded to the assistant director and director of IHDA’s asset management department. Patricia Williams was senior asset manager and oversaw Settlers’ loan and grants from IHDA. (See Trial Tr., vol. XI, 8:17-10:11,13:11-15 (Williams test.).)
The 2008 Loan Summary Report
On July 25, 2008, Connie Saiger (“Saiger”), a loan officer for the BOC, presented a Loan Summary Report to the BOC’s loan committee for approval of new loan commitments to enable Settlers’ to “[p]ur-chase via assignment of beneficial interest [the Faulkner Properties] from Jan Faulkner at the current loan balance and remodel vacant units.” (See JX 6, at 1 of 4; Trial Tr., vol. VI, 37:18-38:3 (Saiger test.).) The Loan Summary Report stated that, in connection with the loans to Settlers’, the BOC was providing a $50,000 line of credit secured by a mortgage on the Washington-Taylor Property, which also guaranteed the loans to purchase the Faulkner Properties. The $3,562,000 loan commitment to purchase the Faulkner Properties would extend the current maturity of the loans by 4 years, with interest only payments due on a monthly basis and principal due at maturity. (See JX 6, at 1 of 4).
*54The BOC did not send any loan commitment letter to Settlers’. Saiger testified that the BOC generally would only send term sheets to new loan customers, and she believed there was no need to do so because the transaction involved an assumption of debt rather than a new loan disbursement. (See Trial Tr., vol. VI, 40:3-16.) However, she admitted that most information as to Settlers’ in the Loan Summary Report came from Settlers’ file at the BOC, since Settlers’ had previously obtained a $150,000 loan from the BOC in 2005. (Trial Tr., vol. VI, 38:7-39:6.)
The Loan Summary Report stated purpose of the $50,000 line of credit was described as follows:
The line of credit will be used in part to hire an individual to write grant applications on behalf of the borrower. The balance will be used to remodel a condominium at 536 Devon in Roselle which recently was vacated by a Settlers tenant in preparation for the property’s release.
(JX 6, at 2 of 4.) That information did not come from Settlers’, because Settlers’ had not requested a line of credit from the BOC in 2008. KJ testified that she was not aware of any request for approval of a line of credit from BSM since 2005, and she had made no such request. (See Trial Tr., vol. IV, 76:8-15, vol. V, 113:15-19.) At trial, the Bank could point to no record, testimony or other evidence to the contrary. Saiger testified that she could not recall where the information came from for the $50,000 line of credit included in the Loan Summary Report. She admitted that it had not been provided to her by KJ, and that there was no written request for that loan from Settlers’ in the BOC records. (Trial Tr., vol. VI, 40:17-41:25.) However, the information was identical to information listed in the loan summary report for a $150,000 line of credit requested by Settlers’ in 2005. (See JX 5, 6; Trial Tr., vol. VI, 54:17-55:3 (Saiger test.).)
Financial information supplied to the loan committee for review in the Loan Summary Report was also not supplied by or authorized to be delivered to Settlers’ in connection with the transaction. That data appears to have come from Settlers’ 2006 and 2007 tax returns which had been prepared by Peterson’s accounting firm, Kol-nicki, Peterson & Wirth LLC, and provided to the BOC. (See Trial Tr., vol. VI, 43:8-44:4 (Saiger test.).) More specific information about rents and expenses of the properties owned by Settlers’ at the time was given to Saiger by Peterson but put together by Joe Lodico on behalf of the BOC a few days before the Loan Summary Report was presented, (Pl.’s Trial Ex. [“PX”] 24; see Trial Tr., vol. II, 7-25 (J.L. test.).) According to Joe, the numbers were estimated by him and checked by Peterson for consistency with prior records held by him and his accounting firm. Joe Lodico testified at trial that he had been asked by Markay, Peterson and others from the BOC to put together Settlers’ rent and income information the day before he sent the list to Peterson, who forwarded Joe’s email to Saiger on July 24, 2008. At no point did KJ or Settlers’ authorize Joe Lodico or Peterson to estimate or turn over this information to the BOC for the purchase by Settlers’ of the Faulkner Properties. (See PX 24; Trial Tr., vol. II, 17-25 (J.L. test.).) Rather, the numbers appear to have been based, at least in part, on financial statements held in Settlers’ record at the BOC and forwarded to Joe Lodico by a bank employee on behalf of Saiger on July 22, 2008. (See PX 13, at 484-488 of 950; Trial Tr., vol. II, 25-33 (J.L. test.).) No reliable evidence disputing Joe Lodico’s account of these events was brought forward by the Bank at trial.
*55Closing costs for the sale and transfer of the Faulkner Properties to Settlers’ were to be paid by the BOC, including local transfer taxes and title insurance premiums, and were estimated at approximately $30,000. The BOC agreed to pay these costs even though Faulkner was seller of the properties; it did so in order to facilitate and expedite the sale of the Faulkner Properties, assuming that Faulkner would not have the funds or an incentive to act with sufficient diligence. (See Trial Tr., vol. VI, 42:5-43:1 (Saiger test.).) The BOC provided Joe Lodico with the funds and documents needed in preparation for the closing. (See Trial Tr., vol. I, 147-154 (J.L. test.).) Indeed, as our country slipped into financial crisis, the BOC showed itself to be strongly incentivized to move the Faulkner debt over to Settlers’,
Joe Lodico testified at trial that “Robert Markay and John Frale both instructed [him] to do everything necessary to get these properties closed ASAP.” (Trial Tr., vol. I, 146:22-24.) At the behest and with the assistance of directors or others at the BOC, Joe Lodico performed the following tasks to facilitate closing on the sale of the Faulkner Properties to Settlers’:
a. Visited each village and city, spoke with the building inspectors and requested a waiver for a 100 percent inspection (see JX 127);
b. Obtained and delivered to the taxing authorities a check issued by the BOC to pay the transfer taxes for the Faulkner Properties;
c. Signed the transfer tax declarations on behalf of the buyer (Settlers’) and the seller (Faulkner), so that the transaction could be approved by the respective municipalities;
d. Provided and delivered the sales contracts for the sale of the Faulkner Properties;
e. Signed the sales contracts on behalf of Settlers’ (see PX 1-7);
f. Obtained signatures needed to effectuate the transfer of the properties from Faulkner to Settlers’ (see JX 128);
g. Provided financial information to the Bank about Settlers’ without approval fi’om Settlers’ (see JX 126);
h. Arranged for the purchaser of the Faulkner Properties (Settlers’) to be at the BOC offices on August 1, 2008, to sign the documents needed to close on the loans for Settlers’ to acquire the Faulkner Properties.
(See Trial Tr., vol. I, 147-156 (J.L. test.).)
Testimony given by Markay and other individuals employed or associated with the BOC indicates a concerted effort by individual officers, directors and employees of the BOC to prevent imminent liquidation of the Faulkner Properties by finding a buyer for the properties from Jan Faulkner. (See, e.g., Trial Tr., vol. X, 20:23-21:11, 36:6-14 (Markay test.).) The testimony of Joe Lodico shows that he was used by the BOC to find Settlers’ to acquire that property. In doing so, his deceit of KJ, whether intentional or not, was done on behest of the BOC by providing Joe Lodico with exaggerated information.
KJ was told that the Faulkner Properties were going to be acquired from the BOC directly, not from a third party. (See, e.g., PX 59 (“Settlers Housing Service was recently contacted with an opportunity by the Bank of Commerce with whom we have done business with for several years. The Bank has come into possession of several multifamily buildings.”) (July 24, 2008 letter to IHDA) (emphasis added).) Joe Lodi-co testified that he first telephoned KJ to advise her that the BOC “is receiving a bunch of buildings back, and it could be a good opportunity for Settlers’ Housing Service, because it’s going to be one hundred percent financing, and I think and I *56believe it’s going to produce cash flow.” (Trial Tr., vol. 1,129:4-15.)
Closing for Sale of Faulkner Properties
On August 1, 2008, KJ appeared at the BOC’s offices to close on the loans to purchase of the Faulkner Properties. (Trial Tr., vol. IV, 91:6-12, vol. V, 122:7-11 (KJ test.).) The Closing took place at BOC in a conference room after hours. Saiger agreed to stay after hours because KJ flew in from California and had limited time. Joe Lodico, KJ, and Saiger were present. (See Trial Tr., vol. VI, 82:19-83:9 (Saiger test.), vol. IV, 86-87 (KJ test.).)
KJ Lodico recalls being at the closing for approximately 15 to 30 minutes. Joe Lodico was also present at the closing; he testified that KJ signed the documents in 10 to 15 minutes. (Trial Tr., vol. IV, 84:1-3 (KJ test.), vol. II, 84:16-21 (J.L. test.).) When KJ arrived at the BOC offices in Wood Dale, Illinois, Saiger, the bank officer responsible for closing of the transaction, walked KJ into a conference room and returned with a stack of documents about 1.5 to 2 inches thick, which she handed to KJ. The stack contained yellow stickers identifying the locations for KJ Lodico’s signature. (Trial Tr., vol. IV, 86:20-87:20 (KJ test.).)
Saiger reviewed with KJ the first set of documents in the stack, which related to one of the seven properties. According to KJ, Saiger explained that the remaining documents in the stack were the same as the first set, except they were for the other properties. KJ testified as follows:
THE WITNESS: And they had these yellow tabs that say sign here all thi’oughout the document—documents. And Connie Saiger went through the first set, that it was for one of the properties that we were going to buy. It was a loan document. She explained to me that these were loan documents. And she went through the first set and showed me where I needed to sign, and so and so forth, and went through it with me. And then she said, in the interest of time, these are all the same, and so you can just go ahead and sign them.
Q. And did you sign them?
A. I did. I signed them everywhere there were these yellow tabs that said sign here. And so because she went through with me the first set of documents, I understood that the remaining documents were for the closing of the remaining six properties.
(Trial Tr., vol. IV, 87:18-88:10 (emphasis supplied).) Joe Lodico’s trial testimony is consistent with KJ’s testimony of the events at the closing. (See Trial Tr., vol. II, 81:10-82:7 (J.L. test.).)
KJ signed all loan documents she was handed at the Faulkner Properties closing on August 1, 2008. (See Stip. ¶ 55; JX 14, 17, 18, 19, 20, 21, 22, 30, 32, 38, 40, 45, 47, 52, 54, 59, 61, 67, 69, and 73.) Included among these documents, however, was a Promissory Note extending a $50,000 line of credit (the “LOC”), as well as Mortgage and Assignment of Rents documents providing for a lien on the Washington-Taylor Property as security for the LOC and all loans for the Faulkner Properties (the “Washington-Taylor Mortgage”).1 The BOC also appended a corporate resolution authorizing KJ to execute the LOC and the Washington-Taylor Mortgage on be*57half of Settlers’, which KJ signed along with the other documents presented to her that day. (See JX 20; Trial Tr., vol. IV, 64:15-19, 76:8-25 (KJ test.).)
Pursuant to those documents, the beneficial interests in all of the respective trusts that owned the Faulkner Properties were sold to Settlers’ as of August 1, 2008. Settlers’ financed the purchase through loans to it by the BOC, including a $50,000 line of credit made by the BOC to Settlers’. Settlers’ collateralized the loan in part by granting the BOC a second mortgage on the Washington-Taylor Property, (JX 17.)
KJ testified at trial that Saiger never advised her that the stack of documents included a mortgage on the Washington-Taylor Property or a line of credit for $50,000 and that she would not have signed ■the documents if she had known they included a mortgage on the Washington-Taylor Property and a line of credit. (Trial Tr., vol. IV, 88:11-89:3.)
Saiger testified that she did not specifically remember telling KJ about the LOC and the Washington-Taylor Mortgage at the closing, but believed she had explained every document presented. However, she testified that her general practice and procedure was to go over each and every document with the client before the document was signed, so in trial testimony she presumed that she had done so in this case as well. (See Trial Tr., vol. VI, 84-87, 115-122.) However, Saiger’s testimony in this respect is unreliable and not credible in light of all other evidence.
First, the evidence shows that closing of the loans on the Faulkner Properties was anything but a typical closing and Saiger had reason to deviate from standard practice when closing on those loans with Settlers’. Multiple aspects of the transactions deviated from customary safe and sound banking practices, as reported by Settlers’ expert witness, Mr. Fitzgibbons. (See PX 23.) According to Mr. Fitzgibbons, the BOC failed to follow normal and customary banking practices in failing to obtain independent appraisals prior to the issuance of a commitment to loan prepared by Saiger and the closing of the loan, which was also supervised by Saiger as loan officer. Mr. Fitzgibbons also opinioned that the BOC also failed to follow normal and customary practices by acting as agent for the sale of the Faulkner Properties for the then owner of the properties. (See PX 23, at 4-5 of 134.)
Second, Joe Lodico and KJ both testified that KJ was at the BOC for approximately 15 to 30 minutes. Their testimony in this respect is undisputed by cross examination or other evidence, presented, and was credible in light of other testimony and evidence presented. Therefore, Saiger’s testimony that she followed usual practice of separately reviewing each and all documents with KJ is unreliable.
Third, Saiger’s involvement in preparing the Loan Summary Report, reviewing and putting together all documents and her years of experience in banking suggest that she was or should have been aware that KJ had had little to no opportunity to review and understand the terms included in the documents presented for signature by Saiger at the closing. She testified that the BOC did not generally send a loan commitment letters to clients in transactions like the one Settlers’ took part. At the same time, the evidence suggests that Saiger was or should have been aware that certain documentation had not been obtained from Settlers’, including any corporate resolution authorizing KJ to pledge the Washington-Taylor Mortgage and any corporate request or documentation for approval of a $50,000 line of credit. (See PX 13, at 502-505 (July 30, 2008 email to Joe Lodico requesting resolutions and attach*58ing 2005 resolutions); see also Trial Tr., vol. II, 76:21-77:8 (admitting email to show that the BOC requested a resolution like the one they obtained in 2005).)
According to KJ, she was wholly unaware that included among the documents she was asked to sign were those for the line of credit, the Washington-Taylor Mortgage and the Corporate Resolution signed by her that day. (See JX 17-20.) She testified at trial that she never requested a line of credit for Settlers’ and was unaware that the transaction to acquire the Faulkner Properties would include a line of credit. Nor was she aware that the documents included the Washington-Taylor Mortgage as collateral for all indebtedness. Her testimony was credible in light of other corroborating evidence. KJ had no prior authorization from Settlers’ Board of Directors to execute such documents. Instead, the BOC included a colórate resolution, which was signed only by KJ on behalf of Settlers’ board of directors to authorize herself to execute loan and security documents not previously approved by the board. (See JX 20.)
The evidence shows that KJ was acutely aware of the need to seek and obtain authorization from IHDA before she could pledge any interest in the Washington-Taylor Property as collateral. She never obtained such authorization, nor did she obtain authorization from Settlers’ Board of Directors to do anything other than to execute loan documents for the Faulkner Properties.
The evidence also shows that Settlers’ never requested a line of credit and was given no prior notice that one would be included among documents to be executed at the closing. Records of email communications between Joe Lodico and employees and/or directors of the BOC include no reference to a line of credit or the need for one. Ultimately, the Bank could point to no record or reliable testimony establishing that either KJ or Joe Lodico were made aware of terms other than the purchase and loan agreements for the Faulkner Properties.
Prior transactions between Settlers’ and the BOC are informative. In 2005, Settlers’ requested a $150,000 line of credit from the BOC. That line of credit was secured by another property owned by Settlers’. (See JX 5.) In connection with that request, Settlers’ submitted details about the purpose of the loan, financial information, IHDA authorization to grant a lien on the Washington-Taylor Property, and resolutions from Settlers’ Board of Directors approving the terms of the loan. (See PX 13, at 502-505; See also Trial Tr., vol. II, 68-77 (J.L. test.).)
In the case of the Faulkner Properties, the BOC was provided with Board resolutions from Settlers’ approving the purchase of the seven properties. The only other resolution made by Settlers’ Board of Directors was to authorize KJ to request authorization from IHDA to grant a ten percent mortgage on the Washington-Taylor Property as additional collateral for the loans. Although KJ submitted to IHDA a request for allowing that, she received no response or authorization from IHDA prior to closing on August 1, 2008.
KJ admits that she failed to review the documents at closing or hire an attorney to assist with the transaction. However, the evidence shows that she had no basis for believing that the documents executed at the closing would involve anything other than the purchase and loan documents to acquire the Faulkner Properties. KJ’s testimony that she relied on Joe Lodico’s representations and the disclosures provided by Saiger at the closing was credible, in light of the speed with which the transaction closed (between July 17 and August 1 of 2008), the terms related by Joe (guaran*59teed financing, $1,000,000 in supposed equity based on older appraisals), and her belief that the information provided by Joe Lodico came from Markay and other individuals at the BOC with whom Joe Lodico had previously dealt with and trusted.
While nothing prevented KJ from requesting additional time to review the loan documents, Settlers’ had no financial reason to close on the purchase of the Faulkner Properties in such a short period of time, and had provided no documents or information, and had not invested considerable effort in pursuing the sale. On the other hand, the evidence shows that the BOC favored, facilitated and directed the short closing timeline in order to protect its interests. While the Bank argues that the transaction closed quickly due to demands by Jan Faulkner, there is no evidence that Jan Faulkner had any interest in proceeding in such a manner. Faulkner had defaulted on the loans and was considering bankruptcy. (See Trial Tr., vol. X, 20:23-21:11 (Markay test.) (describing settlement between the BOC and Faulkner).)
The only other interested party in the transaction was the BOC. It is clear that its directors and officers were interested in finding a purchaser for the properties. And so was the BOC itself. The BOC agreed to pay for closing costs despite not being a party to the sale, it approved the loan terms and closed on the loans with Settlers’ less than one month from the time Settlers’ was even approached with the opportunity to acquire the Faulkner Properties.
Schaumburg Bank now argues that such actions were done by Joe Lodico on behalf of Jan Faulkner or Settlers,’ but the evidence shows that the BOC voluntarily paid costs despite its status as nonparty to the sale, that Joe Lodico was instructed to perform these transactions by directors or officers of the BOC and for the benefit of the bank.
Schaumburg Bank has argued that Joe Lodico’s testimony is unreliable because of his drinking. Joe Lodico does not dispute that his heavy drinking during those years sometimes made him unreliable and affected his memory. However, his testimony during trial was credible, he provided extensive testimony involving detailed recollections of events that were consistent and corroborated by email records, documents and other testimony during trial. Indeed, his testimony at trial was quite coherent. Accordingly, the Court finds that the testimony of Joe Lodico of the events leading up to the closing are found to be credible and more reliable than the limited recollection offered by Saiger who, for reasons discussed earlier, is found not to be credible under the circumstances.
Sad, but also credible was Joe Lodico’s testimony that he “was helping the Bank of Commerce, and ... manipulated Settlers’ Housing Service to take [the Faulkner Properties].” (Tr., vol. II, 126:19-21.) Email communications between Joe Lodico and Markay, Peterson and Saiger aré consistent with Joe Lodico’s trial testimony regarding the circumstances leading up to closing in early August of 2008. His testimony was credible in light of all of the evidence introduced at trial. Although Schaumburg Bank has argued that Joe Lodico’s lifestyle choices at the time should diminish his credibility, it failed to dispute any material part of his testimony by cross examination or other evidence. Accordingly, in light of all the evidence, trial testimony provided by Joe Lodico is found to be reliable, especially when compared to the testimony of Saiger and other key witnesses introduced by Schaumburg Bank.
The evidence at trial shows that the BOC used Joe Lodico to unload troubled *60loans on Settlers’ and cross-collateralize such loans with substantial equity held by Settlers’ in the Washington-Taylor Property. The BOC knew that Settlers’ had not agreed to pledge the Washington-Taylor Property as guarantee for the Faulkner loans, and would not know that the LOC and the Washington-Taylor Mortgage would be included among the other documents. The BOC led Joe Lodico into believing that the transactions would be beneficial for Settlers’ and the BOC alike. At a minimum, the bank took advantage of his reliance on such representations and his ability to persuade KJ that Settlers could proceed with less caution under the circumstances and that she would rely on Joe’s representations of favorable terms offered by the BOC to Settlers’ to facilitate prompt closing only a few weeks later with minimal effort.
It is clear that KJ only agreed to acquire the Faulkner Properties on such a short closing schedule because the opportunity was presented to her by Joe Lodico on behalf of the BOC and its directors. KJ testified that she trusted the BOC and its personnel because she had known Peterson and Markay for several years. (See Trial Tr., vol. V, 91:14-92:6.) Peterson and Markay knew or should have known that Joe Lodico was no longer associated with Settlers’ but that he had a degree of influence over KJ due to their family history. (See Trial Tr., vol. V, 110:22-111:4 (KJ test.) (“During the years of 2005 to 2008, Joe had already left the family and I was still hoping that Joe would come back to the family. And when I was not able to get ahold of him on the phone, I would call Bob Markay and Ken Peterson for advice and also to ask them if they had seen him. And if they did, could they please tell Joe to call me. And—and basically they just counseled me.”) Under these circumstances, KJ relied on the representations related by Joe that had been made by Markay and others at the BOC, and agreed to close on the sale on very short notice.
Cross-Collateralization of the Washington-Taylor Mortgage
After closing on the purchase of the Faulkner Properties, the BOC mailed copies of all of the loan documents to KJ. She admits that she received copies of the documents mailed to her by the BOC, which she did not review at the time and would not review for several months after the closing date. (See Trial Tr., vol. V, 4:10-5:4.).
On September 3, 2008, the Washington-Taylor Mortgage and Assignment of Rents, both dated August 1, 2008, were recorded with the Cook County Recorder of Deeds. (Stip. ¶ 57; JX 17,18.)
On September 4, 2008, IHDA emailed KJ requesting additional information about the proposed second mortgage. (See JX 120.) KJ did not respond to this email, believing the matter to be moot since the Faulkner Properties had been acquired. Since no response was received by IHDA, IHDA never granted Settlers’ request for written authorization. (See Trial Tr., vol. V, 22:5-23:14 (KJ test.), vol. XI, 14-16 (Williams test.).)
In November, 2008, KJ approached the BOC to request a loan for Settlers’ to pay the installment due for property taxes for the Faulkner Properties. According to KJ, when the next installment of property taxes for the Faulkner Properties became due, Settlers’ was unable to pay them because the properties failed to generate enough revenue. At that point, she testified that she was told that Settlers’ already had a letter of credit available (the LOC), and she then drew on the LOC extended at the closing on August 1, 2008. (See Trial Tr., vol. IV, 94:20-97:7.)
According to KJ, she did not know that the LOC was secured by the Washington-*61Taylor Mortgage, or that the draw on the $50,000 line of credit would result in cross-collateralization upon the Washington-Taylor Property of all indebtedness due to the BOC for all the Faulkner Properties. KJ testified that she did not learn about the Washington-Taylor Mortgage until of January of 2009. (See Trial Tr., vol. IV, 97:13-98:25.) KJ testified that she learned that the BOC had taken a mortgage on the Washington-Taylor Property in a conversation she had with Markay in January of 2009. According to KJ, she mentioned to Markay that Joe wanted to sell the Washington-Taylor Property once the contract with IHDA was completed in March of 2009; at that point she testified that Mar-kay told her that Settlers’ could not do that because the BOC had a mortgage on the property for the Faulkner loans. (Trial Tr., vol. IV, 98:2-18.)
On March 2, 2009, Peterson submitted copies of Settlers’ audited financial statements for the year ended on December 31, 2008 to IHDA, as required by the IHDA Use Agreement and regulations, and submitted copies thereof to KJ. (See JX 111, at 1 and 2 of 33.) In Notes to Financial Statements, it was stated that Settlers’ was “not in default” of the forgivable note and conditional grant with IDHA, and that the Washington-Taylor project was in “material compliance” with all the conditions of the IHDA grant. (See JX 111, at 15-16 of 33; Trial Tr., vol. XII, 48:24-51:7 (Peterson test.).) The Washington-Taylor Mortgage was not mentioned in the audit for that year, despite the fact that Peterson was or should have been aware that the terms of the Faulkner loan included the Washington-Taylor Mortgage. (See Trial Tr., vol. XII, 79-81 (Peterson test.).)
Release of the IHDA Mortgage and Renewal of the LOC
On May 29, 2009, IHDA recorded a Release of the IHDA Mortgage with the Cook County Recorder of Deeds as document number 0914948018. (Stip. ¶ 58; JX 21.)
In August 2009, the LOC became due and Settlers’ was unable to pay it. KJ executed a new promissory note extending the maturity of for that loan, which had been fully drawn and remained unpaid. The promissory note stated that it was secured by the Washington-Taylor Mortgage. (See JX 15; Trial Tr., vol. V, 33:20-34:11 (KJ test.).)
In August 2010, KJ executed a second renewal of the $50,000 line of credit, which remained secured by the Washington-Tay-. lor Mortgage. (See JX 16; Trial Tr., vol. V, 36:1-7 (KJ test.).)
FDIC Receivership and Assignment of Assets to Schaumburg Bank
On March 25, 2011, BOC was closed by the Illinois Department of Financial and Professional Regulation, which appointed the FDIC as receiver. (Stip. ¶ 19.) Through an Asset and Purchase Agreement dated March 25, 2011, the FDIC, as receiver for BOC, assigned certain of the assets of the BOC to Advantage National Bank Group, who would change its name to Schaumburg Bank & Trust Company, N.A. in July of 2011 (Stip. ¶¶ 20, 21; JX 4.) Schaumburg Bank is a national banking association with its principal office located in Schaumburg, Illinois. (Stip. ¶ 22.)
On or about June 1, 2011, Settlers’ sent a letter to the Bank, which was also sent to the FDIC and Settlers’ board, which related Settlers’ belief that the Washington-Taylor Mortgage had been obtained by the BOC without approval from Settlers’ or from IHDA. Settlers’ requested that the Bank follow through with ordering appraisals of the Faulkner Properties to modify the loans, and that the mortgage of *62the Washington-Taylor Property be removed. (See JX 109; Trial Tr., vol. IV, 117:12-118:17 (KJ test.).) She was later informed that the Bank would be ordering appraisals, which she received some time prior to October, 2011. (See Trial Tr., vol. IV, 122:10-15 (KJ test.).)
Default and Foreclosure Proceedings in Illinois State Court
On October 31, 2011, Schaumburg Bank & Trust sent a Notice of Default and Demand for Payment letter to Settlers’ at 12220 Whitley St. Whittier, CA. (Stip. ¶ 59; JX 82.)
Also on October 31, 2011, Schaumburg Bank sent Notice of Default and Demand for Payment letters to each of the respective trusts that owned the Faulkner Properties, in care of Settlers’, and in care of Jan Faulkner at 345 Ashland Ave, River Forest, IL. (See Stip. ¶ 60; JX 31, 39, 46, 53, 60, 68, and 74.)
On February 3, 2012, Schaumburg Bank & Trust filed seven complaints (the “Foreclosure Complaints”) seeking foreclosure, among other things, of the Faulkner Properties. (Stip. ¶ 61; JX 75-81.)
On February 6, 2012, Schaumburg Bank filed a complaint seeking foreclosure, among other things, of the Washington-Taylor Property. (Stip. ¶ 62; JX 83.)
On or about January 27, 2012, Schaum-burg Bank sent letters to tenants. (See JX 83.) KJ testified that Settlers’ rental receipts declined by $10,000.00 in the month subsequent to when the letters were sent out. (See Trial Tr., vol. IV, 125:19-21 (KJ test.).)
In February of 2012, Schaumburg Bank & Trust filed motions for the appointment of a receiver to manage the Faulkner Properties and the Washington-Taylor Property during the pendency of the foreclosure proceeding. (Stip. ¶ 63.)
The Chapter 11 Bankruptcy Case
On July 12, 2013, Settlers’ filed its voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. (Stip. ¶ 64.)
On January 31, 2014, Schaumburg Bank filed an Amended Proof of Claim, in the amount of $4,921,425.97, which is designated as Claim No. 12-3 in the Claims Register (the “Schaumburg Bank Claim”). (Stip. ¶ 65.) The Schaumburg Bank Claim asserts a secured claim in the amount of $2,721,000.00 secured by the Faulkner Properties and the Washington-Taylor Property, and an unsecured claim in the amount of $2,200,425.97 for its deficiency claim. OS'ee Answer ¶13.).
KJ filed a proof of claim asserting deferred salary due in the amount of $502,000. (See Claim No. 10). That amount is asserted by Settlers’ to be owed to KJ for unpaid wages since 2000 based on the organization’s audited financial statements. The amounts claimed by KJ and Schaum-burg Bank represent approximately half of the total amount claimed by creditors in Settlers’ bankruptcy case. (See Claims Register Summary, Settlers’ Housing Service, Inc., 13-28022.)
Additional facts set forth in the Conclusions of Law will stand as additional Findings of Fact.
CONCLUSIONS OF LAW
Settlers’ Third Amended Complaint pleaded fourteen counts, some of which have already been disposed of, as set out below:
*63Counts Disposed of By Prior Orders
Count Nature of Claim Disposition
2 Aiding and Abetting Breach of Fiduciary Duty Dismissed with prejudice, see 520 B.R. 253 (Bkrtcy.N.D. Ill. 2014)
4 Fraudulent Concealment Dismissed with prejudice, see 520 B.R. 253 (Bankr. N.D. ILL 2014)
5 Breach of Illinois Consumer Credit Act Dismissed for lack of Subject Matter Jurisdiction under FIRREA, see 1.2 U.S.C. § 1821(d)(13)(D)
7 Constructive Fraud Dismissed with prejudice, see 520 B.R. 253 (Bankr. N.D. Ill. 2014)
10 Conspiracy to Defraud and Civil Conspiracy Dismissed for lack of Subject Matter Jurisdiction under FIRREA, see 12 U.S.C, § 1821(d)(13)(D)
12 Breach of Fiduciary Duty Arising From Fraud in the Execution Dismissed with prejudice, see 520 B.R, 253 (Bankr. N.D, Ill. 2014)
13 Conversion and Accounting Dismissed with prejudice, see 520 B.R. 253 (Bankr. N.D. Ill. 2014)
14 Improper Post-Petition Interest and Receiver's Fees Dismissed with prejudice, see 520 B.R. 253 (Bankr, N.D. Ill, 2014)
The remaining counts which still need to be resolved are the following:
Pending Counts
Count Nature of Claim
1 Equitable Subordination
3 Fraudulent Misrepresentation Related to Fraud in the Execution
6 Fraud, Illegality and Unenforceability of Washington-Taylor Mortgage
S Setoff
9 Unjust Enrichment
11 Tortious Interference with Contract
*64These pending counts involve three types of claims: (1) objections to claim based on fraud in the execution (Counts 3, 6, 9); (2) equitable subordination under 11 U.S.C. § 510 (Count 1), and (3) claims arising out of post receivership conduct and setoff (Counts 8, 11). These claims are described and treated separately below.
I. Allowance and Disallowance op Claims
Creditors seeking to recover on prepetition claims against the debtor must file a proof of claim in the bankruptcy case, see 11 U.S.C. § 501. Proofs of claim are “flle[d] ... against the [bankruptcy] estate.” Travelers Cas. & Sur. Co. of Am. v. Pacific Gas & Elec. Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). The estate is a separate legal entity which is comprised of property, wherever located, including “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1); see also 11 U.S.C. § 1115 (including all property acquired post-petition but before dismissal). Property of the estate is held and administered for the benefit of all creditors by a bankruptcy trustee, who is generally tasked with maximizing the recovery of unsecured creditors. See In re Duckworth, 776 F.3d 453, 458 (7th Cir. 2014); see also 11 U.S.C. § 1107 (authorizing the debtor in possession to act as trustee in Chapter 11 cases).
Section 502 of the Bankruptcy Code governs the allowance and disallowance of claims against the estate. Pursuant to this provision, proofs of claim filed under § 501 are “deemed allowed” unless a party in interest objects. 11 U.S.C. § 502(a). If an objection is made, the court must determine the amount of the claim as of the date of the petition and to allow such claim, except to the extent that enumerated grounds for disallowance set forth in subsection (b) apply. See 11 U.S.C. §§ 502(b)(1)—(9). Because a proof of claim is generally deemed valid, the objecting party has the burden of establishing grounds for disallowance. See Fed. R. Bankr. P. 3001(f); In re Sentinel Mgmt. Group, Inc., 417 B.R. 542, 550 (Bankr. N.D. Ill. 2009); In re Vastag, 345 B.R. 882, 885 (Bankr. N.D. Ill. 2006).
As relevant here, § 502(b)(1) disallows any claim that 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.” This provision is understood to mean that, with narrow exceptions, “any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy.” Travelers, 549 U.S. at 460, 127 S.Ct. 1199 (citing 4 Collier ¶ 502.03[2] [b], at 502-22).
This is consistent with the longstanding principle that “[c]reditors’ entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor’s obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.” Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) (citing Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979))); see Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 598 (7th Cir. 2012). “That principle requires bankruptcy courts to consult state law in determining the validity of most claims,” Travelers, 549 U.S. at 450, 127 S.Ct. 1199 (citing Raleigh, 530 U.S. at 20, 120 S.Ct. 1951). In fact, the Supreme Court has long recognized that the “ ‘basic federal rule’ in bankruptcy is that state law governs the substance of claims[.]” Raleigh, 530 U.S. at 20, 120 S.Ct. 1951 (citing Butner, 440 U.S. at 57, 99 S.Ct. 914); see Peterson, 676 F.3d at 598.
*65Defendant, Schaumburg Bank filed a secured claim in Settlers’ bankruptcy case asserting liability in the total amount of $4,921,425.97. See Claim 12-3. Because the total value of the properties securing the Bank’s claim is estimated at $2,721,000.00, the Bank claims to be secured to the extent of the value of its collateral, and unsecured as to the remaining $2,200,425.97. Settlers’ filed this adversary proceeding seeking Equitable Subordination and other relief, and to object to and disallow the Bank’s claim or parts thereof.
A. Fraudulent Misrepresentation in Relation to Fraud in the Execution (Count 3)
Settlers’ challenges the validity of Schaumburg Bank’s secured claim, in part, by disputing the validity and enforceability of the Washington-Taylor Mortgage based on fraud in the execution. Under Illinois law,2 fraud in the execution of an instrument renders the contract void ab initio. George J. Cooke Co. v. Kaiser, 163 Ill.App. 210, 213 (1st Dist. 1911). “[A] contract that is void ab initio is treated as though it never existed.” Illinois State Bar Ass’n Mut. Ins. Co. v. Coregis Ins. Co., 355 Ill.App.3d 156, 290 Ill.Dec. 394, 821 N.E.2d 706, 713 (2004). Federal and state law are similar in this regard. See Laborers’ Pension Fund v. A & C Envtl., Inc., 301 F.3d 768, 779-80 (7th Cir. 2002); Blaylock v. Toledo, P. & W.R. Co., 43 Ill.App.3d 35, 1 Ill.Dec. 451, 356 N.E.2d 639, 641 (1976). Accordingly, Settlers’ seeks determination that the Washington-Taylor Mortgage was void ab initio for fraud in the execution, and that the Bank’s claim in the bankruptcy case must be disallowed to extent it asserts rights under a mortgage that is void because of fraud in the execution.
.1. Fraud in the Execution
“ ‘Fraud in the execution,’ ... entails deceiving a party to an agreement as to the very nature of the instrument it signs so that the party ‘actually does not know what he is signing, or does not intend to enter into a contract at all.’ ” A & C Envtl., 301 F.3d at 779 (citing Rosenthal v. Great Western Fin. Sec. Corp., 14 Cal.4th 394, 58 Cal.Rptr.2d 875, 926 P.2d 1061 (1996)); see Davis v. G.N. Mortgage Corp., 396 F.3d 869, 881 (7th Cir. 2005) (quoting Belleville Nat’l Bank v. Rose, 119 Ill.App.3d 56, 74 Ill.Dec. 779, 456 N.E.2d 281, 283 (1983)). This occurs “where there is a surreptitious substitution of one paper for another, or where by some other trick or device a party is made to sign an instrument which he did not intend to execute,” Davis, 396 F.3d at 881 (quoting Belleville Nat’l Bank, 74 Ill.Dec. 779, 456 N.E.2d at 283). “A promisor’s signature procured by fraud in the execution gives no more effect to a contract than a promisor’s signature that has been forged. In either case the contract is void; it has never had any legal effect.” A & C Envtl., 301 F.3d at 779; see Coregis Ins., 290 Ill.Dec. 394, 821 N.E.2d at 713; U.C.C. § 3-305(2)(c); Restatement (Second) of Contracts § 163 (1981).
To establish the defense of fraud in the execution, Settlers’ had to show that it did not know that it was signing a note for a $50,000 line of credit or a mortgage agreement granting a lien on the *66Washington-Taylor Property to secure indebtedness of up to $3,412,000, and that its ignorance was excusable because it had reasonably relied upon the representations made by the BOC. See A & C Envtl., 301 F.3d at 780 (citing Ill. Conf. of Teamsters & Employers Welfare Fund v. Steve Gilbert Trucking, 71 F.3d 1361, 1365-66 (7th Cir. 1995), U.C.C. § 8-305(a)(1)(iii)); see also Agathos v. Starlite Motel, 977 F.2d 1500, 1505-06 (3rd Cir. 1992) (a party must prove “excusable ignorance of the contents of the writing signed” and that the instrument signed “is radically different from that which he is led to believe that he is signing”). Settlers’ has met that burden.
2. Washington-Taylor Mortgage Was Void For Fraud in the Execution
Settlers’ has alleged that the BOC engaged in a scheme to defraud that induced Settlers’ into believing that the documents signed at the closing related to the loans to purchase the Faulkner Properties; however, it surreptitiously included documents for a $50,000 loan (which Settlers’ had not requested or approved at the time) and a mortgage agreement pledging on the Washington Taylor Property to secure that debt, and guaranteeing payment of the loans for the Faulkner Properties. Settlers’ claims it never assented to the basic terns set forth in the LOC and Washington-Taylor Mortgage, and that it would not have agreed to purchase the Faulkner Properties if it had known that those loans were secured by the mortgage on the Washington-Taylor Property.
a. Settlers’ Did Not Know It Was Signing the Washington-Taylor Mortgage
The evidence in this case shows that Settlers’ did not know that the documents executed at the closing included documents for a $50,000 line of credit and a $3,412,000 lien on the Washington-Taylor Property. Settlers’ board had not approved those terms, and had never agreed to pledge the Washington-Taylor Property as collateral for the loans to acquire the Faulkner Properties. No corporate resolution approving these transactions had been submitted to the BOC, nor had the bank received a request for the line of credit from Settlers’, and the request for written authorization from IHDA to encumber the Washington-Taylor Property had not been obtained in the short closing schedule set up by the BOC.
The evidence also shows that any prior proposal regarding a 10% equity down payment in the Washington-Taylor Property had been unambiguously conditioned on IHDA approval. Shortly after KJ sent the request for written approval to IHDA, the BOC put together an approved a different transaction that would involve a $50,000 loan consisting of the LOC and a mortgage on the Washington-Taylor Properties to secure all loans extended, including the seven individual loans, but not to exceed approximately $3.5- million. Settlers’ never approved these transactions, nor was KJ or anyone else informed. KJ had expressly declined encumbering the property without IHDA approval; such was prohibited by the IHDA loan. Violation of that prohibition could threaten Settlers’ rights under the IHDA loan and grant agreements, and the IHDA Mortgage. Since the revocable loan from IHDA was expected to mature in 2009, KJ or Settlers’ had little to no incentive to grant any interest in the Washington-Taylor Property.
KJ’s testimony at trial is credible in light of the evidence in this case. Schaum-burg Bank can point to no record or communication to show that KJ understood the nature of the additional documents *67signed along with those for the Faulkner Properties. The BOC did not communicate with her, and Joe Lodico’s testimony is consistent with KJ’s testimony and was credible. KJ did not know or have reason to know that the documents she would sign included the LOC and the Washington-Taylor Mortgage, which was suddenly being pledged to secure loans of approximately $3.5 million.
b. Settlers’ Lack of Knowledge was Excusable Under the Circumstances
The evidence in this case shows that KJ had no knowledge or reason to know that she would be executing the LOC and the Washington-Taylor Mortgage, and that her ignorance was excusable under the circumstances. KJ had no prior knowledge of a $50,000 line of credit, and IHDA had not granted written authorization to use the Washington-Taylor property for a 10% equity down payment to cross-collateralize the loans. Settlers’ board had not authorized KJ to incur additional indebtedness in the form of a 50,000 line of credit or to grant a mortgage on the Washington-Taylor Property.
Schaumburg Bank argues that even if KJ lacked specific knowledge that the documents at closing would include the LOC and the Washington-Taylor Mortgage, that her failure to review all the documents, or even ask Saiger about the possibility that the Washington-Taylor Property was included was not reasonable or excusable. But KJ’s reliance on the terms of the transaction that had been related to her by the Bank and approved by Settlers’ was reasonable under the circumstances, where the BOC had decided to close on the loans as quickly as possible and had represented that the properties were profitable and were worth significantly more than the amount of the loans. The Bank made these representations to induce Settlers’ to acquiring the properties for the amount of loans outstanding and to close on such transaction in the span of two weeks. The Bank knew that no new appraisals or inspections could be ordered by KJ in the span of two weeks from the time KJ first heard of the Faulkner Properties and the time that the Bank scheduled closing for those properties. Under these circumstances, the Bank’s assertion that KJ had a duty to inquire or to be suspicious of the representations made by the BOC is unpersuasive.
As described above, the Washington-Taylor Mortgage and related documents had not been requested or otherwise approved by Settlers’ prior to closing, nor did Settlers’ receive any notice or have a reasonable opportunity of knowing that the additional documents had been included among those that it had previously approved and sought to execute: the purchase and loan documents for the Faulkner Properties.
Schaumburg Bank argues that KJ’s failure to read all the documents or hire counsel shows that her reliance not excusable because she would have realized that the LOC and the Washington-Taylor Mortgage were included had she reviewed the documents at closing or hired counsel to do so. While “[a] party cannot close his eyes to the contents of a document and then claim that the other party committed fraud merely because it followed this contract[,]” N. Trust Co. v. VIII S. Mich. Assoc., 276 Ill.App.3d 355, 212 Ill.Dec. 750, 657 N.E.2d 1095, 1103 (1995), a party lacking any notice of the nature of the documents being executed and lacking reasonable opportunity to review the documents cannot be faulted for relying on representations made at the time of the execution of those documents. See AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1041 (7th Cir. 1990) (“That a more *68cautious buyer might not have relied, might have smelled a rat, does not defeat liability. There is no defense of contributory negligence to an intentional tort, including fraud”)- KJ’s failure to review each of the documents and her reliance on Saiger’s representation that the remaining documents were substantially similar does not excuse liability. See id. at 1041-42 (“while the victim of an ordinary accident is required to use the ordinary care of an average person (even if he is below average in his ability to take care)—and thus to avoid being negligent—the victim of a deliberate fraud is barred only if he has notice of the fraud, and so he need only avoid deliberate or reckless risk-taking.”)
In Laborers’ Pension Fund v. A & C Envtl., Inc., 301 F.3d 768 (7th Cir. 2002), an employer contended its signature on a collective bargaining agreement had been procured by fraud. In evaluating this claim, the Seventh Circuit contrasted the facts, which ultimately were not sufficient to establish fraud in the execution, with the facts in Operating Eng’rs Pension Trust v. Gilliam, 737 F.2d 1501, 1505 (9th Cir. 1984), where the fraud in the execution claim had been established. That exercise by the Seventh Circuit informs as to the nature of that court’s precedent regarding what is required to prove fraud in the execution.
In Gilliam, an employer signed a collective bargaining agreement and later asserted the fraud in the execution claim to defend against the union’s efforts to collect, arguing that he thought he was signing a union membership form. Prior to signing, the union representative told the employer the documents were “standard ... forms” and based upon that he “did not read the documents ... but merely relied on the union representative’s word.” A & C Envtl, 301 F,3d at 781. Based on those fact, “[t]he Ninth Circuit concluded that no binding agreement was created because Gilliam did not know what he signed and his ignorance was reasonable.” Id.
In A & C Envtl., on the other hand, the Seventh Circuit reasoned that the employer’s reliance on a union representative’s statement was not reasonable because he signed a “one page document written in English and entitled “Collective Bargaining Agreement.” Id. Thus, the employer failed to establish that reliance on the representations without reading the contract was reasonable.
In Connors v. Fawn Mining Corp., 30 F.3d 483 (3d Cir. 1994), an employer, Fawn Mining, signed a collective bargaining agreement that contained materially different terms than it had been promised by the union. In ruling that the trial court erred in granting summary judgment against the employer on the fraud in the execution claim, the Third Circuit observed that “there was significant time pressure on both sides” to sign the agreement and that fraud in the execution would exist if the “union surreptitiously substitutes a materially different contract document before both sides execute it.” Id at 493.
In this case, the LOC and Washington-Taylor Mortgage documents were included among a set of similar documents pertaining to purchase of the seven Faulkner Properties. KJ was told and believed that she was signing documents that were identical in nature except that they related to seven separate properties. The documents had been filled out by Saiger on behalf of the BOC, and were presented to KJ at the closing with tabs identifying the sections which KJ needed to sign. KJ signed all the documents presented to her at the closing and left the BOC offices no later than 30 minutes after arriving.
*69Under these circumstances, Settlers’ reliance on representations at the time the Washington Taylor Mortgage was execute ed was reasonable, and her lack of knowledge that she was signing thé Washington-Taylor Mortgage was excusable. Settlers’ has therefore met its burden of proving the defense of fraud in the execution.
Accordingly, the Washington-Taylor Mortgage, including the cross-collateralization provisions authorized therein, was void ab initio and is now unenforceable against Settlers’ or its property.
3. Void Mortgage Cannot be Ratified
Schaumburg Bank has argued that, even if the Washington-Taylor Mortgage was initially invalid due to fraud, Settlers’ was later ratified the grant of the Mortgage when it drew on the LOC in October of 2008, and executed promissory notes renewing the maturity of the fully drawn $50,000 line of credit in August of 2009, and again in August of 2010, both of which acknowledged the Washington-Taylor Mortgage as collateral. However, the mortgage contract here was void ab initio for fraud in the execution, rather than merely voidable:
The difference between a contract that is void ab initio and one that is merely voidable is that “a voidable contract can be ratified and enforced by the obligor, although not by the wrongdoer, while the void contract cannot be.” Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 234 Ill.App.3d 1017, 1023, 176 Ill.Dec. 105, 601 N.E.2d 803 (1992), citing Restatement of Contracts § 475, Comment b (1932), rev’d Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill.2d 112, 189 Ill.Dec. 31, 619 N.E.2d 732 (1993); see also Smith v. Hunter, 171 Ill.App. 30, 36 (1912) (stating where “a contract is void ab initio, or where it becomes void by the terms and conditions therein expressed and agreed to by the parties, no action can be maintained thereon by either party”). In other words, a contract that is void ab initio is treated as though it never existed; neither party can chose to ratify the contract by simply waiving its right to assert the defect. On the other hand, if a contract is merely voidable, a party can either opt to void the contract based upon that defect, or choose, instead, to waive that defect and ratify the contract despite it.
Illinois State Bar Ass’n Mut. Ins. Co. v. Coregis Ins. Co., 355 Ill.App.3d 156, 290 Ill.Dec. 394, 821 N.E.2d 706, 713 (2004). The case cited by the Bank in support of its proposition involved the ratification by a principal of the unauthorized acts of its agent. -See Stathis v. Geldermann, Inc., 258 Ill.App.3d 690, 196 Ill.Dec. 761, 630 N.E.2d 926, 932-33 (1994). It did not involve fraud in the execution or any type of void contract. Schaumburg Bank has not cited any authority supporting ratification of a contract that was void ab initio, which means that no contract ever arose. See Laborers’ Pension Fund v. A & C Envtl., Inc., 301 F.3d 768, 779 (7th Cir. 2002) (“A promisor’s signature procured by fraud in the execution gives no more effect to a contract than a promisor’s signature that has been forged. In either case the contract is void; it has never had any legal effect.”). Therefore, Settlers’ could not have ratified the Washington-Taylor Mortgage.
B. Fraud, Illegality and Unenforce-ability of Mortgage (Count 6)
Count 6 seeks a determination that the Washington-Taylor Mortgage was void ab initio for illegality. See Coregis Ins., 355 Ill.App.3d 156, 290 Ill.Dec. 394, 821 N.E.2d 706, 712 (2004) (noting that “if the subject matter of a contract is illegal, that contract is void ab initio.”). Settlers’ *70claims that the Washington-Taylor Mortgage was void because it agreed to transfer an interest in property which was held by Settlers’ in trust for purposes specified by the IDHA grant. Allegations in this respect plead an alternative ground for determining that the Washington-Taylor Mortgage was void ab initio.
Settlers illegality theory in Count 6 is rather strange, asserting that because it breached an IHDA requirement the bank transaction is void. However, the issue is moot because the loan was released by IHDA without any claim by IHDA of violation of the terms of its loan to Settlers’. IHDA had standing to complain but did not do so, and Settlers has not shown that it has standing to assert those rights.
Settlers seeks to enforce the prohibition in the IHDA loan and grant documents on the theory that, because those terms were breached when the Washington-Taylor Mortgage was granted, such mortgage violated public policy and is thus void ab initio for illegality. But the plain reading of the IHDA Mortgage and Use Agreement does not give Settlers’ standing to enforce a default under the loan. Section 7 of the IHDA Use Agreement provides that upon violation, Settlers’ shall have an opportunity to cure and if it fails to cure, IHDA “may declare a default under this Agreement .... ” (See JX 12, at 7 of 23.) Paragraph 11 of the IHDA Mortgage contains similar language such that upon an event of default, the entirety of the mortgage debt becomes payable to IHDA “at the option of Mortgagee.” (See JX 11, at 9 of 22.)
Moreover, whether the Washington-Taylor Mortgage is considered a “prohibited transfer under Paragraph 7(a) of the IHDA Mortgage is within the exclusive discretion of IHDA. (See JX 11, at 7 of 22 (“Mortgagor shall not, without prior written consent of Mortgagee, create, effect, consent to, suffer or permit any “Prohibited Transfer” which includes any “mortgage, refinancing ... grant of a security interest ... affecting the Project ... or other encumbrance of the Project.”).)
The terms of the IHDA Use Agreement and Mortgage give no standing to Settlers’ to enforce those restrictions. Because IHDA has released its Mortgage and declared Settlers’ to be in compliance with all loan and grant requirements, Settlers’ has not shown that it now has standing to enforce those restrictions.
Settlers’ attempts to argue that standing exists to protect the inchoate trust rights of the intended beneficiaries of the IHDA grant funded through the federal HOME program. However, the court in In re West Central Hous. Dev. Org., 338 B.R. 482, 491 (Bankr. D. Colo. 2005) held that the government had standing to seek the turnover of funds it granted to the debtor. This aligns with the objective of government trust theory under the doctrine of. parens patriae, which confers standing for the government to protect the rights of its citizens benefitting from the federal funds from the entities administering such granted funds. IHDA has asserted no violation of its rights in this case, and has in fact declared that all rules and regulations were complied with. Accordingly, Settlers’ has not shown that it is enforcing IHDA’s rights in this case.
Settlers’ reliance on In re 28th Legislative Dist. Cmty. Dev. Corp., 2011 WL 5509140 at *7 (Bankr. E.D. Tenn. 2011) is also not helpful for the same reasons. In 28th Legislative Dist., the court permitted the debtor-grantee to assert the government trust theory on behalf of the government and itself to protect the debtor’s interest in government funded property. However, in that case, the government was also a party, the federal grant funds continued to be at issue, and the debtor con*71tinued to apply for and receive federal grant funds. None of these facts exist here. IHDA is not a party-in-interest, any interest in Settlers’ property was extinguished, and Settlers’ has admitted that it no longer participates in the HOME federal grant program. Accordingly, Settlers’ has not shown an entitlement to assert IHDA’s or other federal rights in this ease.
Settlers’ has failed to meet its burden of showing that the Washington-Taylor Mortgage is void based on illegality and other public policy grounds. Judgment will therefore be entered in favor of Schaum-burg Bank on Count 6.
C. Unjust Enrichment (Count 9)
Count 9 alleges that the Bank has been unjustly enriched through the benefit of having a mortgage on the Washington-Taylor Property. Unjust enrichment is an equitable claim that arises when “the defendant has unjustly retained a benefit to the plaintiffs detriment, and that defendant’s retention of the benefit violates the fundamental principles of justice, equity, and good conscience.’” Wilson v. Career Educ. Corp., 729 F.3d 665, 682 (7th Cir. 2013) (quoting Health Care Servs., Inc. v. Mt. Vernon Hosp. Inc., 131 Ill.2d 145, 137 Ill.Dec. 19, 545 N.E.2d 672, 679 (1989)). For reasons discussed in connection with Count 3, Settlers’ has met this standard in this case.
Schaumburg Bank was unjustly enriched by retention of the mortgage on the Washington-Taylor Property, which was fraudulently executed. Retention of any benefit from rights arising from the Washington-Taylor Mortgage would be unequitable in light of the fraud proven by Settlers’ in this case.
Judgment will therefore be entered in favor of Settlers’ and against Schaumburg Bank on Count 9.
D. Schaumburg Bank’s Secured Claim Will be Partially Disallowed
Pursuant to 11 U.S.C. § 502(b)(1), the claim of Schaumburg Bank, proof of which was filed in the bankruptcy case, will be partially disallowed to the extent that the Bank claims an interest in the Washington-Taylor Property as its collateral. The claim of Schaumburg Bank cannot be secured by Washington-Taylor Property because the Mortgage on that property was void ab initio for fraud in the execution. Because the Washington-Taylor Mortgage is unenforceable against the Debtor or its property under applicable state law, the Bank’s claim secured by the Washington-Taylor Property will be disallowed.
Defendant, Schaumburg Bank filed a secured claim in Settlers’ bankruptcy case asserting liability in the total amount of $4,921,425.97. See Claim 12-3. Because the total value of the properties securing the Bank’s claim is estimated at $2,721,000.00, the Bank claims to be secured to the extent of the value of its collateral, and unsecured as the remainder of its claim.
The latest appraisal of the Washington-Taylor Property, dated August 21, 2012, estimated the value of the property at approximately $850,000. (See JX 92, at 4 of 34.) Accordingly, assuming that the values on Schaumburg Bank’s proof of claim are based on that appraisal, the secured claim of Schaumburg Bank will be reduced by that amount.
Therefore, the secured claim of Schaum-burg Bank will be disallowed by the value of the Washington-Taylor Property as of the date of filing of the bankruptcy case, or approximately $850,000. That property is held by the estate free and clear of any lien. The Bank’s secured claim will be allowed as to the value of its remaining *72collateral, or $1,871,000.3 The remainder of the Bank’s claim will be allowed as an unsecured claim in the amount of $3,050,425.97.4
II. Equitable Subordination
After notice and a hearing, a court may, 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 order that any lien securing such a subordinated claim be transferred to the estate.
11 U.S.C. § 510(c), “Courts will subordinate a claim under 11 U.S.C. § 510(c) when the claimant creditor engaged in inequitable conduct that injured other creditors or conferred an unfair advantage on the claimant, but not when subordination is inconsistent with the Bankruptcy Code.” In re Sentinel Mgmt. Grp., Inc., 728 F.3d 660, 669 (7th Cir. 2013); see also In re Kreisler, 546 F.3d 863, 866 (7th Cir. 2008) (“Equitable subordination allows the bankruptcy court to reprioritize a claim if it determines that the claimant is guilty of misconduct that injures other creditors or confers an unfair advantage on the claimant.” (citing In re Lifschultz Fast Freight, 132 F.3d 339, 344 (7th Cir. 1997))). Typically, the misconduct that courts have deemed sufficiently inequitable to merit this remedy has fallen within one of three areas: A “(1) fraud, illegality, breach of fiduciary duties; (2) under-capitalization; for] (3) claimant’s use of the debtor as a mere instrumentality or alter ego.” Lifschultz, 132 F.3d at 345 (quoting In re Missionary Baptist Found. of Am., 712 F.2d 206, 212 (5th Cir. 1983)).
“Equitable subordination means that a court has chosen to disregard an otherwise legally valid transaction.” Lifschultz, 132 F.3d at 347. “The result is usually that the claimant receives less money than it otherwise would (or none at all), but that is not the goal. Equitable subordination is remedial, not punitive, and is meant to minimize the effect that the misconduct has on other creditors.” Kreisler, 546 F.3d at 866 (citing Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700 (5th Cir. 1977)).
As noted in the Conclusions of Law as to Jurisdiction, claims based on an asserted fiduciary duty or fraud in the inducement cannot be pursued because D’Oench and § 1823(e) preclude Settlers’ from relying on' unwritten agreements or obligations tied to the assets transferred to Schaum-burg Bank by the FDIC. See D’Oench, 315 U.S. 447, 62 S.Ct, 676 and its progeny, as discussed in the prior opinions, Settlers’ Hous. Serv., Inc. v. Schaumburg Bank & Trust Co., N.A. (In re Settlers’ Hous. Serv., Inc.), 514 B.R. 258, 270, 277-278 (Bankr. N.D. Ill. 2014), 520 B.R. 253, 261, 266 (Bankr. N.D. Ill. 2014).
The misconduct proven by Settlers’ in this case has already been addressed by entry of Judgment on Count 3, sustaining Settlers’ objection to the Bank’s secured claim, in part, and concluding that the Washington-Taylor Mortgage was void ab initio for fraud in the execution. Even though it has been determined that Schaumburg Bank does not hold a valid secured claim in that respect, voiding such mortgage pursuant to the Court’s equita*73ble subordination powers under § 510(c) in connection with that claim is also warranted.
Equitable subordination is appropriate for conduct that rises to the level of “gross and egregious,” “tantamount to fraud, misrepresentation, over-reaching or spoliation,” or “involving moral turpitude.” See Sentinel Mgmt. Group, 728 F.3d at 669; see also Grede v. Bank of New York Mellon Corp. (In re Sentinel Mgmt. Grp.), 809 F.3d 958, 965 (7th Cir. 2016) (knowledge of improper conduct may be enough for equitable subordination of outsider). The fraud proven by Settlers’ in this case in connection with the execution of the Washington-Taylor Mortgage was sufficiently “gross and egregious” to warrant voidance of that mortgage under principles of equitable subordination. Therefore, Settlers’ is entitled to the same relief obtained in connection with Count 3 pursuant to the court’s equitable subordination powers in the bankruptcy case.
Settlers’ seeks other relief beyond voi-dance of the Washington-Taylor Mortgage in connection with Count 1. However, Settlers’ has proven no other fraud beyond the misconduct remedied by voiding the Washington-Taylor Mortgage, and as previously discussed, has been held to be precluded from doing so in this case. Because “[e]quitable subordination is remedial, not punitive,” Kreisler, 546 F.3d at 866, and the harm has been remedied in this case, Settlers’ has not shown an entitlement to additional relief.
Judgment will be entered in favor of Settlers’ and against Schaumburg Bank on Count 1 voiding the Washington-Taylor Mortgage, Further relief will be denied.
III. Claims Based on Post-Receivership Conduct
Settlers’ has failed to show that it is entitled to damages for post-receivership actions of Schaumburg Bank. Judgment on Counts 8 and 11 will be entered in favor of Schaumburg Bank and Settlers’ recovers nothing in connection with these counts.
A. Tortious Interference with Contract (Count 11)
To establish a claim for tortious interference with a contract under Illinois law, a plaintiff must prove: “(1) the existence of a valid and enforceable contract between the plaintiff and another; (2) the defendant’s awareness of this contractual relation; (3) the 'defendant’s intentional and unjustified inducement of a breach of the contract; (4) a subsequent breach by the other, caused by the defendant’s wrongful conduct; and (5) damages.” Voelker v. Porsche Cars North Am., Inc., 353 F.3d 516, 527-28 (7th Cir. 2003) (citing HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., 131 Ill.2d 145, 137 Ill.Dec, 19, 545 N.E.2d 672, 676 (1989)).
In support of its claim, Settlers produced copies of letters allegedly sent by Schaumburg Bank to tenants of Settlers’. See Joint Exhibit 83 (“Notice to Pay Letters”). Additionally, KJ speculated Settlers’ rental receipts declined by $10,000 in the month subsequent to the date of the alleged Notice to Pay Letters. However, Settlers’ presented no rent rolls or other evidence to support KJ’s testimony. Nor did Settlers’ present any evidence of valid leases between Settlers’ and any tenants. Therefore, Settlers’ has failed to prove the existence of valid and enforceable contracts between itself and the tenants, which Settlers’ was required to do in order to succeed on its tortious interference claim.
Additionally, no evidence was presented to show that the letter allegedly sent by Schaumburg Bank was received by Settlers’ tenants. Nor did Settlers present any evidence that its tenants withheld rent *74payments, or made any direct payments to the Bank after receiving the Notice to Pay Letter. Illinois law provides that a mortgagee’s conduct in contacting a mortgagor’s tenants directing those tenants to pay rent directly to the mortgagee rather than the mortgagor does not amount to tortious interference with contractual relations absent evidence that the tenants actually paid rent to the mortgagee. Bank Financial FSB v. Brandwein, 394 Ill.Dec. 488, 36 N.E.3d 421, 431 (Ill. App. Ct. 2015.). Absent such evidence, there is no breach of contract from which damages could arise and, therefore, it necessarily follows that no tortious interference could have occurred. See id.
Accordingly, Settlers’ has failed to establish the elements necessary to prove that Schaumburg Bank tortuously interfered with Settlers’ contracts. Settler failed to show the existence of a valid and enforceable contract between Settlers’ and its tenants. It also failed to show that Schaumburg. Bank intentionally or unjustifiably induced the breach of any alleged contracts, or that the Bank caused the tenants to breach their alleged contracts with Settlers’. Finally, Settlers failed to show that it incurred damages as a result of any action by Schaumburg Bank. Judgment on Count 11 will therefore be entered in favor of Schaumburg Bank.
B. Setoff (Count 8)
Setoff can be pleaded only where there is an indebtedness from the plaintiff to the defendant which might be made the subject of an independent suit, and filing a plea of set-off is tantamount to the institution of a cross-action by the defendant against the plaintiff in the same proceeding. Engstrom v. Olson, 248 Ill. App. 480, 482 (Ill. App. Ct. 1928). The right of setoff allows parties that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A. In re Clark Retail Enterprises Inc., 308 B.R. 869, 895 (Bankr. N.D. Ill. 2004).
Here, Settlers’ claims for tortious interference with contract have not been established, and Settlers’ is entitled to no other damages from Schaumburg Bank in connection with other counts tried. Accordingly, no setoff claim can be shown. Judgment will therefore be entered in favor of Schaumburg Bank on Count 8.
CONCLUSION
For the foregoing reasons, Judgment will be separately entered in favor of Settlers’ and against Schaumburg Bank on Counts 3 and 9, sustaining Settlers’ objection to the Bank’s secured claim in the bankruptcy case. Judgment will also be entered in favor of Settlers’ and against Schaumburg Bank on Count 1, entitling Settlers’ to the same relief in the bankruptcy case: avoidance of the lien claimed by the Bank on the Washington-Taylor Property.
Judgment on remaining Counts 6, 8 and 11 will be entered in favor of Schaumburg Bank.
. The Washington-Taylor Mortgage provides for a lien on the property to secure indebtedness not to exceed $3,412,000.00, The mortgage included a "cross-collateralization” clause providing that, in addition to the Note, the mortgage secured additional indebtedness described as "Loans to U.S. Bank, N.A, Trusts #7375, 7610, 7890, 8040, 8120, 8190 and 8200,” (JX 17.)
. The Mortgage states that it “will be governed by federal law applicable to lender and, to the extent not preempted by federal law, the laws of the State of Illinois without regard to its conflict of law provisions....” (JX 17, at 11 of 14.) The parties do not dispute that Illinois law governs the substance of the Bank’s claim. Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) ("We honor reasonable choice-of-law stipulations in contract cases regardless of whether such stipulations were made formally or informally, in writing or orally”).
. This amount results from subtracting $850,000 from the $2,721,000 secured claim estimated by the Bank in its Proof of Claim (see Claim No. 12-3).
. This is the resulting amount after subtracting the allowed secured claim of $1,871,000 from the total claim amount of $4,921,425.97 stated in Schaumburg Bank’s Proof of Claim (see Claim No. 12-3), | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500517/ | OPINION
Thomas L. Perkins, United States Bankruptcy Judge
This matter is before the Court on confirmation of the Chapter 13 Plan filed by Arthur Gillen (DEBTOR) and the objection thereto by the Standing Chapter 13 Trustee, Marsha Combs-Skinner. The plan is for a term of sixty (60) months and will pay unsecured creditors in full, without interest. The Trustee’s basis for objecting is that the DEBTOR has failed to commit all of his monthly disposable income to the plan, which if he did so would result in a substantially shorter plan term and quicker payoff for creditors. If the DEBTOR is not willing to increase the monthly pay*76ment amount, the Trustee asserts that he should be required to provide for the present value of unsecured creditors’ claims by-paying those claims with interest. The issue turns on the interpretation of section 1325(b)(1).
The material facts are not in dispute. The DEBTOR filed his Chapter 13 petition on November 4, 2016. He is single with no dependents. A retiree, he receives a substantial pension payment each month, plus social security, giving him monthly net income of $7,054.00. After deducting his expenses, the DEBTOR’S monthly net income as calculated on Schedule J is $4,085.12. The DEBTOR’S Form 122C-1 shows he is an over-median debtor with a monthly disposable income of $2,020.40 as calculated on Form 122C-2. The DEBTOR’S Chapter 13 plan proposes a monthly payment of $1,262.00 over sixty (60) months for a total paid in of $75,720,00. After deducting the amounts required for administrative fees, priority and secured claims, the amount remaining, $44,664.25, is sufficient to pay all timely filed unsecured claims in full. The DEBTOR does not dispute that he has excess disposable income great enough to pay interest on allowed unsecured claims if forced to do so.
The Trustee filed her Confirmation Report on January 4, 2017, stating that the DEBTOR’S monthly plan payment should be increased to $2,020.40 or the plan should compensate unsecured creditors with interest. No creditors have objected to the plan, but the Trustee raised her objection at the confirmation hearing on January 19, 2017 and the parties were given time to brief the issue. The Trustee asserts that the DEBTOR has the ability to complete the plan in less than sixty (60) months and, because the plan does not commit his entire monthly disposable income for payment to the Trustee, the DEBTOR should be required to account for the time value of money by paying interest on unsecured claims. The Trustee contends that interest is mandated by section 1325(b)(1)(A).
The DEBTOR admits that his plan cannot be confirmed under Section 1325(b)(1)(B), because it does not propose to submit all of his monthly disposable income to the Trustee. The DEBTOR argues that the plan may be confirmed because it proposes to pay all unsecured claims in full, albeit without interest. The DEBTOR argues that 1325(b)(1)(A) does not require that a debtor pay present value because the phrase “as of the effective date” in section 1325(b)(1) refers only to the timing of the determination.
The Trustee, while conceding that the DEBTOR’S plan need only satisfy either section 1325(b)(1)(A) or (B) in order to be confirmed over her objection, argues that the proper interpretation of the statute requires the lead-in phrase of 1325(b)(1), “as of the effective date of the plan” to be read as modifying subsection (b)(l)(A)’s requirement to pay “the value.” In other words, the Trustee argues that the statute must be construed to require the DEBTOR to pay interest on his unsecured claims as a condition of confirming a plan where the monthly payment amount is less than his disposable income.
The sole issue is whether the DEBTOR’S proposed Chapter 13 plan satisfies the requirements for confirmation by proposing to pay unsecured creditors in full, but without interest, even though he is not submitting all of his monthly disposable income to the Trustee. A Chapter 13 plan must meet the requirements set out in 11 U.S.C. § 1325 to be confirmed. If a proposed plan satisfies section 1325(a), then, absent an objection by the trustee or a creditor, the statute compels a bankruptcy court to confirm the plan without fash*77ioning additional requirements. See Petro v. Mishler, 276 F.3d 375, 378 (7th Cir. 2002).
Section 1325(b) determines the requirements a debtor must meet in order to have a plan confirmed in the event of an objection, and it reads:
(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan-
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
11 U.S.C. § 1325(b) (West 2016). The statute is written in the disjunctive, which means that the debtor must conform to either section 1325(b)(1)(A) or (B) to defeat an objection to the plan. Hamilton v. Lanning, 560 U.S. 505, 508-09, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010).
Section 1325(b)(1) addresses cases where a plan proposes monthly payments of an amount less than the full amount of the debtor’s projected disposable income, with the consequent trade-off that the term of the plan is longer than it would otherwise be if the monthly payment amount was increased. One option for the debtor to overcome an objection to confirmation by the trustee or an unsecured creditor is to increase the monthly payments and shorten the term of the plan as permitted by section 1325(b)(1)(B). The alternative option, under section 1325(b)(1)(A), is for the debtor to pay all allowed unsecured claims in full, which would permit confirmation of the plan even if the monthly payments are less than the debtor’s monthly disposable income. In re Bailey, 2013 WL 6145819 (Bankr. E.D. Ky.)(when the trustee objects, a debtor may satisfy § 1325(b) by paying all unsecured creditors in full under paragraph (1)(A)). This “full payment” option is available only if the debtor has the financial ability, based upon the amount of allowed claims and disposable income, to pay all allowed unsecured claims in full through the plan. Debtors for whom full payment is not feasible because they have insufficient disposable income may only overcome an objection by increasing their proposed monthly payments to the full amount of their projected disposable income.
A split of authority has developed among bankruptcy courts as to whether debtors electing the full payment option are obligated to pay interest on the unsecured claims. Representative of the line of eases holding that interest is not required are In re Edward, 560 B.R. 797 (Bankr. W.D. Wash. 2016) and In re Stewart-Harrel, 443 B.R. 219 (Bankr. N.D. Ga. 2011). Cases that hold that interest is required include In re Hight-Goodspeed, 486 B.R. 462 (Bank. N.D. Ind. 2012) and In re Barnes, 528 B.R. 501 (Bankr. S.D. Ga. 2015). Courts uniformly recognize the general rule that unsecured creditors are not entitled to receive post-petition interest on their allowed claims. See 11 U.S.C. § 502(b); In re Foster, 319 F.3d 495, 497 (9th Cir. 2003). The bankruptcy code contains a handful of exceptions to the rule prohibiting post-petition interest, such as section 1325(a)(4) requiring as a condition of confirmation of a plan that the present value of payments to be made to unsecured creditors not be less than what they would receive in a hypothetical liquidation under chapter 7.
*78The first bankruptcy court opinion to address the issue, holding that the term “as of the effective date of the plan—the value of the property to be distributed under the plan” is best interpreted as an implicit present value requirement, is In re Rhein, 73 B.R. 285 (Bankr. E.D. Mich. 1987). Relying primarily upon commentary set forth in Norton Bankruptcy Law and Practice, while noting the contrary position taken in Collier on Bankruptcy, the Rhein court compared the language of section 1325(b)(1)(A) with similar provisions set forth in sections 1325(a)(4) and (a)(5)(B)(ii). In the latter two provisions, the phraseology is as follows: “the value, as of the effective date of the plan, of property to be distributed under the plan ....” Like Norton, the Rhein court placed no significance on the difference in the juxtaposition of the phrase “as of the effective date of the plan.” The Rhein court rejected the contrary viewpoint taken by Collier on Bankruptcy that section 1325(b)(1)(A) does not require payment of the present value of the claim.
Rhein was quickly disagreed with by the court in In re Eaton, 130 B.R. 74 (Bankr. S.D. Iowa 1991), where Judge Hill noted that in the Bankruptcy Code Congress meant present value whenever it used the specific phrase “value, as of the effective date of the plan.” Since that specific phrase was not used in section 1325(b)(1)(A) and since there is no indication in the legislative history that present value was intended, Judge Hill held that the debtor was not required to pay interest on unsecured claims to overcome the objection to confirmation.
Like the Eaton court, other courts on the “no interest” side of the dispute reason that the juxtaposition makes all the difference. That the difference in phraseology reflects an intentional legislative distinction is best understood by considering the justification for paying interest to certain classes of creditors and not others. As used in section 1325(a)(4) and (a)(5)(B)(ii), “value, as of the effective date of the plan,” is uniformly recognized to mean “present value.” Discounting a stream of future payments to present value requires the payment of interest in order to compensate for the loss in value of money due to inflation. With respect to section 1325(a)(5), the payment of interest to a secured creditor is warranted because a secured creditor has the right, under non-bankruptcy law, to immediate payment via liquidation of its collateral. Since a Chapter 13 debtor has the power to force a secured creditor to accept a stream of future payments in satisfaction of its secured claim, the payment of interest is necessary to put the secured creditor in the position it would have been in but for the bankruptcy. 8 Collier on Bankruptcy ¶ 1325.06[3][b][iii][B] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.)
Similarly, with respect to section 1325(a)(4), unsecured creditors with claims against a solvent Chapter 7 estate have an immediate right to payment upon liquidation of the debtor’s nonexempt assets and the trustee’s Chapter 5 avoidance and collection actions. The payment of interest is necessary to put the unsecured creditors in the same position they would have enjoyed in the hypothetical Chapter 7 liquidation. 8 Collier on Bankruptcy ¶ 1325.05[2][b] (sections 1325(a)(4) and (a)(5) “share the goal of compensating creditors for a delay in payments they would otherwise receive immediately”).
Apart from the exceptional right to interest under section 1325(a)(4), however, unsecured creditors in a Chapter 13 case have no right to an immediate payment in full at the front end of the case. The source of their payments is not a pot of assets in existence on the petition date or *79the date of confirmation. Rather, unsecured creditors get paid from the debtor’s future income, which in Chapter 13 becomes property of the estate when received. Where there is no forced deferral of any pre-existing payment right, there is no entitlement to interest.
The phraseology of section 1325(b)(1)(A) reflects this policy distinction. The differing juxtaposition of the phrase “as of the effective date of the plan” must be considered to be a purposeful placement by Congress that conveys a distinction from the similar but not identical phrasing of sections 1325(a)(4) and (a)(5)(B)(ii). See Loughrin v. U.S., — U.S.—, 134 S.Ct. 2384, 2391, 189 L.Ed.2d 411 (2014)(textual differences between similar language in the same statute is indicative of an intentional distinction by the drafter). Section 1325(b)(1) was added to the bankruptcy code by the Bankruptcy Amendments and Federal Judgeship Act of 1984. By the time of that amendatory legislation, it was already well understood in the federal court system, that by placing the modifying phrase “as of the effective date of the plan” immediately after the word “value,” Congress intended sections 1325(a)(4) and (a)(5) to mean that the plan payments must be discounted to present value as of the effective date of the plan. See, e.g., In re Martin, 17 B.R. 924 (N.D. Ill. 1982). Legislative history supports this conclusion. Id. at 925-26.
In this Court’s view, if Congress had intended to require a debtor to pay interest on allowed unsecured claims under section 1325(b)(1)(A), Congress would have maintained statutory consistency by placing the phrase “as of the effective date of the plan” immediately after the word “value.” The different placement is best construed as conveying a different meaning. Additionally, it is not at all apparent what additional meaning the phrase “as of the effective date of the plan” provides to section 1325(b)(1)(B), which makes perfect sense without that phrase and becomes confusing only when the phrase is included. So the placement of the phrase “as of the effective date of the plan” in the prefatory portion of section 1325(b)(1) is unlikely to have been because Congress intended it to modify subparagraph (B) in addition to subparagraph (A). A reasonable explanation for its placement is that Congress moved it outside of subparagraph (A) so that subparagraph (A) would not be misconstrued as containing a present value requirement.
This Court disagrees -with the Trustee’s contention that the phrase “as of the effective date of the plan,” despite its removed location, must nevertheless be construed as modifying the term “value.” Section 1325(b)(1)(A) requires the bankruptcy court to compare two amounts: (1) the amount of allowed unsecured claims, with (2) the amount of the distributions proposed to be made under the plan to the holders of those claims. The phrase “as of the effective date of the plan” logically identifies the date that that comparison is to be made. Using the effective date of the plan, which in chapter 13 is almost always the date of confirmation, permits confirmation to occur without having to wait until all claims litigation is concluded or until an undersecured creditor liquidates its collateral and thereby establishes the unsecured component of its allowed claim. If additional unsecured claims are allowed after confirmation, the plan may be modified under section 1329 to ensure that all allowed general unsecured claims will be paid in full.
For the foregoing reasons, this Court holds that under section 1325(b)(1)(A), a debtor may overcome a trustee’s objection to confirmation by proposing to pay 100% of allowed unsecured claims, without inter*80est. The DEBTOR’S plan does so and is, accordingly, confirmable. The Trustee’s objection -will be denied. A separate Order will be entered. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500519/ | *87ORDER ON MOTION REQUESTING ALLOWANCE OF ADMINISTRATIVE CLAIM
Phyllis M. Jones, United States Bankruptcy Judge
Before the Court is a Motion Requesting Allowance of Administrative Claim and Notice of Opportunity to Object (“Motion”) filed on November 25, 2015, by Lyndsey Dilks, the former attorney of Ashley Ivey, the Debtor in this bankruptcy case (“Debtor”). Jack Gooding, the Chapter 13 Standing Trustee (“Trustee”), subsequently filed the Trustee’s Response to Motion Requesting Allowance of Administrative Claim (“Response”) on December 17, 2015, and Brief in Support of Trustee’s Response (“Brief in Support of Response”) on February 1,2016.
Dilks filed the Motion two days after the Debtor, through other counsel, filed a notice of conversion from Chapter 13 to Chapter 7. No plan of reorganization was confirmed while the case was pending under Chapter 13. In the Motion, Dilks requests that the Trustee pay her previously approved compensation of $3000.00 in attorney fees and $86.00 in additional expenses pursuant to 11 U.S.C, §§ 330 and 503(b) for services performed in regard to the Chapter 13 case. Further, Dilks asks that her fees and expenses be remitted to her from the Debtor’s postpetition payments to the Trustee and that the payment be distributed to her prior to any refund to the Debtor. The Trustee raised a number of objections to allowance of the fees and payment from the Debtor’s refund, each of which will be addressed below.
A hearing was held on the Motion and Response. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons stated in this Order, the Motion is denied.
JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (B). The following shall constitute the Court’s findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 9014 and 7052.
FINDINGS OF FACT
The parties presented the facts underlying the dispute through a series of exhibits, stipulations, and the testimony of Dilks.1 On December 8, 2014, prior to the Debtor’s bankruptcy filing, the Debtor and Dilks signed a document titled Chapter 13 Bankruptcy Fee Agreement and Client’s Rights & Responsibilities (“Fee Agreement”). On January 20, 2015, the Debtor, represented by Dilks, filed for relief under the provisions of Chapter 13 of the Bankruptcy Code. Gooding was appointed the Chapter 13 Trustee.
On May 1, 2015, pursuant to the Guidelines for Compensation for Services Rendered and Reimbursement of Expenses in Chapter 13 Cases and the Revised Guidelines (collectively, the “Guidelines”), Dilks filed an Application for Attorney Fee (“Short Form Fee Application”). The Short Form Fee Application was signed by both Dilks and the Debtor. It reflected that Dilks applied for a summary fee of $3000.00 for services rendered or to be rendered to complete the plan. Pursuant to the Guidelines, this Short Form Fee Ap*88plication was not noticed to all creditors but only to the Debtor and the Trustee. The summary fee awarded pursuant to the Guidelines was first payable in part upon confirmation of the plan, with the remainder to be paid from the amount disbursed to creditors each month.
On May 11, 2015, the Trustee filed an objection to the Short Form Fee Application (“Objection”), along with a notice of opportunity to respond within thirty days. With no response from any party, an agreed order (“Agreed Order”) was entered sustaining the Trustee's Objection on July 31, 2015. Both Dilks and the Trustee signed the Agreed Order in which the Court approved the requested fees of $3000.00.
After the Agreed Order was entered, Dilks filed an additional application on August 7, 2015, for reimbursement of expenses, which included $56.00 for service to creditors and $30.00 for costs incurred to add a creditor to the case. The Court approved the additional expenses by an order dated August 31, 2015.
On November 23, 2015, after Dilks’s fee and expense applications were approved but prior to confirmation of the Debtor’s Chapter 13 plan, James O, Wyre filed a motion to be substituted as the attorney for the Debtor in the case (“Motion to Substitute”). The Motion to Substitute included a certificate of service stating that it had been served on the same day by electronic case filing on the Trustee and the Dilks Law Firm.
Wyre also filed a Notice to Convert Chapter 13 to Chapter 7 C‘Notice of Conversion”) on November 23, 2015. Notice of the Notice of Conversion and the order granting were transmitted electronically to Dilks, the Trustee, and others on November 24,2015.
On November' 25, 2015, an order granting the Motion to Substitute was entered on the docket. On the same day, Dilks filed the instant Motion with notice of a potential hearing, and it was electronically transmitted to the‘Trustee and the United States Trustee, and sent by United States Mail to the Debtor.
As of November 25, 2015, the date of the filing of the Motion, the Trustee held post-petition wages of the Debtor. On December 1, 2015, the Trustee issued a check made payable to the Debtor in the sum of $6,089.08. This check was remitted directly to the Debtor. After issuing the December 1, 2015 check to the Debtor, the Trustee received additional postpetition wages, and those additional postpetition wages were also remitted to the Debtor by the Trustee.
Dilks testified that she performed a substantial amount of legal work for the Debt- or. The Trustee did not dispute that she performed the services for which she requested compensation.
The Debtor has not objected to the allowance of fees that are requested in the Motion. There is no dispute that the conversion was voluntary and no allegation that the Debtor sought conversion of the case in bad faith. After conversion, on February 1, 2016, the Chapter 7 Trustee docketed his Report of No Distribution with a text entry on the docket reflecting that there is no property available for distribution.
ARGUMENTS
Dilks’s Arguments. At the hearing, Dilks orally moved that the Trustee’s Response be stricken as untimely because it was filed more than twenty-one days from the date of the Motion. Second, she contended that she was due her approved attorney fees and expenses pursuant to the provisions in her Fee Agreement with the Debt- *89or. Finally, she urged the Court to find the Supreme Court’s opinion in Harris v. Viegelahn, — U.S.—, 135 S.Ct. 1829, 191 L.Ed.2d 783 (2015) inapplicable to the case at hand, as did the court in In re Brandon, 537 B.R. 231 (Bankr. D. Md. 2015), and to award her an administrative expense claim for the $3000.00 in fees and $86.00 in approved expenses. She argued that because she had not received any payment for the substantial work she performed for the Debtor, her fees and expenses should be paid in full to her from the funds on hand with the Trustee prior to any refund to the Debtor.
Trustee’s Arguments. In his Response and Brief in Support of Response, the Trustee seeks denial of the Motion on several bases, each of which is contested by Dilks. The Trustee’s principal objection to the allowance and payment of the fees is based on the Supreme Court’s Harris opinion. The Trustee argues that under Harris once the Chapter 13 case converted to Chapter 7, the Trustee was required to return the funds on hand directly to the Debtor, preempting any payment to Dilks for an administrative expense claim. Additionally, the Trustee asserts that the Motion was untimely and that Dilks failed to give proper notice of the Motion to all interested parties, including the Trustee. He further contended at the hearing that the parties’ Agreed Order preempted payment to Dilks as she agreed in the order that in the event the Chapter 13 case was converted, she would not be paid her attorney fees from the Debtor’s refund.
The Court will begin with Dilks’s arguments.
CONCLUSIONS OF LAW
A, Dilks’s Motion to Strike
As a preliminary matter, the Court will address Dilks’s oral motion to strike the Trustee’s Response as untimely. The Trustee filed his Response only one day past the twenty-one day objection period provided in the notice of opportunity to object. Dilks failed to show how she was prejudiced by this one-day delay, and the motion to strike is accordingly denied. Dall v. United States, 957 F.2d 571, 572 (8th Cir. 1992) (concluding trial court had discretion to consider tardy response when no prejudice was indicated).
B. Fee Agreement between the Debt- or and Dilks
Dilks also argued at the hearing that her Fee Agreement with the Debtor contains a limited power of attorney, the implication being that this part of the agreement should be enforceable against the Trustee with regard to the Debtor’s refund check. As relevant on this point, the Fee Agreement between Dilks and the Debtor includes the following provision:
In the event Client’s Chapter 13 case is dismissed or converted to another Chapter, Client grants Attorney a limited power of attorney to apply funds on hand with the Chapter 13 Trustee that would otherwise be forwarded to Client or others towards the balance of Client’s Chapter 13 fee ... by granting to Attorney the right to endorse Client’s name(s) upon checks from the Trustee.
(Ex. B, Part VII).
This provision assumes that the Trustee will send the Debtor’s refund check to Dilks, thus enabling the attorney to endorse the Debtor’s name on the check, acquire her fees pursuant to the Fee Agreement, and remit the remaining balance of the refund to the Debtor. However, if the Trustee does not send the Debtor’s refund check to Dilks, no provision of the Fee Agreement between Dilks and the Debtor gives Dilks an avenue to acquire *90her fees. Here, the Trustee did, in fact, send the refunds directly to the Debtor.
Moreover, the Trustee questions whether he is bound by this provision in the Fee Agreement when he was not a party to the agreement between Dilks and the Debtor entered prior to the bankruptcy filing. The Court must agree. The Trustee was not a party to the Fee Agreement, and in particular, Dilks offered no evidence that the Trustee was made aware of the existence of the power of attorney provision prior to the Motion having been filed or that the Fee Agreement between Dilks and the Debtor was binding on the Trustee for some other reason. In short, the Fee Agreement between Dilks and the Debtor fails to support Dilks’s argument that the Trustee is required to pay her pre-confir-mation fees from the Debtor’s refund. Dilks’s argument on this point must fail.
C. Harris v. Viegelahn
Dilks’s remaining argument is that she should be awarded an administrative expense, to be paid from funds on hand with the Trustee, pursuant to the holding of In re Brandon, 537 B.R. 231 (Bankr. D. Md. 2015), which distinguished the Supreme Court’s ruling in Harris v. Viegelahn, — U.S. —, 135 S.Ct. 1829, 191 L.Ed.2d 783 (2015) in cases converted pri- or to plan confirmation.
The Trustee argues the Supreme Court’s ruling in Harris is applicable to cases converted both prior to and following confirmation of a Chapter 13 debtor’s plan. The Trustee argues that once this case was converted to Chapter 7 he was required to return any undistributed postpe-tition wages on hand to the Debtor. Addressing the parties’ arguments requires an analysis of both Harris and Brandon.
Unlike the present case that was converted to a Chapter 7 case prior to plan confirmation, the Harris case involved a Chapter 13 case that converted to Chapter 7 after plan confirmation. In Harris, the Supreme Court held that payments the debtor made to the Chapter 13 trustee from his postpetition wages that remained undistributed at the time the case converted to Chapter 7 must be returned to the debtor and not distributed to creditors. In reaching this conclusion the Supreme Court began with the following observation:
Conversion from Chapter 13 to Chapter 7 does not commence a new bankruptcy case. The existing case continues along another track, Chapter 7 instead of Chapter 13, without “effect[ing] a change in the date of the filing of the petition.” § 348(a). Conversion, however, immediately “terminates the service” of the Chapter 13 trustee, replacing her with a Chapter 7 trustee. § 348(e).
Harris, 135 S.Ct. at 1836.
The Court went on to state that “§ 348(f)(1)(A) provides that in a case converted from Chapter 13, a debtor’s postpe-tition earnings and acquisitions do not become part of the new Chapter 7 estate ....” Id. at 1837. As stated in Harris, this section “makes one thing clear: A debtor’s postpetition wages, including undisbursed funds in the hands of a trustee, ordinarily do not become part of the Chapter 7 estate created by conversion.” Id. The Court reasoned that “[ajbsent a bad-faith conversion, § 348(f) limits a converted Chapter 7 estate to property belonging to the debtor ‘as of the date’ the original Chapter 13 petition was filed. Postpetition wages, by definition, do not fit that bill.” Id.
Upon conversion to Chapter 7, the services of the Chapter 13 trustee are terminated, and the provisions of Chapter 13 no longer apply. Id. at 1838. The Court in Harris stated, “A core service provided by a Chapter 13 trustee is the disbursement *91of ‘payments to creditors.’ § 1326(c) (emphasis added). The moment a case is converted from Chapter 13 to Chapter 7, however, the Chapter 13 trustee is stripped of authority to provide that ‘service.’ § 348(e).” Id. The Court recognized that once terminated, the trustee is not required by Section 348(e) to hold funds in perpetuity, but stated the trustee must instead “return undistributed postpetition wages to the debtor.” Id.
In reaching its conclusion, the Supreme Court rejected the Chapter 13 trustee’s argument that she could distribute funds to creditors because Section 1327(a) provides that a confirmed plan is binding on the parties, and the second sentence of Section. 1326(a)(2) instructs the trustee to distribute payments in accordance with the plan; Id. The Supreme Court held those provisions “had no force here, for they ceased to apply once the case was converted to Chapter 7.” Id. The Court went on to state, “[w]hen a debtor exercises his statutory right to convert, the case is placed under Chapter 7’s governance, and no Chapter 13 provision holds sway,” citing to Section 103(i) of the Bankruptcy Code, which provides that “Chapter 13 ... applies only in a case under [that] chapter.” Id; see also 11 U.S.C. § 103(i) (2012).
The Supreme Court also disagreed with the trustee’s argument that upon conversion the trustee still had a duty to wind up the affairs of the Chapter 13 estate. The Supreme Court explained that Rule 1019 of the Federal Rules of Bankruptcy Procedure specifies the trustee’s post-conversion duties, which are to turn over records and assets to the Chapter 7 trustee and to file a report with the United States Trustee. Id. at 1839 (citing Fed. R. Bankk. P. 1019(4) & 1019(5)(B)(ii)). Those duties do not include distributing funds to creditors. Id.
This Court acknowledges the facts in Harris are distinguishable from the facts of the present case. Harris involved conversion to Chapter 7 after instead of prior to confirmation of the plan and involved distributions to creditors instead of distributions to attorneys for compensation for fees and costs as administrative expenses. However, research has found that substantially all courts faced with the issue of whether a Chapter 13 trustee may pay administrative expense claims in a case converted prior to confirmation have followed the reasoning in Harris to answer that question in the negative. See In re Hoggarth, 546 B.R. 875, 880 (Bankr. D. Colo. 2016) (denying attorney’s request for balance of administrative expense claim to be paid from postpetition wages on hand at conversion in case converted to Chapter 7 from Chapter 13 prior to confirmation); In re Vonkreuter, 545 B.R. 297, 303 (Bankr. D. Colo. 2016) (holding that Harris applies in cases converted pre-confirmation and “allowed administrative expense claims under § 503(b) may not be paid from undistributed postpetition earnings”); In re Harris, No. 15-12618-JDW, 2016 WL 3517757, at *3 (Bankr. N.D. Miss. Feb. 1, 2016) (denying application for administrative expense claim and holding Harris prohibits a Chapter 13 trustee from paying administrative expenses when case converts to Chapter 7 prior to confirmation); In re Beckman, 536 B.R. 446, 450 (Bankr. S.D. Cal. 2015) (holding in case converted pre-confirmation trustee cannot use funds on hand at conversion from debtor’s post-petition wages to pay adequate protection creditors, nor can he “deduct attorney’s fees (or his administrative commission) from these funds”); In re Spraggins, Nos. 13-28807-ABA, 14-29130-ABA & 14-35351-ABA, 2015 WL 5227836, at *2 (Bankr. D.N.J. Sept. 4, 2015) (holding trustee must refund to debtor all postpetition wages on hand at conversion even if case converted prior to confirmation and unpaid attorney fees, whether no-look fees or not, *92cannot be deducted from funds prior to refund); In re Sowell, 535 B.R. 824, 827 (Bankr. D. Minn. 2015) (denying attorney’s request to include directive in order for Chapter 13 trustee to tender funds to debtor’s attorney from funds on hand after pre-confirmation conversion of case); In re Beauregard, 533 B.R. 826, 832 (Bankr. D.N.M. 2015) (holding funds from postpetition wages held by former Chapter 13 trustee cannot be used to pay administrative expenses but must be returned to the debtor regardless of whether plans were confirmed or unconfirmed at the time of conversion).
In support of her interpretation of Harris, Dilks urges the Court to adopt the holding of In re Brandon, 537 B.R. 231 (Bankr. D. Md. 2015). In Brandon, a debt- or’s Chapter 13 case was converted to Chapter 7 prior to confirmation, and counsel for the debtor sought allowance of attorney fees and payment of those fees from the postpetition wages held by the Chapter 13 trustee at the time of conversion. Id. at 233. The Brandon court saw a distinction between the treatment by Section 1326(a)(2) of a confirmed plan and an unconfirmed plan as provided by the second and third sentences of Section 1326. Id. at 236. The court reasoned that a case with a confirmed plan is governed by the second sentence that provides the trustee shall distribute payments in accordance with a confirmed plan. Id. Further, a case where no plan has been confirmed is governed by the third sentence (providing that if a plan is not confirmed, the trustee shall return payments to the debtor, after deducting any unpaid claim allowed under Section 503(b)). Id. The court in Brandon held that the holding in Harris was inap-' plicable in its case because a plan had not been confirmed at the time of conversion. Id. at 237. Consequently, the trustee’s “post-conversion responsibilities continue to include compliance with the third sentence of § 1326(a)(2) requiring the payment of administrative expenses such as the remaining allowed fee of debtor’s counsel prior to returning unpaid funds to a debtor.” Id. at 236.
This Court declines to follow the Brandon court for in doing so it would ignore the holding in Harris that “no Chapter 13 provision holds sway” after conversion. Harris, 135 S.Ct. at 1838. Instead, this Court agrees and joins with the courts in In re Sowell and In re Beauregard in finding that the analysis and conclusions reached by the Supreme Court in Harris apply in a case converted prior to plan confirmation. In re Sowell, 535 B.R. at 826 (Harris applies with “equal force” to a case converted prior to confirmation); In re Beauregard, 533 B.R. at 831 {Harris means that funds must be returned to debtor upon conversion prior to confirmation). Indeed, there is “no principled basis upon which to continue to give effect to the third but not the second sentence of § 1326(a)(2).” In re Beauregard, 533 B.R. at 831.
In Harris the Supreme Court recognized Congressional intent to protect post-petition earnings as evidenced by Section 348(f) and to terminate the services of Chapter 13 trustees upon conversion. It follows that upon conversion from Chapter 13 to Chapter 7 the debtor’s funds are protected, the trustee’s services are terminated, the provisions of Chapter 13 no longer govern. Therefore, the trustee’s wind up duties cannot include compliance with the third sentence of Section 1326(a)(2) or any other services governed by Chapter 13 provisions.
For these reasons, the Court finds that upon conversion from Chapter 13 to Chapter 7 all undistributed funds that were on hand with the Trustee that were paid from the Debtor’s postpetition wages must be *93returned to the Debtor. Dilks’s request for payment of her attorney fees and expenses from funds on hand following conversion is denied.
This does not end the inquiry, however, as Dilks has requested not just payment of, but also allowance of, fees and expenses as an administrative expense claim. While under Harris, the Court finds that any such administrative expense could not be paid from the funds on hand with the Trustee at the time of conversion, the Court must nevertheless evaluate whether Dilks should be awarded an administrative expense claim in the case that is now proceeding under the provisions of Chapter 7 of the Bankruptcy Code.
D. Trustee’s Arguments against Allowance of the Administrative Claim
In his Response, the Trustee raises two procedural objections to the allowance of Dilks’s administrative claim: (1) that the Motion was untimely filed; and (2) that the Motion was not properly noticed under the applicable rule.
Timeliness of the Motion, As to the first issue, Federal Rule of Bankruptcy Procedure 1019(6) provides in relevant part, “A request for payment of an administrative expense incurred before conversion of the case is timely filed under § 508(a) of the Code if it is filed before conversion or a time fixed by the court.” Fed. R. Bankr. P. 1019(6). It is undisputed the Motion was not filed prior to conversion of this case.
However, the Rule specifically provides that the Court may fix a different deadline for filing an administrative expense claim when a case is converted. Moreover, Section 503(a) of the Bankruptcy Code provides that “[a]n entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.” 11 U.S.C. § 503(a) (2012) (emphasis added). “Cause” for the court to allow a tardy request for payment of attorney fees is not defined by Rule 1019 or Section 503. 4 Keith M. Lundin, Chapter 13 Bankruptcy 294-45 (3d ed. 2000 <& Supp. 2004).
At least one bankruptcy court has found cause to allow the filing of a request for payment of administrative expense after a conversion from Chapter 13 to Chapter 7 has occurred. See In re Simmons, 286 B.R. 426, 430 (Bankr. D. Kan. 2002) (deciding request for attorney fees filed after conversion should be considered timely because changes in the court’s procedures misled debtors’ counsel, who would have otherwise filed her fee request prior to conversion).
In the instant case, the evidence plainly demonstrates that filing her Motion prior to the Notice of Conversion in compliance with Rule 1019 was beyond Dilks’s control. Dilks was unaware the Debtor retained other counsel to represent her in this case, and Wyre filed the Notice of Conversion on the same day he filed the Motion to Substitute. Indeed, no order substituting Wyre as counsel for the Debtor had been entered when he filed the Notice of Conversion. Under such circumstances, the Court finds cause to deem the Motion timely under the Rule. The Trustee’s argument against allowance of Dilks’s administrative claim as being untimely must fail.
Notice of the Motion. The second issue raised by the Trustee is whether the Motion was procedurally defective because Dilks failed to comply with the notice requirements of Federal Rule of Bankruptcy Procedure 2002(a)(6). Rule 2002(a)(6) provides:
[T]he clerk, or some other person as the ■court may direct, shall give the debtor, the trustee, and all creditors and inden*94ture trustees at least 21 days’ notice by mail of ... a hearing on any entity’s request for compensation or reimbursement of expenses if the request exceeds $1,000.
Fed. R. Bankk. P. 2002(a)(6). At the hearing, Dilks responded that the electronic notice she provided constituted effective service of the Motion under Federal Rule of Bankruptcy Procedure 9014, which is applicable to contested matters and governs the required notice in this instance.
In her Motion, Dilks proceeds under Sections 330(a) and 503(b) of the Bankruptcy Code. Section 330 is the statutory authority for compensating a debtor’s attorney for services performed in a Chapter 13 case from the bankruptcy estate created under Section 1306(a) of the Bankruptcy Code. 11 U.S.C. § 330(a)(4)(B) (2012). Section 503(b)(2) authorizes, after notice and a hearing, the allowance of such compensation and reimbursement as an administrative expense. 11 U.S.C. § 503(b)(2) (2012). Although Dilks moves for her “approved compensation” to be deemed an administrative expense in her Motion, in reality the Motion constituted a new request for fees and expenses and a request that those fees and expenses be deemed an administrative expense. Dilks’s prior Short Form Fee Application was approved as a summary compensation award under the Guidelines, locally known as a “short form” application, but was payable only upon confirmation of the Chapter 13 plan, an event that never occurred.2 Because confirmation never occurred, the fees awarded pursuant to Dilks’s Short Form Fee Application could no longer be paid or elevated to administrative expense status. Dilks, therefore, had to request payment of the fees and expenses that accrued pre-confirmation anew. This could only be done with the “long form” application, both because confirmation would never occur, and because the Guidelines provide that the Trustee will recommend approval of only one summary compensation award, which Dilks had already received with her Short Form Fee Application.
Dilks’s Motion therefore, had to conform to the “long form” requirements. Under the Guidelines, “[a]n attorney seeking interim or final compensation for services or reimbursement of necessary expenses from an estate in a Chapter 13 case shall file an application as set forth in Federal Rule of Bankruptcy Procedure 2016.”3 (Ex. I, Guideline 1). Requests for compensation under Rule 2016 in excess of $1000,00 must be noticed pursuant to Rule 2002(a)(6). 9 Collier on Bankruptcy ¶ 2016.10 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
*95Courts apply Rule 2002(a)(6) in circumstances similar to those in the instant case, where a debtor’s counsel seeks compensation and/or expense reimbursement under Sections 330 and 503, the same statutes relied upon by Dilks. See, e.g., In re Garris, 496 B.R. 343, 354-55 (Bankr. S.D.N.Y. 2013) (court ordered Chapter 13 debtor’s attorney, after case dismissal, to provide notice under Rule 2002(a)(6) of his request for compensation or reimbursement of expenses exceeding $1000.00 under Sections 330 and 503); In re Jordan, No. 99-20073-13, 2000 WL 33712290, at *2 (Bankr. D. Idaho Mar. 24, 2000) (recognizing that Chapter 13 counsel seeking fee allowance under Sections 330 and 503(b)(2) after case was dismissed must provide clear notice to debtor, creditors, United States Trustee, and trustee under Rule 2002(a)(6) (citing In re Barrera, No. 98-02092, 1999 WL 33486717, at *2 n.4 (Bankr. D. Idaho May 7, 1999))).
The Motion contained a notice giving parties twenty-one days to object and providing that if objections were filed, a hearing would be set by subsequent notice, but if no objections were filed, the Motion may be granted without further notice or hearing. (Motion at 2). Dilks thus complied in part with Rule 2002(a)(6). Unfortunately however, the Motion with notice of a potential hearing was not served on all creditors as provided in Rule 2002(a)(6), but was instead served only upon the Trustee, the United States Trustee, and the Debtor. Dilks did not, therefore, fully comply with Rule 2002(a)(6).
Despite her argument to the contrary, Dilks was not excused from compliance with Rule 2002(a)(6) by Rule 9014. Dilks argued that the Motion was properly served and noticed under Rule 9014, but that Rule, by its own terms, applies only to contested matters “not otherwise governed” by the Federal Rules of Bankruptcy Procedure. Fed. R. Bankr. P. 9014(a). As stated above, the Court finds that Rule 2002(a)(6) governs and expressly sets out the procedure for giving notice of a hearing regarding compensation and reimbursement. Even though other aspects of the Motion may be governed by Rule 9014, notice is governed by Rule 2002(a)(6).
The Court concludes that the Trustee proved Dilks did not comply with Rule 2002(a)(6) in serving all creditors. The failure to comply with Rule 2002(a)(6) would not ordinarily be fatal to the Motion because under the circumstances of this case the Court would give Dilks the opportunity to re-notice the proper parties in the manner outlined in Rule 2002(a)(6). However, in this case, allowing the fee and allowing it as an administrative expense upon proper notice would be nothing more than an empty gesture for two reasons. First, under Harris Dilks will not be paid her attorney fees from the funds belonging to the Debtor. Second, the Bankruptcy Code specifically provides for treatment, after conversion, of administrative expenses incurred prior to conversion, and that treatment does not favor Dilks’s position.
Section 726(b) provides that post-conversion administrative expenses in a Chapter 7 liquidation converted fi’om Chapter 13 have priority over any pre-conversion administrative expense. 11 U.S.C. § 726(b) (2012). Consequently, an administrative expense fee allowed as requested by the Motion would be subordinate to the administrative expenses of the pending Chapter 7 case. In the instant case, the Chapter 7 Trustee docketed his Report of No Distribution on February 1, 2016, reflecting that there are no Chapter 7 assets with which to pay any allowed administrative expenses. Therefore, even if the Court were to grant Dilks’s Motion despite its procedural defects, the Chapter 7 estate is *96devoid of any property available for distribution to administrative claimants. The Court must deny Dilks’s request for allowance of administrative expenses due to the circumstances of this case.
This conclusion dispenses with the need for the Court to address the Trustee’s final argument and interpret the Agreed Order to determine whether Dilks consented to refrain from requesting payment of any administrative expense for attorney fees from the Debtor’s refund if the case were converted,
CONCLUSION
The Court is acutely aware that the extension of Harris to pre-confirmation cases may result in harsh consequences for bankruptcy attorneys who represent Chapter 13 debtors. Those consequences may, in turn, produce a chilling effect on the availability of attorneys willing to take the risk. Moreover, the Court is sympathetic to Dilks’s plight. She performed the services for which she now seeks compensation, but to grant her request to be paid from the Debtor’s refund would be to ignore United States Supreme Court precedent that this Court is bound to follow, and no other sources of payment are available to her in the Chapter 7 case.
Therefore, this Court concludes that upon conversion from Chapter 13 to Chapter 7 all undistributed funds on hand with the Chapter 13 Trustee paid from the Debtor’s postpetition wages must be returned to the Debtor and Dilks’s request for compensation and allowance of administrative expenses must be denied.4
For the foregoing reasons, the Motion Requesting Allowance of Administrative Claim and Notice of Opportunity to Object is DENIED.
IT IS SO ORDERED.
. Arkansas Rule of Professional Conduct 3.7 forbids a lawyer from acting as an advocate at a trial in which the lawyer is likely to be a witness unless “the testimony relates to the nature and value of legal services rendered in the case.” Ark. Rules of Prof’l Conduct R. 3.7(a)(2) (2015). Here, the issue is the payment of attorney fees and the exception applies. Moreover, Dilks was not counsel of record for the Debtor at the time of the hearing.
. The Guidelines provide two methods for counsel to seek compensation from the Chapter 13 estate. The first method is the "long form," which requires attorneys to file an application as set forth in Rule 2016 of the Federal Rules of Bankruptcy Procedure. The second is known as the "short form," which allows for a "summary compensation award of fees and costs in a Chapter 13 case for the service through confirmation of the plan.” (Ex. I, Guideline 2). The summary compensation award is paid in part upon confirmation of the plan, and thereafter "at the rate not to exceed twenty-five percent (25%) from the total amount disbursed to creditors each month.” (Ex. I, Guideline 4). The Chapter 13 Trustee will only recommend approval of one "summary compensation award” for the services and fee rates encompassed by the "short-form” application, (Ex. I, Guideline 6). Fees sought under the "short form” application are awarded "summarily” and "without notice.” (Ex. I, Guidelines 2, 7).
. Federal Rule of Bankruptcy Procedure 2016(a) details the requirements for a proper request for compensation and reimbursement. The Court will not address whether the Motion itself complied with the requirements of Rule 2016, as it was not raised by the parties at the hearing,
. This Order should not be construed as disagreeing with the procedure outlined by In re Rogers, 519 B.R. 267 (Bankr. E.D. Ark. 2014), regarding payment of attorney fees as administrative expenses when a Chapter 13 case is dismissed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500520/ | ORDER
Phyllis M. Jones, United States Bankruptcy Judge
Before the Court is the Application for Allowance of Compensation and Reimbursement of Expenses for Trustee (“Application”) filed by Richard L. Cox (“Cox” or “Former Trustee”) on November 16, 2016 (Doc. No. 512) and the Trustee’s Response to Former Trustee’s Application for Compensation and Reimbursement of Expenses (“Response”) filed by M. Randy Rice (“Rice” or “Successor Trustee”) on November 27, 2016 (Doc. No. 516),
The Application seeks a trustee’s fee in the amount of $45,496.07 based on trustee compensation percentages set forth in 11 U.S.C. § 326(a) for distributions made by Cox in the amount of $844,921.31.1 Rice, in his Response, states that while he does not object to a trustee’s fee being approved based on the distributions made by Cox, he objects to the percentages used by Cox to calculate the amount sought. Rice asserts that the commissions paid to Cox, as the former trustee, and to himself, as the successor trustee, should be paid on a pro rata basis on total distributions made in the case by all trustees.
The Application and Response were heard on February 14, 2017, and after receiving evidence and the undisputed statements of counsel the Court took the matter under advisement. The Court now grants the Application in regard to the expenses but disallows the requested fees without prejudice for Cox to re-apply for trustee compensation at, the conclusion of the case in an amount calculated in accordance with the method set out below.
The Court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). The following shall constitute the Court’s findings of fact and conclusions of law made in accordance with Rules 9014 and 7052 of the Federal Rules of Bankruptcy Procedure.
BACKGROUND
Turner Grain Merchandising, Inc., filed a voluntary petition for relief under the provisions of Chapter 11 on October 23, *992014. On May 15, 2015, the case was converted to a case under Chapter 7, and Cox was appointed Chapter 7 trustee. On May 12, 2016, Cox resigned as trustee.2 On the same date that Cox resigned, Rice was appointed as the successor Chapter 7 trustee.
At the hearing, Cox introduced Petitioner’s Exhibit 1, which included a Cash Receipts and Disbursements Record (“Report”) reflecting the receipts and disbursements for the case during the time Cox was the Chapter 7 trustee. The Report reflects that $619,251.39 was turned over to Cox from the Chapter 11 estate on June 2, 2015. Additionally, $240,059.30 was received by Cox from an accounts receivable action originally filed as an inter-pleader in the United States District Court and $314,688.38 was received from Helena National Bank as a recovery in an adversary proceeding. (Petitioner’s Ex. 1). During the time Cox was the Chapter 7 trustee he made two disbursements to Rabo AgriFinanee, Inc., one in the amount of $602,379.45 (Check No. 101) and the second in the amount of $237,672.34 (Check No. 102). (Petitioner’s Ex. 1). In addition he incurred bank and technology service fees in the amount of $4,869.52.3 (Petitioner’s Ex. 1). The two disbursements to Rabo AgriFinanee, Inc. and the bank and technology services fees total the $844,921.31 disbursement amount referenced in the Application. On May 17, 2016, Cox transferred the remaining funds on hand in the amount of $329,077.76 to Rice (Check No. 103). (Petitioner’s Ex. 1).
Cox stated that the trustee fee he requested in his Application is based on the percentages set forth in 11 U.S.C. § 326(a). He stated that historically in this District the trustee first appointed would receive the higher percentages for trustee fee commissions on the basis of “first in, first out.” Therefore, he calculated the requested trustee fee using 25% of $5,000.00, 10% of $45,000.00, and 5% of $794,921.31, resulting in the fee amount of $45,496.07.
Cox acknowledged that trustees typically file interim fee applications to be paid during the case but stated he did not file interim fee applications in this case because he did not believe he had funds on hand to use to pay the fee. Rice acknowledged that had the Court approved interim trustee fees and the fees had been paid to Cox, he does not believe he would have asked that Cox disgorge the fees.
It is undisputed by the parties that Rice does not have sufficient funds on hand to pay all the administrative fees in the case and that it is too early in the case to determine if the case will be administratively solvent. Cox, however, requests that the amount of his fee be determined based on the percentages used in his Application for the disbursements he made as trustee, understanding the possibility exists that he will receive only a pro rata distribution on the allowed fee.
In discussing the inequities of a “first in, first out” method, Rice stated that Cox filed only one adversary proceeding while serving as trustee, but Rice, or attorneys he has retained to represent the estate, had filed forty-six adversary proceedings as of the date of the hearing. In addition, there are other pending adversary proceedings in connection with this bankruptcy case. Therefore, Rice argued, the costs associated with the administration of this case are ongoing and Rice estimated the case will be pending for an additional two to three years, at best, based on the com*100plexity of the issues involved and the number of pending adversary proceedings.
In addition, Rice stated that although he can separately bill the estate for attorney and paralegal fees for some legal services, many costs of administering the case can only be recovered through the trustee fee, and he and his office will have to absorb those costs over the next two to three years. These trustee services include handling telephone calls from creditors and other interested parties, including the press; submitting the required reports to the United States Trustee; providing documents and assisting in the preparation of tax returns for the estate; paying overhead associated with maintaining records and documents; accounting for funds received and disbursed; examining proofs of claims filed;4 and preparing reports required to close the case.
ARGUMENTS
Cox argues that the Bankruptcy Code does not specifically govern how to calculate fees in cases where there is more than one trustee. He relies on the language of Section 326(a) for his position that since his disbursements were made first he should benefit from the statutory language which provides that his compensation is “not to exceed 25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000.” 11 U.S.C. § 326(a) (2012) (emphasis added). He states that, based on the cases he has been involved in during his numerous years of experience as a Chapter 7 trustee, the original trustee in this District has historically received the higher percentages for the “first” disbursements made in the case. The successor trustee’s fee is then based on the percentages in Section 326(a) that take into consideration the previous disbursement levels of the original trustee.
Rice agrees that the Bankruptcy Code does not provide how to calculate the trustee fees for cases with more than one trustee but also notes the absence of statutory authority for giving priority treatment to one trustee over another. He argues that a more equitable calculation of fees would be to base the fees on the total amount of the disbursements made in the case pursuant to the percentages and then to allocate the fees on a pro rata basis according to the amounts disbursed by each trustee. This approach, Rice argues, would be consistent with other provisions of the Bankruptcy Code providing that if a class of claims is not to be paid in full then the class should be paid on a pro rata basis. If Cox is awarded a fee of $45,496.07 based on the higher percentages for disbursing $844,921.31, Rice will have to disburse $1,413,149.67 to receive the same fee. Rice argues this result is not equitable under the circumstances of this case.
In addition, Rice contends that regardless of the size of an estate there are certain administrative services, including trustee reports and final accountings, that are functions of any case, and he believes that the basis for the higher percentages for the first distributions is to help defray the usual costs associated with administration of any size case.
APPLICABLE LAW
The analysis begins with an interpretation of Sections 326 and 330, the Bankruptcy Code provisions that set forth the limits and standards for trustee compensation. Section 326
Section 326(a) fixes the schedule of compensation of trustees. It provides that the *101court “may allow reasonable compensation” under Section 330 for the trustee’s services, payable after the services are rendered. 11 U.S.C. § 326(a) (2012). Payment for a trustee’s services is determined based on the amount of disbursements made by the trustee, with compensation capped at the following amounts:
25 percent on the first $5,000 or less, 10 percent on any amount in excess of $5,000 but not in excess of $50,000, 5 percent on any amount in excess of $50,000 but not in excess of $1,000,000, and reasonable compensation not to exceed 3 percent of such moneys in excess of $1,000,000 upon all moneys disbursed or turned over in the case by the trustee to parties in interest, excluding the debt- or, but including holders of secured claims.
11 U.S.C. § 326(a) (2012).
The use of the phrase “may allow reasonable compensation” indicates that courts have discretion in awarding compensation to trustees. Otherwise the imperative “shall” would have been used instead of “may.” In re Mack Props., Inc., 381 B.R. 793, 797-98 (Bankr. M.D. Fla. 2007) (citing Jama v. Immigration and Customs Enforcement, 543 U.S. 335, 346, 125 S.Ct. 694, 160 L.Ed.2d 708 (2005) (“may” connotes discretion)).
The House Report related to Section 326, proposed as part of the Bankruptcy Reform Act of 1978, points out that “[t]he limits in this section, together with the limitations found in section 330, are to be applied as outer limits, and not as grants or entitlements to the maximum fees specified.” H.R. REP. NO. 95-595, at 327 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6283.
Additionally, there is ample case law interpreting Section 326 as a mechanism for providing a statutory cap on fees and finding that the trustee is not automatically entitled to the statutory cap amount. See, e.g., In re Mack Props. Inc., 381 B.R. at 799-800 (requiring a factual basis for awarding maximum fee and declining to award maximum fee); In re Brous, 370 B.R. 563, 568 (Bankr. S.D.N.Y. 2007) (reasoning that Section 326(a) sets a maximum limit but not a “right to or standard for awarding compensation”); In re Ward, 366 B.R. 470, 476 (Bankr. W.D. Pa. 2007) (denying full statutory compensation); In re Clemens, 349 B.R. 725, 733 (Bankr. D. Utah 2006) (declining to award trustee’s requested maximum compensation).
With regard to the issue of compensating two trustees in a single case, the relevant statute is Section 326(c). It provides that if more than one person serves as trustee in a single case, “the aggregate compensation of such persons for such service may not exceed the maximum compensation prescribed for a single trustee.” 11 U.S.C. § 326(c) (2012). Section 326, however, does not address the question of how to apply the sliding fee scale when more than one trustee serves in a single ease.
Section 330
While Section 326 sets forth the limits on trustee compensation, Section 330 provides the authority and the standard for compensating trustees. Under Section 330(a)(1)(A), the court may award a trustee “reasonable compensation for actual, necessary services.” 11 U.S.C. § 330(a)(1)(A) (2012).
The standard of reasonableness is expanded upon by other provisions of Section 330. For example, Section 330(a)(4)(A) prohibits compensation for unnecessary duplication of services or services not reasonably likely to benefit the debtor’s estate or not necessary to the administration of the case. 11 U.S.C. § 330(a)(4)(A) (2012). Sec*102tion 380(a)(2) expressly provides that the court may award compensation in an amount that is less than that requested. 11 U.S.C. § 330(a)(2) (2012). In addition, Section 330(a)(7), added in 2005 and made applicable to all trustees, provides, “[i]n determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on section 326.” 11 U.S.C. § 330(a)(7) (2012).5
The trending view of Section 330(a)(7) is that, because Congress has used the term “commission,” a trustee fee is presumptively reasonable if in compliance with the formula in Section 326(a). 3 Collier on Bankruptcy ¶ 326.02[l][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.); see also In re Rowe, 750 F.3d 392, 398 (4th Cir. 2014); Hopkins v. Asset Acceptance LLC (In re Salgado-Nava), 473 B.R. 911, 921 (9th Cir. B.A.P. 2012). These courts have - held, however, that to give effect to Section 330 as a whole, the presumption may be rebutted by evidence of extraordinary circumstances.6 In re Rowe, 750 F.3d at 397; In re Salgado-Nava, 473 B.R. at 921. If extraordinary circumstances exist and the presumption is rebutted, the bankruptcy court may then be called to determine if there is a rational relationship between the requested commission and the services actually rendered. 7 In re Rowe, 750 F.3d at 399; In re Salgado-Nava, 473 B.R. at 921.
Proceeding under this analysis, courts have reached varying conclusions about the meaning and application of “extraordinary circumstances.” The court in In re Scoggins lists examples gleaned from various sources. In re Scoggins, 517 B.R. 206, 217 (Bankr. E.D. Cal. 2014). Some of these examples include the following extraordinary circumstances: the case administration is below acceptable standards; trustee duties are delegated to an attorney or other professional; trustee fees are greater than the amount left for unsecured *103claims; disbursements are high in proportion to effort expended by the trustee; the trustee assumes and completes a sale contract executed prior to bankruptcy; or a “carve out” or “short sale” has resulted in artificial inflation of the estate. Id. (citing U.S. Trustee, Handbook for Chapter 7 Trustees, ch. 2-1 at 39, ch. 7 at 4-1; In re Rowe, 750 F.3d at 397; In re Salgado-Nava, 473 B.R. at 922 n.16; 3 Collier on Bankruptcy ¶ 330.02[1][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.); In re McKinney, 383 B.R. 490, 492 (Bankr. N.D. Cal. 2008); In re KVN Corp., Inc., 514 B.R. 1, 5 (9th Cir. B.A.P. 2014)).
Although termed a “commission” under Section 330(a)(7), a trustee fee is still limited by Sections 330 and 326 to reasonable compensation, and the reasonableness standard permits a court “to award compensation that is less than the amount of compensation that is requested.” 11 U.S.C. § 330(a)(2) (2012); see also In re Coyote Ranch Contractors, LLC, 400 B.R. 84, 95 (Bankr. N.D. Tex. 2009) (stating that in awarding Chapter 7 trustee fees, the issue is whether the trustee’s services resulted in tangible and material benefit to the estate); In re Owens, No. 05-70329-fra7, 2008 WL 4224530, at *2 (Bankr. D. Or. Sept.15, 2008) (finding requested fees excessive and disproportionate to benefit of services); In re McKinney, 383 B.R. at 494 (recognizing that if statutory maximum is substantially disproportionate to the value of the trustee’s services to the estate, court will award the maximum amount that is not substantially disproportionate); 3 Collier on Bankruptcy ¶ 330.02[l][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (stating the court may “award less than the amount requested”). But see Mohns, Inc. v. Lanser, 522 B.R. 594, 601 (E.D. Wis. 2015) (ruling that courts should not reduce commission awarded to a Chapter 7 trustee based on the perception that statutory commission was disproportionate compensation).
DISCUSSION
Reasonableness of Fees
With Sections 326 and 330 and interpreting case law as guidance, the Court begins with the issue of whether Cox’s requested fees, as a “commission” pursuant to Section 330(a)(7), are presumptively reasonable to the extent that he is entitled to the maximum fee award of $45,496.07. Under this approach, extraordinary circumstances may rebut the presumption of reasonableness. Based on the undisputed statements and evidence presented at the hearing, the following facts are relevant to the determination of extraordinary circumstances.
First, the circumstance of two trustees serving consecutively in a single case is not the typical way Chapter 7 cases are administered. The Bankruptcy Code does not explicitly address how to interpret the sliding scale of Section 326(a) to allocate trustee fees in this situation.
Second, several professionals have been hired by the estate to pursue adversary proceedings and to provide other services. It is too early to determine how these proceedings may affect the administration of the estate. This fact was recognized by Cox, who acknowledged that even if his trustee’s fee is allowed in full, he realizes he may very well receive only a pro rata share of his fee if the estate ultimately proves to be administratively insolvent. Of course, any pro rata fee treatment would also apply to Rice’s fees.
Third, a comparison of the services to be provided by Rice with those already provided by Cox reflects that Rice will ultimately serve longer and will be required to fulfill the most significant administrative *104tasks in the case. By Rice’s optimistic estimate, this case will remain open for another two or three years while the Successor Trustee’s adversary proceedings, among others, run their courses and the claims process is completed. During this period, Rice will be expected to fulfill ongoing administrative duties, which will be expansive considering the size and complexity of the case. The duty to examine claims will be a particularly time-consuming task, with more than one hundred proofs of claim as yet to be evaluated. The Successor Trustee’s review of claims will be crucial in maximizing the distribution to each allowed, unsecured creditor.
By contrast, the only evidence in the record as to Cox’s administrative efforts is Petitioner’s Exhibit 1. It reflects that Cox made two large disbursements to a single creditor and incurred bank and technology service fees. Cox then turned over $329,077.76 to the Successor Trustee upon his resignation. Yet if Cox’s fee of $45,496.07 is allowed the possibility exists that Cox could receive a higher fee than Rice, who will probably serve three times longer and shoulder the administrative burden of the estate’s forty-six plus adversary proceedings and the claims review process for the more than one hundred claims filed in the case. Until the case is fully administered, the actual result cannot be determined. At this point, under Cox’s interpretation of Section 326(a), Rice will have to recover an additional $1,084,071.91 to disburse $1,413,149.67 to creditors to be entitled to receive the same fee amount as that requested by Cox.
In summary, two trustees will share one aggregate trustee fee in circumstances where the Successor Trustee will ultimately provide more administrative services than the Former Trustee. Considering these facts, the Court concludes that extraordinary circumstances exist to rebut the presumption of reasonableness of the trustee fee being requested by Cox. The next issue to be determined is whether there is a rational relationship between the requested commission and the services actually rendered.8 In re Rowe, 750 F.3d at 399; In re Salgado-Nava, 473 B.R. at 921.
In this case, there is little evidence linking the fees requested by Cox with the services rendered for the benefit to the estate. Cox introduced Petitioner’s Exhibit 1 showing all receipts and disbursements made during his tenure as trustee. This was the only documentary evidence introduced at the hearing and it clearly reflected that $619,251.39 of the $844,921.31 Cox disbursed came from funds the debtor-in-possession turned over to Cox on June 2, 2015, after conversion from Chapter 11 to Chapter 7. The trustee commission on disbursing the $619,251.39, alone, under Cox’s “first in, first out” theory under Section 326(a), generated $34,212.57 (all but $11,283.50) of the requested fee amount. Yet Cox expended minimal effort to obtain these funds, all of which were paid to a secured creditor or to the bank for technology and service fees. The Court notes that a trustee who “merely disburses funds from the debtor’s bank account” may still earn fees at the statutory cap if the “determination of claims was complex.” In re McKinney, 383 B.R. at 495. However, if Cox encountered any complication in determining the claims paid it is not apparent from this record.
*105The Court also notes that the result might be different if Cox had continued to serve as trustee in this case. In the circumstance where one trustee functions throughout a case and distributions total more than $1,000,000.00, the trustee’s later distributions would generate a trustee fee paid at a lower percentage rate to counter the higher percentage rates on earlier distributions. Had Cox remained in the case, the higher percentages attributable to the first distributions would have been balanced by the lower percentage used on later distributions. In the instant case, however, the higher rates will be countered with the lower rate on fees paid to Rice, not Cox. At the same time, Rice will be required to expend numerous administrative hours to fulfill his duties as Successor Trustee including the review of the claims, preparation of required reports, duties attendant to being plaintiff in the numerous adversary proceedings, making distributions, and filing his final report.
Cox argues that he should be paid in accordance with the statutory language allowing the greatest fee rate for the first disbursements and that this is the way initial and successor trustees have historically been compensated in.this District. However, applying this interpretation of the formula to a case with two trustees has the potential to distort the statute’s purpose and result in payments that overcompensate the first trustee and undercom-pensate the second trustee. Consequently, neither is reasonably compensated as required by Sections 326 and 330. Reasonableness, not historic practice, is the standard the Court must uphold.
Based on the foregoing, the Court determines that Cox’s fee application in the amount of $45,496.07 will be denied because of the extraordinary circumstances created by the facts in this case and the lack of any evidence of a rational relationship between the fees Cox requested and the services he rendered.
Apportionment of Fees
Cox’s Application for fees calculated at the maximum rate having been denied, the remaining question is how to compensate .Cox and Rice for the services rendered or to be rendered in the case. At the hearing, Rice proposed that the Court adopt the reasoning in In re Calhoun, a case dealing with compensating initial and successor trustees in a single Chapter 7 case. In re Calhoun, 430 B.R. 536 (Bankr. W.D. Wis. 2010).
The Calhoun court began its analysis by recognizing two important principles. First, the sliding scale in Section 326(a) represents the maximum compensation to be awarded. Second, regardless of the number of trustees serving in a case, “ ‘the aggregate compensation ... may not exceed the maximum compensation prescribed for a single trustee.’” Id. at 537 (quoting 11 U.S.C. § 326(c) (2012)).
In Calhoun, the initial trustee’s position was the same as Cox’s, which was that he should receive fees based on his distributions and that the successor trustee “simply picks up where the first trustee leaves off.” Id. at 538. The court observed that its research revealed no case that followed this method suggesting that this “silence may be explained by the inequitable results of this approach.” Id. The court also rejected the approach whereby each trustee would be entitled to fees under the Section 326(a) formulas without reference to the other’s work. Id. at 538 n.l. The court explained this approach is prohibited by Section 326(c), which provides that the aggregate fees for two trustees may not exceed the maximum prescribed for a single trustee. Id.
The Calhoun court resolved the issue by treating the trustee commission as a pot of *106money to be divided after the ease concludes and total disbursement amounts are known. Id. at 538 (citing Gold v. Guberman (In re Computer Learning Ctrs., Inc.), 407 F.3d 656 (4th Cir. 2005); In re Frost, 214 B.R. 295 (Bankr. S.D.N.Y. 1997)); see also In re Arius, Inc., 237 B.R. 843, 847 (Bankr. M.D. Fla. 1999) (concluding the “proper method of calculating a trustee fee cap involving the service of more than one trustee within a single chapter of the Bankruptcy Code is to include all disbursements in the case”). The aggregate trustee fee can then be calculad ed under the Section 326(a) formula based on total distributions in the case, and “each trustee is entitled to a pro rata share of this sum.” In re Calhoun, 430 B.R. at 538. The trustee’s pro rata share is calculated by dividing each trustee’s distributions by the total amount distributed in the case. Rice contends that this method based on disbursements is preferable to basing fees on time spent, which can be burdensome since it requires that the trustee keep time records for his administrative services in the case.
The Court agrees that, considering all the methods for compensating two trustees in a single case, the approach taken by the Calhoun court is the most equitable way to apportion the aggregate trustee fees between Cox and Rice, given the. facts and circumstances of this case. Additionally, calculating compensation due two trustees based on total distributions conforms to the fee cap of Section 326 and the standard of reasonableness of Section 330.
The Court adopts the method used by the court in In re Calhoun and concludes that the fees for the trustee services due Cox and Rice will be apportioned according to the Calhoun method. As the Calhoun decision recognizes, this method will typically require waiting until the end of the case when all disbursements have been made for the compensation amounts to be determined. Id. at 538; see also In re Frost, 214 B.R. at 297 (stating because Chapter 7 trustee fees are contingent on the total disbursements made, it can be argued that an interim trustee cannot be fully compensated until the case is closed (citing 3 Collier on Bankruptcy ¶ 326.03[l][a] (15th ed. 1996))). Under the facts of the case before the Court, the parties do not dispute that a delay in the distributions may be necessitated by other factors as well.
CONCLUSION
The Court determines that, based on the facts of this case, the aggregate trustee compensation should be calculated under the Section 326(a) formula based on total distributions in the case, and each trustee is entitled to a pro rata share of this sum. Each trustee’s pro rata share will be calculated by dividing the trustee’s distributions by the total amount distributed in the case. This method is determined by the Court to be the most equitable basis for allocating the aggregate trustee fee available under Section 326(a). Therefore, the Application is granted, in part, as to the expenses requested in the amount of $2,923.64. The Application is denied as to the trustee fees requested in the amount of $45,496.07. At the conclusion of the case, Cox may resubmit an amended application with fees calculated pursuant to the pro rata method outlined above.
IT IS SO ORDERED.
, The Application also seeks reimbursement of expenses in the amount of $2,923.64. Rice does not object to the allowance of the expenses.
. The record does not reflect the basis for his resignation.
. There are no check numbers associated with the bank and technology service, fees.
. Rice stated that over one hundred proofs of claims have been filed in this case, and the examination of those claims has yet to be completed.
.In addition, Section 330(a)(3), although no longer directly applicable to compensation for Chapter 7 trustees, provides a list of factors for courts to consider in determining the reasonableness of compensation for Chapter 11 trustees, examiners, and professional persons. Section 330(a)(3) was amended in 2005 to apply specifically to Chapter 11 trustees without reference to trustees in cases filed under other chapters. Prior to the amendment, the factors applied to compensation for all trustees regardless of chapter. Accordingly, following the amendment, courts have found Section 330(a)(3) "immaterial in determining the compensation for a Chapter 7 trustee.” In re Rowe, 750 F.3d 392, 396 (4th Cir. 2014); see also Hopkins v. Asset Acceptance LLC (In re Salgado-Nava), 473 B.R. 911, 919 (9th Cir. B.A.P. 2012) (stating the factors of Section 330(a)(3) “no longer directly apply to chapter 7 trustees”); 3 Collier on Bankruptcy ¶ 330.02[l][a] (Alan N, Resnick & Henry J. Sommer eds., 16th ed.) (stating the 2005 Amendments "changed the legal framework ... by excluding chapter 7 trustees from the entities subject to the mandatory application of the factors listed in section 330(a)(3).”) Nevertheless, some courts have continued to apply various factors, similar to the factors listed in Section 330(a)(3), in considering the reasonableness of compensation awards to Chapter 7 trustees if such application is warranted by the facts and circumstances of the case. See, e.g., In re Clemens, 349 B.R, at 732.
. The requirement of "extraordinary circumstances” is not statutory; it is borrowed from the U.S. Trustee's policy of refraining from objecting to "maximum commissions for chapter 7 trustees except in 'extraordinary circumstances.’” In re Scoggins, 517 B.R. 206, 215 (Bankr. E.D. Cal. 2014) (citing U.S. Trustee, Handbook for Chapter 7 Trustees, ch. 2-1 at 39; In re Rowe, 750 F.3d at 397; In re Salgado-Nava, 473 B.R. at 922 n.16). As the court in Scoggins points out, the U.S. Trustee’s policy lacks the force of law. Id.
. According to the court in In re Salgado-Nava, this analysis "may, but need not necessarily include, the § 330(a)(3) factors and a lodestar analysis.” In re Salgado-Nava, 473 B.R. at 921.
. This inquiry is similar to an alternate view of Section 330(a)(7) that focuses on whether the fees are disproportionate to the benefit of the services provided. Cases following this view often consider the lodestar or Johnson factors as an aspect to be considered along with the other facts and circumstances of the particular case. See, e.g. In re Clemens, 349 B.R. at 730-31. | 01-04-2023 | 11-22-2022 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.