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https://www.courtlistener.com/api/rest/v3/opinions/8500589/ | HUMPHREY, J.,
filed the opinion of the Bankruptcy Appellate Panel in which PRESTON, C.J., joined. WISE, J. (pp. 21-23), filed a separate opinion concurring in the result. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500590/ | CONCURRENCE
TRACEY N. WISE, Bankruptcy Appellate Panel Judge,
concurring in the judgment.
The Rooker-Feldman doctrine precluded the bankruptcy court from reviewing the merits of the state court’s in rem judgment. This conclusion ends the analysis. As a result, I write separately to concur with the majority’s result, but to respectfully disagree with its reasoning and the scope of its opinion.
Without subject matter jurisdiction, the majority engages in a merits analysis much like the bankruptcy court’s analysis to which it assigned error. Reasoning that “the unusual facts of this case do not lend themselves to a straight-forward application of’ Hamilton v. Herr (In re Hamilton), 540 F.3d 367 (6th Cir. 2008) (see supra pp. 144-45), the majority misconstrues the discharge injunction and the inquiry authorized by Hamilton. Bearing in mind Hamilton’s admonition that state courts may construe the discharge injunction if they do it properly, Hamilton’s. application to these “unusual facts” must begin with a review of what the discharge enjoins.
In Hamilton, there was no dispute that the debt at issue was unsecured and that the creditor obtained a judgment of personal liability against the debtor for a pre-petition debt covered by hid discharge order in violation of 11 U.S.C. § 524(a). But, as the majority recognizes in passing, “there are only two things that a discharge actually does: it voids judgments and it enjoins collection of claims as a personal obligation of the debtor.” In re Livensparger, Case No. 12-10361, 2015 WL 1803922, at *3, 2015 Bankr. LEXIS 1427, at *10 (Bankr. W.D. Mich. Apr. 17, 2015). “Actions against a debtor in rem do not violate the discharge injunction.” In re Black, Case No. 09-78266, 2014 WL 690159, at *3, 2014 Bankr. LEXIS 682, at *1 (Bankr. E.D. Mich. Feb. 14, 2014).
The Judgment in the instant matter did not seek to impose personal liability against Debtor Linda Isaacs for a discharged debt. Rather, the state court lawsuit sought to foreclose on a mortgage lien on Debtor’s property, and a discharge under § 524 does not affect an in rem judgment against a debtor’s property related to a pre-petition lien. Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) (“[T]he Code provides that a creditor’s right to foreclose on the mortgage survives or passes through the *152bankruptcy. See 11 U.S.C. § 522(c)(2).”); cf. 4 Collier on Bankruptcy ¶ 524.02[1] (Alan N. Resnick & Henry J. Sommer eds,, 16th ed. 2011) (“[A] creditor may enforce a prepetition judgment lien after the discharge, if the automatic stay is no longer in effect and the lien has not been avoided, paid, or modified so as to preclude enforcement.”).
The bankruptcy court held that the chapter 7 discharge order discharged the mortgage debt at issue. It then made another determination regarding the attendant mortgage lien based on this statement in the subject mortgage; “The lien of this Mortgage will attach on the date this Mortgage is recorded,” (Mem-Op. at 4-7, ECP No. 77.) Relying on this language, the court concluded:
[T]he debt & question was unsecured by virtue of GMAC’s failure to record the Second Mortgage prior to Debtor’s petition and [ ] it was discharged at the time Debtor concluded her 2004 Chapter 7 case, The Circuit Court judgment served as an improper modification of this Court’s discharge order, and, as a result, the Rooker-Feldman doctrine does not apply. This Court, therefore, grants summary judgment in favor of Debtor and finds the Circuit Court judgment void ab initio as it relates to the debt in question.
(Id. at 2.) In reaching its conclusion, however, the bankruptcy court did not distinguish between personal liability and an in rem action.
The majority takes issue with the bankruptcy court’s conclusion regarding the validity of the unavoided lien and finding of a discharge violation. To that end, the majority focuses attention on matters outside its subject matter jurisdiction. The state court here, unlike the state court in Hamilton, did not assess personal liability against Debtor in violation of the discharge injunction — it merely addressed the validity . of a lien, a state law determination made in all in rem foreclosure actions. The majority’s reasoning suggests the bankruptcy courts can serve as an appellate court over every foreclosure action under the rationale that an otherwise permissible in rem action may violate the discharge injunction if the lien is deemed invalid. Under this reasoning, the Hamilton exception swallows the Rooker-Feldman rule.
Finally, while the procedural posture of the underlying action is unusual, what is not unusual is that a creditor violated the automatic stay. The bankruptcy code provides remedies for such violations. See 11 U.S.C. § 362(k). A debtor in this circumstance may pursue the available remedy for a violation of the automatic stay, but may not seek federal appellate review of a state court’s in rem judgment.1
I concur with the majority’s ultimate holding that the bankruptcy court lacked subject matter jurisdiction under the *153Rooker-Feldman doctrine. But I respectfully disagree that the Hamilton exception authorized either the bankruptcy court or the majority to engage in a contract interpretation analysis where the state court action adjudicated only in rem relief and not personal liability against Debtor for a discharged debt.
. Nor am I persuaded by the law or reasoning proffered by the majority to support the proposition that "post-discharge in rem conduct may violate Code § 524(a) and the debtor’s discharge.” (See supra p. 145 n.8.) First, a creditor’s action cannot be deemed in rem when the debtor owns no real property. See Jarrett v. Ohio (In re Jarrett), 293 B.R. 127 (Bankr. N.D. Ohio 2002); In re Norvell, 198 B.R. 697 (Bankr. W.D. Ky. 1996); In re Blakely, Case No. 13-50069 2013 Bankr, LEXIS 5474 (Bankr. E.D. Ky. Mar. 27, 2013). Emelity addressed a lien awarded post-petition in a domestic dispute. In re Emelity, 251 B.R, 151 (Bankr. S.D. Cal. 2000). None of these cases apply to a consensual prepetition mortgage on real property and a post-petition action to enforce that mortgage. Finally, Breul was procedurally a stay violation action — the precise remedy available to Mrs. Isaacs, In re Breul, 533 B.R, 782 (Bankr. C.D. Cal. 2015). The bankruptcy court did not "determine whether the foreclosure judgment impaired Isaacs’ discharge” as the majority contends (see supra pp. 150-51); rather, it revisited the state court’s determination of the Mortgage's validity.
*153Simply stated, a bankruptcy court does not have subject matter jurisdiction to revisit a state court’s in rem judgment concerning a lien’s validity under the auspices of a Hamilton exception. A bankruptcy court, however, may entertain an avoidance action or a stay violation action in such circumstances. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500591/ | OPINION REGARDING TIMELINESS OF CREDITOR ROBERT MITCHELL’S PROPOSED POST-CONFIRMATION PLAN MODIFICATION
Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction
This Chapter 13 case presents a question about the meaning of Bankruptcy *154Code § 1329(a). That section permits certain types of modifications of a confirmed Chapter 13 plan to be made, “[a]t any time ... before the completion of payments under such plan.” 11 U.S.C. § 1329(a). If a proposed plan modification is filed and served before a debtor completes her payments under the confirmed plan, but a timely objection to the modification is filed and not ruled on until after the completion of such payments, does the above phrase in § 1329(a) mean that the modification is untimely? The Court concludes that the answer to this question is “no.”
II. Background
This case came before the Court for a hearing on May 18, 2017, on creditor Robert Mitchell’s proposed post-confirmation plan modification (Docket # 113, the “Plan Modification”). The Debtor timely objected to the Plan Modification. One of the issues discussed during the hearing which the Court must decide concerns the timeliness of the Plan Modification. The issue is whether, as the Debtor argues, the Court must disapprove the Plan Modification because “the completion of payments under” the Debtor’s confirmed plan has occurred, within the meaning of 11 U.S.C. § 1329(a).
At the May 18 hearing, the Debtor’s attorney argued that the Debtor had completed her payments under the confirmed plan. The Chapter 13 Trustee agrees that this is so. In a status report filed on May 24, 2017, the Trustee reported that the Debtor completed all required payments under the confirmed plan on May 17, 2017.1 While that date was one day before the May 18 hearing on the plan modification, it was well after the date on which creditor Robert Mitchell filed and served his Plan Modification — March 21, 2017.2 The question is whether that fact — that the Plan Modification was filed and served before the Debtor completed all payments required by the confirmed plan — is sufficient to make the Plan Modification timely under § 1329(a). Or, is the Plan Modification untimely under § 1329(a) because the Debtor completed her required plan payments before the Court has ruled on (approved or disapproved) the Plan Modification?
Confirming action taken during the May 18 hearing, the Court entered an order on May 19, 2017, allowing the Debtor, the Chapter 13 Trustee, and creditor Robert Mitchell each to file a list of any cases they want the Court to consider, regarding this time-bar issue.3 The Debtor timely filed a list of three cases, which are discussed below.4 Neither the Trustee nor creditor Robert Mitchell filed a list of cases. The Court has reviewed the cases cited by the Debtor on this issue, and the Court has conducted its own legal research.
III. Discussion
The Court now decides this time-bar issue, and rules in favor of creditor Robert Mitchell on the issue. His proposed Plan Modification is not time-barred under § 1329(a).
Section 1329(a) provides that “[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim .... ” 11 U.S.C. § 1329(a). Section 1329(b)(2) says that “[t]he plan as modified becomes *155the plan unless, after notice and a hearing, such modification is disapproved.” 11 U.S.C. § 1329(b)(2).
The Court concludes that the critical date for purposes of timeliness is when the proposed plan modification is filed, rather than when the Court later rules on any objections to the modification. As the United States Court of Appeals for the Seventh Circuit has explained:
Although § 1329(a) states that the plan “may be modified” only within the prescribed time, when this language is read in the context of § 1329 as a whole, it is clear that it is referring to the time when the modification may be requested, not to the time within which the bankruptcy court may approve the modification. ... [Section 1329(b)(2)] means that the modification is effective, i.e., that the plan is modified, on the date the party requests modification of the plan, unless the court later disapproves it.
Germeraad v. Powers, 826 F.3d 962, 969 (7th Cir. 2016) (citation omitted). In Ger-meraad, the trustee filed a motion to modify the debtors’ confirmed chapter 13 plan after discovering that their income had increased significantly. The bankruptcy court denied the motion and the trustee appealed, first to the district court and then to the United States Court of Appeals for the Seventh Circuit. By the time the court of appeals heard the case, the debtors had completed making their plan payments, and they argued that the appeal was moot because modification was no longer permitted under § 1329(a). The court of appeals disagreed, explaining that “if we were to vacate the bankruptcy court’s order disapproving the modification, then by operation of § 1329(b)(2), the modified plan would be reinstated and deemed effective as of the date it was filed. ... The modification thus would have occurred within the time period specified in § 1329(a).” Id.
The United States Court of Appeals for the Fifth Circuit came to a similar conclusion, in Meza v. Truman (In re Meza), 467 F.3d 874 (5th Cir. 2006). In that case, the trustee filed a motion to modify the Chapter 13 debtors’ confirmed plan. But one month before the scheduled hearing on the modification, the debtors paid the balance of their plan in full with a lump sum payment to the trustee. The debtors then argued that the trustee’s proposed modification should be denied as untimely under § 1329(a). The bankruptcy court and district court agreed. But the court of appeals reversed. That court reasoned:
Here, Trustee filed a proposed modification prior to Debtors’ attempt to pay the plan balance. Obviously Debtors’ making their final payment did not nunc pro tunc make untimely that modification filing. Because the modification was timely filed, and would become effective after the notice period unless disapproved, it precluded Debtors from making their final payment under the earlier confirmed plan.
Id. at 879; see also Profit v. Savage (In re Profit), 283 B.R. 567, 574 (9th Cir. BAP 2002) (“the bankruptcy court correctly held that Trustee’s motion [to modify the Chapter 13 plan] was timely filed, pursuant to § 1329(a), because the plan payments had not been completed at the time the motion was filed .... ”).
The Court agrees with the reasoning and holdings of these cases. In this case, creditor Robert Mitchell filed the Plan Modification before the Debtor completed all required payments under the confirmed plan. The Debtor’s later completion of the plan payments did not make creditor Robert Mitchell’s modification untimely. This conclusion is supported by the language of § 1329(b)(2), which would deem the date of *156Mitchell’s modification of the plan to be the date the modification was filed, unless the Court later disapproved it, 11 U.S.C. § 1329(b)(2), and the date of such filing (March 21, 2017)-was well before the Debt- or completed her payments under the existing confirmed plan (May 17, 2017). So Mitchell’s Plan Modification is not untimely under § 1329(a).
None of the three cases cited by the Debtor support her argument. The Debtor cited the Gemeraad and Meza cases, discussed above, but these cases undercut the Debtor’s argument. And the Debtor cited the case of In re Salva, No. 03-09405(ESL), 2009 WL 2898822 (Bankr. D.P.R. Apr. 1, 2009). That case is unlike this case, however, and does not support the Debtor’s argument. Salva merely held that a Chapter 13 trustee’s proposed plan modification was untimely because the plan modification was filed after the debtors completed their payments under the confirmed plan. See id. at *4
The Court acknowledges that at least two cases support the Debtor’s argument, but the Court finds the Gemeraad, Meza, and Profit cases cited above to be more persuasive. In In re Brown, 378 B.R. 416 (6th Cir, BAP 2007) (unpublished), the debtors filed a motion to modify the plan before plan payments were complete. The motion was denied and the debtors appealed. But the debtors completed their plan payments and were granted a discharge before the appeal was decided. The court ruled that the appeal had become moot because payments had been completed and the plan could no longer be modified under § 1329(a). Id. at *3. As support for its decision, the court cited the Meza and Profit cases, described above. Id. But as explained above, those cases actually support this Court’s interpretation of § 1329(a) (and § 1329(b)(2)).
The case of In re Torres, 336 B.R. 839 (Bankr. M.D. Fla. 2005) supports the Debtor’s position. In that case, the debtor filed a claim objection seeking to reclassify a secured claim as unsecured. One month later, before the objection was decided, the debtor completed the plan payments. The court viewed the claim objection as a proposed plan modification, and ruled that “[rjeclassification of a claim ... is not allowed after the debtor has made all payments under the confirmed plan and is explicitly precluded under the plain language of Bankruptcy Code Section 1329(a).” Id. at 842. Again, however, the cases relied upon by the Torres court for its decision do not support this conclusion. Each of the cases cited by Torres addressed a motion to modify a plan that was filed after the plan payments had been completed.
The Court respectfully disagrees with the Brown and Torres cases, to the extent they are inconsistent with the Court’s ruling in this opinion.
IV. Conclusion
For the reasons stated in this opinion, the Court concludes that creditor Robert Mitchell’s Plan Modification is not time-barred under § 1329(a). The Debtor has made other arguments in objecting to the Plan Modification, so other issues remain to be decided. As previously ordered, the Court will hold a further hearing on the Plan Modification on June 22, 2017 at 2:00 p.m;
. "Trustee’s Report Regarding The Status of Case,” filed May 24, 2017 (Docket # 139) at 2 ¶ 3.
. Docket ##113, 114.
. Docket # 138 at 1 ¶ 2.
. Docket #143. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500593/ | MEMORANDUM OPINION REGARDING DEBTOR’S MOTION TO AVOID JUDGMENT LIEN OF CRP HOLDINGS A-l, LLC UNDER § 522(F)(1)
Cynthia A. Norton, United States Bankruptcy Judge
This matter is before the court on remand from the Eighth Circuit. This court granted the motion of Casey D. O’Sullivan, a Chapter 7 debtor, to avoid a judgment lien of CRP Holdings A-l, LLC pursuant to 11 U.S.C. § 522(f)(1), and CRP appealed.1 The Eighth Circuit bankruptcy appellate panel affirmed this court, noting however, that it had “serious doubts” about whether CRP had an enforceable lien at all.2 The Eighth Circuit reversed, reasoning that this court had assumed CRP held a cognizable judicial lien under applicable Missouri law.3 On remand, the Eighth Circuit directed this court to “determine whether; CRP has a judicial lien on the property (either enforceable or unenforceable).” 4 The 'parties have briefed the issue and the court is ready to rule.
Findings of Fact
The facts are not disputed, and are re- , stated only for purposes of background.
CRP obtained a default judgment against the Debtor in Platte County, Missouri Circuit Court. Three weeks later, CRP recorded the judgment in Barton County, Missouri, where the Debtor re*165sides with his wife. When the Debtor filed Chapter 7 bankruptcy shortly thereafter, he claimed his Barton County home, owned jointly with his nonfiling spouse, as exempt under the Missouri homestead exemption5 and the doctrine of tenancy by the entireties (“TBE”). He also filed a motion to avoid CRP’s judgment lien. CRP objected to the motion, arguing that because its judgment lien did not attach to the exempt TBE property, the lien did not impair the TBE exemption and thus could not be avoided under § 522(f)(1). Contradictorily, CRP also argued it would be harmed if the court avoided its lien, since it intended to enforce its lien against the Debtor’s property when and if the Debt- or’s spouse died. In the interim, CRP did not object to the discharge of its debt, and the Court entered a discharge order in due course.
In its opinion, the Eighth Circuit noted that it, like the BAP, had serious doubts about whether CRP had a lien that affixed to the Debtor’s real property.6 Although recognizing the broad definition of “judicial lien” in 11 U.S.C. § 101(37), the Eighth Circuit observed that Missouri narrowly defines “real estate” — for purposes of whether a judgment constitutes a lien against real estate — as an interest in property “liable to be sold upon execution.”7 Citing cases from Missouri and other states recognizing TBE, the Court pointed that there is thus “a strong argument that CRP did not obtain any lien on the property.”8 The Court recognized a distinction between unenforceable and nonexistent liens, however, expressly agreeing with the BAP that an unenforceable lien would nonetheless be avoidable under § 522(f)(1). The Court concluded by directing the parties to only one of two possible results on remand:
In sum, if under Missouri law CRP’s notice of foreign judgment failed to give rise to a lien on [the Debtor’s] exempt homestead property, the debt would have been dischargeable through the bankruptcy proceedings. [The Debtor] would then not need to resort to § 522(f) to avoid CRP’s judgment. Alternatively, [the Debtor] could move to avoid the lien under § 522(f)(1) if CRP’s notice of foreign judgment fastened an existent, but presently unenforceable, lien on his exempt property.9
Discussion
Notwithstanding the clear choice behind Door No. 1 or Door No. 2, CRP attempts to convince this Court that the Eighth Circuit left open a Door No. 3: a path to allow CRP to escape avoidance of its lien now, only to have that lien magically appear and attach to the Debtor’s “survivor-ship interest” in the home upon the Debt- or’s spouse’s death. CRP’s .argument is outside the scope of the remand and lacks all merit.
First, both of the higher courts in this case were correct to surmise that CRP’s judgment was not an enforceable lien against the Debtor’s TBE property under Missouri law when the- Debtor filed bankruptcy. In fact, Missouri courts have recognized continually since at least 1895 that a judgment does not create a lien against an entirely exempt homestead property based on Missouri’s definition of *166“real estate” as property “liable to be sold upon execution.”10
Second, the reason this court assumed CRP had a cognizable and avoidable lien under § 522(f)(1) is that CRP treated its judgment as a lien. That is clear from CRP’s actions here, in recording the judgment lien as a foreign judgment in the county where the Debtor owned his exempt home and in challenging the lien avoidance on contradictory grounds.
CRP’s actions are also consistent with how other parties to a real estate transaction — buyers, sellers, lenders, and most importantly, title companies — treat judgments post-discharge, as liens to be cleared before a transaction may proceed. In the court’s experience, seasoned debtors’ counsel err on the side of caution by filing appropriate § 522(f)(1) lien avoidance motions. When they do so, they may avoid exactly what is happening in this case now — expensive and protracted arguments about whether or not the judgment is a lien.11 In effect, an unavoided but unenforceable judgment lien gives a judgment creditor post-discharge leverage; if a debtor does not pay something, the judgment lien creditor may not cooperate by releasing the worthless lien that never attached in the first place. The alternative— a rush to bankruptcy court to reopen the bankruptcy case to obtain an order avoiding the lien before the buyer, seller, lender or title company backs out of the proposed transaction — is a similarly unpalatable option.12
CRP thus did not have a judgment lien against the Debtor under Missouri law when the Debtor filed his chapter 7 bankruptcy case. But that does not, however, end the inquiry. As the Eighth Circuit points out, the Bankruptcy Code in § 101(36) defines a judicial lien as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Likewise, the Bankruptcy Code defines what is a “lien”: “[t]he term ‘lien’ means charge against or interest in property to secure payment of a debt or performance of an obligation.”13 And with the filtering lens of these definitions, the court then looks to applicable state law to see if a-particular judgment constitutes a “judgment lien” within the meaning of the Bankruptcy Code.
There is no question that a judgment, even against entirely exempt TBE property, may constitute a “cloud” against title. The question is whether a “cloud” may constitute an “interest in property” under Missouri law such that the “cloud” may be considered a “lien” and thus avoided as a “judicial lien” for purposes of overriding *167bankruptcy law. Although other states may treat “clouds” differently, under Missouri law, a judgment against TBE property is a cloud that gives rise to an “interest in property” such that it may be avoided under § 522(f)(1).
The Mahen14 case illustrates the point. Mahen has convoluted facts, but, in essence, an estranged husband and wife each attempted to convey their interests in their TBE property, the husband by conveying the property to his children, and the wife by executing a temporary alimony order against the property. At the execution sale, the wife’s agent colluded with the sheriff to have a sheriffs deed issued in the name of the agent’s clerk for no consideration; forged the wife’s name on a deed; and had his clerk mortgage the property to a third party. The third party subsequently sought to foreclose the deed of trust. In the subsequent equitable action by the husband, wife and children15 to enjoin the foreclosure and set aside the fraudulent sheriffs deed and deed of trust, the defendants argued that plaintiffs had an adequate remedy at law such that no grounds for equitable relief existed. The circuit court agreed, and dismissed the suit. On appeal, the Missouri Supreme Court reversed.
The Missouri Supreme Court observed that it was true the husband’s conveyance and the wife’s judgment were void in that neither was effective as against the TBE property, such that they had an adequate remedy at law. Nonetheless, the Court said the question “is whether all these void instruments are a cloud upon the title which would warrant the interposition of a court of equity.”16 The Court focused on the practical difficulties of a party examining the respective conveyances and judgment to determine if they were void or not:
Here the title was held by the entireties. To the ordinary abstracter, or to the lay mind, a distinction might not be discovered between a deed by the entireties and a joint tenancy or a tenancy in common. Certain words might change the entire effect of the instrument. Here was a conveyance, regular on its face, made by [husband], and purporting to convey his interest. Here was a deed, regular on its face, which purported to convey the interest of [wife]. Here was a sheriffs deed reciting a judgment and execution in due form. So far as the record shows, the casual observer would not penetrate the difference and ascertain that all these conveyances were void from the inability of the owners to convey .... We think the record sufficiently shows a cloud upon the title to warrant the interposition by a court of equity.17
The same practical difficulties observed by the Missouri Supreme Court in 1922 exist today. The clerk who accepted CRP’s judgment for recording in Barton County would not know if the judgment created a lien or not. An abstractor or title company would not know if the Debtor’s real estate was “liable to be sold on execution.” Perhaps, although the deed said “husband and wife,” they were not married at the time? Perhaps the four unities of *168title18 did not exist at the time the Debtor and his wife acquired the property, such that the TBE presumption might be defeated? Perhaps the Debtor (or his wife) had taken some other action to sever the tenancy? Perhaps one or the other had died? Perhaps the homestead had been abandoned as of the time the judgment was recorded? Indeed, Missouri also recognizes that although a judgment lien does not attach to an exempt homestead, it will attach “the moment” the cover of the homestead is removed if the real estate is abandoned.19
If a Missouri judgment is a “cloud” sufficient to give Missouri courts jurisdiction to remove it even though the judgment gives rise to no lien and all attempts to execute on it as against an exempt property are void; if a Missouri judgment has sufficient force to spring “in a moment” to become a lien, then it certainly must be said to give the judgment creditor “an interest in property.” The Eighth. Circuit expressly held that the Debtor “could move to avoid the lien under § 522(f)(1) if CRP’s notice of foreign judgment fastened an existent, but presently unenforceable, lien on his exempt property.20
Given that CRP’s judgment could become a lien the moment the Debtor vacates the property or his spouse dies, this court concludes that CRP’s notice of foreign judgment “fastened an existent, but presently unenforceable lien” properly avoided under § 522(f)(1). In the alterná-tive, under Missouri law, the recording of CRP’s judgment in Barton County where the Debtor’s exempt real estate was located vested CRP with “an interest in property” as a result of the otherwise unenforceable judgment, such that its resulting “judicial lien” as defined by the Bankruptcy Code should likewise be avoided under § 522(f)(1).
CRP attempts to avoid this result by citing to a case applying Tennessee law, In re Arango.21 Although CRP’s argument is exceedingly difficult to follow, the court understands it thusly: we have no judgment lien on any “present possessory interest” of the Debtor; we do have a lien on Debtor’s future “right of survivorship”; and because our lien is not avoidable now, it has survived the discharge such that we can — as of a moment, perhaps? — spring it on the Debtor if his wife dies.
Whether or not Arango reached the correct result under Tennessee law, the Debt- or here is correct that Arango does not apply. First, this argument is a “Door No. 3 argument” that is outside the scope of the remand.
Second, and more importantly, Missouri law does not recognize the “right of survivorship” as being a different title or right than the original TBE interest. Rather, Missouri law is clear that upon the death of one of the TBE tenants, the surviving tenant “does not acquire new title, but holds only the same title he or she took in the beginning ....22
*169
Conclusion
The Bankruptcy Code recognizes only three types of mutually exclusive liens — consensual, statutory, and judicial.23 Debtors’ powers to avoid judicial liens that would otherwise encumber their exempt property are crucial to preserving those debtors’ fresh start.24 The reason these powers are crucial is vividly illustrated here — a judgment creditor with admittedly no enforceable lien and a discharged debt has nonetheless held up this Debtor’s fresh start for almost two years and continues to threaten to do so — notwithstanding more than 120 years of unbroken Missouri law proclaiming that it has no enforceable rights against this Debtor’s property. Even if this court is wrong in its interpretation of Missouri law, §§ 101(36), (37), and 522(f)(1) should be broadly construed under § 105(a) in favor of a debtor’s fresh start — and the bankruptcy court given the same equitable powers the Missouri courts recognize to ensure that CRP does not unduly leverage this Debtor or his fresh start in the future.25
A separate order will issue. ■
. In re O'Sullivan, No. 15-30173, 2015 WL 3526996 (Bankr. W.D. Mo. June 4, 2015).
. In re O’Sullivan, 544 B.R. 407, 412 n.5 (8th Cir. BAP 2016).
. In re O'Sullivan, 841 F.3d 786 (8th Cir. 2016).
. Id. at 790.
. Mo. Rev. Stat. § 513.475 allows a $15,000 homestead exemption.
. O'Sullivan, 841 F.3d at 789.
. /d/citing Mo. Rev. Stat. § 511.010).
. Id.
. In re O'Sullivan, 841 F.3d at 790.
. See, e.g., Macke v. Byrd, 131 Mo. 682, 33 S.W. 448 (Mo. 1895); Smith v. Thompson, 169 Mo. 553, 69 S.W. 1040 (Mo. 1902); Mahen v. Ruhr, 293 Mo. 500, 240 S.W. 164 (Mo. 1922); Baker v. Lamar, 140 S.W.2d 31 (Mo. 1940). Mo. Rev. Stat. § 511.010 and its predecessors have contained the same language defining "real estate” since at least 1895.
. These lien avoidance motions are routinely filed even against judgments arising out of an associate circuit court, which by statute do not create liens in Missouri. The form for doing so is often part of the software package for filing the bankruptcy case, as was the form lien avoidance filed in this case.
. The filing fee to reopen a Chapter 7 bankruptcy case is currently $260. In this district, a motion to reopen requires a 21-day notice, unless expedited. L.R. 1017-l.E., L.R. 5010-1. A motion to avoid a judgment lien is typically granted withopt a hearing if properly served and no party objects within 14 days. Note that lien avoidance motions under § 522(f) are governed by Fed. R. Banlcr. P. 4003(d), which treats them as contested matters under Rule 9014, and not as adversary proceedings under Rule 7001. See Fed. R. Bankr. P. 7001(2).
. 11U.S.C. § 101(37) (emphasis added).
. Mahen v. Ruhr, 240 S.W. at 166.
. The suit was originally brought by the husband, then a child and his trustee were joined as co-plaintiffs. The suit is captioned in the name of the wife, however, and it is not clear in the opinion how or when she became a plaintiff.
. Mahen v. Ruhr, 240 S.W. at 166.
. Mahen v. Ruhr, 293 Mo. 500, 240 S.W. 164, 166 (Mo. 1922).
. In re Brewer, 544 B.R. 177, 181 (Bankr. W.D. Mo. 2015) (interest, title, time, and possession),
. Smith v. Thompson, 169 Mo, 553, 69 S.W. 1040, 1042 (Mo. 1902) .(emphasis added).
. O'Sullivan, 841 F.3d at 790 (emphasis added).
. 992 F.2d 611 (6th Cir. 1993).
. Frost v. Frost, 200 Mo. 474, 98 S.W. 527, 528 (Mo. 1906) (the title is held "freed of the contingency," the contingent prospect of "owning it all,”)
. E.g., Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 114 L.Ed.2d 337 (1991); 11 U.S.C. § 101(36), (51), (53).
. Farrey v. Sanderfoot, 500 U.S. at 297-98, 111 S.Ct. 1825.
.A debtor in this Debtor’s situation — with an entirely exempt homestead — should be allowed to employ § 522(f)(1) to protect his exemption and fresh start the same as a debt- or with only a partial homestead exemption. To read § 522(f)(1) otherwise makes no sense. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500595/ | MEMORANDUM OPINION
The central question before the Court is whether “total proceeds” recovered through § 827(a) attorney representation includes both cash and noncash proceeds. This Chapter 13 case came before the Court for hearing on February 28, 2017, on Anthony B. Bush’s Application for Approval of Attorney’s Fees and Expenses related to the adversary proceeding (Case No. 16-08027) arising from this bankruptcy case. (Docs. 38). The Debtor was present by counsel Anthony B. Bush. Britt Griggs appeared on behalf of the Bankruptcy Administrator, and recommended not approving the application. For the reasons set forth below, the Application to Approve Attorney’s Fees and Expenses is denied, with leave to amend within 14 days.
I. FACTS
The Debtor filed his petition in bankruptcy on October 21, 2015. (Doc. 1). Nearly a year later, the Debtor filed an adversary proceeding (16-08027) alleging that RTO National, LLC, violated the automatic stay provided under 11 U.S.C. § 362 when it repossessed a portable storage building. (Doc. 28). That next day, the Debtor filed an application to employ Anthony B. Bush to represent him in the proceeding. (Doc. 29). The Court approved the application. (Doc. 33). The application provided for compensation to Mr. Bush of “forty-five (45) percent of the total recovered proceeds plus any incurred expenses.” (Doc. 29, Para. 3).
On January 3, 2017, Mr. Bush, on behalf of the Debtor, filed a Motion to Approve Compromise and Settlement whereby RTO National, LLC, agreed, in exchange for a full and final release of all claims asserted in adversary proceeding 16-08027, to the following: (a) to pay the Debtor the sum of $6,000.00 inclusive of costs, damages, and fees; (b) to return to the Debtor the repossessed portable storage building (which had total outstanding balance due of $4,393.56); and (c) extinguish any debt associated with the portable storage building. (Doc. 37). Filed simultaneously with the settlement, Mr. Bush submitted an Application for Approval of Attorney’s Fees and Expenses, in which he requested $5,000.00 in attorney’s fees and $0.00 in expenses. (Doc. 38). The Bankruptcy Administrator’s response, filed on February 6,2017, did not recommend approval of the application for the reasons discussed below. (Doc. 41).
II. LAW
A. Jurisdiction/Core Proceeding
This Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (O). This is a final order.
B. Application for Attorney’s Fees and Expenses
Under 11 U.S.C. § 327(a), the trustee or debtor in possession, with court approval, may hire attorneys to pursue legal claims on behalf of the estate. Crosby v. Monroe Cty., 394 F.3d 1328, 1331 n. 2 (11th Cir. 2004); In re Goines, 465 B.R. 704, 706-07 (Bankr. N.D. Ga. 2012); see 11 U.S.C. § 1303; see also Fed. R. Bankr. P. 6009. Section 330(a)(1) of the Bankruptcy Code *187permits “reasonable compensation for actual, necessary services rendered” and “reimbursement for actual, necessary expenses” related to such legal claims, provided that the terms of employment are approved by the court. The reasonableness of attorney compensation is frequently determined by the court through an application to employ professional persons, prior to pursuing any possible legal claims.
In this case, the Debtor, with Court approval, hired Mr. Bush to represent him in Adversary Proceeding 16-08027 against RTO National, LLC. In approving the application to employ, this Court also approved Mr. Bush’s compensation for his representation. Specifically, Mr. Bush would receive “forty-five (45) percent of the total recovered proceeds plus any incurred expenses.” (Doc. 29, Para. 3) (emphasis added).
Nearly four months later, Mr. Bush submitted an Application for Approval of Attorney’s Fees and Expenses that requested $5,000 in attorney’s fees and $0.00 in expenses. (Doc. 38). The Bankruptcy Administrator recommended not approving the application on two grounds: (1) the total recovered proceeds should include only the cash proceeds of $6,000.00 and exclude the $4,393.56 debt forgiveness; and (2) the total fee requested, including the forgiven debt, is nearly 48% of all proceeds, despite the application to employ limiting any fees at 45%. (Doc. 41). This Court will address each ground in turn,
i. “Total Recovered Proceeds” Includes Both Cash and Non-Cash Proceeds
The central question before the Court is whether total recovered proceeds, in the context of § 327(a) representation, encompasses both cash and noncash proceeds. This is a matter of first impression for this Court. Furthermore, the Bankruptcy Code does not define proceeds in this context and the Court is not aware of any case law addressing the issue. As such, it is appropriate to look to state law to determine whether proceeds includes cash proceeds as well as noncash proceeds. Although not explicitly applicable in this case, the Court finds the Alabama version of the Uniform Commercial Code’s definition of “proceeds” persuasive. In regards to specific property, “proceeds” are broadly defined using language such as “whatever is acquired,” “whatever is collected,” and “rights arising out of.” Ala. Code § 7-9A-102(64). Section 7-9A-102 provides more clarity by separating this broad category into “cash proceeds” and “noncash proceeds.” “‘Cash proceeds’ means proceeds that are money, checks, deposit accounts, or the like.” Ala. Code § 7-9A-102(9). ‘“Noncash proceeds’ means proceeds other than cash proceeds.” Ala. Code § 7-9A-102(58). The plain language of the Alabama version of the Uniform Commercial Code makes clear that proceeds is a broad category including both cash and noncash proceeds. Similar definitions are used by the majority of states having adopted a version of the Uniform Commercial Code. Further supporting this conclusion is the definition of “proceeds” found in Black’s Law Dictionary — “[mjoney, checks, and the like are termed cash proceeds; all other proceeds are noncash proceeds.” PROCEEDS, Black’s Law Dictionary (10th ed. 2014). Thus, it appears that the general consensus is that proceeds is a broad category including both cash and noncash proceeds.
Here, Mr. Bush’s application to employ provided for compensation of forty-five percent of “total recovered proceeds.” This Court concludes that, under these circumstances, total recovered proceeds is not strictly limited to cash proceeds but also includes noncash proceeds. Thus, Mr. Bush is entitled to attorney’s fees equal to forty-five percent of the $6,000.00 cash proceeds *188and the $4,393.56 in noncash proceeds — > the extinguished debt relating to the portable storage building.
ii, Mr. Bush’s Attorney’s Fees are Limited to Forty-Five Percent of “Total Recovered Proceeds’’
Section 327(a) requires that the trustee, or the debtor in possession, obtain court approval prior to hiring an attorney to pursue a claim on behalf of the estate. 11 U.S.C. § 327(a), This is accomplished before this Court by way of an Application to Employ Professional Persons and is intended to ensure the compensation sought is reasonable. L. Bankr. R. 9007-1. In this case, the Court approved Mr. Bush’s application requesting attorney’s fees equal to forty-five percent of total recovered proceeds. However, the Application for Approval of Attorney’s Fees and Expenses submitted by Mr. Bush requested attorney’s fees of nearly forty-eight percent of total proceeds recovered. (Doc. 38). In accordance with the application to employ, this Court is denying, with leave to amend within 14 days, Mr. Bush’s application for attorney’s fees as it exceeds forty-five percent of total recovered proceeds.
III. CONCLUSION
This Court approved Mr. Bush to represent the Debtor in the previously mentioned adversary proceeding. His compensation for this representation was approved at forty-five percent of total recovered proceeds. The use of “total recovered proceeds” in the Debtor’s application to employ encompasses both cash and noncash proceeds. Thus, Mr. Bush’s compensation is properly calculated using both the $6,000 in cash proceeds and the $4,393.56 in noncash proceeds— the extinguished debt relating to the portable storage building. However, the total compensation for attorney’s fees should not exceed forty-five percent of the total recovered proceeds, as approved in the Application to Employ Professional Persons. The Court will enter an order by way of a separate document.
Done this 5th day of July, 2017. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500596/ | CORRECTED
MEMORANDUM DECISION
William R. Sawyer, United States Bankruptcy Judge
This Chapter 13 case came before the Court for an evidentiary hearing on the objection to confirmation of plan filed by 21st Mortgage Corporation (“Bank”) (Doc. 17) on March 8, 2017. The Debtor was present in person and by counsel Larry G. Cooper, Jr.; the Bank was present by counsel Kristofor D. Sodergren; and Chapter 13 Trustee Sabrina McKinney was present. For the reasons set forth below, the Bank’s objection is sustained and confirmation of the plan is denied.
I. FACTS
In 2007, Debtor Jason Allen Hubbard purchased a mobile home, financing the purchase price and related costs in the amount of $47,399.00. The indebtedness is secured by a security interest in the mobile home and a mortgage on the land upon which the mobile home sits, in Chambers County, Alabama. The loan went into default and, on April 13, 2016, the Bank conducted a foreclosure sale on the land, at which time it purchased the property. On May 13, 2016, the Bank brought suit against the Debtor in the Circuit Court of Chambers County, Alabama, seeking to eject the Debtor from the property.1
The Debtor filed a petition in bankruptcy pursuant to Chapter 13 of the Bankruptcy Code on October 19, 2016. The Debtor did not file a Chapter 13 Plan within 14 days of the date of the petition as required by Bankruptcy Rule 3015. On November 9, 2016, the Clerk sent a Notice of Dismissal, providing that the case would be dismissed in 21 days unless a Plan was filed. (Docs. 6, & 10). On November 28, 2016, the Debtor filed a Plan. (Doc, 12). On November 29, 2016, the Debtor filed an Amended Plan. (Doc. 13), Neither Plan contains a Certificate of Service showing that it had been served on parties in interest as required by Local Rule 3015-1. Both the Bank and the Trustee have filed objections to the Plan. (Docs. 17 & 22).
The Debtor proposes to “cure and maintain” the indebtedness to the Bank under his Plan. (Doc. 13). The Bank objects contending that the Debtor’s right to “cure and maintain” terminated at the time of the foreclosure sale. The Debtor responds, contending that there is no valid foreclosure sale and, therefore, he still has a right to “cure and maintain” under the Code. In *190support of this contention, the Debtor testified at the March 8th hearing that he did not receive any of the foreclosure notices sent by the Bank or their lawyers.
The Court does not accept the Debtor’s testimony concerning his nonreceipt of notices from the Bank. The Bank offered evidence of mailings made September 28, 2015, March 8, 2016, and April 19, 2016, (Bank Exhibits 6, 8, & 13), all of which pertain to default and foreclosure. The notices were all properly addressed and the Court accepts the proffer of the testimony of the Bank representative that they were duly mailed at the time they were prepared. Indeed, the Debtor did not dispute that the notices were prepared and mailed as represented by the Bank. The Debtor testified that he has a mailbox at his residence and that he receives mail addressed to him. Nevertheless, the Debtor contends he did not receive the notices. Having examined the documents, having heard the testimony of the Debtor and his wife and having considered their demeanor, the Court rejects the Debtor’s contention that he did not receive the notices sent by the Bank and their lawyers.
II. LAW
A. Jurisdiction and Core Proceeding
This Court has jurisdiction to hear this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding. 28 U.S.C. § 157(b)(2)(L). This is not a final order. Bullard v. Blue Hills Bank, — U.S. -, 135 S.Ct. 1686, 1688, 191 L.Ed.2d 621 (2015).
B. Chapter 13 Plan Confirmation
Chapter 13 of the Bankruptcy Code permits an individual to file a plan to pay his debts, or a portion of his debts over time, and keep his property. See, Bullard v. Blue Hills Bank, — U.S. -, 135 S.Ct. 1686, 1686, 191 L.Ed.2d 621 (2015). One provision of Chapter 13, commonly resorted to by debtors, permits a debtor to “cure” a default on his home mortgage and “maintain” payments, thereby allowing him to keep his residence. 11 U.S.C. § 1322(b)(5) provides as follows:
... [a Debtor may] provide for the curing of any default within a reasonable time and maintenance of payments while the ease 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.
Prior to 1994, the Code did not state when a debtor lost his right to cure and maintain. In 1994, Congress amended the Code, adding § 1322(c)(1), which provides as follows:
... a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbank-ruptcy law.
11 U.S.C. § 1322 (c)(1) (emphasis added).
Thus, it is clear enough under the Code as it now stands that a debtor may not cure a mortgage delinquency after the property is “sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.”
In this case, the Bank has offered evidence that it properly conducted its foreclosure sale on April 13, 2016. (Bank Ex. 12). As the Debtor did not file his petition in this case until pctober 19, 2016, six months after the foreclosure sale, he may not “cure and maintain” the mortgage delinquency provided that the sale was conducted in accordance with applicable non-bankruptcy law. If the foreclosure sale conducted by the Bank in this case, was *191made in accordance with Alabama law, its objection should be sustained. In re Connors, 497 F.Bd 314, 318-19 (3rd Cir. 2007) (debtor loses the right to cure a default when the gavel falls); McCarn v. WYHY FCU (In re McCam), 218 B.R. 154, 160-61 (10th BAP Cir.); In re Morgan, Case No. 06-30531, 2006 WL 2338147 (Bankr. M.D. Ala. Aug. 9, 2006) (Williams, B.J.); In re Fothergill, 293 B.R. 263 (Bankr. S.D. Fla. 2003); In re Cottrell, 213 B.R. 378 (Bankr. M.D. Ala. 1996) (Steele, B.J.); In re Sims, 185 B.R. 853, 863-66 (Bankr. N.D. Ala. 1995) (section 1322(c)(1) prohibits debtor from reinstating mortgage after the foreclosure sale); see also Commercial Fed. Mtg. Corp. v. Smith (In re Smith), 85 F.3d 1555, (11th Cir. 1996) (holding that debtor could not “cure and maintain” mortgage after foreclosure sale in case decided prior to effective date adding § 1322(c)(1)).
C. Burden of Proof on Chapter 13 Plan Confirmation
The procedural posture at Chapter 13 confirmation determines who carries the burden of proof. The debtor bears the burden of proof on the question of whether his plan should be confirmed. In re Santiago, 404 B.R. 564, 570 (Bankr. S.D. Fla. 2009); In re Pearson, 398 B.R. 97, 102 (Bankr. M.D. Ga. 2008); In re Snipes, 314 B.R. 898, 901 (Bankr. S.D. Ga. 2004); In re Baird, 234 B.R. 546, 550 (Bankr. M.D. Fla. 1999).
When a creditor files an objection to confirmation of a Chapter 13 Plan, it bears the burden as to any issues raised in its objection. In re Santiago, 404 B.R. 564, 569 (Bankr. S.D. Fla. 2009); In re Brown, 244 B.R. 603, 608 (Bankr. W.D.Va. 2000); In re Blevins, 150 B.R. 444, 445-46 (Bpnkr. W.D. Ark. 1992). The Bank carried its burden here. It informed the Court that it was objecting to the Debtor’s “cure and maintain” proposal on the grounds that it foreclosed on the property prior to the bankruptcy filing. At the evidentiary Rearing, the Bank offered proof that it conducted a foreclosure sale, in accordance with applicable nonbankruptcy law, on April 13, 2016, months prior to the Debtor’s bankruptcy filing.
However, the Debtor argues that the foreclosure was not conducted in accordance with Alabama law as notice of the sale was not personally served on the Debtor. The Debtor cites no law supporting this contention and the Court is aware of none.2 Alabama Law requires that notice of the foreclosure sale be published in a newspaper for three consecutive weeks. Ala. Code 1975 § 35-10-13. The Bank offered proof of publication, in accordance with Alabama law, of the notices of sale. (Bank Exhibits 9, 10, & 11). Moreover, the mortgage signed by the Debtor in this case calls for any notice to be mailed to the Debtor by first class mail. (Bank Ex. 15, Mortgage, Para. 15).3 Notices were sept by the Bank to the Debtor, by first class mail, on August 28, 2015; March 8, 2016; and April 19, 2016. (Bank Exhibits 6, 8, & 13). The Court concludes that the foreclosure sale conducted by the Bank here was properly conducted under Alabama law. See, In re Sharpe, 391 B.R. 117, 139 (Bankr. N.D. Ala. 2008) (concluding that foreclosure sale *192was properly held where actual notice was given). The Debtor’s argument — that the sale was invalid because notice was not personally served on him — is without merit.
III. CONCLUSION
The Bank objects to the Debtor’s Plan, contending that he may not cure and maintain the mortgage as the property was sold, in accordance with applicable non-bankruptcy law, at a foreclosure sale prior to the bankruptcy filing. The Debtor contends that the sale was not valid as notice of the sale was not personally served on him. As the Debtor has not cited any authority for this position, and as the Court is aware of none, the Bank’s objection is sustained and confirmation of the Plan is denied. The Court will schedule a hearing by way of a separate order.
Done this 28th day of March, 2017.
. 21st Mortgage Corp. v. Jason A, Hubbard, Case No. CV-2016-900058,
. It strikes the Court as ironic that the Debtor would fail to send copies of his Chapter 13 Plan to the Bank, as required by Local Rules, and yet seek relief by accusing the Bank of failing to make personal service of the notice of sale — notwithstanding the fact that there is no law or contractual requirement that it do so. Local Bankruptcy Rule 3015-1.
. Paragraph 15 provides, in part, that "[a]ll notices given by Borrower or Lender in connection with this Security Instrument must be in writing. Any notice to Borrower in connection with this Security Instrument shall be deemed to have been given to Borrower when mailed by first class mail.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500597/ | ORDER AND MEMORANDUM OPINION
JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE
This Adversary Proceeding is before the Court on Plaintiffs Complaint, which was set for trial before the undersigned on October 17, 2016. Appearing on behalf of the Trustee Plaintiff (hereinafter the “Trustee” or “Plaintiff’), were attorneys C. Michael Smith and Suzanne Paul; the Trustee was also present. On behalf of Defendant Lanac Investments, LLC (hereinafter “Lanac”), was attorney Edward Le-*197Breton. On behalf of creditor M.B. Barge, Co. (hereinafter “MB Barge”), was attorney Robert Turnipseed. The Complaint alleges an actual and constructive fraudulent transfer of the tank barge, KDZ 1801 (hereinafter “the 1801”), by Debtor Kudzu Marine, Inc. (hereinafter “Debtor” or “Kudzu”), to Defendant Lanac, Pretrial and post-trial briefs were submitted by both parties, as well as proposed findings of fact and conclusions of law by each party. (Docs. 49, 50, 53, 54, 55, 56, 57, 58).
The Court heard testimony from multiple witnesses including principals of the litigants and interested parties, multiple marine surveyors, and the owner of a marine repair service. The principals of the litigants and interested parties were: Steve Wilson, a shareholder of the Debtor; John Canal, principal of Lanac Investments, LLC and Bunkers International; William Gotimer, attorney and agent for Lanac Investments, LLC and general counsel for Bunkers International; Chris Gonsulin, owner of creditor, MB Barge, Co. The marine surveyors were: Christopher Collier; Mark Shiffer; Perry H. Beebe (hereinafter “Beebe, Sr.”); and by deposition testimony, Perry J. Beebe (hereinafter “Beebe, Jr.”);1 and Fred Bud-wine. Allen Henry of Henry Marine, a business that offers marine repair services also testified. Each of the marine surveyors were tendered as experts, and the Court accepts them as such.
For the reasons set forth below, the Court finds that only constructive fraud existed at the time of the transfer because the barge was sold for less than reasonably equivalent value. In making this finding, the Court considered the appraisals submitted by the parties. Each appraisal was found to be lacking certain persuasive elements. Because each appraisal lacked factors relevant to this Court’s estimation of value, and, because the appraisals considered together indicate a value above what Lanac paid for the barge, the Court was unable to assign a fair market value of the barge at the time it was sold. Consequently, the Court finds that the barge is due to be returned to the Trustee for sale at auction where the fair market value will be determined by the market. A separate order regarding the details of the auction will be entered herewith. The Court further finds as follows.
Jurisdiction and Issues Presented
The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H). This is a final order.
The Plaintiff’s Complaint asserts three causes of action: constructive fraud under 11 U.S.C. 548(a)(1)(B) based on the 1801 being sold for less than reasonably equivalent value (Doc.l at 3-4); actual fraud under the Alabama Uniform Fraudulent Transfer Act as made applicable by Section 544(b)(1) of the Bankruptcy Code (Doc. 1 at 4-6); and actual fraud because the transfer was concealed from Debtor’s creditors and the Debtor retained control of the barge after it was sold. (Doc. 1 at 6-7).
Findings of Fact
Prior to filing bankruptcy, Debtor was a local maritime company engaged in the business of pushing tank barges loaded with fuel. According to Steve Wilson’s testimony, Debtor was owned by three share*198holders: Robert Tompkins (35% interest), Steve Wilson (25% interest), and Javier Brito (45% interest).2 In April of 2009, Debtor purchased the 1801 for $1.3 million dollars. Each shareholder guaranteed the ship mortgage on the barge with Iberia Bank, and were personally exposed if the partnership failed to pay the loan. The 1801 is a steel-constructed, double skin, coastwise tank barge built in 1971 with a cargo capacity of 18,000 barrels. In order for the barge to perform its intended use, Kudzu had to maintain a valid certificate of inspection (“COI”) with the Coast Guard, which it initially did.
The barge’s prior owner had it appraised before Kudzu purchased it. Marine surveyor Mark Shiffer boarded the vessel to survey its condition and, relying on Shiffer’s findings, Beebe, Sr. estimated the barge’s value. Together, this formed the April 17, 2009 Shiffer-Beebe 2009 Survey concluding that the 1801 was well-maintained with a fair market value of $1.433 million and a useful life of at least twenty years. (PEX 4).3
Mr. Wilson testified that while Kudzu was in full operation, its main customer was Specialty Fuels Bunkering, (“SFB”), which is owned by Kudzu shareholder, Javier Brito. In turn, SFB worked with Bunkers International (“Bunkers”), in the trading of bunker fuel. Mr. Wilson stated that SFB was ninety-eight to ninety-nine percent of Kudzu’s business with no other major source of revenue. To assist its business with SFB, Kudzu was obligated to MB Barge on two bareboat charter agreements of the barges, MB3 and MB7, dated December 19, 2011 and April 15, 2010, respectively. (PEX 1,2).
Mr. Wilson testified that Kudzu never made a profit, which resulted in SFB loaning Kudzu money to make the ship mortgage payments to Iberia Bank. In November of 2011, the COI with the Coast Guard was set to expire. Without the funds to pay for the repairs necessary for recertification, Kudzu began the process of shutting down its. business operations and liquidating its assets. According to the voluntary petition, those assets consisted of the 1801, a push boat named the Sandra Ann, a push boat named the Russell T, and a push boat named the Patty White. (Doc. 1 at 20). By July of 2012, Kudzu had ceased operations and defaulted on the two bareboat charter agreements with MB Barge. Steve Wilson admitted that Kudzu breached the charter agreements, but disputes the amount Kudzu owes MB Barge as a result of the breach.
On September 25, 2012, MB Barge sent an anticipatory breach letter to Kudzu threatening to take further action against Kudzu if the chartered barge MB-7 was not recertified so that the MB3 and MB7 contracts could be executed. (PEX 5). On October 23, 2012, Mr. Gonsulin met with Kudzu shareholders Steve Wilson and Bobby Tompkins in New Orleans in an effort to resolve MB Barge’s potential breach of contract claim against Kudzu. During those negotiations, Mr. Gonsulin proposed that MB Barge could secure a buyer of the 1801 and the push boat Russell T who was willing to pay approximately one million dollars for the barge. The proposition was presented as an exclusive listing agreement between Debtor and MB Barge in which MB Barge retained the exclusive rights to list and approve the sales of the barges, and $318,208.90 of the *199sale proceeds would be paid toward MB Barge’s claims against Kudzu once it sold. (PEX 6). Disputing the amount it owed to MB Barge, Kudzu refused to sign the agreement and the negotiations failed. On October 26, 2012, MB Barge sent a letter to Kudzu threatening a lawsuit if Kudzu disposed of any assets before resolving its claim with MB Barge. On October 31, 2012, MB Barge filed its lawsuit against Kudzu for the breach of the bareboat charter agreements.
SFB was aware of Kudzu’s financial issues, but desired to continue using the 1801 as they had all along. Knowing Kudzu was attempting to liquidate its assets, Mr. Brito suggested that Bunkers purchase the 1801 and continue to charter the barge to SFB. The principal of Bunkers is John Canal, who is also the principal of Lanac. In December of 2012, William Gotimer, attorney for both Lanac and Bunkers, began negotiations to purchase the barge. Mr. Canal testified that Mr. Gotimer was authorized as Lanac’s agent to negotiate the purchase of the 1801 from Kudzu.
Negotiations Surrounding the Sale of the KDZ 1801
In December of 2012, Mr. Gotimer began discussing the sale of the 1801 with attorney James B. “Jim” Newman, who represented SFB. As part of the sale, they originally discussed by email that the 1801 must be free and clear of all liens, the SFB loan to Kudzu should remain in place as an offset to any judgment obtained by MB Barge, and that financing through Iberia Bank would speed the sale process. (PEX 14 at 1-2). They also discussed whether the 1801 would be rechartered to SFB and whether Kudzu had the financial capability to declare bankruptcy. (PEX 14 at 1-2, 5-6). The idea behind the sale was “to have New Iberia [sic] release the individual guarantors and Specialty as guarantors in return for a better credit and a commitment to repair the vessel to class status ($50K) and an assignment of the charter hire between the new owner and Specialty. This will assure New Iberia [sic] that the vessel has been repaired, will be insured, will be maintained and [it] need not rely on a guarantee for payment.” (PEX 14 at 1-2).
In February of 2013, Mr. Gotimer discussed with Sara Shipman-Myers, an employee of SFB, Lanac’s intent to charter the 1801 back to SFB on favorable terms and to give SFB the right to purchase the vessel for fair market value at the end of the term. In March of 2013, Mr. Gotimer discussed financing with Iberia Bank, which required local participation of SFB or Mr. Brito to go forward. During the financing negotiations, Iberia Bank’s Vice President of Commercial Banking mentioned MB Barge’s potential summary judgment ruling to Sara Shipman Myers and that it posed potential challenge's for Iberia Bank, and that it would be best to “proceed with the sale/payoff in order to preempt any judgment issues.” (PEX 15 at 15).
On February 20, 2013, Alex Lankford, counsel for Kudzu, received an offer to purchase the 1801 from Graestone Logistics for approximately $500,000. (PEX 10). Mr. Lankford conveyed this offer to SFB lawyer Jim Newman indicating Kudzu’s intent to enter into an agreement with Graestone. Mr. Lankford also requested the fair market value of the barge noted in the latest survey, (PEX 15 at 7), so the barge could be sold at fair market value “thereby relieving Kudzu of its obligations on the loan (and satisfying the mortgage on the barge) and relieving Kudzu’s shareholders of their personal guarantees on the loan.” (PEX 15 at 6). The Graestone offer fell through and Lanac continued negotiations to purchase the barge.
*200By May 25, 2013, Lanac’s negotiations with Iberia Bank had completely fallen through, so Mr. Gotimer sought financing with ServisFirst Bank. During those negotiations, Mr. Canal estimated to Servis-First that the barge would be worth more than $1 million after necessary repairs were made and the COI was brought current — a statement that Mr. Canal testified was mere puffery for the sake of securing financing, and not a personal valuation of what he thought the barge was worth at the time it was purchased, or even after it was repaired.
Satisfactory financing terms between Lanac and ServisFirst were secured, and included a guarantee of the loan by Mr, Canal and Bunkers, as well as a requirement that there be an additional guarantee from someone local to Mobile, Alabama. (PEX 14 at 63-64; JEX 10 at LANAC 0417-18; JEX 11 at LANAC-1171). Mr. Brito, concerned that his guarantee on Kudzu’s mortgage was already dangerously close to default, agreed to be the local guarantor. Guaranteeing the loan with La-nac allowed Mr. Brito to limit his financial exposure by avoiding payment or default on his Kudzu/Iberia Bank guaranty, and, Lanac’s payment of the Iberia indebtedness would release the Kudzu shareholders from all guaranties on the barge, Mr. Canal testified that Mr. Brito was not compensated in any way for his participation in the transaction. When the Trustee questioned why Mr. Brito’s guaranty was kept confidential from the other Kudzu shareholders, Mr. Canal stated that it is Lanac’s policy to not disclose loan terms to sellers. The negotiations of the 1801 concluded on May 30, 2013, when Lanac bought the 1801 and the Sandra Ann for $493,126.61. (JEX 2). Kudzu shareholder Steve Wilson admitted that Kudzu did not inform MB Barge of the negotiations or the sale of the 1801.
After the Sale
At the time of the sale, the 1801 had been out of service for a year and was not purged of toxic gases, a process referred to as “gas-freeing” in the industry. As it was, the Coast Guard would not certify the barge for its intended use, Thus, sometime between June and mid-July of 2013, the barge was taken to Henry Marine in Co-den, Alabama and was gas freed. Mr. Henry testified that after the Coast Guard inspected the 1801, the Coast Guard notified Lanac in a letter dated March 5, 2014, that it did not meet double hull standards under the Oil Pollution Act of 1990, and, the Coast Guard would consider it a single hull vessel. (DEX 9).
With there being no work in the area for single hull vessels, Lanac permitted Henry Marine to hire a naval architect to resolve the hull issues. Over the course of the next year, repairs were made in accordance with the Coast Guard recommendations to classify it as a double hull vessel, and the permanent COI was issued on October 23, 2014. (DEX 5). Mr. Henry testified that the approximate cost of repairs made to the 1801 was $93,770.74. (DEX 5). The vessel has been in service since that date. (DEX 5 at LANAC 351). The total amount expended by Lanac to purchase and repair the 1801 was $520,872.95. Despite being operable, Mr, Canal testified that to date, the 1801 has not been profitable due to its age because many major oil company ports will not accept older barges like the 1801. The barge is now chartered with Atlantic Gulf Bunkering, and significantly, was never chartered to SFB.
On November 24, 2014, Lanac established a line of credit in the amount of $3,000,000.00 with Israel Discount Bank of New York and executed a First Preferred Fleet Mortgage to secure the line of credit. Part of the security for this line of credit was the 1801. Using the First Preferred *201Fleet Mortgage monies, Lanac paid off the ship mortgage of ServisFirst on the 1801. Mr. Brito’s personal guaranty of the Ser-visFirst loan was then released without him making any payments on that guaranty-
Appraisals Summary
Eight appraisals were submitted to the Court for consideration in valuing the barge. No single appraisal was persuasive enough for the Court to rely on it more than the others in assigning value. Some appraisals were almost irrelevant due to when they were generated, some were unpersuasive due to the lack of current personal knowledge of the barge by the appraiser, one had a significant variation in the cargo capacity of the 1801, and at least one was unclear as to whether the USCG COI had expired and whether the estimated cost of all repairs was included in its valuation. A summary in chronological order by date is as follows.
The Shiffer-Beebe April 17,2009 Survey appraised the fair market value of the barge at $1,433,000.00. Beebe, Sr. testified that the barge had been well maintained by its previous owner and was in above average, almost like new condition with a useful life of twenty years and suitable for the route and service intended, (PEX 4). This survey is only relevant as to the condition of the boat when 'it was purchased by Kudzu.
On December 29, 2010, Beebe, Jr. surveyed the barge and appraised the fair market value at $630,000.00 with a replacement value of $2,000,000.00. The survey noted that the deck and sides and end coatings were in very good and good condition, respectively. (DEX 2). This survey is unpersuasive because it was issued in 2010, approximately three years before Lanac purchased the barge.
On October 29, 2012, Mr. Schiehl performed a table top valuation4 of the barge. At that time, the barge was undergoing Coast Guard certification. The fair market value of the barge was redacted, but Mr. Schiehl noted that the vessel was well-maintained and appeared to be suitable for its intended purpose. (PEX 9). The timing of this survey, some 6 months before the barge was sold, as well as its redaction of value, makes this survey less persuasive.
On May 6,2013, twenty-four days before Lanac purchased the barge, Beebe, Jr. performed another survey of the 1801. He boarded the vessel at Eagle’s Landing in Mobile, Alabama. Both Plaintiff and Defendant submitted this survey into evidence. In Plaintiffs exhibit, the fair market value is redacted (PEX 12 at 6); in Defendant’s exhibit, the fair market value is $590,000.00 (DEX 1 at 6), and a replacement value of $2,000,000.00 was noted in both exhibits. (PEX 12 at 5, DEX 1 at 5). Beebe, Jr. testified in his deposition, that when he conducted this appraisal, he believed the COI was current, and that he did not know the COI had expired. (DEX 7 at 42, 43), He also testified that Sara Ship-man Myers gave him a punchlist of repairs (which she obtained from Kudzu shareholder Bobby Tompkins), but that he did not know whether the repairs were completed or just contemplated since he did not enter the internal cargo compartments of the barge. (DEX 7 at 45). Though this survey is the most relevant in time and personal knowledge of all of the surveys presented, it is nonetheless unpersuasive because it is based on two flaws: that the *202COI was current, and that Beebe, Jr. was uninformed as to the status of the repairs. Beebe, Jr. admitted in his deposition that his appraised value of the barge would be different if he had known that the COI was expired and whether the repairs were complete or just contemplated. Therefore, the basic assumptions of this survey are too uncertain to make this survey reliable in determining fair market value.
On August 21, 2013, two months and twenty-one days after Lanac purchased it, and after some repairs were completed, marine surveyor Christopher Collier boarded the barge and found it to be in in above average condition for its age and service, suitably equipped and in suitable condition for continued service as a coast-wise tank barge. (DEX 4 at 8). The 1801 had a temporary COI at the time this survey was completed. Mr. Collier appraised the fair market value of the 1801 at that time to be $625,000.00.
On December 18, 2013, approximately six months after the barge was sold, George Stone and Fred Budwine generated an appraisal of value on the barge, (hereinafter the “Budwine survey”). Mr. Stone boarded the vessel and found its condition to be in generally fair order and fit for its intended route and service. (DEX 3 at 8). The temporary COI was set to expire on July 31, 2014. Using Mr. Stone’s opinion on condition, Mr. Budwine assigned $700,000.00 as the fair market value with a replacement value of $1,700,000.00. It is undisputed that the 1801 has a cargo capacity of 18,000 barrels, but this survey indicates a cargo capacity of only 13,000 barrels. The record is unclear whether Mr. Budwine based his valuation on this error, or if it is just a typo. This survey is unsigned by either George Stone or Fred Budwine. (DEX at 8). Because this appraisal was generated after Lanac purchased and made repairs to the barge, and because the survey contains an error in cargo capacity, the Court finds this survey less relevant in determining fair market value.
On January 21, 2014, Mr. Shiffer and Beebe, Sr. reviewed the 2009 Shiffer survey and the 2012 Schiehl report and concluded that the barge had more than twenty years of useful life with a fair market value of $1,200,000.00 and a replacement value of $2,250,000.00. (PEX 19). This appraisal is lacking in that Beebe, Sr. did not board the vessel himself to survey its condition, nor did he rely on a current survey performed by Shiffer, Schiehl or anyone. Instead, he merely reviewed the other previously performed surveys, assumed that the barge was similarly maintained in the interim, and based his valuation on that assumption. Therefore the Court does not rely on this survey.
On August 3, 2016, in preparation for this trial, Mr. Shiffer and Beebe, Sr. issued a table top supplement to the joint 2009 Shiffer-Beebe, Sr. Report referenced above. Mr. Shiffer and Beebe, Sr. met and reviewed their own prior appraisals as well as the appraisals performed by Beebe, Jr. and the Budwine Survey referenced above. At the time this supplement was issued, the COI had expired, but Shiffer and Beebe, Sr. concluded that the barge was in good order regardless. To calculate the current value of the barge, they estimated the cost of the repairs recommended by Beebe, Jr. to be $68,630.00. They deducted the cost of those repairs and concluded the fair market value was not less than $1,131,370.00. (PEX19). The Court finds this appraisal supplement unpersuasive as it was performed approximately three years after the transaction was completed.
Conclusions of Law
Plaintiff’s Complaint requests relief under 11 U.S.C §§ 548(a) and 544(b)(1). Under either statute, the party alleging *203the fraudulent conveyance bears the burden of proof by a preponderance of the evidence. In re Vista Bella, Inc., 511 B.R. 163, 192 (Bankr. S.D. Ala. 2014). Here, that party is the Chapter 7 Trustee. The Court will address actual fraud first, and constructive fraud second.
Count Three: Actual Fraud
Section 548(a)(1)(A) states in pertinent part that the trustee may avoid any transfer of a property interest belonging to and incurred by the debtor if the transfer was made “with actual intent to hinder, delay, or defraud any entity to which the debtor was or became” indebted to on or after the date that such transfer was made. 11 U.S.C. § 548(a)(1)(A). “Actual fraud denotes the actual mental operations of intending to defeat or delay the rights of the creditor.” Vista Bella at 193. The phrase “actual intent to hinder, delay, or defraud” is established by circumstantial evidence. Vista Bella, Inc., 511 B.R. 163, 194 (Bankr. S.D. Ala. 2014). That evidence is established by certain “badges of fraud” as set out by the Eleventh Circuit in In re XYZ Options, Inc., 154 F.3d 1262, 1271 (11th Cir. 1998). “No specific combination of badges is necessary for a finding of actual intent, and the presence of any of the badges of fraud does not compel such a finding.” Vista Bella at 194. “The badges merely highlight circumstances that suggest that a transfer was made with fraudulent intent.” Id. “With that being said, it is clear that actual intent to hinder, delay, or defraud is a heavily fact-dependent question and generally comes down to the credibility of the witnesses.” Id. at 193, 195. “Although part of the Alabama Code, [the badges of fraud] are appropriate to use to determine if there is a fraudulent transfer under federal law.” Id. The badges are as follows:
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. Before the transfer was made 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.
Id. at 194. The Court will only discuss the badges of fraud that are relevant o the circumstances of this case.
Badge One: Transfer to an Insider
The Trustee contends that the sale of the 1801 was an insider transfer because the transfer to Lanac was less than arms-length and designed to confer future benefits in the 1801 on Kudzu shareholder, Javier Brito. (Doc. 53 at 4). The Court does not find that the transfer was made to an insider.
An “insider” is defined, among other things, as a director, officer or general partner of the debtor; a person in control of the debtor; or a partnership in which the debtor is a general partner. 11 U.S.C. *204101(31)(B). Black’s Law Dictionary defines an “insider” in the bankruptcy context as “[a]n entity or person who is so closely related to a debtor that any deal between them will not be considered an arm’s length transaction and will be subject to close scrutiny.” Id. See also Black’s Law Dictionary 798 (7th ed. West 1999).
Though Mr. Brito is an insider of Kudzu, he is not an insider of Lanac; and, Lanac is not an insider of Kudzu. The fact that the transaction through ServisFirst required a personal guaranty by someone local, which turned out to be Mr. Brito, does not by itself establish that Lanac’s purchase of the barge was not at arm’s length. Furthermore, the evidence, as presented, proved Mr. Brito received nothing more than the other Kudzu shareholders: a release of their guaranties and the Iberia Bank mortgage. Thus, the Trustee has failed to establish that badge one exists.
Badge Two: Post-Transfer Retention or Control of the Property
The Trustee relies on the emails between Mr. Gotimer and counsel for Iberia Bank proposing that SFB will “soon own the barge” (PEX 21) and that SFB would be the end user of the barge, all of which were conditions required by Iberia Bank for it to finance the purchase. The Court is not persuaded by this evidence. Those emails represent negotiations relating to a deal with Iberia Bank that never took place and are thus, irrelevant in determining fraud as to this sale. The purchase was not financed through Iberia Bank, and the evidence did not establish that either SFB or Mr. Brito ever used the barge after Lanac purchased it. The fact that an unex-ecuted draft option agreement for Mr. Bri-to to purchase the barge from Lanac at the end of the loan term is in evidence does not establish that SFB retained control of the barge after Lanac purchased it. Just as the failed negotiations with Iberia Bank are irrelevant to this inquiry, so is the unexecuted draft option agreement.
The Trustee also asks the Court to infer that the non-production of the “Duplex” attachment to Mr. Gotimer’s email, which allegedly contained the documents evidencing a side deal between Lanac dnd Mr. Brito, establishes that Mr. Brito or SFB retained control of the barge or conferred future benefits on Mr. Brito for less than fair market value. (Doc. 53 at 5). The Court disagrees. The evidence merely established that there was an attachment to an email between Mr. Gotimer and counsel for Mr. Brito titled, “Duplex,” which contained Mr. Brito’s personal guaranty documents, as well as some “other documents,” which were to remain confidential from the other Kudzu shareholders. The “other documents” were not presented into evidence by either of the parties. It is not the duty of the Court to infer or speculate what the evidence might prove if it had been presented. If the Trustee wished for the Court to consider any documents included in the Duplex attachment, she should have requested that they be produced and presented them at trial. Because the Trustee failed to produce the contents of the Duplex attachment, this Court will not infer what those documents establish. Therefore, this Court finds that the Trustee failed to prove that Mr. Brito retained the barge or exerted control over the barge after it was sold.
Badge Three: Concealment of the Transfer
The Trustee contends that the draft option agreement, which she refers to as the “side agreement” with Mr. Brito was concealed from the other Kudzu shareholders, and the sale altogether was concealed from creditor MB Barge thereby lacking the hallmarks of forthright honesty in fact. (Doc. 53 at 5). This Court disagrees. As stated above, by failing to produce the *205Duplex documents, the Trustee has failed to establish the existence of an untoward “side agreement,” and thus, any reliance on such is unfounded. As to whether the sale of the barge was concealed from MB Barge, the Court finds that Mr. Gonsoulin knew the barge was for sale. This knowledge is evidenced by the exclusive listing agreement proposed to Kudzu by MB Barge, which Kudzu rejected, as well as Kudzu’s offer to pay a commission to Mr. Gonsoulin if he found a buyer for the barge.
As for the nondisclosure of Mr. Brito’s guaranty, the court finds this irrelevant as to concealment of the transfer. Nevertheless, Mr. Canal testified that it is Lanac’s policy to not disclose loan terms to sellers, thereby giving this nondisclosure a bona fide, legitimate purpose. In re Int’l Mgmt. Assoc., LLC, 2016 WL 552491 (Bankr. N.D. Ga. Feb. 10, 2016)(citing In re Polaroid Corp., 472 B.R. 22, 35 (Bankr. D. Minn. 2012). This Court thus finds that transfer was not concealed, and the Trustee has failed to carry her burden of proof on badge three.
Badge Four: Threat or Existence of Suit
It is undisputed that all parties knew of the lawsuit filed by MB Barge against Kudzu. Therefore, the Court finds that this badge has been established.
Badge Five: Substantially All Assets Transferred
Kudzu shareholder Steve Wilson testified that once the 1801 and the Sandra Ann were sold to Lanac, Kudzu owned no other assets. Thus, badge five has been established.
Badge Eight: Consideration Received Was Less Than the Reasonably Equivalent Value of the Asset
The Trustee contends that the purchase price paid by Lanac for the barge is not the reasonable equivalence of the fair market value of the 1801. Lanac disputes this allegation and contends that it paid fair market value for the barge. As discussed below as it relates to constructive fraud, this Court finds that the purchase price of the 1801 did not reflect the fair market value of the barge at the time of the sale. Therefore, badge eight has been satisfied.
Badge Nine: Insolvency At the Time of or Shortly After the Transfer
It is undisputed that Kudzu was experiencing financial woes prior to the sale of the 1801. If Kudzu was not insolvent before the transfer, then it became insolvent when it filed for Chapter 7 relief within the succeeding ninety days. Badge nine has been established.
Badge Ten: Substantial Debt Incurred Shortly Before or After the Transfer
The Trustee alleges that Kudzu was attempting to avoid the attachment of MB Barge’s potential judgment lien by selling the last of its assets and filing for bankruptcy before the summary judgment motion was ruled on. The Trustee relies on an email from Iberia Bank’s Vice President of Commercial Banking to Sara Shipman-Myers (employee of SFB and Mr. Brito), stating that the “summary judgment time-line is going to present a challenge for us... It would be my recommendation to go ahead and proceed with the sale/payoff in order to pre-empt any judgment issues....” (PEX 15 at 15). During trial, there was no showing that MB Barge would have won or did win on its motion for summary judgment, and the Court will not speculate as to such. The Trustee has failed to establish that badge ten applies.
Having considered the relevant badges of fraud set out in Vista Bella, the Court finds that eight of the eleven badges are applicable to this set of facts,'with the presence of only four badges having been *206affirmatively established by the Trustee. There is no specific combination of badges. necessary to find actual fraud. Vista Bella at 194. The finding is highly factual and determined on a case-by-case basis. Id. Considering the evidence as it relates to each badge of fraud, this Court finds that actual fraud does not exist regarding the sale of the 1801. All of the “evidence” the Trustee relies on relates to the negotiations of a deal with Iberia Bank that never even happened. The Trustee also relies on-“evidence” she did not produce: the contents of the Duplex attachment, and then asks this Court to speculate what may have been proven if the attachment had actually been produced. As a general finder of fact and seeker of truth, this Court does not engage in speculation or conjecture and refuses to do so here. This Court saw no evidence of actual fraud, and as such, this Court finds that the badges of fraud that are present do not add up to actual fraud.
Count Two: Section 544(b)(1) Avoidance of Fraudulent Transfer
“Section 544(b) gives a trustee the ability to avoid any transfer of an interest of the debtor in property that is voidable under applicable nonbankruptcy law by a creditor holding an unsecured claim that is allowable under the Bankruptcy Code.” In re Vista Bella, Inc., 511 B.R. 163, 193 (Bankr. S.D. Ala. 2014). In this case, the Trustee invokes the Alabama Uniform Fraudulent Transfer Act (“AUF-TA”), Ala. Code § 8-9A-1 et séq., as her nonbankruptcy law of choice. The badges of fraud necessary to determine actual fraud under the Bankruptcy Code are the same badges necessary to determine actual fraud under the Alabama Uniform Fraudulent Transfer Act. As such, the Court finds a separate analysis for recovery under Section 544(b)(1) is unnecessary. The reasoning set out above as to Count Three of Plaintiffs Complaint is hereby adopted and dispositive regarding the actual fraud allegations in Count Two of Plaintiffs Complaint.
Count One: Section 548(a)(1)(B) Constructive Fraud
Section 548(a)(1)(B) states that the trustee may avoid any transfer of an interest of the debtor in property, if the debtor voluntarily or involuntarily—
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debt- or was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B).
“Constructively fraudulent transfers require not only a lack of reasonably equivalent value, but also, for the most part, that the transaction leave the debtor financially vulnerable. As a result, the trustee may not avoid a transaction simply because it was for less than a reasonably equivalent value. The debtor must also be in one of three fragile financial conditions: insolvency; possessing an unreasonably small capi*207tal; or believing that the debtor would incur debts beyond its ability to repay after the transaction. If a transaction leaves the debtor in any one of these conditions, and if the transaction was for less than a reasonably equivalent value, then fraud is presumed; no evidence of the debtor’s intent is required.” 5-548 Collier on Bankruptcy P 548.05.
“Reasonably equivalent value (“REV”) is not specifically defined in the Bankruptcy Code.” Vista Bella at 197. “However, the purpose of the requirement is well known: ‘to protect creditors against the depletion of a bankrupt’s estate.’ ” Id, (citing In re TOUSA, Inc., 680 F.3d 1298, 1311 (11th Cir. 2012); In re Rodriguez, 895 F.2d 725, 727 (11th Cir. 1990)). “Therefore, § 548(a)(1)(B) ‘does not authorize voiding a transfer which confers an economic benefit upon the debtor’ because ‘the debtor’s net worth will have been preserved, and the interests of the creditors will not have been injured by the transfer.’” Id. (citing Rodriguez, 895 F.2d at 727). “The pivotal question asks what value a debtor received from a transfer.” Id. “The Bankruptcy Code defines “value” for § 548 purposes in § 548(d)(2)(A), to include ‘property, or satisfaction or securing of a present or antecedent debt of the debtor.’” Id. The fact the Debtor “ultimately landed in bankruptcy does not preclude a finding that value was not given, even if the value increased the debtor’s insolvency.” In re PSN USA, Inc., 615 Fed.Appx. 925, 932 (11th Cir. 2015). “A determination of whether value was given under [§ ] 548 should focus on the value of the goods and services provided rather than on the impact that the goods and services had on the bankrupt enterprise.” Id.
To determine whether a debt- or received REV, this Court has adopted the three part test set out by the Northern District of Georgia: “(1) whether the debt- or received value; (2) whether the value received was in exchange for the property transferred; and 3) whether the value was reasonably equivalent to the value of the property transferred.” Vista Bella, 511 B.R. 163, 197 (citing In re Knight, 473 B.R. 847, 850 (Bankr. N.D. Ga. 2012). A dollar-for-dollar transaction is not required, nor is strict market equivalence of the transferred property and the received consideration. Id.
This Court finds the first two factors have been sufficiently met. First, Kudzu received value as defined by the Code: “value” for § 548 purposes in § 548(d)(2)(A), to include “property, or satisfaction or securing of a present or antecedent debt of the debtor.” Vista Bella, Inc. at 197. “Value includes the mere opportunity to receive an economic benefit in the future.” Vista Bella at 203 (citing In re Fruehauf Trailer Corp., 444 F.3d 203, 212 (3d Cir. 2006)). Whether value was received at all is a threshold questiop resolved by the court’s determination of whether “based on the circumstances that existed at the time of the transfer, it was legitimate and reasonable to expect some value to accrue to the debtor.” Id. Because the sale of the 1801 released Kudzu’s antecedent debt with Iberia Bank, value was received by Kudzu and the first factor is satisfied. Second, the value received by Kudzu (release of the Iberia Bank mortgage) was given by Lanac in exchange for the 1801 and the Sandra Ann, thereby satisfying the second factor.
The parties dispute the third factor of whether the value given was the reasonably equivalent value of the property. The Trustee proposes the Court rely on appraisals submitted by Beebe, Sr., and Mark Schiffer which value the barge at three different time periods at over $1,000,000.00 thereby demonstrating the *208$460,711.64 purchase price paid by Lanac was less than reasonably equivalent value. In contrast, Lanac contends that appraisals submitted by the Trustee are flawed in that neither Beebe, Sr., nor Mark Schiffer have surveyed, or even seen, the barge since 2009 and thus, their estimates of value do not adequately reflect what the barge was worth at the time Lanac purchased it. Additionally, Lanac contends that its appraisals conducted by Beebe, Jr., Christopher Collier, and Fred Budwine, and the lack of other better offers demonstrate the purchase price was sufficient for this Court to find that reasonably equivalent was given by Lanac. While this Court agrees with Lanac that the Trustee’s appraisals are indeed flawed, it does not agree that reasonably equivalent value has otherwise been established. As previously addressed, every appraisal submitted lacks a relevant piece of the puzzle in determining fair market value.
The purchase agreement for the 1801 states a total purchase price of $460,711.64. Even if the Court were to give the most weight to the lowest-value appraisal of $590,000.00, the evidence shows that Lanac still paid $129,288.36 less than the barge’s appraised value. An approximate $129,000.00 difference is too great for this Court to find that reasonably equivalent value was given. The Court recognizes that Lanac purchased the barge in significant disrepair, and spent approximately $93,770.74 in repairs to make the barge operable again. Factoring the cost of repairs, the purchase price is still $35,517.62 less than the lowest appraised valuation.
In situations like this, the market is a better indicator of value than relying on multiple, widely varying appraisals. Trying to properly weigh the evidence and assign a value based on eight disparate appraisals makes the valuation process more arbitrary than this Court can accept. The eight appraisals entered into evidence range in value from $590,000.00 to $1,433,000.00. The purchase price of $460,711.64 clearly falls below this range. Consequently, the Court is unable to conclude that Lanac paid a reasonably equivalent value for the barge.
Turning to the remaining elements of constructive fraud under § 548(a)(1)(B), the Court finds the only element that applies is subsection (B)(ii)(I): that the debt- or 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. Section 101 of the Code defines insolvent as “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation .... ” § 101(32(A). Kudzu shareholder Steve Wilson testified that Kudzu never operated at a profit and that Kudzu had no other marine assets once the Sandra Ann and 1801 were sold. On behalf of Lanac, Mr. Gotimer testified that he knew Kudzu would have no marine assets left after Lanac purchased the Sandra Ann and the 1801, The Court finds that Kudzu either was or became insolvent when the transfer occurred. Accordingly, both elements of constructive fraud are satisfied and this Court finds that constructive fraud exists.
Good Faith Defense
Lanac defends against the Trustee’s allegations entirely by raising the § 548(c) value and good faith defense. The Trustee points out in her post-trial brief (Doc. 53 at 13), that Lanac failed to raise this affirmative defense in its answer, and thus cannot avail itself of the statuteis safe harbor.5
*209Federal Rule of Civil Procedure 8(c), as made applicable to bankruptcy proceedings by Rule 7008 of the Bankruptcy Rules of Procedure, sets out a non-exhaustive list of defenses that must be pled in the affirmative. The purpose of Rule 8(c) is to give the opposing party notice of the defense and a chance to argue why the defense lacks merit. The general rule in federal court is that a party’s failure to plead specifically any affirmative defense will result in waiver of that defense. However, this Court joins those other courts that have held the general rule is not hard and fast, but instead discretionary, U.S. v. Miss. Vocational Rehab. for the Blind, 794 F.Supp. 1344, 1353 (S.D. Miss. 1992)(“federal caselaw [sic] recognizes the role of judicial discretion in waiver determination. Where the matter is raised in the trial court in a manner that does not result in unfair surprise, .,. technical failure to comply precisely with Rule 8(c) is not fatal”). In its Answer, Lanac pleaded its Fourth Defense to state that, “[t]he amount paid in exchange for the barge reflected market conditions at the time of the sale, and is therefore not inadequate consideration for the sale; such that Kudzu cannot prove any fraudulent conveyance or transaction.” (Doc. 9 at 2). Analyzing this defense in the context of the evidence presented, this Court finds that even though the words “good faith” were not expressly stated in the Fourth Defense, good faith was nonetheless sufficiently pled to put the Plaintiff on notice that Lanac intended to present evidence that the transfer that occurred between it and Kudzu was proper, or in other words, in good faith. See Mickowski v. Visi-Trak Worldwide, LLC, 415 F.3d 501, 506-07 (6th Cir. 2005). Accordingly, the Court will consider Lanac’s good faith defense.
Section 548(c) allows a party to obtain good faith transferee status where the transferee proves by preponderance of the evidence that it took the asset for value and in good faith. If this status is proven, the good faith transferee is allowed to retain “a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.”6 § 548(c). “The good faith test under § 548(c) is generally presented as a two-step inquiry. The first question typically posed is whether the transferee had information that put it on inquiry notice that the transferor was insolvent or that the transfer might be made with a fraudulent purpose.” In re Int’l Mgmt. Assocs., LLC, 2016 WL 552491 (Bankr. N.D. Ga. Feb. 10, 2016)(citing In re American Housing Foundation, 544 Fed.Appx. 516, 520 (5th Cir. 201S)(citing Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC 439 B.R. 284, 310-12 (S.D.N.Y. 2010). “Once a transferee has been put on inquiry notice of either the transferor’s possible insolvency or of the possibly fraudulent purpose of the transfer, the transferee must satisfy a ‘diligent investigation’ requirement.” Id.
The Fourth Circuit Court of Appeals held that “in evaluating whether a transferee has established an affirmative defense under Section 548(c), a court is required to consider whether the transferee actually was aware or should have been *210aware, at the time of the transfers and in accordance with routine business practices, that the transferor-debtor intended to “hinder, delay, or defraud any entity to which the debtor was or became ... indebted.” In re Taneja, 743 F.3d 423, 430 (4th Cir. 2014) (citing 11 U.S.C. § 548(a)(1)(A);Goldman v. City Capital Mortg. Corp. (In re Nieves), 648 F.3d 232, 238 (4th Cir. 2011)). In Taneja, the Fourth Circuit found its prior § 550(b)(1) good faith analysis in Nieves applicable to good faith under § 548(c). This Court is persuaded by the reasoning employed by the majority of the Forth Circuit Court of Appeals and holds that the § 550(b)(1) “knew or should have known” good faith standard adopted in In re Nieves is applicable to the good faith defense analysis under § 548(c). A party cannot discharge its burden of demonstrating good faith through willful blindness to information that would otherwise put the party on notice of fraud. See In re Bell & Beckwith, 838 F.2d 844, 850 (6th Cir. 1988); Goldman, 648 F.3d at 242.
Applying the law set out above, and considering that the testimony and evidence presented at trial, this Court finds that Lanac conducted itself in good faith in purchasing the 1801. Considering the first prong of the good faith analysis, this Court finds that Lanac was on inquiry notice as it had sufficient information relating to the Debtor’s financial status that it knew or should have known of the potential insolvency of Kudzu.
The Trustee asks this Court to adopt a reading of § 548(c) which would preclude any finding of good faith if the transferee knew or should have known of the Debt- or’s insolvency. This Court does not agree with the Trustee’s rigid definition, instead it agrees with the many courts that have noted good faith is not “susceptible of a precise definition”7
After approximately four months of negotiations with Kudzu’s counsel, Lanac requested that Beebe, Jr. appraise the barge a mere three weeks before the transaction was finalized. Lanac relied on this appraisal (albeit a faulty appraisal) in establishing the price it was willing to pay for a barge in disrepair with an outdated COL The fact that the appraiser made incorrect assumptions about the value of the barge should not be- held against Lanac. The testimony and evidence presented at trial establish that Lanac negotiated extensively with Kudzu, sought out the best financing terms for the purchase, had an independent appraisal of the barge conducted before the purchase, and, notwithstanding knowledge of Kudzu’s financial situation, conducted an arm’s length transaction in purchasing the 1801. Lanac’s adherence to reasonable business practices, despite not paying reasonable equivalent value for the barge, is sufficient for this Court to conclude that this transaction is an arm’s-length transaction. Therefore, this Court finds that Lanac acted in good faith. To find otherwise would risk an inequitable and unnecessarily punitive result based on conduct that occurred in good faith, but was based on wrong or faulty information. See, e.g., In re Taneja, 743 F.3d at 433(Fourth Circuit upheld bankruptcy court’s good faith finding based on the seller’s lawyer’s assurances to the buyer that the transactions were arm’s-length when the buyer expressly asked if the transactions were fraudulent).
*211In conclusion, the Court finds that because Kudzu was made insolvent by the transfer, and because Lanac did not give reasonably equivalent value for the barge, constructive fraud exists.8 However, despite this finding of constructive fraud, the Court finds that Lanac is nonetheless entitled to good faith transferee status and a lien on the barge under § 548(e).9
The Trustee’s Recovery
Once fraud is established, the Trustee may recover the property transferred or the value of the property transferred under § 550. The Code does not provide any guidance on when a court should order a monetary judgment as opposed to the return of the property, only that a court must issue a “single satisfaction.” § 550(d). Bankruptcy courts have discretion whether to award the trustee recovery of the property transferred or the value of the property transferred. In re Taylor, 599 F.3d 880, 890 (9th Cir. 2010). The factors which a court should consider in determining whether to order turnover of the property rather than payment of the property’s value include, whether the value of the property is (1) contested; (2) is not readily determinable; or (3) is not diminished by conversion or depreciation. In re Centennial Textiles, Inc., 220 B.R. 165, 177 (Bankr. S.D.N.Y. 1998) (citing In re Aero-Fastener, Inc., 177 B.R. 120, 139 (Bankr. D. Mass. 1994). The factors are -written in the disjunctive; therefore, all three must not be present for a court to order turnover. Here, two factors are present: the value of the barge being highly contested, and it’s value being not readily determinable based on the appraisals submitted. As such, this Court finds that there is a sufficient lack of evidence as to the value of the barge such that an order to return and sell the barge is necessary.
Section 550 provides that an estate may recover the full value of an avoided transfer because § 550 is designed and intended to return the bankruptcy estate to the financial position that it would have been in had the fraudulent transfer never occurred. In re Consolidated Yacht Corp., 337 B.R. 711 (Bankr. S.D. Fla. 2006)(citing, Morris v. Kansas Drywall Supply Co., Inc., (In re Classic Drywall, Inc.), 127 B.R. 874, 876 (D. Kan. 1991). One component of that analysis is § 550(e), which permits the recipient of the fraudulent transfer to recover monies it expended to preserve the transferred property, if, and only if, the transferee accepted the transfer in good faith. Section 550(e) is applicable from an equitable perspective because § 550 is intended to return the debtor to the position it would have been had the transfer not occurred — not to return it to a better position. Id. at 714.
As previously stated, “good faith” is not a defined term in the Bankruptcy Code, and is properly determined on a case-by-case basis. This Court has found that under the unique circumstances of this case, Lanac is a good faith transferee and thus, *212§ 550(e) is available to Lanac. Section 550(e) gives teeth to the good faith defense by allowing the transferee a lien to secure any net consideration the transferee gave in improving, repairing and preserving the property transferred, or if less, the increase in value of the property caused by the improvement, such as paying taxes or discharging superior liens. See 5-550 Collier on Bankruptcy P 550.06. “The amount of the lien is limited to the lesser of two amounts: (1) the transferee’s cost incurred in making the improvement (less any profit realized by or accruing to the transferee from the property); or (2) any increase in the value of the property resulting from the transferee’s improvement.” Id, “‘Improvement’ is defined in section 550(e)(2) to include: (1) physical additions to the property, (2) repairs, (3) payment of any tax on the property, (4) payment of any debt secured by a lien on the property that is superior or equal to the trustee’s rights and (5) preservation of the property.” Id. In order to apply Section 550(e) to determine the amount of Lanac’s liens, the Court will set this matter for an evidentia-ry hearing by separate order.
CONCLUSION
Having considered the pleadings, the credibility of the testimony and the evidence presented at trial, as well as the parties’ post-trial submissions, the Court concludes that actual fraud as alleged by the Trustee simply did not exist, but that constructive fraud due to a lack of reasonably equivalent value was present during the transfer of the 1801. Despite the existence of constructive fraud, Lanac established that it acted in good faith during the transaction, thereby securing it a §§ 548(c) and 550(e) lien for its purchase price and the costs of improvements. The amount of the lien shall be determined by an eviden-tiary hearing on damages. Lanac is ORDERED to remove the barge from service and hold the barge in trust until the amount of the lien can be determined and the barge sold by the Trustee at public auction.
. For clarity, Perry H. Beebe and Perry J. Beebe are father and son, but th^y are not officially senior and junior. However, for readability purposes, the Court designates them as such. It also bears noting that they are not employed by the same appraisal firms and they each conducted their appraisals of the barge independent of one another.
. The Court notes that these percentages total 105%. These percentages were not objected to and the Court was not presented with any disputing evidence.
. "PEX” stands for Plaintiffs Exhibit. Defendant's Exhibit is referred to herein as "DEX,” and Joint Exhibit is referred to as "JEX.”
. A table top valuation is not always based on personal knowledge of the condition of the vessel, Essentially, one surveyor boards the vessel to formulate an opinion as to condition only, and then another surveyor uses that appraisal to extrapolate and assign value to the vessel.
, See 5-548 Collier on Bankruptcy P 548,09; Bayou Superfund LLC v. WAM Long/Short Fund II, L.P. (In re Bayou Group, LLC), 362 B.R. 624, 631 (Bankr. S.D.N.Y. 2007) ("The *209good faith/value defense provided in section 548(c) is an affirmative defense, and the burden is on the defendant-transferee to plead and establish facts to prove the defense.”).
. It has already been found by this Court that Kudzu received value as defined by the Code in § 548(d)(2)(A), Further analysis at this juncture is unnecessary. See analysis of reasonably equivalent value, supra, p. 207.
. In re Fair Finance Co., 2014 WL 7642447 (Bankr. N.D. Ohio July 30, 2014) (citing Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Grp.), 916 F.2d 528, 536 (9th Cir. 1990) (quoting Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 984 (1st Cir. 1983)).
. Because the analysis for constructive fraud under state law is the same as under the Bankruptcy Code, a discussion as to constructive fraud under the AUFTA will not be discussed.
. The main difference between the defense of section 550(b) for subsequent transferees and the defense of section 548(c) is that section 550(b) is a complete defense to recovery of the property transferred or its value. That is, once the transferee shows good faith, value given and a lack of knowledge of the avoidance, the trustee may not recover anything from that transferee. Under section 548(c), however, the transaction is still avoided, but the transferee is given a lien to the extent value was given in good faith. 5-548 Collier on Bankruptcy P 548.09 | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500598/ | {Nature of Proceeding: Complaint for Nondischargeability of a Debt (Doc. # 1)}
OPINION
John J. Thomas, Bankruptcy Judge
A Complaint has been filed by the Plaintiff, PHI Air Medical, L.L.C., against the Debtor, Terry Blair, seeking a ruling holding the Debtor’s obligation to PHI 'in the amount of $10,383.86 is nondisehargeable under 11 U.S.C. § 523(a)(4) and (a)(6). Trial on this matter occurred March 21, 2017, after which I took the adversary under advisement.
A creditor bears the burden of proving, by a preponderance of the evidence, the debtor’s obligation falls within one of the exceptions to discharge enumerated in § 523(a). Grogan v. Garner, 498 U.S. 279, 286-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). These exceptions are construed strictly against the objecting creditor. In re Fegeley, 118 F.3d 979, 983 (3rd Cir. 1997).
The facts are not unusual and will be described generally. Prior to the Debtor’s bankruptcy, the Debtor was in need of emergency helicopter transport to a medical facility which required the preflight execution of an “assignment of insurance benefits.” Air transport was provided by PHI, which billed $27,376. This was the amount submitted to the Debtor’s health insurance carrier by PHI. The carrier approved payment of $10,383.86 and, rather than honoring the assignment, sent a check to the Debtor. The Debtor deposited the check in his own account, never paid PHI, and used the fund for other purposes besides paying PHI. Thereafter, the Debt- or filed Chapter 13 bankruptcy.
PHI argues the fact the Debtor executed an assignment of insurance benefits prior to the medical flight. PHI claims the *228executed assignment prevented the Debtor from using the proceeds for any purpose other than paying PHI. PHI’s primary position is the Debtor, by treating the insurance check as his own property, ran afoul of § 528(a)(4) which renders nondis-chargeable debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, . or larceny.” 11 U.S.C.A. § 523 (West).
PHI places a great deal of reliance on the existence of a binding assignment which would effectively remove Debtor’s claim against his carrier from property of the estate.1 The assignment would mean the Debtor in this case would have no right to demand the insurance carrier pay him the $10,383.86 reimbursement check. Notwithstanding the legal assignment, however, the insurance carrier did, in fact, pay the Debtor this check which then obligated the Debtor to pay those proceeds over to PHI under a separate provision of the “Assignment of Benefits.” See Assignment at Doc. # 24, page 25. (“In the event any such proceeds are paid directly to me, I agree to pay them promptly to Provider [PHI].”) It also changes the character of this analysis. Since the legal assignment was not honored by the insurance carrier (assuming it knew about it), the legal assignment became ineffective, and PHI must now rely on a provision in the Assignment of Benefits requiring the Debtor to turn over the fund. This is a provision which fits within . the Restatement definition of an equitable assignment or a contract to transfer proceeds to be received in the future. I find that this check became the property of the Debtor subject to an equitable assignment. In In re Napoleon, the bankruptcy court concluded funds delivered to an assignor were imposed with a constructive trust for the benefit of the assignee. In re Napoleon, 551 B.R. 200, 205 (Bankr. E.D.N.C. 2016). In accord, In re Justin, 2014 WL 3373863 (Bankr. E.D.Mich. 2014); In re Helms, 467 B.R. 374 (Bankr. W.D.N.C. 2012). This is a position rooted in the legislative history of § 541.
Situations occasionally arise where property ostensibly belonging to the debtor will actually not be property of the debt- or, but will be held in trust for another. For example, if the debtor has incurred medical bills that were covered by insurance, and the insurance company had sent the payment of the bills to the debtor before the debtor had paid the bill for which the payment was reimbursement, the payment would actually be held in a constructive trust for the person to whom the bill was owed.
S. Rep. No. 989, 95th Cong. 2d Sess. 82 (1978).
*229The use of the term “property of the debtor” in legislative history is unfortunate since it may be somewhat misleading. There is no question that all legal and equitable interests of the debtor in property are generally included in debtor’s estate. 11 U.S.C. § 541(a)(1). Section 541(d), however, excludes from that property those items in which the debtor’s interest is only legal and not equitable. Undoubtedly, this would include the res of an express trust in which the debtor was a trustee. In this Circuit, a constructive trust would also be removed from the debtor’s estate and entitle the provider with a right of turnover. In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1059 (3rd Cir. 1993)2. A constructive trust, however, is a legal construct which is only implemented where both the legal and equitable ownership of a fund is in the hands of the owner. It is an equitable remedy utilized by the courts and designed to create a fair result in the absence of an express or resulting trust.3 A constructive trust simply does not exist until a court says it does.
“A constructive trust has been defined to be a relationship with respect to property subjecting the person by whom the title to the property is held to an equitable duty to convey it to another on the ground that his acquisition of the retention of the property is wrongful and that he would be unjustly enriched if he were permitted to retain the property ... a constructive trust is imposed not to effectuate intention but to redress wrong or unjust enrichment. A constructive trust is remedial in character.”
City of Philadelphia v. Heinel Motors, 142 Pa.Super, 493, 16 A.2d 761, 765-66 (1940) citing Restatement of the Law of Trusts, Vol. 1, p. 5, Chap. 1, section 1(e).
If PHI was seeking the imposition of a constructive trust and a turnover of what remains of this fund held by the Debtor, I would likely grant such request; but PHI is not asking for a turn over of funds, rather, an exception from discharge of the Debtor’s obligation to repay this sum.
It is generally held a “[constructive or implied trust or trust ex maleficio is not sufficient to create [a] fiduciary relationship within [the] meaning of 11 U.S.C.A. § 523(a)(4).” Constructive or Implied Trusts; Trusts ex Maleficio, 2F Bankr. Service L.Ed. § 27:782. In accord, Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934). Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996); In re Thompson, 458 B.R. 504 (8th Cir. BAP 2011), aff'd, 686 F.3d 940 (8th Cir. 2012); In re Fahey, 482 B.R. 678 (1st Cir. BAP 2012). Because the fund in question was not created as a result of an express or residual trust, I conclude the Debtor was not acting in a fiduciary capacity.
11 U.S.C. § 523(a)(4), though, not only covers fraud or defalcation while acting in a fiduciary capacity, but this subsection would also be applicable to acts of embezzlement or larceny.
Embezzlement is the fraudulent appropriation of property by a person to *230whom such property has been entrusted, or into whose hands it has lawfully come. It differs from larceny in the fact that the original taking of the property was lawful, or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the taking....
Larceny is the fraudulent and wrongful taking and carrying away of the property of another with intent to convert the property to the taker’s use without the consent of the owner. As distinguished from embezzlement, the original taking of the property must be unlawful.
4 Collier on Bankruptcy ¶ 523.10,[l][e][2] at 523-76, 77 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017).
The facts before me do not appear to allow the possibility of larceny inasmuch as Debtor’s possession of the proceeds were anticipated by the terms of the “Assignment of Benefits” which appear to contemplate the health insurance company might send the insurance check directly to the insured.4 “[L]arceny requires taking and carrying away of another’s property ....” Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 1760, 185 L.Ed. 2d 922 (2013). Despite the dishonored assignment, the check from the health insurance carrier was never the actual property of PHI. There was no larceny.
It appears clear, for PHI to prevail, it must establish the Debtor embezzled these funds. This is where the Supreme Court’s discussion in Bullock is instructive. It is not every breach of contract which will fit within the § 523(a)(4) criteria. Fraudulent conduct, or its equivalent, is a necessary element of finding cause has been established under § 523(a)(4). Bullock v. BankChampaign, N.A., 133 S.Ct. at 1759.
The Debtor most certainly breached his agreement to transfer the fund to PHI, but did such conduct cost him his ability to discharge this debt? Embezzlement requires a “felonious intent” which “must have existed at the time of the taking.” Moore v. United States, 160 U.S. 268, 270, 16 S.Ct. 294, 295, 40 L.Ed. 422 (1895). Here, the Debtor did not implement a deception so as to arrange transfer to him of funds meant for PHI. He resisted this air transport and only consented, because his treating physician offered no alternative. In violation of the assignment, the insurance carrier sent the check to the Debtor, which check became the property of the Debtor.
Once the Debtor received this insurance check, he offered the same to PHI with the proviso he would be released from any balances owing. He even retained counsel to assist him in the negotiation. Unquestionably, the Debtor held that fund in a constructive trust for the benefit of PHI. In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1059 (3rd Cir. 1993). But, one cannot embezzle one’s own properly. In re Phillips, 882 F.2d 302 (8th Cir. 1989). If the insurance carrier was aware of the *231assignment, then it obviously ignored it and sent the check for $10,383.86 directly to the Debtor. At that point, the fund belonged to the Debtor who was contractually responsible for paying it over to PHI together with the balance of expense for the medical flight. Just as one cannot steal money from oneself, one cannot embezzle money from a constructive trust. Although I have no problem finding an obligation to pay PHI, I simply do not see a felonious intent to deprive another of its property inasmuch as the check received by the Debtor vested a full interest in the fund in the Debtor, not PHI, especially when construing § 523(a)(4) strictly against the objecting creditor as I must.
I am hard-pressed to find the type of felonious intent required by the Court in Bullock. There is no clearer illustration of the dynamics implicated here than comparing the facts present in Bullock with those in the present case. Bullock also involved an allegation that dischargeability should be denied under § 523(a)(4) because the trustee of a trust for the benefit of his siblings, violated the trust by borrowing money from the trust for the benefit of his mother. While the Supreme Court acknowledged such activity was a breach of fiduciary duty, the Court explained the trustee was not possessed of the fraudulent intent which Congress was attempting to address in § 523(a)(4). The Court held § 523(a)(4) was inapplicable. As was stated in Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151, 153, 79 L.Ed. 393 (1934), a willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances. Under these facts, I simply cannot find the fraudulent intent needed to deny the dischargeability of this debt. In accord, In re Tucker, 346 B.R. 844, 853 (Bankr. E.D.Okla. 2006). This Court finds PHI has not met its burden of proof, and the debt is not excepted from discharge pursuant to 11 U.S.C. § 523(a)(4).
PHI also advances the discharge of this obligation should be denied under the provisions of § 523(a)(6), which excepts from discharge those debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” There is authority for this position found in a number of Chapter 7 cases. In re Gandara, 218 B.R. 808, 813 (Bankr. E.D.Va. 1997); Richmond Metro. Hosp. v. Hazelwood (In re Hazelwood), 43 B.R. 208, 214 (Bankr. E.D.Va. 1984); In re Lavitsky, 11 B.R. 570 (Bankr. W.D.Pa. 1981). The cited cases predated the seminal case in this area, Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). Kawaauhau emphasized the act in question must not only cause injury, but the debtor must intend for that injury to occur. This holding, the Court said, was consistent with an earlier ruling of the court. Kawaauhau v. Geiger, 118 S.Ct. at 978 citing McIntyre v. Kavanaugh, 242 U.S. 138, 37 S.Ct. 38, 61 L.Ed. 205 (1916). Nevertheless, the broader Chapter 13 discharge provides that debts arising qnder § 523(a)(6) are eligible for discharge. 11 U.S.C. § 1328(a)(2). For this reason, I must rule in favor of the Debtor on that Count.
My Order will follow.
. Property interests are determined under state law inasmuch as those interests should not be affected by the "happenstance of bankruptcy.” Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (U.S. 1979). Pennsylvania law recognizes two forms of "assignments,” legal and equitable. In re Purman's Estate, 358 Pa. 187, 190, 56 A.2d 86, 88 (1948). Legal assignments exist where the assignor has a present intent at the time of assignment to divest himself of his right. Melnick v. Pennsylvania Co. for Banking and Trusts, 180 Pa.Super. 441, 443-44, 119 A.2d 825, 826 (1956). An "equitable assignment” depends on the equitable powers of the court for enforcement.
An equitable assignment has been best described in the Restatement of Contracts:
In some circumstances a contract to assign or a contract to transfer proceeds may create a right in the promisee very similar to that of an assignee. Even though there is no present assignment, the promisee may have a right to specific performance of the promise. If it can be enforced against third parties, such a right resembles that of an assignee, and it is sometimes referred to as an "equitable assignment” or "equitable lien.”
Restatement (Second) of Contracts § 330 (1981) comment c.
. But see a contrary position voiced in In re Omegas Grp., Inc., 16 F.3d 1443, 1452 (6th Cir. 1994) ("Constructive trusts are anathema to the equities of bankruptcy since they take from the estate, and thus directly from competing creditors ....”)
. A resulting trust ■ arises where a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest therein, unless the inference is rebutted or the beneficial interest is otherwise effectively disposed of. Restatement of the Law of Trusts 2d § 404.
. PHI’s Complaint specifically alleged, in Count I, that the Debtor committed "larceny.” Thereafter, in a pretrial brief, (Doc. # 26), PHI suggested embezzlement under the same subsection might be more ap propo. "When an issue not raised by the pleadings is tried by the parties' express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move — at any time, even after judgment — to amend the pleadings to conform them to the evidence and to raise an impleaded issue. But failure to amend does not affect the result of the trial of that issue.” Federal Rule of Civil Procedure Rule 15(b)(2), made applicable in bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7015, In the absence of objections, I must conclude this issue was tried by consent. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500599/ | MEMORANDUM OPINION
Robert L. Jones, United States Bankruptcy Judge
The debtors, Jacob and Tobitha Lara, filed their motion seeking actual and punitive damages, plus attorney’s fees, for violations of the automatic stay and the discharge injunction by Vivint, Inc. Vivint did not respond to the motion or appear at the hearing held on the motion on February 22, 2017. The Laras appeared at the hearing and testified in support of their motion.
The Court concludes that Vivint did willfully violate the automatic stay and discharge injunction. As set forth below, the *234Court awards actual and punitive damages, plus the requested attorney’s fees.
The Court has authority to decide this matter under 28 U.S.C. §§ 1384(b) and 167(b)(2). This memorandum opinion contains the Court’s findings of fact and conclusions of law. See Fed.R.Bankr.P. 7052 and 9014.
I.
A.
The Laras filed their joint chapter 7 bankruptcy case on September 15, 2016; Jacob Lara is 29, Tobitha Lara is 27. The Laras are represented by John J. Grieger, Jr., of Legal Aid of Northwest Texas. Vivint is one of the Laras’ creditors, holding an unsecured claim in an amount the Laras listed in their schedules as unknown. They misspelled Vivint as “Vivnt,” but identified Vivint’s claim as arising from a contract for a home security system. They stated that Vivint’s address is 4931 North 300 West, Provo, Utah 84604.
The home security system was installed by Vivint at the Laras’ residence in Midland, Texas. Several months before their bankruptcy filing, the Laras moved to Seminole, Texas.
The Laras, on Schedule G, which concerns leases and executory contracts, stated that they were rejecting the contract with Vivint.
Vivint is a domestic, for-profit corporation that has the location of its registered agent as 4931 N 300 W, Provo, Utah 84604. Debtors’ Ex. C. A formal notice of the Laras’ bankruptcy filing was served by first class mail by the Bankruptcy Noticing Center on Vivint at 4931 North 300 West, Provo, Utah 84604-5816. The official notice describes the filing, the imposition of the automatic stay, and that the debtors, the Laras, would be seeking a discharge through their bankruptcy filing. The notice further informed creditors that there were no assets in the estate and thus the filing of proofs of claim was unnecessary.
Prior to filing their bankruptcy case, the Laras paid their Vivint account through an arrangement with Vivint by which Vivint would draft their account to pay for services provided by Vivint. Shortly after the Laras’ bankruptcy filing on September 15, 2016, Vivint drafted $63.00 from the Laras’ account. Tobitha Lara immediately called a Vivint representative and advised her of the bankruptcy filing. The Vivint representative was sympathetic, advising Mrs. Lara that she, too, had once filed a bankruptcy case. Another Vivint representative advised Mrs. Lara that the $63.00 would be refunded, which in fact it was two weeks later. In doing so, Vivint obviously recognized that it had run afoul of the automatic stay that is imposed upon a bankruptcy filing.
Despite rectifying the original stay violation, Vivint continued to demand payment from the Laras for their then past due account of approximately $60.00. Vivint representatives made several phone calls to the Laras, both to Tobitha Lara at their home number and to Jacob Lara to his cell phone while he was working. Each time the Laras advised the caller of their pending bankruptcy case.
Then, on October 26, 2016, Vivint started sending monthly emails demanding payment. On October 26, 2016, Vivint sent an email to the Laras stating, “Jacob, your account is 30 days past due.” The email, in a highlighted box, exclaimed, “Past Due Account!” It also had a smaller highlighted box stating, “Make Payment.” The address at the bottom of the email is 4931 N. 300 W, Provo, Utah 84604. The body of the email stated that Vivint was sending “this friendly reminder” that the Laras’ balance was overdue. Debtors’ Ex. E. (emphasis *235added). The email farther recited that it was an attempt to collect a debt and that any information obtained would be used for such purpose. Id.
A second demand was made by Vivint’s email dated November 26, 2016. It stated, “Jacob, your account is 60 days past due.” It contained the same highlighted statements but, in the body of the email, stated that “we encourage you to make your payment as soon as possible.” Debtors’ Ex. F. (emphasis added). It further stated that if a payment arrangement was not made, Vivint would accelerate the agreement for immediate collection. The same address for Vivint was included.
The third email from Vivint is dated December 27, 2016. It stated, “Jacob, your account is 90 days past due.” Though the larger highlighted box stated, “Past Due Account!”, the smaller highlighted box said, “Call Now.” The body of the email said that it was extremely important that the Laras contact Vivint to resolve the payment and that Vivint “strongly urge[s] you to pay your balance as soon as possible.... ” It also threatened acceleration of the agreement.
On December 29, 2016, the Laras received their discharges under section 727 of the Bankruptcy Code. Notice of the discharges, like the original notice of the Laras’ bankruptcy filing, was mailed to Vivint at 4931 North 300 West, Provo, Utah 84604-5616. Debtors’ Ex. H. It was mailed to all creditors, including Vivint, on January 1, 2017.
Shortly after the Laras received their discharges, Vivint sent yet another demand to the Laras, advising again that they were 90 days past due. This demand, however, was sent from the Vivint Collection Center in Chicago, Illinois. Though using a different format, it stated that it was “extremely important” that the Laras contact Vivint concerning payment; the Laras were “strongly” urged to pay the balance as soon as possible. It said that the total amount “DUE UPON RECEIPT” was $62.78. Debtors’ Ex. I.
Finally, on January 27, 2017, again from the Provo, Utah address and in the same format as the prior notices from such address, Vivint advised the Laras that they were 90 days overdue and that they were “strongly” urged to pay the balance as soon as possible. All notices from Vivint from the Provo, Utah address recited that they were an attempt to collect a debt and that any information obtained would be used for such purpose. This demand was made 17 days after the Laras filed the motion here and served it on Vivint.
B.
The Laras’ attorney, John J. Grieger, Jr., submitted his affidavit in support of an award of attorney’s fees for Vivint’s multiple stay violations. Grieger spent 18.7 hours on this matter; he values his time at $400 an hour. The fees do not include time expended by two other attorneys with Legal Aid of Northwest Texas that worked on the case. Nor does it include time spent traveling from Wichita Falls, Texas, where Grieger maintains his office, to Lubbock for the hearing.
Grieger has been licensed to practice law since 1990. His prosecution of the matter was handled competently and professionally. He also used good judgment in counseling the Laras concerning their rights. The $400 rate is an approved rate adopted by the Board of Directors of Legal Aid of Northwest Texas for an attorney that has been licensed for 20-30 years. All fees were incurred as a direct result of Vivint’s stay violations. The fees are fair and reasonable under the circumstances.
II.
The automatic stay is the protection afforded to an individual that seeks *236relief under our nation’s bankruptcy laws. The coverage of the automatic stay, by the provisions of the Bankruptcy Code, is both broad and specific. It stays the “commencement or continuation” of a “judicial, administrative, or other action or proceeding against the debtor”; it stays any “act to collect, assess, or recover a claim against the debtor”; it covers the attempted enforcement of a judgment against the debtor or the debtor’s property; it encompasses any acts that seek to “obtain possession” or “control” over estate property, including any act to “create, perfect, or enforce” any lien; and it covers any act to “collect, assess, or recover a claim” against the bankruptcy estate. See 11 U.S.C. § 362(a). The action stayed must concern rights and claims that arose before the commencement of the bankruptcy case. Id.
The debt here that Vivint was seeking to collect arose before the Laras filed their bankruptcy case, which, as with all the alleged facts, Vivint has not disputed. The motion for sanctions was filed on January 10, 2017; it contained a conspicuous notice stating that interested parties had until February 3, 2017 to file an objection or other response to the motion. The motion recites, and correctly so, that the Laras not only listed Vivint as an unsecured creditor, but they also listed the contract between Vivint and the Laras as an execu-tory contract that the Laras were rejecting. The facts as determined from the evidence mirror the facts alleged by the Laras’ motion. The motion asserted that the repeated violations of the automatic stay and the discharge injunction were willful and that the Laras were thereby injured by Vivint’s conduct; Vivint was properly served with the motion and did not file a response and made no appearance at the hearing. Vivint is deemed to have admitted the Laras’ allegations.
■ ■ A.
Section 362(k) of the Bankruptcy Code provides that a willful stay violation concerning an individual debtor mandates an assessment of damages against the violator. “Willfulness within the context of an alleged stay violation is almost universally defined to mean intentional acts committed with knowledge of the bankruptcy petition.” In re San Angelo Pro Hockey Club, Inc., 292 B.R. 118, 124 (Bankr. N.D. Tex. 2003) (internal citations omitted). Vivint’s demands — through phone calls and, particularly, through the formal demand letters emailed or mailed to the Laras — were made intentionally. Vivint knew that the Laras had filed bankruptcy. The Laras, through counsel, submit that Vivint had at least five discreet chances to honor and abide by the automatic stay. The first chance arose upon receipt of the initial notice of the Laras’ bankruptcy filing. Second was when Tobitha Lara contacted the Vivint representative after Vivint drafted the Laras’ bank account. The third chance arose from the multiple times the Laras advised Vivint representatives of the bankruptcy filing in phone conversations had between Vivint and the Laras. The Laras’ discharge and Vivint’s receipt of notice of the discharge was the fourth opportunity. The fifth chance arose upon the Laras’ filing of the motion here. Given its failure to respond to the motion here, Vivint has offered no explanation for its conduct. The Court can only conclude that Vivint’s conduct arose from base-level incompetence or, worse, was intentional.
The Laras and their counsel request an award of actual damages of $500.00, plus attorney’s fees of $7,480.00; they seek punitive damages of $10,000.00 for each of the five chances that Vivint had to rectify its conduct.
Actual damages of $500.00 covers, at least partly, the Laras out-of-pocket *237expenses for dealing with this. They traveled to Lubbock for the hearing. Tobitha Lara makes $12.50 an hour; Jacob Lara makes $14.50 an hour. Both Jacob and Tobitha Lara testified that they missed several hours of work. Vivint’s conduct caused stress and frustration for the Lar-as. In making this assessment, the Court notes that the Laras were not overly sensitive and were not easily aggravated. They simply wanted Vivint to recognize and abide by what they understood to be the most basic protection provided by their bankruptcy filing — that creditors could no longer hound them for their debts. The price of filing bankruptcy, and all that that entails, affords debtors this basic protection. x
The evidence establishes that the Laras incurred actual damages of at least $500.00 due to missed work and pay as a result of Vivint’s conduct. An award of the $7,480.00 in attorney’s fees is likewise appropriate. The Court assumes that the Laras have not paid such fees to Legal Aid of NorthWest Texas and will therefore direct that the award of attorney’s fees goes to Legal Aid of NorthWest Texas.
B.
The statute further provides that individuals injured by a willful stay violation may, in appropriate circumstances, recover punitive damages. § 362(k).' The Fifth Circuit has held that “egregious conduct” by the violator is an appropriate circumstance for an award of punitive damages. Young v. Repine (In re Repine), 536 F.3d 512, 621 (5th Cir. 2008). Vivint’s conduct beyond the first stay violation (the drafting of the Laras’ account for the $63.00) was egregious. In determining the amount of punitive damages, the Court considers the degree of reprehensibility of Vivint’s conduct, the disparity between the harm or potential harm to the Laras and the punitive damages, the difference between penalties imposed in comparable cases, and the need to deter such conduct in the future. Bruner-Halteman v. Educ. Credit Mgmt. Corp. (In re Bruner-Halteman), 12-32429-HDH-13, 2016 WL 1427085, at *9 (Bankr. N.D. Tex. April 8, 2016).
Vivint’s failure to honor the basic promise of the Bankruptcy Code and to continue to do so after multiple notices was outrageous. The Laras request punitive damages of $10,000.00 for each of the five instances that Vivint was reminded that it needed to stop. This is a reasonable approach. In this regard, the Court denies an award for punitive damages for Vivint’s first stay violation caused by its drafting the Laras’ account. This occurred proximate to filing of the case and was rectified after Tobitha Lara contacted Vivint. But somehow, and for some reason, Vivint persisted in its efforts to collect its $63.00 and it ramped-up its efforts with each demand — a “friendly reminder” evolved to “strongly” urging payment of the $63.00 that was “DUE UPON RECEIPT.” The Court, therefore, awards punitive damages of $2,000.00 for Vivint’s failure to cease its collection efforts after its second chance, the phone call made by Tobitha Lara after the drafting of the Laras’ account; $4,000.00 for its failure to stop in light of the various phone calls between the Laras and Vivint; $8,000.00 for its continued demands after the Laras’ discharge; and $10,000.00 for ignoring the motion here.
III.
The total .award is as follows:
(1) $500.00 in actual damages and $24,000.00 in punitive damages- to the Laras; and
(2) $7,480.00 in attorney’s fees that shall be paid to Legal Aid of NorthWest Texas.
*238The Court will issue an order in accordance with this Memorandum Opinion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500601/ | OPINION
TRACEY N. WISE, Bankruptcy Appellate Panel Judge.
Appellant/Debtor Antoinette Pace (“Debtor”) owned nonresidential real estate that foreclosure creditor The Farmers National Bank of Canfield (“FNB”) sold in *266a prepetition foreclosure sale. After the sale but still prepetition, FNB obtained a deficiency judgment against Debtor and filed two judicial liens. During her chapter 7 case, Debtor filed a motion pursuant to § 522(f)(1)(A)1 to avoid the FNB judgment liens (and two other unrelated judgment liens) on the grounds that they impaired Debtor’s Ohio homestead exemption in her residence. The bankruptcy court denied Debtor’s motion as to one of FNB’s judicial liens, ruling that § 522(f)(2)(C) specifically prohibits the avoidance of a deficiency judgment lien because it is a lien based on a judgment arising out of a mortgage foreclosure. The court denied Debtor’s motion seeking avoidance of FNB’s other judicial lien, without prejudice, to the extent that it alleged that the lien was duplicative of FNB’s first judicial lien. The bankruptcy court granted the motion to avoid the other two unrelated judicial liens.
For the reasons stated below, the Panel REVERSES the bankruptcy court’s ruling that § 522(f)(2)(C) precludes avoidance of a mortgage deficiency judgment lien and REMANDS this case to the bankruptcy court for entry of an order consistent with this Opinion.
ISSUES ON APPEAL
Debtor raises two issues on appeal:
1. Did the bankruptcy court err in denying Debtor’s motion to avoid the FNB judicial lien pursuant to § 522(f)(2)(C) because the motion was unopposed?
2. Did the bankruptcy court err in determining that a judicial lien securing a mortgage deficiency judgment is prohibited from avoidance pursuant to § 522(f)(2)(C) because it is a judgment arising out of a mortgage foreclosure?
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. Pursuant to 28 U.S.C. § 158(a)(1), this Panel has jurisdiction to hear appeals “from final judgments, orders, and decrees” issued by the bankruptcy court. For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. U.S., 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citation and quotation marks omitted); see also Riley v. Kennedy, 553 U.S. 406, 419, 128 S.Ct. 1970, 1981, 170 L.Ed.2d 837 (2008). A “bankruptcy court’s order denying [a] [djebtor’s motion to avoid a lien pursuant to section 522(f) is a final appealable order.” Snyder v. Rockland Trust Co. (In re Snyder), 279 B.R. 1, 2 (1st Cir. BAP 2002) (citations omitted); accord, Davis v. Davis (In re Davis), Nos. 04-029, 03-06524-M, 314 B.R. 904, at *2 (10th Cir. BAP 2004) (unpublished table decision) (citation omitted).
A bankruptcy court’s legal conclusions are reviewed de novo. Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810, 814 (6th Cir. 2015) (citation omitted). “Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (6th Cir. BAP 2007) (citation omitted).
*267FACTS AND PROCEDURAL HISTORY
The relevant facts are undisputed. Debt- or filed a chapter 13 bankruptcy petition on December 21, 2015 (“Petition Date”). She scheduled her residence located at 3481 Forty Second Street, Canfield, Ohio (“Residence”) at a value of $147,630. Debt- or claimed the Ohio homestead exemption in her Residence in the amount of $132,900 pursuant to Ohio Revised Code § 2329.66(A)(1).2
Debtor’s Schedule D listed judicial liens encumbering the Residence filed by FNB and Midland Funding. Schedule D also listed a secured claim against the Residence in favor of the Mahoning County Auditor/Treasurer. Schedule D did not list a mortgage against the Residence, but in her answer to Part Four of the Statement of Financial Affairs regarding prepetition lawsuits, Debtor listed a concluded foreclosure case styled Farmers vs. Antoinette C. Pace, 2011 CV 00032, in the Mahoning County, Ohio Court of Common Pleas.
Debtor converted her chapter Í3 case to a chapter 7 case on March 1, 2016. On June 22, 2016, Debtor filed her Motion to Avoid Liens (Bankr. No. 15-42267, ECF No. 32 (“Motion”)) pursuant to § 522(f), seeking to avoid judicial liens on her Residence thát impaired her homestead exemption. The Motion identified the subject liens as follows (collectively, the “Judicial Liens”):
• The Farmers National Bank of Can-field, filed May 20, 2014,3 in the amount of $141,013.65 with $15.39 interest (“FNB Lien No. 1”)
• The Farmers National Bank of Can-field, filed May 20, 2014,4 in the amount of $141,013.65 with $15.39 interest (“FNB Lien No. 2”)
• Midland Credit Management, Inc., filed October 21, 2011, in the amount of $1,889.72 with 4% interest (“MCM Lien”)
• Matthew C. Giannini, filed February 24, 2015, in the amount of $2,975.00 with 3% interest (“Giannini Lien”)
The Motion also asserted that the Mahon-ing County Treasurer held a lien against the Residence for unpaid real estate taxes totaling $15,435.78.
On February 2, 2016, FNB filed a proof of claim in the amount of $151,869.39, which was denominated Claim No. 5-1. Attached to the proof of claim is a Certificate of Judgment Lien for Lien Upon Lands and Tenements filed July 3, 2014, in the amount of $141,013.65 with interest at the rate of $15.39 per diem and $1,914.15 in costs. The bankruptcy court determined that the Certificate appeared to evidence FNB Lien No. 1.
The bankruptcy court held a hearing on the Motion on August 3, 2016. Although no party opposed the relief requested, during the hearing, the court' expressed concern that Debtor willfully allowed real estate taxes on her Residence to remain unpaid to create an impairment to her homestead exemption. The court ordered Debtor to file a supplemental brief on the issue.
*268Debtor filed her Support Brief (Bankr. No. 15-42267, EOF No. 47 (“Support Brief’)) on August 18, 2016, in which she argued that: (i) no party objected to the relief requested; (ii) there was no evidence of fraud by Debtor in allowing unpaid real estate taxes to accumulate to the extent that they impaired her homestead exemption; and (iii) the homestead exemption should be liberally construed in her favor. Debtor also asserted that the amount of the unpaid real estate taxes is $22,612.98, as opposed to the $15,435.78 asserted in the Motion.
On August 23, 2016, the court entered the Order Granting, in Part, and Denying, in Part, Motion to Avoid Liens (Bankr. No. 15-42267, EOF No. 48 (“Order”)). Notwithstanding the bankruptcy court’s request for briefing on the accruing property tax lien issue, the Order does not address this issue. Rather, pursuant to § 522(f), the bankruptcy court ruled that Debtor’s homestead exemption was sufficiently impaired to warrant avoidance of the MCM Lien and Giannini Lien and granted the Motion to that extent. The court denied avoidance of FNB Lien No. 1, finding that “it is clear that [FNB] Lien No. 1 is a ‘judgment arising out of a mortgage foreclosure’” and “that § 522(f)(2)(C) specifically prohibits the avoidance of this lien.” (Order at 6.) Finally, the court denied avoidance of FNB Lien No. 2 without prejudice because, “based on the record before the Court, the Court [could not] find that [FNB] Lien No. 2 is a duplicate of [FNB] Lien No. l.”5 (Id.) Debtor timely filed a notice of appeal of the Order on September 6,2016.
■ DISCUSSION
I. The Bankruptcy Court did not err in denying the Motion when it was not contested.
Debtor argues that the bankruptcy court erred in denying the Motion “when no party in interest objected and there was no evidence presented otherwise.” (Br. at 10.) The bankruptcy court acknowledged that, “[although no party filed an objection or otherwise responded to the Motion, the Court held a hearing on the Motion ...” and recognized that Debtor argued in her Support Brief that “no party has objected to the relief requested .... ” (Order at 4, 5.) Regardless, the court denied the Motion as to the FNB Liens.
The bankruptcy court’s local rules provide that “[f]ailure to file a response on a timely basis may be cause for the Court to grant the motion or application as filed without further notice to the extent such action would not conflict with any Federal Rule of Bankruptcy or Civil Procedure.” N.D. Ohio Bankr. LBR 9013-1(d). Even so, “[t]he granting of an uncontested motion is not an empty exercise but requires that the court find merit to the motion.” Nunez v. Nunez (In re Nunez), 196 B.R. 150, 156 (9th Cir. BAP 1996) (citation omitted). “Critical review of uncontested motions, moreover, is consistent with a basic legal principle — that courts are not required to grant a request for relief simply because the request is unopposed.” In re Franklin, 210 B.R. 560, 562 (Bankr. N.D. Ill. 1997). “The public expects, and has a right to expect, that an order of a court is a judge’s certification *269that the result is proper and justified under the law.” In re Evans, 153 B.R. 960, 968 (Bankr. E.D. Pa. 1993) (quoting In re Delaware River Stevedores, 147 B.R. 854, 869-70 (Bankr. E.D. Pa. 1992)). “As the party seeking to avoid the lien [under § 522(f) ], [a] [djebtor bears the burden of proof by a preponderance of the evidence.” In re Loucks, No. 11-33747, 2012 WL 260383, at *1 (Bankr, N.D. Ohio Jan. 27, 2012) (citing Lee v. Bank One, N.A. (In re Lee), 249 B.R. 864, 867 (Bankr. N.D. Ohio 2000)). “Despite the fact that [a] [djebtor’s [mjotion is unopposed, the [cjourt retains the authority and obligation to review her motion and determine whether it has merit.” In re Beauvais, No. BK14-40365, 2014 WL 2708302, at *1 n.1 (Bankr. D. Neb. June 11, 2014) (citations omitted).
The bankruptcy court did not err in denying the Motion simply because it was unopposed. The court had the authority to consider the merits of the Motion regardless of whether objections were raised. That no objection was raised does not provide a basis to reverse the court’s holding.
II. Section 522(f)(2)(C) does not prohibit avoidance of a judicial lien that arises as a result of a mortgage foreclosure deficiency judgment.
A. There is no factual dispute that if § 522(f)(2)(C) does not preclude avoidance, all of the Judicial Liens, including the FNB Liens, are avoidable under § 522(f)(2)(A).
The Motion sought to avoid the Judicial Liens on the Residence pursuant to § 522(f), which provides in relevant part:
(1) ... [Sjubject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—
(A)a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5); ■,
[[Image here]]
(2)(A) For the purposes of this subsection, 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.
(B) In the case of a property subject to more than 1 lien, a lien that has been avoided shall not be considered in making the calculation under subparagraph (A) with respect to other liens.
(C) This paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.
11 U.S.C. § 522(f).
Debtor only may avoid the fixing of a • judgment lien on her Residence “to the extent that such lien impairs an exemption to which [Debtor] would have been entitled.” 11 U.S.C. § 522(f)(1). Impairment is determined under an equation in § 522(f)(2)(A). To the extent that the sum of the liens on the Residence plus Debtor’s exemption in same exceeds the value of the Residence, Debtor’s exemption is impaired. 11 U.S.C. § 522(f)(2)(A).
Debtor asserted that the Residence had a value of $147,630 as of the Petition Date and that the Judicial Liens on the Residence collectively totaled $286,892.02. The $22,612.98 of unpaid real estate taxes owed on the Residence are secured by a statuto*270ry lien against it under Ohio Revised Code § 5721.10 (the “Real Estate Tax Lien”), Accordingly, the § 522(f)(2)(A) equation using the amounts stated in the Motion plus the updated Real Estate Tax Lien amount is as follows:
[[Image here]]
[Editor’s Note: The preceding image contains the reference for footnote 6].
It is not necessary to resolve the factual issue of whether FNB Lien No. 2 is dupli-cative of FNB Lien No. 1 to determine whether the remaining three Judicial Liens are subject to avoidance under the § 522(f)(2)(A) equation. If FNB Lien No. 2 is removed from the equation, the three remaining Judicial Liens total $145,878.37,7 and all liens on' the Residence (including the Real Estate Tax Lien) total $168,491.35. The impairment would be reduced to $153,761.35 in that scenario, which is still sufficient to support lien avoidance under § 522(f)(1)(A). The bankruptcy court correctly reached this same conclusion.
*271B. Section 522(f)(2)(C) does not preclude avoidance of the FNB Liens.
If the § 522(f)(1)(A) avoidance analysis ended with the § 522(f)(2)(A) impairment equation, all four Judicial Liens would be avoidable. However, the bankruptcy court held that this lien avoidance calculation was affected by § 522(f)(2)(C), which provides: “[t]his paragraph shall not apply with respect to a judgment arising out of a mortgage foreclosure.” 11 U.S.C. § 522(f)(2)(C). Relying on that' language, the bankruptcy court denied the Motion as it pertained to FNB Lien No. 1, stating:
Based on the Debtor’s answer to part 4 of the [Statement of Financial Affairs] and Claim No. 5-1, it is clear that [FNB] Lien No. 1 is a “judgment arising out of a mortgage foreclosure.” Thus, to the extent the Debtor is attempting to avoid [FNB] Lien No. 1, the Court finds that § 522(f)(2)(C) specifically prohibits the avoidance of this lien.
(Order at 6.) The court did not cite legal authority or analyze the statutory language to support this holding. The Order states that, “[i]n entering this order, the Court has considered the substance of the Motion, the Schedules and other documents filed by the Debtor, and the claims filed in this bankruptcy case.” (Id. at 2.)
Thus, the final issue before the Panel is the purely legal question of whether a mortgage deficiency judgment lien is a “judgment arising out of a mortgage foreclosure” within the meaning of § 522(f)(2)(C). “A split in authority has emerged on this issue .... [under which] [t]he overwhelming majority of courts hold that mortgage deficiency liens are not ‘judgments [that] aris[e] out of a mortgage foreclosure’ and are therefore avoidable under § 522(f).” First Nat’l Bank of Manchester v. Elsa (In re Elza), 536 B.R. 415 (E.D. Ky. 2015) (citing Banknorth, N.A. v. Hart (In re Hart), 328 F.3d 45 (1st Cir. 2003); In re Maxwell, No. 09-35713, 2010 WL 4736206 (Bankr. E.D. Tenn. Nov. 16, 2010); In re Burns, 437 B.R. 246 (Bankr. N.D. Ohio 2010); In re Linane, 291 B.R. 457 (Bankr. N.D. Ill. 2003); In re Carson, 274 B.R. 577 (Bankr. D. Conn. 2002); In re Smith, 270 B.R. 557 (Bankr. W.D.N.Y. 2001)).8 The Sixth Circuit Court of Appeals has not ruled on this issue, but the three courts within the Circuit that have examined it agree with the majority position. See Elza, Maxwell, and Burns, supra. Only two opinions, both from the same court, hold to the contrary: In re Criscuolo, 386 B.R. 389 (Bankr. D. Conn. 2008) and In re Vincent, 260 B.R. 617 (Bankr. D. Conn. 2000).9
Although a majority of courts agree that § 522(f)(2)(C) does not preclude avoidance of a mortgage deficiency judgment lien, different rationales have emerged to support that conclusion. Some courts have examined the foreclosure law of the state in which they sit to determine that a mortgage deficiency judgment lien does not “aris[e] out of a mortgage foreclosure” *272within the meaning of § 522(f)(2)(C).10 Por example, in Smith, the court compared the nature of a mortgage foreclosure judgment with that of a mortgage deficiency judgment under New York state law and concluded:
A judgment of foreclosure and sale arises out of a foreclosure, as an equitable suit, and it is the judgment of foreclosure and sale to which subdivision 522(f)(2)(C) makes reference. In contrast, a deficiency judgment is a legal remedy which, by statute, is allowed as a relief that is incidental to the foreclosure.
Smith, 270 B.R. at 561. Therefore, “pre-sum[ing] that Congress was particular in its selection of words for [§ ] 522(f)(2),” the Smith court concluded that “a deficiency judgment is not subject to the exclusion of’ § 522(f)(2)(C), which applies only to a “judgment arising out of a mortgage foreclosure.” Id.
Other courts in the majority have taken a different approach and focused their analyses on the procedural mechanisms of state foreclosure law. In Been, the Ninth Circuit Court of Appeals analyzed California law on sold-out junior lienholders to determine “whether the plain meaning of ‘judgment arising out of a mortgage foreclosure’ encompasses [a creditor’s] judgment lien.” Been, 153 F.3d at 1036. California law provides that a junior lienholder’s underlying lien is extinguished through the senior lienholder’s foreclosure sale. The “sold-out junior lienholder” then can bring an independent action on the underlying promissory note for the deficiency balance remaining after a foreclosure sale. Accordingly, the Ninth Circuit affirmed its bankruptcy appellate panel’s holding: “The non-judicial foreclosure sale by ... the senior lien holder[ ] terminated [the junior lienholder’s] secured interest in [the debt- or’s] property and, therefore, any remaining rights which might ‘arise out of the foreclosure proceeding. Because [the junior lienholder’s] judgment arose out of an independent action on the promissory note, section 522(f)(2)(C) is inapplicable.” Id. at 1036-37.
In contrast, led by the First Circuit Court of Appeals in Hart, other courts in the majority have determined that “application of state law is inappropriate because [§ 522(f)(2)(C)] is not ambiguous.” Hart, 328 F.3d at 48 (citation omitted). After closely examining the structure of § 522(f), the First Circuit held that “the meaning of the terms used in § 522(f)(2)(C) become ‘sufficiently clear’ for [the court] to conclude that Congress did not intend § 522(f)(2)(C) as an exception to otherwise avoidable liens.” Id. The First Circuit explained:
Like the Appellate Panel, when we examine the structure of § 522 and analyze the placement of § 522(f)(2)(C) within this structure, we find that the meaning of “this paragraph” is not ambiguous and that [§ ] 522(f)(2)(C) does not create any exception to otherwise avoidable judicial liens. Congress uses “paragraph” to refer to the numbered sections of the statute, and specifically, uses “this paragraph” to refer to § 522(f)(2). This structural analysis also makes it clear that Congress uses “this subsection” in § 522(f)(2)(A) to refer to all of § 522(f). Consequently, we are to utilize § 622(f)(2)(A)’s impairment formula for all judicial liens. *273Section 522(f)(2)(C) does not create different treatment for “a judgment arising out of a mortgage foreclosure.” Instead, Congress used § 522(f)(2)(C) to contrast mortgage foreclosure judgments from liens which are avoidable under § 522(f), clarifying that the entry of a foreclosure judgment does not convert the underlying consensual mortgage into a judicial hen which may be avoided. Mortgage foreclosure judgments do not become judicial liens subject to avoidance under § 522. “Rather, a deficiency judgment— whether it arises in a foreclosure action as in Maine or in a separate action as in Massachusetts — is a non-consensual judicial lien like any other which is subject to avoidance under § 522(f).”
Id, at 48-49 (citations omitted). The First Circuit also recognized that “Congress uses the word ‘lien’ throughout § 522(f) and only uses judgment in § 522(f)(2)(C).” Id. at 49. “Congress would have used the word ‘lien’ [in § 522(f)(2)(C) ] if it intended to exclude deficiency judgment liens.” Id. Upon this reasoning, the First Circuit held that the language of § 522(f)(2)(C) is not ambiguous and does not preclude the avoidance of mortgage deficiency judgment liens. Id. As one court noted, “this reading ... comports with the fact that the ‘primary purpose of § 522(f) [is] to benefit debtors,’ ... and the overarching goal of bankruptcy is to provide a ‘fresh start.’” Elza, 536 B.R. at 423 (citations omitted).
Two bankruptcy courts in the Sixth Circuit, among others, considered both state foreclosure law and the statutory text of § 522(f)(2)(C) before agreeing with the majority and concluding that § 522(f)(2)(C) does not preclude avoidance of mortgage deficiency judgment liens. In Bums, the court recognized that “under Ohio law ... ‘[t]he right to judgment on a note evidencing the debt secured by a mortgage and the right to foreclose on the mortgage constitute two separate causes of action, one legal and one equitable.’ ” Burns, 437 B.R. at 252 (citation omitted). “‘One exhausts the mortgage security, the other affords a personal remedy ....’” Id. (citation omitted). Because a deficiency judgment lien “is a complimentary remedy that arises out of the underlying obligation, not out of a mortgage foreclosure,” the court reasoned that it is removed “from the purview of § 522(f)(2)(C).” Id. at 253. The Bums court also was persuaded by the textual analysis of § 522(f)(2)(C) in Hart. After considering both rationales, Bums ultimately held that the mortgage deficiency judgment lien at issue was avoidable. The court in Maxwell reached the same conclusion based on its review of Tennessee state foreclosure law and the Hart and Bums textual analyses. Maxwell, 2010 WL 4736206, at *6 and *7. Bums and several courts that share the majority view of § 522(f)(2)(C) recognize that courts should begin statutory interpretation by examining the statute’s text for ambiguity and only consider legislative history or other outside sources when the statute is ambiguous. See, e.g., Burns, 437 B.R. at 249. Those courts rely at least partially upon state law to determine the meaning of § 522(f)(2)(C), but they do not state in their opinions that the statute is ambiguous or unclear.
Upon considering each of the aforementioned approaches to this issue, the Panel adopts the First Circuit’s reasoned analysis and conclusion in Hart that § 522(f)(2)(C) is unambiguous, and no review of state law or legislative history is necessary or appropriate to interpret its meaning. “The Sixth Circuit has made clear that statutory interpretation of a Bankruptcy Code provision begins with ‘the language of the statute itself....” Elza, 536 B.R. at 418 (quoting Deutsche *274Bank Nat. Trust Co. v. Tucker, 621 F.3d 460, 463 (6th Cir. 2010)).
Unless they are otherwise defined, the words in a statute will be interpreted as taking their ordinary, contemporary, common meaning. When construing a federal statute, it is appropriate to assume that the ordinary meaning of the language that Congress employed accurately expresses its legislative purpose. If the statutory language is unambiguous, the judicial inquiry is at an end, and the plain meaning of the text must be enforced.
Deutsche Bank, 621 F.3d at 462-63 (citation and internal quotation marks omitted).
“ ‘[I]t is a general principle of statutory construction that when Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.’” Hart, 328 F.3d at 49 (quoting Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 452, 122 S.Ct. 941, 951, 151 L.Ed.2d 908 (2002)). Applying this tenet, if Congress intended § 522(f)(2)(C) to modify the entirety of § 522(f), it would have used “subsection” rather than “paragraph” in the phrase “[t]his paragraph shall not apply ....” Congress also did not reference § 522(f)(2)(C) in § 522(f)(1) where it states that avoidance is “subject to paragraph (3),” which excludes certain nonpossessory, nonpurchase-money liens from avoidance. If Congress wanted to exclude “a judgment arising out of a mortgage foreclosure” from avoidance under § 522(f)(1), it only had to modify § 522(f)(1) to say “subject to paragraph (3) and paragraph (2)(C).” It did not, and the Panel must assume that was intentional. Because we find that § 522(f)(2)(C) is not ambiguous, reference to either state law or legislative history is not required to interpret or apply it. Accordingly, the Panel holds that § 522(f)(2)(C) can and must be applied in accordance with its plain meaning; it does not preclude avoidance of mortgage deficiency judgment liens.11 Rather, § 522(f)(2)(C) “clarifies] that the entry of a foreclosure judgment does not convert the underlying consensual mortgage into a judicial lien which may be avoided,” Hart, 328 F.3d at 49.
CONCLUSION
For the reasons stated, the Panel REVERSES the bankruptcy court’s ruling that § 522(f)(2)(C) precludes avoidance of a deficiency judgment lien and REMANDS this case to the bankruptcy court for entry of an order consistent with this opinion.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
.Pursuant to Ohio Revised Code § 2329.66(B), the Ohio Judicial Conference adjusts the exemption amount in Ohio Revised Code § 2329.66(A)(1) every three years. For the satisfaction of judgments and orders from April 1, 2013 through March 31, 2016 (during which Debtor filed her bankruptcy petition), the exemption amount was $132,900.
. Debtor changed this date to July 14, 2014, in her appellate brief (ECF No. 13 ("Brief”)).
. Debtor changed this date to May 30, 2014, in her Brief.
. The Motion alleges that FNB Lien No. 1 and FNB Lien No. 2 were filed in the same amount on the same day and asserts that Lien No. 2 duplicates Lien No. 1. However, the Motion also states that FNB Lien No. 2 is based on a different court case than FNB Lien No. 1. Debtor’s Brief notes that FNB Lien No. 2 "may have been released June 12, 2014," and the Brief does not comment on the matter further. (Br. at 7.) This appeal addresses only the § 522(f)(2)(C) issue.
. Debtor’s exemption is impaired regardless of whether the Real Estate Tax Lien is in the original amount stated in the Motion ($15,-435.78) or in the revised amount stated in the Support Brief ($22,612.98). The impairment is reduced to $287,597.80 if the lesser Real Estate Tax Lien amount is used.
. The bankruptcy court noted that FNB’s Claim No. 5-1 for $151,869.39, alone, exceeds the value of the Residence. (Order at 7.)
. Other opinions holding the majority position include: Cal. Central Trust Bankcorp v. Been (In re Been), 153 F.3d 1034 (9th Cir. 1998); In re Anderson, No. 09 B 12312, 2010 WL 322167 (Bankr. N.D. Ill. Jan. 25, 2010); In re Pascucci, 225 B.R. 25 (Bankr. D. Mass. 1998), abrogated on other grounds by Nelson v. Scala, 192 F.3d 32 (1st Cir. 1999); In re Rose, No. 11-62057-7, 2012 WL 1492338 (Bankr. D. Mont. Apr. 27, 2012); In re Biles, No. 10-13792-R, 2011 WL 1600521 (Bankr. N.D. Okla. Apr. 27, 2011); In re Shea, 533 B.R. 358 (Bankr. E.D.N.Y. 2015); In re Phillips, 439 B.R. 892 (Bankr. N.D. Ala. 2010); and In re McMorris, 436 B.R. 359 (Bankr. M.D. La. 2010).
. Interestingly, a decision from that court decided by a different judge holds with the majority. See Carson, 274 B.R. at 579-80.
. See, e.g., Burns, 437 B.R. at 252-53 (Ohio law); Maxwell, 2010 WL 4736206 at *6-7 (Tenn. law); Pascucci, 225 B.R. at 28-29 (Mass. law); Rose, 2012 WL 1492338, at *3 (Mont. law); Shea, 533 B.R. at 360-62 (N.Y. law); Phillips, 439 B.R. at 895-96 (Ala. law); McMorris, 436 B.R. at 363-64 (La. law); Linane, 291 B.R. at 460-61 (Ill. law).
. For these same reasons, the Panel rejects the analyses and conclusions in the minority Connecticut decisions in Criscuolo and Fin-cent, supra, both of which find ambiguity in § 522(f)(2)(C) and, thus, analyze § 522(f)(2)(C)’s legislative history. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500602/ | OPINION AND ORDER DENYING PLAINTIFFS’ REQUEST FOR ORDER TO SEIZE PROPERTY
Thomas J. Tucker, United States Bankruptcy Judge
On June 12, 2003, the Court entered a default judgment in the amount of $653,498.03 in favor of Plaintiffs and against Defendant in this adversary proceeding (Docket #28, the “Judgment”). On May 31, 2013, the Plaintiff Agnes Reid filed a motion entitled “Ex Parte Motion for Renewal of Judgment” (Docket #40, the “Motion”), seeking renewal of the Judgment. The Motion stated, in relevant part that “[a]s of May 30, 2013, Defendant has failed to satisfy the [JJudgment” and that “Defendant has not paid any amount whatsoever toward the [JJudgment” (Id. at ¶¶2-3). On June 4, 2013, the Court entered an order renewing the Judgment for an additional 10-year period (Docket #41).
Recently, Plaintiffs submitted to the Clerk of this Court a document entitled “Request [for] Order to Seize Property,” which, in relevant part, requests that the Court enter an order requiring “any sheriff, deputy sheriff or authorized court officer” to “[sjeize and sell, according to law, any of the personal property (as determined by the officer) of [the defendant] ... as will be sufficient to satisfy” the debt arising out of the Judgment, and to take certain other actions. (A copy of the request is attached to this Opinion and Order, for reference purposes.)
The Court must deny Plaintiffs’ request, because this Court does not have authority to order a state sheriff or other state court officer to collect a judgment of this Court.1
*276In Hauk v. Valdivia (In re Valdivia), 520 B.R. 95, 97 (Bankr. E.D. Mich. 2014) (footnote omitted), Aff'd, No. 14-14429, 2015 WL 1015127 (E.D. Mich. Mar. 3, 2015), this Court stated:
[T]he Court concludes that only the United States Marshals Service may serve and execute on a writ of execution issued by this Court. No state court officer may do so. See Branch Banking & Trust v. Ramsey, 559 Fed.Appx. 919, 924 (11th Cir.2014) (interpreting 28 U.S.C. § 566(c) to mean that “only a U.S. marshal may execute the federal writ of execution by levying on and selling [a judgment debtor defendant’s] property”). This Court has no authority to direct a state officer to serve and execute on a writ of execution. Only an appropriate state court would have such authority.
The Court explained further that:
if [the p]laintiff s counsel wants to use a state court officer to execute on a writ of execution, he can only accomplish that by domesticating this Court’s September 3, 2014 default judgment in an appropriate Michigan court, and then have that Michigan court issue its own writ of execution, which a state court officer can then serve. Plaintiff can file an authenticated copy of this Court’s judgment in the office of the clerk of a circuit, district, or municipal court in the state of Michigan under the “Uniform Enforcement of Foreign Judgments Act.” Mich. Comp. Laws Ann. §§ 691.1171-691.1179. That Michigan law provides, in relevant part:
Sec. 3. A copy of a foreign judgment authenticated in accordance with an act of congress or the laws of this state may be filed in the office of the clerk of the circuit court, the district court, or a municipal court of this state. The clerk shall treat the foreign judgment in the same manner as a judgment of the circuit court, the district court, or a municipal court of this state. A judgment filed under this act has the same effect and is subject to the same procedures, defenses, and proceedings for reopening, vacating, or staying as a judgment of the circuit court, the district court, or a municipal court of this state and may be enforced or satisfied in like manner.
Mich. Comp. Laws Ann. § 691.1173 (bold emphasis added). As used in this statute, “foreign judgment” includes a judgment of the United States Bankruptcy Court — it “means any judgment, decree, or order of a court of the United States or of any other court that is entitled to full faith and credit in this state.” Mich. Comp. Laws Ann. § 691.1172.
Valdivia, 520 B.R. at 97-98.
Thus, Plaintiffs may domesticate their Judgment in an appropriate state court, and pursue collection of the Judgment in that court. Or alternatively, Plaintiffs may file a request for this Court to issue a writ of execution directed to the United States Marshal.
Accordingly,
IT IS ORDERED that Plaintiffs’ Request [for] Order to Seize Property” is denied, without prejudice to Plaintiffs’ right to file a request for a writ of execution directed to the United States Marshal.
Attachment
*277[[Image here]]
. The Court notes that it previously denied a similar request by the Plaintiffs, on November 27, 2013. (See "Order Denying Plaintiff Agnes Reid’s Ex Parte Motion for Appointment of Court Officer for Purposes of Serving And Executing Order to Seize Property” (Docket # 44).) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500603/ | MEMORANDUM OF DECISION & ORDER
PRESENT: HONORABLE SCOTT W. DALES, Chief United States Bankruptcy Judge
I. INTRODUCTION
Nancy Vander Roest (the “Plaintiff’) sued her former husband, Jerry Lee Van-der Roest (the “Defendant”), to obtain an order declaring that her obligations under their prepetition divorce decree are not in the nature of support, and therefore dis-chargeable in her chapter 13 case. She also seeks an order awarding damages for his post-petition efforts to collect the debt, which she contends he pursued willfully and in violation of the automatic stay.
After the close of discovery, the Plaintiff filed a motion for partial summary judgment (the “Motion,” ECF No. 18) on the declaratory aspects of her complaint, leaving the question of damages for another day. After two extensions, the pro se Defendant filed a response (the “Response,” ECF No. 24). The court has reviewed the Motion and the Response, and has determined that it may resolve the Motion without additional oral arguments.
For the following reasons, the court will grant the Motion.
II. JURISDICTION
The United States District Court for the Western District of Michigan has jurisdiction over the Plaintiffs chapter 13 bankruptcy case, and has referred the case to the United States Bankruptcy Court. See 28 U.S.C. §§ 1334(a) and 157(a); W.D. Mich. L. Civ. R. 83.1(a). Proceedings governing the automatic stay and the discharge of particular debts fall within the court’s core jurisdiction, where the court’s authority is at its height. Moreover, the parties have consented to the court’s entry *280of final judgment. See Pretrial Order dated January 25, 2017 at p. 1; Wellness Int’l Network, Ltd. v. Sharif, — U.S. -, 135 act. 1932, 1939, 191 L.Ed.2d 911 (2015).
Although the court has authority to enter final judgment, today’s order, which postpones a ruling on the stay violation and damages questions, is interlocutory under the single judgment rule applicable in federal court. See Fed. R. Civ. P. 54(b).
III. ANALYSIS
A court should grant a motion for summary judgment only if it is satisfied that there is no genuine factual issue warranting a trial on the merits, and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c) (made applicable to this adversary proceeding by Fed. R. Bankr. P, 7056), The moving party bears the initial burden on the motion to show the absence of factual disputes and entitlement to judgment under applicable law. In reviewing a summary judgment motion, the court is mindful of where applicable law places the burden of proof. If the court is satisfied that there are no factual disputes warranting trial, the court must consider whether the moving party is entitled to relief as a matter of law.
In disputes involving the dis-chargeability of particular debts, the creditor bears the burden of bringing his claim within the exception to discharge by a preponderance of the evidence, even where, as here, the, debtor filed the complaint seeking the determination. Hart v. Molino (In re Molino), 225 B.R. 904, 907 (6th Cir. BAP 1998), Although the decision is affected by the applicable state domestic relations laws, determining whether an obligation is in the nature of support under the Bankruptcy Code is a federal question. Long v. Calhoun (In re Calhoun), 715 F.2d 1103, 1107 (6th Cir.1983) (citations omitted)).
Here, the Plaintiff has supported the Motion by including copies of the Judgment Of Divorce dated June 17, 2013 (the “JOD,” Exh. 1) and the Order re: Implementation of Judgment dated December 18, 2014 (the “Implementing Order,” Exh. 2), and has made various legal arguments. Against this showing, the Defendant has submitted only his unsworn brief arguing that “Judge Bell’s decision was made to ensure fairness and equal justice,” and that “[i]t. is important this Bankruptcy Court read Judge Bell’s final comments regarding this court case at the issuing of his final order on June 17, 2013.” See Response at p. 2. His unsworn statements also purport to show that the Plaintiff is financially able to meet her obligations to the Defendant, and that he will suffer greater financial hardship unless his claim against his ex-wife is treated as support, particularly given his report of fire damage at the “farm house.” Id. He also complains that the Plaintiff “failed to provide all of the information requested by the defendant at the March 29, 2017 deposition.” Id. at l.1
The Sixth Circuit’s decision in Sorah v. Sorah (In re Sorah), 163 F.3d 397 (6th Cir.1998), instructs a bankruptcy court to consider traditional state law indi-cia that are consistent with support obligations. These include, but are not limited to:
a. a label such as alimony, support, or maintenance in the decree or agreement,
*281b. a direct payment to the former spouse, as opposed to the assumption of a third-party debt, and
c. payments that are contingent upon such events as death, remarriage, or eligibility for Social Security benefits.”
Sorah, 163 F.3d at 401.
Here, the Plaintiff contends, with good reason, that the JOD and the Implementing Order reveal the true nature of her debt as a property settlement obligation, rather than a “domestic support obligation,” notwithstanding a provision within the JOD that purports to transform the debt from dischargeable to non-dis-chargeable upon the occurrence of the Plaintiffs default. The court agrees with the Plaintiffs construction of these documents, and with her view that the purported transformation is unenforceable .under federal law. See Calhoun, 715 F.2d at 1107 (federal law controls).
For example, as originally framed, the JOD provides that neither party is entitled to alimony, “except as otherwise provided herein.” JOD at p. 2. As is customary, the JOD provided for the division of specified marital debts, including the home equity line of credit (“HELOC”) secured by the Galesburg real estate and awarded the property to the Defendant under the heading “Property Settlement in Lieu of Dower.” Id. at pp. 4-6. The JOD’s terms governing property settlement and allocation of debt require each of the former spouses to hold the other harmless for assumed debts. See, e.g., JOD at pp. 3, 5, 6.
A careful review of the JOD shows that the divorce court attempted to fortify the ex-spouses’ property settlement and debt-related divisions by authorizing either party to apply to the court for treatment of these obligation as “spousal support in the amount defaulted for which that party becomes liable as a result of the defaulting party’s action.” See JOD at p. 7. The supposed transformation from property settlement or hold-harmless obligation to “spousal support” is described in the provisions under the heading “Anti-Bankruptcy Clause,” which provides in relevant part as follows:
Spousal support is reserved in an amount equal to any and all liabilities assigned to the parties’ pursuant to this Judgment of Divorce. In the event either party default’s [sic] upon their respective obligation as ordered herein and the opposing party must pay for those liabilities, the opposing party will be entitled to spousal support in the amount defaulted for which that party becomes liable as a result of the defaulting party’s action.
In the event the aforementioned spousal support is ordered same shall be paid through the office of the Friend of the Court.
In the event the aforementioned spousal support is ordered, said spousal support shall be non-modifiable, non-extendable and non-reviewable.
Said support does not terminate upon death of the Payor, Payee or remarriage. This spousal support shall not be taxable to the Payee and not deductible by the Payor for Federal and State income tax purposes. Other than the above provision, neither party is entitled to spousal support and both parties shall be forever barred from same.
See JOD at p.7 (the “Anti-Bankruptcy Clause”). According to this passage, the divorce court did not award spousal support originally to either spouse; instead, the putative spousal support obligation purports to spring into existence upon either party’s default in meeting his or her property settlement obligations, including with respect to the HELOC. The amount *282of the supposed support award is measured by the unpaid property settlement obligation, rather than any particular showing of need or ability to pay at the time of the default.
Prom the court’s review of the JOD, and especially the Anti-Bankruptcy Clause, it plainly appears that, other than labeling the post-default obligation as “support” and authorizing the Friend of the Court to collect them,2 the divorce court did not imbue the obligations purportedly transformed under this clause with the traditional indicia of spousal support.
First, although true spousal support is generally modifiable to take into account the changing needs of the beneficiary or capacity of the payer, the post-default obligation under the Anti-Bankruptcy Clause is expressly termed “non-modifiable, non-extendable and non-reviewable.” So, as noted above, the amount of the supposed support obligation is measured by the unpaid obligations under the various hold harmless clauses, rather than by any showing of need or capacity to pay. See M.C.L. §§ 552.23 (court may award spousal support “after considering the ability of either party to pay and the character and situation of the parties, and all the other circumstances of the case”) and 552.28 (after a judgment for alimony or other allowance for either party, the divorce court may “make any judgment respecting any of the matters that the court might have made in the original action”).
Second, the supposed support “does not terminate upon death of the Payor, Payee or remarriage.” JOD at p. 7. Because the obligations under the JOD are not contingent upon death or remarriage, these Sorah factors point towards property settlement, rather than support. See Sorah, 163 F.3d at 401; Lewis v. Lewis (In re Lewis), 423 B.R. 742, 749 (Bankr. W.D. Mich. 2010) (even post-BAPCPA, Sorah “supplies the ‘indicia’ that should be focused upon”). Typically, the obligation to support a spouse does not survive the person to be supported, and although Michigan law recognizes that the estate of a deceased spouse may have continuing obligations to support the surviving spouse, Luckow v. Luckow, 291 Mich.App. 417, 805 N.W.2d 453 (2011), even a payer’s postmortem support obligation is modifiable, unlike the obligation imposed under the JOD in this case.
Third, the JOD also purports to determine the State and Federal tax consequences relating to the supposed spousal support payments, specifying that the payments “shall not be taxable to the Payee [Mr. Vander Roest] and not deductible by the Payor [Ms. Vander Roest] for Federal and State income tax purposes.” See JOD at p. 7. As Judge Shefferly explained, the tax provisions in the JOD reveal the divorce court’s intent not to award alimony or support, because under the Internal Revenue Code, alimony payments are deductible on the payer’s return, and taxable on the payee’s. See Andrus v. Ajemian (In re Andrus), 338 B.R. 746, 754-55 (Bankr. E.D. Mich. 2006) (citing 26 U.S.C. §§ 71(a) and 215(a)).
Fourth, when called upon to implement the Anti-Bankruptcy Clause, the divorce court entered the Implementing Order, which twice characterized the Debtor’s obligation to pay the Defendant $7,282.50 on account of the HELOC as “alimony in gross,” a term of art under state law indicating the division of property rather than support. Staple v. Staple, 241 Mich.App. 562, 616 N.W.2d 219, 222 (2000) (“alimony in gross is not really alimony intended for the maintenance of a *283spouse, but rather is in the nature of a division of property”). The divorce court’s use of the phrase “alimony in gross” in the Implementing Order corroborates the conclusion to be drawn from the Anti-Bankruptcy Clause making the hold harmless obligations non-modifíable: the debt is not in the nature of support.
Finally, as Judge Shefferly observed in Andrus when reviewing a similar clause in a divorce decree (which evidently intended to prejudge issues in future bankruptcy proceedings), the court finds no authority for giving the Anti-Bankruptcy Clause preclusive effect on the discharge-ability questions presently before this bankruptcy court. See Andrus, 338 B.R. at 755-56 (“There is no authority to permit such ‘automatic conversion’ [from dis-chargeable property settlement debt to non-dischargeable support obligation] and, conceptually, it appears to violate both §§ 523 and 727 of the Bankruptcy Code.”). Although state courts enjoy concurrent jurisdiction to determine the dischargeability of most debts (other than those specified in § 523(c)), no such authority exists in advance of any bankruptcy filing. Accordingly, even if the Anti-Bankruptcy Clause were susceptible to an interpretation that it transformed the property settlement obligations into support under Sorcih, the court would not be inclined to enforce the transformation in this proceeding.
Finding that the Plaintiff has supported her Motion with documentary evidence as Rule 56(c)(1) in the form of the JOD and the Implementing Order, and given the legal arguments just discussed, the court has no difficulty concluding that the Plaintiff has met her summary judgment burden, thereby shifting to the Defendant the burden of showing the necessity of a trial.
In response to a properly supported summary judgment motion, the party bearing the burden of proof at trial cannot “rest on his pleading” but must show that a material factual dispute exists. United States v. MedQuest Assocs., 812 F.Supp.2d 821 (M.D. Tenn. 2011). Here, the Defendant’s Response, consisting only of his unsworn statements bearing mostly on the Plaintiffs ability to pay (and the hardship he will suffer if the debt is dis-chargeable) raises no genuine issue of material fact. The Response comes closest to suggesting a factual dispute where it alludes to the tenor of Judge Bell’s comments during the hearing that resulted in the Implementing Order. However, the Defendant did not provide this court with a transcript of the hearing and, as .noted above, Judge Bell described the obligation as “alimony in gross,” which is not' support. As in the federal courts, the Michigan courts speak through their orders. Tiedman v. Tiedman, 400 Mich. 571, 576, 255 N.W.2d 632, 634 (1977).
The court finds no genuine issue of material fact in support of the Defendant’s characterization of the Plaintiffs debt as a domestic support obligation within the meaning of 11 U.S.C. §§ 101(14A) and 523(a)(5). Rather, the Plaintiffs debt to the Defendant under the JOD is in the nature of a divorce-related property settlement, falling under 11 U.S.C. § 523(a)(15), dis-chargeable in a chapter 13 case if she confirms and makes all payments required under the chapter 13 plan. See 11 U.S.C. § 1328(a).
IV. CONCLUSION AND ORDER
For the foregoing reasons, the court will grant the Plaintiffs Motion and, at the conclusion of this adversary proceeding,3 will award declaratory relief indicating that her debt to the Defendant is not a *284domestic support obligation, With respect to the remaining count of the Plaintiffs complaint (seeking damages for Defendant’s allegedly willful violation of the stay), the court will enter a scheduling order as discussed during the pretrial conference held on May 31, 2017 in Kalamazoo, Michigan.
The court notes, however, that in making a decision on the remaining issues after trial it will be mindful that the JOD’s Anti-Bankruptcy Clause and the Implementing Order, and perhaps the comments of the divorce court, may undercut a finding of willfulness. Stated differently, the Defendant’s reliance on the divorce court’s rulings,' if subjectively reasonable, may preclude or diminish the relief available to the Plaintiff under § 362(k).
Finally, the court notes that the Defendant is not bereft of all remedies under the Bankruptcy Code, only the privileges he hoped to enjoy as the holder of a non-dischargeable domestic support obligation. Although today’s decision means that his claim against his ex-wife may be discharged upon successful completion of her plan, the plan has neither been confirmed nor completed. The trustees in this district will not recommend confirmation unless they are satisfied that the debtor is committing all disposable income to the repayment of her debts within the plan commitment period. 11 U.S.C. § 1325(b)(1). Moreover, once the plan has been confirmed, upon a proper showing, an unsecured claim holder can request a plan modification to increase the plan dividend to take into account post-confirmation changes in a debtor’s financial circumstances, including those changes that the Defendant forecasts in his Response. Id. § 1329(a).
The court encourages the Plaintiff and her counsel to carefully consider their continued prosecution of this adversary proceeding, and the effect of such litigation on two parties who have endured more than their share of judicial proceedings.
NOW, THEREFORE, IT IS HEREBY ORDERED as follows:
1. The Motion (EOF No. 18) is GRANTED to the extent provided herein; and
2. The court will prepare a final pretrial order scheduling a trial to consider whether the Defendant willfully violated the automatic stay and, if so, what remedy, if any, to impose.
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 John A. Potter, Esq., Nancy Vander Roest, and Jerry Lee Van-der Roest.
IT IS SO ORDERED.
. Even forgiving an unrepresented litigant's failure to submit an affidavit or solemn declaration as the applicable rule requires, the Response does not show how the discovery is essential to support the Defendant's opposition to the Motion. See Fed, R. Civ, P. 56(d).
. These two Sorah factors favor the Defendant's interpretation.
. See Fed. R. Civ. P. 54(b) & 58(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500604/ | MEMORANDUM OPINION OVERRULING OBJECTION OF UNITED STATES STEEL CORPORATION TO CONFIRMATION OF SECOND AMENDED JOINT PLAN OF REORGANIZATION
Kay Woods, United States Bankruptcy Judge
On May 2, 2017, Debtors and Debtors-in-Possession Allied Consolidated Industries, Inc., Allied Erecting & Dismantling Co., Inc., Allied Industrial Scrap, Inc. (“AIS”), and Allied-Gator, Inc. (“AGI”) (collectively, “Debtors”) and the Official Committee of Unsecured Creditors (“Committee”) jointly filed Second Amended Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (“Joint Plan”) (Doc. 356). On May 31, 2017, United States Steel Corporation (“U. S. Steel”) filed Objection of United States Steel Corporation to Confirmation of Second Amended Joint Plan of Reorganization (“Objection”) (Doc. 364), which is presently before the Court.
The Court held a hearing to consider confirmation of the Joint Plan on June 7, 2017, which hearing was continued to and concluded on June 14, 2017 (“Confirmation Hearing”). At the Confirmation Hearing, the Court heard the testimony of (i) John K. Lane of Inglewood Associates, LLC, Crisis Manager for the Debtors and proposed “Creditor Trustee”1; and (ii) Michael R. Ramun, Sales and Marketing Manager for AGI. The Court admitted into evidence Joint Exhibits 1 through 19 and U. S. Steel Exhibit 8. Upon conclusion of the Confirmation Hearing, the Court orally approved confirmation of the Joint Plan and overruled the Objection. The Court enters this Memorandum Opinion and accompanying Order tp memorialize its overruling of the Objection.2
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)(L). The following constitutes the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I. BACKGROUND
On April 13, 2016, the Debtors filed voluntary petitions pursuant to chapter 11 of Title 11. The Debtors’ cases were substantively consolidated on July 11, 2016 (see Doc. 123).
*287On March 9, 2017, the Debtors and the Committee jointly filed (i) First Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (Doc. 313); ■ and (ii) First Disclosure Statement for Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (Doc. 314). A hearing to consider approval of the Joint Disclosure Statement was scheduled for April 25, 2017 (“Disclosure Hearing”) (see Doc. 317).
The day prior to the Disclosure Hearing, the Debtors and the Committee jointly filed (i) First Amended Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (Doc. 345); and (ii) Amended First Disclosure Statement for Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (“Joint Disclosure Statement”) (Doc. 346).
At the Disclosure Hearing, the Court conditionally approved the Joint Disclosure Statement as modified on the record. The Court directed the Debtors and the Committee to file a second amended joint plan of reorganization and a second amended joint disclosure statement to incorporate the changes to those documents conditionally approved by the Court at the Disclosure Hearing.
On May 2, 2017, the Debtors and the Committee jointly filed (i) the Joint Plan; and (ii) Amended Second Disclosure Statement for Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (“Final Joint Disclosure Statement”) (Doc. 357). On that same date, the Court entered Order (a) Approving Second Amended Disclosure Statement for Second Amended Joint Chapter 11 Plan of Reorganization; (b) Setting Deadline for Return of Ballots; (c) Setting Confirmation Hearing; and (d) Setting Deadline for Objection to Confirmation of the Proposed Second Amended Joint Chapter 11 Plan of Reorganization (Doc. 358), in which the Court, inter alia, approved the Final Joint Disclosure Statement and scheduled a hearing to consider confirmation of the Joint Plan on June 7, 2017.
On May 31, 2017, U. S. Steel filed its Objection, and, on June 6, 2017, the Committee filed Official Committee of Unsecured Creditors’ Response to Objection of United States Steel Corporation to Confirmation of Second Amended Joint Plan of Reorganization (Doc. 369).
On June 1, 2017, the Debtors filed Ballot Tabulation Report (Doc. 366), in which the Debtors represented that 42 of 43 voting creditors accepted the Joint Plan. Specifically, Classes 1, 3, 4, 5, 6, and 7 voted in favor of the Joint Plan. Class 2, consisting only of U. S. Steel, voted to reject the Joint Plan.
At the June 7, 2017 Confirmation Hearing, the following parties appeared: (i) Andrew W. Suhar, Esq., Melissa M. Macejko, Esq., and Joseph R. Macejko, Esq. on behalf of the Debtors; (ii) Frederic P. Schwieg, Esq. on behalf of the Committee; (iii) Charles M. Oellermann, Esq., Michael R. Gladman, Esq., and David M. Belczyk, Esq. on behalf of U. S. Steel; (iv) Amy L. Good, Esq. on behalf of Daniel M. McDer-mott, United States Trustee for Region 9 (“UST”); (v) Harry A. Readshaw, Esq., on behalf (a) Eckert Seamans Cherin & Mel-lot, LLC, (b) Nadler Nadler & Burdman Co., LPA, and (c) Anness Gerlach & Williams, Inc. (collectively, the “Professionals”); (vi) Scott A. Norcross, Esq. on behalf of Norfolk Southern Railway Co. (“Norfolk Southern”); and (vii) Jonathan K. Schoenike, Esq. on behalf of Michael D. Ramun.
At the June 14, 2017 Confirmation Hearing, the following parties appeared: (i) Mr. *288Suhar and Ms. Macejko on behalf of the Debtors; (ii) Mr. Schwieg on behalf of the Committee; (iii) Messrs. Oellermann, Gladman, and Belczyk on behalf of U. S. Steel; (iv) Ms. Good on behalf of the UST; (v) R. Scott Heasley, Esq. on behalf of Norfolk Southern; and (vi) Mr. Schoenike on behalf of Michael D. Ramun.
II. ANALYSIS
The Objection contains several discrete objections to the Joint Plan. Two objections asserted by U. S. Steel have been resolved by agreement and modification on the record at the Confirmation Hearing: (i) the Debtors have agreed to use language offered by U. S. Steel to modify certain alleged contradictory and/or ambiguous provisions of the Joint Plan; and (ii) the Debtors have agreed that the “Fairless Agreements” would be rejected rather than assumed.3 The remaining objections can be summarized, as follows:
First, the Joint Plan is mischaracterized as a plan of reorganization, whereas it actually provides for liquidation of the Debtors' assets rather than reorganization of the Debtors’ business operations. Second, the Joint Plan fails to meet the best-interest-of-creditors test in 11 U.S.C. § 1129(a)(7), which requires the Joint Plan to provide U. S. Steel with no less than what it would receive if the Debtors’ assets were liquidated under chapter 7. Third, the Joint Plan is not feasible. Fourth, the Joint Plan does not comply with the cram-down standard in 11 U.S.C. § 1129(b)(2)(A) with respect to U. S, Steel’s claim. The Court will address each of these objections, in turn.
A, The Joint Plan Is Not a Plan of Reorganization
Turning to the first objection, the Court finds that the Joint Plan is a plan of reorganization. U. S. Steel asserts that the Joint Plan is a liquidating plan because it falls squarely under 11 U.S.C. § 1141(d)(3), which provides:
[d](3) The confirmation of a plan does not discharge a debtor if—
(A) the plan provides for the liquidation of all or substantially all of the property of the estate;
(B) the debtor does not engage in business after consummation of the plan; and
(C) the debtor would be denied a discharge under section 727(a) of this title if the case were a case under chapter 7 of this title.
11 U.S.C. § 1141(d)(3) (2017). Here, there is no question that the Joint Plan provides for the liquidation of substantially all of the Debtors’ property and that the Debtors would not be entitled to a discharge if this case were a chapter 7 case. Thus, the requirements in subparagraphs (A) and (C) are met. However, because 11 U.S.C. § 1141(d)(3) is in the conjunctive, all three provisions of this subsection must be met for the Joint Plan to be a liquidating plan. The Court finds that Joint Plan does not meet the requirement in subparagraph (B).
The Joint Plan provides for the Debtors to engage in business after consummation of the Joint Plan. Section 8.2 of the Joint Plan, which defines “Trust Assets,” provides that the “Reorganized Debtor” will continue operations post-confirmation during the time the “Creditor Trust” is liquidating assets.4 Section 8.2(d) of the Joint Plan provides for certain income from the *289Reorganized Debtor’s ongoing operations to be contributed to the Creditor Trust; specifically, “[t]he net income from scrap processing operations of AIS and the ongoing sales and other operations of the hydraulic shear business known as AGI.” (Jt. Plan § 8.2(d).) Section 8.3(b) of the Joint Plan states, “The [Joint] Plan contemplates that operations income from AIS and AGI will be used to fund the [Joint] Plan.” (Id. § 8.3(b) (n.4 omitted).) The Joint Plan further states, “Upon termination of the Creditor Trust, all remaining assets of the Creditor Trust will vest with the Reorganized Debtor. It is anticipated that this will include, among other assets, the operating assets of the hydraulic shear business knowns [sic] as AGI.” (Id. § 8.9.)
In Financial Security Assurance, Inc. v. T-H New Orleans Limited Partnership (In re T-H New Orleans, Limited Partnership), 116 F.3d 790 (5th Cir. 1997), the Fifth Circuit Court of Appeals held that 11 U.S.C. § 1141(d)(3) did not apply because “T-H NOLP’s conducting business for two years following Plan confirmation satisfies § 1141(d)(3)(B).” Id. at 804 n.15 (citation and parenthetical omitted). In the present case, the Joint Plan provides for the Reorganized Debtor to continue the business operations of AIS and AGI post-confirmation, which negates one of the required elements of 11 U.S.C. § 1141(d)(3). Thus, the Court will overrule U. S. Steel’s first objection.
B. Ü, S. Steel Would Fare Better in a Chapter 7 Liquidation
The second objection posed by U. S. Steel is that the Joint Plan fails to meet the best-interests-of-creditors test in 11 U.S.C. § 1129(a)(7).
(a) The court shall confirm a plan only if all of the following requirements are met:
* * *
(7) With respect to each impaired class of claims or interests—
(A) each, holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date[.]
11 U.S.C. § 1129(a)(7) (2017). U. S. Steel’s' claim is in an impaired class, and U. S. Steel did not vote to accept the Joint Plan. Accordingly, U. S. Steel must receive or retain under the Joint Plan no less than it would receive or retain if the Debtors’ assets were liquidated under chapter 7.
U. S. Steel argues that it would fare better if the Debtors’ assets were liquidated under chapter 7. U. S. Steel spends a great deal of time arguing that the Debtors have under-valued their assets in the “Liquidation Analysis,”5 asserting that creditors would be paid in full with interest if the case were converted to chapter 7,6 This is a curious argument given that the Joint Plan proposes payment to all credi*290tors — including U. S. Steel — in full plus interest at the rate of six percent per annum. Nowhere does U. S. Steel challenge the premise in the Joint Plan that all creditors will be paid in full. Nor does U. S. Steel ever argue that the six percent interest rate is not adequate to fully compensate it for the time value of money. Since the Joint Plan provides that U. S. Steel will be paid in full, plus interest, how can U. S. Steel fare better under a chapter 7 liquidation? How can being paid in full plus interest under a chapter 7 liquidation, as U. S. Steel argues would occur, be better than being paid in full plus interest under the Joint Plan? The outcomes under the Joint Plan and U. S. Steel’s version of a liquidation analysis result in the same benefit to U. S. Steel.
Not only does U. S. Steel fail to argue that the 100 percent payout under the Joint Plan is inflated or unlikely, Mr. Glad-man appears to have acknowledged that the Joint Plan will pay creditors in full. At the June 7, 2017 hearing regarding a motion to compromise, which U. S. Steel has opposed, Mr. Gladman argued that there was no need to escrow the amount of the disputed secured portion of the claims asserted by the Professionals because the Professionals were adequately protected under the Joint Plan’s distribution scheme.7 Mr. Gladman stated:
This notion about whether or not the money for the professionals would need to be held in escrow if the settlement is rejected, we don’t believe that that’s the case. The issue here is whether or not the professionals’ interest is adequately preserved and that can be accomplished without a cash escrow.
Indeed, the debtor has proposed a 100 percent plan here and has projected in its plan and disclosure statement that they will generate approximately $24,000,000.00_compared_to $16,000,000.00 in claims. There is more than enough to satisfy the professionals’ liens if those are ultimately found to be valid. Of course, the professionals could also monitor the reports that are going to be provided by the creditor trust, and, if at some time it appears that there actually might be a shortfall to secure that claim, they could come back to the court and ask for an escrow at that point.
(June 7, 2017 Hr’g at 12:18:03 p.m. (emphasis added).)
U. S. Steel makes additional arguments concerning how it is disadvantaged by its treatment under the Joint Plan. It argues that the “crux” of its objection to the Joint Plan is the “extraordinary constraint on the marketing of the real estate” to which U. S. Steel’s judgment lien attaches. U. S. Steel argues that there is no assurance that the real estate will ever be sold. This is simply not the case. The real estate identified in Sections 8.2(j) and (k) of the Joint Plan is included in the Trust Assets to be contributed to the Creditor Trust. Section 8.6 of the Joint Plan provides, “The Creditor Trust shall continue until all Unclassified Claims and Class 1 through 5 [sic] Claims and the allowed Claim of Michael D. Ramun in Class 6 are paid in full or the Trust Assets are liquidated and all proceeds are paid out to the appropriate parties.” (Jt. Plan § 8.6.) Thus, the Joint Plan provides assurance that the real estate will be sold.
U. S. Steel argues that a 24-month period to market and sell the real estate is too long. U. S. Steel states that, although the Final Joint Disclosure Statement sets forth a 24-month period for the sale of the *291real estate, the Joint Plan has no such provision. U. S. Steel is technically correct regarding the express provisions in the Joint Plan; however, U. S. Steel ignores the Creditor Trust Agreement, which is attached to the Joint Plan as Exhibit A. The Creditor Trust Agreement explicitly states:
Notwithstanding anything to the contrary in this Agreement, in no event shall the Trustee unduly prolong the duration of the Trust, and the Trustee shall, in the exercise of its reasonable business judgment and in the interest of the Beneficiaries, at all times endeavor to (i) liquidate the Trust Property to maximize net recoveries and (ii) otherwise terminate the Trust as soon as practicable in accordance with this Agreement.
(Creditor Trust Agreement § 3.1.) Mr. Lane testified that he considered the outside date for the Creditor Trustee to sell the real estate at auction to be 24 months after the “Effective Date.”8 The provision in the Creditor Trust Agreement, coupled with the testimony of Mr. Lane, is sufficient for the Court to find that the marketing and sale of the real estate 'will occur within 24 months, which is reasonable considering the large number of parcels and the nature of the real estate. A 24-month period to market and sell the real estate is not outside the range of reasonableness, not an “extraordinary” length of time, and does not disadvantage U. S. Steel.
U. S. Steel cites Central Bank of Kansas City v. Orlando (In re Orlando), 53 B.R. 245 (Bankr. W.D. Mo. 1985) as being remarkably similar to the facts before this Court. This Court, however, finds In re Orlando to be distinguishable rather than remarkably similar. In In re Orlando, the bankruptcy court dealt with the debtors’ request for a stay of two orders, one granting relief from the automatic stay and the other converting the case from chapter 11 to chapter 7. The debtors had proposed a plan that included an indefinite period of time to sell real estate, while at the same time not providing for any adequate protection payments to creditors. Unlike in the Joint Plan before this Court, the bankruptcy court in In re Orlando found that the “proposals of the debtors, ... entail only that payment will be made at a date in the future, which is uncertain, and that no payments of interest, either as adequate protection or as interest payments under a confirmed plan, will be made.” Id. at 247. Also unlike the present case where U. S. Steel has a judgment lien in an unknown secured amount, the secured creditors in In re Orlando had consensual liens from the extension of credit. As a judgment lienholder, rather than a consensual lienholder, U. S. Steel would not be entitled to adequate protection payments. The Joint Plan provides for a reasonable, finite period of time for the Creditor Trustee to market the real estate and also provides for the payment of interest at six percent per annum until the claims are paid.
A case more on point is Mercury Capital Corporation v. Milford Connecticut Associates, L.P., 354 B.R. 1 (D. Conn. 2006). In Mercury Capital, the bankruptcy court had approved the debtor’s plan, which provided for the sale of certain real estate over a 30-month period, over a competing secured creditor’s proposed plan, which provided for the sale of the same real estate within one year. The confirmation order was vacated and remanded to the bankruptcy court for further proceedings consistent with the district court’s decision. Notwithstanding the remand, however, the district court favorably noted, “The Bank*292ruptcy Court’s decision reasonably reflects the view that, by marketing the property, the debtor’s plan will give all creditors the best chance to be paid.” Id. at 9. The 30-month period to market and sell the real estate in Mercury Capital exceeds the contemplated 24-month marketing and sale period in the Joint Plan. This Court accordingly finds that the 24-month marketing and sale period is reasonable.
As further evidence of the undue delay in the Joint Plan, U. S. Steel referenced the testimony of Mr. Lane that, since December 2016, (i) he had not had any communications with the listing real estate agent; and (ii) the Debtors have taken no action to market any real or personal property. Mr. Lane testified that he had stopped trying to market and sell the Debtors’ property when the UST and U. S. Steel each filed motions to convert this case to chapter 7 on February 6, 2017 and February 8, 2017, respectively (see Docs. 272 and 276). While the motions to convert were pending, Mr. Lane said that he refrained from marketing efforts because it was uncertain if the Debtors would have the authority to close on any negotiated sales if this case were to be converted. The Court finds Mr. Lane to be a credible witness, credits his testimony, and finds that the delay in marketing the Debtors’ property is a result of the uncertainty injected into this case by, among other things, U. S. Steel’s own actions in filing the motion to convert.
There is no support for U. S. Steel’s argument that it is disadvantaged by artificial constraints on the marketing of U. S. Steel’s collateral. U. S. Steel argues that it would not face the same time constraints in a chapter 7 liquidation, but provides no support for this argument. A chapter 7 trustee would have to review and evaluate the Debtors’ assets and determine how to sell such assets to maximize the proceeds for creditors. It is unknown how long it might be before a chapter 7 trustee would be- in a position to sell the real estate. There is no evidence that a chapter 7 trustee’s marketing period would be any shorter than the marketing period utilized by the Creditor Trustee. Any orderly liquidation by a chapter 7 trustee would likely take as long as the time contemplated in the Joint Plan.
U. S, Steel also objects that the Joint Plan does not acknowledge all of its collateral, arguing that certain categories of equipment that the Joint Plan treats as personal property are actually fixtures to the real estate to which its lien attaches. U. S. Steel argues that the Joint Plan does not acknowledge that its judgment lien extends to all categories of the Debtors’ real property, including improvement's and fixtures. However, U. S. Steel’s assertion that certain categories of equipment constitute fixtures does not make it so. Whether or not any specific piece of equipment constitutes part of the real estate depends upon whether it meets the definition of a fixture in the Ohio Revised Code. This is a mixed question of law and fact.
Ohio law is quite specific regarding the definition and characterization of fixtures. Ohio Revised Code § 5701.02 provides the following definition of “fixture”.
§ 5701.02. Definitions relating to real property
(C) “Fixture” means an item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the realty and not the business, if any, conducted by the occupant on the premises.
Showe Mgmt. Corp. v. Kerr (In re Kerr), 383 B.R. 337, 341-42 (Bankr. N.D. Ohio 2008) (quoting O.R.C. § 5701.02(C) (2008)). *293The Court finds no support for U. S. Steel’s contention that it would not face this same issue regarding its collateral in a chapter 7 liquidation. To the contrary, a chapter 7 trustee would have a fiduciary duty to all creditors and would have to make a determination, which might involve litigation, concerning what, if any, items of equipment come within the purview of U. S. Steel’s judgment lien. There is no reason to believe that a chapter 7 trustee’s position concerning what constitutes personal and real property would differ from the categories in the Joint Plan.
Although the Debtors and U. S. Steel disagree about whether certain property constitutes personal property or real property, these disputes do not have to be resolved for purposes of confirmation. They can be resolved when any such property is sold and the Creditor Trustee seeks Court approval of such sale.
Last, U. S. Steel objects on the basis that it is penalized because the Joint Plan provides for the escrow of $1.2 million from the sale of equipment to which the Professionals’ lien allegedly attaches pending resolution of the validity of such lien. U. S. Steel offers no support for its contention that it is penalized. At the June 7, 2017 Confirmation Hearing, the Professionals agreed to cap their secured claims at $1,200,000.00, which constitutes approximately two-thirds of the Professionals’ claims. But for the conceded reduction in the secured amount of the Professionals’ claims, approximately $1,800,000.00 — ie., the entire amount of Professionals’ claims — would have had to be escrowed pending resolution of the validity of the Professionals’ lien. Moreover, even if the Professionals’ lien is eventually avoided, the proceeds of the equipment sale being held in escrow would not inure to the benefit of U. S. Steel, but instead would be distributed to unsecured creditors, as set forth in the Joint Plan.
For the foregoing reasons, the Court will overrule U. S. Steel’s objection based on 11 U.S.C. § 1129(a)(7).
C. The Joint Plan Is Not Feasible
For its third objection, U. S. Steel argues that the Joint Plan is not feasible. Section 1129(a)(ll) provides that a plan will be confirmed only if “[cjonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.” 11 U.S.C. 1129(a)(ll) (2017). U. S. Steel relies primarily on the Debtors’ monthly operating reports to demonstrate that the Debtors have been losing money since the inception of this case. It also relies on Exhibit 3 to the Final Joint Disclosure Statement to show that the Debtors incurred “substantial losses” for the year ending March 31, 2016. Mr. Lane was questioned extensively about the Debtors’ monthly operating reports and testified that the deductions for amortization and depreciation as current operating expenses, which are an accounting function, were “meaningless” for the Debtors. Mr. Lane explained that these expenses mostly relate to the $40,000,000.00 that the Debtors spent to construct the manufacturing facility, which, all parties agree has a fair market value of far less than $40,000,000.00. These expenses were originally included as operating expenses based on accounting principles, but were moved “below the line” as non-operating expenses beginning with the January 2017 operating report.9 Thereaf*294ter, with the proper allocation of amortization and depreciation, the Debtors have shown a net operating profit. The Court finds Mr. Lane’s explanation to be credible and further finds that the monthly operating reports showing amortization and depreciation as operating expenses do not reflect the Debtors’ true operations.
Additionally, U. S. Steel argues that the testimony of Michael R. Ramun, Sales and Marketing Manager for AGI, demonstrates the Joint Plan’s lack of feasibility. Michael R. Ramun testified that he had no knowledge of any written business plans for AGI or post-reorganization plans regarding employees, tasks, or products for AGI. However, Michael R. Ramun is not a principal of the Debtors and has no responsibility for the development of business plans, so his lack of knowledge about any such plans is not determinative of the feasibility of AGI. Moreover, Mr. Lane, who has been acting as Crisis Manager for the Debtors, testified that AGI has been profitable post-petition and that he is “confident” AGI could be profitable in the future. Again, the Court finds Mr. Lane’s testimony to be credible. For these reasons, the Court will overrule U. S. Steel’s objection on the basis that the Joint Plan is not feasible,
D. The Joint Plan Cannot Be Crammed Down
The fourth objection asserted by U. S. Steel is that the Joint Plan cannot be crammed down. 11 U.S.C. § 1129(b)(2) requires that the Joint Plan be fair and equitable and that it not unfairly discriminate.
[B](2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(A) With respect to a class of secured claims, the plan provides—
(i)
(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of spch holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this sub-paragraph; op
(iii) for the realization by such holders of the indubitable equivalent of such claims.
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, ....
11 U.S.C. § 1129(b)(2) (2017).
U. S. Steel has filed a proof of claim in the amount of $10,648,216.47, in which U. *295S. Steel asserts that its claim is secured in an “unknown” amount. (Claim No. 32-1, part 1 at 9.) The Joint Plan provides for U. S. Steel’s claim in Class 2 and bifurcates the claim as an estimated secured claim in the amount of $2,684,754.52 (“Estimated Secured Claim”)- and an estimated unsecured claim in the amount of $8,000,000.00 (“Estimated Unsecured Claim”). The Joint Plan provides for U. S. Steel to retain its lien on the real estate and receive interest at the rate of six percent until the Estimated Secured Claim is paid when the real estate is sold. U. S. Steel’s lien will attach to the proceeds of the sale of the real estate. Thus, the requirement in § 1129(b)(2)(A) is met.
As set forth above, the Joint Plan provides for payment in full of all classes of claims. With respect to the Estimated Unsecured Claim, the Joint Plan is also fair and equitable because the requirement of § 1129(b)(2)(B) are met. The Estimated Unsecured Claim is treated pro rata with all other unsecured claims in Classes 3 and 5.
There is no support for U. S. Steel’s contention that it has to be paid prior to the unsecured creditors potentially being paid in full. As set forth above, the Joint Plan provides for payment in full of all classes of claims.
[I]t is important to underscore what compliance with any of the three clauses in section 1129(b)(2)(A) entails: payment in full of the secured claim. As a result, there can be no fair and equitable argument because of this full payment, even though the secured lender is being paid over time when junior classes, such as unsecured creditors, may be paid sooner. “It must be remembered that the absolute priority rule does not require sequential distributions (i.e., cash payment in full to senior creditors before any distribution is made to junior creditors), but merely that the values represented by the higher-ranking claims are fully satisfied by the values distributed under the Plan.”
7-1129 Collier on Bankruptcy ¶ 1129.04[2] (16th ed. 2017) (n.10 omitted). Because the Joint Plan provides for distributions of 100 percent of each class of claims, there can be no argument that the Joint Plan is not fair and equitable.
U. S. Steel also argues that the Joint Plan unfairly discriminates with respect to both its Estimated Secured Claim and its Estimated Unsecured Claim. “The code only prohibits discrimination between classes if the discrimination is unfair. A plan unfairly discriminates against a class if similar claims are treated differently without a reasonable basis for the disparate treatment.” Mercury Capital Corp. v. Milford Conn. Assocs., 354 B.R. 1, 10 (D. Conn. 2006). No other creditor is in the same position as U. S. Steel. There is no way to know the actual secured value of U. S. Steel’s claim.10 Although U. S. Steel claims to be similarly situated to Norfolk Southern, that is not the case. Norfolk Southern filed Claim No. 21-1 in the amount of $244,029.47 claiming to be secured on the basis of a judgment lien filed approximately one week prior to the April 13, 2016 petition date. Consequently, because the Norfolk Southern judgment lien is subject to avoidance, the Joint Plan treats Norfolk Southern’s entire claim, which is dealt with in Class 3, as unsecured. U. S. Steel argues that the entirety of its proof of claim should also be paid pro *296rata with other unsecured claims, while at the same time arguing that it has a security interest in all of the real estate and all categories of equipment that are fixtures to the real estate. U. S. Steel argues that, if the real estate sells for less than the Estimated Secured Claim, it may never be paid in full. Because U, S. Steel has conceded that the value of the Debtors’ assets exceeds the total amount of the claims, there is no basis for U. S. Steel’s argument that it may not be paid in full. Since the value of the Estimated Secured Claim is merely estimated, if U. S. Steel is paid less on its Estimated Secured Claim, the value of the Estimated Unsecured Claim will increase commensurately. U. S. Steel’s argument actually boils down to timing, but since the Joint Plan contemplates that U. S. Steel will be paid in full plus interest, the mere possibility that Norfolk Southern or Class 5 general unsecured creditors may be paid in full prior to U, S. Steel being paid does not remove the Joint Plan from the cramdown provisions in 11 U.S.C. § 1129(b)(2).
U. S. Steel argued at the Confirmation Hearing that it was entitled to be paid pro rata on 100 percent of the value of its claim. Under that hypothetical, if U. S. Steel received payment on the Estimated Secured Claim as a result of real estate sales, it would have then been paid disproportionately more on its Estimated Unsecured Claim than other general unsecured creditors. Thus, in U. S. Steel’s view, the only way for it not to be unfairly discriminated against is for it to unfairly discriminate against other unsecured claims. Although 11 U.S.C. § 1111(b)(2) provides for a class of secured creditors to elect to have their claims treated as secured to the extent that such claims are allowed, there is no complementary provision that entitles U. S. Steel to elect to have its entire claim treated as unsecured, while still asserting it has a secured claim.
For the reasons stated, the Court finds that U. S. Steel’s objection regarding cramdown is without merit.
Ill, CONCLUSION
U. S, Steel has four fundamental objections to confirmation of the Joint Plan, each of which this Court overrules. First, the Joint Plan is, in fact, a plan of reorganization, AIS and AGI will continue to operate following the Effective Date, and the Joint Plan contemplates that AGI will continue to operate after termination of the Creditor Trust. Second, the Joint Plan meets the best-interest-of-creditors test in 11 U.S.C. § 1129(a)(7) because U. S. Steel will receive the same value under either the Joint Plan or a chapter 7 liquidation. Third, the Joint Plan is feasible, as exhibited through the testimony of Mr. Lane. Finally, the Joint Plan meets the cram-down requirements in 11 U.S.C. § 1129(b)(2)(A) because it is fair and equitable and does not unfairly discriminate against U. S. Steel.
ORDER OVERRULING OBJECTION OF UNITED STATES STEEL CORPORATION TO CONFIRMATION OF SECOND AMENDED JOINT PLAN OF REORGANIZATION
On May 2, 2017, Debtors and Debtors-in-Possession Allied Consolidated Industries, Inc., Allied Erecting & Dismantling Co., Inc., Allied Industrial Scrap, Inc., and Allied-Gator, Inc. (collectively, “Debtors”) and the Official Committee of Unsecured Creditors jointly filed Second Amended Joint Plan of Reorganization Proposed by the Debtor and the Official Committee of Unsecured Creditors (“Joint Plan”) (Doc. 356). On May 31, 2017, United States Steel Corporation (“U. S. Steel”) filed Objection of United States Steel Corporation to Confirmation of Second Amended Joint Plan of *297Reorganization (“Objection”) (Doc. 364), which is presently before the Court.
The Court held a hearing to consider confirmation of the Joint Plan on June 7, 2017, which hearing was continued to and concluded on June 14, 2017 (“Confirmation Hearing”). At the Confirmation Hearing, the Court heard the testimony of (i) John K. Lane of Inglewood Associates, LLC, Crisis Manager for the Debtors and proposed “Creditor Trustee”1; and (ii) Michael R. Ramun, Sales and Marketing Manager for AGI. The Court admitted into evidence Joint Exhibits 1 through 19 and U. S. Steel Exhibit 8. Upon conclusion of the Confirmation Hearing, the Court orally approved confirmation of the Joint Plan and overruled the Objection.
For the reasons set forth in the Court’s Memorandum Opinion Overruling Objection of United States Steel Corporation to Confirmation of Second Amended Joint Plan of Reorganization entered on this date, the Court hereby finds:
1. The Joint Plan is a plan of reorganization;
2. The Joint Plan meets the best-interest-of-creditors test in 11 U.S.C, § 1129(a)(7);
3. The Joint Plan is feasible; and
4. The Joint Plan meets the cramdown requirements in 11 U.S.C. § 1129(b)(2)(A).
As a consequence, the Court hereby overrules U. S. Steel’s Objection.
IT IS SO ORDERED.
. Creditor Trustee is defined in Article I of the Joint Plan at page 4.
. To the extent the Court’s oral ruling may be inconsistent with this Memorandum Opinion and accompanying Order, the Memorandum Opinion and Order shall control.
. The Fairless Agreements are defined in Section 7.1 of the Joint Plan.
. Reorganized Debtor is defined in Article I of the Joint Plan at page 7, and Creditor Trust is defined in Article I of the Joint Plan at page 4.
. The Liquidation Analysis is in Exhibit 8 to the Final Joint Disclosure Statement, as described in Article IV(D) of the Final Joint Disclosure Statement.
. U. S. Steel relies on a Gordon Brothers valuation from mid-2015 in arguing that the Debtors have undervalued their assets in the liquidation analysis. Whether or not this valuation is an accurate reflection of the present liquidation value of the Debtors’ assets is not relevant if the Joint Plan — as it does — provides for U. S. Steel to receive a full recovery.
. The Professionals have filed three proofs of claims in the combined amount of $1,790,789.60, which they assert are fully secured. (See Claim Nos. 24-1, 25-1, and 34-1.)
. Effective Date is defined in Article I of the Joint Plan at page 4.
. The Debtors’ January 2017 monthly operating report was admitted as Joint Exhibit 12 and is filed on the docket at Doc, 288.
. U. S. Steel acknowledges this in its proof of claim- wherein it states that the amount of the secured claim is "unknown.” (Claim No. 32-1, part 1 at 9.) When the Court inquired at an earlier- hearing if there was any disagreement about the amounts of the bifurcation, U. S. Steel’s counsel indicated the monetary split was not objectionable.
. Creditor Trustee is defined in Article I of the Joint Plan at page 4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500605/ | *299OPINION AND ORDER GRANTING TRUSTEE’S MOTION TO APPROVE SETTLEMENT BETWEEN THE TRUSTEE AND PNC BANK, N.A.
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for hearing on September 16, 2016 (the “Hearing”), upon the Motion to Approve Settlement between the Trustee and PNC Bank, N.A. (Doc. # 311) (the “Compromise Motion”), filed by the Chapter 13 Trustee, Frank M. Pees (“Trustee”), and the response thereto (Doc. #313) (the “Response”), filed by *300Karen Elaine Boddie (“Debtor”). Present at the hearing were Trastee, attorney Don Mains (“Mr. Mains”) as counsel for Trustee, and Debtor, who appeared pro se.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1384 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
The Court, having considered the testimony of witnesses, exhibits admitted into evidence, and the documents of which it has taken judicial notice,1 makes the following findings of fact and conclusions of law.
I. Factual Background and Arguments of the Parties
A. Procedural History
On March 12, 2007, Debtor filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. In due course, Debtor’s proposed Chapter 13 Plan was confirmed. Sometime after the filing of the Chapter 13 case, Debtor acquired additional assets, including a civil claim (the “PNC Claim”) against PNC Bank (“PNC”). These additional assets are property of the bankruptcy estate. See 11 U.S.C. § 1306. Debtor did not initially disclose the PNC Claim by filing amended schedules2; she was under the impression she had properly disclosed the PNC Claim because she advised her counsel of its existence.3
In the latter half of 2011, Debtor engaged attorney Joseph S. Tann, Jr. (“Mr. Tann”) to pursue the PNC Claim. At the time of the engagement, neither Debtor nor Mr. Tann filed an application with this Court seeking approval of his engagement and authorizing him to perform services on behalf of the Debtor or her bankruptcy estate. Mr. Tann (proceeding without court authority) ultimately prepared and filed a complaint against PNC.4
. After Debtor completed the payments set forth in the Plan,5 Debtor filed the Third Motion of Debtor Karen Elaine Bod-die for a Determination under Section 1325(c) of [Title] 11 of the United States Code (Doc. # 133) (the “Determination Motion”). According to the Determination Motion, the District Court had directed *301Debtor to seek a determination from this Court whether any recovery from the PNC Claim must be paid into Debtor’s plan for the benefit of creditors. In addition, Debtor sought a determination whether the PNC Claim, along with other post-petition assets, were property of the bankruptcy estate. After a hearing held on May 10, 2013, this Court ruled, inter alia, that the PNC Claim was property of Debt- or’s bankruptcy estate. See Order Granting Third Mot. of Debtor Karen Elaine Boddie for a Determination under Section 1325(c) of Chapter [sic] 11 of the United States Code and Directing United States Trustee to Review Case (Doc. # 138).
On May 27, 2013, Debtor filed a motion seeking authority to prosecute the PNC Claim on behalf of the estate (Doc, # 142), to which Trustee objected (Doc. # 152). After a hearing held on August 8, 2014, the Court denied Debtor’s request and held that Trustee was the proper party to prosecute the PNC Claim. See Order Den. Debtor’s Mot, for Authority to Proceed on Behalf of the Estate (Doc. # 207).
Subsequently, Debtor twice filed motions seeking approval of the employment of Mr. Tann as special counsel with respect to the PNC Claim. Objections were interposed by Trustee and the United States Trustee (the “UST”),6 and both motions were denied after a hearing.7
B. The PNC Claim and the Settlement
The PNC Claim resulted from Debtor’s experience at a PNC branch located in or near Bexley, Ohio (“PNC Bexley”). On July 30, 2011, Debtor entered the PNC Bexley branch and requested transfer of $10,000,00 from her business account to her personal account, and sought to withdraw $6,000.00 in cash from her business account. Debtor had opened the PNC business account just three (3) days prior — on July 27, 2011 — at a different PNC branch. At the time the business account was opened, Debtor deposited a check for approximately $54,000.00 from the Ohio Public Employee Retirement System (the “OPERS Check”) into the account, PNC Bexley refused to honor Debtor’s request to withdraw $6,000.00 in cash. According to Debtor, when she challenged PNC Bex-ley’s refusal to honor the request, PNC Bexley summoned the police. Debtor was ultimately allowed to withdraw $1,000.00 in cash and transfer $15,000.00 to other accounts,8
Debtor alleges that PNC Bexley stated that it could not honor Debtor’s request to withdraw $6,000.00 because it did not have sufficient funds on hand to honor it. Debt- or — who is African-American — contends that this explanation was pretext, and that the refusal to honor her request, the use of such pretext, and the summons of the police department in response to her actions, were racially motivated and racially dis*302criminatory. Debtor claims that such discrimination has caused her to suffer emotional distress, that she has had to attend therapy as a result of the discrimination, and that she has been unable to work for five (5) years as a result of the discrimination.
Pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure, Trustee’s Compromise Motion seeks authority to accept $50,000.00 in exchange for the full and final release of any and all claims against PNC (the “Settlement”). Trustee contends that the Settlement is reasonable in light of the circumstances of the case, and would result in a substantial increase in the dividend paid to general unsecured creditors. During his testimony at the Hearing, Trustee also expressed concerns regarding the feasibility of funding any continued litigation of the PNC Claim.
Debtor, however, urges the Court to reject Trustee’s proposed settlement. In the Response, Debtor contends that Trustee (and his staff) do not have the necessary expertise to prosecute and/or negotiate settlement of the PNC Claim, that Trustee failed to avail himself of all relevant information prior to settling the matter, and that Trustee failed to involve Debtor in the settlement negotiations, which Debtor asserts was in contravention of this Court’s order.9 At the Hearing, Debtor reasserted her complaint about not being involved in the settlement process, and argued that the Settlement is unreasonably low given the amount of mental anguish she has suffered (and continues to suffer) due to the alleged racial discrimination by PNC.10
II. Analysis
Rule 9019(a) of the Federal Rules of Bankruptcy Procedure provides, in pertinent part: “On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P. 9019. The rule offers no guidance on the criteria to be used in evaluating whether a compromise should be approved; however, the Sixth Circuit Court of Appeals has articulated a “fair and equitable” standard that must be applied by bankruptcy courts when reviewing a proposed compromise. Waldschmidt v. Commerce Union Bank (In re Bauer), 859 F.2d 438, 441 (6th Cir. 1988) (citing LaSalle Nat’l Bank v. Holland (In re American Reserve Corp.), 841 F.2d 159, 161 (7th Cir. 1987)).
In determining whether a compromise is fair and equitable, bankruptcy courts should consider the following factors:
(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
*303Fishell v. Soltow (In re Fishell), 47 F.3d 1168, 1995 WL 66622 at *3 (6th Cir. Feb 16, 1995) (quoting Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986)).
The responsibility of the bankruptcy court “is not to decide the numerous questions of law and fact raised by [the objecting party] but rather to canvass the issues and see whether the settlement ‘fall[s] below the lowest point in the range of reasonableness[.]’ ” Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983) (citing Newman v. Stein, 464 F.2d 689, 693 (2d Cir. 1972)). A bankruptcy court must make an “informed and independent judgment as to whether a proposed compromise is fair and equitable.” Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). However, “[t]he [bankruptcy] judge ... is not to substitute her judgment for that of the trustee, and the trustee’s judgment is to be accorded some deference.” Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int’l, Inc.), 136 F.3d 45, 50 n.5 (1st Cir. 1998) (quoting Hill v. Burdick (In re Moorhead Corp.), 208 B.R. 87, 89 (1st Cir. B.A.P. 1997)) (brackets and ellipsis in original).
Moreover, “the Court must consider the principle that law favors compromise.” In re Goldstein, 131 B.R. 367, 370 (Bankr. S.D. Ohio 1991) (citation omitted).
[T]he very uncertainties of outcome in litigation, as well as the avoidance of wasteful litigation and expense, lay behind the Congressional infusion of a power to compromise. This is a recognition of the policy of the law generally to encourage settlements. This could hardly be achieved if the test on hearing for approval meant establishing success or failure to a certainty.
Fla. Trailer & Equip. Co. v. Deal, 284 F.2d 567, 571 (5th Cir. 1960). The party proposing the compromise bears the burden of persuading the bankruptcy court that the compromise should be approved. Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1381 (9th Cir. 1986) (citing Knowles v. Putterbaugh (In re Hallet), 33 B.R. 564, 565-66 (Bankr. D. Me. 1983)). Importantly, however, bankruptcy courts enjoy “significant discretion” when determining whether to approve or reject a proposed compromise. Rankin v. Brian Lavan & Assocs., P.C. (In re Rankin), 438 Fed.Appx. 420, 426 (6th Cir. 2011); see also In re Nicole Energy Serv.’s, Inc., 385 B.R. 201, 239 (Bankr. S.D. Ohio 2008).
A. Probability of Success
The first factor requires the Court to evaluate the probability of success were Trustee to continue to prosecute the PNC Claim on behalf of Debtor’s bankruptcy estate.
This step requires the court to estimate both the value of the proposed settlement and the likely outcome of litigating the claims proposed to be settled. The [c]ourt need not make a precise determination of the outcome, however, since an exact judicial determination of the values in issue would defeat the purpose of compromising the claim. |
In re Nicole Energy Servs., Inc., 385 B.R. 201, 239 (Bankr. S.D. Ohio 2008) (internal quotation marks and citations omitted).
In the District Court Case, there are four (4) causes of action set forth in Debt- or’s Amended Complaint for Damages with Jury Demand (District Court Case, Doc. # 15) (the “Complaint”) that remain pending against PNC: Denial of Statutory Right to Make and Enforce Contracts under 42 U.S.C. § 1981 (Count I); Violation of Uniform Commercial Code (Count III); Defamation (Count IV); and Interference *304With or Destruction of Evidence (Count XI).
i. Denial of Statutory Right to Make and Enforce .Contracts under 1$ U.S.C. § 1981 (Count I)
“Section 1981 prohibits intentional race discrimination in the making and enforcing of contracts with both public and private actors.” Christian v. Wal-Mart Stores, Inc., 252 F.3d 862, 867-68 (6th Cir. 2001) (citing 42 U.S.C. § 1981). To establish a prima facie case under 42 U.S.C. § 1981 for breach of contract by a commercial establishment, the plaintiff/customer must prove by preponderance of the evidence that:
(1) plaintiff is a member of a protected class;
(2) plaintiff sought to make or enforce a contract for services ordinarily provided by the defendant; and
(3) plaintiff was denied the right to enter into or enjoy the benefits or privileges of the contractual relationship in that (a) plaintiff was deprived of services while similarly situated persons outside the protected class were not and/or (b) plaintiff received services in a markedly hostile manner and in a manner which a reasonable person would find objectively discriminatory.
Id. at 872. Once a plaintiff establishes a prima fade case, the burden “shifts to the defendant to articulate a legitimate, nondiscriminatory reason for its actions.” Id. at 868. If the defendant carries that burden, then the plaintiff must prove “that the defendant’s proffered reason is not its true reason but a pretext for discrimination.” Id.
A plaintiff that is successful on the merits of a discrimination claim under 42 U.S.C. § 1981 is entitled to recover compensatory damages, and may be entitled to recover punitive damages. See, e.g., Bivins v. Wrap it Up, Inc., No. 07-80159-CIV, 2007 WL 3047122 (S.D. Fla. Oct. 18, 2007). Punitive damages, however, may only be awarded if the plaintiff shows “that the defendant acted with ‘reckless or callous indifference to the federally protected rights’ of the plaintiff, or that [the] defendant was ‘motivated by evil motive or intent.’ ” Beya v. Hoxworth Blood Ctr., 173 F.3d 428, 1999 WL 137625, at *5 (6th Cir. 1999) (quoting Beauford v. Sisters of Mercy-Province of Detroit, Inc., 816 F.2d 1104, 1108-09 (6th Cir. 1987)).
Review of the evidence submitted reveals that there are several significant hurdles to any substantial recovery on this claim. First — even assuming Trustee is able to prove a prima facie case — there are nondiscriminatory reasons for PNC Bexley’s actions according to the statements of PNC Bexley’s employees concerning the incident with Debtor.11 According to a statement of Mary Ann Gagnon— the branch manager of PNC Bexley— when PNC Bexley conducted its due diligence with respect to Debtor’s request, Ms. Gagnon saw that Debtor’s business account was opened just three (3) days prior, and that the deposit of the OPERS Check had been flagged as a suspicious deposit. Ms. Gagnon’s statement further asserts that Curtis Pope — the PNC employee who flagged the deposit — indicated that he had done so because the deposit was unusually large compared to Debtor’s other transactions, However, in response to the flag on the deposit, there was a notation on Debtor’s account indicating that the OPERS Check looked genuine and unaltered. Ms. Gagnon also contacted Mr. Pope by telephone. Mr. Pope told her that the check was “good” but to “follow *305procedures.” Mr. Pope advised Ms. Gag-non that his branch manager also suggested that she “follow procedures.” Thus, PNC Bexley may have denied Debtor’s request to withdraw $6,000.00 in cash because PNC Bexley was simply following procedures governing circumstances such as those presented, or because Ms. Gagnon believed that PNC’s procedures required the denial of Debtor’s request (even if they did not). Relying on the finder of fact to conclude that such reasons were a pretext for discrimination is a substantial risk to success in the litigation against PNC.
Debtor also claims that calling the police was, discriminatory. Mr. Gagnon’s statement indicates, however, that the police were called because Debtor was using profanity with PNC Bexley’s employees and scaring customers. The statement of Kelli Trinoskey — the employee that placed the call to the police — states that she did so because Debtor was yelling and the situation continued to escalate. The statement of Matthew Morrison — another PNC Bex-ley employee — describes that Debtor remained in the bank after it had closed and refused to leave when asked to do so by PNC Bexley’s employees. Even if Debtor remained relatively calm throughout the entire incident as Debtor contends, it seems that the fact that Debtor remained in the bank after closing and refused to leave would be reason enough to call the police. Thus, it appears that there may have been a legitimate nondiscriminatory reason for PNC Bexley to summon the police.
Assuming arguendo that Trustee can succeed in proving a case under 42 U.S.C. § 1981, there also appears to be significant impediments to obtaining a substantial award of damages. Debtor asserts that the incident has caused her to suffer emotional distress, that she has had to undergo therapy, and that she has been unable to work for five (5) years as a result of the discrimination. In her deposition,12 Debtor identified symptoms of her emotional distress— crying spells, depression, trouble sleeping, and anxiety — but she testified that she did not know whether the incident at PNC Bexley caused the emotional distress that led to those symptoms. Boddie Dep. 211:13-212:22. Debtor further testified during her deposition that her father and sister had both passed away,13 and she testified at the Hearing that she has bipolar disorder. A finder of fact could plausibly determine that Debtor’s emotional distress was not caused by the incident at PNC Bexley, but is a result of other traumatic events and/or Debtor’s existing mental condition.
In addition, other damages allegedly caused by PNC Bexley’s failure to honor Debtor’s request to withdraw $6,000.00 in cash appear to be limited: Debtor was unable to purchase an item of furniture at a clearance price, and she had to delay of the start of “some work” on her carriage house. Boddie Dep. 212:23-213:12. While these damages, if proven, would be recoverable by Trustee, it seems that the total amount of such damages could be far less than the amount of the Settlement.
Last, although a plaintiff may potentially recover punitive damages for violations of 42 U.S.C. § 1981, based on the facts highlighted to the Court, Trustee may have difficulty proving that PNC acted with “reckless or callous indifference to the federally protected rights” of Debtor, or that PNC was “motivated by evil motive or intent.” Beya, 173 F.3d 428, 1999 WL 137626, at *5, Any recovery of punitive *306damages on the § 1981 claim against PNC appears to be speculative.
ii. Violation of the Uniform Commercial Code (Count III)
The next cause of action that is pending in the District Court Case is a claim for, PNC’s violation of Ohio Revised Code § 1304.31.14 That section provides, in pertinent part:
(A) Except as otherwise provided in sections 1304.01 to 1304.40 of the Revised Code, a payor bank wrongfully dishonors an item if it dishonors an item that is properly payable, but a bank may dishonor an item that would create an overdraft unless it has agreed to pay the overdraft.
(B) A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and damages may include damages for an arrest or prosecution of the customer or other consequential damages. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact to be determined in each case.
Ohio Rev. Code § 1304.31 (emphasis added). The term “item” is defined as “an instrument or a promise or order to pay money handled by a bank for collection or payment.”15 Ohio Rev. Code § 1304.01.
It is unclear whether Debtor actually presented an item to PNC Bexley, as that term is defined by Ohio statute. However, even assuming that Trustee can prove that Debtor presented an item and that PNC wrongfully dishonored the item, liability for the wrongful dishonor is limited to actual damages. As previously discussed, any actual or compensatory damages award to the estate could be far less than amount of the Settlement.
Hi Defamation (Count IV)
Under Ohio law, the elements of defamation are “(a) a false and defamatory statement concerning another; (b) an unprivileged publication to a third party; (c) fault amounting at least to negligence on the part of the publisher; and (d) either actionability of the statement irrespective of special harm or the existence of special harm caused by the publication.” Harris v. Bornhorst, 513 F.3d 503, 522 (6th Cir. 2008) (quoting Akron-Canton Waste Oil, Inc. v. Safety-Kleen Oil Serv., Inc., 81 Ohio App.3d 591, 611 N.E.2d 955, 962 (1992)). Oral statements that that do not require the showing of special damages are referred to as slander per se and encompass “words that import an indictable criminal offense involving moral turpitude or infamous punishment, impute some loathsome or contagious disease that excludes one from society[,] or tend to injure one in one’s trade or occupation.” King v. Bogner, 88 Ohio App.3d 564, 624 N.E.2d 364, 366 (1993) (citing McCartney v. Oblates of St. Francis deSales, 80 Ohio App.3d 345, 609 N.E.2d 216, 222 (1992)). In certain circumstances, however, a defendant may enjoy qualified immunity for statements made to police officers. See Dehlendorf v. City of Gahanna, Ohio, 786 F.Supp.2d 1358, 1364 (S.D. Ohio 2011). In addition, “[e]xpressions of opinion are protected under the Ohio Constitution and therefore cannot constitute defamation under state law.” Harris, 513 F.3d at 522 (citing Vail v. Plain Dealer Publ’g Co., 72 *307Ohio St.3d 279, 649 N.E.2d 182, 185 (1995)).
The Complaint in the District Court Case alleges that Debtor was falsely accused of being involved in criminal activity. It is unclear from the record, however, what exactly was said, who made the allegedly defamatory accusation, and to whom the accusation was made. Even assuming that the allegedly slanderous statement(s) could be more precisely identified, the legal and factual complexities associated with proving the slander claim weigh in favor of approving the Settlement. First, it would have to be determined if the statements were merely an expression of an opinion of the person who made the statements, and thus protected under the Ohio Constitution. Moreover, if the statements which Debtor believes are defamatory were made to the police,16 PNC may be entitled to qualified immunity regarding the statements.
If the defamation claim survived those hurdles, Trustee would then have to prove the prima fade elements of a defamation claim. Unless it could be proven that PNC Bexley engaged in slander per se, for which damages are presumed, Trustee would be required to show special damages. Nothing in the record suggests that Debtor was substantially damaged as a result of any slanderous statement allegedly made by PNC. The Court therefore cannot anticipate that litigation of this claim would yield a higher return to the estate than the Settlement.
iv. Interference With or Destruction of Evidence (Count XI)
Under Ohio law, there is . a common law cause of action in tort for the spoliation of, interference with, or destruction of evidence. See Smith v. Howard Johnson Co., Inc., 67 Ohio St.3d 28, 615 N.E.2d 1037, 1038 (1993).
[T]he elements of a claim for interference with or destruction of evidence are (1) pending or probable litigation involving the plaintiff, (2) knowledge on the part of defendant that litigation exists or is probable, (3) willful destruction of evidence by defendant designed to disrupt the plaintiffs case, (4) disruption of the plaintiffs case, and (5) damages proximately caused by the defendant’s acts[.]
Id. “In a spoliation case, the term ‘willful’ denotes both the intentional and wrongful commission of an act. Acts that are willful include those committed with premeditation, malice, or a bad purpose.” Maynard v. Jackson Cty. Ohio, 706 F.Supp.2d 817, 829 (S.D. Ohio 2010) (citations omitted).
The claim for destruction of evidence in the instant matter is a result of PNC’s alleged destruction of the surveillance video from July 30, 2011 — the date of Debt- or’s incident at PNC Bexley. Mr. Tann testified that, within a few days of July 30, 2011, he alerted PNC’s counsel that video from that day needed to be preserved, as it may be needed for future litigation. The video was never provided to Debtor or Mr. Tann by PNC, and PNC now contends that the video was overwritten in accordance with PNC policy.
Although the video clearly should have been preserved, there are several obstacles Trustee would have to overcome to prevail on this claim. Initially, Trustee would have to show that the destruction of *308the video was willful. If the video was truly overwritten in accordance with PNC’s policies, destruction of the video may have been a mere mistake, as opposed to an act “committed with premeditation, malice, or a bad purpose.” Maynard, 706 F.Supp.2d at 829. Moreover, because PNC Bexley’s surveillance system records video but not audio, it would be difficult to demonstrate that destruction of the video proximately caused damages to Trustee’s case. It seems that, without audio, the video would be nearly useless in determining whether Debtor was the subject of discrimination by PNC Bexley. Thus, it appears that settlement of this cause of action is in the best interest of the estate.
B. Difficulties of Collection
Trustee did not introduce any evidence regarding the difficulty of collection of any judgment the estate may receive were it to continue to prosecute the PNC Claim— likely because Trustee does not foresee any difficulty collecting any judgment from PNC. While it may be true that collectability of any judgment from PNC — a large financial institution — is a nonissue, the Court would be remiss if it did not acknowledge that PNC has the financial resources to sustain litigation over an extended period of time and may appeal any judgment obtained by Trustee. Thus, although there is little doubt that any judgment would ultimately be collectible, collection of the judgment could be delayed, if PNC elected to pursue its appellate rights.
C. Complexities, Expense, Inconvenience, and Delay Associated with Litigation
The bankruptcy court must also evaluate the complexity of the District Court Case, “including the expense, inconvenience and delay that the parties would face if the case were to proceed to trial.” In re Nicole Energy Serv’s, Inc., 385 B.R. 201, 254 (Bankr. S.D. Ohio 2008). The discussion above illustrates that prosecution of the PNC Claim would involve complex eviden-tiary and legal issues; it naturally follows that prosecution of the PNC Claim would result in significant legal fees and expenses to the bankruptcy estate.
First and foremost is the complexity and expense associated with obtaining counsel to prosecute the PNC Claim. As it currently stands, Trustee has not engaged special counsel with respect to the PNC Claim, instead opting to have Mr. Mains — a staff attorney in Trustee’s office — handle settlement negotiations. Mr. Mains and Trustee have not sought any additional compensation for the time Mr. Mains has expended with respect to the PNC Claim, and thus, the Settlement proceeds will not be taxed for payment of attorney fees. Trustee testified, however, that were the estate to continue prosecution of the PNC Claim, Trustee would be required to hire experienced litigation counsel, which — according to Trustee — may be difficult. Because Debtor has almost consummated her Chapter 13 Plan, there is no money currently flowing into the Chapter 13 estate,17 and most of the money that was paid into the estate by Debtor has already been disbursed to creditors. The financial information regarding Debtor’s Plan available on Trustee’s website indicates that Trustee is holding only $5,016.00 out of the $115,520.67 that Debtor paid into the Chapter 13 Plan. Thus, the estate does not have the resources to pay an attorney on an hourly basis. Alternatively, Trustee would have to find an attorney willing to *309prosecute the PNC Claim — a claim which Trustee described in testimony as “sketchy” — on a contingency fee basis. Trustee also testified that Debtor has been difficult to work with, that she has been unresponsive, and that she has threatened to sue Trustee’s counsel. Under these circumstances, it would not be surprising if Trustee had difficulty hiring experienced counsel.
Proof of damages also presents a challenge. Debtor asserts that much of her alleged damages are for, or resulted from, emotional distress that Debtor claims she suffered as a result of PNC’s actions. As noted above, however, Debtor indicated in her deposition that she didn’t know whether the incident at PNC Bexley caused her emotional distress. When asked about this at the Hearing, Debtor testified that she was not a doctor and could not say for certain what caused her emotional distress. Thus, it is evident that, if Trustee were to continue prosecution of the PNC Claim, expert testimony would be needed to prove the legitimacy and extent of Debt- or’s claimed emotional distress, and that PNC’s actions caused Debtor’s emotional distress. The expense of hiring experts, along with the other expenses inherent in litigation — including costs for transcribing depositions already taken, costs associated with taking additional depositions, fees for obtaining documents, and witness fees— may make it difficult or impossible for Trustee to continue litigation of the PNC Claim, given the estate’s lack of, financial resources. The Court finds that the complexities and expense of continuing litigátion weigh in favor of approving the Settlement.
Moreover, continuing the litigation would cause more delay. Due to the peculiarities of the matters that arose in this Chapter 13 case, this case has been pending for over ten (10) years, which is substantially longer than the normal duration of Chapter 13 cases.18 Trustee estimated that bringing the litigation to trial would require two (2) to three (3) more years, and any judgment favorable to Trustee may then be appealed. Approval of the Settlement will allow payment to creditors now rather than two (2) or three (3) years hence, while avoiding the risk of an adverse outcome.
D. Interests of Creditors
In considering the final factor, the Court finds that the Settlement meets the paramount interests of creditors. First, approval of the Settlement would result in a significant increase in the dividend paid to unsecured creditors — from thirteen percent (13%) to approximately seventy percent (70%). Second, the Court notes that all creditors of Debtor’s bankruptcy estate were served with the Compromise Motion, and not a single creditor objected. Third, as noted above, this case has been pending for over ten (10) years. As the PNC Claim is the only asset of Debtor’s bankruptcy estate left to be administered by Trustee, settlement of the PNC Claim will allow for prompt final administration of the bankruptcy estate, payment to creditors, and issuance of Debtor’s discharge.
*310III. Conclusion
The Court finds that there is significant risk to proceeding to litigation with respect each of the causes of action remaining in the District Court Case, and that, even if Trustee were successful in proving the elements of one or more causes of action, there is substantial uncertainty as to whether any damages award would result in a higher net distribution to the estate than the proposed Settlement. Debtor is correct in her assertion that Trustee and his counsel do not have expertise in handling matters such as the PNC Claim; however, Trustee introduced a wealth of exhibits — all of which were admitted without objection — that allowed the Court to assess the strengths and weaknesses of the estate’s causes of action. In contrast, Debtor did not introduce any evidence— documentary or otherwise — which suggested to the Court that continuing litigation may result in a higher net recovery for the estate or is otherwise in the best interest of the estate.
For the foregoing reasons, the Court finds that the Settlement is fair and equitable and should be approved. Therefore, it is
ORDERED that the Motion to Approve Settlement between the Trustee and PNC Bank, N.A. (Doc. # 311) is hereby GRANTED; it is further
ORDERED that Trustee is authorized to accept $50,000.00 in exchange for the full and final release of any and all claims against PNC.
IT IS SO ORDERED.
. Pursuant to the Order Overruling Objections to Notice of the Court's Intent to Take Judicial Notice (Doc. # 347), the Court took judicial notice of the following documents (and the contents thereof) filed in the lawsuit styled as Boddie v. PNC Bank, N.A., Case No. 2:12-cv-00158 (S.D. Ohio): (1) Amended Complaint for Damages with Jury Demand (Dist. Ct. ECF Doc, No; 15); (2) Stipulation of Partial Dismissal (Dist. Ct. ECF Doc. No. 22); (3) Opinion and Order [on PNC's Motion for Partial Judgment on the Pleadings] (Dist. Ct, ECF Doc. No. -85); and (4) Order [Striking Second Amended Complaint Except ¶ 28] (Dist. Ct. ECF Doc. No. 87).
. Debtor finally filed an Amended Schedule B (Doc. # 115) on December 3, 2012, listing, among other things, the PNC Claim.
. Debtor had counsel from the inception of her case until December 29, 2014, when she terminated her last counsel’s employment. She has proceeded pro se since then,
. Mr. Tann initiated the cause of action against PNC in state court. The matter was subsequently removed to the United States District Court for the Southern District of Ohio (the "District Court”), and assigned case number 2:12-CV-00158 (the “District Court Case”).
. In the Order Denying Chapter 13 Trustee’s Motion to Convert Case (Doc, # 187), entered June 12, 2014, the Court’ ordered Debtor to remit an additional $800.00 to Trustee for administration and disbursement to creditors. It is unclear whether Debtor has made the payment.
. The UST only objected to Debtor’s first motion seeking authority to employ Mr, Tann, filed September 27, 2013. The Chapter 13 Trustee filed objections to both motions.
. Despite disapproval of his employment, Mr. Tann has filed several motions or applications in an attempt to procure compensation for services rendered with respect to the PNC Claim, all of which this Court has denied, In the Memorandum Opinion and Order On Motion to Lift Automatic Stay With Respect to Attorney Charging Lien (Doc. # 325), the Court detailed the efforts by Debtor and Mr. Tann to obtain appointment of Mr. Tann as special counsel for the estate and secure compensation for services rendered by Mr. Tann. The Court finds no need to recite that history in this Opinion.
.It appears that a small portion of the $15,000.00 transfer may have been transferred to an account other than Debtor’s personal account. It is unclear exactly how much was transferred to Debtor’s personal account, and how much was transferred elsewhere.
. At the hearing on Debtor’s motion seeking authority to prosecute the PNC Claim on behalf of the estate (Doc. # 142), the Court denied the motion, but stated that it "urges the trustee to include [Debtor] in the conversations and make her aware of the status of [the settlement negotiations] from time to time[.]” Hr'g Tr. 26:6-8, August 8, 2014.
. The Response also seeks denial of the Compromise Motion on the basis that the motion was not properly served upon Debtor. However, it appears from the certificate of service attached to the Compromise Motion that Debtor was properly served with the motion by U.S. mail. Moreover, as Debtor did not argue that service of the Compromise Motion was insufficient at the Hearing, the Court will deem that argument abandoned.
. The statements of several of PNC Bexley’s employees were admitted into evidence as Trustee’s exhibits 14 through 17, and as Debt- or’s exhibit 1.
. Debtor's deposition was admitted into evidence, without objection, as Trustee's Exhibit 12.
. Boddie Dep, 212:5-12.
. Ohio Revised Code § 1304.31 is Ohio’s codified version of § 4-402 of the Uniform Commercial Code.
. " ‘Item’ does not include a payment order governed by sections 1304.51 to 1304.85 of the Revised Code, a credit slip, or a debit card slip.” Ohio Rev. Code § 1304.01.
. The Bexley Police Call Report for the incident between Debtor and PNC Bexley states that "the bank manager indicated that the account was fraud." Nothing in the record further clarifies what the bank manager actually said to the police, and/or whether the bank manager was simply relaying to the police what was reflected in PNC’s system with respect to the deposit of the OPERS Check. It seems, however, that the claim for defamation could stem from whatever the bank manager told the police.
. Debtor has made all required payments to the estate except possibly the $800,00 payment required by the Order Denying Chapter 13 Trustee’s Motion to Convert Case (Doc. #187). See n.5, supra.
. With the enactment of the Bankruptcy Reform Act of 1978, Congress intentionally prohibited Chapter 13 plans from providing for payments over a period that is longer than five (5) years. See 11 U.S.C. § 1322(d). That ended "what it termed 'the closest thing there is to indentured servitude,’ where some debtors are put 'under court supervised repayment plans for seven to ten years.’ ” Pierrotti v. United States IRS (In re Pierrotti), 645 F.3d 277, 281 (5th Cir. 2011) (quoting H.R. Rep. No. 95-595, at 117 (1977), reprinted in 1978 U.S.C.A.N.N. 5963, 6078). Typically, Chapter 13 cases are fully administered and the debt- or’s discharge is entered shortly after completion of the debtor’s plan payments. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500606/ | MEMORANDUM OPINION
THE HONORABLE DENNIS R. DOW, UNITED STATES BANKRUPTCY JUDGE
Before the Court are several items: a Request to Determine Lease Term filed by debtor Millennium Super Stop II, LLC (“Millennium” or “Debtor”); a Motion to Approve Contract for Sale filed by Debtor; a Motion to Reject Executory Contract filed by Debtor; an Adversary Complaint to Compel Turnover of Property filed by Debtor and an Adversary Proceeding against Debtor for Declaratory Relief and for Specific Performance filed by 786 Enterprises, Inc. (“786”). This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 1384(b), 157(a) and 157(b)(1). They are core proceedings, pursuant to 28 U.S.C. § 157(b)(2)(E) and (N) which this Court may hear and determine and in which it may issue a final order. The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure made applicable to these proceedings by Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below the Motion to Approve Contract for Sale is denied; the Motion to Reject Executory Contract is denied; the Complaint to Compel Turnover of Property is denied; and the Complaint for Declaratory Relief and Specific Performance is granted. The Request to Determine Lease Term is moot.
I. FACTUAL AND PROCEDURAL BACKGROUND
In June 2010, Debtor and 786 entered into a lease agreement (“Lease”) in which Debtor leased a gas station and convenience store at 1601-03 W. 12th Street, Kansas City, Missouri, named Millennium Super Stop II (the “Property”) to 786. The Property includes 16 gas-diesel pumps, a Wendy’s restaurant, an outdoor elevated sign, a car wash and signage on 1-670. 786 paid a fixed monthly rent to Debtor of $16,500. Article 15 of the original Lease gave 786 the exclusive right to purchase the Property for the appraised value at a future date and included an agreement to employ Hopkins Appraisal Services (“Hopkins”) for purposes of acquiring written appraisals of the Property (the “Option”). 786 paid Debtor a non-refundable, good-faith $75,000 deposit towards the Option. The Lease was prepared by Debtor’s counsel and signed on June 7, 2010.
In 2012, 786 notified Debtor that it was exercising the Option to purchase the Property and Hopkins was retained to perform an appraisal. In December 2012, Hopkins appraised the property at $1,620,000. However, Debtor was unable to close on the sale due to ongoing litigation against it by Eagle Fuels regarding a contract to acquire branded fuel.
In November 2014, the Eagle Fuels litigation was settled and 786’s counsel drafted an amendment to the Lease that included provisions modifying Article 15 as follows: the Lease was to continue on a month-to-month basis until terminated by either party; 786 could exercise its option to purchase at any time prior to the termination of the Lease and the $75,000 depos*335it would be applied to the purchase price; and in the event 786 did not exercise its option to purchase, Debtor was to return the $75,000 deposit.
In April 2015, 786 again notified Debtor that it intended to exercise the Option to purchase the Property and Hopkins was again requested to perform an appraisal. Due to interference in the appraisal process by Debtor’s then-counsel, Hopkins withdrew from the process. Thereafter, the parties amended the Option to designate a replacement appraiser (the “Option Amendment”). The amendment provided that Industrial State Bank, 786’s lender that would finance the acquisition, would choose either Burgess Appraisal or Bliss & Associates to perform the appraisal to establish the purchase price.
On September 10, 2015, Industrial Bank issued an engagement letter to Bliss to appraise the Property. Bliss conducted the appraisal and reported the Property’s value was $1,400,000. On October 23, 2015, 786 gave timely written notice to Debtor of its election to purchase the Property for $1,4000,000 and included a signed purchase agreement in the form required by the Lease. On October 27,2015, Debtor’s counsel issued a letter to 786 that Debtor would not execute the purchase agreement because Bliss was not the designated appraiser under the Lease, an obviously false contention.
On October 30, 2015, Debtor commenced a lawsuit in the Circuit Court of Jackson County, Missouri, to challenge the valuation of the Property alleging the language in the Lease was vague. 786 sought specific performance of the Option among other things. On June 27, 2016, Debtor sent 786 a letter giving notice of intent to terminate the Lease on August 1, 2016. The state court action was set for trial on August 1, 2016, but Debtor filed a petition for relief under Chapter 11 in this Court on July 26, 2016.
II. LEGAL ANALYSIS
A. Ambiguity
Debtor asserts that the Option Amendment is ambiguous as applied because it leads to an absurd result in that the fair market value of the Property is substantially greater that the appraisal amount. “The cardinal rule in the interpretation of a contract is to ascertain the intention of the parties and to give effect to that intention.” J.E. Hathman, Inc. v. Sigma Alpha Epsilon Club, 491 S.W.2d 261, 264 (Mo. banc 1973). When investigating intent, sources outside the contract itself are often considered, i.e., subsidiary agreements, the facts and circumstances surrounding the execution of the contract, the construction the parties have placed on the contract, and other external circumstances. Butler v. Mitchell-Hugeback, Inc., 895 S.W.2d 15, 21 (Mo. banc 1995). However, where the contract is unambiguous, intent is ascertained from the contract alone. J.E. Hathman, 491 S.W.2d at 264. A disagreement between the parties as to the proper interpretation of the contract does not render the contract ambiguous. Id. In a contract, an ambiguity arises only where its terms are susceptible to fair and honest differences. Venture Stores, Inc. v. Pac. Beach Co. Inc., 980 S.W.2d 176, 181 (Mo. Ct. App. 1998) (citing CB Commercial Real Estate Group, Inc. v. Equity Partnerships Corp., 917 S.W.2d 641, 646 (Mo. App.1996)). The determination of a contract’s ambiguity is a question of law and properly decided by the court. Id.
Here, the plain language of the option amendment states, “The parties agree to be bound by the appraisal and agree that it shall satisfy the condition set forth in Article 15 of the Lease.” The plain *336language of the option is clearly not ambiguous.
However, Debtor argues that the absurd result (the alleged unfair appraisal amount) makes the clause ambiguous and thus unenforceable. Debtor argues that the fair market value, as established by Debt- or’s own testimony and two older appraisals, is so much higher than the appraised value that it would lead to an absurd result for 786 to be able to purchase the property at the appraised value.
The Court disagrees.' First, the appraisal result is not the type of absurdity envisioned by the courts. The terms of the contract, as mentioned above, were plain and clear. The Court need not even go beyond the language of the contract for that reason alone, but even if it does, the process was also not absurd. Debtor’s circular argument that the result obtained by utilizing the process agreed to in the amended option is disingenuous. Debtor testified that he understood the amendment provisions and intended to be bound by their terms. The option, language does not provide a mechanism to contest the appraised value. The language is plain and clear that the agreed appraiser will determine a value and 786 will tender that amount and Debtor will convey the Property. Once 786 exercised the Option and the appraiser determined a value there was no manner set forth in the language to enable Debtor to challenge that procedure and amount. Debtor agreed to that language, and, in fact, Debtor actually edited the draft amendment but did not further define value or create a procedure to dispute an appraisal result, There was also testimony that Debtor uses the same language in its leases on other properties.
Furthermore, there is no persuasive evidence that the result is absurd. Debtor testified to his opinion that the value of the Property is approximately $3 million, and based his opinion on planned development and monthly events in the area. However, this was a lay opinion, with no support and he was not qualified as an expert. Central Bank’s 2016 inferred appraise^ amount was based on the Bank’s 80% loan-to-value policy and a loan amount of $1,700,000, but the purpose of the Bank’s testimony was not to value the property and the Bank’s agent was not qualified to testify to value. The other appraisals upon which Debtor relies were not admitted into evidence. The additional appraisal that was admitted into evidence was performed by Hopkins in December 2016 and showed an appraised value of $1,620,000. The two professional appraisals admitted into evidence at trial (Hopkins 2016 and Bliss) are not so far apart as to cause the result to be absurd when interpreting the plain language of the modified Option.
The only expert testimony admitted at trial was the Bliss appraiser whose appraisal valued the Property at $1,400,000. Although the appraisal is subject to criticism, there was no evidence presented that his appraisal did not meet applicable appraisal standards. The Court agrees that his depreciation analysis was questionable in using an 80% deduction for obsolescence of improvements with little explanation as to how he arrived at that percentage amount. In addition, the sales analysis arguably could have included more comparable properties. Most importantly, however, the income approach analysis was not discredited and there was ample support for the integrity of 786’s financial information on which the income analysis was based. Debtor attempted to question 786’s management of- the property but the issues identified, such as restrooms and the car-wash closed for repair, were- minor and/or temporary issues. Debtor also claimed that the financial information of 786 utilized by Bliss for the income analysis was insuffi*337cient and unreliable. However, both 786’s accountant, and banker testified to the reliability of its financial information, as did 786’s principal.
Thusj the Court finds that the language used in the amendment to the option contained in the Lease is not ambiguous and does not lead to an absurd result.
B. Was Amendment Illusory/Without Consideration?
The necessary elements of an enforceable contract under Missouri law are (1) offer; (2) acceptance; and (3) bargained for consideration. See Johnson v. McDonnell Douglas Corp., 745 S.W.2d 661 (Mo. 1988), A contract is “illusory” where a party has it in his power to keep his promise yet escape performance of anything detrimental to himself. Cooper v. Jensen, 448 S.W.2d 308 (Mo. Ct. App. 1969).
Debtor argues that when the parties amended the Option in 2014 and agreed to make 786’s $75,000 option deposit refundable that it rendered the Option illusory and without consideration. Thus, according to Debtor, the Option is void and not an enforceable contract. What Debtor fails to note is that in the 2014 amendment, 786 agreed to pay $75,000 towards Debt- or’s Eagle Fuels litigation settlement, to purchase another property by a date certain so Debtor could use the proceeds to pay the litigation settlement and to continue to pay rent on a month to month basis at what the testimony showed to be an above market rate. All of these terms satisfy the element of consideration and 786 has performed them. Further, the sufficiency of the consideration was acknowledged by the parties in the Option amendment.
The Court notes that Debtor does not even address in its brief why these additional detriments to 786 did not constitute consideration. The Court finds that the amended Option was not without consideration and illusory, and therefore the Option is enforceable.
C. Is 786 entitled to Specific Performance?
786 argues that it exercised its option to purchase the Property as required under the terms of the Lease and the amended Option terms and should be granted specific performance allowing it to purchase the Property fbr the price established by the Bliss appraisal. Specific performance is an equitable remedy by which a contract that is sufficiently definite, certain and complete is enforced as written. Coale v. Hilles, 976 S.W.2d 61, 65 (Mo. Ct. App. 1998). An option constitutes a continuing offer until accepted and at such time of acceptance, a valid agreement arises supported by mutual promises. Frey v. Yust, 516 S.W.2d 321, 323 (Mo. Ct. App. 1974). An exercised option contract may be enforced by specific performance. See Venture Stores, 980 S.W.2d at 180 (citing Dean Operations, Inc. v. Pink Hill Assocs., 678 S.W.2d 897, 900 (Mo. Ct. App. 1984).
The required elements for a valid contract per Missouri law are (1) parties; (2) subject matter; (3) promises made by both parties; (4) price; and (5) consideration. Id. In this case, (1) Debtor & 786 are the parties; (2) Millennium Super Stop is the property at issue; (3) the parties promised to pay the appraised value and convey the Property; (4) the priee of the Property was agreed to be the appraised value by the agreed appraiser per the terms of the amended Option; (5) the consideration for the Option is as discussed above. Thus, the elements necessary for the option to be considered a contract subject to specific enforcement under Missouri law are clearly met here *338and 786 is entitled to specific performance — the conveyance of title to the Property under the amended Option.
Venture Stores, Inc. v. Pacific Beach, Inc., 980 S.W.2d 176 (Mo. Ct. App. 1998), is very similar to this case. Venture Stores held a purchase option and sued Pacific Beach for specific performance after it exercised the option and Pacific Beach refused to comply. Pacific Beach claimed the option was ambiguous and unenforceable. That court held that the option was not ambiguous and that Venture Stores was entitled to specific performance. The Venture Stores court also ruled that rent payments during the pendency of litigation should be credited against the purchase price. This Court agrees that Debtor should have complied with the option as amended and conveyed the property after 786 exercised the option on October 23, 2015, and an appraised value was obtained. It does appear to be inequitable for Debtor to retain the monthly $16,500 rent that 786 has paid during the pendency of the state court lawsuit and this bankruptcy case, in addition to receiving the full agreed appraisal amount. The Court also notes that Debtor’s refusal to perform was clearly in bad faith, a false reason having been given for refusal to close. Debtor’s efforts since then have all been in furtherance of a sort of seller’s remorse and unwillingness to abide by the terms of the Option in hopes of securing a higher price. Thus, the purchase price will be reduced by the amount of rent that 786 has paid to Debtor from November 22, 2015 (30 days after it exercised the Option) up to the date of this Order.
D. Is Contract Executory? And even if so, is 786 entitled to protection under 365(i)?
Debtor asserts that the Option is an executory contract and may be rejected by it. 786 argues that Debtor breached the Option before attempting to reject it, that its performance was therefore excused, and that the Option was no longer executo-ry, and Debtor is thus unable to reject it.
The Eighth Circuit follows the Countryman test in determining whether'a contract is executory. That test provides: “A contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” In re Interstate Bakeries Corp., 751 F.3d 955 (8th Cir. 2014).
The Court agrees with 786 that the decision In re Orla Enterprises, Inc., 399 B.R. 25 (Bankr. N.D. Ill. 2009) is on point. In that case, the tenant gave notice to the debtor of its intention to exercise its purchase option but the debtor refused to sell the property pursuant to the option. As here, litigation ensued in the state court followed by debtor filing bankruptcy and attempting to reject the option under § 365(a) as an executory contract. That court determined that under the Countryman test, when debtor breached the contract prior to bankruptcy by failing to perform under the option, the option was no longer executory for purposes of § 365. Here, 786 had fully performed under the Option to the extent possible given Debt- or’s failure to perform and breach of the option. 786 thus has no further duty to perform but rather holds a claim against Debtor and the contract is no longer exec-utory for purposes of § 365. Debtor admits in its own brief on p. 10 that “Debtor’s rejection of the Option results in a material breach of the contract.” Debtor argues the Orla case differs because the tenant had abandoned the property and the parties were no longer in a contractual relationship at the time the bankruptcy peti*339tion was filed. While true, that was not the basis for the Orla court’s decision, and this distinction does not change the application of Orla to this case.
Debtor also contends the lease and option were not integrated and thus the option is unilateral and creates no obligations under the lease. The Court fails to see the relevance of this argument but notes that the Lease and the Option are clearly integrated. The “Option to Purchase” in included as Article 15 in the Lease. Additionally, Article 16.9 of the Lease integrates all sections as the “entire agreement.” The 2014 amendment is simply that, an amendment to an article of the original lease. However, Debtor again fails to address case law that finds that a purchase option contract contained in a lease is a unilateral contract that becomes a bilateral executory contract once it is exercised. (but as discussed above, is no longer executory once Debtor breached pre-petition). See Orla, 399 B.R. at 28.
Notwithstanding any of the above discussion, even if the contract option is executory and subject to rejection, 786 is entitled to the protection of § 365(i) which provides that 786 has the right to retain possession of the Property. See In re Pogue, 130 B.R. 297 (Bankr. E.D. Mo. 1991). Section 365(i) provides that if the trustee rejects an executory contract for the sale of property and the purchaser is in possession, such purchaser may treat such contract as terminated, or may remain in possession of such real property. If the purchaser remains in possession, the purchaser shall continue to make all payments due under the contract, but may offset against such payments any damages caused by nonperformance of any obligation of the debtor. 11 U.S.C. § 365(i)(2)(A). Further, § 365(i)(2)(B) requires that the trustee shall deliver title to the purchaser in accordance with the provisions of the contract.
Debtor asserts that § 365(i) is not applicable because 786 is a tenant at sufferance and is wrongfully in possession because Debtor gave notice of termination. Under Missouri law, once a lessee exercises an option to purchase leased real estate, the lessee is in possession of that property pursuant to a contract to purchase and a bilateral contract remains. Briar Road, LLC v. Lezah Stenger Homes, Inc., 321 S.W.3d 488 (Mo. Ct. App. 2010). Once a buyer accepts an option in the prescribed manner, a binding bilateral contract is created and that bilateral contract is specifically enforceable. In re Estate of Schulze, 105 S.W.3d 548 (Mo. Ct. App. 2003). Riddle v. Elk Creek Salers, 52 S.W.3d 644 (Mo. Ct. App. 2001).
Here, 786 had exercised the option to purchase over 8 months prior to Debtor sending a notice of intent to terminate the lease and therefore acquired equitable title to the property. Debtor admits in its brief that it could not have challenged 786’s exercise of the Option on the basis that the Lease was terminated because the Option was exercised prior to such termination. Debtor’s argument that 786 did not accept the offer or enter into a sale contract as prescribed by the Option is without merit. 786 clearly exercised the Option under the terms of the Lease and has been ready and willing to enter into a sale contract but unable to do so due to Debtor’s refusal.
E. Motion to Approve Sale
Debtor filed a Motion to Approve Contract for Sale and attached a proposed Contract of Sale. Initially, the Court notes that Debtor failed, in its motion, at trial *340and it its post-trial brief, to identify what parts of § 363(f) would permit the sale free and clear of the Option under these circumstances 1
Notwithstanding Debtor’s failure to identify which part of which statute supports its Motion, there is no evidence there is an actual contract to purchase. The attached Contract for Sale recites that the buyer Alliance Petroleum, LLC, would purchase the Property for $2,500,000. However, the purported buyer’s principal testified that he expected the property to be in good working order and for all improvements to be made at Debtor’s expense prior to sale. Debtor had testified that the car wash was broken and pumps were old and there was testimony that the bathroom and other areas had been in disrepair. Debtor’s principal testified to at least $550,000 in repair costs. There would also be a sales commission paid to the broker of 5-10% of the purchase price which would be approximately $125,000-$250,000. Further, the “offer to purchase” gives the Purchaser many routes to terminate the alleged contract. The prospective buyer could inspect the Property, books and records, and could terminate the sale contract without cause for any reason during the review period. It is absolutely not clear to the Court based on the proposed buyer’s testimony and the draft sales contract that this proposed sale would be significantly better for the estate over the sale to 786 after the potential repair deductions are made and a sales commission is paid. Considering such deductions to the offer price of $2,500,000, the final net purchase price could be $1,825,000-$1,700,000. It is not clear that the higher sale price would be a greater benefit to creditors than the option price of $1,400,000.
F. Fraudulent Conveyance
In certain of its filings, Debtor appeared to argue that a sale of the Property to 786 in accordance with the Option would constitute a fraudulent conveyance under § 548. Debtor does not address this issue other than a brief mention at trial that specific performance would result in a constructively fraudulent transfer. The Court notes that § 548 which governs fraudulent transfers does not apply in this situation as it applies to pre-petition transfers. Further, as discussed above, Debtor has offered no proof that the transfer of title to 786 in exchange for the appraised amount would not be for “reasonably equivalent value.” The Court will consider this argument abandoned.
III. CONCLUSION
For all of these reasons, the Motion to Approve Contract for Sale is denied; the Motion to Reject Executory Contract is denied; judgment will be entered for the defendant 786 Enterprises, Inc. on the Complaint to Compel Turnover of Property; and judgment will be entered for the plaintiff 786 Enterprises, Inc. on the Complaint for Declaratory Relief and Specific Performance. The Request to Determine Lease Term is moot.
. The Court need not determine whether sale free and clear of the lease/option is even permissible. See Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003); disagreed with by In re Crumbs Bake Shop, Inc., 522 B.R. 766 (Bankr. D.N.J. 2014). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500607/ | MEMORANDUM OF DECISION
Honorable Jim D. Pappas, United States Bankruptcy Judge
Introduction
*344Chapter 7 trustee1 R. Sam Hopkins (“Trustee”) objects to the proof of claim filed in this chapter 7 case by Duncan Limited Partnership (“DLP”). Dkt. No. 392. DLP contests Trustee’s objection. Dkt. No. 409. The Court conducted a hearing concerning the objection on December 13, 2016, at which the parties presented evidence and testimony. See Minute Entry, Dkt. No. 438. Closing arguments were submitted via briefs, Dkt. Nos. 456, 457, 462, 463. Having taken the issues under advisement, and having considered the evidence and testimony, arguments of the parties, and applicable law, this Memorandum sets forth the Court’s findings, conclusions and reasons for its disposition of the objection. Rules 7052; 9014.
Facts
Deer Valley Trucking, Inc. (“DVT”) was founded by Jason Duncan in late 2009, On April 3, 2015, DVT filed a chapter 11 petition. Dkt. No. 1. On February 12, 2016, the case was converted to a chapter 7 case. Dkt. No. 181. Amended Proof of Claim No. 50 was filed on October 31, 2016, by DLP, an entity owned by Jason’s2 parents, Jack and Janet Duncan (“the Duncans”). Am. Proof of Claim at 1, Ex. 213, The claim asserts that DVT owes DLP approximately $2.4 million, arising from three separate credit transactions. Id, at 3.
A. The Winch Truck Loan and Equipment Loan
Jason testified that, when it began operations, DVT purchased a specialized truck. JD Farms, LLC, an entity owned , by the Duncans, loaned DVT the funds to do so. The parties refer to this transaction as the Winch Truck Loan. Exs. 201.
Jason testified that prior to, and shortly after, the formation of DVT, JD Farms loaned funds to DVT, and to other entities in which Jason held an interest, to purchase other trucks and equipment. Jason testified that once DVT was formed, those trucks and the equipment were transferred to DVT. That DVT also assumed these debts is not disputed by Trustee. The parties refer to these obligations collectively as the Equipment Loan.
Both the Winch Truck Loan and the Equipment Loan balances were to be repaid over a three-year period in monthly installments, together with eight percent interest. Exs. 201, 202. While DVT made numerous payments on the loans to JD Farms, in about June 2012, it began to make payments on the loans to DLP. According to Janet, JD Farms assigned the loans to DLP based upon the advice of an estate planning attorney representing the Duncans. That DVT is now obliged to pay DLP on these loans, rather than JD Farms, is not disputed by Trustee. DVT continued making the required payments to DLP through November 2012; it made no payments on these loans thereafter. Exs. 201 at 2; 202 at 2.
B. The Factoring Loan
Jason testified that in July 2010, DVT had an opportunity to expand its business. To fund that growth, he approached a number of individuals to see if they would be interested in either loaning money to, or making capital investments in, DVT. *345Jason testified that it was during this time that he approached his father about his efforts to raise money for DVT. Janet testified that, when he asked, the Duncans told Jason they were not interested in investing in DVT.
Jason testified that after the Duncans declined to invest in DVT, he requested that they make a “factoring” loan to DVT (the “Factoring Loan”). Jason testified the this loan was intended to enable DVT to hire more employees, Paul Duncan3 explained that he understood that because DVT needed to pay its drivers a month or two before DVT received payment from its customers, DVT needed financing to operate during the gap. The Factoring Loan was intended to provide that financing.
The Duncans agreed to make the Factoring Loan to DVT. Notably, the loan was to accrue interest at 25%. Janet testified that the interest rate on the Factoring Loan was “very attractive” to the Dun-cans. Paul testified that he understood that another lender was already providing factoring to DVT at a higher interest rate, so both the Duncans and DVT stood to benefit from the Factoring Loan. Jason further testified that DVT’s need for financing was significant at that time, and that he was utilizing the loan from the Duncans, funds contributed by his partner, and funds from a factoring company to operate the company’s business.
As with the Winch Truck and Equipment Loans, DVT originally made payments on the Factoring Loan to JD Farms, and then in about June 2012, began making payments to DLP. See Ex. 103-5. Jason testified that the original balance of the Factoring Loan was $1.7 million. See Ex. 203. Jason testified that while under the agreement, DVT was obliged to make monthly interest payments on the Factoring Loan, but he and his father did not agree on a date when the principal balance was to be paid off. DVT made multiple interest payments on the Factoring Loan, but stopped making payments in November 2012. See also Exs. 103-5, 103-6.
C. The Promissory Notes and Subordination Agreement
Jason testified that the original agreements for all of the DLP loans were oral. However, in September 2012, the terms of the loans were renegotiated and formalized through the drafting and execution by DVT of promissory notes. Exs. 214, 215, 216. Jason testified that, at about this time, DVT was attempting to obtain additional financing from GE Capital Corporation, and that the lender would not provide any funds to DVT unless DLP agreed to subordinate its interests to that of GE Capital. Jason testified that to facilitate a subordination agreement between DLP and GE Capital, DVT’s corporate counsel drafted the promissory notes, and DVT’s president, Wade Chapman, signed them. See Exs. 214, 215, 216.
The effective date of the promissory notes for the Winch Truck and Equipment Loans was December 1, 2012. Exs. 214 at 1, 215 at 1. The notes all provided that the remaining balances of the loans were to be repaid in twelve monthly installments at 15% interest. Exs. 214 at 1; 215 at 1. The effective date of the promissory note for the Factoring Loan was January 1, 2013. Ex. 216. It was to be repaid in 120 monthly installments with interest accruing at 15%.
In August, 2013, DLP, GE Capital, and DVT entered into-a subordination agree*346ment. Ex. 207.4 Under its terms and the promissory notes, DVT was precluded from making any payments to DLP, and DLP was precluded from accepting payments from DVT, unless certain “Payment Conditions” were met. Ex. 207 at 1; see also Ex. 214 at 2. For example, the conditions specified that DLP could not be paid if DVT was in default on the GE Capital loan; DVT also had to meet a certain “fixed charge coverage ratio”5 to make payments to DLP. Ex. 207 at ¶ 1(1); see also Ex. 214 at 2. The record does not reflect whether these conditions were ever met by DVT, but no further payments were made by DVT to DLP on the Equipment and Winch Truck Loans.
D. Balances Due on the Loans
The balances due on the loans, asserted in the DLP Amended Proof of Claim, and in DLP’s closing brief, do not coincide. In its proof of claim, DLP asserts that the balances due on the Winch Truck Loan, the Equipment Loan, and the Factoring Loan, were $63,060.51, $147,787.63, and $2,261,000.00, respectively. Ex. 213 at 3. Of those totals, $52,983.03, $124,169.35, and $1,700,000.00, are asserted as principal balances, with the remainder being claimed as accrued prepetition interest. Id.
In contrast, in its closing brief, DLP, asserts the total balances due on the Winch Truck Loan, the Equipment Loan, and the Factoring Loan, as of two days prior to the filing of the petition, were $67,906.61, $158,761.62, and $2,273,175.94, respectively. DLP’s Br. at 12, Dkt. No. 457. These amounts were apparently calculated based on the terms of the promissory notes. DLP’s Br. at 11; compare DLP’s Br. at 14-16 with Exs. 214 at 1, 215 at 1, 216 at 1. To compute these amounts, DLP utilized the principal balances of the loans as of the effective dates of the promissory notes, which were $47,956.48, $112,120.37, and $1,700,000.00. DLP’s Br. at 14-16. It then calculated the monthly balances of the loans as interest accrued monthly until the filing of the petition. Id. The Factoring Loan balance also accounts for three payments that were apparently made by DVT to DLP in January and April 2013. Id. at 11,16
E. The Bankruptcy Case
On April 3, 2015, DVT filed a chapter 11 bankruptcy petition. Dkt. No. 1. In its Schedule F, it listed a claim in favor of DLP for $2,500,000, as having been incurred in “11/2012”, for “Operating Loan.” Dkt. No. 21 at 41. In its Statement of Financial Affairs, Wade Chapman and Jason Duncan were each listed as owning 50% of the stock in DVT. Id. at 71. Jason verified the Schedules and Statement of Financial Affairs under penalty of perjury on behalf of DVT. Id. at 64, 73. When DVT was unable to reorganize, on February 12, 2016, the case was converted to a chapter 7 case. Dkt. No. 181. Trustee was appointed to serve as chapter 7 trustee. Dkt. No. 191.
Analysis
A. Allowance of Claims
A proof of claim, filed under § 501, and in accordance with Rule 3001, is *347deemed allowed, and constitutes prima fa-cie evidence of the validity and amount of the claim. § 502(a); Rule 3001(f). However, if a party in interest objects to a claim, the Court must determine whether the claim is allowed, and if so, the amount of the claim as of the date of the filing of the petition. See § 502(b); In re Davis, 554 B.R. 918, 921 (Bankr. D. Idaho 2016).
B. Trustee’s Grounds for Objection
DLP attached only unsigned copies of the promissory notes to the proof of claim filed in this bankruptcy case. Understandably, then, most of Trustee’s grounds for objecting to DLP’s Amended Proof of Claim targeted the validity and enforceability of its undocumented claims against DVT. See Am. Obj. to Claim at 2, Ex. 392. However, after the hearing, before the first round of closing briefs were filed, the parties stipulated to the admission into evidence of signed copies of the three promissory notes. Dkt. No. 449; Exs. 214, 215, 216.6 As a result, in his closing brief, Trustee limited his objection to DLP’s claim to three grounds. Tr.’s Br. at 10, Dkt. No. 456.
First, Trustee argues that the entire amount of the Factoring Loan should be recharacterized from a debt to an equity interest. Tr.’s Br. at 5,10. Second, Trustee argues that should the Factoring Loan portion of the claim not be recharacterized, it should be subordinated to other claims in the bankruptcy case pursuant to § 510(b). Id. Finally, Trustee argues that the Court should disallow the amounts claimed by DLP for prepetition interest for all of the loans. Id. at 3.
1. Recharacterization of the Factoring Loan
Section 726(a) provides the order of distribution of property of the estate in a chapter 7 case. In sum, it provides that a debtor (or, as here, the equity owners thereof) can receive nothing from the estate until after all administrative expenses and claims held by creditors are paid in full with interest. § 726(a)(l)-(6); see also § 101(10)(A) (defining “creditor” as an “entity that has a claim against the debt- or” arising before the bankruptcy filing); § 101(5)(A) (defining “claim” as “right to payment”). This distribution scheme, under which chapter 7 creditors are paid before those who hold equity in a debtor-corporation, is what makes characterization of a “claim” as debt or equity critical in a case like this, where there will not be enough funds available to satisfy all allowed .creditor claims in full. In other words, if the Factoring Loan is allowed as an unsecured claim, it will share ratably in any distributions with other creditors. If, instead, the Factoring Loan is recharacter-ized as equity, DLP will receive no distribution.
While DLP asserts it is a creditor holding an allowable claim against DVT in this case, the Code gives bankruptcy courts authority, under appropriate circumstances, to “recharacterize” claims as equity in bankruptcy cases. Official Comm. of Unsecured Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings Int’l, Inc.), 714 F.3d 1141, 1148 (9th Cir. 2013). In the Ninth Circuit, “to determine whether a particular obligation owed by the debtor is a ‘claim’ for purposes of bankruptcy,” courts must decide whether the holder of the obligation has “a ‘right to payment’ under state law.” Id. If it does not, “the court may recharacterize the debtor’s obligation to the transferee under *348state law principles.” Id. at 1147. To the extent state law would not recognize a claim as a debt, but rather, would treat it as an equity interest, the claim is disallowed and recharacterized as an equity interest. See In re Lothian Oil Inc., 650 F.3d 539, 544 (5th Cir. 2011), cited with approval by the Ninth Circuit in In re Fitness Holdings, 714 F.3d at 1148.
So how should the DLP Factoring Loan be treated? In Idaho, courts may recharacterize debts as capital contributions based on the intent of the parties, regardless of the labels the parties may assign to their transactions. Idaho Dev., LLC v. Teton View Golf Estates, LLC, 152 Idaho 401, 272 P.3d 373, 378 (2011). The determination as to whether to recharac-terize an advance as a capital contribution or as a loan is a question of fact. Id. Importantly, the party seeking to rechar-acterize an advance as equity carries the burden of proving it was a capital contribution. Id. at 380.
In Idaho Dev., LLC, the Idaho Supreme Court explains that, in this context:
The-real aim of the trial court is to make the determination whether an advance is debt or equity, which depends on the distinction between a creditor who seeks a definite obligation that is payable in any event, and a shareholder who seeks to make an investment and to share in the profits and risks of loss in the venture ....
Id. at 377. As an example, the Idaho Supreme Court pointed to a prior decision where it found shareholders were not creditors because:
(1) they were not listed on the corporate records as creditors;
(2) no note was executed;
(3) the proceeds of the loans were not used for corporate purposes; and
(4)a different creditor had relied on the availability of the funds to satisfy its loan, but they were ultimately not available.
Id. at 378 (citing Weyerhaeuser Co. v. Clark’s Material Supply Co., 90 Idaho 455, 413 P.2d 180 (1966)). In addition to the Weyerhauser factors, the Idaho Supreme Court has also considered the level of capitalization of the entity receiving the advance, the language of the documents, and whether there were fixed repayment terms. Id. at 380 (referencing factors used In re SubMicron Systems, Corp., 291 B.R. 314 (D. Del. 2003)).
Employing these factors here, the Court finds and concludes that DVT and DLP intended the Factoring Loan to be just that, a loan. Both Jason and Janet testified that when Jason originally approached the Duncans about “investing” in DVT, they both declined. It was not until Jason offered the Duncans the terms of the Factoring Loan that they were persuaded and decided to provide funds to DVT. And the money advanced by DLP to DVT was used in its corporate operations.
While the Factoring Loan was originally an oral agreement, a promissory note was ultimately executed by DVT to evidence and modify the terms of the oral agreement which describes, in no uncertain terms, a credit transaction. This note labels DLP as a lender, requires DVT to repay the factoring advances at a fixed rate of interest in monthly payments, has a fixed maturity date, and specifies events of default entitling DLP to accelerate the balance due on the loan. Ex. 206. And that DLP entered the subordination agreement with GE Capital further evidences that DVT and DLP intended the Factoring Loan to be a debt. Indeed, if the parties considered the advances made by DLP to DVT to be an equity interest, that interest was, by definition, already subordinate to *349GE Capital’s loan, and no subordination agreement would have been required, or at least, DLP’s equity interest would have been described as such in that agreement.
Trustee argues that if the Court focuses upon the original terms of the parties’ oral agreement, especially the 25% interest rate and the lack of a fixed maturity date, the Court should come to a different conclusion about the nature of the transaction. Tr.’s Br. at 8.
As the “determinative inquiry” is the intent of the parties “as it existed at the time of the transaction,” the Court is now hesitant to look behind the terms of a signed promissory note. Idaho Dev., 272 P.3d at 377. But in addition to what the parties may say in their contracts, their intent may be inferred “from what they do through their actions, and from the economic reality of the surrounding circumstances.” Id. at 377-78. Regardless, even considering the terms of the parties’ original oral agreement, Trustee has not persuaded the Court that the transaction should be recharacterized. While the original 25% interest rate seems high, Paul testified that DVT proposed that rate because it was already paying another factoring company an even higher rate. Trustee .provided no evidence to the contrary. Thus, to the Court, the original interest rate is not a dispositive indication of a capital contribution.
The lack of a maturity date under the oral agreement also fails to sway the Court’s opinion. The fixed monthly payments of only accrued interest support the purpose of the loan to provide continuing “gap” financing for the time between DVT paying its drivers and receiving payment from its customers. Additionally, the Court infers from Jason’s testimony that the lack of a maturity date was more due to the parties simply neglecting to establish one at the time the agreement was made, not because the parties intended that DVT would not be obligated, at some future time, to repay all of the funds advanced.
Considering all of the evidence, the Court finds the Factoring Loan was a debt, and declines 'Trustee’s request to recharacterize the transaction as a capital contribution and to disallow DLP’s claim in the bankruptcy case on this basis.
2. Subordination of the Factoring Loan under § 510(b)
Trustee argues that, even if the claim for the Factoring Loan became a “debt” when DVT executed the promissory note, and therefore is a “claim” for purposes of § 502, the Court should find that DLP’s claim based upon the Factoring Loan should be subordinated to other allowed unsecured claims pursuant to § 510(b). Tr. Br. at 6. Section 510(b) provides that:
“[A] claim • arising from recision of a purchase or sale of a security of the debtor ..., for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated
The definition of a “security” within the Code includes a non-exhaustive list of a number of instruments. See § 101(49)(A). However, to support his argument, Trustee focuses solely on one type of instrument: an “investment contract.” § 101(49)(A)(xii); Tr. Br. at 6. He argues that under the test established in Idaho case law,7 the original oral agreement for *350the Factoring Loan between DVT and JD Farm’s was an investment contract. Id. And because the promissory note arose from the parties’ oral agreement, DVT’s claim “arose out of the purchase of a security” for purposes of § 510(b). M; see also Pensco Tr. Comp. v. Tristar Esperanza Props., LLC (Tristar Esperanza Prop., LLC), 782 F.3d 492, 496-97 (9th Cir. 2015).
a. Recharacterization vs. Subordination
DLP argues that determining whether the original agreement was an investment contract, in order to come within the broad reach of § 510(b), is a misapplication of the concept of claim recharacterization as adopted by the Ninth Circuit in In re Fitness Holdings. DLP’s Br. at 5-6. DLP insists that the Court may only recharac-terize transactions in connection with the § 502 claims allowance process.
DLP is correct that § 510(b) applies to determine the relative priority of distribution to those holding otherwise allowed claims, rather than deciding whether a party holds a claim at all. See § 510(b). As the Ninth Circuit has emphasized, for purposes of § 510(b), the critical question, “is not whether the claim is debt or equity at the time of the petition, but rather whether the claim arises from the purchase or sale of a security.” Tristar Esperanza, 782 F.3d at 497.
However, even if DLP holds an allowed claim, it must be subordinated to other claims “if there is a sufficient nexus or causal relationship between the claim and the purchase or sale of securities.” Id. As the Ninth Circuit explains;
Even though the claims were based on promissory notes — fixed, admitted debts at the time of the petition — we remanded for determination of the origin of the notes, instructing the lower court that [i]f the promissory note claims are linked to the [issuance of securities], they should be subordinated.”
Id. (citing In re Betacom of Phx., Inc., 240 F.3d 823, 832 (9th Cir. 2014)).
Thus, here, the Court must look beyond the unambiguous language of the DLP promissory note for the Factoring Loan, to the nature and subject of the parties’ oral agreement, with the goal of determining whether the parties’ original oral Factoring Loan agreement was an investment contract for purposes of subordination under § 510(b).
b. “Investment Contract”
Trustee relies on the Howey-For-man test,8 as adopted by the Idaho Supreme Court, to argue the oral agreement constituted an investment contract. State v. Gertsch, 137 Idaho 387, 49 P.3d 392 (2002); see also, In re Gables Mgmt, LLC, 473 B.R. 352, 360 (Bankr. D. Idaho 2012) (citing Gertsch, 49 P.3d at 396). This Court, in Gables,9 observed that:
The [.Howey-Forman ] test has three prongs to show the existence of an investment contract: 1) an investment of money, 2) a common enterprise, and 3) a reasonable expectation of profits to be *351derived from the entrepreneurial or management efforts of others.
Id. at 360 (citing Gertsch, 49 P.3d at 396).
When measured against these factors, the parties oral agreement for the Factoring Loan fails the third-prong of the Howey-Forman test. Under the third prong, the Duncans must reasonably have expeeted to make a “profit”, which is “generally defined as either ‘capital appreciation resulting from the development of the initial investment ... or a participation' in earnings resulting from the use of investors’ funds.” Id. (citing Forman, 421 U.S. at 852, 95 S.Ct. 2051). Here, JD Farms’ returns on the Factoring Loan were not tied to the value of its assets, nor did DLP anticipate in sharing in the earnings generated by DVT beyond that necessary to repay the loan plus interest. Instead, DLP expeeted only to recover the funds advanced (ie., “loaned”) to DVT, with fixed amounts of interest, regardless of the financial success or failure of DVT. Thus, the oral agreement was not an investment contract.
Trustee argues that the fixed interest payments should not be dispositive since transactions resembling loans have been held in other cases to be investment contracts when they carry extremely high interest rates. Tr.’s Br. at 9; Gables, 473 B.R. at 361. However, the “extremely high” rate referenced in Gables was the “equivalent of one hundred percent annually in some eases.” Id. (citing Gertsch, 49 P.3d at 392). Indeed, the Court has held that a rate that is merely “above market” does not qualify as “extreme.” Id. As was discussed earlier, in context, the twenty-five percent interest rate originally provided for in the oral agreement for the Factoring Loan was high, but not “above market,” and thus, by no means “extreme.”
Trustee also points to the lack of a fixed maturity date in the parties’ oral agreement as evidencing DLP’s intent to invest in DVT. But as explained previously, this argument is not persuasive to the Court under the circumstances here. DVT Was a fairly new venture, the Duncans were family, and the failure of the parties to set a firm date for repayment of the principal amounts advanced under the Factoring Loan does not change the character, of the transaction.
Under the Howey-Forman test, the original agreement between DVT and DLP was a loan, not an investment contract, and thus not a security. Because of this, the promissory note, and DLP’s claim for the Factoring Loan, did not arise from DLP’s purchase of a security and cannot be subordinated pursuant to § 510(b).10
C. The Allowance of Pre-petition Interest
A claim is to be allowed, except to the extent it is unenforceable against the debtor under any agreement. § 502(b)(1). Trustee argues that the Court should disallow DLP’s claim for any prepetition interest on the loans because, as of the petition date, DLP had no enforceable right to recover such interest. Tr.’s Br. at 5, Dkt. No. 456. He contends that, under the terms of the various promissory notes, no payments were due on the DVT loans before the bankruptcy petition was filed, and thus, no interest could have accrued on the loans. Id. In his view, no interest would accrue on the loaned funds until repayment was due. Id.
The Court declines to credit Trustee’s argument because the language of the promissory notes contradicts it. Indeed, *352section four of each of the promissory notes, entitled “Interest,” explicitly provides that interest was to accrue on the loan balances beginning on the effective date of the notes, regardless when payments were to commence. See, e.g., Ex. 214 at 1. In contrast, the payment provisions relied upon by Trustee in no way restrict or delay the accrual of interest. They simply provide that monthly payments to DLP need not be made by DVT unless certain “payment conditions” were met, or, at the latest, on October 15, 2015. Ex. 214 at 1-2.
While Trustee argues that the amortization schedules attached to the promissory notes support his position, the Court finds the opposite is true. Indeed, the first payments on each amortization schedule include a large interest component. See, e.g. Ex, 204 at 4. In other words, the amortization schedules presume interest accrued on the loans prior to the time the first payments were due on the loans.
Simply put, DLP is entitled to recover, as part of its claim, all interest that accrued on the three loans up to the date of DVT’s bankruptcy filing.
Conclusion
DLP’s claims for the Factoring Loan will not be recharacterized as equity, nor will it be subordinated pursuant to § 510(b). Additionally, prepetition accrued interest will be allowed for the claims for the Winch Truck Loan, the Equipment Loan, and the Factoring Loan.
However, there were discrepancies between the amounts asserted to be due on DLP’s claim in its Amended Proof of Claim as compared to those set forth in its closing brief, but no admissible evidence was submitted to establish the amount due on the three loans on the date of the bankruptcy filing. If the parties can agree on the amounts due, they are to submit an agreed form of order which includes those amounts for entry by the Court. To the extent the parties cannot agree on the amounts to be allowed, DLP is to file a second amended proof of claim, to which Trustee can object if he further contests the amounts due.
. Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 10Ó1-9037, and all Civil Rule references are to the Federal Rules of Civil Procedure, Rules 1-86.
, Solely for clarity, the Court refers to the Duncan family members by their first names. No disrespect is intended.
. Paul is Jason's brother. He testified that he is a general partner of DLP, and that he helps his mother with the affairs of that entity.
. The copy of the subordination agreement admitted in evidence is not signed by all the parties, but Paul testified that he believed that, at some point, all necessary parties signed the agreement, because DVT eventually received the financing from GE Capital. The subordination agreement recites that its purpose was to subordinate any interests DLP may have had in any collateral [i.e. DVT accounts receivables] to the secured rights of GE Capital, and in addition, to subordinate DLP’s right to payment to GE Capital.'
. The promissory notes contain these same requirements. Exs. 214 at 2; 215 at 2; 216 at 2. Section 6 of the promissory notes defines the calculation of the “fixed charge coverage ratio.” See, e.g. Ex. 214 at 2.
. While the evidentiary record was closed at the conclusion of the hearing, discerning no prejudice, and given the stipulation of the parties, the Court will consider the notes as part of the evidentiary record.
. Both parties seem to agree and rely only upon state law to support their arguments concerning the meaning of “investment contract" in this context. Under these circumstances, and given the Court’s decision on this issue, the Court need not decide whether the *350parties’ suggested approach is the correct one.
. See S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); United Hous. Found., Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975).
. Ironically, the Court in Gables analyzed the Idaho Supreme Court version of the Howey-Forman test in a claims allowance context. Gables, 473 B.R. at 354. However, despite this being a § 510(b) analysis, the determination of whether a transaction is an investment contract remains the same.
. The Court need not consider DLP’s other arguments against the applicability of § 510(b). See DLP’s Br. at 10-11, Dkt. No. 457. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500609/ | *363OPINION.1 ON BARBARA B. BRA-ZIEL’S AMENDED MOTION TO ALLOW POST-PETITION CLAIM
Edward J. Coleman, III, Judge, United States Bankruptcy Court, Southern District of Georgia
Pending before the Court is the Amended Motion to Allow Post-Petition Claim For the Preservation of the Estate (the “Amended Motion”) (dckt. 48) filed by the Debtor’s attorney, Barbara B. Braziel (“Brazier”). In this Chapter 13 case, the Court granted the Debtor’s application to pay the filing fee in installments, allowing him to pay such fee within 120 days from his petition date. However, on the last day set for paying that fee, the Debtor informed his counsel, Braziel, that he was unable to pay the fee. Rather than seeking additional time pursuant to Federal Rule of Bankruptcy Procedure 1006(b), Braziel elected to pay the filing fee to the clerk and then seek reimbursement as an administrative expense. The Court is now called upon to determine whether Braziel may seek reimbursement for her advance of the filing fee through the Debtor’s Chapter 13 plan.
I. JURISDICTION
The Court has subject-matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(B) (providing that core proceedings include “allowance or disallowance of claims against the estate ... ”).
II. PROCEDURAL BACKGROUND
A. The Debtor’s Chapter 13 Plan
The Debtor filed his Chapter 13 bankruptcy petition and plan on March 7, 2016. (Dckts. 1, 2). In his plan, the Debtor proposed to make 60 monthly payments of $362.00 and pay unsecured creditors a 0% dividend or a prorata share of $100.00, whichever is greater. (Dckt. 2). To date, nine (9) claims have been filed in this case: one (1) secured claim for $14,219.70, seven (7) general unsecured claims totaling $28,197.83 and Braziel’s priority claim for the $310.00 Chapter 13 filing fee.
On March 14, 2016, the Trustee issued a Notice to Commence Wage Withholding and subsequently began to receive the Debtor’s proposed monthly plan payments. A confirmation hearing was held on June 1, 2016. On June 3, 2016, the Trustee filed his Motion on Plan Confirmation (dckt. 28) which provided:
Trustee moves that debtor(s)’ plan be confirmed, subject to payment of the filing fee. The plan commits Debtor(s)’ disposable income to the plan for a period of at least thirty-six (36) months and otherwise conforms to the requirements of Title 11. The plan will pay $100.00 or more to unsecured creditors, but in any event will pay not less than 0.00% of the total allowed unsecured claims.
On June 8, 2016, the Court entered its Order on Confirmation (dckt. 30) conditioning confirmation of the Debtor’s plan upon the payment of the $310.00 Chapter 13 filing fee.
B. Filing Fee Installments
Along with his petition, the Debtor filed an Application to Pay Filing Fee in Installments (dckt. 4), which was granted by this *364Court’s order dated March 9, 2016 (dckt. 9). Pursuant to this order, the Debtor was required to pay the $310.00 Chapter 13 filing fee on or before July 5, 2016 2 in no more than four installment payments. (Dckt. 9). The Debtor failed to pay his filing fee by the July 5, 2016 deadline and did not seek a 60-day extension of such deadline as allowed by Bankruptcy Rule 1006(b)(2). As a result, on July 7, 2016, the Court entered its Order To Pay Filing Fees requiring the Debtor to pay his filing fee in full, or provide a written request to be heard on or before July 21, 2016, to avoid dismissal of his ease. (Dckt. 32)
C. The Advance by Braziel
According to Braziel, after the Court filed its Order to Pay Filing Fees, she spoke with the Debtor by telephone regarding his need to pay the filing fee to prevent dismissal of his bankruptcy case. (Dckt. 48, ¶ 8). After determining that the Debtor did not have sufficient funds to pay the filing fee, Braziel asserts that she “agreed to advance the $310.00 expense, pay the filing fee to the Court, and thereafter seek allowance of an administrative expense claim in the Debtor’s case.” Id. On July 21, 2016, Braziel electronically paid the filing fee on the Debtor’s behalf. Because the filing fee was paid, the Court granted confirmation of the Debtor’s plan on August 3,2016. (Dckt. 35).
D. Braziel’s Proof of Claim
Shortly after paying the filing fee, on July 26, 2016, Braziel filed a proof of claim (Official Form 410) for a $310.00 claim based on “[s]ervices performed.” (Claims Register 9-1). Braziel made the following representations in her proof of claim:
1) Paragraph 9 of Official Form 410 asks: Is all or part of the claim secured? Braziel checked “Yes” and described the nature of the property securing her claim as “Administrative Fees.”
2) Paragraph 12 of Official Form 410 asks: Is all or part of the claim entitled to priority under 11 U.S.C. § 507(a)? Braziel checked “No.”
3) Part 3 of Official Form 410 asks who is the person completing the proof of claim. Braziel checked “I am the trustee, or the debtor, or their authorized agent.”
(Claims Register 9-1).
Braziel then filed her Motion to Allow Claim 93 (“Motion to Allow Claim”) seeking an order from this court allowing her $310.00 claim to be added to the Debtor’s case as an “administrative claim” and directing the Trustee “to fund this claim in accordance with the terms of the confirmed plan.” (Dckt. 34). Braziel’s Motion to Allow Claim did not invoke any section of the Bankruptcy Code or a Bankruptcy Rule in support of her claim. Nor did Braziel attach or reference any document specifying the Debtor’s obligation to repay this advance.
On August 30, 2016, the Trustee objected to Braziel’s Motion to Allow Claim on the following basis:
The claim is for the post-petition payment of the filing fees due the Court for *365the filing of the Chapter 13 petition. The motion circumvents the provisions of the General Order 2015-54 providing for the payment of the filing fees directly to the Clerk. The provisions of Title 11 allowing for the payment of compensation and reimbursement awarded under 11 U.S.C. § 330(a) do not contemplate reimbursement for the filing fees due the Court in order to file a Chapter 13 petition. The filing of a claim for the reimbursement of the filing fee indicates that the attorney is no longer a disinterested person and may have an interest adverse to the estate as a creditor in the case with an administrative claim. See 11 U.S.C. § 327. The motion to allow the administrative claim filed by [Braziel] for Debtor was served only on the Trustee, with no notice to all Creditors in the case with timely filed, allowed claims even though the Creditors are impacted by the allowance of such a claim. Notice to all parties in interest and a hearing are needed to resolve the matter. See 11 U.S.C. § 503(b).
(Dckt. 37).
E. The Hearing
On October 13, 2016, the Court held a hearing5 on- Braziel’s Motion to Allow Claim and the Trustee’s related objection. Notably, the Debtor did not appear. At the hearing, Braziel’s co-counsel, James B. Wessinger, III (“Wessinger”), stated that Braziel’s employment contract with the Debtor gave her sufficient authority to pay the filing fees on the Debtor’s behalf and obligated the Debtor to repay Braziel for the advance of the filing fee 6. Thus, Wes-singer argued that it was appropriate for Braziel to file a proof of claim in this Debtor’s ease. At the conclusion of the hearing, the Court took the matter under advisement and instructed Braziel to amend her Motion to Allow Claim and proof of claim to set forth the specific Code provision that serves as the basis for her administrative expense claim. Further, because Braziel’s claim was clearly unsecured, the Court requested Braziel amend her proof of claim accordingly.
F. Amended Proof of Claim
After the hearing, on October 21, 2016, Braziel amended her proof of claim to reflect a $310.00 unsecured claim based on the “[c]ourt filing fee advanced post-petition.” Braziel also made the following changes:
*3661) Paragraph 12 of Official Form 410 now indicates that Braziel’s claim is entitled to priority under 11 U.S.C. § 507(a)(2)7.
2) On Part 3 of Official Form 410 Bra-ziel checked “I am the creditor.”
(Claims Register 9-2). In addition, Braziel filed the instant Amended Motion, which invokes 11 U.S.C. § 503(b)(1)(A) as the sole basis for her claim to be allowed as an administrative expense. (Dckt. 48).
III. CONCLUSIONS OF LAW
By her Amended Motion, Braziel seeks to be reimbursed through the Debtor’s plan for the $310.00 filing fee she advanced in this case. Braziel’s motion has changed from a Motion to Allow Claim to the more provocatively entitled Amended Motion to Allow Post-Petition Claim for the Preservation of the Estate. What was first characterized as a pre-petition debt filed after the claims bar date is now characterized as a post-petition debt. Braziel initially filed her claim as a secured claim with no priority. She now asserts that she holds an unsecured priority claim. Finally, Braziel first filed her proof of claim and Motion to Allow Claim on behalf of the Debtor, Bra-ziel now asserts the claim on behalf of herself, as a creditor.
These changes to Braziel’s position reflect a certain amount of confusion about-the precise basis upon .which she seeks reimbursement of the filing fee advanced by her. There are several ways to characterize what Braziel is really seeking to accomplish in her Amended Motion. The first option, urged by Braziel, is to consider the “claim” a request for allowance of an administrative expense under § 503(b)(1)(A), on the theory that advancing the filing fee was an “actual and necessary cost or expense of preserving the estate.” Secondly, the filing fee might be viewed as a reimbursable expense under § 503(b)(2) relating to the compensation and expenses awarded under § 330(a); the Trustee argues this is improper. Third, Braziel’s post-petition claim might be allowable under 11 U.S.C. § 1305(a)(2) — it is, after all, a claim which arose post-petition. While neither party invoked § 1305(a)(2)8, the Court will address it anyway. Ultimately, none of these theories support allowance of Braziel’s asserted claim or her request for reimbursement through the Debtor’s plan.
A. Braziel Is Not Entitled to Payment of an Administrative Expense Pursuant to § 503(b)(1)(A)
Pursuant to 11 U.S.C. § 503(a), “an entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.” Section 503(b) provides a non-exclusive list9 of allowable administrative expenses, including the “actual, necessary costs and expenses of pre*367serving the estate.” 11 U.S.C. § 503(b)(1)(A). In order to maximize the value of the estate preserved for the benefit of all creditors, § 503 administrative expenses are to be construed narrowly. Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus., Inc.), 19 F.3d 1371, 1377 (11th Cir. 1994). To determine whether a claim qualifies as an administrative expense under § 503(b)(1)(A), courts generally apply a two-prong test: 1) the claim must arise from a transaction with the bankruptcy estate; and 2) the claim must have directly and substantially benefitted the estate10. 4 Collier on Bankruptcy ¶ 503.06[3] (16th ed. 2015).
In her Amended Motion, Braziel argues that her filing fee advance “preserved the estate” by preventing the Debt- or’s case from being dismissed. The Court does not find this argument persuasive. First, Braziel’s “advance” arises out of a transaction with the Debtor, not his estate. While it is true that the Debtor’s bankruptcy estate was in existence at the time Braziel advanced the filing fees, the obligation to pay the filing fee under 28 U.S.C. § 1930 is not an obligation of the estate. Rather, 28 U.S.C. § 1930, requires the party commencing a bankruptcy case (here, the Debtor) to pay the appropriate filing fee. Accordingly, Braziel’s “advance” benefitted the Debtor personally by satisfying his obligation to pay the required filing fee.
Second, Braziel’s “advance” does not provide a direct or substantial benefit to the estate. Generally, claims predicated on the actual and necessary costs and expenses of preserving the estate involve, for example, outlays for repairs, upkeep, rent, insuring the value of property, or other goods and services incidental to protecting, conserving, maintaining and rehabilitating the estate. 4 Collier on Bankruptcy 503.06[1] (16th ed. 2015). Such expenses provide a benefit to the estate, and its creditors, by maintaining or adding to the value of the assets of the debtor’s estate. The advancement of a Debtor’s filing fee does not provide such a benefit to the estate. Rather, it only serves to satisfy the Debtor’s requirement to pay a filing fee under 28 U.S.C. § 1930.
Because Braziel’s advance fails both prongs of the two-prong test under 11 U.S.C. § 503(b)(1)(A), she is not entitled to an administrative expense under that code section.
B. Braziel Is Not Entitled to Payment of an Administrative Expense Pursuant to § 503(b)(2)
Section 503(b) of the Bankruptcy Code also allows as an administrative expense “compensation and reimbursement awarded under section 330(a) of this title.” 11 U.S.C. § 503(b)(2). Although Braziel does not appear to make an argument that the filing fee advance is an administrative expense under § 503(b)(2), the Trustee at least raised the question by asserting in his Objection that the payment of a debt- or’s filing fee is not the type of reimbursable expense contemplated by 11 U.S.C. § 330(a). (Dckt. 37).
Section 330(a) provides the statutory authority for compensating the services and reimbursing the expenses of officers of the estate, including debtors’ attorneys. A Chapter 13 debtor’s attorney may be paid *368by the estate only pursuant to § 330(a)(4)(B), which provides:
In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services ■ to the debtor and the other factors set forth in this section. Interpretation of a statute starts with the plain meaning of the text of that statute. United States v. Wright, 625 F.3d 583, 591 (9th Cir.2010). “Courts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct, 1146, 117 L.Ed.2d 391 (1992). See also Lamie v. U.S. Trustee, 540 U.S. 526, 533, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004) (“It is well established that when the statute’s language is plain, the sole function of the courts-at least where the disposition required by the text is not absurd-is to enforce it according to its terms.”) (internal quotation omitted) (interpreting § 330 of the Bankruptcy Code).
11 U.S.C. § 330(a)(4)(B); See In re Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)(ob-serving that the Bankruptcy Reform Act of 1994, which deleted the phrase “the debtor’s attorney” from § 330(a)(1), did not affect compensation for Chapter 13 debtors’ attorneys because their compensation is authorized by § 330(a)(4)(B)).
Many courts addressing the propriety of fee applications have allowed Chapter 13 debtor’s attorneys to not only seek compensation for the value of their services, but also reimbursement for expenses under § 330(a)(4)(B). See, e.g. In re Genatossio, 538 B.R. 615, 617 (Bankr, D. Mass, 2015) (“[section] 330(a)(4)(B) permits counsel for a chapter 13 debtor to seek an award of fees and expenses ... ”); In re Lastran, 462 B.R. 201, 213 (Bankr. N.D. Tex.2011); In re Marvin, 2010 WL 2176084 (Bankr. N.D. Iowa 2010); In re Williams, 384 B.R. 191, 194 (Bankr. N.D. Ohio 2007).
On the other hand, at least one bankruptcy court has held that the plain meaning of “compensation” and the absence of “reimbursement” in § 330(a)(4)(B) eliminates the basis for reimbursing a Chapter 13 debtor’s attorney for his or her expenses. In re Marotta, 479 B.R. 681, 690 (Bankr. M.D. N.C. 2012), Using the conventional rules of statutory construction, the Marotta court found:
The Oxford English Dictionary defines “compensation” as “salary or wages; payment for services rendered.” Oxford English Dictionary (2d ed. 1989) “Reimbursement” is defined as “repayment.” Id. Although “compensation” may encompass reimbursement for expenses in other contexts, the plain meaning of the statute suggests that Congress did not intend reimbursement of attorney expenses under Section 330(a)(4)(B) (“reasonable compensation”) as it did under Section 330(a)(1) (“reasonable compensation ... and reimbursement for actual, necessary expenses”). The use of the word “reimbursement” in a neighboring paragraph suggests that Congress indeed meant the plain, dictionary defíni.tion of “compensation” in Section 330(a)(4)(B). The “commonsense canon of noscitur a sociis” counsels that a word is given- “more precise content by the neighboring words with which it is associated.” United States v. Williams, 553 U.S. 285, 294, 128 S.Ct. 1830, 170 L.Ed.2d 650 (2008) (citing 2A Sutherland Statutes and Statutory Construe*369tion § 47.16 (7th ed. 2007)). Applying this canon, the Court determines that the narrow, plain meaning of the word “compensation” to mean payment for services, rather than reimbursement for expenses.
Marotta, 479 B.R. at 689-90.
Respectfully, this Court disagrees that the omission of the words “reimbursement of expenses” from § 330(a)(4)(B) means that a Chapter 13 debtor’s attorney can never seek reimbursement for his or her expenses. It is easy to imagine contested matters that may arise in a Chapter 13 case that would require a debtor’s attorney to incur expenses, such as deposition costs or witness fees. To suggest that such direct expenses of representing the debtor are not reimbursable seems contrary to the concepts of reasonableness and necessity encompassed in § 330(a)(4)(B). Moreover, that subsection refers back to the “other factors set forth in this section,” which are the factors relating to other professionals compensated under § 330(a)(1).
This Court, as well as many other courts, have adopted a “no-look” fee which obviates the need, in most cases, to address whether the expenses of a Chapter 13 debtor’s attorney are reimbursable under § 330(a)(4)(B). This Court’s General Order 2010-3 provides that “a claim for attorney’s fees for services rendered and expenses advanced to a Chapter 13 debtor will be deemed automatically approved by the Court, in the absence of an objection, so long as said claim does not exceed the sum of three thousand dollars ($3,000.00).” Bankr. S.D. Ga. Gen. Order 2010-3 (emphasis added). Thus, this Court acknowledges that a Chapter 13 debtor’s attorney may incur certain reimbursable expenses, but these expenses are included in the Court’s “no-look” fee.
If, however, a Chapter 13 debtor’s attorney seeks compensation or reimbursement of expenses above the Court’s “no-look” fee, General Order 2010-3 provides:
In the event a debtor’s attorney subsequently determines that an award of $3,000.00 does not adequately compensate the attorney for legal services rendered, the attorney may petition for reasonable attorney’s fees disclosing all time expended in such representation from the beginning of the case under the standards set forth in 11 U.S.C. § 330 and Norman v. Housing Authority of the City of Montgomery, 836 F.2d 1292 (11th Cir. 1988),
Bankr. S.D. Ga. Gen. Order 2010-3.
In this case, Braziel is not seeking payment of an administrative expense under § 503(b)(2), nor has she met the procedural requirements11 necessary under General Order 2010-3 to seek compensation (or reimbursement of expenses) above this Court’s $3,000.00 “no-look” fee. Regardless, the Court finds that the advance of a Chapter 13 debtor’s filing fee is not properly reimbursable under 11 U.S.C. § 330(a)12. Pursuant to 28 U.S.C. § 1930, a debtor’s filing fee is, in essence, his or her cost of admission. To allow a debtor’s attorney to satisfy this obligation of the debtor and seek repayment as an adminis*370trative expense funded by the Trustee has the potential to push this cost onto creditors. Nothing in the Bankruptcy Code contemplates such treatment of the filing fee.
C. Braziel’s Post-Petition Claim Must Be Disallowed Pursuant to 11 U.S.C. § 1305(c)
At the October 13, 2016 hearing, Wessinger indicated that Braziel’s employment contract obligates the Debtor to repay Braziel for the filing fee advanced. As a result, Braziel filed her amended proof of claim for the “[c]ourt filing fee advanced postpetition” and the instant Amended Motion seeking allowance of such “post-petition claim.”
Section 1805 of the Bankruptcy Code governs the filing and allowance of post-petition claims in a Chapter 13 case:
11 U.S.C. § 1305. Filing and allowance of postpetition claims
(a) A proof of claim may be filed by any entity that holds a claim against the debtor-
(1) for taxes that become payable to a governmental unit while the case is pending; or
(2) that is a consumer debt, that arises after the date of the order for relief under this chapter, and that is for property or services necessary for the debtor’s performance under the plan.
⅜ * *
(c) A claim filed under subsection (a)(2) of this section shall be disallowed if the holder of such claim knew or should have known that prior approval by the trustee of the debtor’s incurring the obligation was practicable and was not obtained.
11 U.S.C. § 1305 (emphasis added).
Here, since Braziel’s claim is not for taxes payable to a governmental unit, it must fall within the purview of § 1305(a)(2) to be allowed. Braziel’s $310.00 advance is likely a “consumer debt,13” as it was used to pay the filing fee for the Debtor’s personal bankruptcy. However, the Court doubts whether such debt was “for property or services necessary for the debtor’s performance under the plan.” The legislative history of this code section references two examples of the kind of necessary post-petition expenses for which § 1305(a)(2) was enacted: “auto repairs in order that the debtor will be able to get to work, or medical bills.” H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 427-28(1978). The need to advance a Debt- or’s filing fee arguably does not involve the same exigent circumstances as those evidenced in the legislative history of § 1305(a)(2). See In re Phillips, 219 B.R. 1001, 1007 (Bankr. W.D. Tenn. 1998) (finding, based on the legislative history and the interpretation of courts which have dealt with the issue, that routine legal work by a debtor’s attorney is not within the purview of § 1305(a)).
Regardless, even if Braziel’s claim fell within the purview of § 1305(a)(2), the Court must disallow Braziel’s claim under § 1305(c). For a post-petition claim to be eligible for allowance, one of three conditions must be satisfied: 1) prior approval of the Chapter 13 trustee was obtained; 2) the claim holder did not know and should not have known of the need to get prior approval of the trustee; or 3) the prior approval of the trustee was not practicable. Phillips, 219 B.R. at 1007.
*371Here, the first condition has clearly not been met because the Trustee has objected to Braziel’s claim. Second, the Court finds it unlikely that Braziel, as the Debtor’s attorney, did not know of the need to obtain approval of the trustee to incur a post-petition debt. Third, the Debtor and Braziel were presumably aware of the filing fee deadline of July 5, 2016 at the time the Debtor filed his petition and had the ability to seek an additional 60 days to pay the filing fee under Bankruptcy Rule 1006(b). However, the Debtor never made such a request. Thus, Braziel’s decision to advance the filing fee was not prompted by an emergency situation that rendered obtaining the Trustee’s approval impracticable. Because the Court “shall” disallow a post-petition claim which fails to meet the requirement of § 1305(c), Braziel’s Amended Motion, to the extent it seeks allowance of a post-petition claim, is denied.
IV. CONCLUSION
Congress enacted a statute setting forth the filing fees which debtors must pay to file under the various chapters of the Bankruptcy Code. In that same statute, Congress provided that a Chapter 7 individual debtor may seek a waiver of the filing fee based on certain income criteria. Congress did not provide for the waiver of the filing fee in a Chapter 13 case. However, Congress did provide that an individual debtor, including a Chapter 13 debtor, may pay his or her filing fee in installments. Indeed, the Debtor took advantage of this latter provision and was granted leave to pay the filing fee in installments by a given deadline. What Congress did not provide for was what happened in this-case — the payment of the filing fee by debtor’s counsel followed by a request to be reimbursed through the Debtor’s plan.
The Court finds that Braziel’s advance of the Debtor’s filing fee may give rise to a post-petition claim against the Debtor. However, to the extent Braziel holds a valid claim, it is not allowable in this case under 11 U.S.C. § 1305, Further, the Court finds that Braziel is not entitled to reimbursement of the Debtor’s filing fee as an administrative expense under 11 U.S.C. § 503(b)(1)(A) or (b)(2). While the Court recognizes that certain expenses of a Chapter 13 debtor’s attorney may give rise to an administrative expense claim, it does not find that the advance of a debtor’s filing fee is such an expense. Accordingly, the Court will enter a separate order DENYING Braziers Amended Motion to Allow Post-Petition Claim For the Preservation of the Estate (dckt. 48).
. I am authorized to state that Chief Judge Susan D. Barrett joins in the holding in this case.
. This deadline represented the 120th day after the Debtor’s petition date, as contemplated by Bankruptcy Rule 1006(b) ("the final installment shall be payable no later than 120 days after filing the petition”).
. The introductory paragraph of the Motion to Allow Claim "moves the Court for an order allowing a pre-petition claim to be filed after the bar date,” Braziel’s certificate of service also makes reference, not to a Motion to Allow Claim, but to a "Motion to Allow Pre-Petition Debt” and "Order Allowing Pre-Petition Debt.” (Dckt. 34, p. 3).
. General Order 2015-5 provides "Effective March 1, 2016, the filing fees for filing a case under Chapter 13 of Title 11 of the United States Code prescribed by 28 U.S.C. § 1930 shall no longer be paid through the Chapter 13 plan ... said filing fees shall be paid directly to the Clerk Banltr. S.D, Ga. Gen. Order 2015-5.
. On September 2, 2016, the Clerk's Office sent a Notice of Hearing on Braziel’s Motion to Allow Claim to all creditors provided in the Debtor’s creditor matrix. (Dckt. 40).
. Braziel's employment contract authorized her "to take any actions necessary to protect the Debtor(s) in this matter” and "appointed] her to act on Debtor(s) behalf in any way that she deems necessary.” (Dckt. 48-l). The employment contract does not expressly contemplate this extension of credit by Braziel, nor the reimbursement of expenses, but does provides that the Debtor agrees to pay an attorney fee of $3,000,00 for all legal services rendered up to confirmation, an hourly rate of $225.00 for all attorney services rendered after confirmation, and the sum of $250.00 for each Motion of Relief From Stay; Id. The employment contract further provides that "[t]he Debtor(s) agree to pay for any additional services including but not limited to the following: (a) representation of the Debtor(s) in any Motion for Leave to Sell, (b) motions to approve personal injury claims, (c) discharge-ability actions, (d) judicial lien avoidances, (e) relief from stay actions, or (f) any adversary proceedings.” Id.
. The proof of claim form (Official Form 410) instructs parties to "not use this form to make a request for a payment of an administrative expense” and to “[m]ake such request according to 11 U.S.C. § 503."
. Some courts have held that a § 1305(a)(2) claim may also qualify as an administrative expense under § 503(b). See e.g., In re Rattler, 2013 WL 828286 at *3 (Bankr. S.D. Ala. 2013) ("Section 1305(a)(2) and § 503(b)(1), as written, are not mutually exclusive”); In re Chaney, 308 B.R. 588 (Bankr. N.D. Ga. 2004).
.11 U.S.C. § 503(b) provides that administrative expenses "include” the nine categories listed in such code section. Section 102(3) provides that the terjn "include” and "including” are not to be construed as limitations. Accordingly, the nine described categories are not an exhaustive list of all of the types of claims that are entitled to administrative priority. However, Braziel has not asserted any other basis for her entitlement to an administrative expense.
. There are exceptions to the benefit test. Under the so-called Reading doctrine, courts have found that damages resulting from post-petition torts committed by a debtor-in-possession or trustee are "actual and necessary costs" of administration. 4 Cottier on Bankruptcy 503.06[3][c] [i] (16th ed. 2015); See Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).
. To seek compensation above the “no-look” fee, a Chapter 13 debtor’s attorney is required to file a fee application containing certain information, including an itemized statement of his or her fees and expenses. Fed. R. Bankr. P. 2016(a); In re Nelson, 2017 WL 449581 (Bankr, E.D. Wis. 2017). No such application has been filed by Braziel,
. The Court recognizes that a filing fee paid by a debtor’s attorney may be properly reimbursable in the context of a Chapter 7 case because it is generally paid from funds received from the debtor. See In re Saturley, 131 B.R. 509, 520 (Bankr. D. Maine 1991).
. The Bankruptcy Code defines a consumer debt as a "debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500610/ | OPINION
CHRISTINE M. GRAVELLE, U.S.B.J.
Introduction
In this case the Court is tasked with determining if the marital tort claim of Asma Warsi-Chaudry (“Wife"), which she alleges in her divorce proceeding against debtor, Ghazali Chaudry (“Husband”), is more properly characterized as a debt for willful and malicious injury under 11 U.S.C. § 523(a)(6), or a debt incurred in the course of a divorce or separation under 11 U.S.C. § 523(a)(15). A marital tort claim is referred to in New Jersey as a Tevis claim, following a state supreme court opinion of the same name. See Tevis v. Tevis, 79 N.J. 422, 400 A.2d 1189 (1979). This Court will refer to Wife’s marital tort using that term of art.
The Court finds that based upon the facts presented in this case, Wife’s Tevis claim is a debt arising under 11 U.S.C. § 523(a)(6). Because the time to object to the dischargeability of the Tevis claim has expired, Husband’s liability on the claim, if any, has been discharged.
Facts
Husband and Wife were married in 2001. Wife filed for divorce, ultimately filing an amended complaint for divorce on June 3, 2014. The amended complaint included a Tevis claim, alleging that Husband committed assault upon Wife during the course of the marriage, causing damages. The Superior Court of the State of New Jersey, Chancery Division, Family Part (the “Family Court”), which presides over the divorce case issued a sua sponte order on July 25, 2014 severing the Tevis portion of the complaint and forwarding that claim to the Law Division for a determination, On January 5, 2015, the Law Division dismissed the severance of the Tevis claim and transferred it back to the Family Court.
In February 2016, Husband filed the present bankruptcy listing Wife as a creditor. The Court sent Official Form 309A-Notice of Chapter 7 Bankruptcy Case to all listed creditors, including Wife. The Notice specified that the deadline to object to the discharge of a debt under 11 U.S.C. § 523(a)(2), (4), or (6) was May 20, 2016. On May 20, 2016 Husband and the Chapter 7 Trustee filed a stipulation which extended the deadline for the Trustee to object to discharge. Husband and the Trustee further extended the deadline by consent for an additional month. Wife received • no such extension. Neither the *374Trustee, nor the Wife, nor any other creditor filed an adversary complaint challenging the dischargeability of any debts, and Husband received his discharge on September 20, 2016.
On February 28, 2017 Wife filed a motion styled as an “Ex-Parte Motion for a Determination” that Wife’s Tevis claim survived Husband’s discharge. Husband’s attorney filed opposition on procedural grounds, including the fact that Husband was deployed, and the matter was adjourned by the Court. The parties appeared on April 11, 2017, at which point the Court requested more briefing. Additional oral argument was held on May 16, 2017.1
Law
Section 523(a)(6) of the Code excepts from discharge “any debt ... for willful and malicious injury by the debtor to another entity or to the property of another entity.” See 11 U.S.C. § 528(a)(6). Liabilities arising from assault or assault and battery are generally considered as founded upon a willful and malicious injury, and are therefore within the exception. See In re Granoff, 250 Fed.Appx. 494, 495-96 (3d Cir. 2007) (citing 4 Collier on Bankruptcy ¶ 523.12[4] (15th ed. Rev. 2007)).
A debtor may be discharged from a § (a)(6) debt unless the creditor requests, upon notice and a hearing, a determination from the court that the debt may be excepted from discharge. 11 U.S.C. § 523(c)(1). Objections to the discharge-ability of a debt are properly brought by way of an adversary proceeding. F.R.B.P. 4007(a); F.R.B.P. 7001(4). In a Chapter 7 case, a complaint to determine the dis-chargeability of a § 523(a)(6) debt must be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a). F.R.B.P. 4007(c). The court may extend the time to file a complaint only if the motion for the extension is filed before the time has expired. Id.
Section 523(a)(15) excepts from discharge debts, “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record.” Debts under § 523(a)(15) are not subject to any temporal requirement for the filing of an adversary complaint objecting to their discharge. See F.R.B.P. 4007(c). If the debt is characterized as one arising under § 523(a)(15), then the claim is not dischargeable regardless of whether an adversary proceeding is filed within a certain timeframe.
Here, an initial analysis of the facts shows that Wife’s Tevis claim in her amended divorce complaint specifically references reckless, wanton, and malicious assault by Husband against her. It would thus appear that the compensatory and punitive damages sought in that count would fall under the purview of § 523(a)(6). As no adversary complaint was filed in a timely manner, the debt would then be deemed to be discharged.
But, the New Jersey Supreme Court has instructed that marital tort claims be presented in connection with the divorce action in order to resolve all of the parties’ legal disputes in one proceeding. See Tevis v. Tevis, 79 N.J. 422, 434, 400 A.2d 1189 (1979). The Tevis court found that the potential for money damages arising from a marital tort are relevant in a matrimonial proceeding, and therefore must be *375joined under the “single controversy doctrine.” Tevis v. Tevis, 79 N.J. at 434 Id. “When issues of child welfare, child support and child parenting are intertwined with dissolution of the marriage and the necessary resolution of the marital tort, the Family Part may conclude that the marital tort should be resolved in conjunction with the divorce action as part of the overall dispute between the parties.” Brennan v. Orban, 145 N.J. 282, 301-302, 678 A.2d 667 (1996). Any damages predicated upon the tort liability of one spouse to another must be considered in the court’s decision respecting equitable distribution, alimony, and the ability to pay alimony, to prevent a double recovery on the claim. See Giovine v. Giovine, 284 N.J.Super. 3, 29, 663 A.2d 109 (App. Div. 1995).
As Wife’s Tevis claim is a part of a divorce proceeding by virtue of her allegations in the amended divorce complaint, Wife argues that it is non-dischargeable under § 523(a)(15).
The only bankruptcy court in this district to address the dischargeability of a Tevis claim presumed that such a claim would be discharged absent the timely filing of an adversary proceeding under § 523(a)(6). See In re Galtieri, 2007 WL 2416425 at *1 (Bankr. D.N.J. Aug. 17, 2007). In that case the court opined that such an adversary would be filed “presumably pursuant to 11 U.S.C. § 523(a)(6) alleging willful and malicious injury.” Id. (emphasis added). The Galtieri court did not definitively conclude that a Tevis claim must be brought under § 523(a)(6), nor did it conduct any analysis as to the application of § 523(a)(15) to a damage award on a Tevis claim included in a judgment for divorce.
As such, additional inquiry is necessary to determine if a Tevis claim is a debt incurred by Husband in connection with the divorce proceeding. The Bankruptcy Code does not define when a debt is incurred. However, “debt” is defined as “liability on a claim.” 11 U.S.C, § 101(12). A “claim” is defined as “a right to: payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 11 U.S.C, § 101(5)(A). Congress intended to adopt the broadest possible definition of the term “claim.” See In re Grossman’s Inc., 607 F.3d 114, 121 (3d Cir. 2010) (citations omitted). In determining whether a creditor holds a pre-petition claim, “our focus should not be on when the claim accrues ... but whether a claim exists.” Id.
In New Jersey, interspousal tort immunity no longer exists to bar the suit of one spouse against another for injuries sustained by one spouse due to the tor-tious conduct of the other. Merenoff v. Merenoff, 76 N.J. 535, 557, 388 A.2d 951 (1978). Wife was not barred from filing marital tort claims against Husband during their marriage. See Tevis v. Tevis, 79 N.J. at 429, 400 A.2d 1189 (continuing marriage of parties per se does not prevent filing lawsuit for personal injuries based on tort). She need not have waited for the filing of a divorce complaint to make her allegations. Her Tevis claim was not dependent upon the filing of the divorce. Those claims existed independent of the divorce action and may be time-barred if not filed within the time period set by the applicable' statute of limitations. See Giovine v. Giovine, 284 N.J.Super. at 10, 663 A.2d 109 (considering whether battered woman’s syndrome can excuse strict application of two-year statute of limitations for tort). The Tevis court simply made clear that, if a spouse has not already done so, he or she must include the claim in the divorce complaint in compliance with the entire controversy doctrine. *376See Tevis v. Tevis, 79 N.J at 430, 400 A.2d 1189.
The existence of a Tevis claim must be distinguished from the existence of other types of claims normally associated with a divorce proceeding like claims for equitable distribution, alimony, and child support. The latter claims do not exist until a divorce complaint is filed. In New Jersey, “a non-debtor spouse has an allowable pre-petition claim against the debtor’s bankruptcy estate for equitable distribution of marital property when the parties are in divorce proceedings before the bankruptcy petition is filed.” In re Ruitenberg, 745 F.3d 647, 653 (3d Cir. 2014). This is because the filing of a divorce complaint is an event that defines the scope and extent of distributable marital assets. See Vander Weert v. Vander Weert, 304 N.J.Super. 339, 348, 700 A.2d 894 (App. Ct. 1997). “Once the divorce complaint is filed, the marital estate is, not technically but in a practical sense, in custodial egis .., [and] significant equities in the then-distributable marital estate are thereby created ...” Id. at 349, 700 A,2d 894. Unlike a Tevis claim, which exists at the time the assault occurs, an equitable distribution or support claim cannot exist absent a divorce proceeding. Debts for equitable distribution and support cannot be incurred other than in connection with a divorce or separation agreement. Consequently, they fall squarely within the exception to discharge outlined in § 523(a)(15) of the Code, The Tevis claim exists whether or not a divorce or separation proceeding is filed.
Wife submits that the Tevis claim is so intertwined with the other issues in the divorce proceeding so as to be incurred in connection with that proceeding. She notes that the Law Division agreed with her and, as a result, dismissed the severance of the Tevis claim and transferred it back to the Family Part for determination. This Court takes no position on whether the Tevis claim should be heard in the Law Division or in the Family Part and notes that it is a distinction without a difference. This Court’s determination that a Tevis claim must be established as non-dischargeable under § 523(a)(6) of the Code does not prevent consideration by the Family Part of the consequences that may have occurred from the facts alleged to support the Tevis claim. Damages suffered by Wife, if any, do not cease to exist as a result of this Court’s decision.2
Pursuant to statute, the Family Part may consider factors that may have resulted from the alleged tort claims, such as “[t]he age and physical and emotional health of the parties,” and “[t]he income and earning capacity of each party,” in making an award for equitable distribution. See N.J.S.A, 2A:34-23.1. However, in such analysis the alleged wrongful acts of husband need not be proven or considered, nor would the award be based upon said actions. Instead, the Family Court would conduct a wholly independent analysis based upon those factors specifically enumerated in the equitable distribution statute. So, the Family Part may still consider the impact, if any, of the Tevis claim on its determinations of equitable distribution, alimony, support, child custody, and any other issues that may be affected by the Tevis-related allegations. For example, if Wife’s ability to earn was impacted by injuries suffered in the assault, she may be entitled to more alimony or Husband may *377be ordered to contribute a higher percentage to a child support allowance. In such a case, it would not matter who caused a spouse’s injuries, just that the injuries may need be considered when determining maintenance and support.
The Court recognizes that judgments of divorce may include damages awarded on a Tevis claim. If the movant had come to this Court with such a divorce judgment, the analysis and outcome may have been different. If the Tevis award was so intertwined with awards of alimony, support and equitable distribution in the divorce complaint, non-dischargeability under § 523(a)(15) may be warranted. The Court envisions a situation where Tevis damages could have affected the related alimony and equitable distribution awards. That is not the case presented here. In the present matter, the State Court will be able to make alimony, support, custody and equitable distribution determinations with the knowledge that the Tevis claim cannot be pursued. This will prevent any double recovery. The issues will not become intertwined because the State Court may proceed as though the Tevis claim was never pled.
Conclusion
In this matter any relationship between Wife’s Tevis claim and the remainder of the divorce has no effect on the fact that her claims existed prior to the divorce, and therefore could not have been incurred in connection with the divorce. Therefore the claim is not the type contemplated by § 523(a)(15), but is rather more properly characterized as a debt under § 523(a)(6). Because an adversary proceeding was not timely filed pursuant to F.R.B.P. 4007(c) the debt is dischargeable, and the motion is DENIED.
. On May 17, 2017, shortly after the additional oral argument, counsel for Husband submitted an additional filing directing the Court to the May 15, 2017 Supreme Court opinion in Midland Funding, LLC v. Johnson, 581 U.S. -, 137 S.Ct. 1407, 197 L.Ed.2d 790 (2017). Wife’s attorney filed a reply later in the day on the 17th. The Court reviewed the documents, but did not find the arguments presented to be relevant to this matter.
. Although not presented here, this Court queries whether facts alleged in a Tevis claim may influence a family court's decision regarding custody and visitation. The Court presumes that the discharge granted in this decision extends to monetary damages and does not prevent the family court from assessing the truthfulness of the allegations if necessary to effectively administer the divorce proceeding. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500611/ | OPINION
THE HONORABLE STACEY L. MEISEL, UNITED STATES BANKRUPTCY JUDGE
As the Supreme Court has held - state law defines property interests.1 While this proposition seems rather simple on its face, in bankruptcy we regularly grapple with the intersection of state defined property interests and the Bankruptcy Code.2 Sometimes, these state and federal principles seemingly collide rather than coexist. This has occurred in cases deciding wheth*379er the Bankruptcy Code permits the bifurcation of a lien held by a New Jersey condominium association when the lien is recorded pursuant to the New Jersey Condominium Act,3 which provides a priority of payment as a result of following certain requirements set forth in the Condominium Act. It is this issue that must be resolved by the Court.
This matter comes before the Court on a confirmation hearing of the Chapter 13 plan (“Plan”)4 filed by Catherine M. Smiley (the “Debtor”). Under the Plan, the Debtor seeks to, inter alia, modify the secured claim filed by Hampton Commons Condominium Association, Inc. (the “Association”) by reclassifying a portion of the secured claim as unsecured. The Association objects to confirmation, asserting that the Plan should not be confirmed because it improperly seeks to cram-down a partially secured consensual lien on the Debt- or’s principal residence.5 The Association maintains that its secured claim is protected by section 1322(b)(2) of Bankruptcy Code and, therefore, it cannot be bifurcated. The Debtor counters by asserting she may, in fact, bifurcate the Association’s secured claim pursuant to section 1322(c)(2) of the Bankruptcy Code.
The following shall constitute the Court’s findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.6
JURISDICTION AND VENUE
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 and amended September 18, 2012. This matter concerns the confirmation of a Chapter 13 plan. It constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). Venue is proper under 28 U.S.C. § 1408.
PROCEDURAL HISTORY AND FACTUAL BACKGROUND
The facts relevant to this decision are not in dispute. The Association is a nonprofit corporation operating as the condominium association for a planned-unit development known as “Hampton Commons” in Newton, New Jersey. The Association was established pursuant to the Condominium Act, and by Master Deed dated February 11,1986 and recorded September 29, 1986 in the Sussex County Clerk’s Office in Deed Book 1385, Page 64, et seq. (“Master Deed”).7 The Debtor is the owner of a condominium unit located at 11 Oriole Terrace, Newton, New Jersey 07860 (“Property”), a unit within the Association by virtue of a unit deed dated December 17, 1992 and recorded December 30, 1992, in the Sussex County Clerk’s Office in Deed Book 1901, Page 88.8 After the Debtor changed her name, the deed was subsequently re-recorded on February 5, 2012 in the Sussex County Clerk’s Office in Deed Book 3244, Page 821.
According to Article VII, Sections 7-9 of the Master Deed, each member of the Association is obligated to pay mainte*380nance fees to the Association on a monthly-basis to cover the common expenses of the Association. In relevant part, Article VII, Section 9 states:
9. That the owner of each unit is bound to contribute according to the percentage of his undivided interest in the common elements towards the expenses of administering and of maintenance and repairs of common elements, the expenses of administering and maintaining the Association, and all of its real and personal property in such amounts as shall from time to time be fixed by the Association. ...9
According to the Association’s Bylaws and its Resolution Pertaining to Collection of Delinquent Assessments (the “Resolution”), if a unit owner defaults in paying his/her maintenance fees, the Association may accelerate the monthly payment for the remainder of the Association’s fiscal year, record a lien against the unit for any portion of the unpaid maintenance fees, and foreclose upon said lien in the same manner as afforded to mortgage lenders.10 In pertinent part, the Resolution provides the following:
[a]ll installment payments on any type of assessment including special assessments shall be due and payable within fifteen (15) days after the due date thereof. The remaining assessment installments, including any special assessment instalments, shall be accelerated if the delinquent installment has not been paid by ninety (90) days after the due date. After ninety (90) days the entire assessment balance shall be fully due and payable and the delinquent unit owner shall be notified that a lien for the accelerated assessment amount shall be recorded following a time period set forth in the notice if not paid in full. Should default continue for a period of thirty days (30) days or more after the filing of the lien, then the Board may foreclose on the lien pursuant to Law and/or commence a suit against the delinquent unit owner to collect the assessment. The Board shall also notify any Mortgage holder on the unit of the default by the owner.11
Article VII, Section 10 of the Master Deed provides that late fees may be assessed for the unit owner’s failure to pay maintenance fees on time.12 It further provides that reasonable attorney’s fees and costs incurred are to be assessed to the defaulting unit owner.13 In relevant part, Article VII, Section 10 states:
10. That all charges, expenses and assessments chargeable to any unit plus reasonable attorney’s fee [sic] incurred for the recovery thereof, shall constitute a lien against said unit in favor of the Association, which lien shall be prior to all other liens except: (1) assessments liens and charges for taxes past due and unpaid on the unit; and (2) payments due under bona fide mortgage instruments, duly recorded, prior to such assessments. The Association’s lien shall be recorded inthe [sic] Clerk’s Office of Sussex County pursuant to the Condominium Act, N.J.S.A. 46:8B-21....14
On February 29, 2012, the Association recorded a $5,870.08 lien against the Property for unpaid assessments, charges, and expenses due to the Association (“2012 *381Lien”).15 The 2012 Lien was recorded in. the Sussex County Clerk’s Office in Book 8964, Page 216.16 On June 12, 2013, the Association recorded a second lien against the Property for $3,723.67 for unpaid assessments, charges and expenses due to the Association (“2013 Lien”).17 The 2013 Lien was recorded in the Sussex County Clerk’s Office in Book 9143, Page 546.18 The 2012 and 2013 Liens will be collectively referred to as the “Liens.”
On February 10, 2016, the Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code.19 The Association filed a proof claim on March 14, 2016 asserting a $13,790.45 claim against the Debtor for unpaid condominium maintenance fees. The proof of claim provides for a $9,093.75 secured portion (the total of the 2012 Lien and 2013 Lien combined) and a $4,696.70 unsecured portion. The unsecured portion represents the arrears owed to the Association, which were not part of the Liens and arose after their recordings. The Debtor lists the Property on Schedule A with a $142,000.00 value.20 Champion Mortgage Company (“Champion Mortgage”) holds a $174,174.28 first mortgage on the Property. The parties do not dispute that there is insufficient equity in the residence to support both the entire outstanding claim for unpaid assessments and the mortgage held by Champion Mortgage.
Debtor’s Arguments for Cram-Down of the Association’s Claim.
On its face, the Plan proposes to cram-down and bifurcate the Association’s claim under section 1322(b)(2). Pursuant to the Plan, the Association’s secured claim is reduced to $1,710.00 and the balance of the secured portion is reclassified as unsecured.21 The Debtor asserts that “the amount of $1,710.00 was calculated by multiplying the monthly aggregate customary condominium assessments against the unit, $285.00, times 6 months'pursuant to [section] 46:8B-21.”22 Absent from the Plan is any legal analysis/explanation as to how the Association’s secured claim may be modified pursuant to section 1322(b)(2). Although not raised by the Debtor' or the Association, the Court notes that at the time the 2013 Lien was recorded, the monthly condominium assessments were $250.00.23 Indeed, the Association charged the Debtor a $285.00 monthly condominium assessment, but that only started in January 2014.24 Neither the Debtor nor the Association informed the Court of the amount of the monthly condominium assessments for the time period covered by the 2012 Lien.
The Association objected to the Plan. The Association contends that it is entitled to the full value of its secured claim and that the Debtor’s attempt to bifurcate and cram-down the Association’s secured claim is in contravention of section 1322(b)(2). The crux of the Association’s arguments is two-fold. First, the Association asserts section 46:8B-21(b) of the Condominium Act provides condominium association liens *382with a limited priority over prior recorded mortgages to the extent of six months of customary maintenance fees.25 Thus, even when a hypothetical condominium owner’s prior recorded mortgages exceed the value of the property (ie., the property is “underwater”), the condominium association’s lien, even if recorded after the mortgage is recorded, will always receive, at a bare minimum, the value of six months of customary maintenance fees if and when the property is foreclosed upon.
Second, the Association asserts that, unless the value of the Property is entirely exceeded by municipal and federal tax liens, the limited priority created by section 46:8B-21(b) guarantees a portion of the Association’s claim will always have a secured interest in the Property.26 A secured interest in the Property, the Association contends, “trigger[s] protection under the Anti-Modification Clause [ (section 1322(b)(2) ], even when there is no other equity in the property that the [A]ssociation’s lien would attach to.” 27 The Association cites to two New Jersey bankruptcy court decisions, In re Robinson28 (“Robinson F) and In re Robinson29 (“Robinson II”) and one New Jersey district court decision, Whispering Woods Condo. Ass’n v. Rones (In re Rones),30 wherein the courts held, inter alia, that section 46:8B-21(b) provides a limited priority for condominium associations’ liens for unpaid assessments, théreby treating the lien as a security interest in the debtors’ principal residence and preventing it from being modified under a Chapter 13 plan. Indeed, by asserting its claim is protected by section 1322(b)(2), the Association concedes its claim is secured by a security interest (a consensual lien).31
The Court held a¡ confirmation hearing on September 28,2016. The Debtor argued she is permitted to modify the Association’s secured claim pursuant to section 1322(c)(2) - not section 1322(b)(2). The Debtor maintained that section 1322(c)(2) is an exception to section 1322(b)(2). The Debtor acknowledged that section 1322(b)(2) applies by focusing on the exception contained in section 1322(c)(2). Since neither the Debtor nor the Association previously briefed this theory, the Court required supplemental briefing and adjourned the confirmation hearing.
Both the Debtor and the Association submitted supplemental briefing.32 The Debtor concedes courts have generally applied section 1322(c)(2) to situations involving reverse mortgages and short-term mortgages that come due in full or will come due prior to the end of a debtor’s Chapter 13 plan.33 The Debtor provides no authority with facts similar to this case that utilizes section 1322(c)(2) to permit bifurcation of a condominium association’s *383secured lien. However, the Debtor asserts the plain language of section 1822(c)(2) requires its application to condominium association liens, which by their terms are due in full when they are filed.34 The Association disagrees and asserts the Debtor is “misreading” section 1322(c)(2).35 Specifically, the Association contends that section 1322(c)(2) refers to the modification of a payment rather than the modification of a claim.36 In other words, the Debtor cannot utilize section 1322(c)(2) to modify the Association’s entire claim.37 The Court held a second round of oral arguments on November 9, 2016 and reserved decision.
After the hearing, the Court reviewed the parties’ arguments and observed that neither the Debtor nor the Association briefed38 Holmes v. Cmty. Hills Condo. Ass’n.39 At the time, Holmes was a very recent New Jersey district court decision that remanded a bankruptcy court decision to permit the bankruptcy court to decide whether the condominium association’s lien was created by contract, statute, or by both.40 According to Holmes, the contracts versus-statute distinction is essential in analyzing whether section 1322(b)(2) applies because section 1322(b)(2) only pertains to claims that are “security interests” which, by definition, are consensual and not statutory.41 More importantly, the Holmes decision was the first New Jersey decision that opined about the possibility of both a consensual and a statutory lien existing at the same time.42 Consequently, the Court requested the Debtor and the Association submit additional simultaneous supplemental briefing43 on whether the Holmes decision had any impact on their respective positions.44 The Court did not scheduled additional oral arguments.
Both the Debtor and the Association submitted supplemental briefing.45 The Debtor continues to maintain that section 1322(c)(2) is an exception to section 1322(b)(2), therefore permitting the cram-down of the Association’s secured claim.46 However, based on Holmes, the Debtor also asserts two new positions. First, the Debtor asserts that the Association failed to provide the Court with evidence exhibiting it complied with sections 46:8B-21(a) and (b)(6).47 Specifically, the Association failed to demonstrate it provided notice to both the Debtor and Champion Mortgage that it was in the process of recording the *384Liens.48 Second, the Debtor asserts that the Association’s Liens, at least to the extent of the six month priority, are statutory and are therefore not protected by section 1322(b)(2).49 To this end, the Debt- or argues that since “the Association’s statutory lien may be modified under the Bankruptcy Code and since its security interest is completely unsecured and maybe [sic], stripped off under the Bankruptcy Code, the Debtor is entitled to the relief she is seeking [under the Plan].”50
On the other hand, the Association first urges the Court that Holmes is not binding authority.51 The Association argues that the Holmes decision neither made a finding nor ruled on the merits of the parties’ arguments. Further, “even if the Bankruptcy Court or the District Court of New Jersey had issued an opinion in Holmes, it would be persuasive but not binding on the Court in this case.”52 Next, the Association asserts that the “distinction between statutory and consensual liens as discussed in Holmes does not matter” with regard to the Debtor’s original section 1322(c)(2) argument.53
In response to the Debtor’s allegation that the Association failed to produce evidence indicating it provided notice of the Liens to the Debtor and Champion Mortgage, the Association asserts section 46:8B-21(b)(6) “is not relevant to the matter before the Court.” 54 Nevertheless, the Association submitted to the Court the following: (1) a copy of a June 7, 2013 Notice of Filing of Claim of Lien sent to the Debtor via certified mail; and (2) a copy of a June 7, 2013 letter addressed to Champion Mortgage.55 The letter to Champion Mortgage states the following: “[the Association] has filed a Claim of Lien for its unpaid assessments due and owing from the unit owner, Catherine M. Smiley.” 56
DISCUSSION
Section 1322(c)(2) is an exception to section 1322(b)(2). Therefore, before the Court can address whether the Debtor’s section 1322(c)(2) argument has merit, the Court must first address whether the Association’s secured claim is insulated from modification by section 1322(b)(2). If section 1322(b)(2) does not afford anti-modification protections to the Association’s secured claim, the Debtor may modify the Association’s secured claim and a section 1322(c)(2) analysis would be superfluous. If section 1322(b)(2) provides anti-modification protections to the Association’s secured claim, then this Court must further analyze whether the exception set forth in section 1322(c)(2) applies.
I. Bankruptcy Code Section 1322(b)(2).
A Chapter 13 plan may generally modify the rights of holders of secured claims. Specifically, “a debtor’s bankruptcy plan may modify the unsecured portion of a lien down to the amount of the collateral securing it when the collateral is worth less than the lien, a process referred to as ‘stripping,’ ‘cramming down,’ or ‘bifurcating’ the lien.”57 Section 1322(b)(2) places an impor*385tant limit on the general rule — it prohibits modification of the rights of holders of claims secured by a security interest in real property that is the debtor’s principal residence:
(b) Subject to subsections (a) and (c) of this section, the plan may—
* ⅛ *
(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 ....58
Notably, the plain language of section 1322(b)(2) indicates that the provision applies solely to a “security interest.” Fortunately, section 101(51) of the Bankruptcy Code provides a definition of a “security interest”: “[t]he term ‘security interest’ means lien created by an agreement.”59 “As such, it is to be distinguished from a ‘statutory lien,’ ie., one ‘arising solely by force of a statute on specified circumstances or conditions.’”60 For the purposes of section 1322(b)(2), examining the type of hen at issue is essential to the analysis.61 “Assuming the other requirements of section 1322(b)(2) are met, the nature of a lien, ie., whether it is a consensual lien (security interest), dictates whether modification of the underlying secured claim is permitted.”62
II. The Condominium Association’s Lien — Statutory, Consensual, or Both?
Section 101(37) defines “liens” as a “charge against or interest in property to secure payment of a debt or performance of an obligation.”63 The Bankruptcy Code defines three types of liens: judicial hens, security interests, and statutory hens. Although the legislative history indicates that the “three categories are mutually exclusive”, the Bankruptcy Code is devoid of any language that expressly makes that conclusion.64 Notwithstanding the discussion in the legislative history, the Supreme Court dictates that “[property interests are created and defined by state law.”65
The Association contends the limited priority created by section 46:8B-21(b) guarantees a portion of - the Association’s secured claim will always have a secured interest in the Property and, therefore, the Association’s claim is afforded anti-modification protections pursuant to section 1322(b)(2). In relevant part, section 46:8B-21 states the following:
a. The association shall have a lien on each unit for any unpaid assessment duly made by the association for a share of common expenses or otherwise, including any other moneys duly owed the association, upon proper notice to the appropriate unit owner, together with interest thereon and, if authorized *386by the master deed or bylaws, late fees, fines and reasonable attorney’s fees; provided however that an association shall not record a lien in which the unpaid assessment consists solely of late fees. Such lien shall be effective from and after the time of recording in the public records of the county in which the unit is located of a claim of lien stating the description of the unit, the name of the record owner, the amount due and the date when due. Such claim of lien shall include only sums which are due and payable when the claim of lien is recorded and shall be signed and verified by an officer or agent of the association. Upon full payment of all sums secured by the lien, the party making payment shall be entitled to a recordable satisfaction of lien. Except as set forth in subsection b. of this section, all such liens shall be subordinate to any lien for past due and unpaid property taxes, the lien of any mortgage to which the unit is subject and to any other lien recorded prior to the time of recording of the claim of lien.
b. A lien recorded pursuant to subsection a. of this section shall have a limited priority over prior recorded mortgages and other liens, except for municipal liens or liens for federal taxes, to the extent provided in this subsection. This priority shall be limited as follows:
(1) To a lien which is the result of customary condominium assessments as defined herein, the amount of which shall not exceed the aggregate customary condominium assessment against the unit owner for the six-month period prior to the recording of the lien.
(2) With respect to a particular mortgage, to a lien recorded prior to: (a) the receipt by the association of a summons and complaint in an action to foreclose a mortgage on that unit; or (b) the filing with the proper county recording office of a lis pendens giving notice of an action to foreclose a mortgage on that unit.
(3) In the case of more than one association lien being filed, either because an association files more than one lien or multiple associations have filed liens, the total amount of the liens granted priority shall not be greater than the assessment for the six-month period specified in paragraph (1) of this subsection. Priority among multiple filings shall be determined by their date of recording with the earlier recorded liens having first use of the priority given herein.
(4) The priority granted to a lien pursuant to this subsection shall expire on the first day of the 60th month following the date of recording of an association’s lien.
(5) A lien of an association shall not be granted priority over a prior recorded mortgage or mortgages under this subsection if a prior recorded lien of the association for unpaid assessments has obtained priority over the same recorded mortgage or mortgages as provided in this subsection, for a period of 6.0 months from the date of recording of the lien granted priority.
(6) When recording a lien which may be granted priority pursuant to this act, an association shall notify, in writing, any holder of a first mortgage lien on the property of the filing of the association lien. An association which exercises a good faith effort but is unable to ascertain the identity of a holder of a prior recorded mortgage on the property will be deemed to be in substantial compliance with this *387paragraph. ... 66
The Court of Appeals for the Third Circuit has not addressed the issue before this Court. Nevertheless, several courts within the District of New Jersey have grappled with the issue67 in an effort to decipher “whether, and to what extent, claims secured by condominium liens and homeowner association liens may be modified in bankruptcy.”68
Robinson I was the first decision by a bankruptcy court in the Distribt of New Jersey to address whether condominium liens may or may not be modified in a Chapter 13 plan.69 Similar to the present case, Robinson I concerned a debtor seeking to strip off a condominium association’s hen in her Chapter 13 plan, claiming the Hen was wholly unsecured.70 Prior to reaching its ultimate holding, the Robinson I court made a critical finding, albeit in a footnote and without an explanation, that a condominium association lien is a security interest.71 Notably, in the same footnote, the Robinson I court noted the “confusion” is caused by the fact that a condominium association’s lien “is supported by both the [condominium association’s] bylaws and by state law.”72 Subsequently, the Robinson I court held that the anti-modification provisions of section 1322(b)(2) applied even when the claim, which was secured solely by the debtor’s principal residence was wholly unsecured.73 The Third Circuit’s In re McDonald decision overruled Robinson 7.74 The Third Circuit, in overruling Robinson I, held that a wholly unsecured mortgage on a Chapter 13 debtor’s residence is not subject to the anti-modification clause.75
Virtually the same issue arose in another identically named76 case - Robinson 17.77 The condominium association filed a lien pursuant to the association’s master deed and the Condominium Act. The debtors’ plan proposed to modify the condominium association’s claim by cramming it down to zero. The Robinson II court found that section 46:8B-21(b) granted the condominium association’s lien limited priority over the first mortgage up to six months’ worth of assessments.78 As a result, the Hen was secured by at least some equity in the property.79 The Robinson II court ruled against the debtor and held that “the [debtors’ proposed treatment of the [condominium association’s] secured claim [was] impermissible” since, pursuant to section 1322(b)(2), the court could not *388“modify the rights of even partially secured claims which are claims only secured by the Debtors’ principal residence.”80 Indeed, prior to making its ultimate decision, the Robinson II court acknowledged that the condominium association’s lien derived from both the master deed and the Condominium Act, but the court did not make a finding as to whether the character of the lien was consensual or statutory.81
The condominium association lien issue reappeared in 2015, but this time the bankruptcy court tackled the issue of whether the lien arose by statute (section 46:8B-21) or through the language in the master deed and/or bylaws.82 The Honorable Christine M. Gravelle conducted an extensive analysis of case law from both within and outside of the Third Circuit.83 She observed that courts around the country are split on their classification of condominium liens.84 In the end, Judge Gravelle found the “decisions concluding that the condominium liens are statutory [were] distinguishable on their facts or simply not persuasive. ...”85 Contrary to the holdings issued by two district courts (outside of New Jersey),86 she concluded that the condominium association’s lien was a security interest (consensual lien), which held a statutory priority.87 Judge Gravelle stated the following:
[i]t is the act of purchasing the condominium unit, and voluntarily accepting and recording the unit deed, that gives rise to the lien.
* * *
In order to gain the benefit of the super-priority lien provided by the [Condominium] Act, the condominium association must record a Notice of Lien in accordance with the [Condominium] Act. The [Condominium] Act bestows a priority to the condominium association for the “aggregate customary condominium assessment against the unit owner for the six-month period prior to the recording of the lien ...” [section] 46:8B-21. The fact that the Act provides a statutory priority lien for a portion of the claim does not *389change the character of the lien as a security interest.88
In the end, Judge Gravelle ruled that the secured claim could be bifurcated and the portion of the claim that did not have a statutory priority was subject to modification.89
The condominium association appealed Judge Gravelle’s ruling. It is important to note that on appeal to the district court, the parties did not contest Judge Gra-velle’s characterization of the condominium association’s lien as a consensual lien. The parties instead limited the appeal to a single issue: whether a consensual lien, with a partial priority, could be crammed-down.90 The district court reversed in part and remanded. The district court held that: (1) section 46:8B-21 provides a limited priority for condominium association liens for unpaid assessments, which ensures the claim is secured by a security interest in the debtors’ principal residence; and (2) no portion of the condominium association’s secured claim could be modified pursuant to section 1322(b)(2).'91
The nature of a condominium association’s lien was again revisited in the New Jersey district court case Holmes. In Holmes, the debtor appealed a bankruptcy court decision92 that denied confirmation of her Chapter 13 plan.93 The bankruptcy court previously found the debtor’s Chapter 13 plan was not feasible as a matter of law because the plan sought to modify a condominium association’s lien in defiance of section 1322(b)(2).94
The appeal presented a single issue: whether a condominium association lien is a security interest in the debtor’s principal residence, and hence subject to' the anti-modification provision set forth in section 1322(b)(2).95 The district court never decided the issue. Instead, the district court remanded the case to the bankruptcy court to permit factual findings regarding “the existence, priority, and recordation of (a) any security interest; (b) any statutory lien; (c) the priority of such; and (d) relat-edly, whether any such lien is secured by equity in the property.”96 In remanding, the district court made notable observations about the nature of the condominium association’s lien. First, the district court observed that the Condominium Act “seemingly can operate to create a lien.”97 Second, the district court suggested the possibility of multiple liens operating simultaneously:
[s]o it is not so simple to say that there is a security interest (ie., one arising from agreement), as to which the [Condominium] Act merely sets a priority. Remember, the condominium association’s lien is secured by the unit (which is underwater on its mortgage) only to the extent it can be regarded as senior to the mortgage. So the priority issue under the [Condominium] Act is inextri*390cably intertwined with the issue of whether the lien is secured by the unit at all.98
In the most recent decision, Keise, a District of New Jersey bankruptcy court was again asked to revisit whether, for the purposes of section 1322(b)(2), a lien held by either a homeowner’s or condominium association99 is a security interest (consensual lien) or a statutory lien.100 The facts in Keise are strikingly similar to those of this case.101 The debtors failed to pay a numbers of assessments and the homeowner’s association filed a lien against the property.102 The debtors’ Chapter 13 plan provided for a bifurcation of the homeowner association’s secured claim — reducing it to six months of unpaid assessments.103 The debtors argued that the homeowner’s association’s lien was statutory and, therefore, subject to modification.104 Citing to the Bankruptcy Code’s definition of “statutory lien” under section 101(53), the homeowner’s association contended that the existence of an agreement creating a security interest precludes the lien from being classified as statutory.105 To this end, the homeowner’s association argued that section 46:8B-21 does not create a lien, but serves only to dictate the priority and mechanisms for enforcement of a eonsen-sual lien created by the agreement.106 The limited priority granted by section 46:8B-21 ensured that a portion of the homeowner’s association’s lien was secured, and as a result, the entire lien could not be modified.107
The Keise court partially deviated from Judge Gravelle’s holding in Rones, finding the condominium association’s claim as:
secured simultaneously by two separate liens — one consensual lien created by the Declaration and one statutory lien created by the New Jersey Condominium Act — with each lien available to the [condominium association’s] to enforce its claim .... [E]ach lien offers both, benefits and burdens with regard to creation, perfection and enforcement.108
In reaching its ultimate holding, the Keise court made a number of findings. First, “[t]he Condominium Act explicitly provides for the creation of a lien.”109 Specifically, Judge Kaplan found the language of section 46:8B-21(a) (“[t]he association shall have a lien on each unit for any unpaid assessments duly made by the association for a share of common expenses or otherwise ... ”)110 clearly and unambiguously creates a lien.111 Second, Judge *391Kaplan determined that the agreement between the debtors and the homeowner’s association itself created a consensual lien:
[w]hile the Court deems it evident that the [Condominium] Act, in and of itself, creates a lien securing outstanding assessments, the [c]ourt also finds that the Declaration creates a consensual lien. Specifically, the Declaration states in relevant part, “assessments], together with such interest thereon, late charges, and cost of collection thereof (including reasonable attorneys’ fees) shall be a continuing lien upon the Lot against which each such assessment is made ...” Thus, by consenting to the Declaration, the Debtors also have granted a lien in favor of the [association in the event the [d]ebtors fail to pay assessments.112
Third, Judge Kaplan opined that K[n]othing in the Condominium Act, the Declaration or the bankruptcy code precludes the creation and employment of multiple enforcement mechanisms to recover a single debt.”113 Fourth,- Judge Kaplan observed that section 46:8B-21(f) reinforces the premise that the homeowner’s association’s claim is secured by two separate liens. Section 46:8B-21(f) provides the following:
f. Liens for unpaid assessments may be foreclosed by suit brought in the name of the association in the same manner as a foreclosure of a mortgage on real property. ... Suit to recover a money judgment for unpaid assessments may be maintained without waiving the hen securing the same. Nothing herein shall alter the status or priority of municipal hens under R.S.54:5-1 et seq.114
The court interpreted this subsection to mean “an association may pursue an in personam judgment, resulting in a judgment hen, without waiving its rights to pursue enforcement of its statutory hen.”115 Fifth, Judge Kaplan observed that recent state and federal case law support the legal conclusion that the condominium association’s claim is secured by two liens, Judge Kaplan pointed to the Hickory Hill at Totowa Homeowners Ass’n, Inc. v. Ortiz decision, wherein a New Jersey state appellate court permitted a homeowner’s association to levy on a judicial hen, even though the association was entitled to a statutory hen securing the same claim.116 Correspondingly, Judge Kaplan interpreted Holmes to suggest that “both a contractual and statutory hen may be present, and should be considered separately.”117
Finally, Judge Kaplan deduced that finding the homeowner’s association’s claim is secured by both a consensual hen and statutory hen is consistent with and reinforces public policy concerns.118
As the Third Circuit has observed, “[t]he legislative history of § 1322(b)(2) ‘indicates that it was designed to protect and promote the increased production of homes and to encourage private individual ownership of homes as a traditional and important value in American life.’ ” In re Ferandos, 402 F.3d 147, 151 (3d Cir. 2005) (quoting In re Davis, 989 F.2d 208, 210 (6th Cir. 1993)). The Supreme Court has also noted that the protection afforded to residential mortgage lenders *392by § 1322(b)(2) “was intended to encourage the flow of capital into the home lending market.” Nobelman, 508 U.S. at 332, 113 S.Ct. at 2112, 124 L.Ed.2d. However, a residential mortgage is not at issue in this case. Instead, the claim is for unpaid condominium association fees, which are not the types of debts Congress sought to protect by enacting § 1322(b)(2).119
In finding that the condominium association’s claim is secured by both a consensual and statutory lien, Judge Kaplan held that the condominium association’s claim “does not fall within the ambit of § 1322(b)(2).”120 He observed that section 1322(b)(2) is applicable when “a claim [is] secured only by a security interest in real property that is the debtor’s principal residence .121 Hence, since the condominium association’s claim was secured by both a security interest and a statutory lien, Judge Kaplan held “it is not afforded the protections of [section] 1322(b)(2).”122
A. The Association Complied with Sections 46:8B-21(a) and (b)(6).
At the outset, the Court must address the Debtor’s challenge as to whether the Association provided sufficient evidence to prove it notified the Debtor and Champion Mortgage of its Liens in accordance with sections 46:8B-21(a) and (b)(6). Section 46:8B-21(a) requires, inter alia, that the condominium association provide notice of the lien “to the appropriate unit owner.” At the same time, in order for a lien to benefit from the limited priority, it needs to also satisfy six requirements listed under section 46:8B — 21(b), one of which is subsection (6). Section 46:8B-21(b)(6) provides the following:
(6) When recording a lien which may be granted priority pursuant to this act, an association shall notify, in writing, any holder of a first mortgage lien on the property of the filing of the association lien. ...123
In response to the Debtor’s challenge, the Association submitted to the Court copies of two letters. The first letter was sent to the Debtor and the second letter was sent to Champion Mortgage. Both letters were sent on June 7, 2013. In sum, both letters explain that the 2013 Lien was being recorded on the Property due to the Debt- or’s failure to pay monthly assessments. The Court finds the letters to be sufficient evidence demonstrating the Association notified both the Debtor and Champion Mortgage of the 2013 Lien and, therefore, complied with sections 46:8B-21(a) and (b)(6).
The Association failed to provide the Court with evidence indicating it notified the Debtor and/or Champion Mortgage that it was recording the 2012 Lien. Therefore, the Court cannot find that the 2012 Lien benefits from limited priority over Champion Mortgage. However, the Court does not find this to be a fatal omission because section 46:8B-21(b)(5) prohibits a condominium association from holding two liens with limited priority on the same property. Section 46:8B-21(b)(5) provides the following:
[a] lien of an association shall not be granted priority over a prior recorded mortgage or mortgages under this subsection if a prior recorded lien of the association for unpaid assessments has obtained priority over the same record*393ed mortgage or mortgages as provided in this subsection, for a period of 60 months from the date of recording of the lien granted priority.124
The Association recorded the 2012 Lien in February 2012 and the 2013 Lien in June 2013. The Liens were recorded approximately 16 months apart from each other. Even if the Association provided evidence that it notified the Debtor and Champion Mortgage of the 2012 Lien, pursuant to section 46:8B-21(b)(5) only one of the Liens would maintain limited priority over Champion Mortgage. Since the Association provided evidence sufficient to support the 2013 Lien, that is the lien the Court will review.
B. The Association’s Secured Claim is Secured by Both a Consensual and Statutory Lien.
The Court is persuaded by and adopts the reasoning in Keise. For the reasons stated in Keise, the Court finds the Association’s secured claim is secured by both a statutory lien arising out of the Condominium Act and a consensual lien arising out of the Master Deed. This Court joins the Keise court and accepts the suggestion made by the Holmes court that section 46:8B-21(a) operates to create a lien. First, this Court agrees that the language of section 46:8B-21(a) explicitly provides for the creation of a statutory lien by utilizing the phrase “[t]he association shall have a lien on each unit for any unpaid assessment duly made by the association for a share of common expenses or otherwise, including any other moneys duly owed to the association. ...”125 Second, section 46:8B-21(a) encompasses greater economic protections for condominium associations than a bare bones master deed. Section 46:8B-9 of the Condominium Act lists the mandatory contents of a master deed.126 Pursuant to section 46:8B-9, condominium associations are neither required to include language giving rise to a lien for unpaid assessments nor any language giving rise to a lien for any other unpaid monies owed to the association.127 However, according to section 46:8B-21(a), condominium associations may file a lien encompassing both monies owed for both unpaid assessments and other unpaid monies owed to the condominium association. The Condominium Act lien occurs regardless of whether the master deed provides for the ability to obtain a lien, thus giving rise to a statutory lien.
Beyond the fact that the Association concedes that its secured claim is secured by a consensual lien, the Court also finds the Master Deed creates a consensual lien. Specifically, the Master Deed states: “all charges, expenses and assessments chargeable to any unit plus reasonable attorney’s fee [sic] incurred for the recovery thereof, shall constitute a lien against said unit in favor of the Association ... ,”128 Hence, when the Debtor purchased the Property and consented to the Master Deed, the Debtor granted a lien in favor of the Association giving rise to a consensual lien.129
C. The Debtor May Modify the Association’s Secured Claim.
The Court finds that section 1322(b) does not apply because the Association’s *394secured claim is secured by both a consensual and statutory lien. As mentioned above, section 1322(b)(2) applies “when a claim [is] secured only by a security interest in real property that is the debtor’s principal residence. ...”130 Here, both a consensual and a statutory lien exist. Therefore, the Association’s claim may be modified.131
However, not all is lost for the Association. As previously stated “[property interests are created and defined by state law.”132 Section 46:8B-21(a) provides:
b. A lien recorded pursuant to subsection a. of this section shall have a limited priority over prior recorded mortgages and other liens ....
(1) To a lien which is the result of customary condominium assessments as defined herein, the amount of which shall not exceed the aggregate customary condominium assessment against the unit owner for the six month period prior to the recording of the lien.133
Section 46:8B-21(a) provides the Association with a six month priority that is not subject to modification or cram-down. The Court finds that the Association possesses a secured claim for $1,500.00, representing six months of unpaid condominium assessments, payable under the Plan. When the 2013 Lien was recorded, the Association charged a $250.00 monthly condominium assessment fee. Six months of such monthly condominium fees equates to $1,500.00. The residual amount of the Association’s lien has no priority and is subordinate to the existing lien of Champion Mortgage. Accordingly, the balance of the Association’s claim is unsecured and shall be treated under the Plan the same as all other general unsecured claims.
CONCLUSION
The Court overrules the Association’s objection and grants confirmation of the Debtor’s proposed plan. The Debtor may amend her Plan to provide for a payment of $1,500.00 to the Association and designate the reminder of the Association’s claim as unsecured. The Debtor’s counsel or the Standing Chapter 13 Trustee shall submit a proposed form of order consistent with this Court’s opinion.
. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
. References to the Bankruptcy Code are to the United States Bankruptcy Code, 11 U.S.C. §§ 101, et. seq.
. New Jersey’s Condominium Act, New Jersey Statute Annotated 46:8B-1.1, et. seq., ("Condominium Act”).
. (Docket No. 12).
. (Docket No. 20).
. To the extent any .of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent any conclusions of law might constitute findings of fact, they are adopted as such.
. (Docket No. 20 at 4-6).
. (Id. at 7-15).
. (Id. at 21).
. (Id. at 22-24).
. (Id. at 23).
.(Id. at 17).
. (Id.).
. (Id.) (error in original).
. (Id. at 26).
. (Id.).
. (Id. at 28).
. (Id.).
. (Docket No. 1).
. (Docket No. 11 at 3),
. (Docket No. 12 at 3, 5-6).
. (Docket No. 26 at 3).
. (Proof of Claim No. 2 at 7) ("[a]ccelerated [m]onthly assessments from 6/1/2013 through and including 12/31/2013 ($250.00 @ 7 months)... $1,750.00”) (emphasis in the original).
. (Id. at 9-10).
. (Docket No. 20 at 32-33).
. (Id. at 34).
. (Id. at 33-35).
. 231 B.R. 30, 35 (Bank. D.N.J. 1997).
. No. 11-26981-RTL, 2012 WL 761251, at *1 (Bankr, D.N.J. Mar. 7, 2012).
. 551 B.R. 162, 167-68 (D.N.J. 2016).
. The Court notes that the Liens appear to be separate and apart from each other. The 2012 Lien covers unpaid assessments. charges, and expenses due to the Association from February 2012 to December 2012. (Id. at 26). The 2013 Lien covers unpaid assessments, charges and expenses due to the Association from May 2013 December 2013, (Id. at 28). The Association failed to submit any documents to this Court indicating the 2013 Lien amended and/or a continued the 2012 Lien,
. (Docket Nos. 26 and 27).
. (Docket No. 26 at 7).
. (id.).
. (Docket No. 27 at 4).
. (Id. at 4, 6).
. (Id. at 4-6).
. The Debtor cited to Holmes as part of a string cite in one of her supplemental submissions. See (Docket No. 26 at 6). However, the Debtor failed to elaborate whether the decision impacted her legal position.
. No. 15-6834 (KM), — B.R. -, -, 2016 WL 4950993, at *1 (D.N.J. Sept. 16, 2016).
. Id. at-, at *5.
. Id. at-, at*4.
. Id.
. The Court also permitted the parties to file responses to each other’s supplemental briefs.
. After the Holmes decision, another New Jersey bankruptcy court addressed whether a homeowner’s or condominium association's lien is created by contract and/or by statute. See In re Keise, 564 B.R. 255 (Bankr. D.N.J. 2017) (finding that a homeowner’s association’s claim is simultaneously secured by both a consensual and statutory lien). The Keise decision is discussed in substantial detail below.
. (Docket Nos. 30 and 31).
. (Docket No. 30 at 1)
. (Id. at 3).
. (Id.).
. (Id. at 4-5).
. (Id. at 4) (error in original).
. (Docket No. 31 at 2).
. (Id.).
. (Id. at 4).
. (Docket No. 34 at 2).
. (Docket No. 34 at 4-14).
. (Id. at 10),
. Rones, 551 B.R. at 167.
. 11 U.S.C. § 1322(b)(2) (emphasis added); see Nobelman v. Am. Sav. Bank, 508 U.S. 324, 325-26, 332, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (chapter 13 debtor cannot strip down a partially unsecured residential mortgage lien secured only by the debtor’s principal residence).
. 11 U.S.C. § 101(51),
. Holmes, — B.R. at -, 2016 WL 4950993, at *4 (citing 11 U.S.C. § 101(53)).
. See Holmes, — B.R. at - - -, 2016 WL 4950993, at *4-5; In re Rones, 531 B.R. 526, 530 (Bankr. D.N.J. 2015); Keise, 564 B.R. at 258.
. Keise, 564 B.R. at 258.
. 11 U.S.C. § 101(37).
. H.R. REP. 95-595, 312, 1978 U.S.C.C.A.N. 5963, 6269.
. Butner, 440 U.S. 48, 54-55, 99 S.Ct. 914.
. Condominium Act § 46:8B-21(a)-(b).
. My colleague, the Honorable Michael B. Kaplan, provided an updated and full analysis of the existing case law within the District of New Jersey. See Keise, 564 B.R. at 263-64 (citing Robinson, 2012 WL 761251, at *1-*3; Rones, 531 B.R. at 526; Rones, 551 B.R. at 162; Holmes, - B.R. at -, 2016 WL 4950993, at *4). Nonetheless, it is necessary to again review and discuss those same cases in order to provide the background for the conclusion reached by this Court.
. Keise, 564 B.R. at 262-63.
. See Robinson, 231 B.R. at 30-31.
. Id.
. Id. at32n.l.
. Id.
. Id. at 34.
. See In re McDonald, 205 F.3d 606 (3d Cir. 2000).
. Id. at 615.
. Robinson I and Robinson II concern completely different debtors and are in no way related.
. 2012 WL 761251, at *1.
. Id. at *3-4.
.Id. at *3.
. Id.
. Id. at *2.
. See Rones, 531 B.R. 526.
. See id. at 529-33,
. Id. at 530, Judge Gravelle stated the following:
[w]hile it appears to this Court that the [Bankruptcy] Code definitions of various liens are clear on their face, courts are split on their classification of condominium liens. Compare In re Robinson, 231 B.R. 30, 34 (Bankr. D.N.J. 1997) (notes condominium lien is security interest); In re Beckley, 210 B.R. 391, 393 (Bankr. M.D. Fla. 1997) (debt owed to association in form of final judgment remains a security interest); Philtippy v. Corkscrew Woodlands Assocs., Inc. (In re Phillippy), 178 B.R. 67, 69-70 (Bankr. M.D. Pa, 1994) (debt owed to association pursuant to notice of lien remains security interest); In re Bland, 91 B.R. 421, 422 (Bankr. N.D. Ohio 1988) (condomini-urn liens are security interests, not judicial liens, for purposes of 11 U.S.C. § 522(f)) with In re Green, 516 B.R. 347, 351 (E.D. La. 2014) (condominium lien arises from statute, not Declaration); Young v. 1200 Buena Vista Condos., 477 B.R. 594, 602 (W.D. Pa. 2012) (condominium liens are statutory); In re Lopez, 512 B.R. 663, 671 (Bankr. D. Colo. 2014) (condominium association lien generally recognized as statutory).
Rones, 531 B.R. at 530,
. Id. at 531.
. See Green, 516 B.R. 347, 351 (E.D. La. 2014) (holding .that the condominium associa-. tion’s lien against debtor's condominium unit was statutory, and thus could be modified pursuant to debtor's Chapter 13 Plan); Young, 477 B.R. 594, 602 (W.D. Pa. 2012) (finding the condominium association liens are statutory).
. Id. at 533.
. Id.
. Id. at 536-37.
. See In re Rones, 551 B.R. 162.
. Id. at 169-72.
. The bankruptcy court issued an oral decision.
. — B.R. at-, 2016 WL 4950993, at *1-2.
. Id, at-, at *1 (summarizing the bankruptcy court’s holding).
. Id.
. Id. at-, at *5.
. Id. at -, at *4 (emphasis in original) (citing section 46:8B-21(a) ("[t]he association shall have a lien on each unit for any unpaid assessment ... upon proper notice to the appropriate unit owner”)).
. Id. at-, at *4 (emphasis in original).
. In Keise., the issue related to a homeowner's association instead of condominium association. 564 B.R. at 256. Judge Kaplan - while not agreeing with the legal authority leading to his conclusion - ultimately recognized that condominium associations and homeowner’s associations are both controlled by the Condominium Act. Id.
. 564 B.R. at 256.
. The only undeniable, albeit inconsequential, factual difference is that this case pertains to a condominium association while Keise concerned a homeowner’s association. See id. at 256,
. Id. at 257.
. Id.
. Id. at 262.
. Id. at 261-62.
. Id.
. Id.
. Id. at 263-64.
. Id. at 264.
. Condominium Act § 46:8B-21(a).
. Keise, 564 B.R. at 264.
. Id.
. Id.
. Condominium Act § 46:8B — 21(f).
. Keise, 564 B.R. at 265.
. No. A-0894-15T2, 2017 WL 393582 (NJ. Super. Ct. App. Div. Jan. 30, 2017).
. Keise, 564 B.R. at 265 (citing Holmes, — B.R. at -, 2016 WL 4950993 at *4).
. Keise, 564 B.R. at 265.
. id.
. id,
. Id.
. Id. at 265-66.
. Condominium Act § 46:8B-21(b)(6),
. Id. § 46:8B — 21(b)(5).
. Condominium Act § 46:8B-21(a).
. Id. § 46:8B-9.
. Id.
. (Docket No. 20 at 17) (error in original).
.See Keise, 564 B.R. at 265 (finding a consensual lien existed through the operation of similar language); Rones, 531 B.R. at 533 ("voluntarily accepting and recording the unit deed ... gives rise to the lien.”).
. 11 U.S.C. § 1322(b)(2) (emphasis added).
. Since the Court's holding rules out the applicability of section 1322(b)(2), the Court does not need to analyze whether the Debtor’s section 1322(c)(2) argument has merit as there is no need to evaluate an exception to a provision that does not apply.
. Butner, 440 U.S. at 54-55, 99 S.Ct. 914.
. Condominium Act § 46:8B — 21(b)(1) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500612/ | AMENDED ORDER DENYING MOTION TO DISMISS
David M. Warren, United States Bankruptcy Judge
This matter comes before the court upon the Motion to Dismiss for Lack of Subject Matter Jurisdiction (“Motion to Dismiss”) filed by Kristen Anne Murphy (“Defendant”) on March 20, 2017 and the Re*405sponse to Motion to Dismiss (“Response”) filed by Robert Richard Kozec, Jr. (“Plaintiff’) on April 20, 2017. After a review of the Motion to Dismiss, Response, and applicable law, the court finds the matter ripe for adjudication without the need for a hearing and makes the following findings of facts and conclusions of law:
BACKGROUND
On December 23, 2015, the Defendant filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code. The court designated the case as “no-asset,” and the appointed Chapter 7 trustee filed a Report of No Distribution on March 11, 2016.
On March 17, 2016, the Plaintiff initiated this adversary proceeding by filing a complaint against the Defendant. In a Second Amended Complaint (“Complaint”) filed on November 14, 2016, the Plaintiff asserted that, based upon pre-petition actions and occurrences, the Defendant is liable to the Plaintiff for malicious prosecution under North Carolina law (“Malicious Prosecution Claim”). The Plaintiff requested the court to enter a monetary judgment against the Defendant on the Malicious Prosecution Claim and declare that debt non-dischargeable pursuant to 11 U.S.C. § 523(a)(6) (“Dischargeability Claim”), Paragraph 3 of the Complaint contains the following allegation:
This matter is a core proceeding pursuant to 28 U.S.C. § 157, and the court has jurisdiction pursuant 28 U.S.C. §§ 151, 157, and 1334. The court has the authority to hear this matter pursuant to the General Order of Reference entered August 3, 1984 by the United States District Court for the Eastern District of North Carolina.
On November 25, 2016, the Defendant filed an Amended Answer to Amended Complaint (“Answer”), requesting the court to dismiss the Malicious Prosecution Claim or alternatively find that any determined liability of the Defendant to the Plaintiff is dischargeable. Paragraph 3 of the Answer provides that the “Defendant admits the allegations of Paragraph 3 of the Complaint.”
On December 20, 2016, the court entered a Final Pretrial Order that was jointly submitted by the Plaintiff and the Defendant and contains the following provisions:
1. All parties are properly before the court;
2. The Court has jurisdiction of the parties and of the subject matter;
3. The proceeding is a core proceeding, and Counsel have agreed that this is a core proceeding pursuant to 28 U.S.C. § 157(c)(2) and agree that the Court may enter a final judgment ....
Kozec v. Murphy (In re Murphy), Adv. Proc. No. 16-00024-5-DMW (Bankr. E.D.N.C. Dec. 20, 2016).
On February 14, 2017, the court conducted a bench trial of this adversary proceeding and ruled orally that the Defendant is liable to the Plaintiff for the amount of $8,274.94, and this debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6).1 Pending entry of a written judgment and opinion, the Defendant filed the Motion to Dismiss and for the first time asserts that the court lacks subject matter jurisdiction over the Malicious Prosecution Claim, The court suspended *406entry of its judgment and opinion to allow it to consider and address the Motion to Dismiss.
The Defendant alleges that the Malicious Prosecution Claim is a personal injury tort claim over which the court lacks subject matter jurisdiction pursuant to 28 U.S.C. § 157(b)(5); therefore, the court must dismiss the adversary proceeding pursuant to Rules 12(b)(1) and 12(h)(3) of the Federal Rules of Civil Procedure, incorporated by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. In his Response, the Plaintiff vaguely denies that the Malicious Prosecution Claim is a personal injury tort claim yet does not disagree with the Defendant’s contention that the court cannot adjudicate this claim. Instead, the Plaintiff suggests that the court rule on the Dischargeability Claim and either refer the Malicious Prosecution Claim to the United States District Court for the Eastern District of North Carolina or grant the Plaintiff relief from the automatic stay imposed by 11 U.S.C. § 362 to allow adjudication in state court.2
DISCUSSION
The bankruptcy courts are somewhat of an anomaly within the federal judicial system established by the United States Constitution, and their jurisdiction over and authority to adjudicate various matters have been and continue to be broadly challenged and analyzed. “Although they are related concepts ... the scope of the bankruptcy courts’ subject matter jurisdiction, their statutory authority to hear and/or determine any particular matter, and their constitutional authority to do so, each are delineated by different statutory, constitutional, and/or judicial authorities.” Harvey v. Dambowsky (In re Dambowsky), 526 B.R. 590, 595 (Bankr. M.D.N.C. 2015). A review of the applicable history of federal bankruptcy law and procedure is helpful, if not essential, to understanding this interplay.
History of Bankruptcy Courts in the United States
Bankruptcy Act of 1898
The Constitution allows Congress “[t]o establish ... uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const, art. I, § 8, cl 4. Congress first codified provisions for bankruptcy relief with the Bankruptcy Act of 1898 (“1898 Act”), also known as the Nelson Act. Under the 1898 Act, the federal district courts possessed jurisdiction over bankruptcy matters but would generally refer these matters to “referees” who were employed upon appointment by the district courts for two year terms. The referees, often called the “bankruptcy court,” held summary jurisdiction over and could enter final judgment on matters involving the administration of the bankruptcy estate; however, plenary jurisdiction over disputes arising out of or related to the bankruptcy proceeding was exercised by the district judges. This jurisdictional scheme of the 1898 Act is succinctly described as follows:
The Bankruptcy Act of 1898 vested original jurisdiction over all bankruptcy matters in the United States District Courts. In turn, the district judges referred certain matters to bankruptcy referees. There were two main types of bankruptcy matters under the Act of 1898: “proceedings” and “controversies.” “Proceedings” generally involved the administration of the bankrupt’s es*407tate and were solely within the province of the bankruptcy court. “Controversies” were collateral disputes arising out of bankruptcy proceedings. These matters involved the trustee and third parties and could be heard by either the bankruptcy court or by a non-bankruptcy court that had jurisdiction. While proceedings fell within the “summary jurisdiction” of the bankruptcy court, controversies sometimes required the court to exercise “plenary jurisdiction.” The two types of jurisdiction differed in the following manner. Matters within the summary jurisdiction of the bankruptcy court could be adjudicated through the use of more expeditious modes of procedure, with the court sitting in equity. The district court qua bankruptcy court could hear these matters; however, a bankruptcy referee usually rendered final judgment on such matters, subject only to “review” by the district court. In contrast, plenary jurisdiction was exercised only by the district court or state courts, following their general rules of procedure. According to some estimates, as much as fifty percent of all litigation under the Act of 1898 concerned whether the matter was within the bankruptcy-court’s summary jurisdiction.
Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.), 72 F.3d 1171, 1176 (3rd Cir. 1996) (quoting Thomas S. Marion, Core Proceedings and “Neto” Bankruptcy Jurisdiction, 35 DePaul L. Rev. 675, 676-77 (1986)).
Bankruptcy Reform Act of 1978
Congress completely revamped its bankruptcy laws with the passage of the Bankruptcy Reform Act of 1978 (“1978 Act”). Under the 1978 Act, Congress removed the referee courts from the umbrella of the district courts and in each district created a distinct and separate bankruptcy court as an adjunct of the district court. This action was set forth in Title 28 of the United States Code under Chapter 6 titled “Bankruptcy Courts.” This chapter llegan with 28 U.S.C. § 151 titled “Creation and composition of bankruptcy courts” which provided as follows:
(a) There shall be in each judicial district, as an adjunct to the district court for such district, a bankruptcy court which shall be a court of record known as the United States Bankruptcy Court for the district.
(b) Each bankruptcy court shall consist of the bankruptcy judge or judges for the district in regular active service. Justices or judges designated and assigned shall be competent to sit as judges of the bankruptcy court.
Bankruptcy Reform Act of 1978, Pub. L, No. 95-598, § 201(a), 92 Stat. 2549, 2657 (1978) (codified as 28 U.S.C. § 151), amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333 (1984) (current version at 28 U.S.C. § 151) (emphasis added). The 1978 Act provided that like federal district judges, bankruptcy judges were appointed by the President of the United States; however, unlike other presidential appointees, the bankruptcy judges were not afforded the protections of life tenure and salary non-diminution provided for in Article III of the Constitution.3 Rather, the bankruptcy judges serve for fourteen year terms, subject to removal for cause, *408and receive a designated annual salary subject to adjustment under federal law,
The 1978 Act provided the district courts with original jurisdiction over bankruptcy cases and proceedings; however, the newly created bankruptcy courts were to exercise independently this jurisdiction, and they held exclusive jurisdiction over a debtor’s property. Both the district court and the bankruptcy court could permissively abstain from hearing a particular proceeding. This dual jurisdictional scheme was set forth as follows:
(a) Except as provided in susbection [sic] (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11.
(c) The bankruptcy court for the district in which a case under title 11 is commenced shall exercise all of the jurisdiction conferred by this section on the district courts.
(d) Subsection (b) or (c) of this section does not prevent a district court or a bankruptcy court, in the interest of justice, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11. Such abstention, or a decision not to abstain, is not reviewable by appeal or otherwise.
(e) The bankruptcy, court in which a case under title 11 is commenced shall have exclusive jurisdiction of all of the property, wherever located, of the debt- or, as of the commencement of such case.
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 241(a), 92 Stat. 2549, 2668-69 (1978) (codified as 28 U.S.C. § 1471), amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333 (1984) (current version at 28 U.S.C. § 1334).
Northern Pipeline Construction Company v. Marathon Pipe Line Company
In 1982, the United States Supreme Court considered a creditor’s challenge to the constitutionality of the 1978 Act’s jurisdictional provisions. In N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the appellee filed a Chapter 11 petition and initiated in the bankruptcy court an adversary proceeding against the appellant, seeking damages under state law for breach of contract and warranty, misrepresentation, coercion, and duress. The appellant moved for dismissal, contending that the 1978 Act unconstitutionally conferred Article III judicial power upon judges who lacked life tenure and salary protection.
The Supreme Court first noted that the Constitution unambiguously requires that judicial power lie with an independent judiciary, and “[njext to permanency in office, nothing can contribute more to the independence of the judges than a fixed provision for their support ....” Id. at 60, 102 S.Ct. at 2865, 73 L.Ed.2d 598. (quoting The Federalist No. 79, p. 491 (H. Lodge ed. 1888) (A. Hamilton)). The bankruptcy judges whose offices were created by the 1978 Act are undoubtedly not Article III judges. Id. at 60-61, 102 S.Ct. at 2866, 73 L.Ed.2d 598. While Congress may create specialized adjunct courts to make factual determinations regarding a particularized area of law, the 1978 Act gave bankruptcy courts the power to adjudicate not only traditional matters of bankruptcy but of rights not created by Congress. The Su*409preme Court agreed with the appellant and held that the 1978 Act “has impermis-sibly removed most, if not all, of ‘the essential attributes of the judicial power’ from the Art. Ill district court, and has vested those attributes in a non-Art. Ill adjunct. Such a grant of jurisdiction cannot be sustained as an exercise of Congress’ power to create adjuncts to Art. Ill courts.” Id, at 87, 102 S.Ct. at 2880, 73 L.Ed.2d 598.
Bankruptcy Amendments and Federal Judgeship Act of 1984
In response to Marathon, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“BAFJA”) to address the limitations of power possessed by the bankruptcy courts created by Congress under Article I of the Constitution. BAFJA did not make bankruptcy judges Article III judges but reverted to a structure similar the historical referee system, with bankruptcy judges now being appointed by the circuit courts of appeals rather than the President. See 28 U.S.C. § 152(a)(1). Bankruptcy courts are no longer independent courts of record; rather, the term “bankruptcy court” is a pseudonym for the bankruptcy judges serving as judicial officers of a district court. To reflect this distinction, Chapter 6 of Title 28 was renamed from “Bankruptcy Courts” to “Bankruptcy Judges.” Section 151 of this chapter was renamed from “Creation and composition of bankruptcy courts” to “Designation of bankruptcy courts” and currently provides that—
[i]n each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.
28 U.S.C. § 151 (emphases added).
BAFJA replaced the jurisdictional provisions of the 1978 Act with new ones set forth in 28 U.S.C. § 1334, which is void from any mention of the bankruptcy courts and currently provides in part as follows:
(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2),4 and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases in title 11,
28 U.S.C. § 1334. Although only the district courts possess jurisdiction over bankruptcy cases and proceedings, a district, court may refer all of this jurisdiction to its bankruptcy judges that serve as officers of that district court: “Each district •court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.” 28 U.S.C. § 157(a).
Regardless of referred jurisdiction, a bankruptcy judge’s ability to adjudicate a particular proceeding is limited by 28 U.S.C. § 157, and a bankruptcy judge’s absolute authority to adjudicate fully a *410proceeding hinges upon whether it is a “core” proceeding:
Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 1585 of this title.
28 U.S.C. § 157(b)(1). A non-exclusive list of what constitutes a core proceeding is set forth in 28 U.S.C. § 157(b)(2).
While the converse of 28 U.S.C. § 157(b)(1) suggests that a bankruptcy judge may not adjudicate a non-core proceeding, a bankruptcy judge may nevertheless hear and determine a non-core proceeding that is related to a bankruptcy case if all parties to the proceeding consent. Absent this consent, a bankruptcy judge may only hear a non-core, related proceeding and shall submit proposed findings of fact and conclusions of law to the district court, with final order or judgment to be entered by an Article III district judge. Section 157 explains this allocation of authority between bankruptcy judges and district judges as follows:
(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.
28 U.S.C. § 157(c).
Stern v. Marshall
Several years after the enactment of' BAFJA,6 the Supreme Court again considered constitutional limits upon the non-Article III bankruptcy judges’ ability to adjudicate matters of private right. Stern *411v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).7 The Court held that despite having statutory authority under 28 U.S.C. § 157(b)(2)(C),8 a bankruptcy judge lacks constitutional authority to adjudicate a state law counterclaim by the debtor against an entity which files a proof of claim in the case unless that counterclaim “stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id., 564 U.S. at 499, 131 S.Ct. at 2618, 180 L.Ed.2d 475.
The Defendant’s Motion to Dismiss only alleges that the court lacks subject matter jurisdiction over the Malicious Prosecution Claim; however, any subject matter jurisdiction is inherently subject to the court’s statutory and constitutional authority to hear and determine the proceeding. This authority was not expressly challenged, but the court believes sua sponte consideration of its authority in addition to its subject matter jurisdiction is appropriate.
Subject Matter Jurisdiction
Subject matter jurisdiction is by definition a court’s power to adjudicate a controversy of a specific subject matter. Although the Defendant challenges the court’s jurisdiction over the Malicious Prosecution Claim, the court has the authority to determine whether it in fact has subject matter jurisdiction. Chicot Co. Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 376, 60 S.Ct. 317, 319, 84 L.Ed. 329 (1940).
In the federal judicial system, the lower courts are “all courts of limited jurisdiction, that is, with only the jurisdiction which Congress has prescribed.” Id. The “district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. Included within the laws of the United States is the Bankruptcy Code set forth in Title 11 of the United States Code, and as explained supra, the district court’s relevant subject matter jurisdiction is established by 28 U.S.C. § 1334 and may be referred to bankruptcy judges under 28 U.S.C. § 157(a). The United States Court of Appeals for the Fourth Circuit explains this jurisdictional structure as follows:
Two statutes govern jurisdiction over bankruptcy proceedings, 28 U.S.C. ' §§ 157 and 1334. Under the latter statute, district courts “have original and exclusive jurisdiction of all cases under title 11,” and “original but not exclusive jurisdiction of all civil proceedings aris*412ing under title 11, or arising in or related to cases until [sic] title 11,” § 1334(a), (b). Under § 157, district courts can refer § 1334(a) and (b) cases to bankruptcy courts. § 157(a).
Educ. Credit Mgmt. Corp. v. Kirkland (In re Kirkland), 600 F.3d 310, 315 (4th Cir. 2010). Upon proper referral of a matter over which a district court has jurisdiction' under 28 U.S.C. § 1334, the district judges’ and the' bankruptcy judges’ jurisdiction over that matter is one and the same. The bankruptcy judges, which are officers of the district court that holds jurisdiction, possess no more and no less subject matter jurisdiction than the district judges; rather, “the application of § 157(b) and (c) determines the bankruptcy court’s authority to act once that jurisdiction is established.” Id. (citing Valley Historic Ltd. P’ship v. Bank of New York, 486 F.3d 831, 839 n. 3 (4th Cir. 2007)).
In this district as well as most, if not all, other federal judicial districts, the district court entered a general order which refers its subject matter jurisdiction over “any and all cases under Title 11 and any and all proceedings arising under Title 11 or arising in or related to a case under Title 11 ... to the bankruptcy judges for the Eastern District of North Carolina.” Referral of Bankruptcy Matters to Bankruptcy Judges (E.D.N.C. Aug. 3,1984) (emphasis added). Under 28 U.S.C. §§ 157(a) and 1334 and the district court’s general order of reference, this court, which is merely a collection of the appointed bankruptcy judges for this district, has subject matter jurisdiction of (1) cases under the Bankruptcy Code, (2) proceedings arising under the Bankruptcy Code, (3) proceedings arising in a case under the Bankruptcy Code, and (4) proceedings related to a case under the Bankruptcy Code. Whether the court has subject matter jurisdiction of the Malicious Prosecution Claim is not dependent on whether it is a “personal injury tort” claim.
The Court has Subject Matter Jurisdiction of this Adversary Proceeding which Arises in the Defendant’s Bankruptcy Case
A bankruptcy petition and order for relief create a case which is under the Bankruptcy Code, thus the court has subject matter jurisdiction over the administration all such cases filed in this district, including the Defendant’s Chapter 7 case. The court’s definitive jurisdiction over a bankruptcy case does not automatically extend to all proceedings that may be presented to it within the case, and the court must look to the nature of the proceeding to determine whether it arises under the Bankruptcy Code or arises in or is related to the bankruptcy case.
“A proceeding ‘arises under’ Title 11 if it invokes a ‘substantive right created by the Bankruptcy Code.’ ” L. Ardan Dev. Corp. v. Touhey (In re Newell), 424 B.R. 730, 733 (Bankr. E.D.N.C. 2010) (quoting Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987)). “Proceedings ‘arising in’ a case under Title 11 are those that ‘are not based on any right expressly created by title 11, but nevertheless, would have no existence outside the bankruptcy.’ ” Id. at 733 (quoting Bergstrom v. Dalkon Shield Claimants Trust (In re A.H. Robins Co.), 86 F.3d 364, 372 (4th Cir. 1996) (quoting Wood, 825 F.2d at 97)).
This court once held that a determination of dischargeability under 11 U.S.C. § 523 arises under the Bankruptcy Code. In re Toussaint, 259 B.R. 96, 101 (Bankr. E.D.N.C. 2000) (citing Fidelity Nat’l Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913, 919-20 (Bankr. E.D. Cal. 1995)). The United States Bankruptcy Court for the Middle District of North Carolina observed that the Frank*413lin court cited an edition of Collier on Bankruptcy that noted non-dischargeability actions “arise under” the Bankruptcy Code; however, more recent editions conclude that these actions “arise in” bankruptcy cases. Dambowsky, 526 B.R. at 599. Following Dambowsky, this court. later held that “[a] dischargeability proceeding, including the resulting liquidation of a debt, falls within a bankruptcy court’s subject matter jurisdiction as ‘arising in’ a case under title 11 .... ” Baum v. Baum (In re Baum), Adv. Proc. No. 14-00044-5-DMW, 2016 WL 5360709, at *10, ,2016 LEXIS Bankr. 3465, at *29 (Bankr. E.D.N.C. Sept. 23, 2016), appeal docketed, Case No. 5:16-cv-00840-FL (E.D.N.C. Oct. 7, 2016) (citing Dambowsky, 526 B.R. at 601-02) (emphasis added).
The United States Bankruptcy Court for the District of Idaho explained this consolidated jurisdiction as follows:
At times the debt at issue has previously been liquidated; other times it has not. In the case of an unliquidated debt, the bankruptcy court must necessarily determine liability and damages in order to establish the underlying debt. Adjudication of the underlying claim, which arises under nonbankruptcy law, becomes part and parcel of the discharge-ability determination and thus integral to restructuring the debtor-creditor relationship.
Dambowsky, 526 B.R. at 599-600 (quoting Stanborough v. Valle (In re Valle), 469 B.R. 35, 43 (Bankr. D. Idaho 2012)). The United States Bankruptcy Court for the Southern District of Florida similarly recognized that—
[i]n a complaint to determine discharge-ability of a debt there are always two issues — one is a determination of what is the debt (although sometimes this has already been resolved by a state court) and the other is the determination whether that debt is non-dischargeable ... the two issues are intertwined, no matter in which order and however resolved ....
Markwood Invs. Ltd. v. Neves (In re Neves), 500 B.R. 651, 660 (Bankr. S.D. Fla. 2013) (citations omitted).
The Malicious Prosecution Claim is based upon state tort law and not upon any right created by the Bankruptcy Code. The Malicious Prosecution Claim stems from pre-petition occurrences, and the Plaintiff planned to adjudicate the claim in state court until he learned of the Defendant’s bankruptcy filing. Standing alone, the Malicious Prosecution Claim does not arise under the Bankruptcy Code or arise in the Defendant’s bankruptcy; however, when entwined as it is with the Discharge-ability Claim, the court has jurisdiction over the entire adversary- proceeding as arising in the Defendant’s Chapter 7 case.
Alternatively, if the court did not consider the Dischargeability Claim and the Malicious Prosecution Claim as a single proceeding for jurisdictional purposes, the court would still have jurisdiction over the Malicious Prosecution Claim as being related to the Defendant’s bankruptcy case. The Supreme Court believes that “ ‘Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate,’ and that the ‘related to’ language of § 1334(b) must be read to give district courts (and bankruptcy courts under § 157(a)) jurisdiction over more than simple proceedings involving the property of the debtor or the estate ..., ” Celotex Corp. v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 1499, 131 L.Ed.2d 403 (1996) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)) (other citations omitted). The Supreme Court thus recognized the Pacor test which had *414been previously adopted by the United States Court of Appeals for the Fourth Circuit in A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002 n. 11 (4th Cir. 1986).
The Pacor test provides that— [t]he usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate.
Owens-Illinois, Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d 619, 625-26 (4th Cir. 1997) (quoting Pacor, 743 F.2d at 994) (emphasis in original). “[T]he Pacor test does not require certain or likely alteration of the debtor’s rights, liabilities, options or freedom of action, nor does it require certain or likely impact upon the handling and administration of the bankruptcy estate. The possibility of such alteration or impact is sufficient to confer jurisdiction.” Id. at 626.
The United States Bankruptcy Court for the District of Massachusetts interpreted Celotex and Pacor to suggest that “a proceeding that does not impact the estate directly, but nevertheless impacts rights created by the bankruptcy code, may also constitute a 'related to’ matter ... [and because] the scope of the underlying debt is often at issue in dischargeability proceedings, the liquidation of the debt is, if not a core matter, at least ‘related to’ the dischargeability action.” Chen v. Huang (In re Huang), 509 B.R. 742, 753 n. 14 (Bankr. D. Mass. 2014).9 See also Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 868 (9th Cir.2005) (quoting Mann v. Alexander Dawson (In re Mann), 907 F.2d 923, 926 n. 4 (9th Cir.1990)) (finding that “ ‘related to’ jurisdiction is very broad, ‘including nearly every matter directly or indirectly related to the bankruptcy.’”). The Malicious Prosecution Claim is related to the outcome of the Defendant’s bankruptcy case as the Defendant’s “fresh start” will certainly be impacted if she is determined to be liable to the Plaintiff for a non-dischargeable amount; therefore, the court also has “related to” jurisdiction over Malicious Prosecution Claim.
28 U.S.C. § 157(b)(5) Does Not Affect Subject Matter Jurisdiction
The Defendant, asserting that the Malicious Prosecution Claim is a “personal injury tort” claim, challenges the court’s subject matter jurisdiction based upon a separate subsection of 28 U.S.C. § 157 which provides that— *41528 U.S.C. § 157(b)(5). This statute dictates appropriate venues for adjudication of a personal injury tort or -wrongful death claim, and the Defendant suggests that the statute’s use of the words “shall be tried in the district court” divests the bankruptcy court of any jurisdiction over personal injury tort actions.
*414[t]he district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.
*415The Defendant’s position is not unprecedented, and prior to 2011, several courts held that 28 U.S.C. § 157(b)(5) deprives the bankruptcy courts of jurisdiction over personal injury tort and wrongful death claims. The Defendant relies predominantly upon a case in which the neighboring United States Bankruptcy Court for the Middle District of North Carolina held that personal injury tort claims must be tried in the district court and not the bankruptcy court. In re Nifong, Case No. 08-80034C-7D, 2008 WL 2203149, at *2, 2008 Bankr. LEXIS 1608 (Bankr. M.D.N.C. May 27, 2008) (citing Leatham v. Von Volkmar (In re Von Volkmar), 217 B.R. 561, 565 (Bankr. N.D. Ill. 1998) (holding that 28 U.S.C. § 157(b)(5) flatly prohibits a bankruptcy court from adjudicating and liquidating personal injury claims even when brought within a dischargeability proceeding)). See also Goldschmidt v. Erickson (In re Erickson), 330 B.R. 346, 349 (Bankr. D. Conn. 2005) (holding that the bankruptcy court lacked jurisdiction to adjudicate a personal injury tort claim); Rizzo v. Passialis (In re Passialis), 292 B.R. 346, 351 (Bankr. N.D. Ill. 2003) (holding that pursuant to 28 U.S.C. § 157(b)(5) the court had no jurisdiction to determine a personal injury tort claim underlying a dischargeability complaint); Vinci v. Town of Carmel (In re Vinci), 108 B.R. 439, 441 (Bankr. S.D.N.Y. 1989) (holding that bankruptcy courts do not have subject matter jurisdiction over personal injury tort and wrongful death claims); Boyer v. Balanoff (In re Boyer), 93 B.R. 313, 317 (Bankr. N.D.N.Y. 1988) (finding that 28 U.S.C. § 157(b)(5) requires the district court to maintain jurisdiction over personal injury tort and wrongful death claims).
In 2008, the United States Bankruptcy Court for the District of Nevada rejected the position of many of its colleagues that 28 U.S.C. § 157(b)(5) creates a jurisdictional bar that prevents the bankruptcy court from hearing personal injury tort claims, finding the cases “unsupported by any logical analysis.” Adelson v. Smith (In re Smith), 389 B.R. 902, 910 (Bankr. D. Nev. 2008). Giving plain meaning to the statute, the Smith court eloquently reasoned that—
it is significant that Section 157(b)(5) is not worded as Congress might normally construct a restrictive jurisdictional statute. It does not say, for example, “Personal injury and wrongful death claims shall be heard exclusively by the district court, and not by the bankruptcy court” or “Notwithstanding Section 157(a), jurisdiction of personal injury and wrongful death claims shall not be referred to the bankruptcy court.” ... Rather, Section 157(b)(5) refers only to where a matter may be tried (presumably after all pretrial matters have been resolved, and presumably resolved by a court with jurisdiction), and then provides only that the location of such trials “shall [be] order[ed]” by the district court to be in the district court. This wording is a far cry from a grant of exclusive jurisdiction to the district court of all personal injury and wrongful death claims.
Id. at 911.
In 2011, within the contexts of Stem, the Supreme Court essentially nullified Nifong and similar cases by holding, similar to the Smith court, that 28 U.S.C. § 157(b)(5) is not jurisdictional but speaks only to the available venues for trial of a personal injury tort or wrongful death claim: “Section 157(b)(5) does not have the hallmarks *416of a jurisdictional decree. To begin, the statutory text does not refer to either district court or bankruptcy court ‘jurisdiction,’ instead addressing only where personal injury tort claims ‘shall be tried.’” Stern, 564 U.S. at 480, 131 S.Ct. at 2607, 180 L.Ed.2d (2011) (citation omitted). In light of Stem and in agreement with Smith, the court rejects the Defendant’s position that 28 U.S.C. § 157(b)(5) deprives it of jurisdiction of the Malicious Prosecution Claim, assuming it is in fact a personal injury tort claim.
If Congress intended that bankruptcy judges not have jurisdiction over personal injury tort and wrongful death claims of which the district court has jurisdiction under 28 U.S.C. § 1334, then Congress could have excluded these types of claims from referral under 28 U.S.C. § 157(a). Alternatively, Congress could have mandated within 28 U.S.C, § 157(d)10 that the district court withdraw its reference of personal injury tort and wrongful death claims. With neither of these exceptions provided, if a district court has jurisdiction over a personal injury tort or wrongful death claim under 28 U.S.C. § 1334, then so do its bankruptcy judges with referral under 28 U.S.C. § 157(a). The court will further consider whether 28 U.S.C. § 157(b)(5), while not jurisdictional, deprives it of authority to adjudicate the Malicious Prosecution Claim.
Statutory Authority
28 U.S.C. §. 157(b)(5) Does Not Prevent a Bankruptcy Judge from Adjudicating a Personal Injury Tort or Wrongful Death Claim
Despite the Supreme Court’s holding in Stem that 28 U.S.C. § 157(b)(5) is not jurisdictional, many courts, including this one, have continued to interpret the statute to require that a personal injury tort or wrongful death claim be tried in the district court, believing “district court” to mean by a district judge. For instance, the Defendant cites a recent, post-Stem case in which this court postulates that pursuant to the procedural limitations of 28 U.S.C. § 157(b)(5), “ ‘personal injury tort’ claims must be tried in the district court.” In re Abbott, Case No. 15-06822-5-SWH, 2016 WL 6892456, at *2, 2016 Bankr. LEXIS 4047 (Bankr. E.D.N.C. Nov. 22, 2016) (citing Stern, 564 U.S. at 479, 131 S.Ct. at 2594, 180 L.Ed.2d; Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc., 466 B.R. 750, 777 (Bankr. M.D.N.C. 2012)). This consideration is not binding precedent but merely a sidebar to the court’s decision to grant a creditor relief from the automatic stay to continue prosecution of a civil action that was pending in the United States District Court for the Eastern District of North Carolina at the time of the debtor’s petition. Upon deeper analysis, the court rejects the notion that a bankruptcy judge can never adjudicate a personal injury tort or wrongful death claim, finding 28 U.S.C. § 157(b)(5) to be perhaps the most misunderstood bankruptcy related statute within Title 28.
To fully understand 28 U.S.C. § 157(b)(5), one must focus on the meaning of the term “district court” as used in that statute and throughout the bankruptcy related provisions of Title 28. The 1978 Act created the bankruptcy courts as courts of *417record in the United States; however, BAFJA clearly removed this judicial independence and simply designated the term “bankruptcy court” to refer to a district’s bankruptcy judges, serving as judicial officers of the district court and together compromising a unit of the district court. See 28 U.S.C. § 151. Although the bankruptcy courts are not separate, independent courts but merely units of the district courts, they generally operate independently and may even have their own clerk of court, contributing to the confusion. See 28 U.S.C. § 156(b).11 If the bankruptcy judges obtain subject matter jurisdiction over a personal injury tort or wrongful death claim through referral under 28 U.S.C. § 157(a), then the term “district court” within 28 U.S.C. § 157(b)(5) logically encompasses the “bankruptcy court.” This concept is freely recognized within other sections of Title 28.
Under the 1978 Act, the venue provisions for bankruptcy matters provided that “a case under title 11 may be commenced in the bankruptcy court for a district ...” and “a proceeding arising in or related to a case under title 11 may be commenced in the bankruptcy court in which such case is pending.” Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 241(a), 92 Stat. 2549, 2669 (1978) (codified as 28 U.S.C. §§ 1472,1473(a)), amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333 (1984) (current versions at 28 U.S.C. §§ 1408, 1409(a)) (emphases added). Today, as a result of BAFJA’s removal of bankruptcy courts as independent courts of record, the relevant statutes provide that “a case under title 11 may be commenced in the district court for the district .... ” and “a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.” 28 U.S.C. §§ 1408, 1409(a) (emphases added). Despite the use of term “district court,” no one can dispute that these cases and proceedings are actually commenced in the bankruptcy court having referral jurisdiction under 28 U.S.C. § 157(a), yet analogy to the use of “district court” in 28 U.S.C. § 157(b)(5) is repeatedly overlooked. A personal injury tort or wrongful death claim shall indeed be tried in the district court, but a district court includes its unit bankruptcy court when the bankruptcy judges’ jurisdiction and authority to adjudicate the claim are established.
Similarly, the term “bankruptcy court” was used in the 1978 Act’s provisions for abstention of jurisdiction under former 28 U.S.C. § 147112 but does not appear within the current abstention provisions con*418tained in 28 U.S.C. § 1334.13 Although 28 U.S.C. § 1334(c) provides for permissive or mandatory abstention by the district court, bankruptcy judges regularly entertain requests for abstention under this subsection. See, e.g., Newell, 424 B.R. 730; Mercer’s Enterprises, Inc. v. Seascape at Wrightsville Beach, LLC (In re Mercer’s Enterprises, Inc.), 387 B.R. 681 (Bankr. E.D.N.C. 2008); Atlas Fire Apparatus, Inc. v. Beaver (In re Atlas Fire Apparatus, Inc.), 56 B.R. 927 (Bankr. E.D.N.C. 1986). If a bankruptcy judge, as an officer of the district court, can make a determination of whether to abstain from jurisdiction under 28 U.S.C. § 1334(c), then it follows that a bankruptcy judge can also make a determination of the appropriate venue for a personal injury tort or wrongful death claim under 28 U.S.C. § 157(b)(5).
The court finds further support for its conclusion that 28 U.S.C. § 157(b)(5) does not prevent a bankruptcy judge from having statutory authority to adjudicate a personal injury tort or wrongful death claim from the language of 28 U.S.C. § 157(c) which speaks to the authority of a bankruptcy judge to adjudicate a non-core proceeding related to a bankruptcy case. When the parties do not consent to a bankruptcy judge hearing and determining a non-core, related proceeding, then “any final order or judgment shall be entered by the district judge ....” 28 U.S.C. § 157(c)(1) (emphasis added). Congress’s use of “district judge” rather than “district court” distinguishes that the Article III district judge will be entering the final order or judgment rather than the Article I bankruptcy judge, because both judges are officers of the district court. Therefore, a personal injury tort or wrongful death claim being tried in the district court could be presided over by a either a district judge or a bankruptcy judge, although a bankruptcy judge’s authority to enter final judgment will be dependent on whether it is core proceeding or a non-core, related proceeding which the parties consented to the bankruptcy judge adjudicating.
The Malicious Prosecution Claim and the Dischargeability Claim are Together a Core Proceeding which the Court has Authority to Hear and Determine
Core proceedings which a bankruptcy judge may hear and determine include “determinations as to the discharge-ability of particular debts.” 28 U.S.C. § 157(b)(2)(I). For the same jurisdictional reasons set forth supra, the act of liquidating the Malicious Prosecution Claim is integral to the Dischargeability Claim, thus liquidating the Malicious Prosecution Claim is statutorily core, and the court has authority to adjudicate this adversary proceeding under 28 U.S.C. § 157(b). See Dambowsky, 526 B.R. at 606 (citing Van-Voegler v. Myrtle (In re Myrtle), 500 B.R. 441, 446 (Bankr. W.D. Va. 2013)). See also Huang, 509 B.R. at 754 (holding that determination of existence and scope of the debtor’s liability and the creditor’s right to *419payment of a nondischargeable claim is core).
Core proceedings also include the— allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11.
28 U.S.C. § 157(b)(2)(B) (emphasis added). If the Malicious Prosecution Claim is a personal injury tort claim as asserted by the Defendant, then liquidation of that claim for purposes of distribution is specifically excluded from being a core proceeding. The court does not need to determine whether the Malicious Prosecution Claim qualifies as a personal injury tort claim,14 because liquidation of the Malicious Prosecution Claim is not being requested for purposes of distribution but in connection with the Dischargeability Claim. Even if the court does not have the unfettered authority to hear and determine the Malicious Prosecution Claim as a core proceeding under 28 U.S.C. § 157(b)(1), it may still hear and determine this claim under 28 U.S.C. § 157(c)(2) if it is related to the Defendant’s bankruptcy case and the parties consent to the court’s adjudication. See Younge v. Tribune Media Co. (In re Tribune Media Co.), C.A. No. 16-226 (GMS), 2017 WL 2622743, at *4, 2017 U.S. Dist. LEXIS 92896 (D. Del. June 16, 2017) (holding that whether a claim qualifies as a personal injury tort claim is irrelevant when the claimant consents to a bankruptcy court’s authority to enter final judgment).
The Parties Consented to the Court Hearing and Determining the Malicious Prosecution Claim
The court has already determined that the Malicious Prosecution Claim is related to the Defendant’s bankruptcy case through the Dischargeability Claim. If the Malicious Prosecution Claim is non-core, then the court has statutory authority to hear and determine this related claim under 28 U.S.C. § 157(c)(2), because both the Plaintiff and the Defendant consented to the court’s adjudication.
At the time the Complaint and Answer were filed, the Federal Rules of Bankruptcy Procedure provided that “[i]n an adversary proceeding before a bankruptcy judge, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the proceeding is core or non-core and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge.” Fed. R. Bankr. P. 7008 (2014) (amended Dec. 1, 2016).15 In defense—
[a] responsive pleading shall admit or deny an allegation that the proceeding is core or non-core. If the response is that *420the proceeding is non-core, it shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge. In non-core proceedings final orders and judgments shall not be entered on the bankruptcy judge’s order except with the express consent of the parties.
Fed. R. Bankr. P. 7012(b) (2009) (amended Dec. 1,2016).16
The Plaintiffs Complaint contains a statement or allegation that this adversary proceeding is a core proceeding, and the Defendant specifically admitted this allegation in her Answer. In the jointly submitted Final Pretrial Order, the parties expressly “agreed that this is a core proceeding pursuant to 28 U.S.C. § 157(c)(2)17 and agree that the Court may enter a final judgment .... ” Kozec v. Murphy (In re Murphy), Adv. Proc. No. 16-00024-5-DMW (Bankr. E.D.N.C. Dec. 20, 2016). Beyond entry of the Final Pretrial Order, the parties fully litigated the Malicious Prosecution Claim at trial which the court considers an implied consent to it entering judgment. The Defendant cannot rescind this consent a month after the trial which resulted in the pending judgment against her. See In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 702 (Bankr. N.D. Ill. 2011) (citing Carter v. Sea Land Servs., Inc., 816 F.2d 1018, 1021 (5th Cir. 1987)) (holding that debtor cannot undo consent when faced with unfavorable rulings and withdrawal of consent requires a motion and showing of good cause). Regardless of whether the Malicious Prosecution Claim is merged with the Dischargeability Claim or stands alone as a non-core proceeding related to the Defendant’s bankruptcy case, the court has authority to hear and determine the Malicious Prosecution Claim, because both the Plaintiff and the Defendant consented to the court entering final judgment.
Constitutional Authority
Finally, the court will consider whether pursuant to Stem it lacks the constitutional authority to adjudicate the Malicious Prosecution Claim. Although the Malicious Prosecution Claim does not stem from the Defendant’s bankruptcy or would be necessarily resolved within her no-asset Chapter 7 case, the court agrees with the United States Bankruptcy Court for the Middle District of North Carolina that Stem does not affect its constitutional authority to liquidate and enter judgment on this claim. The Dambowsky court explained as follows:
The Stem decision does not impact this Court’s constitutional authority to hear Plaintiffs’ claims because, unlike Stern, Plaintiffs’ action is at heart seeking relief from the bankruptcy power discharging its alleged claim, and a complete ' determination of this relief will result in the liquidation of the underlying claims. Accordingly, Stem does not prevent this Court from liquidating Plaintiffs’ claims.
Dambowsky, 526 B.R. at 605.
More importantly and unlike the debtor-defendant in Dambowsky, the Defendant consented to the court adjudicating the entire adversary proceeding, including the *421Malicious Prosecution Claim. The Supreme Court recently held that allowing bankruptcy litigants to waive the right to Article III adjudication of Stem claims “does not usurp the constitutional prerogatives of Article III courts ... [and] Article III permits bankruptcy courts to decide Stem claims submitted to them by consent.” Wellness Int’l Network, Ltd. v. Sharif, — U.S. -, 135 S.Ct. 1932, 1937, 1949, 191 L.Ed.2d 911 (2015). If the Malicious Prosecution Claim is indeed a “Stem claim,” a proposition which this court rejects, then the parties’ consent to this court’s adjudication gives it constitutional authority to do so.
CONCLUSION
Having determined that it possesses subject matter jurisdiction over this adversary proceeding, as well as the statutory and constitutional authority to enter a final judgment, the court denies the Motion to Dismiss and will proceed with entry of judgment in favor of the Plaintiff; now therefore,
IT IS ORDERED, ADJUDGED, AND DECREED that the Motion to Dismiss be, and hereby is, denied.
SO ORDERED.
. The court’s findings of fact which support its ruling are extensively set forth in a Memorandum Opinion to be entered forthwith after entry of this Order and will not be repeated herein, because they are not specifically relevant to the issues raised by the Motion to Dismiss.
. The Plaintiff, unaware of the Defendant’s bankruptcy petition, initially filed a complaint against the Defendant for the Malicious Prosecution Claim with the District Court for Johnston County, North Carolina. Upon learning of the Defendant’s bankruptcy, the Plaintiff stayed this state court proceeding.
. "The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behavior, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.” U.S. Const, art. Ill, § 1.
. This subsection gives the district court exclusive jurisdiction over matters involving the employment of professional persons under 11 U.S.C. § 327.
. Section 158 governs appeals of orders, judgments, and decrees entered by bankruptcy judges and provides that "[t]he district courts of the United States shall have jurisdiction to hear appeals ....” 28 U.S.C. § 158(a). Unlike a district court's jurisdiction under 28 U.S.C. § 1334, this appellate jurisdiction may not be referred to bankruptcy judges; therefore, absent establishment of a bankruptcy appellate panel under 28 U.S.C. § 158(b), only a district judge will review an appeal from an order, judgment, or decree of a bankruptcy judge.
. While Congress has amended its bankruptcy laws several times since the enactment of BAFJA, most substantially with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the bankruptcy related provisions in Title 28 have not changed significantly. The exception is the addition of 28 U.S.C. § 157(e) which allows a bankruptcy judge to conduct a jury trial if designated by the district court and with the consent of all parties. This provisions was added in response to the Supreme Court's holding that Congress may not strip parties to a proceeding involving a “private right” of their Seventh Amendment right to a jury trial. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), The right to a jury trial with regard to a personal injury tort or wrongful.death claim is specifically protected in 28 U.S.C. § 1411, but the court's ability to conduct a jury trial of this adversary proceeding is irrelevant as neither party requested a trial by jury.
. This landmark case stems from the tabloid sensational May-December marriage between Vickie Lynn Marshall, better known as Anna Nicole Smith, and J. Howard Marshall. After J. Howard’s death in 1995, Vickie and E. Pierce Marshall, J. Howard's son, feuded over the disposition of J. Howard's fortune for many years and in many courts, including the bankruptcy court where Vickie filed for Chapter 11 relief. By the time the bankruptcy court proceeding reached the Supreme Court on E. Pierce’s challenge of the bankruptcy judge's authority to enter judgment, both Vickie and E. Pierce had died under unexpected and unfortunate circumstances. Fittingly, Chief Justice Roberts began the Court’s opinion with the words of Charles Dickens: "This 'suit has, in course of time, become so complicated, that ... no two ... lawyers can talk about it for five minutes, without coming to a total disagreement as to the premises. Innumerable children have been born into the cause; innumerable young people have married into it;’ and, sadly, the original parties 'have died out of it.’ A 'long procession of [judges] has come in and gone out’ during that time, and still the suit ‘drags its weary length before the Court’ ” Stern, 564 U.S. at 468, 131 S.Ct. at 2600, 180 L.Ed.2d (quoting C. Dickens, Bleak House, in 1 Works of Charles Dickens 4-5 (1891)).
. This section provides that core proceedings include "counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C. § 157(b)(2)(C).
. The Huang court nevertheless held, as does this court, that a dischargeability determination and liquidation of the relevant debt are not severable, and "even if the facts necessary to determine the amount or validity of the underlying debt are separable from those related to the requisites for nondischargeability, both the Bankruptcy Code and the jurisdictional statute treat fhe determination of the amount of any nondischargeable debt (as well as the extent of the debtor’s liability on that debt) as an essential element to be determined by, and within the jurisdiction of, the bankruptcy court.” Huang, 509 B.R. at 754.
. "The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if, the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.” 28 U.SC. § 157(d),
. "Upon certification of the judicial council of the circuit involved and to the Director of the Administrative Office of the United States Courts that the number of cases and proceedings pending within the jurisdiction under section 1334 of this title within a judicial district so warrants, the bankruptcy judges for such district may appoint an individual to serve as clerk of such bankruptcy court. The clerk may appoint, with the approval of such bankruptcy judges, and in such number as may be approved by the Director, necessary deputies, and may remove such deputies with the approval of such bankruptcy judges.” 28 U.S.C, § 156(b).
. This section provides that “[sjubsection (b) or (c) of this section does not prevent a district court or a bankruptcy court, in the interest of justice, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11. Such abstention, or a decision not to abstain, is not reviewable by appeal or otherwise.” Bankruptcy Reform Act of 1978, Pub. L. No, 95-598, § 241(a), 92 Stat. 2549, 2669 (1978) (codified as 28 U.S.C. § 1471(d)), amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, 98 Stat. 333 (1984) (current version at 28 U.S.C. § 1334(c)) (emphasis added).
. This section provides that:
(1) Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
(2) Upon timely motion of party in a proceeding based upon State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(c) (emphases added).
. While the court declines to rule on whether the Malicious Prosecution Claim is a “personal injury tort” claim within the meaning of 28 U.S.C. § 157, the court notes that this district does not limit the term to only those claims involving bodily injury. See, e.g., Moore v. Idealease of Wilmington, 358 B.R. 248, 251-52 (E.D.N.C. 2006) (holding that civil rights actions brought under 42 U.S.C. §§ 1981 and 1982 constitute personal injury tort claims within the meaning of 28 U.S.C. § 157(b)(2)(B)).
. This rule now states that "[i]n an adversary proceeding before a bankruptcy court, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy court.” Fed. R. Bankr. P. 7008.
. This rale now states that "[a] responsive pleading shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy court,” Fed, R. Bankr, P. 7012(b),
. The parties are incorrect that 28 U.S.C. § 157(c)(2) provides the statutory basis for a core proceeding; rather, this, provision allows for the bankruptcy court’s adjudication of non-core, related proceedings if the parties consent. The court interprets that the parties' intent was to consent to the court adjudicating this adversary proceeding to the extent that any matters within it are non-core, | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500613/ | MEMORANDUM OPINION
Patrick M. Flatley, United States Bankruptcy Judge
On December 8, 2016, Clifford A. Zucker, in his capacity as Liquidating Trustee and Estate Representative (the “Liquidating Trustee”), objected to the amended employment discharge proof of claim filed by Robert Marquardt (“Marquardt”), former President and Chief Executive Officer (“CEO”) of the Debtor, based upon, among other things, the claim being unenforceable against Fairmont General Hospital, Inc. (the “Debtor”). The primary thrust of the Debtor’s objection is that Marquardt resigned from his position and, as such, is not entitled to certain benefits that would otherwise accrue to him in the event that his departure is characterized as an involuntary termination. At a prior hearing addressing his objection, the Liquidating Trustee agreed to accept as true the statement of facts set forth in Marquardt’s affidavit for the limited purpose of enabling the court to make a determination as to whether he resigned or was terminated. In that regard, if the court determines that Marquardt was terminated, then the Liquidating Trustee has preserved for further litigation the issue as to whether the termination was based upon cause.
The Liquidating Trustee argues that Marquardt’s claim is unenforceable against the Debtor because his claim seeks to recover severance compensation when he resigned, rather than was terminated, from his position as President and CEO of the Debtor. Moreover, the Liquidating Trustee asserts that Marquardt’s admitted request to characterize his departure as a resignation estops him from seeking to recover any severance compensation. Alternatively, the Liquidating Trustee points to certain components of Marquardt’s claim that are *425allegedly not enforceable under his contract with the Debtor. Finally, the Liquidating Trustee asserts that Marquardt amended his proof of claim after the bar date and plan confirmation, and that his amendments do not survive the scrutiny necessary for late-amended proofs of claim. In opposition, Marquardt asserts that his claim is enforceable as he was constructively terminated by the Debtor under state law. Moreover, he asserts that all of the components of his claim are provided for in his employment agreement. Finally, he asserts that his claim, though amended .well beyond the claims bar date, is permissible because he merely adjusted the claim to be more accurate and because he reduced the total amount of his claim.
I. FACTS
For the limited purpose already noted, the Liquidating Trustee concedes the facts asserted by Marquardt. Thus, the background of this dispute unfolds as follows. On July 21, 2009, Marquardt and the Debt- or entered into an Executive Employment Agreement (the “Employment Agreement”) whereby Marquardt would serve as the Debtor’s President and CEO for a three-year term. Under the Employment Agreement, that term was subject to periodic extensions and was in fact extended until December 31, 2013. On September 23, 2013, shortly after the Debtor’s September 3, 2013 entry into bankruptcy, the Debtor’s Board of Directors held a meeting. At that meeting, the Debtor’s directors informed Marquardt that they desired to take the Debtor in a different direction and that they had selected Peggy Coster to replace Marquardt as CEO. In response, Marquardt requested that the Debtor phrase his termination as a resignation. The Board honored Marquardt’s request and described Marquardt’s departure as a resignation in every applicable instance.
During the interaction between the Board and Marquardt, the Board failed to discuss any reason for his purported termination. Moreover, Marquardt received no advance notice that his future as an executive employee of the Debtor was in question. Furthermore, Marquardt was ' not accorded time to consult with an attorney or otherwise contemplate his options. Rather, after he was informed that the Debtor hired his replacement, he immediately requested that he and the Debtor describe his departure as a resignation, after which he left the meeting and forthwith and permanently ceased employment with the Debtor,
On October 4, 2013, Marquardt received his base salary and amounts owed and accrued for paid time off that he earned while employed by the Debtor between the Debtor’s petition date and the end of his employment. Then, on February 6, 2014, Marquardt filed his proof of claim seeking a priority wage claim of $12,475 and a general unsecured claim of $346,089.61. He cited the Debtor’s breach of his Employment Agreement as the basis for his proof of claim. Specifically, he sought to recover $265,000 as the value of his annual base salary, recoverable under the Employment Agreement upon termination without cause, $7,885.20 in compensation for termination without 60 days’ notice, $52,436.58 for 399 hours of unpaid legacy paid time off, $13,256.47 for an additional 100.871 hours of paid time off, and $19,986.36 in compensation for the Debtor’s failure to provide him with healthcare despite terminating him without cause.
After Marquardt’s purported termination, the Debtor ceased to provide him with the same health care benefits it offered during his employment. Instead, it offered him the opportunity to maintain the same coverage at his expense in com*426pliance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for $1,665.54 per month. Marquardt instead elected to go uninsured until he obtained insurance coverage through a new employer. On January 15, 2014, Mar-quardt obtained new employment with Select Medical in Fort Wayne, Indiana as its CEO. His new position compensated him a gross base salary of $145,000 and provided new medical coverage 60 days after the start of his new employment.
The Debtor’s Chapter 11 Plan was confirmed on April 24, 2015. The Effective Date of the Plan was May 28, 2015. On August 30, 2016, the Liquidating Trustee objected to Marquardt’s proof of claim. Marquardt responded, defending portions of his proof of claim but also noting that he intended to file an amended proof of claim. Notably, the claims bar date of February 14, 2014 had passed. However, after a hearing on the matter, the court ordered Marquardt to file an amended proof of claim by November 3, 2016. Marquardt complied and filed his amended proof of claim on November 3.
Marquardt’s amended proof of claim decreased his total claim from $358,564.61 to $311,312.12. The claim still asserted $12,475 in priority unsecured claims, while the remainder of the claim is alleged to be general unsecured debt. Although Marquardt reduced his total claim, the reduction was accomplished by modifying numerous facets of the claim, including increasing the amounts asserted for certain components. Specifically, Marquardt asserts that the claim is comprised of $173,594.06, not $265,000, in base salary compensation under the Employment Agreement. This adjustment represented the greatest reduction of any of the components of the amended proof of claim. Marquardt also decreased the amount of the claim attributable to compensation for the cost of healthcare from $19,986.36 to $10,376.48 and increased the portion of his claim attributable to compensation for failure to provide 60-days’ notice from $7,885.20 to $44,934.84. Finally, the amended proof of claim introduced a new component in that it asserts that Mar-quardt is entitled to $16,401.24 in retirement contributions. This element of the amended proof of claim was absent in the original claim.
The Employment Agreement between the Debtor and Marquardt sets forth the terms regarding Marquardt’s compensation during the course of his employment. It establishes Marquardt’s base compensation at $265,000 subject to a potential annual market adjustment to be determined by the Debtor, and also provides for annual paid time off, health insurance, and various other benefits.
The Employment Agreement also addresses if and how the Debtor must compensate Marquardt should he or the Debt- or terminate his employment. Under the Agreement, the Debtor may terminate Marquardt for cause without notice and without any compensation, other than payment of salary compensation earned up until the date of termination. The Agreement does not define cause, but rather provides a list of potential reasons which may constitute cause. If Marquardt was terminated without cause, he is entitled to at least 60 days prior written notice, or salary payment in lieu of such prior notice. Moreover, the Debtor is required to continue to pay Marquardt his base monthly salary for 12 months, subject to a reduction in the amount of compensation received from his new employer. The Debtor is also required to pay all gross base salary for services performed through Mar-quardt’s last day worked, and is to continue to provide healthcare benefits in effect at the time of his termination for 12 *427months or until he obtains alternative coverage. If Marquardt, rather than the Debt- or, terminated the Employment. Agreement, or the termination was for cause, then Marquardt is entitled only to compensation for services provided through his last day worked.
Finally, the Employment Agreement provides that West Virginia law governs the interpretation and implementation of its terms.
II. ANALYSIS
The Liquidating Trustee raises essentially three grounds for objecting to Mar-quardt’s amended proof of claim. First, he asserts that a proof of claim may only be amended after plan confirmation upon a showing that (1) the amendment relates back to the original claim, (2) the amendment does not unfairly prejudice other creditors, and (3) there is a compelling reason to amend the claim in the face of the Debtor’s discharge, the res judicata effect of the plan, the disruption to the orderly process of adjudication, and the interests of finality. He argues that Mar-quardt cannot satisfy those requirements. Next, the Liquidating Trustee alleges that Marquardt is barred from seeking to recover severance payments because he specifically requested to resign rather than be fired. Third, he asserts that Marquardt resigned, thus none of the provisions contained in the Employment Agreement regarding compensation upon termination by the Debtor apply.
In response, Marquardt asserts that the amended claim relates back to the original claim, that the amendment reduces the total proof of claim and thus cannot be prejudicial, and that the amendment is intended to provide a more accurate depiction of Marquardt’s claim. Furthermore, Marquardt argues that equitable estoppel does not apply on these facts. Finally, Marquardt asserts that he was constructively terminated under West Virginia law, thus the provisions of the Employment Agreement pertaining to termination without cause apply.
I. Claims Amendment Procedure
Pursuant to 11 U.S.C. § 501, a creditor may file a proof of claim in a bankruptcy case. As stated in § 502(a), “[a] claim or interest, proof of which is filed under § 501 of this title, is deemed allowed, unless a party in interest ,.. objects.” To execute a proof of claim, Fed. R. Bankr.P. 3001(a) directs that the proof of claim be “a written statement setting forth a creditor’s claim,” and that it “shall conform substantially to the appropriate Official Form.” When a claim is executed and filed in accordance with the Bankruptcy Rules, then Rule 3001(f) provides that the proof of claim “shall constitute prima facie evidence of the validity and amount of the claim.” When the Rule 3001(f) presumption arises, the Bankruptcy Code establishes a burden shifting framework for the allowance or disallowance of that claim:
The creditor’s filing of a proof of claim constitutes prima facie evidence of the amount and validity of the claim. The burden then shifts to the debtor to object to the claim. The debtor must introduce evidence to rebut the claim’s presumptive validity. If the debtor carries its burden, the creditor has the. ultimate burden of proving the amount and validity of the claim by a preponderance of the evidence.
Stancill v. Harford Sands Inc. (In re Harford Sands Inc.), 372 F.3d 637, 640 (4th Cir. 2004). See also 11 U.S.C. § 502(b) (providing nine grounds on which to disallow a proof of claim); Travelers Cas. & Sur. Co. of Am. v. PG & E, 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) *428(“[T]he court ‘shall allow1 the claim ‘except to the extent that’ the claim implicates any of the nine exceptions enumerated in § 502(b)”).
The strength of a proof of claim’s presumption as to validity and amount is described as “‘some evidence,’” and as “ ‘strong enough to carry over a mere formal objection without more.’” Wright v. Holm (In re Holm), 931 F.2d 620, 623 (9th Cir. 1991) (citation omitted). The party objecting to the proof of claim has the burden of going forward to “ ‘meet, overcome, or, at minimum, equalize the valid claim.’” FDIC v. Union Entities (In re Be-Mac Transport Co,), 83 F.3d 1020, 1025 (8th Cir. 1996) (citation omitted). The amount of evidence necessary to overcome the objection “must be sufficient to demonstrate a true dispute and must have probative force equal to the contents of the claim.” 9 Collier on Bankruptcy ¶ 3001.9[2] (Alan N. Resnick & Henry J. Sommer, eds. 15th ed. rev. 2008). Although the Court of Appeals for the Fourth Circuit “has not previously addressed how the bankruptcy rules allocate the burden of proof for purposes of establishing the amount and validity of a claim .... [its] reading of the bankruptcy rules ... is in accord with [its] sister circuits that have addressed the issue.” Stancill, 372 F.3d at 640 n. 2 (citing, inter alia, In re Hemingway Transp., 993 F.2d 915, 925 (1st Cir. 1993) (“The interposition of an objection does not deprive the proof of claim of presumptive validity unless the objection is supported by substantial evidence,”); In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3d Cir.1992) (“It is often said that the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency.”)).
Before the passage of the claims bar date, courts generally allow amendments of proofs of claim in accordance with Rule 7015 of the Federal Rule of Bankruptcy Procedure. Holstein v. Brill, 987 F.2d 1268, 1269 (7th Cir. 1993); see also In re Enron Corp., 419 F.3d 116, 133 (2d Cir. 2005) (explaining that Rule 7015 grants bankruptcy courts discretion to grant or deny leave to amend claims despite the fact that Rule 7015 otherwise only applies to adversary proceedings). Particularly, courts freely allow the amendment of a claim “where the purpose is to cure a defect in the claim as originally filed, to describe the claim with greater particularity, or to plead a new theory of recovery on the facts set forth in the original claim.” Integrated Resources, Inc. v. Ameritrust Company National Association (In re Integrated Res., Inc.), 157 B.R. 66, 70 (S.D.N.Y. 1993). After the bar date passes, however, courts must apply “careful scrutiny to assure that there was no attempt to file a new claim under the guise of amendment.” United States v. International Horizons, Inc. (In re International Horizons, Inc.), 751 F.2d 1213, 1216 (11th Cir. 1985). Thus, courts apply a two pronged test to determine whether to grant an amendment after the bar date passes: (1) whether the amended claim relates back to a timely filed proof of claim and (2) “whether it would be equitable to allow the amendment.” Pavarini McGovern, LLC v. Waterscape Resort LLC, 520 B.R. 424, 434 (Bankr. S.D.N.Y. 2014). Finally, in cases where a party seeks to amend a claim after confirmation, “a creditor must demonstrate a ‘compelling reason’ to amend the claim given the discharge, the res judicata effect of the plan, the disruption to the orderly process of adjudication and the interests of finality.” Id.
*429Marquardt filed his original proof of claim on February 6, 2014, eight days before the February 14 bar date. In it, Marquardt set forth claims arising from his alleged termination without cause and the rights stemming from that termination under the Employment Agreement. Mar-quardt then amended that proof of claim on November 3, 2016. The amendment sought to cure defects in the claim as originally filed and to describe the claim with greater particularity. The Liquidating Trustee asserts that each component of the proof of claim constitutes an individual claim and buttresses this argument by stating that Marquardt could have filed a series of proofs of claims. However, Mar-quardt is seeking to recover various forms of compensation potentially owed to him under his Employment Agreement and arising out of the same nucleus of operative facts. While the claim is fragmented, each fragment arises out of the Employment Agreement itself such that the constituent parts are all aspects of a single right to payment. Because Marquardt amended the claim to provide greater accuracy and to correct prior mathematical errors, the amendment relates back to the original timely filed proof of claim.
The Liquidating Trustee argues that the amendment will cause undue prejudice to the creditor body because Marquardt increased various components of his claim and added entirely new components as well. However, the amendment, as a whole, reduces Marquardt’s total claim. Insofar as the creditor is seeking to recover less than he previously did, there can be no undue prejudice to the creditor body. Thus, equitable considerations do no support denying Marquardt’s right to amend.
In a case where a creditor seeks to amend a proof of claim after the debtor’s plan is confirmed, courts also require a compelling reason to allow the amendment. The underlying rationale for such an approach is that the plan effectively adjudicates the issue and discharges unclaimed debts. Moreover, to allow constant amendments to claims after confirmation would disrupt the orderly unfolding of the plan process and threaten the principle of finality. However, in this case, the amendment seeks to reduce the total debt claimed. Marquardt filed his initial claim before the bar date and the Debtor failed to object to the claim before confirmation. Thus, the . claim was preserved. Insofar as Marquardt seeks to reduce his total claim, he is not attempting to recover a discharged debt. Rather, he is providing greater accuracy and detail to the claim he filed before the bar date. Thus, the court will overrule the Liquidating Trustee’s objection as to the timing of the amendment.
II, Equitable Estoppel
The Liquidating Trustee asserts that equitable estoppel bars Marquardt from seeking to recover under the terms of Employment Agreement pertaining to termination by the Debtor without cause because it was Marquardt himself who requested that the Board characterize his termination as a resignation. The Liquidating Trustee, in effect, argues that Mar-quardt’s claim should be rejected as being duplicitous. That is, he should not be permitted on one hand to accept the benefit of favorably framing the circumstances of his departure, while, on the other hand, claiming that he was in fact involuntarily terminated for purposes of pursuing a recovery from the proceeds of the bankruptcy estate. In response, Marquardt asserts that equitable estoppel is not proper on these facts.
“Equitable estoppel precludes a party from asserting rights he otherwise would have had against another when his own conduct renders assertion of those *430rights contrary to equity.” Intl’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417-18 (4th Cir. 2000) (Internal quotation marks omitted). The doctrine exists because it is unfair for a party to “rely on [a] contract when it works to its advantage, and repudiate it when it works to its disadvantage.” Hughes Masonry Co. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 839 (7th Cir. 1981). In West Virginia, equitable estoppel exists when a false representation or concealment of material fact is made with actual or constructive knowledge of the facts to a party without knowledge who then relies on the representation or concealment to his prejudice. Syl. Pt. 3, Cleaver v. The Big Arm Bar & Grill, Inc., 202 W.Va. 122, 502 S.E.2d 438, 439 (1998). Thus, a party seeking to invoke equitable estoppel must “identify ... critical elements] of detrimental reliance [and] resulting prejudice that resulted from such reliance.” Id. at 444.
When the Board of Directors sought to terminate Marquardt, Marquardt requested that the Board phrase his termination as a resignation on all documents, when talking with the public, and when talking with the media. The Board obliged. Thus, the Debtor changed its position from asserting that it fired Marquardt to asserting that Marquardt resigned. The Liquidating Trustee points out that Marquardt now seeks to benefit from describing the action as a resignation in order to avoid any reputational harm while, in contradiction, also acquiring compensation for being terminated. However, the' Liquidating Trustee fails to identify any detrimental reliance or resulting prejudice of the Debtor, and the court finds none. That is because, as discussed further in Section III, the record is clear that the Debtor intended to terminate Marquardt, not to seek his resignation. Therefore, at the time the Debtor discharged Marquardt, it was clearly prepared to live with the risks associated with a potential termination claim. It is merely fortuitous that Marquardt’s request for a more favorable characterization has provided fodder for the Debtor’s objection to his claim. Because there is no indication that the Debtor was harmed in any way by allowing Marquardt to represent that he resigned, there simply cannot be a showing of equitable estoppel. Thus, the court will overrule the Liquidating Trustee’s objection as it pertains to equitable estoppel.
III. Constructive Termination
The Liquidating Trustee further argues that Marquardt cannot recover under the Employment Agreement because he resigned, and the Agreement does not provide any post-resignation benefits to Marquardt. In response, Marquardt asserts that he was constructively discharged as the Board of Directors presented him with a Hobson’s choice: resign or be fired.
The Supreme Court of Appeals of West Virginia recognizes the doctrine of constructive discharge in the context of retaliatory or discriminatory discharge actions. See Slack v. Kanawha County Housing and Redevelopment Authority, 188 W.Va. 144, 423 S.E.2d 547 (1992). In such cases “a constructive discharge cause of action arises when the employee claims that because of age, race, sexual, or other unlawful discrimination, the employer has created a hostile working climate which was so intolerable that the employee was forced to leave his or her employment.” Id. at Syl. Pt. 4. Moreover, to show that a resignation was actually a constructive discharge, an employee must “establish that working conditions created by or known to the employer were so intolerable that a reasonable person would be compelled to quit.” Id. at Syl. Pt. 6. However, the ac*431tions undertaken by the employer need not be done with the specific intention of inducing the employee to quit. Id. Moreover, presenting an employee with an ultimatum requiring resignation or termination can serve as the basis for a constructive discharge. Birthisel v. Tri-Cities Health Services Corp., 188 W.Va. 371, 424 S.E.2d 606, 610 (1992).
Looking beyond West Virginia, courts “recognize two varieties of constructive dismissal.” Walker v. City of Cookeville, Case No. M2002-1441-COA-R3, 2003 WL 21918625 (Tenn. Ct. App. Aug. 12, 2003). The first variety arises in the context of hostile work environment discrimination claims, is the most commonly encountered, and has been recognized in West Virginia. Id. The second variety of constructive discharge involves executive employees who have a position-specific contract. Id. In both varieties of claims, courts evaluate whether “the employers actions made working conditions so intolerable that a reasonable person under the circumstances would have felt compelled to resign.” In re Sight Res. Corp., Case No. 0414987, 2007 Bankr. LEXIS 1501 at *3 (Bankr. S.D. Oh. May 4, 2007).
In an instance where an executive employee resigns or retires, the constructive dismissal doctrine provides an opportunity for an employee to overcome a presumption that the resignation was voluntary and thus recover under the terms of an employment agreement. Aliotta v. Bair, 614 F.3d 556, 566 (D.C. Cir. 2010). Such a doctrine is necessary to prevent employers from “attempting] an ‘end run’ around [significant legal] consequences by engaging in conduct calculated to induce an employee to quit.” Id. at *3.
Constructive dismissal cases frequently arise when an employer forces upon the affected employee the perplexing choice between tendering one’s resignation or accepting termination. See In re Sight Res. Corp., 2007 Bankr. LEXIS 1501 (holding that a CEO was constructively discharged when her employer hired her replacement and told her she could resign or be fired.); Walker, 2003 WL 21918625(concluding that an employee was constructively discharged when her employer demoted her, hired her replacement, and required her to train her replacement to do the job she used to perform).
In Slack v. Kanawha County Housing, the Supreme Court of Appeals of West Virginia clearly stated that it was following the majority rule of sister jurisdictions when evaluating whether constructive discharge applies in employment discrimination cases. 423 S.E.2d at 556-57. The issue of constructive discharge of an executive employee seeking to recover under an employment agreement has not been addressed by the Supreme Court of Appeals of West Virginia. Given the Supreme Court of Appeals of West Virginia’s preference for the majority approach, however, and the absence of any clear rationale that would permit constructive discharge claims in employment discrimination cases! but not in cases involving employment contractual disputes, it is this court’s view that constructive discharge principles should apply when an executive employee is forced to resign in order to avoid the adverse consequences of termination.
Notably, the facts of this case are strikingly similar to those found in In re Sight Res Corp. 2007 Bankr. LEXIS 1501. In that case, a hospital’s board of directors determined that it needed new leadership on the eve of bankruptcy. Id. at *3. The board proceeded to hire a new CEO and inform its current CEO that she could resign or be fired. In this case, the facts are harsher. The Debtor selected Mar-quardt’s replacement and informed him that he was being terminated. He was not *432provided a choice. Instead, in the face of the inevitable, he requested that the termination be cast as a resignation. Thus, the facts of this case go one step beyond In re Sight Res Corp., insofar as Marquardt was not presented with a choice but was actually told that he was being terminated. Thus, Marquardt’s request to resign, rather than be terminated, was reasonable, particularly considering the professional reputational harm that typically coincides with being terminated. Moreover, it is clear that his resignation was induced by the conduct of the Debtor, In this case the characterization of Marquardt’s departure as a resignation merely masked the fact that he was being unceremoniously fired. Admittedly, the Board’s willingness to allow for Mar-quardt’s resignation under such circumstances was rather magnanimous. But its decision was stark and final. Marquardt’s services were no longer desired,
Under these circumstances, to accept the Liquidating Trustee’s argument that, in reality, Marquardt’s departure was the result of a voluntary resignation rather than a firing would be to elevate form over substance. Walker, 2003 WL 21918625 at *7 (“The doctrine [of constructive discharge] disregards form and recognizes that some resignations, in substance, are actually terminations ....”) Marquardt faced an ultimatum, and as any reasonable person would have done, let alone an executive, Marquardt merely sought to preserve some dignity and protect his future employment prospects by nominally seeking to resign.
Therefore, the court will overrule the Liquidating Trustee’s objection regarding the inapplicability of the provisions of the Employment Agreement because Mar-quardt resigned. Consistent with the limited scope of this opinion, the court reserves judgment, based upon further litigation, as to whether cause existed for Marquardt’s termination, should the issue remain unresolved between the parties.
TV. Additional Objections
The Liquidating Trustee raises several additional arguments addressing individual components of Marquardt’s claim. Specifically, the Liquidating Trustee asserts that, if his objection is otherwise denied, Mar-quardt is not entitled to assert a priority claim. Additionally, the Liquidating Trustee argues that the Employment Agreement does not provide for compensation of paid time off or retirement benefits even if Marquardt was terminated without cause.
A creditor’s allowed unsecured claim is entitled to priority treatment in an amount up to $12,475 for wages or salaries, including vacation, severance, and sick time, earned within 180 days before the date of the filing of the petition; or for contribution to an employee benefit plan arising from services rendered within 180 days before the date of the filing of the petition, 11 U.S.C. § 507(a)(4) and (5), In this case, Marquardt seeks to recover $12,475, but fails to indicate why a portion of his claim is entitled to priority treatment. Because Marquardt’s termination arose post-petition, his severance claim does not qualify because it did not occur within 180 days before the filing of the petition. See In re M Group, Inc., 268 B.R. 896 (Bankr. D. Del. 2001). Moreover, he received compensation for his services performed pre-petition. Thus, the Liquidating Trustee’s objection is sustained with regard to priority treatment of $12,475.
Regarding the objections to compensation for paid time off and retirement benefits, the Liquidating Trustee asserts that, even if Marquardt were terminated without cause, because Attachment C of the Employment Agreement provides severance only for base salary, and because Marquardt relies upon Attachment B to *433include these forms of compensation, they should not be allowed. However, both Attachment B and Attachment C are incorporated by reference into the Employment Agreement. In a section titled “Severance Terms,” Attachment B provides that all legally permissible benefits will continue during severance. Attachment C provides that the Debtor will continue to pay Mar-quardt’s base monthly salary for 12 months, will pay all gross base salary for services performed through his last day of work, and will maintain health benefits for a period of twelve months or until Mar-quardt receives benefits from a new employer. As Attachment B indicates that all legally permissible benefits will continue during the one-year severance period, and because retirement contributions justifiably fit within that category, Marquardt is entitled to that component of his claim. Therefore, the Liquidating Trustee’s objection as to the retirement contribution component of the claim is overruled. As to the component of the claim pertaining to paid time off, however, neither Attachment B nor Attachment C indicates that Mar-quardt should be compensated for previously earned paid time off or Legacy paid time off. Therefore, the Liquidating Trustee’s objection regarding the paid time off component of the claim is sustained.
For the reasons stated herein, the court does hereby
ORDER that the Liquidating Trustee’s objection to Robert Marquardt’s amended proof of claim is OVERRULED IN PART and SUSTAINED IN PART. Specifically, Marquardt’s amended claim is to be reduced by $65,693.05. Additionally, none of Marquardt’s claim is entitled to priority status. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500614/ | MEMORANDUM OPINION REGARDING THE DISMISSAL OF THE DEBTOR’S CHAPTER 11 CASE
[Doc. No. 191]
Jeff Bohm, United States Bankruptcy Judge
I. Introduction
Irasel Sand, LLC (the “Debtor”), a company that provides sand used in fracking, failed to comply with a prior ruling of this Court that required it to either (1) obtain a final agreement on post-petition financing and use of cash collateral, or (2) face dismissal. The Court gave the Debtor thirteen days to comply with this ruling. The Debtor failed to obtain a final agreement on post-petition financing and use of cash collateral; therefore, the Court found that it was in the best interest of the estate and the creditors to dismiss the case for cause. Thus, the Court issued an order dismissing the above-styled Chapter 11 case. [Doc. No. 191], The findings of fact and conclusions of law set forth below memorialize this Court’s ruling.
II. Findings op Fact
On February 27, 2017, because of the oil and gas downturn of 2015, the Debtor attempted to file for relief under Chapter 11 (the “Petition”). [Doc. No. 1]; [Tape Recording, Mar. 3, 2017 Hearing at 2:19:47-2:20:02 P.M.]. The Court uses the term “attempted” because this case has a checkered history of proper filing. Louis Butler (“Mr. Butler”), the CEO of the *436Debtor’s parent company, Irabel, Inc.1 (“Irabel”), signing on behalf of Irabel, solely approved the filing of the Debtor’s bankruptcy. [Doc. No. 1, p. 7 of 7]. However, at the time of the filing, Irabel and Select Sand, LLC (“Select Sand”) each owned a 50% interest in the Debtor. [Id. at p. 5 of 7]. Thus, a question arose as to whether Irabel, without approval from Select Sands, had the power to authorize the filing of the Petition. [Tape Recording, Mar. 3, 2017 Hearing at 2:08:08-2:11:22 P.M.]. While Select Sand subsequently ratified the Petition, [Doc. No. 24, p, 3 ¶ 6], the questionable filing at the outset has cast a pall over the integrity of the filing.
In addition to the problem concerning the filing of the Petition, the Debtor also faced another issue: whether it would be able to reach a final agreement with its debtor-in-possession (“DIP”) lender, Carousel Specialty Products (“Carousel”), to obtain post-petition financing and permission to use cash collateral. The Court held various emergency hearings regarding these issues, and issued interim orders approving certain post-petition financing and use of cash collateral. [Doc. Nos. 34 & 151]. The most recent interim order was entered after the hearing held on April 27, 2017. At that hearing, the Debtor asserted that it would be able to exit bankruptcy by October 2017 if: (1) it obtained an increase of $500,000.00 in financing from Carousel; (2) it completed various improvements worth over $1.0 million to increase productivity; and (3) it successfully entered into a “take or pay” contract with Sanchez Energy (“Sanchez”). [Apr. 27, 2017 Tr. 13:1-17:11, 20:3-21:13]. Based upon the record made at this hearing, the Court entered a ■ second interim order on May 3, 2017, and this order set forth that the final hearing on post-petition financing would be held on May 18,2017. [Doc. No. 151].
Then, on May 18, 2017, the Court held what it thought was to be the final hearing. However, the Debtor’s proposed counsel informed the Court that the Debtor had not yet reached a final agreement with Carousel regarding DIP financing and the use of cash collateral. [Tape Recording, May 18, 2017 Hearing at 2:35:00-2:35:11 P.M.]. The Court expressed its concern that if the parties could not reach an agreement, then “there’s no way [the Debtor] is going to be reorganized and I’m not going to let attorney time and court time be used when we have a patient that is dying a quick death.” [Id. at 5:10:00— 5:10:13 P.M.]. The Court then gave the Debtor until May 30, 2017 (i.e., thirteen days) to reach a final agreement on post-petition financing and cash collateral usage, or else face dismissal of the case. [Id. at 5:09:17-5:09:26 P.M.].
On May 30, 2017, the Debtor returned to Court and, in response to whether it had Reached a final agreement on post-petition financing and the use of cash collateral, proposed counsel stated that there was no agreement with either Carousel or any alternative lender. [Tape Recording, May 30, 2017 Hearing at 11:44:55-11:44:59 A.M.]. In addition, the parties informed the Court of other developments in the case, namely, that Carousel had finalized an agreement with Irabel’s receiver and Select Sand that would make Carousel the new 100% owner of the Debtor. Specifically, counsel for Carousel stated the following:
At this point, Carousel would like dismissal of the case. And, the reasons for that being we finalized the deal with Irabel’s receiver that was to purchase *437the equity interest in the debtor through the receivership. The state court in Beaumont [presiding over Irabe’s receivership proceeding] has entered a final order approving that sale, so now, Carousel controls half the interest in ... Irasel, the debtor, through Irabel’s interest and has also signed an option agreement with Select Sand, the other 50% owner, or by it is acquiring 50% of Select Sand — or 100% in Select Sand’s interest in the debtor. Select Sand has also given a proxy to Carousel. The proxy allows Carousel to vote Select Sand’s interest. This morning, the unanimous consent was signed by the 100% owners of this debtor removing Irabel as the manager of the debtor and appointing Carousel — Mr. Mitchell in particular — as the new manager. And, as the new manager of the debtor, we would like this case to be dismissed at this time.
[Id. at 11:52:30-11:53:41 A.M.].
Based upon the above-referenced factual background, and the Debtor’s poor financial condition as reflected in the Debtor’s most recent monthly operating report, the Court finds cause to dismiss the case, as discussed below.
III. Conclusions of Law
A.Jurisdiction
The Court has jurisdiction over this case 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 a dismissal of a case necessarily affects the administration of the bankruptcy estate. Additionally, this matter is a core proceeding under the general “catchall” 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”). Whether to dismiss a Chapter 11 case is a matter that can arise only in a bankruptcy. Martensen v. U.S. Tr., No. 4:CV91-3080, 1992 WL 67297, at *1 (D. Neb. Apr. 1, 1992) (“Dismissal of a bankruptcy case is a proceeding that by its very nature can only arise in bankruptcy .... ”).
B. Venue
Venue is proper pursuant to 28 U.S.C. § 1408(1) because the Debtor’s principal place of business was in the Southern District of Texas for the 180 days preceding the filing of the Petition.
C. Constitutional Authority to Enter a Final Order Dismissing a Chapter 11 Case
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 *438brought 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 a final order 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 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.”).
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 órder in the matter at bar. In Stem, the debtor filed a counterclaim based solely on state law; whereas, here, whether to dismiss this case is governed entirely by an express Bankruptcy Code provision — namely, 11 U.S.C § 1112(b)2 — as well as judicially-created law from federal courts as to how this provision 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 dismissing this Chapter 11 case. In re Lake Michigan Beach Pottawattamie Resort, LLC, 547 B.R. 899, 902-03 (Bankr. N.D. Ill. 2016) (“A proceeding for dismissal of a bankruptcy case under section 1112(b) may only arise in a case under title 11 and is a matter in which a bankruptcy judge has constitutional authority to enter a final order.”) (citations omitted).
D. The Debtor’s Chapter 11 Case Can be Dismissed
1. After Notice and a Hearing, §§ 1112(b) and 105 Allow the Court to Sua Syonte Dismiss a Chapter 11 Case for Cause
Section 1112(b) states that “on request of a party in interest, and after notice and a hearing, the court shall ... dismiss a *439case under the chapter ... for cause.” Further, § 105(a) states that:
No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
While § 1112(b) provides that a “party in interest” can make a request for dismissal, when read in conjunction with § 105, judges in the Southern District of Texas, and various other courts, have concluded that a bankruptcy court has power to dismiss a case sua sponte for cause. See, e.g., In re Antelope Techs., Inc., No. 07-31159-H3-11, 2010 WL 2901017, 2010 U.S. Dist. LEXIS 73456 (S.D. Tex. July 21, 2010); In re Starmark Clinics, LP, 388 B.R. 729, 735 (Bankr. S.D. Tex. 2008); see also In re Alston, No. 1-.14-BK-03454MDF, 2017 WL 213805, at *2-3 (Bankr. M.D. Pa. Jan. 18, 2017); Kingsway Capital Partners, LLC v. Sosa, 549 B.R. 897, 902-03 (N.D. Cal. 2016); In re Munteanu, No. 06-CV-6108(ADS), 2007 WL 1987783, at *3 (E.D.N.Y. June 28, 2007). Further, the Fifth Circuit has suggested that it agrees with this premise. See Matter of Little Creek Dev. Co., 779 F.2d 1068, 1071 n.1 (5th Cir. 1986).
The Code defines “cause” for purposes of § 1112(b) with an enumerated list including, in pertinent part: “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” § 1112(b)(4)(A). However, “ ‘this list is not exhaustive’ and courts should ‘consider other factors as they arise.’ ” In re Brown, 951 F.2d 564, 572 (3d Cir. 1991) (quoting S. Rep. No. 989, at 117 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5903; H.R. Rep. No. 595, 95th Cong, at 406 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6362). In evaluating cause, the Fifth Circuit requires courts to examine the totality of the circumstances. Little Creek, 779 F.2d at 1072-74; Antelope, 2010 WL 2901017, at *4-5, 2010 U.S. Dist. LEXIS, at *14-15; Starmark Clinics, 388 B.R. at 736. Indeed, a bankruptcy court has wide discretion in evaluating cause. See In re TMT Procurement Corp., 534 B.R. 912, 921 (Bankr. S.D. Tex. 2015). Thus, this Court, sua sponte, can dismiss the Debtor’s case.
2. This Court Provided Sufficient Notice and Held a Hearing
Before the Court can sua sponte dismiss a case under § 1112(b), it must ensure there is proper notice and a hearing. As the Fifth Circuit has stated ¡in a different but analogous context, “fairness requires that a litigant have the opportunity to be heard before a claim is dismissed, except where the claim is patently frivolous.” See Century Sur. Co. v. Blevins, 799 F.3d 366, 372 (5th Cir. 2015). In so doing, fairness “requires both notice of the court’s intention and an opportunity to respond.” Id. at 373; see also In re Estate of Patterson, 64 B.R. 807, 808 (Bankr. W.D. Tex. 1986) (“[A] court should not engage in the practice of sua sponte dismissal absent notice and adequate opportunity to be heard.”); In re Munteanu, 2007 WL 1987783, at *5 (reversing a court’s sua sponte dismissal of a case under § 1112(b) when the court failed to give notice with “a meaningful opportunity to respond”). However, § 102(1) only requires such notice and opportunity for hearing “as is appropriate in the particular circumstances.” Stated differently, “the concept of notice and a hearing is flexible and depends on what is appropriate in the particular circumstance.” In re Tennant, 318 B.R. 860, 870 (9th Cir. BAP 2004).
*440Here, this Court satisfied the due process requirement under the particular circumstances in this case. See In re Krueger, 812 F.3d 365, 370 (5th Cir. 2016) (finding that debtor’s right to due process was “vindicated” when the debtor had notice of the grounds for .the pending dismissal of his Chapter 7 case and the court held a hearing allowing him an opportunity to respond). On May 18, 2017, this Court, on the record, apprised the Debtor that it would dismiss the entire case if it were unable to obtain final agreements on post-petition financing and the use of cash collateral. [Tape Recording, May 18, 2017 Hearing at 5:09:17-5:10:46 P.M.]. The Court then gave the Debtor thirteen days to reach agreement on these issues, [id. at 5:09:17-5:09:26 P.M.] — a deadline which was reasonable given that the Debtor had already had ample time to negotiate final post-petition and cash collateral agreements with Carousel. On May 30, 2017, the parties returned to court, and proposed counsel for the Debtor informed the Court that: “There is not an agreement with Carousel [or an alternate lender] as to cash collateral or DIP financing, Your Honor.” [Tape Recording, May 30, 2017 Hearing at 11:44:55-11:44:59 A.M.], Thus, having given the Debtor notice, time to reach an agreement with its existing DIP lender or with another lender, and a hearing to respond, this Court satisfied the due process requirements of § 1112(b).
3. Considering the Totality of the Circumstances, the Court Finds that this Case Should be Dismissed
Having satisfied due process considerations, the Court now ■ turns to the issue of whether it should dismiss this case. It will do so if the two prongs of § 1112(b)(4)(A) are satisfied. First, there must be a substantial or continuing loss to the estate; and second, there must be no likelihood of rehabilitation. § 1112(b)(4)(A); TMT, 534 B.R. at 918. To avoid dismissal under this section, “[c]ourts usually require the debtor do more than manifest unsubstantiated hopes for a successful reorganization.” Matter of Canal Place Ltd., 921 F.2d 569, 577 (5th Cir. 1991). Here, the Debtor’s woeful financial performance and poor financial condition, plus its current lack of post-petition financing and inability to use cash collateral, convinces this Court that there is a substantial or continuing loss to the estate, and there is no likelihood of a successful rehabilitation.
a. There is a Substantial or Continuing Loss to the Debtor’s Estate
Satisfying the first prong of § 1112(b)(4)(A) can be done in two ways. One approach is to prove that there is a substantial loss to the estate. In TMT, the court notes that it is not necessary to find both a substantial and continuing loss in order to meet the first prong of § 1112(b)(4)(A). 534 B.R. at 918. Focusing on “substantial loss,” the TMT court found that this phrase means that “the loss is sufficiently large given the financial circumstances of the debtor as to materially negatively impact the bankruptcy estate and interest of creditors.” Id. It further found that “negative cash flow alone can be sufficient cause to dismiss or convert under § 1112(b).” Id. (internal citation omitted).
Here, the Debtor has scheduled property with a total value of $3,098,230.24, which is completely encumbered. [Doc. No. 101, p. 8 of 8]. Further, the Debtor has scheduled the following debts: (1) a claim held by First NBC Bank for $4,167,907.64 secured by all of the Debtor’s property having a value of $3,098,322.24, leaving a deficiency of $1,069,585.40, [Doc. No. 101-1, p. 1 of 2]; and (2) unsecured claims totaling *441$3,426,099.75, [Doc. No. 101-2, p. 13 of 13]. Further, in the Debtor’s Monthly Operating Report ending April 30, 2017 (the “MOR”), the Debtor reported information reflecting that its cash flow has been negative. [Doc. No. 182]. The MOR reflects that the Debtor had a negative net cash flow of $64,864.27 for the month of April 2017. [Id. at p. 8 of 11]. Moreover, the MOR indicates that the Debtor has: (1) negative equity of $5,650,546.06, [id. at p. 3 of 11]; (2) a balance of $940,960,55 owed under its DIP loan, an increase of almost $850,000.00 since March 31, 2017, [id. at p. 4 of 11]; (3) post-petition liabilities of $1,026,249.80, [id.]; and (4) a post-petition net loss of $61,392.96 through April 30, 2017, [id. at p. 6 of 11]. Thus, just like the debtors in TMT, “[t]here is no doubt [that the Debtor has] suffered a substantial loss on a pure balance sheet basis.” 534 B.R. at 918. Further, the MOR shows that the Debtor is failing to make a profit. Therefore, this information alone sufficiently proves that the Debtor has suffered a “substantial loss” to its estate — one of the two conditions that satisfies the first prong of§ 1112(b)(4)(A).
The second approach to satisfying the first prong of § 1112(b)(4)(A) is to prove that there is a “continuing loss” to the estate. This term, as defined by the court in In re Moore Construction, Inc., requires courts to “look beyond a debtor’s financial statement and make a full evaluation of the present condition of the estate.” 206 B.R. 436, 437-38 (Bankr. N.D. Tex. 1997). Here, this full evaluation shows that the Debtor’s estate is suffering a continuing loss. First, Mr. Butler testified that if the effort to obtain additional post-petition financing failed, then it “would cause irreparable harm to the debtor” and the Debtor would be unable to “continue to operate any further.” [Mar. 10, 2017 Tr. 55:10-16], Proposed counsel for the Debtor informed the Court that such financing was not currently available. [Tape Recording, May 30, 2017 Hearing at 11:44:55-11:44:59 A.M.]. Hence, the Debtor can do nothing at this point but suffer continuing losses. Second, the existing interim DIP agreement requires that the Debtor transfer to Carousel all of the Debtor’s receivables and net cash proceeds, [Doc. No. 37-4, pp. 31-32 of 124]; therefore, the Debtor has no unencumbered property which can be used to obtain a second DIP loan from some lender other than Carousel. Third, Mr. Butler testified that the Debtor would likely be able to pay off Carousel by August and exit bankruptcy by October only if the Debtor was able to finalize the agreement with Sanchez. [Apr. 27, 2017 Tr. 18:14-21:13]; [Doc. No. 143, pp. 6-7 of 18]. However, there is no evidence that any agreement with Sanchez has come to fruition, which in turn means that the Debtor will not be able to pay off Carousel and successfully exit from bankruptcy. Taken collectively, these facts underscore that the Debtor is also operating at a “continuing loss,” which is an alternative basis for satisfying the first prong of § 1112(b)(4)(A).
In sum, the Court finds that there is a substantial loss to the Debtor’s estate, and that there is also a continuing loss to the Debtor’s estate. There is no question that the first prong of § 112(b)(4)(A) is satisfied.
b, There is No Reasonable Likelihood of Rehabilitation
The Court now turns to the second prong of § 1112(b)(4)(A): the likelihood of rehabilitation — or lack thereof. Collier’s Treatise defines this second prong as “whether the debtor’s business prospects justify continuance of the reorganization effort [and] ... [r]ehabiliation means to reestablish a business.” 7 Collier on Bankruptcy ¶ 1112.04(6)(a)(ii) (Alan N. Resnick & Henry J, Sommer eds., 16th ed. *4422017). The court in In re L.S. Good & Co. found that “rehabilitation,” as used in § 1112(b)(1)3 means “to put back in good condition; re-establish on a firm, sound basis.” 8 B.R. 315, 317 (Bankr. N.D.W. Va. 1980) (internal citation omitted). In that case, the court found that the likelihood of ■ rehabilitation did not exist when the court was “unaware of any sources offering to lend the capital essential to the rehabilitation” of the debtor. Id. at 318; see also Quarles v. U.S. Tr., 194 B.R. 94, 97 (W.D. Va. 1996) (finding that there was no likelihood of rehabilitation when debtor was generating no profits and reorganization depended on speculative outcomes); In re Cont'l Holdings, 170 B.R. 919, 931 (Bankr. N.D. Ohio 1994) (finding that there was no likelihood of rehabilitation when debtor lacked a reasonably certain source of income).
In another case, one of the creditors sought dismissal of the case by asserting that there was no possibility of reorganization because the Debtor had no source of income or funding for a plan of reorganization. In re 865 Centennial Ave. Assocs. Ltd., 200 B.R. 800, 809 (Bankr. D.N.J. 1996). In that case, the debtor had no equity in its property because its largest creditor held a lien exceeding the value of the property, and an expert testified that the business could not operate without outside financing. Id. at 811. Under these circumstances, the court agreed with the creditor and dismissed the case because the debtor failed to show that there was a “possibility of a successful organization.” Id. In so holding, the court noted that no matter how sincere a debtor may be, the court “is not bound to clog its docket with visionary or impracticable schemes of resuscitation.” Id. at 810. Further, it found that “[w]here the debtor has no cash flow and no source of income and where the claims against the property of the debtor exceed the property’s value, a debtor has not demonstrated a reasonable likelihood of rehabilitation and dismissal may be appropriate.” Id.
Here, the facts are very similar to L.S. Good and 865 Centennial. The Debtor has negative equity because First NBC Bank’s claim for $4,167,907.64 is secured by all of the Debtor’s assets worth only $3,098,322.24, leaving a deficiency of $1,069,585.40. [Doc. No. 101-1, p. 1 of 2]. Second, Mr. Butler, the individual who has substantial experience about how the Debtor’s business operates, [see, e.g., Mar. 10, 2017 Tr. 16:21-19:20], testified, uncon-troverted, that the Debtor’s operations would fail without post-petition financing, [id. at 55:10-16] — and here, there is no additional post-petition financing in place. Third, the MOR reflects that the Debtor had a negative net cash flow of $64,864.27 for the month of April 2017, a net loss of $61,362.96 through the month of April 2017, [Doc. No. 182, pp. 6, 8 of 11], and virtually no cash on hand as of April 30, 2017, [id. at p. 2 of 11]; therefore, the Debtor cannot — to use the L.S. Good court’s expression — be “put back in good condition.” 8 B.R. at 317. Under these circumstances, the Court finds that there is no reasonable likelihood of rehabilitation for the Debtor.
Finally, this Court, in assessing whether cause exists to dismiss a case under § 1112(b), should “consider other factors as they arise.” Brown, 951 F.2d at 572. Here, there are other factors. Carousel, *443the new 100% owner of the Debtor, wants the case dismissed. [Tape Recording, May 30, 2017 Hearing at 11:52:30-11:53:41 A.M.]. In addition, the case has a checkered history of proper filing. [Tape Recording, Mar. 3, 2017 Hearing at 2:08:08-2:11:22 P.M.]. Indeed, one court gave substantial weight to these facts when dismissing a case. See In re Real Homes, LLC, 352 B.R. 221, 222-28 (Bankr. D. Idaho 2005) (dismissing a bankruptcy case when the 100% owner did not authorize or ratify the filing and when the owner subsequently requested the case be dismissed).
Based upon all of the above-discussed circumstances, the Court finds that there is no reasonable likelihood of the Debtor’s rehabilitation; therefore, the second prong of § 1112(b)(4)(A) is satisfied.
IV. Conclusion
For the reasons stated herein, the Court finds that the Debtor’s case should be dismissed for cause pursuant to § 1112(b)(4)(A) because of the substantial or continuing loss to the Debtor’s estate and the absence of a reasonable likelihood of the Debtor’s rehabilitation. An order dismissing this case has already been entered on the docket. [Doc. No. 191].
. Irabel is currently insolvent and has been under receivership since April 4, 2017. [Apr. 27, 2017 Tr. 6:16-21],
. 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.
. This statute has been amended and is now § 1112(b)(4)(A). Compare Act of Nov. 8, 1978, Pub. L. No. 95-598, § 1112, 92 Stat. 2549, 2630 (1978) (creating "a uniform Law on the Subject of Bankruptcies” and defining reasons for dismissal under § 1112(b)(1)) with The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, § 442, 119 Stat. 23, 115-16 (2005) (amending title 11 and allowing dismissal for enumerated reasons under § 1112(b)(4)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500616/ | OPINION REGARDING MOTION FOR RELIEF FROM AUTOMATIC STAY
John T. Gregg, United States Bankruptcy Judge
This matter comes before the court on a motion for relief from the automatic stay [Dkt. No. 48] (the “Motion”) filed by Vanguard Energy Partners, LLC (“Vanguard”). In the Motion, Vanguard requests relief from the automatic stay to continue to arbitrate its claims and effectuate rights of setoff and/or recoupment against Patriot Solar Group, LLC (the “Debtor”). The Debtor, its prepetition secured lender, and one of its largest general unsecured creditors object to the Motion because enforcement of the arbitration provisions in various contracts between Vanguard and the Debtor would conflict with the underlying purposes of bankruptcy in this recently filed Chapter 11 case. They further argue that because Vanguard’s claims are disputed and unliquidated, Vanguard’s request for setoff and/or recoupment is premature. For the following reasons, the court shall deny the Motion.
JURISDICTION
The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G) (motions for relief from automatic stay).
BACKGROUND
The facts, at least as presented in the Motion and the objections thereto, are relatively straightforward. The Debtor supplies, delivers and mounts various components for customers in the solar power industry and employs seventeen full time employees. Prior to the petition date, Vanguard and four project owners entered into contracts whereby Vanguard agreed to construct solar electric generating systems, among other things, for the project owners. Vanguard, in turn, enlisted the Debtor to manufacture, construct and deliver ground mounted racking systems and related equipment for each of the four projects pursuant to four purchase orders (the “Purchase Orders”). Separately, the Debtor agreed to secure permits and unload and install equipment for Vanguard with respect to each of the four projects pursuant to four subcontractor agreements (the “Subcontractor Agreements”).2
In each of the Subcontractor Agreements, Vanguard and the Debtor agreed to submit any claims arising thereunder to binding arbitration. The Subcontractor Agreements all state as follows with respect to arbitration:
Contractor and Subcontractor ... agree to submit all claims, disputes and eontro-*455versies relating to this Agreement to binding arbitration in the State of New Jersey. All claims, disputes and controversies between the Parties arising out of this Agreement shall be decided by final and binding arbitration in accordance with the construction industry arbitration rules of the American Arbitration Association. Notice of the demand for Arbitration shall be filed in writing with the other Party and with the American Arbitration Association. Each Party agrees to have any claim, dispute or controversy arising out of this Agreement decided by a neutral arbitrator and each Party gives up any rights to have any such dispute litigated in a court or by jury trial.
(Subcontractor Agr. at § 9.1.)
The relationship between Vanguard and the Debtor soured soon after the Subcontractor Agreements were executed and the Purchase Orders were accepted. According to Vanguard, the Debtor was unable to perform under all of the Subcontractor Agreements and Purchase Orders for a variety of reasons. Vanguard thus contends that as a result of the Debtor’s breaches, it was forced to arrange for third parties to complete certain work under the Purchase Orders and the Subcontractor Agreements.
On February 14, 2017, Vanguard filed a demand for arbitration and a complaint against the Debtor with the. American Arbitration Association. In its demand and complaint, Vanguard sought damages under the Purchase Orders and the Subcontractor Agreements in the aggregate amount of approximately $3.4 million. The American Arbitration Association thereafter scheduled an initial conference in’the arbitration proceeding for March 7, 2017 in New Jersey.
On March 3, 2017, the Debtor commenced a civil action in the state court of Massachusetts for breach of contract against Vanguard and the surety bond issuer for the projects. Only three days ¡later and one day before the initial conference in the arbitration proceeding, the Debtor filed a voluntary petition for relief under Chapter 11 in this court. The Debtor is currently acting as a debtor in possession under sections 1107 and 1108 of the Bankruptcy Code.3 In its schedules, the Debtor identified Vanguard as holding a disputed claim in the approximate amount of $3.9 million. As of the date of the hearing on the Motion, Vanguard had not filed a proof of claim in this case.4
On April 13, 2017, Vanguard filed its Motion. Vanguard contends that in light of the arbitration provisions in all four Subcontractor Agreements, cause exists to grant it relief from the automatic stay to proceed with the arbitration of its claims against the Debtor and assert the right of setoff and the defense of recoupment.
The Debtor, supported by Huntington National Bank, its prepetition secured lender (“Huntington”), and Shape Corporation, one of its largest general unsecured creditors (“Shape”), filed an objection [Dkt. No. 55] (the “Objection”) in which it argues that under the facts and circumstances of the case, an inherent conflict exists between arbitration and the underlying purposes of the Bankruptcy Code.5 *456As such, the Debtor, Huntington and Shape maintain that the court has discretion whether to enforce the arbitration provisions in the Subcontractor Agreements, The Debtor, Huntington and Shape also assert that because Vanguard has not filed a proof of claim, it would be premature to decide whether Vanguard should be allowed to effectuate setoff and/or re-coupment.
The court held a hearing regarding the Motion on May 25, 2017. At the conclusion of the hearing, the court took the matter under advisement,
DISCUSSION
In its Motion, Vanguard argues that cause for relief from the automatic stay exists because its claims against the Debtor are subject to arbitration. Vanguard also somewhat generically contends that cause exists to allow it to assert rights of setoff and/or recoupment. Section 362 of the Bankruptcy Code provides that relief from the automatic stay should be granted for “cause.” 11 U.S.C. § 362(d)(1). Because “cause” is not defined in the Bankruptcy Code, courts should determine on a case by case basis whether relief from the automatic stay is appropriate. Laguna Assocs. Ltd. P’ship v. Aetna Cas. & Sur. Co, (In re Laguna Assocs. Ltd. P’ship), 30 F.3d 734, 737 (6th Cir. 1994) (citation omitted). One court has described “cause” as an “elastic concept,” which can vary depending on the stage in the proceedings at which the relief from stay is sought. Chrysler LLC v. Plastech Engineered Prods., Inc. (In re Plastech Engineered Prods., Inc.), 382 B.R. 90, 109 (Bankr. E.D. Mich. 2008) (citation omitted); see also Sumitomo Trust & Banking Co. v. Grand Rapids Hotel L.P. (In re Holly’s Inc.), 140 B.R. 643, 700 (Bankr. W.D. Mich. 1992) (burden on debt- or under section 362(d)(2) less stringent early in Chapter 11 case) (citation omitted). Notwithstanding this elasticity, the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the “Arbitration Act”) is entitled to great deference when relief from the automatic stay is sought in order to enforce an agreement to arbitrate. See In re Hermoyian, 435 B.R. 456, 463 (Bankr. E.D. Mich. 2010) (citation omitted).
A, The Federal Arbitration Act and the Bankruptcy Code
Under the Arbitration Act, a written agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The Arbitration Act represents “a liberal federal policy favoring arbitration agreements.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).
The Arbitration Act is intended to enforce private agreements to arbitrate while encouraging the “efficient and speedy resolution” of disputes. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). A court must therefore “rigorously enforce agreements to arbitrate even if the result is ‘piecemeal’ litigation, at least absent a countervailing policy manifested in another federal statute.” Id.; see 9 U.S.C. § 3; see also Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000) (identifying factors to consider when considering whether to enforce arbitration agreement in non-bankruptcy context). This requirement is not lessened when a party subject to an arbitration agreement raises a claim based on a statutory right. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987).
*457However, “[l]ike any statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional command.” Id. at 226, 107 S.Ct. 2332. In McMahon, the United States Supreme Court instructed lower courts to deduce such contrary congressional command by considering (i) the text of the statute, (ii) the statute’s legislative history, or (iii) an inherent conflict between arbitration and the statute’s underlying purposes. Id. at 227, 107 S.Ct. 2332. The party opposing enforcement of an agreement to arbitrate bears the burden “to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.” Id.
The Sixth Circuit Court of Appeals has not considered the intersection of the Arbitration Act and the Bankruptcy Code after McMahon. However, other circuit courts of appeal have overwhelmingly concluded that neither the text nor the legislative history of the Bankruptcy Code reflects a congressional intent to preclude enforcement of agreements to arbitrate in the context of a bankruptcy case. See, e.g., Cont’l Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1020 (9th Cir. 2012); Whiting-Turner Contracting Co. v. Elec. Mach. Enters., Inc. (In re Elec. Mach. Enters., Inc.), 479 F.3d 791, 796 (11th Cir. 2007); Mintze v. Am. Gen. Fin. Servs,, Inc. (In re Mintze), 434 F.3d 222, 231 (3d Cir. 2006); see also MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006) (addressing only whether inherent conflict exists); Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co., L.L.C.), 403 F.3d 164 (4th Cir. 2005) (same).6
In this case, it is clear that Vanguard and the Debtor intended to arbitrate their disputes arising under the Subcontractor Agreements. None of the parties suggests that the Subcontractor Agreements or the arbitration provisions therein are unenforceable. Moreover, the scope of the arbitration provisions in the Subcontractor Agreements is fairly broad, as it encompasses any and all claims of Vanguard and the Debtor under the Subcontractor Agreements (but not necessarily the Purchase Orders). Finally, the Debtor does not contend that the Bankruptcy Code or its legislative history preclude enforcement of agreements to arbitrate. Therefore, the sole issues before this court are whether an inherent conflict exists between arbitration and the underlying purposes of the Bankruptcy Code and, if so, whether the court should exercise its discretion by declining to enforce the parties’ agreement to arbitrate.
1. Core v. Non-Gore Distinction
In deciding whether an inherent conflict exists and as a threshold matter, courts are required to determine whether the dispute that would be subject to arbitration is a core or non-core proceeding pursuant to 28 U.S.C. § 157(b). See, e.g., In re Elec. Mach. Enters., Inc., 479 F.3d at 796; Ackerman and Kuriloff v. Eber (In re Eber), 687 F.3d 1123, 1130 n.6 (9th Cir. 2012).7 Where the dispute is a non-core *458proceeding, a court is generally without discretion to preclude the enforcement of the arbitration provision and the inquiry ends. See, e.g., In re Elec. Mach. Enters., Inc., 479 F.3d at 796. If, however, the dispute is a core proceeding, the court moves to the next step in the analysis— whether enforcement of such agreement would inherently conflict with the underlying purposes of the Bankruptcy Code. See, e.g., id.
The Sixth Circuit Court of Appeals has held that the allowance or disallowance of claims arising under state law, like Vanguard’s claims in this case, is a core proceeding under 28 U.S.C. § 157(b)(2)(B). In re Bavelis, 773 F.3d at 157. Other courts have similarly concluded that the allowance or disallowance of claims against a debtor’s estate through arbitration is a core proceeding. See In re Thorpe Insulation Co., 671 F.3d at 1021-22 (relying on 28 U.S.C. § 157(b)(2)(A)-(B)); In re White Mountain Mining Co., L.L.G., 403 F.3d at 168-69 (same); Smith-Boughan, Inc. v. SunTrust Bank (In re GOE Lima, LLC), 2009 WL 2901524, at *4 (Bankr. N.D. Ohio Sept. 1, 2009) (relying on 28 U.S.C. § 157(b)(2)(B)); cf. In re Elec. Mach. Enters. Inc., 479 F.3d at 798 (state law claim by debtor against creditor was non-core).
In its Motion, Vanguard acknowledges the core nature of its claims against the Debtor’s estate by quoting favorably from Hermoyian. See 435 B.R. at 464 (determination of debt owed by debtor to creditor is core proceeding). However, at the hearing on the Motion and without directing the court to any relevant authority, Vanguard suggested that the dispute might be a non-core proceeding. In light of 28 U.S.C. § 157(b)(2)(B) and Sixth Circuit precedent, this court finds such argument without merit. See In re Bavelis, 773 F.3d at 157. The liquidation of Vanguard’s claims against the Debtor through arbitration would clearly be a core proceeding.8
2. Inherent Conflict Between Arbitration and the Bankruptcy Code
The fact that the dispute between Vanguard and the Debtor is a core proceeding is not in and of itself determinative. See Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Nat’l Gypsum Co.), 118 F.3d 1056, 1067 (5th Cir. 1997) (noting that not all core proceedings will result in inherent conflict with Arbitration Act). The court must next consider whether enforcement of the arbitration provisions in the Subcontractor Agreements inherently conflict with the underlying purposes of the Bankruptcy Code. See, e.g., In re Elec. Mach. Enters., Inc., 479 F.3d at 796. Confronted with the same question, the Second Circuit Court of Appeals explained that:
[E]ven as to core proceedings, the bankruptcy court will not have discretion to override an arbitration agreement unless it finds that the proceedings are based on provisions of the Bankruptcy *459Code that “inherently conflict” with the Arbitration Act or that arbitration of the claim would “necessarily jeopardize” the objectives of the Bankruptcy Code. This determination requires a particularized inquiry into the nature of the claim and the facts of the specific bankruptcy. The objectives of the Bankruptcy Code relevant to this inquiry include “the goal of centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders.” If a severe conflict is found, then the court can properly conclude that, with respect to the particular Code provision involved, Congress intended to override the Arbitration Act’s general policy favoring the enforcement of arbitration agreements.
Hill, 436 F.3d at 108 (emphasis added) (internal citations omitted) (quoting McMahon, 482 U.S. at 227, 107 S.Ct. 2332); see also NLRB v. Bildisco and Bildisco, 465 U.S. 513, 528, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) (general purpose of bankruptcy is to prevent debtors from going into liquidation resulting in a loss of jobs and possible misuse of economic resources).
There is no uniformly-adopted test in order to determine whether an inherent conflict exists. Instead, such determination should be made on a case-by-case basis, considering all of the relevant facts in a particular case. See Hill, 436 F.3d at 108; see also In re No Place Like Home, Inc., 559 B.R. at 877 (citations omitted) (identifying non-exclusive list of factors to consider).
In its Motion, Vanguard devotes minimal discussion to the specific facts of this case. As its primary argument, Vanguard again relies on Hermoyian, this time for the proposition that forums other than bankruptcy courts frequently determine the validity and amount of a debt owed by a debtor to a creditor. 435 B.R. at 465.9 While Hermoyian is well-reasoned, it is distinguishable from the facts in this case.
In Hermoyian, the court granted the creditor relief from the automatic stay solely to liquidate its state law claims through arbitration, but denied the creditor’s request to arbitrate the remaining issues under section 523(a) and 727. Id. at 467. The court based its decision in large part on judicial economy, noting that a trial was scheduled to occur in the state court a mere five days before the debtor and the creditor agreed to arbitrate. Id. at 458. The court also found persuasive the lack of prejudice to other creditors given the no-asset nature of the case, and the fairly ambitious arbitration schedule that had been established by the mediator and the parties. Id. at 459-60.
After the debtor filed a motion for reconsideration, the court concluded that there was no palpable error with respect to its previous decision and reiterated that cause existed to grant relief from the automatic stay. Id. at 461. According to the court, although disputes under sections 523(a) and 727 are core, no conflict existed between arbitration and the underlying *460policy of a centralized forum for claims resolution so as to ensure an orderly distribution of assets from the estate. Id. at 464. In reaching this conclusion, the court emphasized “there are no claims to be resolved nor assets to be distributed in this Chapter 7 case.” Id.
The facts in this case are much different from those in Hermoyian, Most importantly, Hermoyian involved a liquidation under Chapter 7 where there we no assets available for distribution to other creditors. Here, the Debtor seeks to reorganize through Chapter 11' and provide some form of distribution to its creditors through a plan or perhaps a sale of its assets. Other creditors therefore have a direct interest in the liquidation of Vanguard’s claim, which is alleged to be close to $4 million and will likely significantly reduce the amount available for distribution to those creditors. Huntington and Shape both appeared at the hearing on the Motion and advised the court that they are inclined to participate in the claims resolution process. See 11 U.S.C, § 502(a) (providing party in interest, not just trustee or debtor in possession, may object to claim). In the event the arbitration is recommenced, Huntington and Shape would be denied this opportunity.
In addition, it is unclear if judicial economy would be served by enforcing the arbitration agreement. Unlike in Hermoyian, Vanguard and the Debtor were not on the cusp of a trial, and the arbitration had yet to commence beyond the scheduling of the initial conference. See Bill Heard Chevrolet Corp.-Orlando v. Blau (In re Bill Heard Enters., Inc,), 400 B.R. 806, 813 (Bankr. N.D. Ala. 2009) (concluding arbitration should continue because, among other things, it was pending for over seven years before bankruptcy filed); In re Shores of Panama, Inc., 387 B.R. 864, 867 (Bankr. N.D. Fla. 2008) (concluding arbitration should continue because discovery commenced and preliminary matters decided in arbitration pending for more than two years). Instead, Vanguard made its arbitration demand less than a month before the Debtor filed for bankruptcy. Simply put, the arbitration proceeding was in its infancy. Moreover, because Vanguard has not come forward with a proposed arbitration schedule, the court is unable to determine if efficiency would be promoted by enforcing the agreement to arbitrate. Vanguard’s reliance on Hermoyian■ is therefore misplaced given the facts and circumstances in this case.
The court is more persuaded by the arguments advanced by the Debtor. In its Objection, the Debtor maintains that enforcement of the arbitration provision would deprive the Debtor of the relief that Chapter 11 is intended to provide, including modification of rights between debtors and creditors by centralizing disputes in the bankruptcy court. The Debtor asserts that it desperately needs a respite from the dispute with Vanguard in order to avoid immediate liquidation. The Debtor points to its limited resources, including the cash necessary to fund the arbitration which is subject to an agreement with Huntington for the use of cash collateral. Finally, the Debtor emphasizes that at least two creditors, and perhaps even the Official Committee of Unsecured Creditors (the “Committee”), should be afforded an opportunity to participate in the claims resolution process.10
The Debtor directs this court to White Mountain Mining Co., L.L.C., where the Fourth Circuit Court of Appeals affirmed *461the lower courts’ decisions that an inherent conflict existed between arbitration and bankruptcy. 403 F.3d at 164. Noting that centralization of disputes between debtors and creditors is particularly critical in Chapter 11 cases, the Fourth Circuit concluded that the bankruptcy court’s decision was not clearly erroneous when it found, among other things, that arbitration (i) would make it difficult for the debtor to attract additional funding, (ii) would undermine creditor confidence in the debtor’s ability to reorganize, (iii) would undermine confidence of third persons conducting business with the debtor, and (iv) impose additional costs on the estate while diverting the attention of the debtor’s management, even though the debtor was not a named party in the arbitration. Id. at 170.
This court agrees with the reasoning in White Mountain Mining Co. at this stage of the Debtor’s case. One of the underlying purposes of bankruptcy is to provide the debtor with a breathing spell during which it can develop a strategy for its exit from bankruptcy. See Bildisco, 465 U.S. at 532, 104 S.Ct. 1188; Md. v. Port Admin. v. Premier Auto. Servs., Inc. (In re Premier Auto. Servs., Inc.), 492 F.3d 274, 284 (4th Cir. 2007) (citation omitted). At the hearing on the Motion, the Debtor advised the court that it anticipated filing a plan of reorganization. The Debtor further noted that recommencement of the arbitration, including the assertion of setoff rights against Huntington’s collateral, would interfere with its efforts to execute a rehabilitation strategy. Cf. In re GOE Lima, LLC, 2009 WL 2901524, at *4 (debt- or failed to demonstrate that arbitration would seriously interfere with reorganization efforts under proposed plan). Because this case is less than four months old, the court agrees that the Debtor should be given a reasonable period of time to propose a plan or market its assets for sale without simultaneously having to devote significant time and resources towards arbitration with Vanguard.
Finally, the court notes that granting relief from the automatic stay to allow arbitration might result in piecemeal litigation. Kirkland v. Rund (In re EPD Inv. Co., LLC), 821 F.3d 1146, 1150 (9th Cir. 2016). Although the Subcontractor Agreements require arbitration of any disputes arising thereunder, Vanguard is also seeking to arbitrate its claims against the Debtor for breach of the Purchase Orders, under which Vanguard claims separate damages. The Purchase Orders were not attached to the Motion, and at the hearing Vanguard was unable to definitively state whether they contain an arbitration provision or somehow incorporate the terms of the Subcontractor Agreements. Without more, a possibility exists that the Debtor would be forced to unnecessarily expend time and resources by having to litigate in two forums.
For the foregoing reasons, the court finds that an inherent conflict exists between arbitration and the underlying purposes of Chapter 11. The court shall therefore exercise its discretion by denying without prejudice Vanguard’s request to enforce the parties’ agreement to arbitrate.11
*462
B. Exercise of Right of Setoff and/or Defense of Recoupment
In its Motion, Vanguard also seeks relief from the automatic stay in order to exercise its right of setoff and assert the defense of recoupment. The right to setoff permits persons that owe money to one another to apply their mutual debts against one another. In re Gordon Sel-Way, Inc., 270 F.3d 280, 290 (6th Cir. 2001) (citing Citizens Bank of Md. v. Strumpf 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995)). Although the Bankruptcy Code does not provide a federal right to setoff, section 553 generally preserves the rights that arise under applicable non-bankruptcy law. See id. To establish a right of setoff, the party must show, among other things, that there are mutual obligations owed between the parties. Ky. Cent. Ins. Co. v. Brown (In re Barbar Corp.), 177 F.3d 439, 445-47 (6th Cir. 1999). If a party meets the requirements of section 553, the presumption is in favor of setoff, but the court has discretion to deny a setoff where setoff might prejudice third parties. Id. at 447.
Vanguard provides minimal discussion as to why setoff is appropriate. Instead, it generically states that “[t]here is no reason why Vanguard should not be granted relief from the automatic stay to exercise its rights to setoff in this case.” The court finds Vanguard’s request for setoff to be deficient. The Motion lacks any explanation as to how Vanguard satisfies the right of setoff under applicable non-bankruptcy law. See Fed. R. Bankr. P. 9013 (motion required to state grounds for relief with particularity); see also In re Sharif 564 B.R. 328, 367 (Bankr. N.D. Ill. 2017) (court should not have to hunt for basis for relief requested). Moreover, as the Debtor and Huntington stress, Vanguard’s- claims are currently disputed and unliquidated. Finally, the Motion is less than clear regarding the effect of setoff on Huntington’s collateral. As such, the court declines to grant relief from the automatic stay at this time to allow Vanguard to exercise its alleged right of setoff.
Unlike setoff, recoupment is in the nature of a defense to a claim. Malinowski v. N.Y. State Dept. of Labor (In re Malinowski), 156 F.3d 131, 133 (2d Cir. 1998) (citations omitted). Recoupment permits a party to redpce the amount of the other party’s claim to the extent that it has a valid defense arising out of the same transaction or same series of transactions. See, e.g., In re Reeves, 265 B.R. 766, 769-70 (Bankr. N.D. Ohio 2001). Unlike setoff, recoupment does not require the existence of mutual debts. In re Gaither, 200 B.R. 847, 850 (Bankr. S.D. Ohio 1996) (collecting authorities).
Vanguard cites to general legal principles and conclusively states that re-coupment is appropriate because its claims arise out of the same contract or a series of integrated contracts. Vanguard offers nothing more. Although Vanguard may use the defense of recoupment without authorization from the court, Vanguard has expressly requested it in the Motion. See In re Delicruz, 300 B.R. 669, 679-80 (Bankr. E.D. Mich. 2003). To the extent Vanguard desires court approval before raising the defense of recoupment, the court finds such request to be premature. The Debtor has yet to assert any claims against Vanguard in this case. In addition, Vanguard has not provided any detail as to why its claims arise out of the same contracts or a series of integrated contracts. Presumably, there is a basis. However, without a more detailed explanation, such relief is inappropriate, to the extent it is even necessary. *463For those reasons, the court shall deny the Motion as it pertains to recoupment.
CONCLUSION
Based on the specific facts and circumstances of this recently filed Chapter 11 case, the court concludes that an inherent conflict exists between arbitration and the underlying purposes of bankruptcy. The Debtor has satisfied its burden, at least for the time being, that arbitration at this stage of the case would circumvent the objectives of Chapter 11. Moreover, Vanguard has not sufficiently pled its requests to exercise setoff and/or recoupment. The Motion is therefore denied without prejudice. The court shall enter a separate order consistent with this Opinion.
. According to the Subcontractor Agree'ments, Vanguard and the Debtor may have entered into a third agreement for each of the four projects. The Subcontractor Agreements refer to a "Prime Contract.” However, Vanguard did not address the “Prime Contracts” in its Motion or during the hearing on the Motion. The court is^ therefore uncertain whether the “Prime Contracts” constitute a third agreement* in connection with each project, or whether they are simply another name for the Purchase Orders.
Similarly, Appendix A to the Subcontractor Agreements refers to a “Master Subcontractor Agreement.” It is unclear whether the “Master Subcontractor Agreement” is the form upon which the Subcontractor Agreements are based, or whether the “Master Subcontractor Agreement” is a separate document establishing general terms and conditions that supplement the Subcontractor Agreements.
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101 et seq. Specific sections of the Bankruptcy Code are identified as "section
. A review of the claims register as of the date of this Opinion reveals that Vanguard has yet to file a proof of claim. However, the Debtor has not requested, and the court has not set, a bar date for filing proofs of claim.
.Huntington also filed a short objection [Dkt. No. 60],
. Prior to McMahon, the Sixth Circuit had held that a bankruptcy court could simply exercise its discretion without further constraint when considering whether to enforce an arbitration agreement, In re No Place Like Home, Inc., 559 B.R. 863, 871 (Bankr. W.D, Tenn. 2016) (citations omitted). McMahon overruled such holding by requiring an inherent conflict before a court exercises its discretion. See id. at 871-82.
. A core proceeding is generally defined as “one that either invokes a substantive right created by federal bankruptcy law or one which could not exist outside of the bankruptcy.” Bavelis v. Doukas (In re Bavelis), 773 F.3d 148, 156 (6th Cir. 2014) (citations omit*458ted). A non-core proceeding, on the other hand, is a matter that (i) is not a core proceeding under 28 U.S.C. § 157(b)(2), (ii) existed prior to the bankruptcy, (iii) would continue to exist independent of the Bankruptcy Code, and (iv) is not significantly affected by the filing of the bankruptcy case. Id. (citations omitted).
. The court finds it noteworthy that Vanguard has not filed a proof of claim in this case. Regardless of its reasons for not doing so, Vanguard clearly seeks to liquidate its claims in arbitration so that it can subsequently file a proof of claim and assert rights - of setoff against the Debtor’s estate. If Vanguard has no intention of collecting from the Debtor’s estate, the court invites Vanguard to promptly renew its Motion after expressly waiving its rights to receive a distribution from the Debt- or’s estate and effectuate setoff.
. In its Motion, Vanguard also passively cites to two other decisions which purportedly support its request for relief from the automatic stay to enforce the agreement to arbitrate. Both decisions are distinguishable given the specific facts in this case. See In re Elec. Mach. Enters., Inc., 479 F.3d at 799 (proceeding not core, and even to extent it was, trial court failed to make sufficient findings); Dixon v. Household Realty Corp. (In re Dixon), 428 B.R. 911, 916 (Bankr. N.D. Ga. 2010) (to extent debtor’s Truth in Lending Act claims against mortgagee were even core, debtor failed to demonstrate inherent conflict based on specific circumstances).
. The Debtor's argument regarding participation from the Committee is somewhat dubious. Although the Committee has been formed [Dkt. No. 30], it has yet to take any formal action in this case, including the retention of legal counsel.
. The Debtor’s breathing spell is by no means infinite. According to the docket, the Debtor has done very little in this case to date. For example, the Debtor has not filed a motion to set a bar date, which is often viewed as a prerequisite to the filing of a plan, Nor has the Debtor retained an investment banker to explore any potential sale. As time passes, Vanguard's request for relief from the automatic stay to recommence the arbitration will become more compelling to the court. See In re Plastech Engineered Prods., Inc., 382 B.R, at 111. While the Debtor is afforded time *462to develop a rehabilitation strategy, it cannot hide in bankruptcy forever. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500618/ | MEMORANDUM DECISION
Catherine J. Furay, U.S. Bankruptcy Judge
On July 18, 2016, Bradley A. Strom (“Strom” or “Debtor”) commenced the instant bankruptcy case by filing a voluntary petition under chapter 7 of the Bankruptcy Code. He received a discharge on February 13, 2017. The Trustee filed a Final Report on December 20, 2016. Lakeview Care Partners, Inc. (“Lakeview”), a creditor, filed an objection to the Final Report. Lakeview asks the Court to disapprove the Final Report and require the Trustee to pursue collection of the amount of the Lakeview debt from Strom’s ex-wife, Cheryl Dettmering (“Dettmering”), on the ground it is excepted from discharge pursuant to 11 U.S.C. § 523(a)(15) as a debt assigned to Dettmering by the terms of the parties’ Marital Settlement Agreement (“MSA”).
The Court has jurisdiction over this proceeding by virtue of 28 U.S.C. § 1334(b), and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
The parties do not dispute the relevant facts. Dettmering petitioned for dissolution of her marriage to the Debtor on February 17, 2012. A Judgment of Divorce incorporating the provisions of the MSA was entered on March 17, 2014. The MSA assigned responsibility for the Lakeview debt to Dbttmering. On February 25, 2015, Lakeview filed suit against Dettmering and the Debtor claiming the sum of $101,362.50 for services provided to Strom in 2012 and 2013. Lakeview was granted a judgment against both parties, jointly and severally.
Dettmering filed bankruptcy on December 29, 2016. She received a discharge on April 25, 2016. Lakeview was listed as a creditor. Their claim was discharged in her case.
As indicated, Strom filed this bankruptcy case in July 2016. Lakeview was scheduled as a creditor and filed a proof of claim. Strom received a discharge that included discharge of the Lakeview debt. Thus, neither Strom nor Dettmering have any remaining liability on the Lakeview debt.
Despite the discharges of the debt to Lakeview, it argues the Trustee should pursue collection from Dettmering. Its argument is based on the theory that since responsibility for payment was assigned to Dettmering by the MSA, it is a nondis-chargeable debt owed to a former spouse and the Trustee should be required to step into the shoes of the debtor to enforce the MSA and collect the amount of the Lake-view judgment from her.
DISCUSSION
Section 523(a)(15) of the Bankruptcy Code provides in relevant part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
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(15) to a spouse, former spouse, or child of the debtor and not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit[J
11 U.S.C. § 523(a)(15) (emphasis added).
Section 523(a)(15) governs the dischargeability of property settlement debts as opposed to support obligations. This exception was intended to negate the *497distinction between support and property-division provisions (except in Chapter 13 cases) by making both support and nonsupport debts nondischargeable. Hebel v. Georgi (In re Georgi), 459 B.R. 716, 720 (Bankr. E.D. Wis. 2011). All debts owed to a spouse, former spouse, or child of a debtor are nondischargeable if incurred during a marital dissolution proceeding. Zimmermann v. Hying (In re Hying), 477 B.R. 731, 735 (Bankr. E.D. Wis. 2012).
When deciding whether a particular debt falls within a section 523 exception, the statute is generally construed strictly against the creditor and liberally in favor of the debtor. In re Morris, 223 F.3d 548, 552 (7th Cir. 2000). That policy is somewhat varied when the debt at issue arises from a divorce agreement or decree. In re Crosswhite, 148 F.3d 879, 881-82 (7th Cir. 1998). The reason for the tempering of the policy in divorce-related obligations is the determination of Congress that sections 523(a)(5) and (15) express intent to protect former spouses in matters of alimony, maintenance, support and divorce-related obligations despite the Code’s fresh start policy. Id.
Were the applicability of section 523(a)(15) to a support obligation or property division the sole issue, the inquiry would end here. However, the fundamental dispute is whether there is an obligation or debt to the Debtor that could form the basis for a claim against Dettmering.1 In other words, whether any claim, debt or obligation was extinguished when both the Debtor and Dettmering received discharges of the debt to Lakeview.
A provision in a divorce decree to hold harmless or indemnify a spouse for joint obligations incurred during a marriage creates a “new” debt, running solely between the former spouses. Schweitzer v. Schweitzer (In re Schweitzer), 370 B.R. 145, 150 (Bankr. S.D. Ohio -2007). While this “new” debt is “incurred” through the divorce decree, the parties’ personal liability with respect to their joint third party creditors remains unless discharged. Damschroeder v. Williams (In re Williams), 398 B.R. 464, 469 (Bankr. N.D. Ohio 2008). As explained in Wellner v. Clark (In re Clark):
[T]he exception to discharge for “hold harmless” agreements may not provide protection from creditors for the non-debtor spouse. The debts owed to the joint creditors are discharged as to the debtor only. The obligation that is not dischargeable in these situations is a debtor’s responsibility to hold his non-debtor, ex-spouse harmless. The non-debtor ex-spouse may look to the debtor for reimbursement pursuant to any non-dischargeable “hold harmless” obligations, but the non-debtor ex-spouse is not immune from pursuit by the primary joint creditors.
207 B.R. 651, 657 (Bankr. E.D. Mo. 1997).
Dettmering incurred that “new debt” when the judgment incorporating the MSA was granted. The liability of the Debtor on any joint debts or debts subject to recovery under the Lakeview judgment continued to exist as to him, even though Dett-mering was assigned payment of those debts in the decree, because at the time of her bankruptcy he was still subject to pursuit by Lakeview, However, he is no longer exposed to collection action by Lakeview because his liability on that debt has been discharged. Thus, there is no debt owed by him and any contingent liability has been extinguished.
*498The facts in this case distinguish it from all the cases relied upon by Lakeview. In each of the cases cited by Lakeview, the non-debtor spouse remained liable on a debt and was at risk of collection actions. That is not the case here.
Lakeview is not entitled to collect from either the Debtor or Dettmering. There is no circumstance under which Strom has any exposure or liability on the Lakeview debt. Thus, Lakeview seeks to accomplish indirectly — having the trustee pursue collection of the amount of its judgment— what it could not accomplish directly— collecting the amount itself. This is contrary to the fresh start policies of the Code and to the purpose underlying the exception to discharge.
The legislative history of section 523(a)(15) provides further confirmation that pursuit of the amount of the Lakeview claim under an indemnity or hold harmless theory is without basis:
The ... exception ... must be raised in an adversary proceeding during the bankruptcy case ... [otherwise the debt in question is discharged. The exception applies only to debts incurred in a divorce or separation that are owed to a spouse or former spouse, and can be asserted only by the other party to the divorce or separation. If the debtor agrees to pay marital debts that were owed to third parties, those third parties do not have standing to assert this exception, since the obligations to them were incurred prior to the divorce or separation agreement. It is only the obligation owed to the spouse or former spouse — an obligation to hold the spouse or former spouse harmless— which is within the scope of this section. See In re MacDonald, 69 B.R. 259, 278 (Bankr. D.N.J. 1986).
140 Cong. Rec. H10752, H10770 (daily ed. Oct. 4, 1994) (statement of Chairman Brooks) (emphasis added).
Lakeview argues that while there was no specific hold harmless or indemnification in the MSA related to the Lakeview debt, it can be inferred. Even though such provisions can be implied and obligations in an MSA create a “new” debt, that does not change the outcome in the present case. The personal liability of both Strom and Dettmering with respect to Lakeview was discharged. There is no longer any obligation that could be subject to a hold harmless. Since Strom is immune from pursuit by Lakeview, there is no debt or claim he could pursue against Dettmering under the MSA. Lakeview cannot revive its claim against Dettmering in this creative manner. There is no longer a debt or claim between Strom and Dettmering under the MSA for the Lakeview debt and, therefore, nothing to be pursued by the Trustee.
CONCLUSION
There is no indication in the Code or its history that Congress considered it important that a debtor’s creditors be protected by requiring a trustee to pursue recovery from an ex-spouse for payment of a contingent debt that has been discharged as to the debtor and the ex-spouse. For the reasons stated above, the objection to the Final Report is overruled. An order consistent with this Memorandum Decision will be entered.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
. A "claim” includes contingent liabilities. 11 U.S.C. § 101(5). Section 101(12) defines "debt” as "liability on a claim.” Section 523 addresses exceptions to debts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500619/ | MEMORANDUM DECISION
Michael E. Ridgway, United States Bankruptcy Judge
This matter comes before the Court on motion of CAB West LLC, as serviced by Ford Motor Credit Company LLC (“CAB West” or the “movant”). CAB West seeks either allowance of an administrative expense priority claim under 11 U.S.C. § 503(b) or dismissal of the case under 11 U.S.C. § 1307(c)(6). The debtor, Dawn Marie Reiser (“the debtor” or “Ms. Reiser”), filed an objection, as did the chapter 13 trustee, Gregory A. Burrell. A hearing on the motion was held on May 18, 2017, after an order confirming the debtor’s modified post-confirmation chapter 13 plan was docketed, on May 4, 2017. Bradley J. Hal-berstadt represents CAB West. Nicole Anderson represents the debtor. Jeffrey M. Bruzek represents the chapter 13 trustee. Based on the record, the matter is ready for disposition.
This memorandum decision constitutes the Court’s findings of facts and conclusions of law under Fed. R. Bankr. P. 7052, made applicable to contested matters under Fed. R. Bankr. P. 9014(c). The Court has jurisdiction here through 28 U.S.C. §§ 1334 and 157. This matter qualifies as a *500core proceeding under 28 U.S.C. § 157(b)(2)(B).
The Background
The necessary background information is straightforward. Ms. Reiser leased a 2014 Ford Edge from CAB West.1 She filed her petition under chapter 13 of the Bankruptcy Code;2 her plan was filed on June 4, 2015. She later filed a modified plan on December 1, 2015, which was confirmed on January 11, 2016. After confirmation of that plan, she filed yet another modified plan; this one was'confirmed on May 4, 2017. At no point did the movant voice an objection to any plan.
The unopposed, confirmed plan now in force treats the claims of the debtor’s creditors. In relation to the movant, the plan states in part:
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ECF No. 38. By its terms, “cure provi- plan].” Paragraph 7 goes on to state: sions, if any, are set forth in ¶ 7 [of this
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Id. Paragraph 9 of this plan handles the der 11 U.S.C. § 507: treatment of claims entitled, to priority un-
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Id, The plan reshaped the relationship of rights as between Ms. Reiser and the mov-ant, as well as her other creditors. Yet, the movant filed a motion seeking to sculpt its rights after the clay had already hardened — by way of plan confirmation.
The Court confirmed the modified post-confirmation plan on May 4, 2017, and the movant’s hearing on this motion3 occurred on May 18, 2017. In its motion, the movant wants $3,602.864 elevated, in relation to *501general unsecured creditors, to the status of an administrative expense claim under § 503(b)(1)(A) for “actual, necessary costs and expenses of preserving the estate[.]” 11 U.S.C. § 503(b)(1)(A). In the alternative, the movant sought dismissal of the debtor’s case under § 1307(c)(6), for a “material default by the debtor with respect to a term of a confirmed plan.” 11 U.S.C. § 1307(c)(6). At the hearing, the Court denied the movant’s alternative relief sought. Thus, one issue remains.
The Issue
With some exceptions, section 1327 of the Bankruptcy Code binds the debtor and her creditors to the terms of a confirmed chapter 13 plan. Here, a confirmed chapter 13 plan exists. May the movant nevertheless achieve administrative expense claimant status under § 503(b)(1)(A), even though the confirmed chapter 13 plan does not provide for that treatment?
The Binding Effect of a Confirmed Chapter 13 Plan
Section 1327(a) of the Bankruptcy Code is the fountainhead for the binding effect of a confirmed chapter 13 plan. 11 U.S.C. § 1327(a). The Bankruptcy Code supplies this binding effect through these words: “(a) The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan,” Id.
Courts have illumined with insight the effect of § 1327(a). In IMPAC Funding Corp. v. Simpson (In re Simpson), the Bankruptcy Appellate Panel for the Eighth Circuit identified that, “The Eighth Circuit has noted that the binding effect of a confirmed plan may result in res judicata on claims that were or could have been decided in the confirmation process.” 240 B.R. 559, 561 (8th Cir. BAP 1999) (citing Harmon v. United States, 101 F.3d 574, 582-83 n. 5 (8th Cir. 1996). After, in In re Simpson, the court catalogued cases, including one that discusses the binding effect of a confirmed chapter 13 plan, as “a tenet of res judicata,” and others that discuss the effect without reliance upon res judicata. Id. at 561-62. The court then extracted this kernel of law from those cases:
The sum of the judicial decisions that have considered the statutorily binding effect of a confirmed plan of reorganization is that if the confirmed plan treats the creditor, and if the creditor received proper notice of the plan and its proposed confirmation, the creditor’s only potential remedy for a plan it doesn’t like is to appeal the order of confirmation.
Id. at 562; see also, In re Siemers, 205 B.R. 583, 586 (Bankr. D. Minn. 1997) (“If a creditor doesn’t like the treatment of its claim under the terms of a proposed plan, the creditor’s remedy is to object to confirmation, not to ignore the plan and try to attack it later.”).5
*502The binding effect of a confirmed chapter 13 plan decides this issue. In paragraph 9 of the confirmed chapter 13 plan, claims entitled to priority under § 507 are classified. Section 507 of the Bankruptcy Code ranks the priority of ten categories of certain unsecured claims, providing first priority to claims under § 507(a)(1), and tenth priority to claims under § 507(a)(10). 11 U.S.C. § 507(a)(l)-(10). A category of claims that receives a second priority under § 507 is an administrative expense claim for “actual, necessary costs and expenses of preserving the estate” under § 503(b)(1)(A) — the sought status of the movant. 11 U.S.C. § 507(a)(2). Here, paragraph 9 of the debtor’s confirmed plan does not list a claim of CAB West for any amount as one entitled to priority under § 507. Because the confirmed plan binds parties, and because the plan did not treat CAB West as an administrative expense claimant, the Court will not either.
Conclusion
For the foregoing reasons, CAB West is not entitled to an administrative expense claim under 11 U.S.C. § 503(b)(1)(A). The terms of the confirmed chapter 13 plan bind CAB West.
Accordingly, the movant’s motion for allowance of an administrative priority expense claim, or for case dismissal, is DENIED.
IT IS ORDERED.
. No party disputes that the debtor surrendered the vehicle to the movant in January of 2017.
. Unless stated otherwise, references to the "Bankruptcy Code" or to specific statutory sections in this memorandum decision are to 11 U.S.C. §§ 101-1532.
. CAB West attached the debtor’s now confirmed chapter 13 plan as exhibit C to its motion. ECF No. 40 at 8-10.
.The movant calculated $3,602.86 by the addition of $582.40 for "Excessive Wear/Tear,” $1,292.86 for "Payments Owed,” $1,579.00 for "Excess Mileage Charge,” and $148.60 for "Taxes.” ECF No. 40 at 2. [$582.40 + $1,292.86 + $1,'579.00 + $148.60 = $3,602.86], ["Excessive Wear/Tear” + "Payments Owed” + "Excess Mileage Charge" + “Taxes” = Total], Id.
. The binding effect of a confirmed chapter 13 plan is not boundless. There are limited, recognized exceptions to this binding effect. See, e.g., Hon. Joan N. Feeney, Hon. Michael G. Williams & Michael J. Stepan, Bankruptcy Law Manual § 13:44 (5th ed. 2017) ("In general, a final order confirming the plan is binding as to the rights and liabilities of all creditors, unless confirmation is revoked under § 1330, the case is converted or dismissed under § 349, or there are due process defects in the notice of the plan. Where a plan fails to provide adequate notice and specificity of the proposed treatment of a claim, it will not be given binding effect.”) (citations omitted) (collecting cases). A discussion of the application of each of those exceptions will ensue.
There can be no sustainable argument that any of the recognized exceptions apply to CAB West. No revocation of the confirmed plan occurred under § 1330. There has been no conversion or dismissal of the case under *502§ 349. Regarding due process, the debtor provided sufficient notice to CAB West's servicer of the proposed treatment of CAB West’s claim. ECF Nos. 37 at 9, and 38 at 8. This motion attached the plan currently in force as its exhibit C. ECF No. 40 at 8-10. The mov-ant’s attorney filed a notice of appearance and request for notice on April 10, 2017. ECF No. 39. An order confirming the debtor’s modified post-confirmation plan was entered on May 4, 2017. ECF No. 41. Lastly, the movant, at the hearing and through its motion and reply, never raised an issue concerning the adequacy of notice. Thus, none of the recognized exceptions to the binding effect of § 1327(a) are in play here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500620/ | OPINION ON DEBTOR’S MOTION FOR SUMMARY JUDGMENT
Edward J. Coleman, III, Judge
In 2009, the plaintiffs Gray Tybee II, LLC (“Tybee IP), Gray Tybee III, LLC (“Gray Tybee III”), Pannell Properties II, LLC (“Pannell II”), and Pannell Properties III, LLC (“Pannell III”) (collectively, the “Plaintiffs”) entered into a real estate transaction with the Debtor1 which included a “buy-back” provision that allowed Plaintiffs, at their option, to sell the purchased real estate back to the Debtor2 after three years. The Plaintiffs exercised their option under the “buy-back” provision in 2012, but the Debtor defaulted on his obligation to purchase the property. As a result of this default, the Debtor and Plaintiffs entered into a settlement agreement, which required the Debtor to execute a promissory note in favor of the Plaintiffs. After the Debtor defaulted on the promissory note, Plaintiffs filed a lawsuit to recover on the note and obtained a $4,393,294.00 judgment against the Debtor on December 3,2014.
The Debtor filed for Chapter 7 bankruptcy relief on February 11, 2015. On August 10, 2015, the Plaintiffs filed the instant adversary proceeding seeking a determination from this Court that their judgment against the Debtor is non-dis-chargeable pursuant to 11 U.S.C. § 523(a)(2)(B). The Plaintiffs allege that the Debtor deliberately provided false personal financial statements to the Plaintiffs for the purpose of inducing them to enter into the real estate transaction in 2009 and the subsequent settlement agreement in 2012.
Pending before the Court is the Debt- or’s Motion for Summary Judgment (adv. dckt. 22) filed on April 11, 2016. First, the Debtor asserts that summary judgment is appropriate because the Settlement Agreement’s merger clause bars the Plaintiffs from bringing this adversary proceeding based on § 523(a)(2)(B). In addition, the Debtor argues that he is entitled to summary judgment because the evidence in this case demonstrates as a matter of law that the Plaintiffs did not actually rely on the Debtor’s personal financial statements, and to the extent that there was any reliance, it was not reasonable. As will be explained, the Court finds that the merger clause does not preclude the Plaintiffs from bringing this adversary proceeding and that genuine issues of material fact exist as to the Plaintiffs’ reliance on the Debtor’s financial statements. Accordingly, the Court will deny the Debtor’s Motion for Summary Judgment.
1. JURISDICTION
The Court has subject-matter jurisdiction over this proceeding pursuant to 28 *524U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on •July 13, 1984. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(I) (providing that core proceedings include “determinations as to the dischargeability of particular debts”),
II. BACKGROUND
A. The Real Estate Transaction
In the fall of 2008, James Pannell and Thomas Gray, the sole members of the Plaintiffs3, began to make plans to sell their interest in a building located at 218 West State Street in Savannah, Georgia. (Adv. Dckt. 23, Ex. 1). In order to defer the taxes owed on the gains from the sale of this building, Pannell and Gray decided to pursue a “like-kind” exchange under Section 1031 of the Internal Revenue Code (a “1031 Exchange”). Id, In basic terms, a 1031 Exchange allows a taxpayer to defer the payment of taxes on any gain realized from the sale of property (the “underlying property”) by reinvesting the proceeds from the sale into another similar property or properties (the “replacement property”). See 28 U.S.C. § 1031. However, to qualify for a 1031 Exchange, the taxpayer must identify and designate the replacement property within forty-five (45) days from the sale of the underlying property. 28 U.S.C. § 1031(a)(3)(A). The taxpayer must also close on the replacement property within 180 days of selling the underlying property. 28 U.S.C. § 1031(a)(3)(B). In order to confirm that the requirements of a 1031 Exchange have been met, the IRS requires that the taxpayer complete a Form 8824 and file it with his or her tax return.
On November 25, 2008, Pannell and Gray sold their interest in the 218 West State Street property. (Adv. Dckt. 23, ¶ 7). Thus, to qualify for a 1031 Exchange, they were required to designate a replacement property by January 9, 2009. Ultimately, Pannell and Gray, through Plaintiffs, designated the following three tracts of land in Hinesville, Georgia as their replacement properties:
1) Pannell, through Pannell II, would purchase a 5.4 acre tract of land known as Tract F-1B2;
2) Gray, through Tybee II, would purchase a 5.4 acre tract of land known as F-1B1; and
3) Pannell and Gray, through Pannell III and Tybee III, would jointly purchase a 7.6 acre tract of land known as F1-A1A.
(collectively, the “Independence Tracts4”) (Adv. Dckt. 23, Ex. 5). According to the 8824 Forms filed by Pannell and Gray, they identified and designated the Independence Tracts as their replacement property on November 25, 2008. (Adv. Dckt. 23, Ex. 6). However, Pannell and Gray claim that the designation did not actually occur until January 9, 2009, the last day required to make their replacement property designation.
On March 23, 2009, the Plaintiffs purchased the Independence Tracts from Quinnco for a total of $2,434,527.00. Id. As part of this transaction, Quinnco and its two primary members, Debtor and Malo-ney, executed separate buy-back agreements for each tract (the “Buy-Back Agreements”). These Buy-Back Agreements gave the Plaintiffs the option, after three years, of selling the Independence *525Tracts back to Quinnco, the Debtor and Maloney at a combined price of $2,975,384.00. (Adv. Dckt. 23, Ex. 8).
At the end of the three-year period, the Plaintiffs exercised their option under the Buy-Back Agreements, (Adv. Dckt. 23, Ex. 1). However, the Debtor and Maloney were unable to purchase the Independence Tracts and defaulted on their obligations under the Buy-Back Agreements. Id. In early April 2012, the parties began settlement discussions regarding the Debtor’s default of the Buy-Back Agreements. On April 5, 2012, Pannell sent an email to the Debtor outlining a proposed settlement agreement in which Plaintiffs would accept promissory notes from Quinnco, the Debt- or and Maloney totaling $2,052,190.23 (the “Settlement Agreement”). (Adv. Dckt. 23, Ex. 9). On May 7, 2012, the parties entered into the Settlement Agreement and attached the promissory notes as exhibits. (Adv. Dckt. 23, Ex. 11). Among other provisions, the Settlement Agreement extended the closing date on the buy backs to December 17, 2012. Id. The Settlement Agreement also contained a merger clause, which provided, in pertinent part:
This Settlement Agreement, along with the Exhibits as executed and delivered, constitutes the entire and complete agreement between the parties here to and supersedes any prior oral or written agreement between the parties with respect to the obligations and covenants contemplated hereunder.
Id. ■
Ultimately, the Debtor defaulted on the promissory note related to the Settlement Agreement. On December 26, 2012, after this default, the parties entered into a subsequent agreement whereby the Independence Tracts were deeded back to Quinnco and in exchange the Debtor and Maloney executed a new promissory note to Plaintiffs totaling $2,975,384.005. The Debtor defaulted on his payment obligations under this new promissory note. As a result, the Plaintiffs filed suit in the Superior Court of Chatham County to recover on the promissory note, which resulted in a $4,314,340.59 judgment against the Debtor.
B. The Debtor’s Personal Financial Statements
As part of the negotiations for the purchase of the Independence Tracts, the Plaintiffs requested a personal financial statement (“PFS”) from the Debtor. According to Plaintiffs, the Debtor’s PFS was necessary to ensure that the Debtor had the financial ability to “buy-back” the properties. On January 19, 2009, the Debt- or emailed the Plaintiffs a joint financial statement of he and his wife (the “2009 PFS”), which listed the following assets and liabilities:
*526Assets Liabilities
Cash: $ 60,000.00 Primary Residence Mortgage: $ 650,000.00
Marketable Securities: $ 1,978,000.00 Wholly-Owned RE Mortgage: $ 901,000.00
Insurance and Annuities: $ 215,000.00 Partially Owned RE Mortgage: $ 3,062,000.00
Primary Residence: $ 850,000.00 Notes Payable: $ 1,100,000.00
Bluffton SC River House: $ 2,500,000.00 Credit Card Balance: $ 8,000.00
5 Acre Cashiers NC: $ 380,000.00 Contingent Liabilities6: $ 265,000.00
Partially Owned Real Estate: $ 11,016,000.00
Family Trust: $ 500,000.00
Retirement Plans: $ 451,000.00
Other Assets: $ 750,000.00
Total: $ 18,700,000.00 Total; $ 5,986,000.00
(Adv. Dckt. 1, Ex. 1). The 2009 PFS was not signed or dated7 by the Debtor.
The Plaintiffs contend that the Debtor’s 2009 PFS contained several material misrepresentations as to the Debtor’s financial condition. Among the misrepresentations, the Plaintiffs contend that the Debtor failed to disclose the entire extent of his liability on the debt related to the Independence Commercial Tract. In the 2009 PFS, the Debtor indicated that he held a partial ownership interest in the Independence Commercial Tract (with a listed market value of $7,200,00.00) and that he owed a $2,500,00.00 debt on that property. However, the Plaintiffs assert that the Debtor failed to disclose a $7,596,390.59 unconditional guaranty to The Heritage Bank for a loan associated with the Independence Commercial Tract, which he executed on December 30, 2008. (Adv. Dckt. 45).
Further, Plaintiffs contend that the Debtor misrepresented his ownership interest in the “Bluffton SC River House” (the “Bluffton River House”). The 2009 PFS lists this property as wholly-owned by the Debtor and his wife with a market value of $2,500,000.00 and a corresponding debt of $600,000.00. However, Plaintiffs assert that the Debtor and his wife own only 54% of the property, with the remaining interests held by their four daughters directly or in trusts.
On April 17, 2012, as part of the Settlement Agreement negotiations, the Debtor emailed an updated personal financial statement (the “2012 PFS”) to the Plaintiffs, which listed the following assets and liabilities:
*527Assets Liabilities
Cash: $ 25,000.00 Primary Residence Mortgage: $ 600,000.00
Marketable Securities: $ 2,205,000.00 Wholly-Owned RE Mortgage: $ 220,000.00
Insurance and Annuities: $ 560,000.00 Partially Owned RE Mortgage: $ 4,850,000.00
Primary Residence: $ 3,050,000.00 Notes Payable8: $ 2,370,000.00
Wholly-Owned Real Estate: $ 260,000.00
Partially Owned Real Estate: $ 3,950,000.00
Other Business Assets: $ 750,000.00
Retirement Plans: $ 450,000.00
Other Assets: $ 250,000.00
Total: S 11,500,000.00 Total: $ 8,040,000.00
(Adv. Dckt. 1, Ex. 3).
The Plaintiffs contend that the 2012 PFS also contained several material misrepresentations, including the failure to list the Debtor’s $7,596,390.59 unconditional guaranty with The Heritage Bank9 and once again listing the Bluffton River House as wholly-owned. In addition, the Plaintiffs assert that the 2012 PFS falsely indicated the Debtor and his wife owned various life insurance policies, which insured the lives of the Debtor’s parents, with a cash value of $450,000.0010 and a face amount of $3,000,000.00.
C. Procedural History
On February 11, 2015, the Debtor filed his Chapter 7 bankruptcy petition. (Dckt. 1). In his schedules, the Debtor listed Plaintiffs jointly as an unsecured creditor with a $4,314,340.59 claim arising from the above-mentioned default judgment entered. by the Superior Court of Chatham County. Id. On August 11, 2015, the Plaintiffs filed this adversary proceeding seeking a determination that their claims against the Debtor are non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(B). (Adv. Dckt. 1). Specifically, the Plaintiffs assert thaj. the Debtor’s personal financial statements, which allegedly contained false representations, were provided by the Debtor for the purpose of inducing Plaintiffs to purchase the Independence Tracts and later enter into the Settlement Agreement. Id. at ¶ 22.
On April 11, 2016, the Debtor filed a Motion for Summary Judgment arguing that he is entitled to summary judgment on two grounds: 1) the Settlement Agreement contained a merger clause which prohibits Plaintiffs from bringing this adversary based upon alleged misrepresentations that occurred prior to the Settlement Agreement; and 2) the undisputed evidence in this case shows that Plaintiffs did *528not reasonably rely on the 2009 PFS when purchasing the Independence Tracts, nor did they reasonably rely on the 2012 PFS in making the decision to enter into the Settlement Agreement, (Adv. Dckt. 21).
III. DISCUSSION
A. Summary Judgment Standard
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). A factual dispute is genuine “if the evidence is such that a reasonable [factfinder] could return a verdict for the nonmoving party.” Id. at 331, 106 S.Ct. 2548. The party moving for summary judgment has “the initial responsibility of informing ... the court of the basis for its motion” and demonstrating the absence of a genuine issue of material fact. United States v. Four Parcels of Real Prop., 941 F.2d 1428, 1437 (11th Cir. 1991). What is required of the moving party, however, depends on whether the moving party has the ultimate burden of proof on the issue at trial.
When the nonmoving party has the burden of proof at trial, the moving party is not required to ‘support its motion with affidavits or other similar material negating the opponent’s claim’ (citations omitted) in order to discharge this ‘initial responsibility.’ Instead, the moving party simply may ‘show — that is, point Out to the ... court — that there is an . absence of evidence to support the non-moving party’s case, (citations omitted). Alternatively, the moving party may support its motion for summary judgment with affirmative evidence demonstrating that the nonmoving party will be unable to prove its case at trial.
Four Parcels, 941 F.2d at 1437 (citing Celotex, 477 U.S. at 323-31, 106 S.Ct. 2548).
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 v. Gainesville Sun Pub. Co., 9 F.3d 913, 918 (11th Cir. 1993). When reviewing a motion for summary judgment, a court must examine the evidence in the light most favorable to the nonmoving party and all reasonable doubts and inferences should be resolved in favor of the nonmoving party. Id.
B. The Merger Clause Defense
As an initial matter, the Debtor argues that the merger clause in the Settlement Agreement bars the Plaintiffs from bringing this dischargeability proceeding under § 523(a)(2)(B). Essentially, it is the Debtor’s theory that under Georgia law, the merger clause prohibits the Plaintiffs from making claims of fraud or deceit based upon misrepresentations in the Debtor’s financial statements because they were provided prior to the execution of the Settlement Agreement. In Georgia, it is true that a valid merger clause in an agreement may prevent a plaintiff from bringing fraud claims pertaining to pre-contractual representations made by a defendant. First Data POS, Inc. v. Willis, 273 Ga. 792, 795, 546 S.E.2d 781 (2001). However, based on the Supreme Court’s holding in Archer v. Warner, 538 U.S. 314, 123 S.Ct 1462, 155 L.Ed.2d 454 (2003), the Court finds that the Debtor’s argument has no merit.
In Archer, the parties settled a lawsuit under which Warner (the debtor) paid the *529Archers (the plaintiffs) $200,000.00 and executed a promissory note in the amount $100,000.00. In exchange, the Archers released all of their claims against Warner, including a claim for fraud. Warner failed to make any payments under the note, and filed for Chapter 7 bankruptcy relief. The Archers then objected under 11 U.S.C. § 523(a)(2)(A) to the dischargeability of their claim for $100,000.00 on the ground that the debt the parties had settled was procured by fraud. The Supreme Court held that “the Archers’ settlement agreement and releases may have worked a kind of novation, but that fact does not bar the Archers from showing that the settlement debt arose out of ‘false pretenses, a false representation, or actual fraud,’ and consequently is nondischargeable [under] 11 U.S.C. § 523(a)(2)(A).” Archer, 538 U.S. at 320,123 S.Ct. 1462.
The Supreme Court reasoned that the Bankruptcy’s Codes nondischargeability provision indicated that Congress intended the fullest possible inquiry to ensure that all debts arising out of fraud are excepted from discharge, no matter their form. Archer, 538 U.S. at 320, 123 S.Ct. 1462 (citing Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979)). Further, Congress “intended to allow the relevant determination (whether a debt arises out of fraud) to take place in bankruptcy court, not to force it to occur earlier in state court at a time when nondischarge-ability concerns ‘are not directly in issue and neither party has a full incentive to litigate them.’” Archer, 538 U.S, at 321, 123 S.Ct. 1462 (citing Brown, 442 U.S. at 134, 99 S.Ct. 2205).
Based on the Supreme Court’s reasoning in Archer, a number of courts have found that creditors are free to look beyond a settlement to determine the character of the debt for nondischargeability purposes. In re Marino, 2009 WL 361386 at *5 (Bankr. M.D. Fla. 2009); In re Burrell-Richardson, 356 B.R. 797, 802 (1st Cir. BAP 2006) (noting that Brown and Archer have been widely applied by bankruptcy courts in examining the underlying nature of a debt regardless of its form); In re Schwartz, 2007 WL 3051865 at *3 (Bankr. S.D. Tex. 2007) (“In § 523 proceedings, the relevant inquiry focuses on the conduct from which the debt originally arose. Liable parties cannot erase history of a debt’s origin through a settlement and subsequent of the settlement.”).
This Court finds the Supreme Court’s reasoning applicable in this case. Here, the Plaintiffs assert that the Debtor used false financial statements to induce them into entering the real estate transaction, as well as the subsequent Settlement Agreement. However, the Debtor attempts to argue that the Settlement Agreement’s merger clause effectively bars the Plaintiffs from bringing such a claim based on the Debtor’s pre-settlement financial statements. However, if, under Archer, a settlement agreement will not bar a § 523(a)(2) dischargeability complaint, neither will a merger clause within that settlement agreement serve to bar the same action. Accordingly, the Court finds that neither the Settlement Agreement, nor its merger clause, prevents the Court from inquiring into the true nature of the Plaintiffs debt against the Debtor;' that is, whether it arose out of the Debtor’s use of a materially false statement respecting his financial condition.
Because the Court finds that the Settlement Agreement’s merger clause does not prohibit the Plaintiffs from bringing this dischargeability proceeding, summary judgment is not appropriate on such basis.
C. 11 U.S.C. § 523(a)(2)(B)
In their Complaint, the Plaintiffs seek a judgment from this Court declaring *530the Debtor’s debt due to Plaintiffs non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(B), which provides that any debt “for money, property, services, or an extension, renewal, or refinancing of credit” is non-dischargeable “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 money, property, services or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
II U.S.C. § 523(a)(2)(B). At trial, Plaintiffs bear the burden of establishing each of these elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Accordingly, if any one of these elements is not met, the debt at issue is dischargea-ble. In his Motion for Summary Judgment, the Debtor asserts that he is entitled to summary judgment on the basis that the Plaintiffs’ cannot satisfy the “reasonable reliance” element of 11 U.S.C. § 523(a) (2) (B) (iii)11. Accordingly, the Court need not address the other elements under § 523(a)(2)(B).
The reliance element of § 523(a) (2) (B) (iii) requires that Plaintiffs prove that (1) they actually relied on the financial statement and (2) the reliance was reasonable12. In re Jones, 197 B.R. 949, 961 (Bankr. N.D. Ga. 1996). A financial statement does not have to be the only factor influencing a creditor, as partial reliance is all that is needed. In re Anzo, 547 B.R. 454, 467 (Bankr. N.D. Ga. 2016). “The reasonable reliance,analysis is done on a case-by-case basis considering the totality of the circumstances.” In re McDowell, 497 B.R. 363, 370 (Bankr. N.D. Ga. 2013). Among the circumstances that might affect the reasonableness of a creditor’s reliance are:
1) whether the creditor had a close personal relationship or friendship with the debtor;
2) whether there had been previous business dealings with debtor that gave rise to a relationship of trust;
3) whether the debt was incurred for personal or commercial reasons;
4) whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate;
5) whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.
Citizens Bank of Washington v. Wright (In re Wright), 299 B.R. 648, 659-60 (Bankr. M.D. Ga. 2003).
To survive summary judgment, Plaintiffs must establish the existence of a genuine issue of material fact as to whether they reasonably relied on the Debtor’s 2009 PFS and 2012 PFS in making their decision to purchase the Independence Tracts and enter into the subsequent Settlement Agreement. Because' the Court finds that questions of fact remain as to the Plaintiffs’ reliance on the Debtor’s personal financial statements, the Debtor is not entitled to summary judgment.
*5311. The 2009 PFS
The Debtor argues that Plaintiffs could not have relied on the 2009 PFS because it was provided to the Plaintiffs on January 19, 2009 after they made their decision to purchase the Independence Tracts, which the Debtor contends was made at the time Plaintiffs designated the Independence Tracts as the replacement properties for their 1031 Exchange13.
The designation of a replacement property does not result in a legal obligation to purchase the designated property; it is simply a requirement to qualify for the tax benefits of a “like-kind” exchange. See 26 U.S.C. § 1031(a)(3). While it may have resulted in severe tax consequences, Plaintiffs could have chosen to forgo the purchase of the Independence Tracts at any time after the § 1031 designation. Accordingly, the date that the Plaintiffs designated the Independence Tracts as the replacement properties for their 1031 Exchange is not necessarily determinative of when their decision to purchase the properties was made. However, it is certainly a factor that the Court will consider, at trial, in determining whether the Plaintiffs relied on the 2009 PFS.
The Plaintiffs argue that the closing on the Independence Tracts did not occur until March 23, 2009, over two months after they received the Debtor’s 2009 PFS. Accordingly, the Plaintiffs argue that they did in fact rely on the Debtor’s 2009 PFS in making their ultimate decision to purchase the properties and enter into the Buy-Back Agreements with the Debtor. In fact, Pannell testified at his deposition that the Plaintiffs relied heavily on the 2009 PFS because “it was essential that [the Debtor] have the proven financial ability to buy back [the Independence Tracts] at the end of the three-year period.... ” (Adv. Dckt. 31, p. 44-46).
The Debtor also argues that even if the Plaintiffs did rely on the 2009 PFS, such reliance was not reasonable as a matter of law. The Debtor asserts that Plaintiffs’ reliance was not reasonable because they failed to investigate any of the representations in the Debtor’s 2009 PFS despite numerous “red flags” contained in the financial statement. According to the Debt- or, the 2009 PFS contained the following “red flags”:
• The financial statement was not signed by Debtor.
• The financial statement was not dated by Debtor.
• The only date on the financial statement was a typed date of June, 2008, which was seven months prior to the date the statement was provided.
• On the first page, Debtor checked that he had no contingent liabilities but then, on the very next page, he listed two contingent liabilities under the Contingent Liabilities section of the financial statement.
(Adv. Dckt. 22, p. 15).
In response, the Plaintiffs argue that they had no reason to question the veracity of the 2009 PFS because it appeared consistent with their knowledge of the Debtor’s family (and their highly profitable business), the Debtor’s wealthy lifestyle, and the Debtor’s general reputation14. *532(Adv. Dckt. 48, p. 21). See In re Bratcher, 289 B.R. 205 (Bankr.M.D.Fla.2003) (holding reliance was reasonable, in part because the debtor had a good reputation in the community and had a wealthy family with valuable assets); see also In re Davenport, 508 Fed.Appx. ,937 (11th Cir. 2013)(fmding of reasonable reliance not clearly erroneous when, among other things, creditor took into account debtor’s education, job, and family’s reputation in the community).
Further, the Plaintiffs argue that the “red flags” described by the Debtor did not prompt the need to investigate the Debtor’s 2009 PFS. First, the Plaintiffs contend that it was unnecessary for the financial statement to be signed because the Debtor represented in his January 19, 2009 e-mail that it was his. (Adv. Dckt. 48, p. 20). In re Eckert, 221 B.R. 40, 44 (Bankr. S.D. Fla. 1998) (“[w]hile there is no requirement under Section 523(a)(2)(B) that the debtor sign the financial statement, the debtor must affirm the writing in some respect, by using or adopting it”). The Plaintiffs also argue that although the 2009 PFS bore a legend of “Jun-08” the Debtor implied in his January 19, 2009 email that the financial statement was current and he testified in a 2014 deposition that it was current. (Adv. Dckt. 39, p. 85-86). Hurston v. Anzo (In re Anzo), 547 B.R. 454, 467 (Bankr. N.D. Ga, 2016) (“even if a financial statement becomes stale by the passage of time, if the debtor reaffirms that his or her financial condition has not changed ... any staleness may be cured).
The Plaintiffs also dispute that no investigation was done into the items contained in the 2009 PFS. Specifically, Plaintiffs contend that Pannell was familiar with the Debtor’s Bluffton home and thought the listed value of $2.5 million was a fair estimate. In addition, Plaintiffs assert that they compared the 2009 PFS with the Debtor’s tax returns and found no glaring discrepancies.
The Plaintiffs have demonstrated that several issues of fact remain as to the their reliance on the Debtor’s 2009 PFS. Accordingly, the Court finds that summary judgment is not appropriate on the basis that Plaintiffs did not reasonably rely on the Debtor’s 2009 PFS.
2. The 2012 PFS
The Debtor makes a similar argument with respect to the Plaintiffs’ reliance on the 2012 PFS. First, the Debtor argues that the Plaintiffs did not actually rely on the 2012 PFS in making their decision to enter into the Settlement Agreement. The Debtor contends that the Pannell’s April 5, 2012 email, which attached a proposed outline of the Settlement Agreement, demonstrates that the Plaintiffs made their decision to accept promissory notes from the Debtor prior to ever receiving the 2012 PFS on April 17, 2012.
However, the Court finds nothing in Pannell’s e-mail which conclusively establishes that the Plaintiffs’ decision to enter into the Settlement Agreement was made at that time. In fact, Pannell states in the e-mail that the Plaintiffs “look forward to receiving complete financial statements and tax returns from [the Debtor].” Thus, it is reasonable to infer from this language that the Plaintiffs’ decision to enter into - the Settlement Agreement would be conditioned upon a review of the Debtor’s finances and his ability to successfully make payments on the proposed promissory notes. Further, the Settlement Agreement itself obligated the Debtor to deliver a *533signed financial statement to the Plaintiffs “on or before execution and delivery of the Settlement Agreement. (Adv. Dckt. 23-3, p. 8).
The Debtor also argues that even if Plaintiffs did rely on the 2012 PFS, such reliance was not reasonable. The Debtor contends that Plaintiffs failed to conduct any investigation into the accuracy of the 2012 PFS despite its glaring “red flags” and knowledge of the Debtor’s deteriorating financial condition. Like the 2009 PFS, the 2012 PFS was neither signed nor dated. In addition, the 2012 PFS incorrectly listed the debt owed to Plaintiffs as $1,000,000.00 instead of $2,900,000.00.
The Plaintiffs make the same arguments regarding the reasonableness of their reliance on the Debtor’s 2009 PFS. First, the Plaintiffs argue that they thought the representations in the 2012 PFS were accurate because it appeared consistent with their knowledge of the Debtor and his family’s wealthy lifestyle. The Plaintiffs further contend that the fact that the 2012 PFS was not signed or dated did not raise a “red flag” because the Debtor stated in his e-mail accompanying the 2012 PFS that it was his “updated financial statement.” (Adv. Dckt. 23-3). The Plaintiffs also argue that the incorrect listing of their debt on the Debtor’s 2012 PFS was of no concern, as they were largely focused on the sufficiency of the Debtor’s assets, namely his $2.4 million Bluffton borne, $2 million in marketable securities and the $3 million in life insurance on the Debtor’s parents. (Adv. Dckt. 31, p. 104).
The Plaintiffs have demonstrated that several issues of fact remain as to the their reliance on the Debtor’s 2012 PFS. Accordingly, the Court finds that summary judgment is not appropriate on the basis that Plaintiffs did not reasonably rely on the Debtor’s 2012 PFS.
IV. CONCLUSION
In their Complaint, the Plaintiffs alleges that their judgment against the Debtor is non-dischargeable under 11 U.S.C. § 523(a)(2)(B) because the Debtor provided false financial statements for the purpose of inducing Plaintiffs to purchase the Independence Tracts and later enter into the Settlement Agreement. The Debtor filed the instant Motion seeking summary judgment on two grounds: 1) the Settlement Agreement’s merger clause bars Plaintiffs from bringing this adversary proceeding; and 2) the Plaintiffs have failed to satisfy the reasonable reliance element of § 523(a) (2) (B) (iii). However, the Court found that the Debtor is not entitled to summary judgment on such grounds.
Following the Supréme Court’s reasoning in Archer, the Court finds that neither the parties’ Settlement Agreement, nor its merger clause, prevents the Court from examining the nature of the Plaintiffs’ claims against the Debtor for non-dis-chargeability purposes. The Court also finds that the Plaintiffs have met their burden in demonstrating that genuine issues of fact remain as to their reliance on the Debtor’s 2009 and 2012 PFS and as to whether such reliance was reasonable. Accordingly, the Court will enter a separate order DENYING the Debtor’s Motion for Summary Judgment (adv. dckt. 21).
. The actual seller of the property was Quinnco Hinesville, LLC (“Quinnco"), of which the Debtor and Michael F.P. Maloney ("Maloney”) were the sole members.
. Under the buy-back contracts, the Purchasers were Quinnco, the Debtor and Maloney, but the Debtor was obligated “to fulfill the entirety of the Purchaser’s obligations.” (Adv. Dckt. 23-2, Ex. 8).
. Pannell is the 100% owner of Pannell II and Pannell III. Gray is the 100% owner of Tybee II and Tybee III.
. These three tracts of land were part of a larger tract owned by Quinnco known as the ' Independence Commercial Tract.
. The amendment to the Settlement Agreement is not in the record.
. In the January 19, 2009 email, the Debtor drew special attention to the fact that he did not include as a contingent liability his share of the repurchase guarantee under the BuyBack Agreements. He made no reference to the more significant contingent liability, namely his $7,596,390.59 unconditional guaranty to The Heritage Bank.
. The only date on the 2009 PFS was a typed dated of "Jun-08.”
. Schedule 6 of the 2012 PFS indicates a $1,000,000.00 note payable to "Pannel & Grey" This is inaccurate.
. By the time the Debtor filed for bankruptcy on February 11, 2015 he identified Heritage Bank as an unsecured creditor with an unliq-uidated claim of $13,617,143.81. (Dckt. 1).
,In his bankruptcy schedules, the Debtor indicated that he owned four life insurance policies with face values totaling $3,000,000.00 and a total cash value of $0.00. (Dckt. 1).
. The Debtor does not concede that Plaintiffs can prove the remaining elements of 11 U.S.C. § 523(a)(2)(B). (Adv. Dckt. 22, n.l). However, the Debtor does not believe the other elements would be appropriate for summary judgment. Id.
. “Reasonable reliance connotes the use of the standard of the ordinary and average person.’’ City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277, 280 (11th Cir.1995).
. Although the exact date of the designation is disputed, the parties agree that it occurred at least prior to January 9, 2009.
. According to Plaintiffs, Graham Sadler, a commercial realtor and long-time friend of Coker’s, introduced Pannell to Coker during Pannell's search for investment property. (Adv. Dckt. 44, p. 13-16, 25-28). Further, both Pannell and Gray contend that they knew Coker generally as a man from an "extremely wealthy family who was well educated, was involved in a “billion dollar" family business in South Carolina, had worked as an *532executive at that company for a number of years, and was married to the daughter of one of their former law partners. (Adv. Dckt, 31, p. 9; Adv. Dckt. 32, p. 14-15). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500621/ | MEMORANDUM OPINION AND ORDER FINDING THAT ALLIED WORLD MUST POST A BOND PURSUANT TO NEW YORK INSURANCE LAW SECTION 1213
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Before filing “any pleading in any proceeding,” New York Insurance Law section 1213 requires unauthorized foreign insurers to either “procure a license to do an insurance business” within the state, or post a bond “sufficient to secure payment of any final judgment which may be rendered in the proceeding .... ” N.Y. Ins. Law § 1213(c) (McKinney). The Plaintiffs1 here filed a motion (the “Bond Motion,” ECF Doc. # 118) seeking to require the Bermuda Insurers2 to post a $60 million bond to satisfy a potential judgment in this adversary proceeding.
Iron-Starr and the Plaintiffs have settled the dispute between them,3 but the Court must still decide whether Allied World is required to post a bond in this case, and if so, in what amount. For the reasons set forth below, the Court concludes that Allied World — a foreign unauthorized insurer that delivered an insurance policy to MF Global in New York and filed a pleading in this proceeding — must post a bond in the amount of $15 million before the Court will consider Allied World’s pending motion to compel arbitration of this dispute in Bermuda.4 If Allied World fails to post a bond, its pleadings will be stricken and a default judgment will be entered.
I. BACKGROUND
A. Procedural Background
This is the fifth written opinion in this adversary proceeding since it was filed on *547October 27, 2016.5 Familiarity with the Prior Opinions is assumed, and the facts relevant to the issue currently before the Court have largely been set forth in the Prior Opinions, but are also recounted below.
The issue currently before the Court arose after the Plaintiffs filed a complaint against the Bermuda Insurers in this adversary proceeding (the “Complaint,” ECF Doc. # 1), seeking to recover the full policy limits on policies issued by the Bermuda Insurers plus additional damages resulting from these insurers’ refusal to pay policy proceeds in connection with a global settlement of MDL litigation pending in the United States District Court for the Southern District of New York (the “Global Settlement”). Following the filing of the Complaint, the Bermuda Insurers filed cases in the Supreme Court of Bermuda, Civil Jurisdiction (Commercial Court) (the “Bermuda Court”) and obtained ex parte anti-suit injunctions (the “Bermuda Anti-Suit Injunctions”) prohibiting the Plaintiffs from prosecuting the adversary proceeding in this Court. In several earlier opinions in this case, however, the Court first issued a temporary restraining order (“TRO”) barring the Bermuda Insurers from enforcing the Bermuda Anti-Suit Injunctions, then issued a preliminary injunction extending the relief granted in the TRO, and issued an opinion holding the Bermuda Insurers in contempt for violating the TRO. See TRO Opinion, 561 B.R. at 630; Preliminary Injunction Opinion, 562 B.R. at 67; Contempt Opinion, 562 B.R. at 54. In another opinion, the Court also concluded that the Bermuda Insurers violated the Barton Doctrine by filing the Bermuda actions without first seeking authority to do so from this Court. Barton Opinion, 562 B.R. at 877. In the Barton Opinion, the Court ordered the Bermuda Insurers to dismiss the Bermuda actions without prejudice; the Bermuda Insurers complied and discontinued the Bermuda actions. Issues concerning sanctions against Allied World for contempt and for violation of the .Barton Doctrine remain to be decided.
Early on in these proceedings, the Bermuda Insurers also filed in this Court motions to dismiss and motions to compel arbitration in Bermuda. (See ECF Doc. ## 13, 14, 16, 17, 19, 20.)6 Once the Bermuda Anti-Suit Injunctions were lifted, the Plaintiffs were able to respond to the Bermuda Insurers’ motions; the parties have now fully briefed whether this Court should require the Bermuda Insurers to post a bond under New York Insurance Law § 1213 and whether to compel arbitration of the underlying dispute in Bermuda. The Court heard argument on both issues on April 18, 2017, but has not yet entered a decision on the arbitration issue. Because the Court concludes in this Opinion that Allied World must post a bond as required by New York Insurance Law *548§ 1213 before the Court will consider Allied World’s motion to compel arbitration, decision on that motion must await Allied World’s compliance with this Opinion and Order. See Signal Capital Corp. v. Eastern Marine Management, Inc., 899 F.Supp. 1167, 1171 (S.D.N.Y. 1995) (Sotomayor, J.) (in connection with a plaintiffs motion to strike an unauthorized foreign insurer defendant’s answer, concluding that the defendant must “either post a bond or 'have its [a]nswer stricken and a default judgment entered”).
Also, in response to the Plaintiffs’ assertions that the Bermuda Insurers violated the Bar Order in the Global Settlement and the Barton Doctrine by filing suit against them in Bermuda without leave of this Court (see ECF Doc. #68), Allied World and Iron-Starr filed oppositions to the Plaintiffs’ application in connection with the Bar Order and Barton Doctrine issues (ECF Doc. ## 62, 64).7
Additionally, after the Bermuda Anti-Suit Injunctions were lifted, the Plaintiffs filed the Bond Motion. The Bermuda Insurers, in response, filed a joint opposition to Plaintiffs’ Bond Motion (the “Joint Opposition,” ECF Doc. # 127). The Plaintiffs then filed a reply (the “Reply,” ECF Doc. # 130).
On May 10, 2017, Allied World filed a notice (the “Withdrawal Notice,” ECF Doe. # 143) withdrawing its previously-filed motion to dismiss for lack of personal jurisdiction (the “Motion to Dismiss,” ECF Doc. # 14) “to the extent such motion is premised upon the contention that personal jurisdiction is lacking over Allied World ... for any reason other than the insufficient service of process upon Allied World.” (Withdrawal Notice at 2.) Allied World further noted that it “will not take the position that the Court lacks personal jurisdiction over Allied World ... for any reason other than the insufficient service of process upon Allied World.”8 (Id.)
As noted above, the Plaintiffs and Iron-Starr have reached a settlement in principle, resolving the dispute between them. As such, this Opinion addresses only the Plaintiffs’ demand that Allied World post a bond.
B. Factual Background
Allied World, headquartered and incorporated in Bermuda, “is a specialty reinsurance company that underwrites property and casualty insurance and reinsurance.” (Complaint ¶ 23.) The Plaintiffs maintain that Allied World markets and sells insurance products and insures risks, located throughout the United States and in the State of New York. (Id.)
*549Allied World issued an errors and omissions (“E & 0”) insurance policy to MF Global for the policy period from May 31, 2011 to May 31, 2012 (the “AWAC E & 0 Policy,” Complaint, Ex. B). The AWAC E & 0 Policy obligated Allied World to contribute up to the $15 million policy limit in the event of a covered loss. (Bond Motion at 2; AWAC E & 0 Policy at 1). The policy lists “MF Global Holdings Ltd.” as the “Named Corporation” with its principal address at “717 Fifth Avenue, 9th Floor, New York, NY 10022-8101.” (AWAC E & O Policy at 1.)
Affidavits submitted to the Court by Allied World earlier in these proceedings, which are unrebutted by the Plaintiffs, state that MF Global’s broker, Willis (Bermuda) Ltd. (“Willis”), acting on MF Global’s behalf, was responsible for the solicitation, negotiation, issuance, and delivery of the policy, and the payment of premiums on the underlying policy. (4/18/2017 Hearing Tr. at 8-10; ECF Doc. # 13-7 ¶ 12 (“The Allied World Policy was negotiated, underwritten, issued, delivered, and paid for exclusively in Bermuda, through [Willis], a Bermuda-based broker that was acting on MFGH’s behalf in Bermuda”).) It appears that Willis was then responsible for sending or delivering the policy to MF Global in New York. (4/18/2017 Hrg. Tr. 55:8-13.)
II. LEGAL STANDARD
A. New York Insurance Law Section 1213
1. The Purpose of Section 1213(c)
The New York legislature enacted New York Insurance Law section 1213, in part, to address “the often insuperable obstacle of resorting to distant forums for the purpose of asserting legal rights” in relation to insurance policies issued by unauthorized foreign insurance companies. British Int’l Ins. Co. v. Seguros La Republica, S.A., 212 F.3d 138, 140 (2d Cir. 2000) (per curiam) (quoting N.Y. Ins. Law § 1213(a)’s express intended purpose). The statute also “imposes accountability on foreign or alien carriers who, although not authorized to do business in [the state], issue or deliver insurance policies here,” and serves to “assure that a foreign carrier’s funds will be available in [the state] to satisfy any potential judgment against it from the proceeding.” Levin v. Intercontinental Cas. Ins. Co., 95 N.Y.2d 523, 526-27, 719 N.Y.S.2d 634, 742 N.E.2d 109 (2000) (citations omitted); see also Curiale v. Ardra Ins. Co., 88 N.Y.2d 268, 275, 644 N.Y.S.2d 663, 667 N.E.2d 313 (1996) (noting that section 1213 ensures that “[a]lien insurers [will] maintain sufficient funds in the [s]tate to satisfy any potential judgment arising from the policies of insurance (including reinsurance treaties) they issue”).
2. Enumerated Acts in Section 1213(b)
To remedy the problem of requiring residents to resort to far-away jurisdictions to assert their rights, “the statute provides that certain acts by such foreign or unauthorized insurers will automatically trigger appointment of the New York Superintendent as a proper party for service.” In re Residential Capital, LLC, 563 B.R. 756, 777 (Bankr. S.D.N.Y. 2016) [hereinafter “ResCap”] (citing N.Y. Ins. Law § 1213(b)(1)). Specifically, “[t]he case law recognizes that Section 1213 provides a basis for personal jurisdiction over insurance companies based on certain enumerated insurance-related activities, including ‘the issuance or delivery of contracts of insurance to residents of this state or to corporations authorized to do business therein, ... the solicitation of applications for such contracts, ... the collection of premiums, membership fees, assessments or other considerations for such contracts, or ... any other transaction of business.’ ” ResCap, 563 B.R. at 777-78 (quoting N.Y. *550Ins. L. § 1213(b)(1)); see also Blau v. Allianz Life Ins. of N. Am., 124 F.Supp.3d 161, 172, 175-78 (E.D.N.Y. 2015) (analyzing enumerated acts in regards to an analysis of personal jurisdiction).
However, New York courts have clarified that the enumerated acts in section 1213(b) are not prerequisites to the application of the bond requirement set out in section 1213(c). To the contrary, “whether defendants had engaged in any of the activities enumerated in [section] 1213(b)(1) ... is immaterial since the statute does not make the obligation to post security [under section 1213(c) ] contingent upon the manner of service ... or the type of purposeful activity providing the basis for the exercise of in personam jurisdiction.” Travelers Ins. Co. v. Underwriting Members of Lloyd’s of London, 240 A.D.2d 278, 279, 659 N.Y.S.2d 11 (N.Y. App. Div. 1997).
3. The Bond Requirement in Section 1213(c)
New York Insurance Law section 1213(c) provides in relevant part:
(c)(1) Before any unauthorized foreign or alien insurer files any pleading in any proceeding against it, it shall either:
(A) deposit with the clerk of the court in which the proceeding is pending, cash or securities or file with such clerk a bond with good and sufficient sureties, to be approved by the court, in an amount to be fixed by the court sufficient to secure payment of any final judgment which may be rendered in the proceeding ..., or
(B) procure a license to do an insurance business in this state.
N.Y. Ins. Law § 1213(c)(1). As noted above, this section requires an unauthorized foreign insurer to either obtain a license to conduct insurance business in New York, or to post a bond with the clerk of the court in which the proceeding is pending, before filing any pleading in a proceeding against it.
Certain limited pleadings are exempted from the bond requirement contained in section 1213(c)(1). Specifically, nothing in section 1213 will “prevent an unauthorized foreign or alien insurer from filing a motion to set aside service made” in the manner provided by the statute. N.Y. Ins. Law § 1213(c)(3); see also Levin, 95 N.Y.2d at 527, 719 N.Y.S.2d 634, 742 N.E.2d 109 (explaining that section 1213(c)(3) relieves an unauthorized foreign insurer from the requirement to post a bond “when it files a ‘motion’ to set aside service on the ground that the carrier, or the person upon whom service is made pursuant to section 1213(b)(3), did not commit the acts in [New York] that form the predicate for the court’s jurisdiction” contained in section 1213(b)).
k. Courts Have Interpreted the Term “Pleading” Broadly
When applying section 1213(c), courts within this jurisdiction have interpreted the term “pleading” broadly to include motions to compel arbitration. For example, in ResCap, Judge Lane discussed section 1213(c)’s bond requirement, and held that motions to compel arbitration and motions to dismiss for lack of subject matter jurisdiction “are pleadings under Section 1213.” ResCap, 563 B.R. at 778-79. In rejecting the narrow reading of the term “pleading” in section 1213 offered by the insurers in ResCap (and the Bermuda Insurers here), and adopting a broad reading of the term, Judge Lane stated that:
[T]he Court rejects the Bermuda Insurers’ narrow reading of the term “pleading” under the statute. Granted, there are some cases that apply a more restrictive definition of pleadings under Section 1213. See Allstate Ins. Co. v. Administratia Asigurarilor de Stat, 948 F.Supp. 285, 295 (S.D.N.Y. 1996) (limit*551ing “pleading” in Section 1213 to those identified in Federal Rule of Civil Procedure 7 and N.Y. C.P.L.R. 3011). But more cases construe Section 1213 to require that foreign insurers post security before filing any pleading. See, e.g., Signal Mut. Indem. Ass’n v. Rice Mohawk U.S. Constr., Co., 1997 WL 148813, at *1 (S.D.N.Y. Mar. 28, 1997); Marsh & McLennan Cos. v. GIO Ins., 2013 WL 4007555, at *5 (S.D.N.Y. Aug. 6, 2013); John Hancock Prop. & Cas. Ins. [v. Universale Reinsurance Co., Ltd., 147 F.R.D. 40, 50 (S.D.N.Y. 1992) ]; see also British Int’l Ins. v. Seguros La Republica S.A., 212 F.3d 138, 140 (2d Cir. 2000) (stating Section 1213(c)(1) requires “out-of-state insurers post security or obtain a license in order to be allowed to participate in court proceedings in New York”).
ResCap, 563 B.R. at 778-79.
Though Judge Lane found that the Bermuda-based insurers had filed “pleadings,” he ultimately declined to require the posting of a bond under section 1213 in Res-Cap, recognizing that the insured’s broker was based in Bermuda and “the address of the insured on each policy lists [the insured’s] Detroit, Michigan address.” Id. at 782 (noting that the insured’s broker “act[ed] as an intermediary between the [insured] and the [insurers],” but that “[n]o address in New York [was] listed” for the insured).
B. The New York Convention
The Bermuda Insurers also argue that the application of section 1213(c) here is preempted by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention”). (Joint Opposition at 23-33.) The Convention is an international treaty mandating that courts in signatory states “shall, at the request of one of the parties [to an arbitration agreement], refer the parties to arbitration ....” Scherk v. Alberto-Culver Co., 417 U.S. 506, 527, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (citing the Convention, Art. II, § 3). The New York Convention reinforces “the emphatic federal policy in favor of arbitral dispute resolution,” which “applies with special force in the field of international commerce.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985). But important to the preemption issue here, courts in New York have held that a New York prejudgment attachment provision, like the posting of a bond, is not an impediment to arbitration under the Convention. See Atlas Chartering Services, Inc. v. World Trade Group, Inc., 453 F.Supp. 861, 863 (S.D.N.Y. 1978) (“We perceive no conflict between the provisional remedy of attachment and the dictates of the Convention. ... On the contrary, ... attachment, we believe, serves only as a security device in aid of the arbitration.”).
Relevant to this legal framework is the McCarran-Ferguson Act,. 15 U.S.C. § 1011 et seq., which “precludes application of a federal statute in face of state law ‘enacted ... for the purpose of regulating the business of insurance,’ if the federal measure does not ‘specifically relat[e] to the business of insurance,’ and would ‘invalidate, impair, or supersede’ the State’s law.” Humana Inc. v. Forsyth, 525 U.S. 299, 307, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999) (citing Department of Treasury v. Fabe, 508 U.S. 491, 501, 113 S.Ct. 2202, 124 L.Ed.2d 449 (1993)). Congress passed the McCar-ran-Ferguson Act, in part, out of a concern that the Supreme Court’s commerce jurisprudence “might undermine state efforts to regulate insurance” and therefore provided that “ ‘silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of *552such business by the several States.’ ” Humana, 525 U.S. at 306, 119 S.Ct. 710 (quoting 15 U.S.C. § 1011).
Courts in the Second Circuit have determined that pursuant to the McCarran-Ferguson Act, section 1213(c) is not preempted by either the Federal Arbitration Act (“FAA”) or the New York Convention. See Stephens v. Am. Int’l Ins. Co., 66 F.3d 41, 45 (2d Cir. 1995) (discussing the New York Convention and the McCar-ran-Ferguson Act, and emphasizing that “the Convention is not self-executing, and therefore, relies upon an Act of Congress for its implementation”); see also Skandia Am. Reins. Corp. v. Caja Nacional de Ahorro y Segoro, No. 96 CIV. 2301, 1997 WL 278054, at *2-3 (S.D.N.Y. May 23, 1997) (noting that because “under the McCarran-Ferguson Act of 1946 ... the power to regulate insurance is specifically granted to the states whose laws are not preempted by any act of Congress unless such act specifically relates to the business of insurance ... a foreign or alien insured ] is required to post security sufficient to secure payment of any final judgment” under section 1213(c)). Indeed, the Skan-dia court expressly found that “Article VI of the New York [Convention allows [the Court] ... to order the posting of prejudgment security pursuant to N.Y. Ins, Law § 1213(c).” Skandia, 1997 WL 278054 at *3 (stating that pursuant to section 1213(c) and other applicable law, a foreign unauthorized insurer was “required to post security sufficient to secure payment of any final judgment”).
III. THE PARTIES’ CONTENTIONS
A. The Plaintiffs’ Contentions
The Plaintiffs argue that the plain language of section 1213, read in conjunction with the legislature’s stated purpose in enacting the statute, clearly demands the posting of a bond based on the facts of this case. The Plaintiffs assert that the motion to dismiss and the motion to compel arbitration filed by Allied World constitute “pleadings” in this context, and further, that while MF Global may have utilized a broker to procure their insurance policies, these policies were nonetheless issued and delivered by Allied World to New York.
B. Allied World’s Contentions
Allied World maintains that, by transacting solely with MF Global’s Bermuda-based broker, Willis, it did not “issue or deliver” an insurance policy in New York. Additionally, Allied World maintains that none of the motions or pleadings it has filed in this proceeding constitute “pleadings” under section 1213(c) as it has not formally contested the Complaint on the merits. Further, Allied World suggests that the bond requirement in section 1213 is preempted by the New York Convention.
IV. DISCUSSION
Allied World’s business model appears to be specifically designed to sell insurance policies to New York insureds but to attempt to avoid any regulation in New York. By interacting with clients’ brokers, and sending policies to brokers who are technically located outside of New York, Allied World maintains that it falls outside the express terms of section 1213(c)’s bond requirement as it has not “issued or delivered” an insurance policy in New York— the policy was, in its eyes, delivered to a broker in Bermuda. Allied World asks the Court to end the inquiry there rather than follow the policy to its ultimate destination: New York. The Court concludes that Allied World cannot so easily avoid the protection that the New York legislature provides to New York insureds through *553section 1213.9 Section 1213 requires unauthorized foreign insurers, like Allied World, -that issue and deliver insurance policies to New York insureds, to either obtain the requisite license to conduct business in New York, or to post a bond with the clerk of the court in which the proceeding is pending, before filing a pleading in the proceeding. The Court will therefore require Allied World to post a bond in these proceedings.
A. A Motion to Compel Arbitration is a “Pleading” Under Section 1213 That Triggers the Requirement to Post a Bond
Allied World’s position is that a bond need only be posted when an unauthorized insurer files a pleading that defends against a complaint on the merits, such as an answer to a complaint, and therefore that the motion to dismiss, the motion to compel arbitration, and all other items that Allied World filed do not trigger section 1213’s bond requirement. As did the insurers in ResCap, Allied World here relies on a footnote in Levin that reads: “Section 1213’s legislative history indicates that defending on the merits requires the posting of a bond.” ResCap, 563 B.R. at 779 (quoting Levin, 95 N.Y.2d at 528 n.3, 719 N.Y.S.2d 634, 742 N.E.2d 109). The court in ResCap, however, explained that this “statement from Levin is dicta” and that “the actual holding of Levin reads the bond requirement broadly.” ResCap, 563 B.R. at 779 (discussing how “[i]n Levin, the court examined whether the bond requirement applied to a pre-answer motion to dismiss the complaint” but that the New York Court of Appeals has held that “the term ‘pleading’ in Section 1213(c) was not limited to the ‘kinds of pleadings’ identified in N.Y. C.P.L.R. 3011,” which include an answer, a counterclaim, and a cross-claim, among others).
The Court rejects the narrow reading of the term “pleading” offered by the Bermuda Insurers, and adopts the broader approach employed by the ResCap court and others. See Levin, 95 N.Y.2d at 527-28, 719 N.Y.S.2d 634, 742 N.E.2d 109; Marsh & McLennan Companies, Inc. v. GIO Ins. Ltd., 2013 WL 4007555, at *5 (S.D.N.Y. 2013) (enforcing section 1213’s bond requirement on a foreign insurer who filed a motion to dismiss based on arbitration provisions); Northwestern Nat. Ins. Co. v. Kansa Gen. Ins. Co. Ltd., 1992 WL 367085, at *3 (S.D.N.Y. 1992) (requiring a foreign insurance company to post a bond pursuant to section 1213(c) in a case involving a motion to compel arbitration).
B. Allied World “Issued and Delivered” a Policy to New York
Allied World also argues that it did not “deliver” a policy to New York, and therefore is not required to post a bond under section 1213(c). It maintains that it only delivered a policy to MF Global’s broker, Willis, which resides in Bermuda. Allied World’s argument is unpersuasive for several reasons, and flies in the face of the intended purpose of the statute.
The New York legislature plainly declared “that it is a subject of concern that many residents of this state hold policies of insurance issued or delivered in this state by insurers while not authorized to do business in this state, thus presenting *554to such residents the often insuperable obstacle of resorting to distant forums for the purpose of asserting legal rights” in connection with insurance policies issued by unauthorized foreign insurance companies. N.Y. Ins. Law § 1213(a) (broadcasting the express “purpose of this section”). To be sure, just as the statute is intended to regulate, Allied World is an unauthorized foreign insurer, providing insurance to a New York-based company, insuring risks in New York and elsewhere. In Res-Cap, where the court found that an insurance policy was not delivered in New York, Judge Lane expressly stated that the insurance policy was addressed to the insured in Michigan; here, by contrast, the insurance policy is addressed to MF Global’s New York address, and the policy insured risks in New York, among other places. (See AWAC E & 0 Policy at 1.)
Allied World also relies on the Appellate Division’s decision in Ghose v. CNA Reinsurance Co., 43 A.D.3d 656, 841 N.Y.S.2d 519 (2007). Allied World argues that Ghose supports the proposition that an insurance policy must be expressly delivered by the insurer into New York. (Joint Opposition at 16.) Allied World’s reliance on Ghose is misplaced. The First Department in Ghose dismissed the plaintiffs complaint against certain insurers on forum non conveniens grounds. Ghose, 43 A.D.3d at 661, 841 N.Y.S.2d 519. The plaintiff in Ghose, although purportedly a resident of New York when the underlying policy was issued, was suing insurers on behalf of policies issued to a Bermuda-based company that had subsidiaries incorporated in Australia and Bermuda that “conduct[ed] little business in New York.” Id. at 660, 841 N.Y.S.2d 519. Unlike MF Global’s insurance policy, which was expressly governed by New York law, the insurance policy in Ghose was governed by Bermuda law. Id. at 657-60, 841 N.Y.S.2d 519. After finding that Australia was the appropriate forum for the dispute, the court in Ghose expressly noted that the issue whether the insurance companies were required to post a bond under section 1213 was “rendered academic.” Id. at 661, 841 N.Y.S.2d 519.
The Court is unpersuaded that the New York legislature, in drafting section 1213(c), contemplated that foreign unlicensed insurance companies, such as Allied World, that are subject to personal jurisdiction in New York courts could so easily work around the bond requirement if they are parties to litigation in New York. The use of a broker or some other intermediary for the delivery of a policy, rather than delivering a policy directly to an insured, is not enough to skirt the bond requirement. Indeed, the statute itself does not say “delivered directly” or “delivered without the use of intermediaries” — it simply says “delivered.” Allied World’s position is unfounded given that such a narrow reading of the term “delivered” would dictate that no policies were ever actually delivered by insurers, as the technical delivery would take place by a mail carrier or some other delivery service, acting as a necessary intermediary. And though it was interacting with MF Global’s broker, presumably Allied World fully expected that the policies would ultimately be delivered to New York — a natural destination given MF Global’s New York address on the policy.
C. The New York Convention Does Not Preempt Section 1213’s Bond Requirement
Allied World also argues that the New York Convention preempts the requirement for posting a bond because posting a bond here would act as an “impediment” to arbitration. Because the bond requirement is intended to ensure that “funds will be available in this State to satisfy any potential judgment,” Levin, 95 N.Y.2d at 527, 719 N.Y.S.2d 634, 742 *555N.E.2d 109, and because such a bond “serves only as a security device in aid of the arbitration,” Atlas Chartering, 453 F.Supp. at 863, there is no apparent conflict between section 1213(c) and the New York Convention. To the contrary, the bond helps to effectuate the New York Convention’s goals by ensuring that should a matter be sent to arbitration, particularly in a foreign country as Allied World seeks here, sufficient funds to satisfy a judgment will be available to a plaintiff in New York. The court in Atlas Chartering specifically recognized this important principle:
Certainly, a London arbitration can proceed in an orderly fashion even though the defendant’s assets have been attached in New York as security for any award rendered by the London panel. There is no merit to the argument that plaintiff, in seeking an attachment, is attempting to “bypass” the arbitration procedure. See McCreary Tire & Rubber Co. v. CEAT, S.p.A., 501 F.2d 1032, 1038 (3d Cir. 1974).... The attachment, we believe, serves only as a security device in aid of the arbitration. ... Thus, we doubt that a decision permitting attachment would discourage or hamper arbitration under the [New York] Convention.
Atlas Chartering, 453 F.Supp. at 863.
The decision whether the Plaintiffs will be compelled to arbitrate in Bermuda, or whether Allied World will have to defend this action in a U.S. court, must await Allied World’s compliance with the requirement that it post a bond. Allied World previously indicated in these proceedings that a court in Bermuda may well decline to enforce a judgment issued by a court in the United States. {See Bond Motion at 3-4 (“In their first communication notifying the MFG Parties of these anti-suit injunctions (which have since been vacated pursuant to this Court’s Order), [Allied World] warned the MFG Parties that ‘the Supreme Court of Bermuda would not enforce any U.S. judgment against a Bermuda entity.’ ”) (citing Nov. 8, 2016, Letters from Sedgwick Chudley on behalf of the Bermuda Insurers to the MFG Parties).) An arbitration award issued by a panel of arbitrators is not a judgment. With a bond posted in the United States, the Plaintiffs can assure that funds will be available to recover on any judgment issued by a U.S. court, either in an action that proceeds to judgment in a U.S. court or after confirming an arbitration award.
D. Allied World Shall Post a $15 Million Bond
The Plaintiffs requested that the Bermuda Insurers post a bond in the amount of $60 million, an amount that they were “careful” in calculating to “come up with a reasonable estimate.” (4/18/2017 Hrg. Tr. 17:23-24.) The statute provides that the amount of the bond in this type of proceeding is “to be fixed by the court sufficient to secure payment of any final judgment which may be rendered in the proceeding .... ” NY Ins. Law § 1213(c). Here, the policy limit of Allied World’s policy is $15 million, but the Plaintiffs request an additional $40 million to cover other forms of damages, including damages based on the “bad faith refusal to provide coverage in response to the MFG Parties’ reasonable insurance demands .... ” (Bond Motion at 3.)
The New York Court of Appeals has stated that “calculating the amount of the bond that Insurance Law § 1213(c) requires” involves “[t]he task of fixing the amount [and] necessarily falls within the trial court’s discretion.” Levin, 95 N.Y.2d at 529, 719 N.Y.S.2d 634, 742 N.E.2d 109 (citing Curiale v. Ardra Ins. Co., Ltd., 189 *556A.D.2d 217, 221, 595 N.Y.S.2d 186 (1993)). When pressed, the Plaintiffs could not provide the Court with any rational limiting principle that would prevent a plaintiff from requesting a gargantuan bond based on a hypothetical payday, which may nevertheless have no basis in reality. Here, the AWAC E & 0 Policy provides up to $15 million. The Court finds that the Plaintiffs’ proposed bond is not warranted based on the facts and circumstances of the case at this time, and instead requires the posting of a $15 million bond, the amount of the Allied World policy limit. As Judge Sotomayor (as she then was) concluded in Signal Capital Corp., 899 F.Supp. at 1171, if the foreign insurer fails to post a bond, as required, its pleadings will be stricken and a default judgment will be entered.
V. CONCLUSION
Allied World may not skirt the bond requirement in section 1213(c) while continuing to wage a costly battle over an insurance policy it issued that is expressly governed by New York law, addressed to a New York insured, and was ultimately delivered to a New York address. For the reasons stated above, the Bond Motion, as it relates to Allied World, is GRANTED. Allied World is hereby ordered to post a $15 million bond with the Clerk of the Court10 within 14 days of the issuance of this Opinion.
IT IS SO ORDERED.
. The plaintiffs here are MF Global Holdings Ltd. ("MFGH”), as Plan Administrator, and MF Global Assigned Assets LLC ("MFGAA” and together with MFGH, the "Plaintiffs”).
. The Bermuda Insurers are Allied World Assurance Company Ltd. ("Allied World”), and Iron-Starr Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited (together "Iron-Starr”).
. In a recently filed brief on a separate issue in this adversary proceeding, the Plaintiffs stated that they- "have reached settlements in principle and are finalizing settlement agreements with defendant Federal Insurance Company and with [Iron-Starr], Thus, Allied World is the only remaining Bermuda Insurer (and defendant) in this case.” (ECF Doc. #153 at 1.) Accordingly, this Opinion deals solely with the remaining dispute between the Plaintiffs and Allied World.
.As detailed below, the Plaintiffs filed a complaint that initiated this adversary proceeding, and in response, Allied World filed, among other things, a motion to compel the arbitration of the dispute underlying the complaint.
. The first four opinions can be found at In re MF Global Holdings Ltd., 561 B.R. 608 (Bankr. S.D.N.Y. 2016) (order issuing temporary restraining order) [hereinafter “TRO Opinion”]; In re MF Global Holdings Ltd., 562 B.R. 55 (Bankr. S.D.N.Y. 2017) (order granting preliminary injunction) [hereinafter "Preliminary Injunction Opinion”}', In re MF Global Holdings Ltd., 562 B.R. 41 (Bankr. S.D.N.Y. 2017) (order holding Bermuda-based insurers in contempt) [hereinafter "Contempt Opinion”}; In re MF Global Holdings Ltd., 562 B.R. 866 (Bankr. S.D.N.Y. 2017) (order finding that the Bermuda Insurers violated the Barton Doctrine) [hereinafter “Barton Opinion”} (collectively, the "Prior Opinions”). Those opinions describe the background and circumstances of the issues arising in this adversary proceeding. Capitalized terms not defined herein shall have the definitions ascribed to them in the TRO Opinion.
. Additionally, the Bermuda Insurers filed motions for authorization to file certain documents under seal. (See ECF Doc. ## 40, 50).
. Earlier in the case, on December 7, 2016, Allied World filed a brief addressing the Bar Order and Barton Doctrine issues (ECF Doc. #28), as did Iron-Starr (ECF Doc. #32).
. In the TRO Opinion, the Court concluded that personal jurisdiction exists over Allied World, and that service of process was properly made by overnight mail pursuant to the Convention on the Service Abroad of-Judicial and Extrajudicial Documents in Civil and Commercial Matters (the "Hague Service Convention”). 561 B.R. at 616-624. After Allied World filed the Withdrawal Notice, withdrawing its motion to dismiss based on lack of personal jurisdiction, but reserving its argument of "insufficient service of process,” the Supreme Court handed down its decision in Water Splash, Inc. v. Menon, — U.S. -, 137 S.Ct. 1504, 197 L.Ed.2d 826 (2017), concluding that the Hague Service Convention permits service of process by mail if two conditions are satisfied: "first, the receiving state has not objected to service by mail; and, second, service by mail is authorized under otherwise-applicable law.” Water Splash, 137 S.Ct. at 1507. The TRO Opinion essentially concluded that both conditions were satisfied here. TRO Opinion, 561 B.R. at 618-619.
. Allied World cannot avoid the protection the New York legislature provides to New York insureds by requiring arbitration in Bermuda. Section 1213(c)(1) requires posting a bond with “the clerk of the court in which the proceeding is pending.” N.Y. Ins. Law § 1213(c)(1). If the insured files a court proceeding in New York, as the Plaintiffs did here, a bond must be posted even if arbitration is ultimately ordered. The protection the statute provides to New York insureds cannot otherwise be assured.
. Section 1213(c)(1)(A) provides in relevant part that an unauthorized foreign insurer shall "deposit with the clerk of the court in which the proceeding is pending, cash or securities or file with such clerk a bond with good and sufficient sureties .... ” NY Ins. Law § 1213(c)(1)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500622/ | BENCH DECISION REGARDING (I) PETITIONS FOR RECOGNITION OF FOREIGN PROCEEDINGS, (II) RECOGNITION OF FOREIGN REPRESENTATIVE, AND (III) RELATED RELIEF UNDER CHAPTER 15 OF THE BANKRUPTCY CODE
MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE
Mood Media Corporation (“Mood Media”) is a Canadian company. It is the applicant in a proceeding under Section 192 of the Canadian Business Corporations Act that is pending in Ontario and that was filed May 18, 2017. Fourteen direct and indirect U.S. subsidiaries of Mood Media Corp. are also alleged to be Debtors in the Canadian proceeding. Mood Media and the fourteen U.S. companies all seek recognition of the Canadian proceedings as foreign nonmain proceedings in which each of them claims to be a Debtor.
The evidence before me shows that some or all of the relevant U.S. companies are guarantors of some of Mood Media’s obligations, including $350 million of 9.25% senior unsecured notes due 2020. In the Canadian proceeding, Mood Media submitted for approval a proposed scheme of arrangement under which the 9.25% notes would be exchanged for new company notes, plus some common stock, and the old common stock of Mood Media would be cashed out at a price of Canadian 17 cents per share.
Mood Media and its U.S. subsidiaries now seek recognition of the Canadian proceedings as foreign nonmain proceedings, although I understand from today’s hearing that they actually seek recognition of the Canadian proceeding as a foreign main preceding in the case of Mood Media itself. They also seek or will seek recognition and enforcement of orders entered in the Canadian proceeding that approve the scheme of arrangement, and that enjoin certain actions by certain creditors.
I will enter an order that gives substantive relief to the applicants here that is analogous to what is requested, and that I believe gives them what they desire, but not on the theories they have proposed.
The applications for recognition raise two issues.
First, are the fourteen U.S. companies “debtors” in a foreign proceeding? For purposes of Chapter 15, the term “debtor” is defined in section 1502(1) of the Bankruptcy Code as “an entity that is the subject of a foreign proceeding.” 11 U.S.C. § 1502(1). A “foreign proceeding” is defined in section 101(23) of the Bankruptcy Code as “a collective judicial or administrative proceeding in a foreign country ... 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).
It has been acknowledged before me today that the relevant U.S. companies could not have commenced their own proceedings under Section 192 of the Canada *559Business Corporations Act. One must be a Canadian corporation in order to do so.
The application for commencement of the Canadian proceeding has been provided to the Court, and it was submitted with some of the motion papers that were filed on the first day. It makes clear that the application was made by the Canadian company, Mood Media Corporation, for an arrangement with regard to its common shares and notes. The “Applicant” who sought relief in Canada and who petitioned for the approval of the scheme of arrangement was Mood Media Corporation. The only reference to the U.S. companies in the application itself is in the title of the document, which vaguely states that the matter relates to a proposed plan of arrangement “of’ Mood Media Corporation and “involving” the U.S. companies.
The Canadian court entered an interim order that has also been provided to the Court. It authorizes the Applicant, Mood Media Corporation, to arrange meetings of its shareholders and of the holders of its 9.25% notes. The interim order does not authorize or direct the U.S. companies to do anything, or contemplate that they will do anything. Instead, the reorganization proceedings that were contemplated were as to the parent company’s restructuring and replacement of its notes and common stock.
In Canada, only the parent company’s shareholders and the holders of the parent company’s notes were asked to vote on the proposed scheme of arrangement. For that purpose, as I mentioned, the Applicant (the parent company) was authorized to arrange meetings. The U.S. companies were not authorized to do so, and were not even listed among the persons who had the right to speak at the meetings that were being arranged.
It is not even clear from the record that I have that the foreign representative was actually appointed by the Canadian court to act for the U.S. companies. The Canadian court’s order said the foreign representative was appointed for “the proceedings.” There is no explicit statement that the foreign representative has even been authorized to act on behalf of the U.S. companies who were “involved” in the proceedings.
I have also reviewed the Canadian court order approving the scheme of arrangement, which was filed this week. It makes clear, again, that the arrangement is an arrangement “of’ Mood Media Corporation. It includes only the vague language about the scheme “involving” the U.S. companies to suggest that the U.S. companies are even affected by it. The scheme of arrangement requires the noteholders of Mood Media to exchange their notes, and in the process, to release any guarantee claims against the U.S. companies, but it does not affect other creditors of the U.S. companies, and does not affect any assets or business operations of the U.S. companies.
In short, there is no indication in any of the papers submitted to me or in the testimony that I heard today that the Canadian court purported to take jurisdiction over the business or assets of the U.S. companies, or that it even could have done so. The Canadian court ordered that creditors refrain from taking certain actions, but that is all. It exercised no control, gave no directions and organized no procedures by which the U.S. companies were separately directed or authorized to deal with their creditors, or to reorganize their obligations, or to do anything. The U.S. companies, in short, were just there as beneficiaries of orders that related to the restructuring of the parent company’s obligations.
*560The applicants before me today have urged that I take a contrary view of what is required to make somebody a “debtor” in a foreign proceeding. They argue that Canadian courts may order lots of parties to do lots of different things, and that you don’t have to be an Applicant to be “subject” to orders that a Canadian court may issue in a restructuring case. They urge me to find that since the U.S. companies will get releases of their guarantees, and since U.S. creditors have been enjoined from taking certain other actions, that the “business or assets” of the U.S. companies are thereby “subject to” the control or supervision of the Canadian court, and the U.S. companies therefore are “debtors” in those proceedings. '
Just putting the proposition in that form, however, should be enough to show how much of an overstatement it is. For example, in arguing that the Canadian courts can assert power over various entities, the applicants before me have contended that Canadian courts have power to order financing parties to honor their commitments in connection with a restructuring. Maybe they do. But surely that does not mean that a lender in a Canadian proceeding is now supposed to be considered to be a “debtor” in a foreign proceeding for purposes of Chapter 15.
Similarly, the brief submitted on behalf of the applicants makes clear that the Canadian statute contemplates that stock of a Canadian company may be exchanged for stock of a non-Canadian company. In that regard, the non-Canadian company may be a party who is affected by a Canadian proceeding or “involved” in it, and may even be ordered to honor its commitments in connection with that proceeding. That seems entirely right. But the fact that the Canadian court can exercise such powers over that non-Canadian company as to those arrangements hardly makes that company a “debtor” in the Canadian proceeding.
There are plenty of instances in chapter 11 cases in this Court where someone may buy assets, or propose a merger, or offer to issue stock in a non-bankruptcy company either to creditors or to shareholders of a debtor. I may have jurisdiction in such a case over that proposal, and if I confirm a plan I have jurisdiction to order people to comply with their obligations under the plan. But nobody would ever reasonably contend that an acquiring company in such a case is now a chapter 11 “debtor,” or that the buyer’s own obligations are being, restructured by reason of its participation in a transaction that is authorized by another company’s chapter 11 plan. ’
Similarly, a foreign proceeding and a U.S. proceeding often result in releases of claims against officers and directors, or other parties. There are also often releases of claims against indenture trustees when securities are canceled or exchanged. These orders affect releasees, but nobody would reasonably argue that the ability of a court to release those claims means that the releasees are persons who aré subject to the proceedings, and subject to the jurisdiction of the court, in a way that makes them “debtors” in the proceedings.
In fact, a Court in any insolvency proceeding exercises the right to cancel or restructure a creditor’s obligations. In that regard, the creditor’s claim is subject to the Court’s authority, and to the extent that the creditor’s claim is an asset, its asset is being affected by the foreign proceeding. A creditor’s asset is “subject” to the court’s authority as a result, but nobody would think that is sufficient to allow the creditor itself to be treated as it if were a “debtor” in a foreign proceeding,
The “debtor” in the foreign case is the company whose restructuring or liqui*561dation is the subject of the foreign proceeding. In this case, the Canadian court may have had the authority to direct creditors of the Canadian parent to release the guarantees provided by the U.S. companies; nobody has appeared before me to challenge the Canadian court’s authority to do that. The U.S. companies may thereby be affected by the Canadian proceeding, in the same way that a third-party releasee may be affected by a confirmed chapter 11 plan in the United States. But that release of the guarantee is not enough to make the U.S. companies “debtors” in the foreign case. They are not applicants in the Canadian case; they were not authorized or directed to do anything to effect a reorganization of their own liabilities; and no order was issued that exerted any control, or purported to exert any control, or contemplated any control over the assets and affairs of the U.S. companies. In fact, the only effect that the proceeding had on the U.S. companies was that the Canadian court issued orders that prevented the creditors of the U.S. companies from doing certain things. None of this is sufficient to make the U.S. companies “debtors” in the way that was contemplated by Chapter 15.
My own orders in the Tervita cases (Case No. 16-12920 (MEW)) have been cited as supposedly representing a contrary ruling. However, if the Tervita cases raised any issues that are at all analogous to issues raised here, that was not brought to my attention, and I did not rule in Tervita on the issues present here.
I have also been told that in two Delaware cases, recognition was given to proceedings under the CBCA involving U.S. companies who were not applicants in those proceedings. I have looked at the dockets in those cases, and did not find any indication that the issue was raised or litigated, or that any opinions on the question were issued. So I cannot give any credence to the suggestion that these other cases call for a contrary decision to the one I have reached.
The second question raised by the petitions in this Court is whether the Canadian proceedings would qualify as foreign nonmain proceedings, even if the U.S. companies were debtors in those eases.
As to Mood Media, it appears to have its center of main interest in Canada, and there does not seem to be any issue as to whether the proceeding in Canada should be recognized as a foreign main proceeding for Mood Media. As to the U.S. companies, however, there is no contention that they have their centers of main interest in Canada, so the Canadian proceeding cannot be a foreign main proceeding as to the U.S. companies. In addition, the Canadian proceeding cannot be a “foreign nonmain” proceeding unless it is a foreign proceeding “pending in a country where the debt- or has an establishment.” 11 U.S.C. § 1502(5).
Section 1502(2) of the Bankruptcy Code defines an “establishment” as “any place of operations where the debtor carries out a non-transitory economic activity.” 11 U.S.C. § 1502(2). The Collier’s treatise explains that the purpose of this definition is to limit the definition of foreign proceedings “to those pending in a country where the Debtor has a place of business.” See 8 Collier on Bankruptcy, ¶ 1502.01[2] (16th ed.); see also In re Creative Fin. Ltd., 543 B.R. 498, 520 (Bankr. S.D.N.Y 2016) (holding that in order to have an establishment in a country a debtor must “conduct business in that country.”)
Courts have similarly held that in order to have a place of operations from which a debtor carries out economic activity on a non-transitory basis, the debtor must have “a seat for local business activity” in the foreign country that is relevant, and that it must engage in business or professional activity from that seat of local *562business activity that has a “local effect on the marketplace.” Id.; see also In Re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, 131 (Bankr. S.D.N.Y 2007) (holding that the requirements of a “place of operations” from which “economic activity” is conducted require a seat for local business activity that has a local effect on the markets); In Re British Am. Ins. Co., 425 B.R. 884, 915 (Bankr. S.D. Fla. 2010) (same); Lavie v. Ran, 607 F.3d 1017, 1027 (5th Cir. 2010) (holding that the definition of establishment requires “a place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professional”).
In other words, the definition contemplates the existence of a place of business in the foreign country from which market-facing activities are conducted. Here, the U.S. companies admittedly have no office or physical presence of any kind in Canada. The evidence that was offered showed that the companies as a whole operate as an integrated enterprise to some extent, and that management, financial management, cash management, accounting, treasury, internal audit, legal, risk management, human resources, and procurement functions may be shared to some extent. The evidence also showed that the U.S. companies pay management fees to the Canadian parent for services that are provided. However, none of this suffices to show that the U.S. companies maintain a place of operations in Canada from which market-facing activities are conducted. The parent company may employ people who provide services of various kinds to the U.S. companies, but that does not mean the U.S. companies have places of business in Canada.
The evidence also showed that some or all of the U.S. companies transact for the procurement of professional and administrative services in Canada, including accounting services. However, I know of no support for the idea that hiring others to provide services for you amounts to establishing a place of operations from which you conduct economic activity of your own in a jurisdiction.
There is evidence before me that the U.S. companies are subject to oversight by the Canadian parent company’s directors, but that has nothing to do with whether the U.S. companies have a place of operations in Canada from which they conduct economic activity. The U.S. companies also are guarantors of debt obligations that were issued in Canada, and they pay inter-company obligations to the Canadian parent company, but having liabilities or paying debts in a jurisdiction does not mean that the U.S. companies have a place of operations there.
Three of the U.S. companies apparently have license arrangements with Canadian entities for intellectual property. That certainly is not enough to show that all of the U.S. companies engage in economic activity in Canada. Even as to the three U.S. companies that have the licensing arrangements, the evidence was that that economic activity is conducted entirely by U.S. employees who are located in the United States. The statute does not merely require economic activity; it requires the existence of a place of operations in the foreign country from which the economic activity is conducted. The evidence did not support the existence of such a place of operations. To the contrary, it showed that the economic licensing activity, even if it related to Canada, was conducted from a place of operations that is in the United States.
The evidence also was to the effect that the U.S. companies may have contracts or contacts of various kinds with affiliates, franchisees, or distributors in Canada, but nothing was identified that showed that *563the U.S. companies themselves have places of operations in Canada, from which outward-facing market activities of any kind were conducted.
I am aware of cases that hold that not much is needed in order to show that an “establishment” exists. I am aware of cases, for example, that have held that the presence of a few employees in an office who receive payments of subscriptions for investments in funds is sufficient to show that a “place of operations” existed from which non-transitory economic activity was conducted. But I do not even have that in. this case. I have no employees, nothing in Canada that under any applicable case law authority could be construed as a place of operations of the U.S. companies themselves. There may well be connections to Canadian entities or liabilities, but that falls short of showing that any of the U.S. companies has an establishment in Canada.
I therefore will recognize the Canadian proceedings as foreign main proceedings as to Mood Media Corporation, the Canadian parent company, but I will deny the request that I recognize the Canadian proceedings as foreign nonmain proceedings in which the U.S. companies are debtors. I do not believe they satisfy either of the two tests that I have described.
As a practical matter, though, I do not think that will alter the relief that will be available to the U.S. companies. The orders entered in Canada affect the U.S. companies in two ways. First, they require an exchange of the 9.25% notes for new notes, and in doing so they free the U.S. companies from their guarantee obligations as to the 9.25% notes. I can and will enforce that portion of the Canadian court order in connection with my recognition of the order as to the Canadian parent company.
The orders by the Canadian court also bar counterparties from contracts or debt instruments from invoking ipso facto clauses, based on the U.S. companies’ involvement in the Canadian proceedings. For the reasons I have stated here, I do not think the U.S. companies were “debtors” in the Canadian case, and therefore I do not think that ipso facto clauses could or should be invoked as a result. But to the extent anyone wanted to claim otherwise, and argue that the U.S. companies were “debtors” in Canada, then in that instance the U.S. companies would and should be entitled to recognition in this country of the order entered by the Canadian court that would bar such claims. Accordingly, as part of recognition of the orders entered by the Canadian court in the parent company’s case, I will include in my order a direction that counterparties to debt instruments and contracts with the U.S. companies will be barred from claiming that the U.S. companies’ involvement in the Canadian proceedings amounted to their participation as “debtors,” or to the commencement of insolvency proceedings as to the U.S. companies.
Counsel to Mood Media is directed to submit a proposed order that reflects these rulings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500624/ | MEMORANDUM OPINION AND ORDER REGARDING OCWEN LOAN SERVICING LLC’S MOTION TO LIFT THE AUTOMATIC STAY
MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is a motion for relief from the automatic stay (the “Motion,” ECF Doc. # 8) regarding real property owned by Rodolpho O’Farrill (the “Debtor”), located at 1554 Leland Avenue, Bronx, New York 10460 (the “Property’). The Motion was filed on June 19, 2017, by Ocwen Loan Servicing LLC (“Ocwen” or the “Movant”), as servicer for HSBC Bank USA, N.A., as Indenture Trustee for the Registered Holders of the Renaissance Home Equity Loan Asset-Backed Certificates, Series 2005-1. The Motion is supported by a memorandum of law (the “Movant’s Brief,” ECF Doc. # 9) and several exhibits, including copies of documents establishing a perfected security interest and the Movant’s ability to enforce the terms of the underlying note (“Exhibit A,” ECF Doc. #8-1 at 1-46); the Mov-ant’s statement regarding the indebtedness and default of the Debtor regarding the Consolidated Note and Mortgage (defined below) on the Property (“Exhibit B,” ECF Doc. # 8-1 at 47-51); an order filed September 16, 2016, granting a motion to dismiss a chapter 7 petition filed by the Debtor on June 23, 2016, in Case No. 16-11820 (“Exhibit C,” ECF Doc. #8-1 at 52-53); and an order filed April 13, 2017, granting a motion to dismiss a chapter 13 petition filed by the Debtor on December 19, 2016, in Case No. 16-13536 (“Exhibit D,” ECF Doc. # 8-1 at 54-56). No objections to the Motion have been filed. The Debtor did not provide a statement of intention to either retain or surrender the Property as required by section 521(a)(2)(A) of the Bankruptcy Code. Additionally, the chapter 7 trustee (the “Trustee”) filed a response to the Motion on July 12, 2017 (the “Trustee’s Response,” ECF Doc. # 12), stating that he does not object to the Movant’s Motion. (Trustee’s Response ¶ 5.)
For the reasons stated below, the Court finds that there is no automatic stay in place in the instant case. In the alternative, even if the automatic stay was in place in this case, there would be grounds to lift the stay. Further,' the Court grants the Movant in rem relief under 'section 362(d)(4)(B), permitting the Movant to proceed to foreclose against the Property uninhibited by frivolous filings in this case or any subsequent cases, assuming that the Movant complies with applicable State law recording requirements for notices of interests or liens in real property.
I. BACKGROUND
A. The Prior Bankruptcy Filings
In his two prior bankruptcy filings, both pending within the preceding year, the *588Debtor claimed the Property as property of the estate. (Mot. ¶ 6.) Both of the Debt- or’s prior bankruptcy petitions were dismissed. (Mot. 117.)
The Debtor filed a chapter 7 petition on June 23, 2016 (“Petition 1”). (Mot. ¶ 8 (discussing Case No. 16-11820 before Judge Bernstein in the Southern District of New York Bankruptcy Court).) A deficiency notice was filed on June 24, 2016, on account of the Debtor’s failure to submit required documents, including the Debtor’s schedules. (See Case No. 16-11820, ECF Doc. #3 at 1.) On September 16, 2016, Judge Bernstein granted the United States Trustee’s motion to dismiss the case, based on the Debtor’s failure to adequately explain why he did not attend a creditors’ meeting. (Ex. C at 53.)
The Debtor next filed a chapter 13 petition on December 19, 2016 (“Petition 2”). (Mot. ¶ 9 (discussing Case No. 16-13536 before Judge Garrity in the Southern District of New York Bankruptcy Court).) On April 13, 2017, Judge Garrity dismissed the case for cause due to the Debtor’s failure to appear at the scheduled section 341(a) meeting of creditors, and due to the Debtor’s failure to provide all documentation as required by the chapter 13 trustee. (Ex. D at 55.)
B. The Current Bankruptcy Filing
The current chapter 7 proceeding, filed on April 17, 2017 (“Petition 3,” ECF Doc. # 1), is the Debtor’s third bankruptcy case pending in the past year. (Mot. ¶ 6.) However, in his schedules for this filing, the Debtor checked the “No” box for the question “[h]ave you filed for bankruptcy within the last 8 years?” (Petition 3 at 3.)
In his petition, the Debtor requested a 30-day extension due to his inability to obtain credit-counseling services during the seven days after he made his request for such. (Petition 3 at 5.) However, one month and three weeks after May 17, 2017 — the expiration of the 30-day extension — the Debtor had still not filed a statement of completion of a course concerning personal financial management, and a notice of this requirement was filed on July 7, 2017, and a certifícate of mailing regarding this notice was filed on July 9, 2017. (See ECF Docs. ## 10-11.)
C. The Mortgage
On September 20, 2002, the Debtor executed and delivered a promissory note (“Note 2002”) and a mortgage (“Mortgage 2002”), securing payment of Note 2002 in the amount of $128,000.00 to Delta Funding Corporation (“Delta”). (Mot. ¶ 2.) Mortgage Electrical Registration Systems Inc. (“MERS”) held Mortgage 2002 as nominee for Delta, and Mortgage 2002 was recorded on November 18, 2002. (Id.)
On February 9, 2005, the Debtor executed and delivered a promissory note (“Note 2005”) and a mortgage (“Mortgage 2005”), securing payment of Note 2005 in the amount of $73,761.27 to Delta. (Id.) MERS held Mortgage 2005 as nominee for Delta, and Mortgage 2005 was recorded on May 19, 2005 in Instrument Number 2005022400761001 of the Public Records of Bronx County, New York. (Id.)
On February 9, 2005, the Debtor also executed and delivered a promissory note (“Consolidated Note”) and a mortgage (the “Consolidated Mortgage”) to consolidate Mortgage 2002 and Mortgage 2005 into a single lien, securing payment of the Consolidated Note in the amount of $200,000.00 to Delta. (M) MERS held the Consolidated Mortgage as nominee for Delta, and the Consolidated Mortgage was recorded on May 19, 2005 in Instrument Number 2005022400761002 of the Public Records of Bronx County, New York. (Id.) *589The Consolidated Mortgage provides the Movant with a lien on the Property. (Id.)
On February 9, 2009, the Debtor executed and delivered a loan modification agreement (the “Loan Modification Agreement”) that decreased the principal balance of the Consolidated Mortgage to $185,293.40. (Id.)
The Debtor did not provide any estimate of the Property’s value; the only evidence of Property’s value in the record is the Movant’s $431,000.00 estimated market value of the Property. (Ex. A at 48.)
The Consolidated Note and the Consolidated Mortgage have been and remain in default since November 1, 2010, (Mot. ¶ 4.) The Debtor, who does not list any employment information in his schedules, has not sent a payment to the Movant since October 19, 2010. (Ex. A at 49.) The Movant owes a total pre-petition amount of $311,757.96, which includes a principal amount of $183,296 and $76,172.62 of interest, accruing at the contractual interest rate of 6.35000%. (Ex. A at 49.) As of May 3, 2017, the Movant owes a combined total pre-petition and post-petition amount of $312,275.26. (Mot. ¶ 5.)
D. The Motion
The Movant argues that relief from the automatic stay is warranted under sections 362(d)(1) and (4). (Mot. ¶ 14.) The Movant fails to discuss section 362(c). ,
Regarding section 362(d)(1), the Movant argues that, combining continually accruing interest, real property taxes, and insurance on the Consolidated Mortgage, “whatever equity [that] might exist will decrease rapidly. Therefore, Movant’s security interest is not adequately protected, constituting ‘cause’ to terminate the automatic stay as it pertains to Movant’s lien interest [on the Property].” (Movant’s Brief at 2-3.)
Regarding section 362(d)(4), the Movant argues that the Debtor’s pattern of petition filings and subsequent dismissals “for failure to adhere to the Court’s requirements ... suggests that the Debtor has filed each of these bankruptcies for the sole purpose of delaying, hindering, and/or defrauding [the Movant],” and that the Debtor’s “serial filings evidence a lack of good faith.” (Mot, ¶¶ 10-11.) In addition, the Movant seeks a restriction on “any future imposition of the automatic stay on its currently pending foreclosure action [on the Property],” as well as attorneys’ fees and costs in incurred in preparing and filing the Motion. (Mot. ¶¶ 14,16.)
In the Trustee’s Response, the Trustee states that he “does not believe the Debt- or’s [Property] ... holds any value for the creditors of this estate,”' and 'therefore does not object to the Motion. (Trustee’s Response ¶¶ 1, 5.) In addition, the Trustee, like the Movant, fails to discuss section 362(c).
The Movant has standing to bring the Motion, as evidenced by the mortgage assignment (“Assignment,” Ex. A at 42) entered into on March 28,2005, assigning the mortgage for the Property from MERS, as nominee for Delta, to HSBC Bank USA, N.A., as Indenture Trustee for the registered holders of Renaissance Home Equity Loan Asset-Backed Certificates, Series 2005-1, whose address is c/o Ocwen Loan Servicing, LLC, 1661 Worthington Road, Suite 100, West Palm Beach, Florida, 33409. (See Ex. A at 42.)
As already stated, the Debtor failed to provide the required statement of intention to retain or surrender the Property. The section 341 meeting of creditors was originally scheduled for May 23, 2017, so even if the Debtor had stated an intention to retain the Property, the Debtor would have been required to perform the intention within 30 days thereafter, which the *590Debtor did not do. 11 U.S.C. § 521(a)(2)(B). The Debtor did not oppose the Motion in any event.
II. LEGAL STANDARD
A. Section 362(c)
Under section 362(c)(3) of the Bankruptcy Code,
[I]f a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed, ...
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case;
11 U.S.C. § 362(c)(3). Therefore, if a debt- or files a petition, but had one case pending within the preceding year that was dismissed, the automatic stay for the new case terminates after 30 days, as long as the debtor undertakes no successful action to maintain the stay pursuant to section 362(c)(3)(B).
Similarly, under to section 362(c)(4)(A),
(i) [I]f a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, ... the stay under subsection (a) shall not go into effect upon the filing of the later case; and
(ii) on request of a party in interest, the court shall promptly enter an order confirming that no stay is in effectf.]
11 U.S.C. § 362(c)(4)(A). In such a case, if a debtor files a petition, but had two cases pending within the preceding year, both of which were dismissed, the debtor does not receive an automatic stay upon filing the new, third petition.
However, within 30 days of filing the third petition, a party in interest may request that the court order an automatic stay to take effect, if the party in interest can “[demonstrate] that the filing of the later case is in good faith as to the creditors to be stayed[.]” 11 U.S.C. § 362(c)(4)(B). Yet, according section 362(c)(4)(D),
[The] case is presumptively filed not in good faith (but such presumption may be rebutted by clear and convincing evidence to the contrary) — (i) as to all creditors if — (I) 2 or more previous cases under this title in which the individual was a debtor were pending within the 1-year period[.]
11 U.S.C. § 362(c)(4)(D).
B. Section 362(d)
The Bankruptcy Code imposes an automatic stay of nearly all litigation against the debtor. 11 U.S.C. § 362(a). But a party in interest can seek relief from this automatic stay “for causp, including the lack of adequate protection of an interest in property of such party in interest.” 11 U.S.C. § 362(d)(1). A party secured by an interest in real property can also seek relief from the stay “if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors .... ” 11 U.S.C. § 362(d)(4).
1. Section 362(d)(1)
Any party moving to lift the automatic stay under section 362(d) must first establish its prima facie case. See In re Elmira Litho, Inc., 174 B.R. 892, 902 (Bankr. S.D.N.Y. 1994). A prima facie case that a party lacks adequate protection under section 362(d)(1) can be satisfied by showing (i) a quantitative decline in value of a property, or (ii) that the debtor has *591failed to make numerous post-petition payments. See id., at 902-04. If a movant fails to demonstrate its prima facie case, the court must deny the request to lift the stay. 3 Collier on Bankruptcy ¶ 362.10 (16th ed. 2016). Once the creditor makes a prima facie case, the burden shifts to the debtor on all other issues. Elmira Litho, 174 B.R. at 902; 3 Collier on Bankruptcy ¶ 362.10.
Courts may find that there is adequate protection for a secured creditor where there is equity in the property, but the equity cushion must be significant. See In re Rorie, 98 B.R. 215, 221 (Bankr. E.D. Pa. 1989) (stating that in determining whether the equity cushion provides adequate protection, the court considers factors such as “the size of the cushion; the rate at which the cushion will be eroded; and whether periodic payments are to be made to prevent or mitigate the erosion of the cushion,” and holding that an equity cushion valued at almost 42% of the claim is sufficient to provide adequate protection); In re McKillips, 81 B.R. 454, 458 (Bankr. N.D. Ill. 1987) (stating that “an equity cushion of 20% or more constitutes adequate protection,” while “an equity cushion under 11% is insufficient to provide adequate protection”); In re James River Assocs., 148 B.R. 790, 796 (E.D. Va. 1992) (holding that a 2% equity cushion is insufficient to provide adequate protection because of the deterioration of the equity cushion from accumulating interest).
2. Section 362(d)(4>)
In order for the court to lift the automatic stay under section 362(d)(4), the Debtor’s scheme must involve either “(A) [the] transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or (B) multiple bankruptcy filings affecting such real property.” 11 U.S.C. § 362(d)(4). A successful motion to lift the automatic stay under section 362(d)(4) halts the automatic stay from applying to the real property in future bankruptcy filings for a period of 2 years. See 11 U.S.C. § 362(b)(20).
However, it is not easy to successfully move for relief from the automatic stay under 11 U.S.C. § 362(d)(4). “[T]he language [in section 362(d)(4)] was dejiber-ately chosen by Congress to impose a substantial burden of proof on secured creditors 3 Collier on Bankruptcy ¶ 362.05[19][a]. Collier notes that requiring a high standard on motions under section 362(d)(4) is consistent with the statute’s extreme remedy, which halts the automatic stay from applying to the real property in bankruptcy filings for two' years. Id. Courts have agreed with this approach, only granting relief under section 362(d)(4) in extreme circumstances when á creditor has demonstrated that the bankruptcy petition was filed as part of a scheme to delay, hinder, and defraud creditors. In re Young, No. 06-80534, 2007 WL 128280, at *8-10 (Bankr. S.D. Tex. Jan. 10, 2008) (holding that to prevail on a 362(d)(4) motion, a creditor “must demonstrate that the filing of this petition was part of a scheme to ‘delay, hinder, and defraud.’”); In re Muhaimin, 343 B.R. 159, 167 (Bankr. D. Md. 2006) (“To obtain section 362(d)(4) relief, the court must find three elements to be present,” which are (i) a scheme by the debtor, (ii) to delay, hinder and defraud creditors, (iii) involving the actions listed in either section 362(d)(4)(A) or (B)).
III. ANALYSIS
A. Pursuant to Section 362(c)(4), There is No Automatic Stay in Effect
The Debtor filed Petition 1, a chapter 7 petition, on June 23, 2016⅛ which was *592dismissed by Judge Bernstein on September 16, 2016, and then filed Petition 2, a chapter 13 petition, three months later on December 19, 2016, which was dismissed by Judge Garrity on April 13, 2017. The Debtor then filed Petition 3, the instant chapter 7 petition, four days later on April 17, 2017. Both Petitions 1 and 2 were pending within the year preceding the filing of Petition 3, contrary to what the Debtor wrote on his Petition 3 schedules, and Petitions 1 and 2 were dismissed. Therefore, pursuant to section 362(c)(4)(i), the automatic stay “shall not go into effect upon the filing of the later case,” because Petition 3 is a “single or joint case ... filed by or against a debtor .,., and ... 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed ....” See 11 U.S.C. § 362(c) (4) (A) (i).
B. Pursuant to Section 362(d)(4), Even if There Was an Automatic Stay in Effect, the Court Would Grant the Motion
The Movant establishes a prima facie case that the automatic stay, if in effect, should be lifted under section 362(d)(1) by showing that, among other things, the Debtor has failed to make numerous payments on the Consolidated Note and Mortgage, the last payment occurring during October of 2010, over six and a half years ago. Regarding the question of adequate protection of the Property, if the Debtor owns the Property to the extent that its value exceeds the Movant’s claim of $312,275.26, and the Movant’s estimated market value of the Property of $431,000.00 is accurate, the Debtor has an equity cushion of $118,724.74 in the Property, which is 38% of the Movant’s claim. The Movant argues that interest, taxes, and insurance costs will rapidly erode the equity cushion.
The Movant also supports its assertion that it is entitled to prospective relief from the automatic stay under section 362(d)(4) by citing the Debtor’s prior two bankruptcy filings pending within the preceding year, both of which involved the subject Property, and both of which were dismissed due to the Debtor’s failure to attend creditor meetings and/or file the requisite schedules. In his schedules for this bankruptcy filing, the Debtor checked the “No” box for the question “[h]ave you filed for bankruptcy within the last 8 years?” Further, in this bankruptcy filing, the Debtor has thus far failed to file a statement of completion of a course concerning personal financial management, despite nearly three months having passed since he filed his petition. The Debtor also failed to file schedules or to appear for the section 341 meeting.
The Debtor has demonstrated a clear pattern of repeat filings concerning the Property, and in each bankruptcy case the Debtor has consistently failed to honor the obligations of a debtor in good faith, and has instead used the bankruptcy filings as a scheme to delay foreclosure proceedings against the Property. See Muhaimin, 343 B.R. at 167. Additionally, the Debtor has consistently failed to make payments on the Consolidated Note, and has demonstrated no intention of making payments in the future.
IV. CONCLUSION
Pursuant to section 362(c)(4)(A)(i), there is no automatic stay in effect because the Debtor had two cases pending within the year preceding the filing of Petition 3, both of which were dismissed. As a result, the Court finds that there is no automatic stay in place in the instant case.
However, even if the automatic stay was in effect, despite the fact that the Debtor appears to have an equity cushion in the *593Property, the Debtor has not made a payment on the Consolidated Note or Mortgage in over six and a half years, and appears to have attempted to use the Bankruptcy Code improperly and repeatedly in an effort to undermine the Movant’s rights. The Court also finds that the assertions and evidence set forth by the Movant demonstrate that the Debtor’s bankruptcy petition was filed as part of a scheme to delay, hinder, and defraud creditors. Accordingly, pursuant to section 362(d)(4)(B), the Court grants the Movant in rein relief permitting the Movant to foreclose against the Property despite any further bankruptcy filings (in this case or other cases), assuming that the Movant complies with the recording requirements of State law governing recording of notices of interests or liens in real property.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500625/ | OPINION
Brendan Linehan Shannon, Chief United States Bankruptcy Judge
INTRODUCTION1
Before the Court are the (i) Debtors’ Amended Second Omnibus (Substantive) *607Claims Objection2 (the “Objection”) which objects, in part, to 22 claims3 filed by various “Parker Heirs” each seeking $100 million on account of their royalty claims and (ii) the Joint Motion of the Debtors and the Official Committee of Unsecured Creditors for Entry of an Order Establishing the Amount of the Disputed Royalty Holder Claims Reserve4 (the “Claims Reserve Motion”). The Parker Heir Claims are based, in part, on an oil and gas royalty lease (as defined and described infra, the “Walling Lease”) entered into by their grandfather. The Parker Heirs dispute whether the Walling Lease is still valid and, if it is, the amount of the royalties owed therefrom.
As discussed in detail below, the Court finds that the Walling Lease is valid and remains in effect, and that it allows for pooling of the mineral interests. As the 25-Acre Tract does not contain any wells, the only entitlement of the Parker Heirs to royalty payments is through the Walling Lease. The Court further finds that the Debtors have paid the Parker Heirs their royalty payments consistent with the provisions of the Walling Lease. As a result, the Court disallows the Parker Heir Claims in full. Furthermore, as the Parker Heir Claims are disallowed, the Court need not reach the Claims Reserve Motion as it is moot with respect to the Parker Heir Claims.
JURISDICTION AND VENUE
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b)(1) and per the retention of jurisdiction provision embodied in the confirmed Global Settlement Joint Chapter 11 Plan of Reorganization of Samson Resources Corporation and its Debtor Affiliates (with Technical Modifications), Art. XI.5 Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of the Objection and the Claims Reserve Motion constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (K).
FACTUAL BACKGROUND
A. Background of Bankruptcy Case
On September 16, 2015 (the “Petition Date”), each of the Debtors filed a voluntary Chapter 11 petition in this Court. During the pendency of their Chapter 11 cases, the Debtors operated their businesses and managed their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Court entered a final order for joint administration of these Chapter 11 cases6 and has not appointed a trustee. The Office of the United States Trustee for the District of Delaware formed an official committee of unsecured creditors of Samson Resources Corporation (the “Committee”) on September 30, 2015.7
On February 13, 2017, the Court en*608tered an order8 confirming the Global Settlement Joint Chapter 11 Plan of Reorganization of Samson Resources Corporation and Its Affiliates9 (the “Plan”). The Final Effective Date (as defined in the Plan) occurred on March 1, 2017. On the Final Effective Date and pursuant to the terms of the Plan, Samson Resources II became the parent of the majority of the above-captioned reorganized debtors (collectively, the “Reorganized Debtors”)..
Also, on the Final Effective Date of the Plan,10 the Second Lien Lenders (as defined in the Plan) became the new equity owners of the Reorganized Debtors and the Committee formed the Settlement Trust. Pursuant to the terms of the Plan, the authority to object to claims was vested in the Debtors and the Reorganized Debtors (with respect to all claims that are not General Unsecured Claims, as defined in the Plan)11 and the Settlement Trust (solely with respect to General Unsecured Claims).12
B. Debtors’ Business
The Debtors were an onshore oil and gas exploration and production company-that owned royalty and working interests in various oil. and,.gas leases primarily located in Colorado, Louisiana, North Dakota, Oklahoma, Texas and Wyoming. As of the Petition Date, the Debtors operated or had interests in approximately 8,700 oil and gas production sites, generating revenue through sales of oil and natural gas to wholesale buyers throughout the United States.
C. Procedural Background Related to Parker Heirs
The Parker Heirs have filed the following claims (collectively, the “Parker Heir Claims”):
*609[[Image here]]
All in, the Parker Heirs have filed claims totaling over $2 billion in the aggregate. The Debtors dispute any liability to the Parker Heirs, but the pendency of such large disputed claims had obvious ramifications for the Debtors’ ability to file and obtain confirmation of a plan of reorganization under Bankruptcy Code § 1129.
Accordingly, on January 24, 2017, the Debtors filed the Debtors’ Motion to Reclassify for All Purposes and Estimate for Voting Purposes Certain Claims Pursuant to the Solicitation Procedures13 (the “Estimation Motion”). In the Estimation Motion, the. Debtors contend that there were certain unresolved unsubstantiated claims asserted by holders of royalty interests (including but not limited to the Parker Heirs), asserting claims for unpaid royalties, trespass, conversion, or other theories. Many of the claims listed in the Estimation Motion were asserted as priority or secured claims and the Debtors requested that a portion of these claims would be reclassified as general unsecured claims.14
In order to make distributions to general unsecured claimants while the claims listed in the Estimation Motion remained unresolved, the Committee and the Debtors jointly filed the Claims Reserve Motion.15 The Claims Reserve Motion proposes to establish a reserve for these disputed royalty claims so that the now Settlement Trust could promptly make distributions to other general unsecured claimants.
Thereafter, on February 28, 2017, the Debtors filed the Debtors’ Amended Second Omnibus (Substantive) Claims Objection,16 which objected, in part, to the Parker Heir Claims and sought, among other related relief, to (a) disallow each of the *610Parker Heir Claims in their entirety, or, in the alternative, (b) reclassify each of the Parker Heir Claims as a general unsecured claim. As reclassification of the Parker Heir Claims to general unsecured claims would affect the Settlement Trust given the amount and quantity of the claims, the Reorganized Debtors and the Settlement Trust sought to bifurcate the objection to the Parker Heir Claims. Thus, on May 1 and 2, 2017, the Court held an evidentiary trial on the threshold issue of whether the Parker Heir Claims should be disallowed in their entirety.17 The issue of the classification or priority of the Parker Heir Claims was held in abeyance until the Court determines the validity and amount, if any, of each of the Parker Heir Claims. This is the Court’s decision.
D. Background Related to Parker Heirs
At the heart of the Parker Heir Claims is a gas and mineral lease (the “Walling Lease”). To understand the Walling Lease, the Court must look back to a 255-acre tract of land in Texas originally owned by John and Anna Walling. After John Walling’s death, Anna Walling conveyed 230 acres of land to B.F. Lewis in 1904 and retained the remaining 25 acres of land for herself.18 After Anna Walling’s death, the 25-Acre Tract (as defined below) was inherited by Anna Walling’s surviving children, including Pat Walling.
i. Walling Lease
On October 1, 1957, Pat Walling and others executed an Oil Gas and Mineral Lease to Neal Woods, as lessee.19 The Walling Lease covered the 25-acre tract of land in Rusk County, Texas (the “25-Acre Tract”). The Walling Lease stated a primary term of five (5) years, and would remain in effect “so long as oil, gas, sul-phur or other minerals or any of them is produced from said land by Lessee or any of the obligations or conditions hereinafter specified in lieu of production are fulfilled.” 20 The critical condition to the Walling Lease, for purposes of the Court’s analysis, is that it required that a well be drilled and production commenced within the primary 5-year term of the lease, viz. before September 30, 1962.21 The Parker Heirs contend that this did not occur, and hence that the Walling Lease terminated decades ago by its own terms.
The Walling Lease permits “pooling” with other leases:
Lessee is hereby give the power and right, as to all or any part of the land described herein and as to any one or more of the formations thereunder and the minerals therein or produced therefrom, at its option and without Lessor’s joinder or further consent, to at any time, and from time to time as a recurring power and right, either before or after production, pool and unitize the leasehold estate and the Lessor’s royalty *611estate created by this lease with the rights of third parties, if any, in all or any part of the land described herein and with any other land, lands, lease, leases, mineral and royalty rights ... so as to create by such pooling and unitization one or more drilling or production units .. .22
The 25-Acre Tract was pooled into two different units: (i) the Booth-Freeman Gas Unit (“Booth-Freeman Unit”), which is 702.91 acres in total and contains 19.16 acres of the 25-Acre Tract;23 and (ii) the Sanders Gas Unit (“Sanders Unit”), which is 131.35 acres in total and contains 5.84 acres of the 25-Acre Tract.24 As explained by Terry Cross, Esquire, a witness at the trial with decades of experience practicing oil and gas law in Texas, pooling allows an oil and gas developer to aggregate multiple properties and treat them as one property for production purposes.25 Furthermore, pooling in Texas is based on contract, whereby the parties to the lease create the authority to pool various acreages.26
Although only 19.16 acres of the 25-Acre Tract is included in the Booth-Freeman Unit, a well drilled and producing in any part of the Booth-Freeman Unit will perpetuate the lease for the lease’s entire 25 acres.27 Further, as noted above, in order for the Walling Lease to perpetuate, a well had to be drilled within the pooled unit within the “primary term” of the lease.28 Significantly, there are no wells on the 25-Acre Tract, meaning that the only entitlement to royalties arises from the pooling authority in the Walling Lease and the success of wells in both the Booth-Freeman Unit and the Sanders Unit.29
Once acreage is pooled, a royalty interest in the minerals produced in the pooled unit will be allocated by the amount of acres a royalty owner has within that pooled unit.30 For example, 19.61 acres of the 25-Acre Tract are in the Booth-Freeman Unit, thus, any oil or gas produced within the Booth-Freeman Unit will be paid to all royalty owners whose acreage is contained in the Booth-Freeman Unit based on the amount of acres held in the Booth-Freeman Unit. The same holds true for the portion (5.84 acres) of the 25-Acre Tract that are contained in the Sanders Unit.
The Parker Heirs contend that the Walling Lease terminated because no wells were drilled in the pooled tract during the primary term of the Walling Lease. However, at trial, the Debtors produced the following evidence: (1) Permit to drill a well in the Booth-Freeman Unit (referred to herein as the “Booth-Freeman # 1 Well”) dated February 19, 1958,31 (2) the completion report for the Booth-Freeman # 1 Well dated March 22, 1958;32 (3) several applications for permits to drill additional wells as well as completion reports for various wells, all noting the existence of Booth-Freeman # 1 Well and referencing the 702.91 Booth-Freeman Unit;33 (4) *612summaries of production reports for the wells in the Booth-Freeman Unit maintained by the Railroad Commission- of Texas which indicate that the Booth-Freeman #1 Well began production in 1958 and continued production through 1965; and (5) IHS34 production reports that show that the Booth-Freeman # 1 Well continues to produce oil and gas.35 Furthermore, Mr. Cross testified as follows:
A: That the production from the Booth-Freeman Number 1 [W]ell held the leases in that unit until the other wells were drilled, and all the leases in the Booth-Freeman unit have been held by this unit production.
Q: As a result, is it your believing— belief that the Walling [L]ease is valid as we sit here today?
A: It did not terminate.36
In support of their position that no well was drilled in the primary term of the Walling Lease, the Parker Heirs produced a map, provided to them by the Debtors, of the Booth-Freeman Unit that depicted a number of wells drilled after 1962: the Booth-Freeman # 1 Well was not shown on that map.37
ii. Family Tree and Fractional Royalty Interests in 25-Acre Tract
Anna Walling had nine (9) children, 8 of whom survived Anna Walling. Thus, the 25-Acre Tract of land in Rusk County, Texas was divided among Anna Walling’s 8 remaining children. One of Anna Walling’s children, Pat Walling, received a one-eighth (1/8) interest in the 25-Acre Tract.
Upon Pat Walling’s death, one-half (1/2) of his one-eighth (1/8) interest was inherited by his wife Catherine Walling (from whom Randolph Parker inherited his interest). Randolph Parker then conveyed (i) one-half (1/2) of his interest to National Locater Service, Inc. (“National Loca-ter”),38 (ii) and one-half (1/2) to his heirs. Because both of his children predeceased him, Randolph Parker’s .0001065 interest passed to his 12 grandchildren, who collectively comprise the Parker Heirs (Darell D. Parker, Chris Parker (who had three children), William A. Parker (referred to herein as “William A. Parker, Senior”), Cherrie Parker Thornton, Gary Pop, Curtis L. Parker, Diane S. Jones, Kenneth E. Parker (now Kendi Narmer Pakey Bey), Karen Parker, William A. Parker (referred to herein as ‘William A. Parker, Junior”), Clifford O. Parker and Randolph Parker).
Thus, based on the division order signed by Randolph Parker, after the transfer to National Locater, Randolph Parker owned a .0001065 royalty interest in the Booth-Freeman Unit.39 Based on the above, and as reflected in the division order, Randolph Parker’s interest is calculated as: ½ x ½ x ⅛ x ⅛ x 19.61 / 702.91 = .0001065.40 This *613interest has now been divided among the Randolph Parker’s 12 grandchildren.41 Thus, each of the Parker Heirs’ fractional interest in the Booth-Freeman Unit is .00000887.42
iii. Other Mineral Owners of 25-Acre Tract
What happens if there is no valid Walling Lease? During the trial, this became a central question. The Debtors assert that if there is no valid Walling Lease, then the Parker Heirs would not be entitled to any royalties and even asserted that the Parker Heirs would be obliged to reimburse the Debtors for the royalty payments made to the Parker Heirs.
As stated above, there are no wells drilled on the 25-Acre Tract. Every royalty payment associated with the 25-Acre Tract results from the acres being pooled — whether in the Booth-Freeman Unit or the Sanders Unit. Further, the Court notes that there are many other holders of fractional royalty interests on that 25-Acre Tract. As noted above, Pat Walling was one of eight siblings who inherited any land or interests from Anna Walling. Although not at issue in these cases, Pat Walling’s siblings also presumably conveyed their interests and now there are possibly hundreds of fractional royalty interest holders in the 25-Acre Tract claiming rights under the Walling Lease.43
iv. The 69-Acre Tract
The Booth-Freeman Unit also contains a 69.9 acre tract of land (“69-Acre Tract”) which is situated to the north of the 25-*614Acre Tract. The 69-Acre Tract was once owned by John and Anna Walling. After John’s death, the 69-Acre Tract was part of the 230 acres sold by Anna Walling to B.F. Lewis in 1904.44 B.F. Lewis sold off portions of the 230-acre parcel, including what is now known as the 69-Acre Tract.45 In 1913, the 69-Acre Tract was conveyed to Pat Waldron.46 This is one of the major evidentiary disputes set forth during the trial. The Parker Heirs assert that Pat Waldron and Pat Walling, who was also known as Pat Waldpn or Walden, are the same person. Thus, the Parker Heirs also submit that they are royalty owners in the 69-Acre Tract.
The Debtors submitted various documents to support their position that Pat Waldron and Pat Walling/Waldon/Walden were different people. The Debtors’ evidence is set forth in the below chart:
[[Image here]]
To summarize, the Debtors acknowledge the phonetic similarities between the names but point out that it is unlikely that Pat Walling would have engaged in significant land transactions at the age of 15, whereas Pat Waldron was married and in his 50’s in 1913.
Interestingly, the Parker Heirs established that Pat Walling was listed in the census as a wage earner and laborer at the age of 12,47 which does raise a question as to whether Pat Walling could have also been a landowner at that time. The Parker Heirs’ point is well taken regarding whether teen-aged Pat Walling could also have been a landowner in that vastly different time. However, the Parker Heirs did not produce any additional evidence showing that Pat Walling and Pat Waldron were the same man and as discussed in detail below, at this point in the proceedings, the Parker Heirs had the burden of proof to show that Pat Walling and Pat Waldron were the same person.
ANALYSIS
A. Standard of Review
When a claim objection is filed in a bankruptcy case, the burden of proof as to the validity of the claim “rests on different parties at different times.” In re Allegheny *615Int’l, Inc., 954 F.2d 167, 173 (3d Cir. 1992). Bankruptcy Rule 3001(f) provides that a proof of claim executed and filed in accordance with the rules of procedure, i.e., includes the facts and documents necessary to support the claim, constitutes pri-mo, facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). Pursuant to Bankruptcy Code § 502(a), a claim that is properly filed under Rule 3001 and Code § 501 is “deemed allowed” unless a party in interest objects. 11 U.S.C. § 502(a). “The objecting party carries the burden of going forward with the evidence in support of its objection which much be of a probative force equal to that of the allegations of the creditor’s proof of claim.” In re Kincaid, 388 B.R. 610, 614 (Bankr. E.D. Pa. 2008) {citing Allegheny, 954 F.2d at 173-74). If the objecting party succeeds in overcoming the prima facie effect of the proof of claim, the ultimate burden of persuasion then rests upon the claimant to prove the validity of the claim by a preponderance of the evidence. Id.
In this case, the Parker Heirs enjoy the benefit of the presumption embodied in Rule 3001 and section 502 of the Bankruptcy Code, and each of the Parker Heir Claims were deemed allowed upon filing. The Debtors have responded with competent evidence and arguments in opposition to each of the Parker Heir Claims. At trial, therefore, the burden lay with the Parker Heirs to prove the validity of the Parker Heir Claims by a preponderance of the evidence.
B. Discussion of Parties’ arguments
The Parker Heirs assert four primary (and largely independent) arguments in support of their Claims: (i) the Walling Lease terminated and, thus, there is not a valid lease for the gas interests in the 25-Acre Tract; (ii) the Debtors have underpaid the Parker Heirs on their royalty interests; (iii) the Parker Heirs own an interest in the 69-Acre Tract;48 and (iv) the Parker Heirs believe their claim should be classified as a secured claim, priority claim, or an administrative claim. In addition, at trial, the Parker Heirs contested the legitimacy of the transfer of one-half of Randolph Parker’s interest to National Locater and the payments from the Debtors on account of that transfer.
In response, the Debtors insist that the Walling Lease is valid as the Booth-Freeman # 1 Well was drilled and has continued in production through the primary lease portion of the Walling fiease, thereby perpetuating the Walling Lease. The Debtors also claim that the Parker Heirs have received all of their royalty interests in the 25-Acre Tract. Finally, the Debtors do not believe that the Parker Heirs can prove any valid interest in the 69-Acre Tract. As a result, the Debtors do not believe that any of the Parker Heir Claims are valid *616and they seek to have these claims disallowed and expunged. In the alternative, the Debtors assert that if the Parker Heirs indeed have any valid claim against the Debtors, such claims are general unsecured claims and must be reclassified as such.
C. Parker Heir Claims
i. The Walling Lease Did Not Terminate.
As mentioned above, paragraph 17 of the Walling Lease permitted pooling with other leases. Furthermore, the lessee’s authority to pool is derived directly from the terms of the lease. As explained in Browning Oil Co., Inc. v. Luecke, 38 S.W.3d 625, 634 (Tex. App. 2000) (citations and footnotes omitted):
Often, if a tract is of insufficient size to satisfy the state’s spacing or density requirements, lessees will “pool” acreage from different leased tracts. Pooling allows a lessee to join land from two or more leases into a single unit. Operations anywhere within the unit are treated as if they occurred on all the land within the unit, and production from a well on the pooled unit is treated as occurring on all the tracts pooled into the unit. With regard to the royalty interest owners, pooling results in “a cross-conveyance of interests in land by agreement among the participating parties, each of whom obtains an undivided • joint ownership in the royalty earned from the land in the ‘block’ created by the agreement. Royalty is distributed on the basis of the proportion each party’s acreage bears to the whole block.” Effective pooling in essence abrogates the rule of capture by allowing owners of non-producing tracts to share in production from the producing tract. A lessee’s authority to pool is derived solely from the terms of the lease; a lessee has no power to pool absent express authority.
As evidenced at trial, on February 26, 1958, 19.16 acres of the 25-Acre Tract covered by the Walling Lease were pooled with other acreage to form the Booth-Freeman Unit. The Booth-Freeman Unit contains 702.91 acres.49 On July 19, 1991, the remaining 5.84 acres of the 25-Acre Tract covered by the Walling Lease were pooled to form the Sanders Gas Unit, which contains a total of 131.35 acres.50 Thus, all 25 acres covered by the Walling Lease have been pooled into the two units.
The original lessee in the Walling Lease was Neal Woods. Carter Jones Drilling Company, Inc. became a successor in interest to Neal Woods. Pursuant to the Declaration of Gas Pooled Unit Cartea-Jones Drilling Company, Inc., et al— Bootlir-Freeman Gas Pooled Unit No. 151 production on any tract constitutes production on every other tract in the Booth-Freeman Unit, and any production is allocated based upon the percentage each owner holds in the unit.52
*617The record adduced at trial conclusively demonstrates that the Booth-Freeman # 1 Well was completed on March 22, 1958, and began producing oil and gas at that time.53 It has continued producing since its completion.54 By 1997, a total of seven (7) wells (Booth-Freeman # 1-# 7 Wells) were drilled in the Booth-Freeman Unit, each was completed, and all of them continue to produce today.55 The Debtors acquired working interests in the deep rights in the Booth-Freeman Unit by two assignments in 2000 and another assignment in 2003.56 Between 2001 and.2007, the Debtors drilled and completed an additional nine wells in the Booth-Freeman Unit (Booth-Freeman # 8-# 16 wells). The Debtors currently operate a total of 11 of the 16 wells in the Booth-Freeman Unit.
When the Parker Heirs were originally provided by the Debtors with a map of the Booth-Freeman Unit the Booth-Freeman # 1 Well was not shown on the map.57 This has caused much confusion for the Parker Heirs and has led them to reasonably conclude that production had not commenced in the primary term of the Walling Lease, since the Debtors’ own map did not show a well dating from prior to 1962. However, at trial, Mr. Cross explained that Booth-Freeman # 1 Well was not noted on this map simply because the Debtors do not own an interest in the Booth-Freeman # 1 Well.58 As a matter of record, Indigo Min-*618erais operates the Booth-Freeman # 1 Well. However, due to the pooling in the Booth-Freeman Unit, it does not matter who operates or has interest in each individual well, the wells and acreage are “pooled” to create a collective unit.
The Sanders Gas Unit contains one well, the Sanders # 1 well, which was completed on July 29,1991. The Debtors do not operate the Sanders # 1 well: Chisos operates this well. However, it continues to produce gas.
Production from the Booth-Freeman # 1 Well is sufficient to perpetuate the Booth-Freeman Unit, as well as the Walling Lease, because production anywhere in the Booth-Freeman Unit constitutes production on the Walling Lease. Chambers v. San Augustine Cty. Appraisal Dist., 514 S.W.3d 420 (Tex. App. 2017) (“Production anywhere on a pooled unit is treated as production on every tract in the unit. Thus, all royalty interest owners in the land subject to the lease share in production no matter where the well is drilled on the leasehold. The lessor’s royalty interest under a lease providing that lessor will have a fractional portion of the minerals produced is considered an interest in real property and is taxable as such.” (citations omitted)).
Based upon the evidence and testimony described above, the Court finds that the Walling Lease has not terminated because the Booth-Freeman # 1 Well was drilled within the primary period of the Walling Lease, began producing and continues in production. The Walling Lease did not terminate and remains in effect.59
ii. The Parker Heirs Do Not Own Mineral Rights in the 69-Acre Tract.
As mentioned above, the Booth-Freeman Unit contains the 69-Acre Tract situated to the north of the 25-Acre Tract. The 69-Acre Tract was once owned by a Pat and Katie Waldron. The Parker Heirs claim that Pat Waldron and Pat Walling are the same person, which the Debtors dispute.
One source of confusion is a May 6, 1987, affidavit by Pat Walling’s niece Dore-tha Moore, which states that Pat Walling changed his last name to Waldon, which was sometimes spelled Walden. Significantly, the affidavit does not mention the last name of Waldron.60
As summarized above, the Debtors have produced affidavits of heirship, census records, and marriage and death records, to show that Pat Walling/Waldon is not the same person as Pat Waldron.61 Further, the Debtors produced multiple title opinions held in the land files that the Debtors obtained when they acquired their interest in the units, which state that Randolph Parker only owned an interest in the 25-*619Acre Tract.62 Based on the title opinions, it does not appear that any interests are attributable to Randolph Parker in the 69-Acre Tract.
In addition, Randolph Parker signed a division order (as discussed in more detail below) acknowledging that he only owned a .0001065 interest in the Booth-Freeman Unit based on his interest in the 25-Acre Tract pursuant to the Walling lease.63 If Randolph Parker held an additional claim in the Booth-Freeman unit, his interest would have exceeded that .0001065 interest (as that figure corresponds only to the proportional interest in the 25-Acre Unit, as calculated above).
The Parker Heirs, as noted above, have proposed some plausible theories concerning whether Pat Walling/Walden could possibly be the same as Pat Waldron. However, the Parker Heirs have the burden of proof regarding ownership of any royalty interests, and they needed to come into Court with evidence establishing their ownership interests in the 69-Acre Tract and rebutting the Debtors’ evidence. This, they did not do. As such, the Court finds that the Parker Heirs do not possess any royalty interests in the 69-Acre Tract.
iii. The Debtors Do Not Owe the Parker Heirs a Larger Royalty Payment.
a. Division Order
A division order, as used in the oil and gas industry, is essentially a contract between the lessee and mineral interest owners (including royalty owners). The purpose of the document is to warrant and affirm the amount of each mineral interest owner’s interest. The function of a division order is (i) to provide a procedure for distributing the proceeds from the sale of oil and gas by authorizing and directing to whom and in what proportion to distribute the sale proceeds and (ii) to protect the lessee from liability for improper payment of royalties. Neel v. Killam0 Oil Co., Ltd., 88 S.W.3d 334, 342 (Tex. App.-San Antonio 2002, pet. denied). As a condition for the payment of proceeds from the sale of oil and gas production to a mineral interest owner, a lessee is entitled to receive a signed division order from the mineral interest owner containing provisions set forth in Section 91.402 of the Texas Natural Resources Code.
Division orders are binding until revoked. Pan Am. Petroleum Corp. v. Long, 340 F.2d 211, 223 (5th Cir. 1964) (holding that “the law of Texas is that a division order is the operative instrument of transfer, whether called a contract or not, and until revoked is binding on the parties, who thereunder declare their present ability and intent to transfer, sell, or otherwise dispose of the oil to the pipeline, and their entitlement to payment for this same transfer.”); Exxon Corp. v. Middleton, 613 S.W.2d 240 (Tex. 1981); Ohrt v. Union Gas Corp., 398 S.W.3d 315, 327 (Tex. App.-Corpus Christi 2012, pet. denied); see also TEX. NAT. RES CODE ANN. § 91.402(g). Texas law and the Walling Lease place the burden on the mineral interest owner to notify the Operator in writing of any change in ownership of an interest.
In Middleton, landowners brought suit to recover alleged deficiencies in royalty payments for natural gas production from wells. The division orders, which had been executed by the landowners, obligated the lessees to pay royalties at lesser rates than those required under the royalty clauses of the natural gas leases. The Supreme Court *620reiterated that under Texas law payments made and accepted under an agreement, such as the division orders in question, were effective until the agreement was revoked. Middleton, 613 S.W.2d at 250.
The Middleton decision solidified Texas’ “binding-until-revoked rule.” Following Middleton, both state and federal courts have found that royalty owners who execute division orders have waived any right to subsequently claim that larger payments are owed. See Bailey v. Shell Western E & P, Inc., 555 F.Supp.2d 767 (S.D. Tex. 2008); Neel v. Killam Oil Co., Ltd., 88 S.W.3d 334, (Tex. App.-San Antonio 2002, pet. denied) (if the royalty owners “had signed the new division orders and accepted one-sixteenth royalty payments under the new division orders, they would have waived their rights to the larger amount they claimed was owed to them”); Ohrt, 398 S.W.3d at 327 (“appellants were bound by the division orders because they accepted royalty payments based on the unit percentages under the division orders, and they did not revoke the division orders”).
For example, in Bailey, the landowner executed 32 different division orders and accepted payments under them beginning in 1984. Bailey, 555 F.Supp.2d at 773-74. Bailey first expressed discontent in a letter dated in 1990. For the next seven years, Bailey failed to make any additional complaint until after a lawsuit in 1997. The court found that the claimant consented to the treatment of which he complained and that the producers adhered to the instruments between themselves and the claimants. Based on this, the Court concluded that Bailey had waived his claim to larger royalty payments. Id. The same is true here.
After the transfer to National Locater, Randolph Parker signed a division order reflecting his .0001065 interest in the Booth-Freeman Unit. Later, after the Parker Heirs notified the Debtors of the -change in ownership and provided evidence of such change, the Debtors sent the Parker Heirs several division orders (collectively, the “Division Orders”) identifying the Parker Heirs’ respective royalty interests.64 The Parker Heirs affirmed their royalty interests by executing these Division Orders and returning them to the Debtors. Consistent with the Parker Heirs’ certification of their interests, the Debtors have distributed royalty payments for years in accordance with the Division Orders and the Parker Heirs accepted those payments with no objection or other indication of inaccuracy related to the Division Orders or the payments.
The Parker Heirs assert claims seeking a larger portion of the revenues derived from production from the wells based on alleged ownership interests that are far larger than the ownership interests identified in the relevant Division Orders.65 However, because the Walling Lease has *621been perpetuated by production from the Booth-Freeman Unit and the Sanders Unit, the Parker Heirs are only entitled to royalties based on their pro-rata share of unit income determined by their ownership of net mineral acres as set forth in the respective Division Orders. There are no wells on the 25-Acre Tract, and so the Parker Heirs’ only possible entitlement to royalty payments in either the Booth-Freeman Unit or the Sanders Unit derives from the pooling authority in the Walling Lease. The record reflects that the Parker Heirs executed Division Orders clearly stating the royalty interest on which payments would be made. The record further reflects that the Parker Heirs in no way attempted to revoke the Division Orders until, at the earliest, the filing of their proofs of claim.66 As such, the Court finds that the Parker Heirs are bound by the Division Orders.
b. Sale to National Locater
The Parker Heirs also dispute Randolph Parker’s sale of one-half of his interest to National Locater. The Debtors claimed that they have been unable to make payments to National Locater and thus, pursuant to Texas law, have been turning funds over to the Texas Unclaimed Property fund.
On May 4, 1987, Randolph Parker executed a Royalty Deed to National Locater, conveying half of his “undivided interest, in and to all of the oil royalty, gas royalty, and royalty in casinghead gas, gasoline, and royalty in other minerals in and under” the 25-Acre Tract.67 The Debtors presented a certificated copy of the Royalty Deed to the Court at the trial. The Parker Heirs did not dispute the legitimacy of the Royalty Deed but did dispute whether the *622Debtors have been paying royalties to National Locater based on such transfer.
The testimony at trial was as follows:
Q: Did you hear Ms. Jones say earlier today that she thought why Yates French from Kirkland & Ellis had misrepresented something to her with respect to national locator [sic]?
A: Yes.
Q: And what is this debtor’s — excuse me. What is this Parker Heirs’ Exhibit 74?
A: This is the Texas unclaimed property detail listed for national locator spelled L-O-C-A-T-O-R service, S-E-R.
Q: Okay. So someone searched through National Locator spelled with the last two letters O-R in Locator, right?
A: That is correct.
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Q: What is Debtors’ Exhibit 67?
A: This is the royalty deed from Randolph Parker to National Locator Service Inc. [sic].
Q: How is National Locator Service Inc. [sic] spelled on Debtors’ Exhibit 67?
A: National and Locator is L-O-C-AT-E-R.
Q: Okay. And that’s different than the Texas unclaimed property detail spelling that someone used to search for that name, right?
A: That is correct.
Q: Okay. Did Samson, in fact, send funds for National Locator [sic] to Texas per the (indiscernible) [unclaimed property] statute?
A: Yes, we did.
Q: Okay. Have you actually performed a search of the Texas unclaimed property details using the correct spelling of National Locator [sic] as it is in the deed that’s Debtors’ Exhibit 67?
A: Yes.
Q: What did you find when you performed that search on the Texas unclaimed property details?
A: Spelling it with an E-R, there are unclaimed funds under that amount from Samson.68
Based on the testimony and the royalty deed admitted into evidence at trial, the Court finds that Randolph Parker transferred one-half of his royalty interests to National Locater.69 The Court further finds that the Debtors have complied with the terms of the royalty transfer to National Locater.
c. Accounting
After the transfer to National Lo-cater, Randolph Parker owned a ,0001065 royalty interest in the Booth-Freeman Unit related to the 25-Acre Tract. As reflected in the Division Order signed by Randolph Parker,70 this interest is calculated based on the above, and as reflected in the division order, Randolph Parker’s interest is calculated as: ½ x ½ x ⅛ x ⅛ x 19.61 / 702.91 = .0001065.71 This interest has now been divided among the Randolph Parker’s 12 grandchildren. Thus, each of the Parker Heirs’ fractional interest in the *623Booth-Freeman Unit is .00000887.72
The Debtors assert that they have been properly paying each of the Parker Heirs his or her share of the royalties on production from the Booth-Freeman Unit and the Sanders Unit. The Parker Heirs dispute that the Debtors properly accounted for their equal proportional share of their royalty interests.73
At this stage of the proceedings, the Parker Heirs had the burden to establish the amount of their claims and to rebut the Debtors’ records and evidence of proper, regular payments under the Walling Lease. Prior to the trial, the Parker Heirs employed Mary Ellen Denomy, an accountant who specializes in oil and gas, to develop the record regarding any errors in calculating the Parker Heirs’ royalty payments. However, during trial, the Parker Heirs withdrew Ms. Denomy as a witness.74 Thus, the Parker Heirs did not put forth any evidence regarding the alleged errors in the Debtors’ accounting for the Parker Heirs’ royalty payments.
At trial, the Debtors presented the check details to each of the Parker Heirs75 and elicited the following testimony from Lisa Johnson, the Debtors’ Division Order and Land Administration Manager:
Q: Earlier today, I heard Ms. Jones question why the Parker [H]eirs received checks in different amounts. Did you hear her say that? *
A: Yes.
Q: Is there an explanation for that?
A: Yes.
Q: Would you please explain that to the Court?
A: Okay. So there are factors that play into the checks, one of them being, some owners will be put into the system without a social security number. And our system, if you do not have a social secu- ' rity number, we automatically withhold 28 percent to pay the taxes for the owner until they provide us with a tax — or social security number. So we do know some of that went on with some of their checks. That would be one of the reasons. Another reason would be because of all the adjustments that were made per the different affidavits that were sent, there were different adjustments *624that were made so different peoples decimals would have been different at different times, That’d be another reason. Another reason would be through the course of these checks going out and being sent to the Parker [Hjeirs, some would cash them, some would not. If their checks were not cashed, they continued to accrue in our system. Therefore, they would be paid different ones— you pay different amounts at different times. So those are a few reasons as to why their checks would have been different amounts.76
Thus, the only evidence presented at trial was that the Debtors complied with the written instructions of the Parker Heirs regarding their inheritance of Randolph Parker’s royalty interest, that there are coherent business explanations for the different amounts received by each of the Parker Heirs, and that the Debtors have fully and properly paid the Parker Heirs for their fractional royalty interest.
The Court finds that the Debtors have paid the Parker Heirs all royalties earned in the ordinary course of the Debtors’ businesses.
CONCLUSION
For the reasons set forth above, the Court finds that the Walling Lease has not terminated and remains in full force and effect, the Walling Lease provides for pooling, and the Parker Heirs have been paid their proportional royalties in the ordinary course of the Debtors’ business. As such, the Parker Heirs have not met their burden by a preponderance of the evidence to support the Parker Heir Claims. The Court will SUSTAIN the Second Omnibus Objection, in part and as set forth herein, and disallow the Parker Heir Claims in their entirety. The Court need not reach the Claims Reserve Motion as it is moot as it relates to the Parker Heir Claims.
An appropriate order will issue.
. Terms not defined in this Introduction shall have the meanings ascribed to them infra.
. D.I. 2060. See also D.I. 2015, which was later amended by D.I. 2060.
. The Parker Heirs filed 22 Claims that are identified in the Objection (Claim Nos. 1227. 1229. 1272. 1422, 1423, 1474, 1477, 1480, 1481, 1483, 1485, 2197, 2419, 2558, 2674, 2685, 2687, 2688, 2696, 2697, 3698 and 2720).
. D.I. 1980.
. D.I. 2009 and 2019.
. D.I. 70.
. D.I. 129.
. D.I. 2019.
. D.I. 1822.
. See D.I, 2070.
.The Reorganized Debtors and the Debtors will be referred to herein as the "Debtors.”
. Plan, Art. VII,B.
. D.I. 1923.
. The Estimation Motion was later withdrawn without prejudice. D.I. 2008.
. D.I. 1980.
. D.I. 2060.
.The Trial Transcripts shall be referred to herein as (i) May 1, 2017 Hr'g Tr. pagedine or (ii) May 2, 2017 Hr’g Tr. pagedine. See D.I. 2351 and 2352. After the trial, the Debtors and the Parker Heirs submitted a Certification Regarding Trial Exhibits (D.I. 2376) (the "Trial Certification") which lists and identifies each exhibit to be admitted related to the Trial. On June 5, 2017, the Court entered the Order Admitting Parker Heir Trial Exhibits which admitted the exhibits discussed in the Trial Certification. D.I. 2410. Trial Exhibits shall be referred to herein as "Debtors Tr. Exh. #” or "Parker Heirs Tr. Exh. #.”
. See Debtors Tr. Exh. 18 (Deed from Anna Walling to B.F. Lewis, dated November 2, 1904).
. Debtors’ Tr. Exh. 1.
. Walling Lease at ¶ 2.
. Id.
. Walling Lease at ¶ 17.
. See Debtors Exhs. 2, 3 and 104-107.
. See Debtors Exhs. 3 and 4.
. May 1, 2017 Hr’g Tr. 39:16-22.
. May 1,2017 Hr’g Tr. 42:9-14.
. May 1, 2017 Hr’g Tr. 40:23-41:3.
. May 1, 2017 Hr’g Tr. 39:3-8.
. May 1, 2017 Hr’g Tr. 64:5-65:2.
. May 1, 2017 Hr’g Tr. 40:23-41:3.
. Debtors Tr. Exh. 6.
. Debtors Tr. Exh. 7.
. Debtors Tr. Exhs. 8, 148 and 149.
. IHS is a subscription service commonly used in the oil and gas industry to access public records. May 1, 2017 Hr’g Tr. 58:11— 59:3.
. Debtors Tr. Exhs. 9 and 10.
. May 1, 2017 Hr’g Tr, 59:6-12.
. Parker Heirs Tr. Exh. 41.
. Debtors Tr. Exh. 67,
. Debtors Tr. Exh. 15.
.The first ½ is a result of Randolph Parker conveying one-half of his royalty interest to National Locater Service, Inc, See Debtors Tr. Exh. 67. The second ½ is included because upon Pat Walling's death, one-half of his interest was inherited by his wife Catherine Walling (from whom Randolph Parker inherited his interest). The first 1/8 is a result of Pat Walling and his seven siblings receiving a l/8th interest of their parents' interest. The last l/8th is the royalty in the Walling Lease. The 19.16 figure is the numerator of the last fraction is the number of acres of the 25-Acre Tract included in the Booth-Freeman Unit, *613and 702.91 figure is the denominator of the last fraction is the total number of acres in the Booth-Freeman Unit.
.Originally, William A, Parker, Senior, filed an affidavit of heirship claiming 100% of Randolph Parker’s royalty interest. As a result, William A. Parker, Senior, collected the royalty payment that would have otherwise been paid to the Parker Heirs, Upon discovery, Diane Jones filed the Corrected Affidavit for Randolph A, Parker and William. A. Parker. See Debtors Tr. Exh. 73. Subsequently, Diane Jones filed an Amended and Corrected Affidavit for Randolph A. Parker, William A. Parker and Lonnie Parker which corrected her previous affidavit to add Lonnie Parker and his child Darrell D. Parker. See Debtors Tr. Exh. 84. To further complicate the division of royalty interests, originally the Debtors divided one-half of Randolph Parker's royalty interest to Lonnie Parker and one-half to William A. Parker (i.e, on a per stirpes basis); however because both Lonnie Parker and William A. Parker predeceased Randolph Parker, Randolph Parker’s royalty interest should have been divided equally among all twelve of the grandchildren on a per capita basis. See Debtors Tr. Exh. 94. Although this calculation adjustment took some time for the Debtors to complete, the adjustment was made and the royalty interest was then divided equally among the twelve grandchildren of Randolph Parker including a payment of back-royalties and interest accounting for the delay. See Debtors Tr. Exh. 95; May 1, 2017 Hr’g Tr. 244:24-246:9,
. Chris Parker's .00000887 interest is now owned by his children: Chris D. Parker, Crystal Sykes, and Breanna Parker. See Debtors Tr. Exh. 98.
. Lisa Johnson testified as follows at the hearing;
Q: Does Samson own all of the working interest created by the Walling lease?
A: No.
Q; Are those other working interest owners part of this bankruptcy proceeding?
A: No.
Q: What would the effect be if the Court were to find that this lease terminated on those other parties?
A: Well, it would impact too many owners. I would speculate there’s probably over 100 royalty owners to this 25 acres and more than one working interest owner.
Q; And, in fact, would the Walling [Ljease still be valid with respect to these other owners that aren’t in this proceeding?
A: Yes.
May 2, 2017 Hr’g Tr. 157:1-15.
. Debtors Tr. Exh. 18.
. The 69-Acre Tract was conveyed by B.F. Lewis to J.R. Bell in 1906; J.R. Bell conveyed the property to Heniy Walling, and later, Henry Walling conveyed the 69-Acre-Tract to Pat Waldron on November 5, 1913. See Debtors Tr. Exhs. 17, 18, 20 and 21.
. Debtors Tr. Exh. 21.
. May 2, 2017 Hr g Tr. 65:12-21; Park Heir Exh. 84.
. At the trial, Ms. Jones indicated that she was unsure regarding whether the Parker Heirs had claims to the 69-Acre Tract:
That’s why we put it together, we put it together the best way that we knew how, because we didn't know what they owed us. So that’s all we were trying to accomplish was saying you owe us something and we need to figure out what that something is. They made the other — and we said, why? This is why we feel you owe us something. They made the 75-acre tract more of an issue. They threw it up in their defense as far as why they shouldn't even pay us anything, and I think that they did that to muddy the situation myself, but if it was up to me we would have just been dealing with the 25 acres and what they owe us pertaining to that, but — ...—it just kind of evolved into more and more and more.
May 2, 2017 Hr’g Tr. 122:5-16 and 18-19. However, as the arguments regarding 69-Acre Tract were briefed and were not formally withdrawn, the Court will discuss the claims to the 69-Acre Tract herein.
. Debtors Tr, Exh. 2.
. Debtors Tr. Exh, 4.
. Debtors Tr. Exh. 2 (the “Declaration of Unit for Booth-Freeman Unit").
. The Declaration of Unit for the Booth-Freeman Unit provides:
(1) That drilling or re-working operations on, or production from any portion of said pooled unit shall be considered as operations upon each separately owned tract of land,
(2) Production of gas from said unit on any tract included therein shall be allocated to each of the undersigned parties in the proportion that the number of mineral acres owned by each of the undersigned parties within the unit bears to the total acres so pooled.
Debtors Tr, Exh. 2 at p. 2,
. See Debtors Tr. Exhs. 5, 6, and 7.
. See Debtors Tr. Exh. 9.
. See Debtors Tr. Exhs. 8 and 10.
. Debtors Tr. Exhs. 53, 59, and 63.
. See Parker Heirs Tr. Exh. 41.
. Many of the factual disputes between the parties derive from miscommunications, and the Debtors’ unresponsiveness to the Parker Heirs’ inquiries both prior to and during these cases, including providing maps without differentiating various ownership of wells. The Court takes the time to quote the transcript as these issues could have been avoided in toto via communications between the Debtors’ counsel and the pro se Parker Heirs, At trial, Mr. Cross testified as follows:
Q: Mr. Thompson just referred to Exhibit 41, which is a map that the Debtors did provide to the Parker Heirs. I'll give you time to get there, sir. Are you there?
A: I have it up.
Q: Okay. If you look in the bottom left comer you'll see date 04/08/2016, author Samson GIS, SF — SJF, and as Mr. Thompson stated, this is something that they provided to us and I just want to get on record that there is no Booth-Freeman number one in this map. If you look at it closely— tell me if I'm mistaken — do you see a Booth number one — Booth-Freeman number one in this map?
A: No. It’s not on this map.
Q: Okay. And I would just like to point out that — well, I'll come back to that. In the right-hand bottom corner it says, "Legend, Parker lease.” So, the inference to us was that these are the wells associated with this lease — the 1957 lease. When this was given to us, this is what we were being today, is that these are the wells and I’ve highlighted them. I've highlighted them beginning with — number two is kind of in the middle of the page, more toward the bottom than the top, and if you can just follow the highlights you’ll see it begins with number two. Now, there's some other ones that we didn’t understand what their purpose in this is. But there’s Booth-Freeman one HD, HB, 2H, and those things we don’t have any idea what those are about. But there is no Booth-Freeman number one. Would we agree that there's no Booth-Freeman number one in this description?
A: It’s not on this map.
Q: Okay. Now, do you have an opinion as to why the oil company would tell us initially that these are the wells associated with the Parker lease as they’ve put in this legend repeatedly?
A: I do. Samson does not own an interest in the Booth-Freeman number one well.
Q: So because they don’t own an interest in it they shouldn't still — because now they’re trying to say that that’s what holds this lease. So, because they don’t own an interest in it and this says “Parker lease,” this would lead me as an average, every day *618person to believe that these are the wells involved with this lease if I'm reading this— A Well, in the legend you also see the Booth-Freeman gas unit operated, this part of the legend. And whether they own an interest in the lease doesn’t have a bearing on whether it holds the lease or not.
Q: Say that last part again?
A: Whether Samson owns an interest in the Booth-Freeman number one is not relevant to the question of does the well — did the well hold the lease in the unit. I mean, it’s just a fact Samson does not own interest in that well today.
May 1, 2017 Hr’gTr. 147:1-148:25.
. The Debtors raised an alternative argument of adverse possession if the Court found that the Walling Lease terminated. As the Court finds that the Walling Lease has not terminated, the Court need not reach the issue of whether the Debtors have established a lease via adverse possession.
. Debtors Tr. Exh. 37.
. See Debtors Tr. Exhs. 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 39, and 40.
. Debtors Tr. Exhs. 12, 13 and 14.
. Debtors Tr. Exh. 15.
. Debtors Tr. Exhs. 74, 75, 76, 77, 78, 79, 80, 81 and 82 (collectively, the "Division Orders”).
. For example, Gary Pop, one of the Parker Heirs, states in the Parker Heirs’ Amended Response/Objection to Debtors’ Amended Second Omnibus (Substantive) Claims Objection (D.I. 2162), filed on March 24, 2017, that:
The 16 Booth-Freeman wells and Sanders Gas Unit well 1 sit on land the Debtor’s operate but the Callie Morrison Walling Lease does not cover these wells as it expired in 1958 due to the fact that none of these wells were producing within the first year of the lease as required. And they did not produce during the 5 year primary term. We add that the Debtors have not paid the Parker Heirs 100% of the royalties due us because we are not due a meager royalty as the 25 acre tract of land associated with the aforementioned wells is un-leased. We are un-leased mineral holders and are due a full ownership in any produc*621tion from any wells within the 702.91 acre pooled unit.
D.I. 2162, p. 6.
. Pursuant to the Walling Lease, the Parker Heirs are obligated to inform the Debtors of any change in ownership of the royalty interests. Walling Leas, Debtors Tr. Exh. 1, ¶ 15. Furthermore, the division order signed by Randolph Parker provides:66
No change of ownership or transfer of interest shall be binding on you until you are furnished at your office or the address shown above a certified copy of the recorded instruments evidencing such transfer and your regular form or transfer order or an amended division order is executed by all parties to such transfer and is returned to you. You shall not be required to recognize such transfer as being effective earlier than 7:00 a.m. of the first day of the calendar month in which said written notice is received by you. You are hereby relieved of responsibility for determining when any interest herein set forth has been increased, decreased, terminated, or transferred and Owner agrees to give written notice to you of any such change and to hold you harmless for all loss or expense that may result from any incorrect payment prior to such written notice.
Debtors Tr. Exh. 15, p, 2 (“Change of Ownership”) (The “you” and "your” reference in the division order refers to the operator, which in this case is the Debtors.). Furthermore, Texas statute dictates that a mineral owner must notify the lessee of any change in ownership. See Tex. Nat. Res. Code § 91.402(c)(1). "The division orders state that the signatures of appellants '[certify] the ownership of their decimal interest in production or proceeds as described’ therein. They require lessors to notify in writing of any change in ownership, interest, or address.” Ohrt, 398 S.W.3d at 330. Thus upon inheriting Randolph Parker's royalty interest under the Walling Lease, the Parker Heirs had the obligation to provide documentation to support the transfer of interest from Randolph Parker to the Parker Heirs.
. Debtors Tr. Exh. 67. This also reinforces the Court’s holding that the Walling Lease had not terminated in its primary term; because in 1987, Randolph Parker believed that the Walling Lease was in full force and effect when he transferred half of his interest to National Locater.
. May 2, 2017 Hr’gTr. 154:14-156:1.
. As mentioned above, much of this dispute could have been avoided through communication between the Debtors and the Parker Heirs. To compound the confusion, the demonstrative accession chart which was provided to the Court by the Debtors during the hearing spelled the transferee as "National Locators” rather than the correct spelling of "National Locater,” as set forth in the deed. See Debtors Tr. Exh. 67.
. Debtors Tr. Exh. 15.
. See, supra, note 40.
. Chris Parker’s .00000887 interest is now owned by his children: Chris D. Parker, Crystal Sykes, and Breanna Parker. See Debtors Tr. Exh. 98.
. At trial, Ms. Jones asserted:
They argue that they have done that but even without Ms. Denomy's input, there are times over the 17 years that I would get a check, say, for $13. They would get a check for 95 cents. Someone else would get a check for, say, $40. And if we’re divided equally, we’re all supposed to get the same exact amount. So we still question — we still say that something was not right according to even their own accounting system ...
May 2, 2017, Hr’g Tr. 135:15-23. •
. At trial, Ms. Jones withdrew her expert witness Ms. Mary Ellen Denomy:
Ms. Jones: Since it’s causing such a stir and such an issue we asked Ms. D[enomy] to help us to figure out the dollar amount that the debtors owed us anyway. She wasn’t crucial to our case. I mean, we feel like our- case is strong anyway. This was just to help us to figure out—
The Court: The amount.
Ms. Jones: —the money out. So since it’s causing such an issue, we’re just going to withdraw her as a witness and we’re just going to present our case and be satisfied with that, ... So it’s not a major issue to us.
The Court: Okay.
Ms. Jones: We’ll just present our case.
The Court: All right. I understand.
Ms. Jones: And we will rely on our original proof of claim which was back to the amount of $100 million and let the Court decide what the outcome is going to be.
May 2, 2017 Hr’g Tr. 26:8-27:10.
.Debtors Tr. Exh, 97.
. May 2, 2017 Hr’g Tr. 150:22-151:24. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500626/ | MEMORANDUM OPINION IN SUPPORT OF ORDER DISMISSING COMPLAINT AND ENTERING JUDGMENT IN FAYOR OF THE DEFENDANTS
ROBERT A. GORDON, U.S. BANKRUPTCY JUDGE
I. Preliminary Statement
The questions presented for determination are (1) whether the Debtor/Defendant, Rebecca Patchell committed fraud as to the Plaintiff, Conestoga Title Insurance Company (Conestoga Lancaster) with respect to the settlement of the sale of her personal real estate such that her potential liability to Conestoga Lancaster should be excepted from her discharge and (2) whether, after the passage of well over three years since Conestoga Lancaster’s claim accrued, the non-debtor Defendant Lowell McCoy can be held liable on the basis of his unsealed Guaranty of Payment and Performance (Guaranty). The answer to both questions is ‘no’.
II. Factual History
Conestoga Lancaster is a Title Insurance Company that acts as an underwriter *639and insurer of real estate titles situate in Maryland and Pennsylvania. Trial Transcript at 21 (Tr. at_). Its principal place of business is Lancaster, Pennsylvania and the policies it issues are written through a network of independent agents. Id. In August of 2005, Ms. Patchell and Mr. McCoy purchased Conestoga Title Company, Inc. (Conestoga Elkton), an already operating title agency based in Elkton, Maryland. At that time, Ms. Patchell had significant years of experience in supervising and managing the practical aspects and legwork of conducting settlements and insuring titles and Mr. McCoy had the wherewithal to pay the purchase price of over $1 million, which he did. They agreed that Ms. Patchell’s investment would be to operate and manage the business with Mr. McCoy content to remain a passive owner. Tr. at 58-59.1
On August 31, 2005, Conestoga Elkton entered into an Agency Agreement (Agreement) with Conestoga Lancaster. Plaintiffs Exh. 1 (PI. Exh. _). The Agreement appointed Conestoga Elkton as Conestoga Lancaster’s agent, and granted Conestoga Elkton the authority to write title insurance for real estate transactions, subject to the Agreement’s terms. Id.; Tr. at 21. Ms. Patchell signed the Agreement on behalf of Conestoga Elkton and Mr. McCoy witnessed her signature. The same day, Ms. Patchell and Mr. McCoy both signed the Guaranty in favor of Conestoga Lancaster. PI. Exh. 2. Per the Guaranty, Ms. Patchell and Mr. McCoy each guaranteed “the full performance of the [Agreement] by [Conestoga Elkton] [including] the payment of premiums, indemnifications and claims of loss. ...” Id.
In 2007, Ms. Patchell agreed to sell real estate that she personally owned at 18 Guilford Court, North East, Maryland 21901 (Guilford Court) to a Mr. Wayne Powell. Prior to the sale, Guilford Court was encumbered by two liens and attendant debt. The. senior lien was held by NBRS Financial (NBRS) and by the time settlement occurred, a total payoff amount of $219,720.86 was due. and owing. The junior lien was held by Cecil Bank (locally owned and operated in Elkton) and the corresponding indebtedness was in the original principal amount of $150,000.00 (Cecil Bank Lien). PI. Exhs. 17 and 19. It is unclear what the total payoff amount on the underlying indebtedness was at the time of the now 10 years old settlement. This is so because in lieu of payment, Cecil Bank agreed to release and transfer the lien to other, substitute real estate collateral also personally owned by Ms. Patchell. Cecil Bank’s decision to do so opened the way for Ms. Patchell to receive the proceeds of sale, net of what was owed to NBRS. Yet, Cecil Bank’s post-settlement change of heart is what ultimately led to this litigation.
Mr. Donald Delgado testified at trial on behalf of Conestoga Lancaster. Mr. Delgado began his employment with the Plaintiff in 1993 and is its Vice-President of Agency Administration. Tr. at 20. He knew Ms. Patchell before this transaction unfolded and was directly involved in the pre-litigation events. He testified that the general scope of his employment requires him to be, “primarily in charge of supporting our agents and auditing them to ensure that they’re doing what they’re supposed to be doing under our agency agreement.” Id. He acknowledged that Conestoga Lancas*640ter agreed to insure Mr, Powell’s title pri- or to the sale of Guilford Court. Conestoga Lancaster also agreed to allow Conestoga Elkton to conduct the settlement, notwithstanding Ms. Patchell’s direct, personal stake in the outcome. He gave the following direct testimony on that point:
Q (by Mr, Malloy): So if Ms, Patchell, through her settlement company, wants to get to settlement on a property that she owns an ownership interest in it is not prohibited under the Agency Agreement?
A (by Mr. Delgado): Correct.
Q; But it is treated somewhat differently?
A: Correct.
Q: Explain how it is treated differently.
A: Well, we to provide comfort to all the parties involved, including the lender, the seller that there’s no impropriety, and even ourselves, we like to just supervise the transaction to give that comfort that there’s no impropriety since the seller, in this case Ms. Patchell, was going to be receiving a large sum of money according to the HUD-1 settlement statement when all funds are disbursed.
Q: ... So your company, Conestoga Title Insurance, you are not conducting the settlement?
A: Correct.
Q: You are disbursing the funds?
A; In this case we required that the funds be disbursed by us. Again, to provide comfort to all of the parties involved that there is no impropriety.
Tr. at 29-30,
Mr. Delgado acknowledged that Ms. Patchell followed the requirements of the Agreement by giving him advance notice of the settlement once the date was set. He then testified that, , .1 requested a copy of the preliminary HUD-1 settlement sheet prior to the settlement and when she provided that I noticed there was only one of the two liens listed to be paid off.” Tr. at 29. Mr. Delgado was then asked to describe his follow-up communications with Ms. Patchell.
Q (Mr. Malloy): And then so this was a fax you received from Ms. Patchell?2
A: Yes.
Q: .. .And it includes wiring instructions for Conestoga [Lancaster] to wire the funds to her bank account?
A: Yes.
Q: And do you remember, was this the first time that you recall seeing the HUD-1 Statement?
A: Yes.
Q: And look through the HUD-1 Statement, You see it is only the first loan that is listed to be paid off?
A: Correct. On line 504 on the Seller’s section of the transaction it’s listing a payoff tó NBRS Financial for $219,000.
Q: And this caused you to ask about the second loan?
A: Correct, I noticed there was no payoff for the second loan and I inquired as to why that was, if there was a zero balance on it or what the case was,
Tr. at 31-32.
Ms. Patchell promptly responded via email to Mr, Delgado’s question about the second loan:
A: (Mr, Delgado) Her reply was that she was switching collateral from Guil-ford to Cherokee,3 that [Cecil Bank] is releasing Guilford. She just called Sandy *641at [Cecil Bank] and asked her to forward something in -writing. She said she knew that I would need that and she should have requested it already.
Q: And so do you see the next day, it is April — well, it is the same day I guess. There was an email forwarded to you from a bank employee?
A: Right, that’s on — it looks like on April 25th there was an email from Ms. Sandy Feltman at Cecil Bank to Ms. Patchell explaining — the email says that [Cecil Bank] will release the lien on [Guilford Court] for no consideration and [Cecil Bank] will be recording an IDOT on [Cherokee], And that email was forwarded to me the next day, April 26th.
Tr. at 32-33.
At the time, Ms. Feltman was employed by Cecil Bank as its Senior Vice-President and Director of Lending. The April 25, 2007 email thread referred to by Mr. Delgado between he, Ms. Patchell and Ms. Feltman reads as follows:
Email sent to Ms. Patchell by Mr. Delgado at 1:13 p.m.:
Beckie,
Is there a $0.00 balance with your IDOT to Cecil Federal? Can you fax something to me showing that and that it will be or has been satisfied?
Thanks
Don
Reply email sent at 1:19 p.m. to Mr. Delgado by Ms. Patchell:
I am switching collateral from Guilford to Cherokee. Cecil Bank is releasing Guilford. I just called Sandy and asked her to forward something in writing to me. I knew you would need that. Should have requested already. It slipped my over-loaded mind!!!
I’ll forward to you ASAP!!!!
Thanks!!
Beckie
Email sent at 5:10 p.m. from Ms. Felt-man to Ms. Patchell:
Cecil Bank will release the lien on 18 Guilford Ct, North East, MD for no consideration. Cecil Bank will be recording an IDOT on 15 Cherokee Dr., North East, MD.
PL Exh. 8.
The direct examination of Mr. Delgado continued:
Q (Mr. Malloy): And so did you hear anything else from Ms. Patchell or receive any other documentation prior to the settlement?
A: Not prior to settlement. We would have received the funds from the bank.
Q: Did you disburse those funds in accordance with the instructions from Ms. Patchell?
A: Yes.
Q: ... And so do you know approximately how much was disbursed to Ms. Patchell?
A: She received proceeds in the amount of $118,079.40.4
Q: And the loan to Cecil Bank was never paid off?
A: That is correct. Not at the time of settlement.
Q: Did [Conestoga Lancaster], through Ms. Patchell, issue a title insurance commitment for this transaction?
A: Yes. Ms. Patchell, her agency [Conestoga Elkton] issued a commitment *642prior to the settlement and then they issued policies after the settlement.
Tr. at 33-34.
Settlement was held on April 30, 2007 in Conestoga Elkton’s office after Mr. Delgado confirmed that “everything looked fíne.” Tr. at 63. On the day of settlement, Ms. Patchell neither had a signed release of the Cecil Bank Lien nor a new deed of trust to secure Cecil Bank’s debt with Cherokee.5 Tr. at 34-35 and 63. Nevertheless, Mr. Delgado released the settlement funds to pay NBRS Financial, miscellaneous settlement costs and the net proceeds of $118,079.40 to Ms. Patchell in accordance with the HUD-1 settlement sheet. Likewise, the title policy was subsequently issued in favor of Mr. Powell. Tr. at 34; PI. Exh. 9.
By July 27, 2007, Mr. Delgado still had not received either a signed release or a deed of trust from Ms. Patchell. He emailed her and informed her that the Cecil Bank Lien was still recorded against Guilford Court and she needed to see that it was released. Trial Tr. 35; PI. Exh. 7. She replied via email about 20 minutes later and wrote:
Hey!!
Things are going. Jeez!! You and Janet!! She actually reminded me 2 days ago that I need to stop by Cecil Bank to sign the transfer stuff and get my release!!!! My fault totally. Been busy solving the world’s problems!! I promise I will get over there AFTER the end of the month!!! Okay?
Thanks!
Beckie
Exh. 7.
Ms. Patchell gave direct testimony as follows with respect to her subsequent attempts to get Cecil Bank to provide the release and transfer its lien to Cherokee:
Q (Mr. Emery): ... Did you raise the issue that she had emailed you after consulting with Mary Halsey, president of the bank, that they were going to release Guilford Court for no consideration and substitute other property?
A (Ms. Patchell): I asked a million times in person and over the phone—
Q: Well let — not a million times.
A: Well, I’m sorry, that’s true. It’s an exaggeration. Because I actually would go to Cecil Bank all the time to help Mr. Fayer prepare title commitments and settlement sheets — ....
* * *
Q: When did you first — if you recall— first contact Cecil Bank about where’s the release and IDOT?
A: I would speculate and say it had to be the following week sometime because I was probably there and saw Sandy for one reason or another.
* * *
Q: Is it fair to say you did contact the bank on several occasions inquiring as to where these documents [sic]?
A: Absolutely.
Q: Do you recall what you were told?
*643A: Sandy, [sie]“Bec, we’ll get to it. It’s busy. I’m doing a million things. I’ll get to it. I promise.”
Tr. at 73-75.
Ultimately, Cecil Bank neither provided the promised release nor accepted Cherokee as substitute collateral. On October 29, 2007, Steven Fayer, Esquire, Cecil Bank’s counsel, sent a letter to David Burroughs, Esquire, who appears to have been representing both Ms. Patchell and Conestoga Elkton. PI. Exh. 14. Mr. Fayer referred to Cecil Bank’s prior promise to release its lien and accept substitute collateral, memorialized in Ms. Feltman’s email, as a mere “agreement in principle”. He also indicated that, among other things, Cecil Bank had obtained an appraisal of Cherokee and had determined that the loan to value ratio was insufficient to permit substitution. The letter does not include an explicit demand for payment from Ms. Patchell but it does lay the responsibility for the problem on her and outlines Cecil’s enforcement rights against Ms. Patchell and Guilford Court under the loan documents.
Mr. Fayer’s letter offers one explanation for Cecil Bank’s rejection of the release and substitution scenario. In her testimony, Ms. Patchell offered an alternative account:
Q (Mr. Emery): ... Do you know why [Cecil Bank] changed [its] position?
[[Image here]]
A (Ms. Patchell): ... Well, my initial contact was with Mary Halsey, face-to-face.6 My additional conversations after that were with Sandy Feltman. Period. As far as what they agreed to do. When Mr. Hughes called me and this whole thing blew up apparently Mr. Sposato found out that Mary had loaned me a line of credit and that we were looking to replace the collateral, she had agreed to it. He was upset with me because I wouldn’t sell him my title company,
Q: Was he negotiating with you to purchase that?
A: He had negotiated with Mr. McCoy for a period of time. And then he claimed, came at me directly and said when you get rid of Mr. McCoy you come and see me, I’ll take care of you.
Q: And what was your response?
A: No thank you.
Q: And was it shortly after that that Mr. Fayer’s letter was sent to Mr. Burrows [sic]?
A: It wasn’t very long.
Tr. at 76-77.
Thereafter, Cecil Bank filed a confessed judgment action against Ms. Patchell and Conestoga Elkton but the judgment was set aside after Ms. Patchell testified to her reliance upon Cecil Bank’s representation that it would release and accept substitute collateral for the Cecil Bank Lien. Plaintiffs Exh. 11; Plaintiffs Exh. 13 at 35. Cecil Bank also took action against Mr. Powell, the purchaser of Guilford Court. Mir. Delgado explained what Cecil Bank did and how that ultimately drew Conestoga Lancaster into the middle of that dispute.
Q. (Mr. Malloy): So what happened next with .. .the Cecil Bank loan?
A (Mr. Delgado): Well, it was in 2010 the purchaser, Mr.’ Powell, who was our insured, received a letter from Cecil Bank stating that this lien was never satisfied or released on his property. That they intended to take whatever actions necessary to enforce that lien and collect their monies.
Tr. at 36.
In response to Cecil Bank’s pressure, Mr. Powell filed a title insurance claim *644with Conestoga Lancaster. Mr. Delgado explained what happened next:
A: Well, a lien existed on one of our insured’s property and the bank with that lien intended or advised our insured that they were, they had a lien on his property and under our policy we are obligated to defend his title because he has a policy stating that we will do that for him. And that is one of the covered risks of the policy.
Q: (Mr. Malloy): And so how did [Conestoga Lancaster] respond?
A: Well, we hired counsel to represent our company and they entered negotiations with Cecil Bank’s counsel to resolve the claim. And we negotiated an amount of $67,000 that Cecil Bank would receive in order to release the lien on our insured’s property.
Tr. at 39.
Conestoga Lancaster paid that amount to Cecil Bank and the Cecil Bank Lien was released from Guilford Court on January 31, 2013. PI. Exhs. 4, 6 arid 22. On June 24, 2013, Conestoga Lancaster sent Ms.. Patc-hell an email demanding that $67,000, plus attorney’s fees of $18,634.20, be paid to Conestoga Lancaster. PI. Exh. 3. Ms. Patc-hell testified that Exhibit 3 was the first notice she received of either Cecil Bank’s assertion of a claim against Mr. Powell/Conestoga Lancaster or any settlemeni/reso-lution activity between Cecil Bank and Conestoga Lancaster. Tr. at 69, 77-78. The Agreement was terminated in January of 2010 after Ms. Patchell advised Conestoga Lancaster that Conestoga Elkton was going out of business. Id. at 50.
The parties took the'deposition of Sandra Feltman on March 11, 2016 and the transcript of her testimony was admitted into evidence as Defendant’s Exhibit 1. As regards the agreement to release the Cecil Bank Lien against Guilford Court and substitute Cherokee as collateral, Ms. Felt-man testified as follows:
Q (Mr. Emery): Do you have any specific recollection of [the Guilford Court] transaction with Ms. Patchell?
* * *
A (Ms. Feltman): She called, saying that she was selling her property on Guilford and that she wanted to change the collateral from that property to her personal residence on Cherokee.
* * *
A: She asked me if Cecil Bank would be willing to do so. So at that time—
Q: What did you do then?
A: I had to go to the president/CEO, Mary Halsey, for her permission.
Q: Did you in fact do that?
A: Yes, I did.
* * *
A: I asked [Ms. Halsey]. She said Cecil Bank would be willing to do so and that it was okay to go ahead and contact [Ms. Patchell] through email that Cecil Bank was willing to do so.
Defendant’s Exhibit 1 at 7-9 (Def. Exh. at
At that point in the deposition, Ms. Felt-man was shown the email included as Plaintiffs Exhibit 8 that she sent to Ms. Patchell. She confirmed that the email was hers and that she sent it. Her testimony continued:
Q (By Mr. Emery): At that point in time who called the shots at Cecil Bank? Who was in charge?
A: Mary Halsey, President and CEO.
* * *
Q: What was your belief with respect to the agreement to substitute collateral? Was it something that was going to happen?
*645A: Yes, because we had done that in the past for other customers. This was not— this was not extraordinary, you know.
Q: Let’s back up a little bit. The real estate market in 2007, do you have a recollection of what was the market like back then, and if so, could you tell us?
A: The market was very busy. A house would go on the market and it would sell within the week. Interest rates were down. Loans were readily available to customers because a lot of lenders were doing no doc loans. '
Q: What is a no-doc loan?
A: That is where a customer can just state what their income and debts are without actually having any verification of any income or debts.
Def. Exh. at 10-11.
Ms. Feltman was then asked about Cecil Bank’s change of position:
Q: (Mr. Emery) Did there come a time when you learned that Cecil Bank was not in agreement with the substance of your April 25th, ’07, email that collateral would be substituted?
A: Well, I personally wasn’t involved with that process, but, you know, in my capacity, I did hear that that was what was taking place.
Q: Was the bank going through some changes at this time? If so, what were they?
A: In, you know, May, June, or July, that area, there was a situation between the president—
Q: Ms. Halsey?
A: —and CEO, Mary Halsey, and the chairman of the board, Charles Sposato, where Charles Sposato took every decision-making capability away from Ms. Halsey and every decision was made by Mr. Sposato.
Q: There came a time when the bank refused to honor the substance that was reflected in that April 25th, ’07, email?
A: That is my understanding, yes.
* * *
A: ... There were a lot of — there were some decisions, I cannot be specific, but I could see the trend where, you know— in fact, sometimes Mr. Sposato would say something and then later down the road would change his mind. And sometimes it would happen at a closing, you know.
⅜ ⅜ ⅜
Q: Is it fair to say Mr. Sposato decided to run the whole show by himself or he was the ultimate authority?
A: That’s correct. We could not make any decisions without running everything past him.
[[Image here]]
Q: And you’ve explained to us I guess the nature of the real estate industry, residential real estate industry at that point in time. Is that how things worked normally or did they usually have these documents available at settlement?
A: No. The release and everything were done after settlement.
Q: How long, if you know?
A: It depended on — there wasn’t any given amount of days or anything. Whenever they came across — whoever settled, you know, sent the documents for us to release.
Q: Correct me if I’m wrong. Settlement occurs. Ultimately a title insurance policy is issued to the lender; is that correct?
A Correct.
Q: And keeping in mind the nature of the real estate industry in ’07, were these title policies often issued before the releases were in hand and recorded, if you know?
*646A: I would say in some cases, yes.
Q: It would be fair to say it was customary back at that time in that real estate industry as if existed in ’07 for things to occur sometimes months later that would enable someone to complete a file?
A: Yes.
Q: Was that the exception or the norm, if you can recall?
A: That was probably the norm at that time because of the — how the real estate market was going.
Q: Were you at all surprised when Mr. Sposato put I guess the stop to the agreement that you and Mary Halsey had with Ms. Patchell? Did that surprise you?
A: No, because nothing he did surprised me.
Q: Was it solely because of Mr. Sposato that this substitution of collateral never occurred?
A: That would be my understanding. That’s my belief.
Def. Exh. at 13-18. Mr. McCoy was the final witness called to testify (as an adverse witness) at trial. The essence of his relevant testimony is eapsulized in this exchange:
Q (Mr. Malloy): Mr. McCoy, did you understand my question?
A: Would you state it again, please.
Q: As the guarantor of the Agency Agreement or for the losses under the Agency Agreement, claims of loss, wouldn’t you be responsible for paying my client’s loss that they’ve paid out in this matter?
A: Well, I signed this Agreement and what it says, so you don’t have to keep asking me each one, just that’s it.
Q: Is that a yes or a no or something?
A: I guess it’s a yes.
Tr. at 89.
III. Procedural History
Ms. Patchell filed her Chapter 7 Petition on April 9, 2015. This Adversary Proceeding was commenced on May 13, 2015. Pretrial proceedings went smoothly, save for the parties’ failure to file pre-trial memo-randa as required by the Pre-trial Order (Dkt. No. 14). Trial was held on March 23, 2016 (Dkt. No. 21). At the close of the Plaintiffs case, the pefendants’ moved for judgment of dismissal under Bankruptcy Rule 7052. Tr. at 92. The Court agreed that on the surface, the evidence did not appear to support a claim for fraud against Ms. Patchell. Moreover, the claim for relief against Mr. McCoy was filed over seven years after the settlement of the sale of Guilford Court. The claim therefore seemed to have been filed well outside of the general three year limitations period applicable in Maryland, notwithstanding Mr. McCoy’s candid admission of liability.7 However, in the absence of pretrial memo-randa and without a foundation of relevant law, the Court was reluctant to rule, then and there. Hence, a briefing schedule and oral argument date were set. The papers were timely filed and argument was held on June 14, 2016. The matter is ripe for decision.
IV. Jurisdiction and Venue
This Court has jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. *647§§ 157(b)(1) and 1334 and Local Rule 402 of the United States District Court for the District of Maryland. The claim against Ms. Patchell presents a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The parties, including the non-debtor Mr. McCoy, have consented to the entry of a final judgment on the merits and therefore this Court finds that the entry of a final judgment will not offend the strictures of Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) and is in compliance with Wellness Int’l Network, Ltd. v. Sharif, — U.S. -, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) (holding that parties may knowingly and voluntarily consent to adjudication of a claim by the Bankruptcy Court). Venue is proper under 28 U.S.C. § 1409(a).
V, Legal Standards
1. 11 U.S.C. §§ 523(a)(2)(A) and (a)(b) and Bankruptcy Rule 7052.
Conestoga Lancaster relies upon 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4) as the bases for Ms. Patchell’s alleged liability.8 Its contention is that before she consummated the settlement, Ms. Patchell had an affirmative duty to disclose to Mr. Delgado that she did not yet have a release and substitute deed of trust from Cecil Bank. Conestoga Lancaster avers that because she did not make that disclosure, she committed a fraudulent misrepresentation by omission. Conestoga Lancaster likewise contends that even if she did not commit fraud, her, at a minimum, negligent, breach of contract will suffice to support a claim of defalcation in a fiduciary capacity.
Section 523(a)(2)(A) and (a)(4) provide, in material part:
(a) A discharge under section 727 ... does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition...
* * *
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny...
The exceptions to discharge enumerated in Section 523 are construed narrowly in order to “protect the purpose of [the Bankruptcy Code of] providing debtors a fresh start.” In re Gordon, 491 B.R. 691, 697 (Bankr. D. Md. 2013) (citations omitted). Whether a creditor attacks from the vantage point of Section 523(a)(2)(A), or (4), the burden is on the creditor to establish by a preponderance of evidence that a debt is non-dischargeable. Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 2008) (citing Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). A Plaintiffs case must satisfy five elements in order to prevail under Section 523(a)(2)(A). Grogan v. Garner, 498 U.S. 279, 287-288, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir. 2007); Dubois v. Lindsley (In re Lindsley), 388 B.R. 661, 668 (Bankr. D. Md. 2008). Those elements are: (1) that the defendant made a representation, (2) that the defendant knew at the time the representation was made that it was false, (3) that the defendant made the representation with the intent and purpose of deceiving the plaintiff, (4) that the plaintiff *648justifiably relied upon the false representation and (5) that the plaintiff suffered damages as a proximate result of the representation. Lindsley, 388 B.R. at 668. The debtor’s intent shall be determined subjectively with the totality of the relevant circumstances taken into account. Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998); In re Pleasants, 231 B.R. 893, 898 (Bankr. E.D. Va. 1999), aff'd, 219 F.3d 372 (4th Cir. 2000). The standard of reliance under Section 523(a)(2)(A) is the lesser one of justifiable (as opposed to reasonable) and that element is also to be assessed in accordance with the overall circumstances of the case. Field v. Mans, 516 U.S. 59, 73, 116 S.Ct. 437, 445, 133 L.Ed.2d 351 (1995); Colombo Bank v. Sharp (In re Sharp), 340 Fed.Appx, 899, 906 (4th Cir. 2009),9
Section 523(a)(4) excepts from discharge debts that arise from, “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). In order to prevail under this subsection, the creditor must prove, “(1) the establishment of an express trust regarding the funds, (2) that the debtor acted in a fiduciary capacity and (3) the debt is based upon the debtor’s fraud or defalcation while acting as a fiduciary.” In re Gordon, 491 B.R. at 697. However, just as with claims under Section 523(a)(2)(A), proof of an intentional wrong is required. As stated by the Supreme Court in Bullock v BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 1759-60, 185 L.Ed.2d 922 (2013):
[W]here the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term [defalcation] 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. .., 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 know 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.”
Bullock settled the conflict among the Circuits as to whether a finding of intentional, or merely negligent, conduct was necessary to except from a fiduciary’s discharge a debt that arose from the violation of an express trust. In deciding that evidence of intentional conduct is necessary, the Court rejected the holding of Rwanda v. Uwimana (In re Uwimana), 274 F.3d 806 (4th Cir. 2001) (relied upon by Conestoga Lancaster) and other like decisions,
*649Rule 7052 incorporates Federal Rule of Civil Procedure 52. FRCP 52(c) governs the entry of judgment upon partial findings. The Rule provides:
If a party has been fully heard on an issue during a nonjury trial and the court finds against the party on that issue, the court may enter judgment against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue. ... A judgment on partial findings must be supported by finding of fact and conclusions of law as required by Rule [7052],
“A district court sitting without a jury may enter judgment as a matter of law against a party on any claim once the party has had a full opportunity to present evidence on that claim.” Carter v. Ball, 33 F.3d 450, 457 (4th Cir. 1994). A Rule 52(c) motion for judgment may be entered, as long as the non-moving party has been fully heard with respect to an issue essential to that party’s case. EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253, 272 (3d Cir. 2010); Morales Feliciano v. Rullan, 378 F.3d 42, 59 (1st Cir. 2004). “In considering whether to grant judgment under Rule 52(c), the district court applies the same standard of proof and weighs the evidence as it would at the conclusion of the trial”. EBC, Inc., 618 F.3d at 272 (citations omitted). Thus, “the court does not view the evidence through a particular lens or draw inferences favorable to either party”. Id. The Court has evaluated the evidence submitted during Conestoga Lancaster’s case and has concluded that judgment for the Defendants under Rule 7052 is proper and should be entered.
2. The Maryland Statute of Limitations
In Maryland the general statute of limitations for a civil action, including an action on a simple contract, is three years from the date the action accrues. Md. Cts. & Jud. Proc. Code Ann. § 5-101; McMahan v. Dorchester Fertilizer Co., 184 Md. 155, 157-158, 40 A.2d 313 (1944). However, relying upon the sealed Agreement (and not the Guaranty) as the primary document that governs Mr. McCoy’s rights, Conestoga Lancaster looks to Md. Cts. Jud. Proc. Code Ann. § 5-102(a)(5) which provides a twelve (12) year limitations period for agreements under seal. With that additional period of time, Conestoga Lancaster asserts the Complaint is timely filed. Hence, the question on this point is which limitations period applies.
VI. Analysis
A. Sections 523(a)(2)(A) and (a)(4)
1. Did the Debtor make a representation?
The answer to this question is undoubtedly ‘yes’. Mr. Delgado asked Ms. Patchell about the anticipated treatment of the Cecil Bank Lien before the settlement was held and whether it still had a balance and/or was to be paid off. Ms. Patchell responded that Cecil Bank had agreed to release its lien against Guilford Court and accept Cherokee as substitute collateral. She adopted Ms. Feltman’s representation made on behalf of Cecil Bank that confirmed Cecil Bank’s agreement, but that makes no difference as to her personal responsibility. See Hudson Valley Water Res., Inc. v, Boice (In re Boice), 149 B.R. 40, 45 (Bankr. S.D.N.Y. 1992) (interpreting Section 523(a)(2)(B)). The representation regarding the treatment of the Cecil Bank Lien was one of material fact, made to Conestoga Lancaster by Ms. Patchell. Therefore, the first element is satisfied.
2. Did the Debtor know at the time that the representation was false?
The Bank’s claim for relief against Ms. Patchell begins to crumble when the sec*650ond question is examined. Ms. Patchell’s express representation was that Cecil Bank would release its lien against Guil-ford Court and accept Cherokee as substitute collateral. When the entirety of the facts and circumstances are taken into account, it is plain that no reasonable fact-finder could conclude that Ms. Patchell knew the falsity of the statement at the time it was made. This is so simply because the statement was not false. As a reflection of Cecil Bank’s intention, the statement was as true as true can be. This conclusion is emphatically verified by Ms. Peltman’s testimony and in particular her explanation of how she obtained authority to make the statement: from her brief, non-controversial exchange with Ms. Halsey, then President and CEO of Cecil Bank. Ms. Patchell’s request that the Cecil Bank Lien be released from Guilford Court and affixed to Cherokee was neither unusual nor unique; Ms. Feltman expressly confirmed that such an accommodation was a standard practice at Cecil Bank at the time. Hence, Ms. Patchell accepted Cecil Bank’s agreement, embodied in Ms. Feltman’s email, at face value. And the Court finds that Mr. Delgado did likewise. There is no evidence that he was in any way concerned by the notion that the Cecil Bank Lien would be released and secured by substitute collateral to allow Ms. Patc-hell to receive the net proceeds. His passivity seems to embody the conventional wisdom and high-flying, “fire, ready, aim,” practice of the time. It is evidence on par with Ms. Feltman’s testimony as to the decidedly low industry standards of compliance and diligence, the same low standards that paved the way for the Great Recession. Cecil Bank’s subsequent, arbitrary change of position ultimately undercut the agreement Ms. Feltman memorialized in the email. Nevertheless, it would be terribly wrong to find that Ms. Patchell “knew of the falsity” of the representation that embodied the agreement at the time it was made. That is so because the statement was an accurate reflection of Cecil Bank’s intention at the time.
3. Did Ms. Patchell make the statement with the intent and purpose of deceiving Conestoga Lancaster?
The preceding finding of fact effectively answers the third question as well. As Ms. Patchell understood Ms. Feltman’s statement to be true (and she was correct about that) the Court cannot find that she published it with a deceptive purpose. Instead, the Court finds that she obtained and published the statement in a sincere, honest effort to give Mr. Delgado the information he requested so he would be fully informed. Ms. Feltman, on behalf of Cecil Bank, believed the statement to be an accurate representation of her employer’s intentions at the time she sent the email and she intended to follow through with the stated plan until it was derailed by Mr. Sposato’s arbitrariness. There is no evidence that even suggests a contrary plan was afoot. Ms. Patchell was perfectly entitled to rely upon the accuracy of the statement and pass it on to Mr. Delgado. Hence, there was no intent to deceive with respect to the express representation that there would be a release and substitution of the Cecil Bank Lien.
Yet, Conestoga Lancaster puts a different spin on Ms. Patchell’s obligation. It asserts she had a duty to tell Mr. Delgado before settling that she did not yet have in hand either the release or a substitute deed of trust and that her failure to do so constitutes intentional deception by omission. There are several problems with this argument. By Ms. Feltman’s uncontradict-ed, and completely unbiased testimony, it was not unusual, and in fact normal at the time, for the sort of peripheral documents involved here — a release and substitute deed of trust — to be prepared and execut*651ed long after the settlement occurred. Thus, without evidence of any shady, or even questionable, behavior on Ms. Pate-hell’s part, there is no reason to conclude that she purposefully withheld this information from Mr. Delgado in order to deceive him in light of the fast-paced market place’s disdain for compliance and fifth-rate level of diligence; it would be much more reasonable to conclude that she believed the documents would be provided •within a reasonable time after the settlement. The Court likewise concludes that Mr. Delgado would likely have believed exactly the same thing. Mr. Delgado, acting in the role of escrow agent, held all the money and hence, all the cards — he retained that position in order to “supervise” the transaction and “give comfort” that there was no “impropriety” to all parties involved including especially his employer, Conestoga Lancaster. He was on exactly the same plane of knowledge as Ms. Patc-hell (including knowledge of Conestoga Elkton’s obligations under the Agreement) and, nevertheless, made the choice to release the money and fund the transaction, including the distribution of the net proceeds to Ms. Patched. He knew what Ms. Feltman wrote in her email and if he had a legitimate concern it would have been exceedingly simple for him to ask Ms. Patched whether she had the release and substitute deed of trust. If she answered “no”, he could have withheld the money and put the settlement on hold until the documents were in hand. That would have been precisely in line with the way he described his role and likely would have made for a “clean” settlement.10 The fact that he did not do so speaks to both the convincing nature of Ms. Feltman’s representation as to what Cecil Bank promised to do and Mr. Delgado’s understanding of a residential real estate market where releases were neither prepared nor recorded until well past the settlement date.
The Court, in In re Lindsley, 388 B.R. 661 (Bankr. D. Md. 2008), examined a claim of fraud by omission in the context of a Section 523(a)(2)(A) exception to discharge. Summarizing prior case law, the opinion provides:
A misrepresentation can be any words or conduct which produce a false or misleading impression of fact in the mind of another. In re Pleasants, 231 B.R. 893, 897 (Bankr. E.D. Va. 1999). An omission may constitute a misrepresentation where the circumstances are such that a failure to speak or act creates a false impression. Id.
388 B.R. at 669.
Lindsley involved the plaintiffs’ purchase of a large tract of land, a portion of which had been dedicated to the State of Maryland as an environmental easement. The easement carried with it an environmental mitigation credit bank, meaning that, with .the State’s oversight, valuable, yet virtual, credits could be sold by the owner to developers of other, unrelated parcels of land to “mitigate” the environmental impact of the unrelated parcel’s development. Id. at 665. At the time of the sale of the real estate, the credit bank still had substantial value. However, the plaintiff buyers did not know that because the debtor, Mr. Lindsley, purposefully did not tell them. Instead he, (1) falsely asserted that he had already exhausted the mitigation credit bank by his sale of all the credits and (2) did not let the purchasers know that he intended to secretly continue to sell credits after the settlement as if he still owned the real estate. Hence, the exception of the debt from his discharge was grounded upon both the debtor’s overt material misrepresentation as to whether *652the credits had been exhausted and his covert omission of material information regarding his intention to keep selling the mitigation credits. The evidence proved both active and silent deception by Mr. Lindsley — the credit bank was in existence and fungible at the time of settlement but he did not inform the buyers of that, nor did he tell them he would continue to sell the credits post-settlement. Finding intentional deception and fraud, in part by omission, by Mr. Lindsley was therefore easy.11
In this case, the opposite conclusion is just as easily reached. The facts and circumstances indicate that Ms. Patchell sincerely, and with good reason, believed Cecil Bank would follow through on its promise. That alone is enough to find she was not engaging in nefarious deception. Conversely, there are no indicators of either surreptitious, wrongful or murky conduct by her from which the Court can reasonably conclude that she acted with a deceptive purpose. Ms. Patchell asked Cecil Bank to release its lien and accept substitute collateral and they agreed. When Mr. Delgado asked her about the Cecil Bank Lien, she provided him with Ms. Feltman’s confirmation of the bank’s intention. Ms. Patchell subsequently worked hard to get Cecil Bank to keep its promise but Cecil Bank — its decision-making now controlled by Mr. Sposato’s whim and caprice — would not. Two explanations were given for this change of heart. The first is Cecil Bank’s assertion, included in Mr. Fayer’s letter, that Cherokee did not have sufficient equity to support the Cecil Bank Lien. The second is Ms. Patchell’s assertion that Mr. Sposato revoked Cecil Bank’s promise as retribution for her refusal to sell him Conestoga Elkton. Ms. Feltman likewise attributes the decision to Mr. Sposato’s arbitrary and capricious behavior and not the reason given in Mr. Fayer’s letter. But the Court need not decide which is more likely because either supports an absence of fraudulent intent on the part of Ms. Patchell. In other words, both confirm that Cecil Bank did make the promise in question, that Ms. Patchell had at least colorable right to believe and rely upon it and that the promise was revoked as a result of circumstances beyond her control. This does not add up to the type of dark, concealed, half-truths and inventions that characterize fraudulent behavior. Ms. Patchell likely breached the strict language of the Agreement by failing to have the signed release and substitute deed of trust at settlement,12 but that is well short of intentional, fraudulent behavior. Moreover, in the context of the high-flying, pre-Great Recession times, where booking new deals outstripped common sense to the extent that the global economy was sacrificed on the altar of greed, it seems it would have been strange' if the documents had been present at settlement.13 In any *653event, Ms. Peltman’s confirmation of Cecil Bank’s promise seemed to be more than good enough at the time for everyone to proceed and consummate the transaction. Under these circumstances, the Court cannot find intentional deception, whether overt or covert, on the part of Ms. Patc-hell.
4. Did Conestoga Lancaster justifiably rely upon the false statements?
As Ms. Feltman’s representation (adopted by Ms. Patchell) was true, this fourth question likewise answers itself. All of the actors took her email at face value and it was an accurate reflection of Cecil Bank’s intention at the time it was made. Nevertheless, Conestoga Lancaster contends that it detrimentally relied upon Ms. Patchell’s omission of material information. It avers that Mr. Delgado never would have released the proceeds or granted the title insurance had Ms. Patchell (acting fraudulently) told him she did not have the release and substitute deed of trust on the day of the settlement. The Court cannot find that Conestoga Lancaster was justified in relying upon a belief that Ms. Patc-hell actually had the release and substitute deed of trust at settlement, because the Court cannot find that Mr. Delgado truly believed Ms. Patchell had the release and substitute deed of trust that day. To the contrary, the Court concludes it is far more likely that Mr. Delgado understood, in light of the prevailing industry standards, that the documents would be provided at a later date. Nevertheless, assuming he did believe, then it was incumbent upon Conestoga Lancaster to show such belief was justified. Justifiable reliance presents a lower hurdle than reasonable reliance. Field, 516 U.S. at 70, 116 S.Ct. 437. However, it nonetheless presents a hurdle of substance.
In Field, the Court was called upon to determine whether reasonable, or justifiable, reliance was the legislatively mandated standard under Section 523(a)(2)(A). The Court held that the common law standard in use for garden-variety state law fraud at the time of the original statute’s enactment14 would be the correct one. Hence, the Court looked to the prece-dential overview included in the Restatement (Second) of Torts (1976) for guidance and determined that because the majority of states applied a justifiable reliance standard, that was the proper one for purposes of Section 523(a)(2)(A). Explaining the difference between justifiable and reasonable reliance, the Court stated:
The Restatement expounds upon justifiable reliance by explaining that a person is justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’
* * *
Here a contrast between a justifiable and reasonable reliance is clear: ‘Although the plaintiffs reliance on the misrepresentation must be justifiable ... this does not mean that his conduct must conform to the standard of the reasonable man. Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct in all cases.’
Field, 516 U.S. at 70-71, 116 S.Ct. 437.
Still, the Court recognized that the more “plaintiff-friendly” prism of justifiable reliance is not unlimited, holding, “[A] person is ‘required to use his senses, and cannot recover if he blindly relies upon a misrep*654resentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.’ ” Id. at 71, 116 S.Ct. 437.
When these standards are applied to this dispute, the Court cannot find that Conestoga Lancaster’s reliance was justified. Mr. Delgado’s self-described role was to insure the settlement unfolded with the interests of all, including those of his employer, protected. He was in the position of power and control and had every right— perhaps a duty — to pull the plug if every element did not meet with his satisfaction. Ms. Feltman’s email was unmistakably clear — it is a no-nonsense summary of Cecil Bank’s intentions. However, she did not indicate in the email that the release and substitute deed of trust would be provided at the time of the settlement. With that, Mr. Delgado had every right to stop the transaction and require the signed documents in advance of settlement. At a minimum, if he thought the signed release and substitute deed of trust should have been present at the settlement table, then he should have asked about them before he released the money to Conestoga Elkton. Because he did not, and in light of his self-described role and position of power, the Court finds that his failure to do so was not justifiable under the circumstances.
5. Was the debt obtained by the alleged fraud?
For the reasons explained above, the Court concludes that the indebtedness was not obtained by fraud. Conestoga Lancaster asserts that it had to pay Cecil Bank (and its own attorneys) in settlement to resolve the title dispute as a result of Ms. Patchell’s fraud. However, Ms. Patchell did not commit fraud and therefore there is no basis to except the debt from her discharge under Section 523(a)(2)(A). While she likely breached the Agreement, or perhaps acted negligently, that type of liability is insufficient to gain an exception to discharge.15
6. Is there evidence of the requisite sort of intentional conduct by Ms. Patchell sufficient to except the debt from her discharge pursuant to Section 523(a)(4)?
Assuming the funds released by Mr. Delgado were held in an express trust by Conestoga Elkton (if even briefly before the checks were written and disbursed) and that Ms. Patchell was acting as Conestoga Lancaster’s fiduciary (and that the corporate shield cannot deflect her personal responsibility)16 there would still be no evidence of intentional wrongdoing, or other equivalent conduct on her part sufficient to except the debt from her discharge under Section 523(a)(4). In the absence of intentional wrongdoing, the Supreme Court in Bullock held that the risk taken by the fiduciary, “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances know to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding *655person would observe in the actor’s situation.” 133 S.Ct. at 1760. For the reasons explained above, the Court cannot find either that Ms. Patchell’s conduct was intentionally purposed to do wrong or that it was a “gross deviation from the standard of conduct” such that Section 523(a)(4) is satisfied. To the contrary, her behavior, and that of Mr. Delgado and Ms. Feltman, appears to have been in accordance with the mores of the market place at the time of the settlement — although her failure to have the release and substitute deed of trust at settlement likely violated the Agreement, it was not a gross deviation from the standard of conduct that “law-abiding” people decided to observe at the time. If it were, the jail cells would today be filled to bursting with individuals clad in silk, designer suits.
Conestoga Lancaster asserted that Ms. Patchell could be held liable, and the debt excepted from her discharge under Section 523(a)(4), on the basis of her negligent breach of contract. Conestoga Lancaster relied upon Rwanda v. Uwimana, 274 F.3d 806 (4th Cir. 2001) in support of this position. It is true that the legal standard expressed in that case may have helped Conestoga Lancaster and pointed the way to a different result. However, Uwimana’s holding — that a fiduciary’s debt could be excepted from discharge under Section 523(a)(4) without a showing of intentional conduct — was expressly rejected by Bullock. Without facts that support either intentional conduct or a “gross deviation” from the appropriate standard of conduct, Conestoga Lancaster cannot prevail under Section 523(a)(4). Because there is no such evidence, the debt will not be excepted from Ms. Patchell’s discharge.
B. Statute of Limitations
1. Is Conestoga Lancaster’s claim against Mr. McCoy barred by the three year statute of limitations?
The statute of limitations begins to run when a cause of action accrues. Bass v. Standard Acc. Ins. Co., 70 F.2d 86, 87 (4th Cir. 1934). A guarantor’s promise under a guaranty becomes absolute and enforceable — and hence the cause of action against her accrues — upon the default of the principal and the proper triggering of the guaranty obligations. Mercy Med. Ctr. v United Healthcare of the Mid-Atlantic, 149 Md. App. 336, 358, 815 A.2d 886 (2003).17 Thus, the limitations period begins to run from the time the guarantor is liable for suit and that occurs when the principal becomes liable for the debt guaranteed. Allied Funding v Huemmer, 96 Md. App. 759, 763, 626 A.2d 1055 (1993) (“the statute of limitations on a contract of guaranty cannot begin to run until a right of action accrues on the principal debt”).
Contrary to the express terms of the Agreement, Ms. Patchell did not have the release and substitute deed of trust on April 30, 2007, the day of settlement, Conestoga Lancaster asserts that it believed Ms. Patchell did have the documents that day. Whether that belief existed or not, the evidence confirms that Mr. Delgado knew by no later than July 27, 2007 that the Cecil Bank Lien still had not been released from Guilford Court. That was the day he sent Ms. Patchell an email inquiring about the Cecil Bank Lien which was still of *656record and telling her that it needed to be “satisfied/released as to Guilford Ct.” PL Exh. 7. At that point in time, both the breach and Conestoga Lancaster’s knowledge of it could not be reasonably denied. Accordingly, the Court finds that the claim for relief against Mr. McCoy under the Guaranty accrued on the day of settlement and, at the very latest, on July 27, 2007. That being the case, the limitations period began to run on Conestoga’s claim against Mr. McCoy on the same day.18
A contract of guaranty is collateral to, and independent of, the principal contract. General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 260, 492 A.2d 1306 (1985); Kushnick v. Lake Drive Bldg. & Loan Ass’n, 153 Md. 638, 641, 139 A. 446 (1927). Likewise, one’s status as a guarantor does not, without more, make one a party to the principal obligation. Id. As stated in Kushnick
The guaranty is a separate and independent contract, involving duties and imposing responsibilities very different from those created by the original contract to which it is collateral. The fact that both contracts are written on the same paper or instrument does not affect their separate nature,
Id. at 642 (citation omitted).
Notwithstanding the fact that two separate contracts are presented — one under seal and the other not — Conestoga asserts that Mr. McCoy’s liability should be governed by the Agreement he did not sign in order to trigger the hoped for extended limitations period, Conestoga stated, “Mr. McCoy guaranteed the performance of the [Agreement] by the Agent. The Agency Agreement is an instrument executed under seal. As such, it is a specialty under Maryland law and subject to a 12 year statute of limitations, rather than an ordinary 3 year period for breach of contract.” PI. Mem, in Opp. to Def. Mt. Summ. J. at 10 (Dkt. No. 26). Conestoga Lancaster relies upon Hooper v Hooper, 81 Md. 155, 174, 31 A. 508 (1895) to make this contention.
It is true that Hooper in part held that, “the liability of a guarantor is coextensive with the liability of the principal”. Id. at 173-74, 31 A. 508. From that, Conestoga Lancaster asserts that as long as the debt is enforceable against the principal, it is enforceable against the guarantor. However, to apply that language literally here would be to ignore context and meaning. While it is somewhat convoluted factually, Hooper is easily distinguishable from this dispute.
In Hooper, three brothers guaranteed the debt of a fourth that arose from sums lent to him by a manufacturing company formerly owned by their late father. Id. at 165, 31 A. 508. The guaranty was dated April, 1889. In March 1894, the manufacturing company demanded payment from William, the indebted brother, and also from the guarantors. In turn, two of the guaranteeing brothers told Alcasus, the defendant and co-guarantor, that they were going to pay William’s debt and demanded contribution. When Alcasus was sued by his fellow guarantors, he asserted that the statute of limitations had already expired as either three years had passed since the execution of the guaranty, or, since the date of the last loan to William.
The Court held that limitations does not begin to run “in favor of a ... guarantor [until] he is liable to suit, and this may or may not be the same time the principal becomes so liable.” Id. at 170, 31 A. 508. *657The Court employed conditional language because the guaranty included a notice requirement and grace period. However, the simple essence of the holding is that the cause of action against the guarantors did not accrue until William went into default and then only after the grace period expired. Hence that is when the limitations period began to run; not when the guaranty was executed, approximately fíve years before. The Court did use the language quoted by Conestoga Lancaster regarding the “coextensiveness” of the guarantor’s liability with that of the principal, but that was merely to make the point that limitations had not run in favor of William, the principal obligor. Id. at 172, 31 A. 508. The case did not hold that the twelve year limitations period can be used to breathe life into a collateral, unsealed document.
Hooper’s rationale cannot be conflated to give Conestoga Lancaster what he needs — a ruling that its claim against Mr. McCoy is governed by the twelve year statute of limitations. The Guaranty and the Agreement are two separate agreements. Mr. McCoy signed the Guaranty and admitted he is otherwise bound by it. However, he signed the Agreement only as a witness to Ms. Patchell’s signature but not as a party. Conestoga Lancaster’s claim for relief accrued against him on April 30, 2007 and the limitations period began to run then. Because he is not a party to the sealed Agreement, his liability has to be governed by the Guaranty and because it is not under seal, the general three year limitations period applies. Therefore, the Complaint against him must be dismissed.19
Conclusion
For the above articulated reasons, the underlying debt incurred by Conestoga will not be excepted from the Debtor’s discharge nor will Mr. McCoy be found liable under the Guaranty. A separate judgment order will issue.
. Conestoga Elkton had been an agent of Conestoga Lancaster under its prior ownership, Tr. at 60. Despite the similarity in their names, the parties emphasized that Conestoga Lancaster and Conestoga Elkton are entirely separate and do not have any economic or ownership interest in each other.
. The fax is PI. Exh. 12.
. “Cherokee” is 15 Cherokee Drive, North East, MD (Cherokee), also owned by Ms. Patc-hell in 2007.
. Ms. Patchell testified that this money was used for various business and personal ex-' penses. Tr. at 65.
. Ms. Patchell asserted that it was Cecil Bank’s responsibility to prepare the release and substitute deed of trust while Ms. Felt-man testified that the settlement agent would normally do so. The Plaintiff stresses that Conestoga Elkton’s (Ms. Patchell’s) failure to prepare these documents was negligent at best and fraudulent at worst. However, the Court concludes this question is not crucial to a proper resolution, in light of the industry standards at the time as capsulized in Ms. Feltman’s testimony and Ms. Patchell’s unre-butted testimony as to her post-settlement efforts to get the documents from Cecil Bank.
. At the time, Ms. Halsey was Cecil Bank's President and CEO.
. The statute of limitations was raised as an affirmative defense on behalf of Ms. Patchell (Dkt. No. 12) but not on behalf of Mr. McCoy (Dkt. No. 7). It was also mentioned by the Court in the wake of the Defendant's motion for judgment. The parties each addressed the question of whether limitations applied on the merits in their post-trial papers without debating whether it had been waived.
. Unless otherwise noted, all statutory citations are to the Bankruptcy Code (Code) found at Title 11 of the United States Code and all rule citations are to the Federal Rules of Bankruptcy Procedure (Rules).
. A convincing case could be made that Conestoga Lancaster may not rely upon Section 523(a)(2)(A) but instead must look to Section 523(a)(2)(B) because the essential question— whether the Cecil Bank Lien was recorded against Guilford Court, or, released and transferred to Cherokee — was one respecting the Debtor’s financial condition. See Engler v. Van Steinburg, (In re Van Steinburg) 744 F.2d 1060, 1061 (4th Cir, 1984); Blackwell v, Dadney, 702 F.2d 490, 491 (4th Cir. 1983). The Court suggested this at trial and during oral argument but Conestoga Lancaster has chosen to rely upon Subsection (a)(2)(A). If Section 523(a)(2)(B) does apply Conestoga Lancaster would have had to have relied upon a written statement of Ms. Patchell to its detriment. Id. The prime analytical difference would then be the governing reliance standard, 'reasonable' instead of ‘justifiable’. However, because the Court cannot find that Ms. Patchell acted with fraudulent intent (a requisite of both) the subtleties and nuances of which standard should apply need not be explored.
. Hindsight being 20/20.
. The excepted debt was comprised of the gross proceeds Mr. Lindsley received from his post-settlement sale of the credits.
. Paragraph 4 of the Agreement requires:
Before closing or settlement, Agent shall:
(d)(1) secure ... appropriate evidence or curative material justifying the removal of all objections set out in the binder or report of title except those remaining as an exception on the policy ....
(g) Agent agrees to promptly record all documents which are required to be recorded ... and to be responsible for the satisfaction of such liens of record....
.Ms. Feltman also testified generally that a settlement agent would normally prepare a deed of trust and release and they would normally be executed prior to settlement. Def. Exh. at 28-29; 13, 33-34. Ms. Patchell disagreed. However, Ms. Feltman also confirmed the specifics of Ms. Patchell’s story, especially regarding the fast-paced market and lack of diligence. Hence, the Court can only conclude that to the extent there is a contradiction, Ms. *653Feltman must have been referring to -settlements funded by Cecil Bank.
. See Section 17(a)(2) of the Bankruptcy Act of 1898.
. In a similar vein, Conestoga Lancaster likely breached its contractual obligation to Conestoga Elkton under the Agreement by failing to consult with it as to the settlement discussions with Cecil Bank and its ultimate decision to settle. See Pi. Exh. 1 at ¶ 5 ("Conestoga [Lancaster] agrees to consult with [Conestoga Elkton] prior to making final decision on losses on policies issued by [Conestoga Elkton]”). By the same token, it appears Conestoga Lancaster retains unfettered discretion to settle.
. See Airlines Reporting Corp. v. Ellison (In re Ellison), 296 F.3d 266, 271 (4th Cir. 2002) (“while an officer of a corporation is in no way personally liable for corporate torts solely on account of his corporate position, where the officer actually participates in or otherwise sanctions the tortious acts, personal liability may lie”).
. The Agreement expressly indicates that it is governed by Pennsylvania law. PL Exh. 1 at ¶ 17. The Guaranty does not include a choice of law provision. Nevertheless, and notwithstanding its reliance upon the sealed Agreement in order to assert a 12 year limitations period, Conestoga Lancaster does not assert that Pennsylvania law must apply to this dispute. Instead, both sides exclusively rely upon Maryland law with respect to the limitations question.
, In its post-trial memoranda, Conestoga Lancaster appeared to agree that the claim accrued on April 30th. See PI. Mem. in Opp. to Def. Mt. Summ. J. at 19 (Dkt. No. 26); PI. Mem. re; Pers. Guar, at 8 (Dkt. No. 32).
. Limitations would also appear to run in favor of Ms. Patchell. The Defendants also rely upon the doctrine of "equitable estop-pel”, derived from Hill v. Cross Country Settlements, LLC, 402 Md. 281, 936 A.2d 343 (2007). In short, the contention is that Conestoga Lancaster should not be allowed to enforce its claim against either of the Defendants due to its "voluntary conduct” in settling the claim with Cecil Bank. However, the doctrine does not apply where (1) a plaintiff acts under a legal compulsion or duty, or (2) acts to protect his or her own property interests. Hill, 402 Md. at 305, 936 A.2d 343. The Court finds that Conestoga Lancaster was operating under a legal compulsion (and perhaps also to protect its own property interests) when it settled with Cecil Bank because of the title insurance it gave to Mr, Powell. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500628/ | *685OPINION AND ORDER DISMISSING DEFENDANTS’ COUNTERCLAIMS CONTAINED IN THEIR “COUNTER-COMPLAINT”
Thomas J. Tucker, United States Bankruptcy Judge
This adversary proceeding came before the Court for an initial scheduling conference on March 20, 2017, During that conference, Defendants’ counsel acknowledged that the counterclaims Defendants filed against the Plaintiff, consisting of six counts (Counts I through V),1 which Defendants labeled as a “Counter-Complaint” (Docket # 15), are property of the bankruptcy estate in the Defendants’ related Chapter 7 case, which until March 20, 2017 were neither scheduled nor claimed as exempt.
The Court concludes'that the Defendants’ counterclaims must be dismissed for the following reasons, As Defendants’ counsel admitted, during the March 20, 2017 scheduling conference, the counterclaims that Defendants are asserting arose before Defendants filed their pending Chapter 7 bankruptcy case. As a result, all of the counterclaims are property of the bankruptcy estate in the Chapter 7 case. This, means that unless and until the Chapter 7 Trustee abandons these claims under 11 U.S.C. § 554, or the claims otherwise are no longer property of the bankruptcy estate, only the Chapter 7 Trustee has standing and authority to pursue these claims. See, e.g., Auday v. Wet Seal Retail, Inc., 698 F.3d 902, 904 (6th Cir. 2012); Michigan First Credit Union v. Smith (In re Smith ), 501 B.R. 325, 325-26 (Bankr. E.D. Mich. 2013); In re Stinson, 221 B.R. 726, 729, 731 & n.3 (Bankr. E.D. Mich. 1998).
After the initial scheduling conference on March 20, 2017, Defendants filed amended schedules in their bankruptcy case, which listed their counterclaims against the Plaintiff and stated the value of those counterclaims as “unknown.”2 Defendants also file amended Schedules C which claimed exemptions in the counterclaims in the amounts of $1,698.05 (Andrii Garak’s claimed exemption) and $2,531.07 (Svitlana Garak’s claimed exemption) for a total of $4,229.12 in claimed exemptions.3
Such exemptions cannot yet be deemed allowed in any amount, however, because Federal Rule of Bankruptcy Procedure 4003 gives parties in interest and the Chapter 7 trustee 30 days to object to any amended claims of exemptions. See Fed. R. Bankr. P. 4003(b)(1).
As matters currently stand, only the Chapter 7 Trustee may prosecute the counterclaims, and Defendants’ continuing prosecution of these claims would violate the automatic stay, under 11 U.S.C. § 362(a)(3). See Smith, 501 B.R. at 326; Stinson, 221 B.R. at 730-31.
Accordingly,
IT IS ORDERED that all of Defendants’ counterclaims in their “Counter-Complaint” (Docket # 15) are dismissed, without prejudice to the right of the Chapter 7 Trustee to file and prosecute such claims, and without prejudice to the right of the Debtors/Defendants to file and prosecute such claims if, after, and to the extent that the claims are no longer prop*686erty of the bankruptcy estate in Defendants’ related bankruptcy case.
.The counter-complaint erroneously labels two different counts "Count IV" ("COUNT IV STATUTORY/REGULATORY VIOLATIONS FOR UNFAIR AND DECEPTIVE PRACTICES" and “COUNT IV CONCERT OF ACTION/CIVIL CONSPIRACY”).
. See Debtors' amended Schedules- A/B (Docket #26 in Case No,. 16-54081) at pdf p. 5.
, See Debtors’ amended Schedules C (Docket #26 in Case No, 16-54081) at pdf p. 8, 10. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500630/ | OPINION AND ORDER (1) DENYING DEBTOR’S EX PARTE MOTION TO REOPEN CASE, BUT WAIVING MOTION FILING FEE; AND (2) STRIKING THE “CERTIFICATE OF DEBTOR EDUCATION” FILED JUNE 27, 2017
Thomas J. Tucker, United States Bankruptcy Judge
This case is before the Court on the Debtor’s motion filed June 27, 2017, entitled “Ex Parte Motion To Reopen Case and Request Waive Reopen Fee.” (Docket # 16, the “Motion”). The Motion seeks to reopen this case, to enable the Debtor to file a Financial Management Course Certificate (“Certificate”) and receive a discharge, The Motion was filed more than 8 years after this case was closed without a discharge, due to the Debtor’s failure to timely file such Certificate. The Motion also seeks a waiver of the filing fee for the *689Motion. For the following reasons, the Court will deny the Motion, except for the waiver of the filing fee.
A. Background
The Debtor filed a voluntary petition for relief under Chapter 7 on March 14, 2008, commencing this case. That same day, the Clerk issued a notice that the first meeting of creditors would be held on April 24, 2008 at 1:00 p.m. (Docket #9, the “Notice”). The Notice was served on all creditors, the Chapter 7 Trustee, Debtor’s attorney, and the Debtor. (Docket # 11). On March 17, 2008, the Court entered an Order granting the Debtor a waiver of the Chapter 7 filing fee. (Docket # 10).
Under Fed. R. Bankr. P. 1007(b)(7)(A),1 1007(c),2 and 4004(c)(1)(H),3 and 11 U.S.C. § 727(a)(ll),4 to obtain a discharge under 11 U.S.C. § 727, the Debtor was required to file a Certificate “within 60 days after the first date set for the meeting of creditors,” which meant that the deadline was June 23, 2008. The Debtor failed to file the Certificate by the June 23, 2008 deadline, or at anytime thereafter while the case remained open. The Debtor also failed to file a motion to extend the deadline to file the Certificate. On December 15, 2008, after the case had been fully administered, the case was closed without a discharge due to Debtor’s failure to file a Certificate. (Docket # 14). Notice that the Debtor’s bankruptcy case was closed without a discharge was served by mail on December 17,2008 on all creditors, Debtor’s attorney, and the Debtor. (Docket # 15). Such notice stated: “All creditors and parties in interest are notified that the above-captioned case has been closed without entry of discharge as Debtor did not file Official Form 23, Debtor’s Certification of Completion of Instructional Course Concerning Personal Financial Management.” (Id.)
(H) the debtor has not filed with the court a statement of completion of a course concerning personal financial management if required by Rule 1007(b)(7)[.]
More than 8 years later, on June 27, 2017, the Debtor filed the Motion, and a Certificate. (Docket ## 16, 17). The Certificate states, in relevant part, that “on June 26, 2017 ... [Debtor] Mark A. Barrett completed a course on personal finan*690cial management given by internet by GreenPath, Inc.” (Docket # 17).
The Motion does not allege any valid excuse why the Debtor failed to timely complete a financial management course and file the required Certificate, more than 8 years ago. Nor does the Motion allege any reason, let alone a valid excuse, why the Debtor waited for more than 8 years after this case was closed before he moved to reopen it.
B. Discussion
Section 350(b) of the Bankruptcy Code, Bankruptcy Rule 5010,5 and Local Bankruptcy Rule 5010-16 govern motions to reopen a case for the purpose of filing a Certificate. Bankruptcy Code Section 350(b) states that “a case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). Here, in essence, the Debtor seeks to reopen the case to move for an order granting Debtor an extension of time to file the Certificate, so the Debtor can obtain a discharge.
“It is well settled that decisions as to whether to reopen bankruptcy cases ... are committed to the sound discretion of the bankruptcy judge .... ” Rosinski v. Rosinski (In re Rosinski), 759 F.2d 539, 540-41 (6th Cir. 1985) (citations omitted). “To make the decision, courts may consider ‘the equities of each case with an eye toward the principles which underlie the Bankruptcy Code.” In re Chrisman, No. 09-30662, 2016 WL 4447251, at *1 (Bankr. N.D. Ohio August 22, 2016) (citation omitted). Debtor has the burden of establishing that “cause” exists to reopen this case. See id. (citing Rosinski, 759 F.2d 539 (6th Cir. 1985)).
Bankruptcy Rule 9006(b)(3) states, in relevant part, that “the court may enlarge the time to file the statement required under Rule 1007(b)(7) [ (the Certificate) ] ... only to the extent and under the conditions state in Rule 1007(c). Fed. R. Bankr. P. 9006(b)(3). Bankruptcy Rule 1007(c), in turn, permits a bankruptcy court “at any time and in its discretion, [to] enlarge the time to file the statement required by subdivision (b)(7) [of Bankruptcy Rule 1007(c) [ (namely, a Certificate) ].” Fed. R. Bankr. P. 1007(c). However, with an exception not applicable here, any such extension “may be granted only on motion for cause shown and on notice to the United States trustee, any committee elected under § 705 or appointed under § 1102 of the Code, trustee, examiner, or other party as the court may direct.” Fed. R. Bankr. P. 1007(c) (emphasis added).
Several reported bankruptcy cases have considered whether “cause” exists to grant a debtor’s motion to reopen a case to file a Certificate after the debtor’s case was closed without a discharge. Such cases apply a four-part test, and have denied the motion where the Debtor had not completed a post-petition financial management course and filed the motion to reopen and a Certificate within a short time after the case was closed. The four factors that these cases have considered are: “(1) whether there is a reasonable explanation for the failure to comply; (2) whether the request was timely; (3) whether fault lies with counsel; and (4) whether creditors *691are prejudiced.” See, e.g., In re Chrisman, No. 09-30662, 2016 WL 4447251, at *2-3 (Bankr. N.D. Ohio Aug. 22, 2016) (Chapter 7) (denying a Debtor’s motion to reopen to file a Certificate where the debtor had not completed the post-petition financial management course and did not file the motion to reopen and Certificate until more than 7 years after the case was closed, and stating that “the seven year delay in this case [was] extreme”); In re McGuinness, No. 08-10746, 2015 WL 6395655, at *2, 4 (Bankr. D.R.I. Oct. 22, 2015) (Chapter 7) (more than 7-year delay); In re Johnson, 500 B.R. 594, 597 (Bankr. D. Minn. 2013) (Chapter 7) (more than 4-year delay); cf. In re Heinbuch, No. 06-60670, 2016 WL 1417913, *3-4 (Bankr. N.D. Ohio April 7, 2016)(Chapter 13) (approximately 7-year delay).
The Court will apply this four-factor approach in this case. The Court finds that the Debtor has not shown either cause to reopen this case, or cause to grant the Debtor an 8 + year extension of the deadline to file the Certificate.
Factor I: whether there is a reasonable explanation for the failure to comply
The Debtor has not provided a valid or reasonable explanation for his failure to timely comply with the financial course requirement. Nor has the Debtor provided a valid or reasonable explanation for the 8+ year delay in his seeking to reopen this case. This factor, therefore, weighs in favor of denying the Motion.
The Motion says only that “[d]uring the final process of my bankruptcy I moved and lost communication with my lawyer. I was not informed when to take my financial class.” From this it appears that the Debtor’s failure to timely file the Certificate was because he lost touch with his lawyer. But such losing touch with his lawyer was due to the Debtor’s own fault and neglect. Moreover, even if the Debtor was not informed by his lawyer of the June 23, 2008 deadline for taking the financial management course and filing the Certificate, the Debtor was informed, by the notice described above, which was mailed to him on December 17, 2008, that his case had been closed without a discharge, and why it had been so closed.7 Yet the Debtor did nothing to try to rectify this for more than 8 years, and the Motion alleges absolutely no reason, let alone a valid excuse, for such an incredibly long delay by the Debtor.
Factor 2: whether the request was timely
The delay of more than 8 years in both the Debtor’s completion of the financial management course and in filing the Certificate in this case is extreme. Such a long delay frustrates the goals of the legislation which added the financial management course requirement as a condition for obtaining a Chapter 7 discharge. In Chris-man, the Court explained:
Congress added participation in a post-petition financial management instructional course as a condition to obtaining a Chapter 7 discharge to the Bankruptcy Code in the Bankruptcy Abuse Pre*692vention and Consumer Protection Act of 2005. 11 U.S.C. § 727(a)(ll). One of the goals of the legislation and this requirement was to restore individual financial ■ responsibility to the bankruptcy system.
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“The main purpose of a bankruptcy filing is to obtain a discharge, and any action that delays that benefit is mystifying and therefore requires additional justification. Justification supports the goals of not only the bankruptcy system, but also the purpose of the financial management course. Allowing a debtor to take the financial management course years after its target completion provides no educational benefit to the debt- or for the intervening years and denigrates its purpose. Moreover, it maligns the integrity of the system and its fairness to all parties.... It is unfair to creditors to allow a debtor to avoid the responsibilities established by the bankruptcy code and rules, only to later want to fulfill those requirements when faced with a resulting unpleasantness.”
Chrisman, 2016 WL 4447251, at *1, *2 (quoting Heinbuch, 2016 WL 1417913, at *2). In Chrisman, “neither the instructional component nor the paperwork component were timely accomplished,” and the court found that “[t]he Congressional purposes in adding the post-petition financial management instructional requirement to the Bankruptcy Code as a condition of discharge [had] been completely stymied.” Id. at *3. The magnitude of the delay in this case is greater than even the 7-year delay in Chrisman, and the delay in the other cases cited above, in which the debtors’ motions to reopen were denied. This factor strongly weighs in favor of denying the Motion.
Factor 3: whether fault lies with counsel
Debtor was represented by counsel in this case until the case was closed in 2008, but Debtor did not allege in the Motion that his failure to timely complete the Financial Management Course and to file a Certificate was the fault of his counsel. Rather, as discussed above, it appears that the Debtor lost touch with his lawyer through his own fault and neglect. This factor weighs in favor of denying the Motion,
Factor 4: whether creditors are prejudiced
In Chrisman, the Court reasoned, with regard to the prejudice factor, that “[t]o spring a discharge on creditors more than seven years later that many of them will now not even receive, at peril of violating the unknown discharge, is simply unfair.” Id, at *3. The delay in this case is even longer than the delay in Chrisman. Generally speaking, the longer the delay, the greater the prejudice. Here, there was an extremely long delay. This factor therefore, also weighs against granting the Motion.
In summary, all of the relevant factors weigh against a finding of cause to reopen this case. Debtor has failed to demonstrate cause to reopen this case. Accordingly,
IT IS ORDERED that:
1. The Motion (Docket # 16) is denied, except for the waiver of the filing fee.
2. The filing fee for the Motion is waived.
3. The certificate entitled “Certificate of Debtor Education” filed June 27, 2017 (Docket # 17) is stricken, because it is untimely in the extreme, and because this case is closed (and will not be reopened).
. Fed. R. Bankr. P. 1007(b)(7)(A) states the requirement for a debtor to file a Certificate. It provides:
(7) Unless an approved provider of an instructional course concerning personal financial management has notified the court that a debtor has completed the course after filing the petition:
(A) An individual debtor in a chapter 7 ... case shall file a statement of completion of the course, prepared as prescribed by the appropriate Official Form[.]
. Fed. R. Bankr, P. 1007(c) provides the time limit for filing the Certificate. It states, in relevant part:
In a chapter 7 case, the debtor shall file the statement required by subdivision (b)(7) within 60 days after the first date set for the meeting of creditors under § 341 of the Code[.]
. Fed. R. Bankr. P. 4004(c)(1)(H) states:
(c) Grant of discharge
(I) In a chapter 7 case, on expiration of the times fixed for objecting to discharge and for filing a motion to dismiss the case under Rule 1017(e), the court shall forthwith grant the discharge, except that the court shall not grant the discharge if:
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.Under Section 727(a)(l 1), the court may not grant a discharge to a debtor who has not filed a Certificate. It provides, in relevant part, that with exceptions not applicable here,:
(a) The court shall grant the debtor a discharge, unless-
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(II) after filing the petition, the debtor failed to complete an instructional course concerning personal financial management described in section 111 [.]
. Bankruptcy Rule 5010 states, in relevant part, that "[a] case may be reopened on motion of the debtor ... pursuant to § 350(b) of the Code.” Fed. R. Bankr, P. 5010.
. Local Bankruptcy Rule 5010 — 1(b) states, in relevant part that ”[a]fter a case is closed, a debtor seeking to file .. a Certification About Financial Management Course ... must file a motion to reopen the case.” LBR 5010-l(b) (E.D. Mich.).
. The Motion does not allege that the Debtor did not receive this notice. And there is no indication in the record that the mailing was returned undelivered by the post office. And even if the Debtor had moved before this ■ notice was mailed to him, any resulting failure to receive the notice was entirely the Debtor’s fault. The Debtor did not file any notice of an address change in this case until June 27, 2017 (Docket # 18). (Oddly, the “new” address given in Debtor’s notice of address change is the same address he gave in his bankruptcy petition when he filed this case in 2008). Fed. R. Bankr. P. 4002(a)(5) required the Debtor to “file a statement of any change of the debtor’s address.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500631/ | MEMORANDUM DECISION REGARDING MOTION FOR DETERMINATION OF CLAIM
John T. Gregg, United States Bankruptcy Judge
This matter comes before the court on a motion filed by CoBank, ACB (“CoBank”) seeking a determination that it holds a secured claim or, to the extent insufficient collateral exists to satisfy its secured claim in full, a superpriority administrative expense (the “Motion”). Peter Kravitz, the liquidation trustee of the GLC Liquidation Trust (the “Liquidation Trustee”), and Daniel M. McDermott, the United States Trustee for Region 9 (the “UST”), object to the relief requested because the settlement agreement incorporated into a sale order entered by the court (the “Sale Order”) limits CoBank’s remaining claim to “an allowed unsecured deficiency claim.” The parties have requested that the court decide a threshold issue — whether the Sale Order unambiguously determined Co-Bank’s remaining claim to be an allowed general unsecured claim.
JURISDICTION
The court has jurisdiction pursuant to 28 U.S.C. §§ 1384(a) and 157. The court has expressly retained jurisdiction to determine this post-confirmation dispute, which has a close nexus to previous orders entered by this court, including the Sale Order. Thickstun Bros. Equip. Co., Inc. v. Encompass Servs. Corp. (In re Thickstun Bros. Equip. Co., Inc.), 344 B.R. 515, 521 (6th Cir. BAP 2006) (citation omitted); see also Harper v. The Oversight Comm. (In re Conco, Inc.), 855 F.3d 703, 711 (6th Cir. 2017). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (K), (N) and (0).
BACKGROUND
Great Lakes Comnet, Inc. and Comlink L.L.C., the debtors in these jointly administered cases (collectively, the “Debtors”), were in the business of providing telecommunication and data services to various third-party carriers. Prior to the petition date, CoBank made certain loans to and/or for the benefit of the Debtors. In exchange, CoBank was granted first priority security interests and mortgage liens in substantially all of the Debtors’ personal and real property.
On January 25, 2016, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.2 As of the *695petition date, the Debtors were indebted to CoBank in the amount of approximately $25 million. As part of their first day motions, the Debtors filed a motion seeking authority to obtain post-petition financing from CoBank and use its cash collateral [Dkt. No. 17]3 (the “DIP Motion”). In an objection to the DIP Motion [Dkt. No. 39], the UST raised several concerns, including the potential for administrative insolvency, an issue that would persist throughout the sale process. At the hearing, the court granted the DIP Motion on an interim basis [Dkt. No. 61] after the UST’s objections were resolved and the Debtors represented that they would apprise parties in interest if administrative insolvency became an issue. (See Status Rep., Dkt. No. 380, at ¶ 6.)
Several parties, including the UST, filed objections to the entry of an order approving the DIP Motion on a final basis. In his objection [Dkt. No. 151] and at the final hearing, the UST reiterated his concerns with respect to the potential for administratively insolvent estates. The court overruled the objection and entered a final order granting the DIP Motion [Dkt. No. 218] (the “Final DIP Order”), but cautioned that administrative insolvency might need to be addressed at some point in the future.
Pursuant to the terms of the Final DIP Order, the Debtors were authorized to borrow up to the principal amount of $5.5 million from CoBank and use its cash collateral. CoBank, as post-petition lender, was granted, among other things, a priming lien and a superpriority administrative expense under section 364(c)(1) to ensure repayment of the post-petition loans. As prepetition lender, CoBank was granted adequate protection in the form of replacement liens and an administrative expense with priority under section 507(b) in order to protect against the diminution in the value of the collateral subject to CoBank’s prepetition liens.4
Less than one week after the petition date, the Debtors filed a motion to establish bidding procedures and sell substantially all of their assets to a stalking horse bidder, subject to higher and better bids [Dkt. No. 72] (the “Sale Motion”). In an objection to the proposed bidding procedures [Dkt. No. 167], the UST again expressed concerns regarding administrative insolvency because of the amount of the proposed break up fee, among other things. After the court granted the bidding procedures portion of the Sale Motion [Dkt. No. 235], the Debtors continued to market their assets to potential purchasers. Despite the Debtors’ efforts, no other bids materialized and the Debtors informed parties in interest and the court that they intended to seek approval of a sale to the stalking horse bidder at the hearing scheduled for May 10, 2017 [Dkt. No. 363].
The weeks leading up to the sale hearing were challenging for the Debtors and their estates to say the least. On May 5, 2016, the Debtors filed a status report disclosing that the Debtors “do not believe they have sufficient cash or credit to get to a closing of the Sale without creating, or substantially increasing the likelihood of, administratively insolvent estates.” (Status Rep. at ¶ 3.) The Debtors further explained that the sale was unlikely to be *696consummated for approximately three weeks (and possibly longer) after the sale hearing due to various governmental approvals and consents that were prerequisites to the closing. As such, the Debtors stated that they were attempting to negotiate additional financing from CoBank, who might ultimately be the only beneficiary of the sale. Finally, the Debtors requested that the court schedule a status conference to discuss the issue of administrative insolvency.
Concerned with some of the statements made in the status report, CoBank filed a response [Dkt. No. 387] wherein it emphasized that the Debtors’ post-petition financial condition was strong, but for the professional fees which far exceeded those permitted under the budget in the Final DIP Order. CoBank also stated that although it would continue to honor its obligations to extend post-petition financing, it should not be required to fund professional fees beyond those set forth in the budget and the agreed upon carve out in the Final DIP Order.
Also in response to the status report, the UST filed a motion to convert the Debtors’ cases to Chapter 7 or dismiss them altogether because of the substantial and continuing losses to the Debtors’ estates [Dkt. No. 382]. The UST, like Co-Bank, noted the significant amount of professional fees that the Debtors’ estates had incurred in the three months since the petition date. According to the UST’s projections, the Debtors’ estates would be administratively insolvent by mid-June 2016, if not before. The UST also filed an objection to the proposed sale [Dkt. No. 364], again emphasizing that the Debtors’ estates would likely be rendered administratively insolvent, resulting in no distribution whatsoever to unsecured creditors.
The court held a status conference on May 9, 2016 regarding the Debtors’ report, but declined to take any action at that time. Instead, on May 10, 2016 and immediately preceding the hearing on the Sale Motion, the court required the major stakeholders, their professionals and the UST to address the issue of administrative insolvency through mediation [Dkt. No. 394], The parties emerged from mediation late in the day after having reached a resolution that was designed to alleviate concerns regarding administrative insolvency and provide the foundation by which to wind-down the Debtor’s estates. The court ultimately approved the Sale Motion, subject to various settlements placed on the record which would thereafter be incorporated into a proposed sale order.
Eight days after the sale hearing, the parties submitted and the court entered the Sale Order [Dkt. No. 405], Section 39 of the Sale Order, specifically defined therein as the “Settlement Agreement,” memorializes the resolution by and among the Debtors, CoBank (as pre and post-petition lender), the Official Committee of Unsecured Creditors (the “Committee”) and the UST,
Among other things, the Settlement Agreement provides that:
After Prepetition Senior Lender receives the net Sale Proceeds pursuant to section 39(v) above, Prepetition Senior Lender will hold an allowed unsecured deficiency claim in connection with the payment of its Prepetition Debt. The Prepetition Senior Lender will file a proof of claim for such unsecured deficiency claim on or before any applicable claims bar date established by the Bar Date Motion (defined below). However, [Prepetition] Senior Lender agrees to waive the first $80,000 of distributions it would otherwise receive' on account of such unsecured deficiency claim, thereby increasing distributions to the remaining *697holders of allowed non-priority unsecured claims.
(Sale Order at § 39(ix).)
The Settlement Agreement implements the following formula .to calculate the amount of the net sale proceeds to be paid to CoBank at closing:
[CoBank] will be paid the net Sale Proceeds at Closing on account of the Post-petition Loans and Prepetition Debt less, and after first deducting, the sum of (a) the Additional Carve-Out; (b) the Estate Payment (defined in the APA); (c) the Utility Escrow; (d) the Alleged Prior Secured Claims Holdback; and (e) $2 million for the payment of Cure Costs from the Sale Proceeds, plus the amount of any Excess Cure Credit (defined in the APA). In the event that the actual Cure Costs are less than $2 million after all of the objections identified in paragraph 2(a) through (h) of the Sale Order have been litigated to conclusion or otherwise resolved, the difference, less amounts incurred in litigating or otherwise resolving those objections, will be paid to Prepetition Senior Lender (to the extent the Prepetition Debt remains outstanding). Furthermore, in the event of any dispute regarding the computation of “net Sale Proceeds” that is not resolved before Closing, the dispute will be resolved by the Court before and as a condition of Closing (or the disputed amount will be held by the Debtors in a separate segregated escrow account pending resolution of the dispute by the Court).
(Sale Order at § 39(v).) The Settlement Agreement also contains additional consideration for the resolution reached among the Debtors, CoBank, the Committee and the UST, including releases in favor of CoBank, an additional carve out, limits on administrative expenses of professionals, and funds allocated exclusively to general unsecured creditors upon confirmation of any plan of liquidation. (Sale Order at §§ 39(ii)-(iv), (vi)-(viii), (x).)
On June 1, 2016, the sale closed. One day later, CoBank was paid over $29 million after application of the formula set forth in subsection 39(v).5 On July 1, 2016, CoBank filed a proof of claim [Claim No. 82], which was subsequently amended [Claim No. 141], In its proof of claim and amended proof of claim, CoBank did not assert an “unsecured deficiency claim” in accordance with subsection 39(ix) of the Sale Order. Instead, CoBank asserted that it holds a secured claim in the amount of $1,976,836.84, as amended. CoBank also filed an “unsecured” proof of claim [Claim No. 99] on July 16, 2016 for an “unliquidat-ed” amount.
On January 13, 2017, the Debtors and the Committee proposed a joint plan of liquidation [Dkt. No. 671] (the “Plan”). Five days before the confirmation hearing on the Plan, CoBank filed its Motion [Dkt. No. 725], as well as a limited objection [Dkt. No. 724] to the Plan. CoBank objected to any distribution under the Plan absent prior satisfaction of CoBank’s alleged secured claim or superpriority administrative expense. At the confirmation hearing on March 28, 2017, the Debtors, the Committee, CoBank and the UST resolved Co-Bank’s objection by establishing an escrow of $2 million for the benefit of CoBank if it ultimately prevails on the Motion, (See Conf. Order at ¶ 32.) Without any pending *698objections, the Plan was confirmed [Dkt. No. 737].6
At the conclusion of the confirmation hearing, the court held a status conference regarding the Motion during which the Debtors, CoBank, the Committee and the UST requested that the court decide whether section 39(ix) of the Sale Order unambiguously determined CoBank’s remaining claim to be a general unsecured claim.7 Thereafter, the court entered a scheduling order regarding this threshold issue [Dkt. No. 735].
After the parties filed additional briefing [Dkt. Nos. 741, 744, 747, 752], the court held a hearing regarding the Motion on April 28, 2017. At the conclusion of the hearing, the court took the matter under advisement.
DISCUSSION
Because the Settlement Agreement incorporated into the Sale Order is an agreed order similar to a consent decree, it is considered to be a binding contract among the parties. See Sault Ste. Marie Tribe of Chippewa Indians v. Granholm, 475 F.3d 805, 811 (6th Cir. 2007). The court is therefore required to apply general principles of contract interpretation under Michigan law to determine its meaning. Id. (citing McIntosh v. Groomes, 227 Mich. 215, 198 N.W. 954, 955 (Mich. 1924)); City of Covington v. Covington Landing Ltd. P’ship, 71 F.3d 1221, 1227 (6th Cir. 1995); see In re Conco, Inc., 855 F.3d at 711 (citation omitted) (applicable state law governs contract interpretations).8 The parties’ intent should be determined by first examining the plain language of the order for “clear manifestations of intent.” Golden v. Kelsey-Hayes Co., 73 F.3d 648, 654 (6th Cir. 1996) (quotation omitted); see Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 543-44 (6th Cir. 2007) (citing St. Clair Med., P.C. v. Borgiel, 270 Mich.App. 260, 715 N.W.2d 914, 918 (Mich. Ct. App. 2006)).
“If at all possible, each provision ‘should be construed consistently with the entire document and the relative positions and purposes of the parties ... [because] [t]he intended meaning of even the most explicit language can, of course, only be understood in light of the context which gave rise to its inclusion.’ ” Ohio Farmers Ins. Co. v. Hughes-Bechtol, Inc. (In re Hughes Bechtol, Inc.), 225 F.3d 659, 2000 WL 1091509, at *8 (6th Cir. July 27, 2000) (unpublished) (citation and quotation omitted). The court may interpret the order in light of its own understanding of the history of the case and the intention of the parties when they presented the agreed order. Id. (bankruptcy court properly interpreted agreed cash collateral order by relying on context of bankruptcy case); see also Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009) (bankruptcy courts have inherent authority to interpret their own orders); Sault Ste. Marie Tribe of Chippewa Indi*699ans v. Engler, 146 F.3d 367, 372 (6th Cir. 1998) (court approving consent decree is in best position to interpret it).
A contract, including an agreed order, is ambiguous where it is susceptible to more than one reasonable interpretation. Certified Restoration, 511 F.3d at 545. Only where there is more than one reasonable interpretation may the court admit extrinsic evidence to clarify the parties’ intent. Granholm, 475 F.3d at 812 (citing City of Grosse Pointe Park v. Mich. Mun. Liab. & Prop. Pool, 473 Mich. 188, 702 N.W.2d 106, 113 (Mich. 2005)). Where a contract is unambiguous, however, “extrinsic evidence is inadmissible because no outside evidence can better evince the intent of the parties than the writing itself.” Id.
In its Motion, CoBank argues that although the Sale Order provides CoBank with a general unsecured claim, the Sale Order in no way precludes it from also holding a secured claim under section 506 or a superpriority administrative expense under section 364(c)(1).9 According to Co-Bank, it holds two claims: (i) a general unsecured claim with respect to the assets acquired by the purchaser, and (ii) a secured claim or superpriority administrative expense with respect to the non-acquired assets.
Focusing on the express language in subsection 39(ix), the Liquidation Trustee disagrees with CoBank’s interpretation.10 The Liquidation Trustee argues that because the sole condition precedent in the Settlement Agreement — payment of the net sale proceeds to CoBank — has been satisfied, subsection 39(ix) of the Sale Order unambiguously determined the status of CoBank’s remaining claim. The Liquidation Trustee further argues that the phrase “in connection with the Prepetition Debt” modifies the term “unsecured deficiency claim,” meaning that upon satisfaction of the condition precedent, CoBank is entitled to nothing more than a general unsecured claim for its prepetition debt.
After carefully considering the parties’ arguments, the court finds CoBank’s interpretation to be unduly complicated and inconsistent with the plain meaning of subsection 39(ix), the other provisions of the Settlement Agreement, and the proceedings in this case to date. Instead, the court agrees with the simple and straightforward interpretation advanced by the Liquidation Trustee. As the Liquidation Trustee highlights, the first sentence of subsection 39(ix) begins with a phrase establishing a condition precedent. The phrase provides that CoBank shall “hold an allowed unsecured deficiency claim,” but only if CoBank first receives the net sale proceeds pursuant to the formula set forth in subsection 39(v). At the hearing on the Motion, CoBank acknowledged that it had received the net sale proceeds as contemplated by subsection 39(v). See supra note 5. It is therefore undisputed that *700the condition precedent in the Settlement Agreement was satisfied.
The court next considers the meaning of the term “unsecured deficiency claim,” which is what CoBank is deemed to hold after the condition precedent has been satisfied.11 Although the term is not defined in the Settlement Agreement, elsewhere in the Sale Order, or in the Bankruptcy Code, its meaning is clear when examined in connection with the remainder of the sentence. Subsection 39(ix) states that any “unsecured deficiency claim” relates to- the “payment of its Prepetition Debt.” As the Liquidation Trustee notes, the term “Pre-petition Debt” is defined by the Final DIP Order, and incorporated by reference into the Sale Order, to mean:
As of the Petition Date, the aggregate amount of approximately $25,165,732.05 was due and owing in respect of principal, accrued and unpaid interest, and fees, costs and other charges owed under the Prepetition Financing Documents (together with any other fees and expenses incurred in connection with the Prepetition Financing Documents, and all other obligations of the Debtors thereunder, the “Prepetition Debt”).
(Sale Order at § 39(i); Final DIP Order at § D.) By its very definition, “Prepetition Debt” includes any and all amounts that the Debtors owe to CoBank for their pre-petition obligations. See 11 U.S.C. § 101(12). The term “Prepetition Debt” thus captures any claim that CoBank holds relating to the prepetition obligations of the Debtors. See 11 U.S.C, § 101(5). Such prepetition claim, as clearly stated in subsection 39(ix), can be nothing but an “unsecured deficiency claim.”12 Co-Bank disputes the Liquidation Trustee’s interpretation by raising several arguments, none of which are persuasive.
A. CoBank Agreed to Release Its Liens on All Assets
CoBank first argues that although the Settlement Agreement refers to its claim as an “unsecured deficiency claim,” the Settlement Agreement is limited in scope by the remainder of the Sale Order. CoBank contends that the Sale Order released the liens it held on the assets acquired by the purchaser, but did not release the liens it held on non-acquired assets. CoBank’s interpretation is that the Sale Order only affected Co-Bank’s secured claim with respect to the assets sold, and in no way impacted Co-Bank’s secured claim with respect to the non-acquired assets.
In support, CoBank notes the lack of any language in the Sale Order that (i) released CoBank’s liens on non-acquired assets, (ii) released CoBank’s secured claims, (iii) granted the Debtors a general release, (iv) recognized that the settlement was made in full and final satisfaction of CoBank’s secured claims, or (v) stated Co-Bank’s “remaining” claim is unsecured. In other words, CoBank relies on the silence of the Sale Order to reinforce its status as a secured creditor.
However, as noted by the Liquidation Trustee, neither the Settlement Agreement nor any other provision in the Sale Order bifurcate CoBank’s claim between a deficiency claim for acquired assets and a deficiency claim for non-acquired assets. Nowhere in the Sale Order is there a *701distinction between acquired assets and non-acquired assets that would allow the court to conclude, or even infer, that Co-Bank holds an allowed unsecured deficiency claim only with respect to the acquired assets. Instead, subsection 39(ix) unequivocally states that CoBank’s claim for the prepetition debt owed by the Debtors is to be relegated to the status of a general unsecured creditor.
Moreover, if, as CoBank asserts, it retained a lien on the non-acquired assets, there would be no benefit to the Debtors’ estates from CoBank’s agreement to waive the first $80,000 of distributions it would otherwise receive on account of its “unsecured deficiency claim.” {See Sale Order at § 39(ix).) Similarly, it is difficult to understand why CoBank would be required to file an unsecured deficiency proof of claim if its remaining claim is secured by the non-acquired assets. CoBank’s argument renders the consideration it purportedly gave to the Debtors’ estates as part of the Settlement Agreement superfluous. See Dematic Corp. v. UAW, 635 F.Supp.2d 662, 673 (W.D. Mich. 2009) (citations omitted) (contract should be construed to give force and effect to all provisions, rendering none nugatory). For this reason, CoBank’s interpretation does not comport with the remainder of the Settlement Agreement.
CoBank also argues that the phrase “in connection with the payment of its Prepetition Debt” is somehow limited to the acquired assets. Yet any such qualifier (e.g., other than any claim secured by the non-acquired assets) is conspicuously absent from subsection 39(ix) or any other provision of the Settlement Agreement. As a general principle of contract interpretation, the court cannot modify a contract by inserting language that is simply not there. See Stenger v. Freeman, 2015 WL 5579463, at *3 (E.D. Mich. Sept. 23, 2015) (citation omitted) (parties’ failure to insert language in contract confirms conclusion that language chosen admitted only one interpretation). In order to adopt Co-Bank’s interpretation, this court would be forced to improperly modify the terms of the settlement.
CoBank’s argument regarding the lack of specific release language in the Sale Order is equally unavailing. Section 26 of the Sale Order expressly required Co-Bank’s liens on the assets to be released to ensure that the purchaser received the benefit of its bargain under the asset purchase agreement — a sale free and clear of liens, claims and other encumbrances. The Settlement Agreement likewise captures the benefit of the bargain by and among the Debtors, CoBank, the Committee and the UST. The Settlement Agreement makes it clear that CoBank’s remaining claim regarding its prepetition debt (the only outstanding debt after repayment of the post-petition loan in full) would be nothing more than a general unsecured claim.
CoBank cites to an analogous decision from this court for the proposition that the Settlement Agreement falls short of releasing CoBank’s liens on the non-acquired assets. See In re Holly’s, Inc., 190 B.R. 297, 302 (Bankr. W.D. Mich. 1995), According to CoBank, Holly’s requires an agreement to specifically state that the claim “is not a secured claim” in order for the claim to be deprived of its secured status. Co-Bank’s discussion of Holly’s is incomplete, however. A careful reading of Holly’s reveals that the court found a stipulation similar to the Settlement Agreement in this case to be clear and unambiguous with respect to reclassification of claims.
In Holly’s, the secured creditor and the debtor agreed in a stipulation approved by the court that the secured creditor’s claims would be deemed unsecured priority claims. Id. at 301. By implication and in *702the absence of any specific release language, the Holly’s court concluded that the creditor’s claims were no longer secured. Id. at 302. Although the stipulation in Holly’s stated that the claim was “not a secured claim,” the phrase “unsecured deficiency claim” in the Settlement Agreement performs the same function. Moreover, the stipulation at issue in Holly’s, like the Settlement Agreement in this case, never expressly released the creditor’s lien, as CoBank argues is necessary. Id. at 301. As such, Holly’s actually supports the Liquidation Trustee’s contention that CoBank agreed that its remaining claim for all of the prepetition debt would be wholly unsecured and without priority.
B. The Settlement Agreement Was a Global Resolution
CoBank next argues that the Settlement Agreement was never intended to be a “global” settlement extending to all matters between the parties. In its reply brief, CoBank states:
While the Settlement can be fairly characterized as a “global” settlement of the Sale Motion, it cannot be deemed a “global” settlement of all matters between the parties because there is absolutely no evidence that the parties intended to accomplish that. It was, for all purposes, a “partial” settlement.
(Reply Br. at ¶ 9 (emphasis in original).)
The court rejects CoBank’s argument that the Settlement Agreement was limited to matters related to the sale, thereby limiting the release of CoBank’s lien to the acquired assets. The terms of the Settlement Agreement itself confirm that it was intended to be a comprehensive resolution of all matters with significant benefits flowing to CoBank. As stressed by the Liquidation Trustee at the hearing on the Motion, the Settlement Agreement contains the following consideration, all of which materially impacted the relationship by and among the Debtors, CoBank, the Committee and the UST well beyond the actual sale transaction:
• The parties agreed to extend the maturity date under the Final DIP Order while CoBank agreed to increase the carve out by $350,000. (Sale Order at § 39(h).)
• CoBank agreed to advance an additional $500,000 to the Debtors under the Final DIP Order. (Sale Order at § 39(iii).)
• The Debtors and the Committee agreed to give CoBank comprehensive releases and waivers with respect to arguably any and all causes of action that could have been asserted against CoBank by the Debtors and/or the Committee. (Sale Order at § 39(iv).)13
• The Debtor, the Committee and the UST agreed that CoBank, in its capacity as pre and post-petition lender, would be paid the net sale proceeds at closing on account of the post-petition loans and prepetition debt after application of the formula instead of requiring CoBank to wait for confirmation of a plan or a distribution by a Chapter 7 trustee after conversion. (Sale Order at § 39(v).)
• The parties agreed to subordinate, to the extent necessary, certain administrative expenses of professionals so as to protect against administrative *703insolvency. (Sale Order at §§ 39(vi), (vii).)
• CoBank agreed to waive the first $80,000 of distributions it would otherwise receive for its “unsecured deficiency claim.” (Sale Order at § 39(ix).)
• In contemplation of a confirmable plan of liquidation, the parties agreed to earmark and hold in escrow the amount of $500,000 for distribution to general unsecured creditors under any such plan. (Sale Order at §§ 39(viii), (x).)
• The parties agreed to request that the court establish a bar date for the filing of proofs of claim in order to facilitate the formulation of a plan of liquidation. (Sale Order at § 39(x).)
The cumulative effect of these provisions was to provide a means by which to allow CoBank to immediately exit these cases after receiving over $29 million and releases from the Debtors, their estates, and the Committee. In turn, the Debtors and the Committee were provided sufficient funding to propose a liquidating plan, while ensuring that general unsecured creditors would receive at least some distribution from the Debtors’ estates. It is difficult to understand how these settlement provisions are confined to the sale transaction, as CoBank contends.
CoBank also mischaracterizes the impact of the .Sale Order on the Settlement Agreement. The Settlement Agreement was incorporated into the Sale Order as a matter of convenience for the parties. Although the Settlement Agreement was a byproduct of the sale, it is separate and distinct from the other provisions of the Sale Order. (See Sale Order at § 39(xi).) For all intents and purposes, it is more accurately described as a wind-down agreement than a settlement relating to the sale.
Somewhat relatedly, the court cannot overlook the circumstances giving rise to the Settlement Agreement. See In re Hughes-Bechtol, Inc., 2000 WL 1091509, at *8 (citing Kendrick v. Bland, 931 F.2d 421, 423 (6th Cir. 1991); Brown v. Neeb, 644 F.2d 551, 558 n.12 (6th Cir. 1981)) (bankruptcy court may consider purpose of settlement when construing consent decree). The Settlement Agreement was not derived from a dispute regarding the sale of the Debtors’ assets. Rather, it occurred after a court-ordered- mediation to address the issue of administrative insolvency, an issue that was first identified by the UST during first day hearings and asserted as cause to convert the Debtors’ cases to Chapter 7 in a pending motion. Absent resolution of the issue of administrative insolvency, the sale, which was supported by CoBank, was far from certain to occur in the face of numerous objections.
C. CoBank’s Remaining Claim Was Allowed
CoBank further argues that the Liquidation Trustee’s interpretation of subsection 39(ix) is inconsistent with the allowance of CoBank’s claim. CoBank contends that because the exact dollar amount of its unsecured deficiency claim was not finally determined when the Sale Order was entered, CoBank could not possibly hold only an “allowed” unsecured deficiency claim. According to CoBank, the inability to precisely mathematically determine its unsecured deficiency claim renders subsection 39(ix) effective only with respect to a | deficiency claim arising from the acquired assets, but not its secured claim with respect to the non-acquired assets.
Setting aside the fact that CoBank’s argument is difficult to understand, Co-Bank’s position ignores subsection 39(v), which sets forth the formula by which to calculate the amount of CoBank’s unse*704cured deficiency claim. As part of the Settlement Agreement, CoBank agreed that its claim amount would be mathematically calculated by applying the formula in subsection 39(v). The formula allowed the parties to resolve yet another issue, thereby moving one step closer to a wind-down of the Debtors’ estates. The only matter that could not be resolved was the precise amount of CoBank’s remaining unsecured claim. However, the parties ultimately agreed to resolve this issue by requiring CoBank to file proof of its unsecured deficiency claim. (Sale Order at § 39(ix).) By structuring the settlement in this way, the Debtors and the Committee preserved an opportunity to object in the event that the dollar amount asserted in CoBank’s proof of claim was inconsistent with the formula set forth subsection 39(v).
D. The Parties’ Extrinsic Evidence Is Inadmissible
Finally, CoBank points to its secured proof of claim, as amended, and a letter from CoBank releasing only its liens on the assets acquired as part of the sale. CoBank contends that these documents demonstrate that CoBank retained its ability to assert a secured claim, even after the Sale Order was entered. However, they constitute extrinsic evidence that is inadmissible because the Settlement Agreement is unambiguous. Sault Ste. Marie Tribe of Chippewa Indians, 475 F.3d at 812 (citation omitted). Accordingly, it would be inappropriate for the court to consider them. See id. For the same reason, the court shall disregard the orders entered in other bankruptcy cases that the Liquidation Trustee cites in support of his definition of “allowed.” See id.
CONCLUSION
In sum, the court concludes that subsection 39(ix) is clear and unambiguous. It is susceptible to only one reasonable interpretation. When read in conjunction with the other provisions- of the Settlement Agreement and in light of the circumstances under which the settlement arose, the Settlement Agreement requires Co-Bank’s remaining claim to be classified as a general unsecured claim entitled to a pro rata distribution under the confirmed Plan.14
For the foregoing reasons, the court shall deny the Motion. The court shall enter a separate order consistent with this Memorandum Decision.
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101 ef seq. Specific sections of the *695Bankruptcy Code are referenced as "section
. All references to "[Dkt, No. _]" are to docket entry numbers in Case No. 16-00290.
. According to the Debtors, the Debtors and CoBank were careful to distinguish between CoBank’s rights as a prepetition lender, and separately as a post-petition lender. (Final DIP Hr’g Tr. 52, 80-82, Mar. 3, 2016.)
. CoBank acknowledged at the hearing on the Motion that with the exception of the construction lien escrow (which remains in dispute between CoBank and the construction lien claimant), the Debtors have remitted all of the net sales proceeds. (Mot. Hr'g Tr. 25, Apr. 28, 2017.) CoBank further acknowledged that the Debtors have satisfied in full their obligations to CoBank for post-petition financing, (Id. at 27.)
. The Plan became effective on April 1, 2017 [Dkt. No. 742]. On the effective date of the Plan, all of the Debtors’ rights were transferred to the GLC Liquidation Trust. (Conf. Order at ¶¶ 13-14.)
. Because all parties have consented to adjudication of this dispute in a contested matter under Fed. R. Bankr. P. 9014, an adversary proceeding to determine the extent and validity of CoBank’s alleged lien under Fed. R. Bankr. P. 7001 is unnecessary. See, e.g., In re Klein, 486 B.R. 853, 857 (Bankr. E.D. Mich. 2012); see also Tully Constr. Co., Inc. v. Cannonsburg Envtl. Assocs., Ltd. (In re Cannonsburg Envtl. Assocs., Ltd.), 72 F.3d 1260, 1264-65 (6th Cir. 1996).
.CoBank and the Liquidating Trustee agree that Michigan law should be applied to this dispute. (Resp. at ¶¶ 17, 19; Reply at ¶ 2.)
. Relying on paragraph 9 of the Final DIP Order, CoBank asserts a superpriority administrative expense under section 364(c)(1) for the diminution in value of its prepetition collateral. (Mot. at ¶ 8.) However, paragraph 9 of the Final DIP Order grants a superpriority administrative expense only with respect to the "Postpetition Loans.” The court is somewhat puzzled by CoBank’s request for relief under section 364(c)(1) if, as CoBank acknowledges, the Debtors repaid the post-petition loans in full at the closing. See 11 U.S.C. § 364(c)(1) (supeipriority for post-petition loans and extensions of credit). Ultimately, it does not matter for the reasons discussed herein.
. Similar to the Liquidation Trustee, the UST argues in his short objection that the Sale Order is unambiguous, was explicitly agreed to by CoBank, and was the result of a strenuous mediation.
. The parties do not disagree' as to the definition of a deficiency claim, which is a claim a secured creditor holds when the amount of its secured loan exceeds the value of its collateral. (Resp. at ¶ 25; Reply at ¶¶ 13, 18.)
. Because the Debtors satisfied all of their obligations to CoBank with respect to the post-petition loans, CoBank’s remaining claim can only relate to the "Prepetition Debt.” See supra note 5.
. The global nature of the settlement is further augmented by subsection 39(iv) of the Sale Order, which gave all parties in interest (other than those appearing at the sale hearing) an opportunity to object to the releases granted in favor of CoBank before they became effective.
. In his response brief, the Liquidation Trustee formally objected to CoBanlt’s amended proof of claim. The court recognizes the inherent overlap, but declines to fully adjudicate the proof of claim at this time. Cf. Grand Traverse Dev. Co. Ltd. P'ship v. Bd. of Tr. of Gen. Ret. Sys. of City of Detroit (In re Grand Traverse Dev. Co. Ltd. P'ship), 150 B.R. 176, 184-85 (Bankr. W.D. Mich. 1993). The court shall instead confine its decision to the issue identified in the scheduling order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500634/ | MEMORANDUM OPINION
PAMELA S. HOLLIS, United States Bankruptcy Judge
This matter comes before the court on the City of Chicago’s Motion under § 503(a) for Allowance and Payment of Administrative Expense Claim. For the reasons stated below, the court denies the motion.
BACKGROUND
Glenn and Catherine Haynes filed for relief under Chapter 13 of the Bankruptcy Code on November 23, 2015. Them plan was confirmed on March 18, 2016. The Order Confirming Plan provides that:
All property of the estate, as specified by the [sic] 11 U.S.C. section 541 and 1306, will continue to be property of the estate following confirmation, unless (1) the plan provides for surrender of the property, or (2) the property is sold pursuant to the plan or court order.
Case No. 15 B 39945, EOD 36 (March 18, 2016).
The City of Chicago filed a proof of claim in the amount of $2,749.60 based on parking tickets that were issued between September 2010 and June 2014. This claim is scheduled to be paid pro rata with other general unsecured creditors.
While the Hayneses’ Chapter 13 case was pending, the City issued two tickets for parking at an expired meter (the “Expired Meter Tickets”) and one ticket for a red light violation (the “Red Light Ticket”). Glenn and Catherine do not dispute that these tickets were issued. The City did not submit copies of the tickets, and provided no information regarding who was operating the vehicle at the time each violation was committed.
*735According to the City’s motion, the Expired Meter Tickets were issued pursuant to Municipal Code of Chicago (“MCC”) Section 9-64-190(b) and the Red Light Ticket was issued pursuant to MCC Section 9-102-020.
By its motion, the City seeks administrative expense status for the claim based on the Expired Meter Tickets and the Red Light Ticket.
LEGAL DISCUSSION
The Standard for Determining Whether a Claim is an Administrative Expense.
11 U.S.C. § 503 provides the standard for determining whether a creditor’s post-petition claim is classified as an administrative expense. For purposes of this opinion, the relevant portion of the statute is found at subsection (b)(1)(A):
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of preserving the estate ... The City is asking the court to determine that the claim based on the Expired Meter Tickets and the Red Light Ticket is an “actual, necessary cost[ ] and expense[ ] of preserving the estate.”
A successful reorganization (as opposed to liquidation) benefits prepetition creditors. In return for providing that benefit, and in light of the role they play in making a reorganization succeed, certain postpetition creditors are given priority over pre-petition creditors, known as administrative expense priority. In fact, administrative expense claims are second in priority only to certain domestic support obligations and trustee expenses. 11 U.S.C. § 507(a)(l)(2).
In light of this superior position enjoyed by administrative expense claimants, the Seventh Circuit warns that when determining whether a claim warrants such treatment, courts must be mindful of the underlying purpose of the statute— rewarding those who facilitate a reorganization. Since the general rule in bankruptcy court is equality of distribution, “[a]ny preference for claims not intended by Congress to have priority would dilute the value of the intended priority and thus frustrate the intent of Congress.” Matter of Jartran, Inc., 732 F.2d 584, 586 (7th Cir. 1984) (citations omitted).
Therefore, the burden is on the party seeking an administrative expense to show, by a preponderance of the evidence, that its claim is entitled to that priority treatment. See In re DeMert & Dougherty, Inc., 227 B.R. 508, 512 (Bankr. N.D. Ill. 1998). “Administrative expense claims should be narrowly construed in order to keep administrative expenses at a minimum and thus preserve the estate for the benefit of all creditors” Id. at 513 (citations omitted).
To further the underlying statutory purpose of encouraging a successful reorganization while concurrently being mindful of the general rule of equality in distribution, the Jartran panel adopted a two part test for reviewing purported administrative expense claims: “Under these criteria a claim will be afforded priority under § 503 if the debt both (1) arises from a transaction with the debtor-in-possession and (2) is beneficial to the debtor-in-possession in the operation of the business.” 732 F.2d at 587 (quotation omitted).
The City argues that because it is an involuntary creditor, a different test should be used to determine whether its claim is entitled to administrative expense priority. This different test was first discussed in Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968). *736The question before the Supreme Court in Reading was whether to treat a tort claim arising during an arrangement (the precursor to Chapter 11) as an actual and necessary cost of the arrangement — thus giving it priority treatment — or as a general postpetition liability of the debtor.
The Reading Court held that “damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to ‘actual and necessary costs’ of a Chapter XI arrangement.” Id. at 485, 88 S.Ct. 1759. The reasons such damages were awarded administrative expense priority were that the claim arose from a transaction with the debtor-in-possession and that payment of the claim before all other creditors would satisfy the notion of “fundamental fairness”.
The Seventh Circuit explained the importance of Reading:
Tort liability is an expense of doing business, like labor or material costs, and should be treated the same way. Businesses operating in bankruptcy that were excused from tort liability would have an inefficient competitive advantage over their solvent competitors — and deficient incentives to use due care in the operation of the business. It could indeed be argued that in the interest of safety, insolvent firms, not being deferrable by threat of tort suits, should not be allowed to operate at all. Reading strikes a compromise between the safety interest and the interest in saving bankrupts from premature liquidation: the bankrupt that continues to operate (normally under Chapter 11) must give its tort victims priority access to such assets as the bankrupt estate retains.
In re Resource Technology Corp., 662 F.3d 472, 476-77 (7th Cir. 2011) (citations omitted).
The City argues that Reading’s holding has been expanded beyond tort claims, and applies generally to all involuntary post-petition creditors of the estate. In support of its position, the City cites several Circuit-level cases. With one exception, all of these cases are from outside the Seventh Circuit and thus are not binding on this court.
The one Seventh Circuit case that the City puts forth to support this extension of Reading is Yorke v. N.L.R.B., 709 F.2d 1138 (7th Cir, 1983), cert. denied, 465 U.S. 1023, 104 S.Ct. 1276, 79 L.Ed.2d 680 (1984).1 In Yorke, the Circuit recognized that a Chapter 11 Trustee has a duty to bargain over the effects of a decision to terminate operations. The panel found that duty to be “critical to protect employees from the ravages of economic dislocation.” Id. at 1143 (citations omitted).
Since the obligation to bargain arises only with the Trustee’s decision to terminate operations in the overall interests of the creditors, the costs concomitant with that decision properly can be attributed to the Trustee’s efforts to “preserve the estate” on the creditors’ behalf. As the bankruptcy court here determined, therefore, costs stemming from “effects” bargaining can be considered administrative expenses and thus fall within the ambit of the Trustee’s authority. Cf. Reading Co. v. Brown, 391 U.S. 471, 482-84 [88 S.Ct. 1759, 20 L.Ed.2d 751] (1968) (those injured during administration of estate by Trustee *737entitled to priority claim as administrative expense)....
Id.
The Yorke panel focused on injury or loss as the crucial factor — the employees’ back pay awards were an effect of the Trustee’s efforts to preserve the estate, and thus were accorded administrative priority. The Circuit compared the employees’ losses to the injuries suffered by the tort claimants in Reading, and found it appropriate to allow administrative expense priority to those losses even though no tort had been committed.
In this case, while the representative of the estate may have acted negligently or illegally (or neither, since we do not know who operated the vehicle when the tickets were incurred), the other half of the equation is missing. The City has suffered no discernable injury or loss that would compel expanding Reading to encompass this claim. This is not to give short shrift to the fact that someone violated the City’s ordinances. It is instead an acknowledgement that no monetary loss was suffered.
Although other Circuits may have focused on the involuntary nature of the claim, this court is not bound by those decisions. By contrast, when it relied on Reading to allow an administrative expense priority, the Seventh Circuit was interested not just in the creditor’s involuntary status, but also the nature of its claim. See Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 773 (7th Cir. 2004) (“This court has recognized that fundamental fairness may, in appropriate circumstances, demand that a party injured in some manner by the administration of the estate be compensated pursuant to section 603.”) (emphasis added) (citations omitted). In this case, there is no injury or loss, thus Reading’s reasoning is inapplicable.
The City argued that Reading should apply anyway because, as discussed in two First Circuit opinions, debtors should not be allowed to “flout” the law.
So, too, is this case an even stronger one for priority than was Reading. The debt- or in this case deliberately continued a violation of law month after month presumably because it was more lucrative for the business to operate outside the zoning ordinance than within it. If fairness dictates that a tort claim based on negligence should be paid ahead of pre-reorganization claims, then, a fortiori, an intentional act which violates the law and damages others should be so treated.
In re Charlesbank Laundry, Inc., 755 F.2d 200, 203 (1st Cir. 1985) (citations omitted).
We think it would be fundamentally unfair to allow Cumberland Farms to flout Florida’s environmental protection laws and escape paying a penalty for such behavior.
Cumberland Farms, Inc. v. Florida Dep’t of Envtl. Prot., 116 F.3d 16, 21 (1st Cir. 1997).
The City’s argument is not persuasive, because there is no evidence in this case that either Glenn or Catherine Haynes deliberately violated the City’s parking, standing or compliance ordinances. We know only that tickets were issued to the registered owner(s) of a car that was property of the Hayneses’ bankruptcy estate; we know nothing about the circumstances of the underlying violations. If the City wishes to come forward with evidence regarding the intent of the debtors at the time each of these violations occurred— including evidence that one or the other of the debtors were actually operating the vehicle at the time and so could form the requisite intent that was so important to the Charlesbank Laundry and Cumberland *738Farms panels — the court may be willing to reconsider this point.
But even if the evidence showed that Glenn or Catherine deliberately flouted the law, and even if the court were inclined to extend Reading’s reasoning to this particular claim despite the lack of monetary loss, there are other reasons not to do so. First, and most importantly, Reading was a Chapter 11 case. This is a Chapter 13 case. Although there is a great deal of overlap between these two chapters of the Bankruptcy Code. Chapter 13 is not a mini-Chapter 11.
As the Hayneses point out, the requirements and obligations imposed on them by the Bankruptcy Code are much less stringent than those imposed on Chapter 11 debtors-in-possession and trustees. The duties of these Chapter 11 participants are spelled out in great detail in 11 U.S.C. §§ 1106 and 1107. There is no parallel provision in Chapter 13 for debtors, only § 1303: “Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the trustee, the rights and powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(1), of this title.” The Chapter 13 debtor must also file a plan and make payments.
Courts in the Seventh Circuit have recognized various differences between the two chapters in numerous contexts, including:
• Plan confirmation
Confirmation of a Chapter 13 plan requires a substantially different inquiry than needed for a Chapter 11 plan. If a Chapter 13 plan meets the requirements contained in 11 U.S.C. § 1325 (which incorporates other bankruptcy provisions), then the bankruptcy court must confirm the plan. Creditors do not vote on a Chapter 13 plan. Cf. 11 U.S.C. § 1129(a)(10) (in Chapter 11 proceedings, at least one impaired class must vote for the plan). Under Chapter 13, if a debtor proposes a plan which complies with 11 U.S.C. § 1325, a creditor has no grounds to object to the plan.
In re Fillion, 181 F.3d 859, 862 (7th Cir. 1999).
• Analysis of good faith
Granted, Chapter 13 is the individual’s analogue to Chapter ll’s business reorganization provisions. [In re ]Schaitz, 913 F.2d [452] at 453 [ (7th Cir. 1990) ]. Nevertheless, as this court noted in Schaitz, the good faith analyses differ under Chapter 11 and Chapter 13 because businesses and individuals are obviously different. Id. Indeed, as a consequence of this difference between individuals and businesses, objective futility seems meaningless in the Chapter 13 context. Objective futility in the Chapter 11 context focuses on whether a business is capable of surviving after reorganization. Carolin[ Corp. v. Miller], 886 F.2d [693] at 701 [(4th Cir. 1990) ]. This is not an issue in an individual bankruptcy filed under Chapter 13 because, ordinarily, an individual’s survival is not related to what happens in the Chapter 13 proceeding. Furthermore, even if objective futility could be defined in a meaningful manner in the Chapter 13 context, such an absolute requirement would negate the benefits of a case-by-case analysis under the totality of circumstances test.
Matter of Love, 957 F.2d 1350, 1356 (7th Cir. 1992).
• The effect of conversion
[A]s the trustee points out, there are numerous procedural and substantive differences between Chapter 11 and Chapter 13 proceedings. For instance, individuals may not file under Chapter 13 unless their debts are below a certain threshold, but there is no such threshold *739for individuals who wish to file under Chapter 11. See 11 U.S.C. § 109(d)-(e). Debtors cannot be forced to file a Chapter 13 case, while creditors can force a debtor into a Chapter 11 bankruptcy. 11 U.S.C. § 303(a). The differences between Chapter 13 and Chapter 11 are replete with policy considerations, and Congress is better equipped at making these policy choices than the courts.
In re Meier, 550 B.R. 384, 390 (N.D. Ill. 2016).
The City does not cite one opinion that applies Reading v. Brown in a Chapter 13 case.2
The City’s indifference to the gulf between the two chapters is illustrated by its argument that “once the chapter 13 case is filed, the trustee and general unsecured creditors are no longer on the sidelines of how a debtor manages her property.” Motion at 10.
Certainly unsecured creditors in both chapters have more access to information about a debtor than they would outside of bankruptcy court. But in Chapter 11, the Code anticipates the appointment of a committee of unsecured creditors. Their powers and duties are described in 11 U.S.C. § 1103, and include the ability to “investigate the acts, conduct, assets, liabilities and financial condition of the debt- or, the operation of the debtor’s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan” as well as “participate in the formulation of a plan.” § 1103(c). This subsection concludes with a broad grant of power to “perform such other services as are in the interest of those represented.” § 1103(c)(5).
There is no analogue to this section in Chapter 13. Creditors can use Fed. R. Bankr. P. 2004 to investigate the debtor, but there is nothing like the constant monitoring contemplated in Chapter 11. The City argues that “like the creditors in [U.S. Dep’t of Interior v.] Elliott, [761 F.2d 168 (4th Cir. 1985) ], if the creditors or the trustee find that .the debtor is mismanaging the estate, they have recourse with the court.” Motion at 11. This analogy is flawed. Elliott was a Chapter XI arrangement, the precursor to the current Chapter 11. The City skipped right over the reference in Elliott to the elected creditors’ committee that is “empowered to, among other things, examine into the conduct of the debtor’s affairs and to make recommendations to the supervising bankruptcy court concerning the debtor’s operation of the business.” 761 F.2d at 171 (footnote omitted). The idea in Elliott that “the creditors lose their innocence due to their ability to take action to prevent the debtor in possession from incurring post-petition penalties” is not a theory that fits Chapter 13 cases. Id. at 172.
In addition to the differences between Chapter 11 and Chapter 13, another compelling reason that Reading v. Brown should not be extended to this situation is that the City of Chicago has other remedies available to it. While the City cannot impound the Hayneses’ car during the plan term without seeking court permission, *740there is nothing to prevent it from asking for relief from the automatic stay to do so.
Sometimes creditors even ask for conversion or dismissal of the bankruptcy case. The City could do the same. In fact, the City is in the best position of any party in interest to ask for conversion or dismissal if multiple postpetition parking, standing or compliance tickets are issued. After all, how would any other creditor know that tickets are accumulating?
The Hayneses also suggest that the City could file a motion to allow a postpetition claim under 11 U.S.C. § 1305(a)(2), insinuating that they would not oppose such a motion:
(a) A proof of claim may be filed by any entity that holds a claim against the debtor—
(1) for taxes that become payable to a governmental unit while the case is pending; or
(2) that is a consumer debt, that arises after the date of the order for relief under this chapter, and that is for property or services necessary for the debt- or’s performance under the plan.
The City disputes the availability of this remedy, under the theory that the tickets were not incurred by the Hayneses but by the estate. As discussed below at great length, the City’s own ordinance imposes liability on the registered owner. Although we do not know who the registered owner is, we know it is not the bankruptcy estate, and so this theory does not hold water.
Instead, whether a motion to allow a postpetition claim would be granted depends on whether the court agrees that the Expired Meter Tickets and the Red Light Ticket constitute a consumer debt. “Consumer debt” is defined in the Code. It “means debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C, § 101(8). The claim must also be “for property or services necessary for the debtor’s performance under the plan.” If the City could satisfy both of those tests, a motion to allow its postpe-tition claim could be granted.
Finally, the City could simply wait for the bankruptcy case to conclude. This is not as draconian a remedy as it first appears, as only about one-third of all Chapter 13 cases are completed after the full three or five year term. 20,379 Chapter 13 cases were closed last year in the Northern District of Illinois. Of those cases, 13,766 were closed following dismissal and only 6,609 were closed following plan completion. See http://www.uscourts.gov/sites/ default/files/data_tables/bapcpa_6_1231. 2016.pdf (last retrieved July 14, 2017). The City might not have to wait too long to start collection procedures.
Even if the Hayneses successfully complete their plan, the City’s postpetition debt for the Expired Meter and Red Light Tickets will not be discharged. And the City appears to have no problem waiting to collect on its tickets from the Hayneses. According to the proof of claim it filed for its prepetition debt, the City was owed $2,749.60 for tickets issued between September 2010 and June 2014. The Hayneses did not file for relief under the Bankruptcy Code until November 23, 2015, more than 17 months after the City’s last unpaid ticket was issued.
For all of the reasons stated above — the Seventh Circuit’s interpretation of Reading, the inapplicability of Reading to Chapter 13, and the City’s alternative remedies — the court declines to apply the test set forth in Reading v. Brown to the City’s request for administrative expense priority for its postpetition claim.
The City Failed to Prove by a Preponderance of the Evidence That its Claim Arises From a Transaction with the Estate.
Even if the court had determined that the Reading test applied here, the *741first requirement of that test is that the debt must arise from a transaction with the debtor-in-possession. In this case, the City argues that because the Order Confirming Plan provided that the car remained property of the estate, it was the bankruptcy estate that owned the car. Thus, the estate would be liable for the violations that resulted in the Expired Meter and Red Light Tickets, and. these transactions would have been with the estate.
The City argues that.the car became property of the estate by operation of 11 U.S.C, § 541 upon the Hayneses’ filing of their bankruptcy petition, and that the ear remained property of the estate after confirmation due to the wording of the Order Confirming Plan. The City is correct on both counts. Confirmation usually vests property of the estate in the debtor, although the plan or the order confirming the plan may provide otherwise. 11 U.S.C. § 1327(b). The Hayneses’ confirmation order, as do most confirmation orders in this district, provided otherwise:
All property of the estate, as specified by the [sic] 11 U.S.C. section 541 and 1306, will continue to be property of the estate following confirmation, unless (1) the plan provides for surrender of the property, or (2) the property is sold pursuant to the plan or court order.
Order Confirming Plan.3
The City further asserts that no documents transferring title from the Hayneses to the bankruptcy estate need to be executed in order for the car to be property of the estate. See Dardashti v. Golden, 2007 WL 7535054 (9th Cir. BAP Oct. 31, 2007). Again, the City is correct, if it were otherwise, an administrative nightmare would result every time a bankruptcy case was filed and the debtor’s property became property of the estate. The commencement of a bankruptcy case constitutes an “order for relief’ by the bankruptcy court. 11 U.S.C. § 301. “This is the legal event that causes the transfer to the bankruptcy estate of all legal and equitable interests of a debtor.” In re Chesley, 550 B.R. 903, 910 (Bankr. M.D. Fla. 2016).
So the court agrees with the City that the car became property of the estate upon the filing of the bankruptcy case, that it remained property of the estate after confirmation by virtue of the Order Confirming Plan, and that no title transfer documents were required. Why then are the Expired Meter and Red Light Tickets not transactions with the estate?
These tickets were not transactions with the estate because the ordinance applicable to this situation-drafted by the City— states that someone other than the owner of the car is liable for the tickets.
The City cites MCC Section 9-100-030 for the proposition that “all parking, standing, and compliance violations, including automated red light and speed violations are incurred by and assessed against the owner of the vehicle.” Motion at page 5.
*742The City’s summary of the Municipal Code of Chicago, however, is not as precise as the actual words of the ordinance. MCC Section 9-100-030 states:
9-100-030 Prima facie responsibility for violation and penalty — Parking, standing or compliance violation issuance and removal.
(a) Whenever any vehicle exhibits a parking, standing or compliance violation, any person in whose name the vehicle is registered with the Secretary of State of Illinois or such other state’s registry of motor vehicles shall be prima facie responsible for the violation and subject to the penalty therefor.
http://library.amlegal.com/nxt/gateway.dll/ Ulinois/chicago_il/municipalcodeofchicago? f=templates$fn=default.htm$3.0$vid= amlegal:chicago_il(last retrieved July 14, 2017) (emphasis added).
This language is repeated in the sections specifically applicable to the tickets at issue in this case:
Expired Meter Tickets
9-64-220 Parking violations — Enforcement — Prima facie responsibility designated.
(a) Whenever any vehicle is parked in violation of any provision of the traffic code prohibiting or restricting vehicular standing or parking, the person in whose name the vehicle is registered with the Secretary of State of Illinois shall be prima facie responsible for the violation and subject to the penalty therefor.
http://library.amlegal.com/nxt/gateway.dll/ Illinois/chicago-il/municipalcodeofchicago? f=templates$fn-default.htm$3.0$vid= amlegal:Chicago_il (last retrieved July 14, 2017) (emphasis added.)
Red Light Ticket
9-102-020 Automated traffic law enforcement system violation.
The registered owner of record of a vehicle is liable for a violation of this section and the fine set forth in Section 9-100-020 when the vehicle is used in violation of Section 9-8-020(c) and a recorded image of the violation is recorded by an automated traffic law enforcement system.
http://library.amlegal.com/nxt/gateway.dll/ Illlinois/chicago-ll/municipalcodeofchicago? f=templates$fn=default.htm$3.0$vid= amlegal: Chicagofil (last retrieved July 17, 2017) (emphasis added).
“Registered owner” is defined at MCC Section 9-4-010 as “the person in whose name the vehicle is registered with the Secretary of State of Illinois or such other state’s registry of motor vehicles.”
Therefore, all three subsections of the City’s ordinances place prima facie responsibility for parking, standing and compliance violations on the same person — not simply the owner of the car, but the person in whose name the car is registered.
It is “the person in whose name the vehicle is registered with the Secretary of State of Illinois” or the “registered owner of record” (which, according to the MCC’s definitions, means the same thing) who is prima facie liable for a parking, standing or compliance violation. The City could have written the ordinance to provide simply that the “owner” of the car is liable, but it chose instead to impose liability on “the person in whose name the vehicle is registered.” Therefore, these tickets were not transactions with the estate. They were transactions with the person in whose name the ticketed car was registered.
Nevertheless, to support its contention that the estate is liable for these tickets, *743the City cited In re Stokes, 2010 WL 3980232 (Bankr. E.D. Tenn. Oct. 8, 2010).
In Stokes, the City of Chattanooga, Tennessee sought an order directing the payment of certain real property taxes as administrative expenses of the Chapter 13 estate pursuant to 11 ' U.S.C. § 503(b)(l)(B)(i). The Chapter 13 Trustee argued that the claims were merely post-petition claims under 11 U.S.C. § 1305(a)(1).
The Stokes plan provided, as does the plan in this case, that property of the estate would not vest in the debtor until the plan was complete. Therefore, the real property owned by the Stokes debtor remained property of the estate.
The Tennessee bankruptcy court evaluated the property tax claim under a different subsection of § 503(b) than the one at issue in our case. The question in Stokes was not whether the claim was an “actual, necessary cost ... of preserving the estate,” but instead whether the claim was a “tax incurred by the estate”. Both questions, however, require a transaction with the estate rather than with the Chapter 13 debtor.
According to Tennessee law, “real property taxes become both a lien on the property and a personal debt of the property owner or property owners’ as of January 1 of the tax year. T.C.A. § 67-5-2101.” Stokes, 2010 WL 3980232 at *1. The court held, therefore, that “because the property belonged to the debtor’s chapter 13 estate on January 1 ... the 2007, 2008, and 2009 taxes were ‘incurred by the estate.’ ” Id. at *2.
In our case, however, the applicable City ordinance contains much more specific language than the Tennessee statute at issue in Stokes. In Tennessee, real property taxes become a personal debt of the property owner. In Chicago, whenever a vehicle incurs a parking, standing or compliance violation, it is the person in whose name the vehicle is registered with the Secretary of State of Illinois who is prima facie responsible for the liability. Since it interpreted a statute with different language than the one before this court, Stokes is not persuasive on the question of whether the Expired Meter and Red Light Tickets were incurred by the estate.
The Illinois Appellate Court has stated more than once that “one can owp an automobile though the certificate of title is in the name of another.” Pekin Insurance Co. v. U.S. Credit Funding, Ltd., 212 Ill. App.3rd 673, 677, 156 Ill.Dec. 789, 571 N.E.2d 769 (Ill. App. Ct.), appeal denied, 141 Ill.2nd 545, 162 Ill.Dec. 493, 580 N.E.2d 119 (1991) (quotation omitted). See State Farm Mutual Automobile Insurance Co. v. Lucas, 50 Ill.App.3rd 894, 898, 8 Ill.Dec. 867, 365 N.E.2d 1329 (Ill. App. Ct. 1977). These cases show by analogy that a bankruptcy estate can “own” a car while someone else is the “person in whose name the vehicle is registered with the Secretary of State,” As a result, that person is prima facie liable for the ticket issued by the City of Chicago, and not the bankruptcy estate.
Therefore, while the bankruptcy estate takes the debtor’s legal and equitable interests in the vehicle, and is the owner of the car, it is neither “the person in whose name the vehicle is registered” nor the “registered owner of record.” The Expired Meter and Red Light Tickets were issued, pursuant to the City’s ordinance, to the registered owner of the vehicle. Presumably that person was either Glenn or Catherine Haynes, or both. The court does not have this information, and in any event it is not necessary to know it to resolve this motion. The bankruptcy estate is not pri-ma facie liable for the tickets, so these were not transactions with the estate. Therefore, the liability for the Expired *744Meter and Red Light Tickets cannot be an administrative expense.
The City argues that the Hayneses received notice of these violations because “the debtor is in possession of the estate property, and is the correct party to sue and be sued on behalf of the estate.” Reply at 3. This is a red herring. By virtue of the wording of the City’s own ordinance, the Hayneses received notice because they are the registered owners of the vehicle and it is the registered owners who are prima facie liable for the tickets.
For all of the reasons stated above, the City failed to show by a preponderance of the evidence that its claim arises from a transaction with the estate.
The City Failed to Prove by a Preponderance of the Evidence that its Debt Provided a Benefit to the Estate.
Since the City did not prove that its claim arises from a transaction with the estate, the court need not consider the second part of the Jartran test, which asks whether the transaction provided a benefit to the estate. In the interests of considering ail possible arguments, however, the court will address this question.
Expired Meter Tickets
Whether the Expired Meter Tickets provided a benefit to the estate is necessarily a fact-based question. The appropriate inquiry is whether the use of the particular parking spaces that resulted in the Expired Meter Tickets provided a benefit to. the estate, such that the resulting debt should be treated as an administrative expense rather than as a general postpetition claim.
These two tickets are described as “Expired Meter in Central Business. District,” The court takes judicial notice of the map of the boundaries of Chicago’s Central Business District, found on the City’s website:
https://www.cityofchicago.org/city/en/depts/ doit/dataset/boundaries_centralbusiness district,html(last retrieved July 17, 2017).
This area is bounded by Halsted Street on the west, Lake Michigan on the east. Division Street on the north and Roosevelt Street on the south.
According to Schedule 1, Mr. Haynes works at 900 North Michigan Avenue in Chicago. This location is within the Central Business District boundaries. Mrs. Haynes works for Sam’s Club. It is unclear where exactly she is employed, since the address she provided for her employer is in Ben-tonville, Arkansas.
It is possible that the Expired Meter Tickets were incurred by Mr. or Mrs. Haynes white one or both of them were at their place of employment. It is also possible that they were received when the Hayneses drove to the Central Business District to go shopping or attend some sort of entertainment, especially because both Expired Meter Tickets were issued on a Saturday. The first scenario would support the position that the Expired Meter Tickets provided a benefit to the estate; the second would not.
Administrative expenses are narrowly construed, however, and the City has the burden of proving a benefit to the estate by a preponderance of the evidence. Therefore, this uncertainty cuts against the City. Even if the court found that the Expired Meter Tickets were transactions with the estate, the facts before the court do not show by a preponderance of the evidence that they provided a benefit to the estate.
Red Light Ticket
Did the Red Light Ticket provide a benefit to the .estate? To answer this question, the court refers back to the earlier discussion of the priority assigned to claims that result from a debtor’s deliberate violation *745of the law. See Cumberland Farms, 116 F.3d 16; Charlesbank Laundry, 755 F.2d 200.
In this instance, the relevant law is MCC 9-8-020:
(c) Steady Red Indication,
(1) Except as provided in subsection (c)(3), vehicular traffic facing a steady circular red signal alone shall stop at a clearly marked stop line, but if none, before entering the crosswalk on the near side of the intersection, or if none, then before entering the intersection and shall remain standing until an indication to proceed is shown.
http:/Aibrary.amlegaI.com/nxt/gateway.dll/ Illinois/chicagoJl/municipalcodeofchicago? f=templates$fn-default,htm$3.0$vid= amlegal;Chicago_il (last retrieved July 17, 2017)
If Glenn or Catherine Haynes, as the representative of the bankruptcy estate, intentionally chose to violate this section, a ticket would be issued pursuant to MCC Section 9-102-020:
(a) The registered owner of record of a vehicle is liable for a violation of this section and the fine set forth in Section 9-100-020 when the vehicle is used in violation of Section 9-8-020(c) and a recorded image of the violation is recorded by an automated traffic law enforcement system.
http:/flibrary.amlegaI.eom/nxt/gateway.dll/ Illinois/chicago-il/municipalcode of Chicago? f=templates$fn-default. htm$3.0$vid=amlegal:Chicago-il (last retrieved July 17, 2017).
As discussed above, some courts allowed an administrative expense priority where debtors deliberately chose to “flout” the law, “presumably because it was more lucrative for the business to operate outside the ... ordinance than -within it.” Charlesbank Laundry, 755 F.2d at 203.
The Charlesbank Laundry case determined that fairness demanded that claims resulting from these intentionally illegal acts be paid ahead of prepetition claims— and thus applied the reasoning of Reading v. Brown. If the Jartran test is applicable, the question would be whether the representative of the estate determined that an intentional violation of the law provided a benefit to the estate.
Under either theory, however, a crucial element is missing. There is no evidence that either Glenn or Catherine Haynes deliberately violated the City’s ordinance. We know only that the Red Light Ticket was issued to the registered owner of the car. We know nothing about the circumstances of the underlying violation. Was the Red Light Ticket incurred because the representative of the estate intentionally violated the City’s ordinance? Were Glenn or Catherine Haynes even operating the ear at the time the Red Light Ticket was issued?
As stated above with respect to the Expired Meter Tickets, administrative expenses are narrowly construed. The City has the burden of proving by a preponderance of the evidence that its claim is entitled to administrative expense priority. Therefore, this uncertainty about the circumstances under which the Red Light Ticket was issued cuts against the City. Even if the court found that the Red Light Ticket was a transaction with the estate, the facts before the court do not show by a preponderance of the evidence either that it provided a benefit to the estate or that fundamental fairness requires giving it administrative expense priority.
28 U.S.C. $ 959(b) Does Not Create a Category of Administrative Expenses
Finally, the City argues that 28 U.S.C. § 959(b), which requires trustees and debtors in possession to operate the *746property in their possession in compliance with state law, is a basis for awarding administrative expense priority to those post-petition creditors who are harmed when an estate representative violates the law. See In re N.P. Mining Co., Inc., 963 F.2d 1449, 1458 (11th Cir. 1992) (“it makes sense that when a trustee or debtor in possession operates a bankruptcy estate, compliance with state law should be considered an administrative expense”).
28 U.S.C. § 959(b) provides:
Except as provided in section 1166 of title 11 [which applies only in railroad reorganizations], a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager 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.
There are two problems with the City’s argument. First, the case cited on this point by the City created only a very narrow category of new administrative expenses:
Chris-Marine points out that in N.P. Mining, the Eleventh Circuit recognized that it was creating a “new category of post-petition costs entitled to first priority” when it allowed purely punitive civil penalties assessed post-petition for post-petition violations of state mining regulations to be considered administrative expenses. As Chris-Marine effectively asserts, this was because strip mining is “heavily regulated” under state law, and as such there is a strong interest in insuring compliance with state law. As such, fines incurred by the trustee post-petition could be considered “costs ordinarily incident to the operation” of the strip mining business.... Therefore. Chris-Marine correctly points out that the so-called “new category” of expenses to be considered administrative in nature as set forth in N.P. Mining was actually a very narrow new category.
In re Chris-Marine, U.S.A., Inc., 321 B.R. 63, 66 (M.D. Fla. 2004) (citations omitted).
More importantly, and putting aside the question of whether a statute that applies to trustees and debtors in possession also applies to Chapter 13 debtors, section 959(b) does not require or even imply that administrative expense status is required for debts incurred when a statute is violated. Certainly the City may have a claim for the penalty incurred by the violation of its ordinance, but the priority of such a claim is determined by other sections of the Code. See In re Lazar, 207 B.R. 668, 682 (Bankr. C.D. Cal. 1997) (“section 959(b) provides little help for the DA, because it fails to specify the priority of a claim arising from the liability that it imposes”). Whether a claim is entitled to administrative expense priority is due not to its genesis in a violation of state law, but because it represents an actual and necessary cost of preserving the estate.
In this case, the City did not show by a preponderance of the evidence that its claim represents such a cost. Therefore, it is not entitled to administrative expense priority.
CONCLUSION
For all of the reasons stated above, the City’s claim is not entitled to priority as an administrative expense. The motion is denied.
. The City also briefly quotes J. Catton Farms, Inc. v. First Nat. Bank of Chicago, 779 F.2d 1242, 1249 (7th Cir. 1985): "[I]n Reading the Court had stressed the involuntary nature of the tort victim’s relationship to the bankrupt.” This was the City’s only reference to Catton Farms, which makes sense as the creditor in that case was in a voluntary relationship with the debtor, The Catton Farms panel used that voluntary relationship to distinguish Reading.
. Dicta in one Seventh Circuit decision may, in the infrequent situation where a Chapter 13 debtor is engaged in business as contemplated by 11 U.S.C. § 1304, moot this particular argument. "The policy that supports the Reading doctrine — the policy against permitting bankrupt firms to externalize the costs of their torts — depends on whether the bankrupt firm is operating, not which part of the Bankruptcy Code (that is, whether Chapter 7 or Chapter 11) it is operating under.” Resource Technology, 662 F.3d at 477. The Hayneses are not engaged in business, so this comment is inapplicable and does not affect the court's analysis.
. The City devotes much of its reply brief to the origins of the form confirmation order used in this district, which is essentially identical to the order entered in this case. The brief also discusses the Seventh Circuit’s approach to confirmation orders that keep property in the estate: "It would presumably be an abuse of discretion for the bankruptcy judge to confirm a plan that retained more of the property in the hands of the trustee than was reasonably necessary to fulfill the plan, though we need not decide that in this case.” Matter of Heath, 115 F.3d 521, 524 (7th Cir. 1997), The reply briefs analysis is interesting but not relevant. The City's ordinance places liability for parking, standing and compliance violations on the person in whose name the vehicle is registered. Therefore, because of the specific language chosen by the City, it is immaterial for purposes of deciding this motion that the car remained property of the estate after confirmation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500635/ | DECISION
Hon. Catherine J. Furay, U.S. Bankruptcy Judge
To decide Beneficial Financial I Inc.’s (“Beneficial”) motion for summary judgment, the Court recites the following facts alleged or presented with the motion or its defense without determining whether they could be proved at trial. All inferences drawn from the facts are in favor of the nonmoving parties.
In August 2004, the Debtors, Aaron and Linda Lofton (the “Loftons”), signed and delivered a Loan Repayment and Security Agreement and a Mortgage to Beneficial Financial Wisconsin Inc. (the “Note and Mortgage”). Beneficial Financial Wisconsin Inc. merged with Beneficial in 2009. Beneficial engages in lending money and servic-*749tag accounts which are secured by residential mortgages. It serviced the Lofton Note and Mortgage. The Note and Mortgage were subordinate to the lien of the Wisconsin Housing and Economic Development Authority (“WHEDA”).
In April 2009, Beneficial commenced a foreclosure action in Jefferson County, Wisconsin. Beneficial and the Loftons were both represented by counsel in that action. That case was dismissed in 2013. It was then reopened, dismissed, and reopened. After various motions, a judgment of foreclosure was entered in April 2015 and amended in May 2015. Motions to reopen, stay confirmation, and to assert counterclaims were filed. The Loftons filed this bankruptcy thereby staying proceedings in the Jefferson County action.
WHEDA commenced its own foreclosure action in 2015. Judgment of foreclosure was granted. A Sheriff Sale was conducted in that action. Apparently, Beneficial was the highest bidder at that sale.
The Loftons filed a Chapter 13 petition on November 16, 2015. They then filed this adversary proceeding seeking damages from Beneficial and Portfolio Recovery Associates, LLC. They allege that if Beneficial transferred servicing of the Note and Mortgage in approximately August 2015, then Beneficial violated Wis. Stat. § 224.77 by failing to comply with its obligations to provide notice of the transfer of loan services under the Real Estate Settlement Procedures Act (“RESPA”). Alternatively, the Loftons allege Beneficial violated Wis. Stat. § 224.77 by denying it held, owned or serviced the loan, thus misleading the Lof-tons. The Loftons assert these violations give rise to a -private remedy entitling them to damages under Wis. Stat. § 224.80. Beneficial has filed a motion for summary judgment seeking dismissal of the adversary proceeding.
DISCUSSION
A. Jurisdiction
Federal “district courts shall have original and exclusive jurisdiction of all cases under title 11” (the “Bankruptcy Code”). 28 U.S.C. § 1334(a). Federal district courts also have “original but not exclusive jurisdiction of all civil proceedings arising under title 11” of the United States Code, “or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). Consistent with 28 U.S.C. § 157(a), district courts may refer these cases to the bankruptcy judges for their districts. As is the case in the Western District of Wisconsin, the District Court 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 bankruptcy court to whom a case has been referred may hear and determine all cases under the Bankruptcy Code and any “core” proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C'. § 157(b)(1).
This case was originally assigned to Judge Martin. He entered an Order on August 29, 2016, designating this case ás a “non-core” proceeding (ECF No. 21). Thus, absent consent, this ease would be adjudicated in accordance with 28 U.S.C. § 157(c)(1). Section 157(c)(1) provides that a bankruptcy judge may hear a non-core proceeding that is otherwise related to a case under title 11. 28 U.S.C. § 157(c)(1). In non-core proceedings, section 157(c)(1) directs the bankruptcy judge to “submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those *750matters to which any party has timely and specifically objected.” Id.
In a prior motion to dismiss, Beneficial initially argued that this Court lacked constitutional authority under Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to enter a final judgment. (ECF No. 6). However, in its brief in support of summary judgment, Beneficial unequivocally consents to entry of a judgment by this Court pursuant to the holding in Wellness Int’l Network, Ltd. v. Sharif, — U.S. -, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015). (ECF No. 36 at 4 n.1). The Loftons have also consented.
The original pleadings in this matter were filed and Judge Martin’s Order was issued prior to the effective date of amendments to the Federal Rules of Bankruptcy Procedure. The amendments, effective December 1, 2016, contain two provisions that are particularly applicable in this matter. In relevant part, those Rules provide:
Rule 7008. General Rules of Pleading
Rule 8 F.R.Civ.P. applies in adversary proceedings.... In an adversary proceeding before a bankruptcy court, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy court.
Rule 7016. Pre-Trial Procedures
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(b) Determining procedure
The bankruptcy court shall decide, on its own motion or a party’s timely motion, whether:
(1) to hear and determine the proceeding;
(2) to hear the proceeding and issue proposed findings of fact and conclusions of law; or
(3) to take some other action.
Read together, these rules leave to the discretion of the bankruptcy court the appropriate course of action for proceedings. The discretion is informed by the parties’ statements and consent considering the provisions of Rule 7008(a). See Committee Notes on Rules — -2016 Amendment to Fed. R. Bank. P. 7008 and 7016.
Despite this matter having been determined to be non-core, the parties have consented to the entry of final orders and judgments by this Court. The Court has also considered judicial economy. I conclude that the interests of judicial economy favor the exercise of discretion to enter final orders and judgments in this matter rather than preparing and forwarding proposed findings and conclusions and judgments to the District Court.
B. Summary Judgment
The standard for summary judgment is undisputed. Summary judgment is proper 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.” Fed. R. Civ. P. 56(a), incorporated by Fed. R. Bankr. P. 7056; see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In analyzing whether a question of material fact exists, the court construes the evidence in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. Material facts are those facts that under the applicable substantive law “might affect the outcome of the suit.” Id. at 248, 106 S.Ct. 2505.
In opposing a motion for summary judgment, a party cannot merely rest on allegations in the pleadings or on conclusory *751allegations in an affidavit, but must come forward with specific evidence that a material factual issue exists that must be decided at trial. See Valentine v. Joliet Twp. High School Dist., 802 F.2d 981, 986 (7th Cir. 1986); Koclanakis v. Merrimack Mut. Fire Ins. Co., 899 F.2d 673, 675 (7th Cir. 1990); Mestayer v. Wisconsin Physicians Service Ins. Corp., 905 F.2d 1077, 1079 (7th Cir. 1990). Additionally, however, summary judgment may also be granted in favor of the nonmoving party and against the movant provided “‘the moving party against whom summary judgment [is] rendered had a full and fair opportunity to ventilate the issues involved in the motion.’” United States v. Angwin (In re Angwin), Ch. 7 Adv. No. 15-11120-B, 2016 WL 1395378, at *3, 2016 Bankr. LEXIS 1733 at *1 (Bankr. E.D. Cal. Apr. 5, 2016) (quoting Cool Fuel Inc. v. Connett, 685 F.2d 309, 312 (9th Cir. 1982)).
The Loftons’ Complaint contains a claim against Beneficial under Wis. Stat. § 224.77 and seeks damages under Wis. Stat. § 224.80. Various prohibited practices for mortgage bankers and mortgage loan originators are identified in Wis. Stat. § 224.77. Section 224.77(l)(k) bars these entities from violating “any federal or state statute, rule, or regulation that relates to practice as a mortgage banker, mortgage loan originator, or mortgage broker.” Wis. Stat. § 224.77(l)(k). Accordingly, 12 U.S.C. § 2601, commonly referred to as the Real Estate Settlement Procedures Act (“RESPA”), applies.
C. Claims for Violation of Wis. Stat. § 224.77(l)(m)
The Loftons argue Beneficial “improperly and fraudulently” denied that it held, owned, or serviced their loan, which constitutes a violation under Wis. Stat. § 224.77(l)(m). Wis. Stat. § 224.77(l)(m) provides “[n]o mortgage banker, mortgage loan originator, [or] mortgage broker ... may ... [e]ngage in conduct ... that constitutes improper, fraudulent, or dishonest dealing.”
Following a foreclosure judgment in favor of Beneficial, the Loftons state they attempted to contact Beneficial to work out a loan agreement on their second mortgage. The opposition to summary judgment are affidavits of Linda Lofton and a paralegal for the Loftons’ attorney. The affidavits say Ms. Lofton and the paralegal conducted an internet search to locate contact information for Beneficial. There is no explanation as to the reason they did not call the number listed in any of the various notices or pieces of correspondence from Beneficial to the Loftons or why counsel for Beneficial was not asked to provide a phone number or person to contact to discuss a possible loan modification. The search generated a phone number for Beneficial. Linda Lofton called that number and was instructed she needed to contact HSBC. The affidavits do not state the number called nor do they identify the person who answered. The paralegal and Ms. Lofton then say they contacted HSBC and were told it no longer held the Note because it was transferred to Portfolio Recovery Associates. Calls to Portfolio Recovery Associates were also unsuccessful according to Ms. Lofton. After this adversary proceeding was commenced, a person at HSBC was apparently reached who, it is alleged, confirmed HSBC held and serviced the Note but that further information would require authorization.
The Loftons assert this conduct violated Wis. Stat. § 224.77(l)(m), entitling them to damages under Wis. Stat. § 224.80(2).
It is the Loftons’ burden to demonstrate with sufficient evidence that Beneficial’s conduct violated Wis. Stat. § 224.77(1)(m). See Diedrich v. Ocwen *752Loan Servicing, LLC, 839 F.3d 583, 591 (7th Cir. 2016). The Loftons initially contacted Beneficial through a phone number Linda Lofton located on-line. Per Ms. Lof-ton, Beneficial informed her that she needed to contact HSBC Bank to obtain information regarding her loan.1 The remainder of Ms. Lofton’s phone communications took place with either Portfolio Recovery Associates or HSBC Bank, Construing the foregoing in a light most favorable to the Loftons, it is unclear how Beneficial’s conduct was improper under Wis. Stat. § 224.77(l)(m). The Loftons failed to call phone numbers provided in writing from Beneficial. They also did not simply have their attorney contact Beneficial’s attorney for a phone number. Instead, the Loftons initially decided to proceed without assistance and to rely on an internet search. When that did not produce hoped-for responses, a paralegal for their lawyer simply repeated an unproductive internet search rather than asking (or having Attorney Pagel ask) for the correct telephone number to use to contact Beneficial. These failed communications were not initiated or continued by Beneficial. To the contrary, it was solely the actions of the Loftons and a paralegal that resulted in these fruitless communications. There is no evidence that if the Loftons had used the telephone numbers contained in Beneficial’s written communications the contacts would have been as confusing, unsatisfying, improper, fraudulent, or dishonest.
D. Claims Asserted Under RESPA
“RESPA is a consumer protection statute that regulates the real estate settlement process, including servicing of loans and assignment of those loans.” Catalan v. GMAC Mortg. Corp., 629 F.3d 676, 680 (7th Cir. 2011). Beneficial does not dispute that it is subject to RE SPA. Relevant here, section 2605(b) requires servicers to give notice to borrowers “in writing of any assignment, sale, or transfer of the servicing of the loan to any other person.” 12 U.S.C. § 2605(b)(1).
The Loftons allege Beneficial violated RESPA by failing to notify them that it had become the servicer for their Note and Mortgage in 2015. This assertion rests entirely on the reported telephone calls to phone numbers located, initially, through Lofton’s internet searches. Beneficial responds that notice is not required under 12 C.F.R. §§ 1024.33(b)(2)(i)(A) and (B) because it merged with Beneficial Wisconsin Inc. and a transfer under federal law did not occur. Further, there is no evidence in the record to support an allegation that any change in servicer actually occurred. To the contrary, the evidence confirms no such change happened.
Prior to June 16, 2014, RESPA’s implementing regulations clarified that transfers resulting from a merger did not constitute a transfer under 12 U.S.C. § 2605, 24 C.F.R. § 3500.21(d) (2014). Through the Dodd-Frank Act, Congress transferred from the Department of Housing and Urban Development (“HUD”) to the Consumer Financial Protection Bureau (“CFPB”) the authority to administer, enforce, and otherwise implement RESPA. 12 U.S.C. §§ 5581(b)(7)(A) and (B) (Dodd-Frank Act § 1601). Thus, the CFPB promulgated RESPA regulation 12 C.F.R. § 1024.33(b)(2).2 Section 1024.33(b)(2) creates an exception to the notice of transfer of servicer requirement due to a merger or acquisition provided, however, “there is no change in the payee, address to which payment must be delivered, account num*753ber, or amount of payment due.” 12 C.F.R. § 1024.33(b)(2).
Beneficial asserts that by way of merger on October 1, 2009, with Beneficial Financial Wisconsin Inc., it acquired all of Beneficial Financial Wisconsin Inc.’s residential loans, which included the Loftons’ loan. The Loftons concede in their response that “the paperwork Beneficial Financial submitted to the state court does not show a ‘merger’ of any sort. It shows an acquisition of some sort.” (ECF No. 53) (emphasis in original). Section 1024.33(b)(2)(i)B explicitly includes acquisitions under the notice exception to 12 U.S.C. § 2605(b). 12 C.F.R. § 1024.33(b)(2)(i)B. Accordingly, so long as Beneficial’s merger and/or acquisition of Beneficial Financial Wisconsin Inc. did not alter the Lofton’s payee, the address to which payment must be delivered, the Loftons’ account number, or the amount of payment due, no notice was required. See id. Further, if no change in these items occurred in 2015, no notice would have been required at that time.
Unfortunately, it is not clear from Beneficial’s Affidavit in support of summary judgment whether its merger or acquisition with Beneficial Financial Wisconsin Inc. left intact the Loftons’ payee, the address to which the Loftons were to deliver payment, the Loftons’ account number, and the amount due. Nor is there confirmation that no changes occurred in 2015. Without these facts, the Court cannot determine whether Beneficial’s merger with Beneficial Financial Wisconsin Inc. satisfies 12 C.F.R. § 1024.33(b)(2)(i)B’s notice exception to 12 U.S.C. § 2605(b). This constitutes a material fact that may affect the outcome. Thus, based on the facts presented, the Court cannot determine whether 12 C.F.R. § 1024.33(b)’s notice exception is met.
E. Damages
A private cause of action is provided for “[a] person who is aggrieved by an act which is committed by a mortgage banker, mortgage loan originator, or mortgage broker in violation of [Wis. Stat. § 224.77].” Wis. Stat. § 224.80(2).
To survive summary judgment, there must be “adequate evidence of [an] injury under the statute ....” Diedrich, 839 F.3d at 591. Put another way, “the non-moving party must show evidence sufficient to establish every element that is essential to its claim and for which it will bear the burden of proof at trial.” Life Plans, Inc. v. Sec. Life of Denver Ins. Co., 800 F.3d 343, 349 (7th Cir. 2015). This means the Loftons must allege sufficient facts to demonstrate they were injured and that Beneficial was responsible. See Avudria v. McGlone Mortg. Co., 2011 WI App 95, ¶ 31, 334 Wis. 2d 480, 494, 802 N.W.2d 524, 531 (concluding under Wis. Stat. § 224.80(2) that a person is “aggrieved” “if he or she can show some injury or damage”).
Even if the foregoing conduct did constitute a violation under Wis. Stat. § 224.77(l)(m), the Loftons have presented no evidence showing they were “aggrieved” by Beneficial. The Loftons contend they were actually harmed by Beneficial’s conduct in that they 1) incurred attorney’s fees to ascertain who held their loan, 2) continued to pay their first mortgage holder (WHEDA) money they would have committed to other housing, and 3) suffered undue emotional stress because of not being able to determine who held their loan.
Like the plaintiff in Avudria, the Lof-tons cannot establish that they were aggrieved because they have not suffered actual damages. Continuing to pay their first mortgage holder, WHEDA, while attempting to modify their second mortgage *754with Beneficial was a voluntary act. The Loftons were not compelled to do so. They were free to cease those payments. Such a volitional act does' not constitute actual damages caused by Beneficial. They eventually surrendered the home and WHEDA waived the deficiency.
The Loftons argue they suffered actual damages in the form of attorney’s fees. Wis. Stat. § 224.80(2)(b) provides that an aggrieved person may recover “[t]he aggregate amount of costs and expenses which the court determines were reasonably incurred by the person in connection with the action, together with reasonable attorney fees[.]” The affidavits in opposition to summary judgment are devoid of evidence of injury or damages caused by a violation of Wis. Stat. § 224.77. Costs, expenses, and reasonable attorney fees under Wis. Stat. § 224.80(2)(b) are in addition to and do not constitute actual damages. Simply put, the incurred attorney’s fees are not “actual damages” because such fees lack a causal connection to Beneficial’s conduct. Merely having an attorney make phone calls or file suit does not suffice as harm warranting actual damages. See, e.g., Lal v. Am. Home Servicing, Inc., 680 F.Supp.2d 1218, 1223 (E.D. Cal. 2010); Konieczka v. Wachovia Mortg. Corp., No. 11-C-0071, 2012 WL 1049910, at *3 (N.D. Ill. Mar. 28, 2012).
Regarding the Loftons’ claim of emotional distress, they offer no medical records that substantiate the claim that they suffered emotional distress during this time. The Loftons cite Catalan v. GMAC Mortg. Corp., 629 F.3d 676, 696 (7th Cir. 2011), for the proposition that self-reports of emotional distress are sufficient to survive summary judgment. The Loftons mischaracterize the Seventh Circuit’s reasoning in Catalan. In that case, the plaintiffs submitted medical records and offered non-conclusory testimony about their increased stress. Catalan, 629 F.3d at 696. In the present case, there are no such medical records. Instead, Linda Lofton, merely attests that she suffered from “extreme worry” during the time she was “trying to find out who held [her] loan.” Following a judgment, she feared losing her house because she was not able to “figure out who [her] lender was and how to contact them.” All this was despite the facts she had received correspondence containing contact information, there was a judgment, and Beneficial had an attorney who appeared both in the Beneficial foreclosure action and, subsequently, the WHEDA foreclosure action.
Ms. Lofton does not describe in any way how the “extreme worry” disrupted or affected her. This conclusory statement fails to identify or support any actual injury. In reviewing the evidence in a light most favorable to the Loftons, they have not submitted sufficient evidence that they sustained actual damages in the form of emotional distress.
The Court now turns to whether the Loftons have a claim for damages under RESPA. Pursuant to 12 U.S.C. § 2605(f), “[w]hoever fails to comply with any provision of this section [RESPA] shall be liable to the borrower for ... actual damages to the borrower as a result of the failure, and any additional damages, as the court may allow, in the ease of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $ 2,000.” 12 U.S.C. §§ 2605(f)(1)(A) and (B).
As described, the Loftons have not submitted sufficient evidence that they sustained any actual damages from Beneficial’s conduct. With regard to statutory damages under 12 U.S.C. § 2605(f)(1)(B), that section provides the Court may allow additional damages “in the case of a *755[creditor’s] pattern or practice of noncompliance” with RESPA. Id. The record contains no evidence to suggest that Beneficial has engaged in a pattern or practice of noncompliance with RESPA.
CONCLUSION
To defeat summary judgment, the Lof-tons must provide factual opposition that, taken in the light most favorable to them, 1) there was conduct that violated either §§ 224.77(l)(m) or (l)(k), and 2) they sustained actual damages. They have failed to do so.
The Loftons have not presented evidence in opposition to summary judgment that Beneficial improperly or fraudulently denied it held, owned, or serviced their loan. Simply because Linda Lofton and a paralegal decided the foreclosure judgment was not sufficient to identify the owner, holder, or servicer and that internet searches were preferable to using the contact information in communications from Beneficial to locate a telephone number or contact information does not provide any material factual opposition to summary judgment. The confusion, if any, was the sole product of Lofton’s actions. Additionally, there is no evidence of any actual damages. For these reasons, summary judgment on the Wis. Stat. § 224.77(l)(m) claim is granted.
A merger or acquisition does not, by itself, trigger notice obligations under 12 C.F.R. 1024.38(b)(2) or 12 U.S.C. § 2605(b). In the light most favorable to the Loftons, the record is devoid of any indication whether the merger or acquisition resulted in a change of payee, account number, amount due, or payment mailing address. Other than the suggestion that a change occurred based on Lofton’s phone calls, there is not a shred of evidence of any actual change. Neither, however, is there any affirmative statement from Beneficiary that there was no change in 2015. Thus, from the record the Court cannot conclude whether there was conduct that might violate section 224.77(l)(k). Nonetheless, summary judgment dismissing this claim is also appropriate because even if the notice requirements were violated, there is no evidence of actual injury or damages, or that Beneficial engaged in a pattern of noncompliance.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
A separate order consistent with this decision will be entered.
. The parties dispute whether HSBC’s representations to Ms, Lofton fall under Fed. R, Evid. 803(2)'s hearsay exception.
. Effective October 3, 2015. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500636/ | MEMORANDUM DECISION
Hon. Catherine J. Furay, U.S. Bankruptcy Judge
This matter is before the Court on the motion of Plaintiff Peggy A. Berg (“Berg”) for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c), made applicable to bankruptcy proceedings through Fed. R. Bankr. P. 7012(b). To decide this motion, the following facts alleged or presented by agreement of the parties are recited. For the reasons set forth below, the Court concludes the Social Security Administration’s insufficiency position decreased during the 90 days prior to Berg’s bankruptcy filing in the amount of $2,015.00. Accordingly, Berg is entitled to that amount.
FACTS
Peggy A. Berg filed a voluntary Chapter 13 petition under title 11 of the Bankruptcy Code on August 7, 2014. She moved to convert her case to a Chapter 7 on September 8, 2014. The Court entered a final decree on January 21, 2015. On August 4, 2016, Berg filed a motion to reopen her bankruptcy case. On November 15, 2016, she filed the present' adversary complaint seeking to unwind the Social Security Administration’s prepetition setoff of her social security disability benefits.
Berg received disability insurance benefits from the Social Security Administration (the “SSA”) from June 1994 through December 2003. She became re-employed in 2002. Despite having notified the SSA of her return to employment, it continued to pay and Berg retained benefits until the benefits were terminated in December 2003. This resulted in an overpayment of $25,690.00.
The SSA determined Berg was without fault in causing or accepting the overpayment (20 C.F.R. § 404.507(c)). Nonetheless, it also determined that recovery of the overpayment would not be inequitable. She did not appeal the determination. A payment plan was established for payment at the rate of $300.00 per month. Berg made payments for a period and reduced the overpayment to $19,400.00 as of July 2014.
Berg stopped working on November 17, 2012. In March 2014, she filed another application for disability benefits with a protective filing date of January 2014. On July 15, 2014, the SSA granted the application. It determined that she met the criteria for disability as of November 17, 2012. Under the regulations, she was entitled to receive benefits beginning in May 2013. The SSA’s Notice of Award letter dated July 30, 2014, explained the benefits, their accrual rate, and adjustments for cost of living. The Award letter also told Berg that the SSA determined it would use $19,400.00 of the accrued benefits to pay off the remaining overpayment. The SSA kept and applied $19,400.00 of back benefits and sent a payment of $907.00 to Berg *758for July 2014.1 Full benefit payments commenced in August 2014.
Berg filed bankruptcy on August 7, 2014. She identified the $19,400.00 as a possible asset subject to recovery in her schedules. She also disclosed it as a setoff in her Statement of Financial Affairs. Berg commenced this adversary proceeding seeking recovery of the amount of back benefits set off by the SSA. The basis for her claims are 11 U.S.C. §§ 553(b) and 522(h). The parties have stipulated the relevant facts are undisputed. The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (I), and (O).
ARGUMENTS
The parties agree the transaction at issue is a setoff governed by 11 U.S.C. § 553(b). They disagree on the extent to which section 553(b) unwinds that transaction.
The SSA argues the offset of benefits was not inequitable. It points out the SSA cannot waive recovery of overpayments except in narrow circumstances that are inapplicable in this case. It argues the statutory preservation of setoff supports the application of accrued benefits against the overpayment. It contends it did not improve its position or, alternatively, the only possible improvement was $1,163.00 representing a change in position between May 9, 2014,2 and July 30, 2014.
Berg argues the offset of accrued benefits against the overpayment occurred within 90 days of the petition date and would have been recoverable by a trustee under section 553. Further, she asserts there was no “mutual debt” within the 90 days and that the SSA improved its position. In her response, it is clear what Berg does not argue:
(1) the SSA did not overpay her;
(2) the amount of overpayment was incorrectly calculated;
(3) the amount of accrued benefits that were set off were incorrectly calculated;
(4) that, in the qbsence of a bankruptcy, there would have been a right of setoff.
The parties frame the issues as (1) whether the SSA’s actions qualify as a setoff under section 553, and (2) whether, notwithstanding the provisions of section 553, the rights are constrained by section 522 and thus recoverable.
STANDARD
A motion for judgment on the pleadings is subject to the same standard as a motion to dismiss under Rule 12(b)(6). Federal Sign v. Fultz (In re Fultz), 232 B.R. 709, 716 (Bankr. N.D. Ill. 1999). The Court “may not look beyond the pleadings, and all uncontested allegations to which the parties had an opportunity to respond are taken as true.” Alexander v. City of Chicago, 994 F.2d 333, 335 (7th Cir. 1993). Therefore, we must determine whether the complaint states “a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). All *759well-pleaded factual allegations in Berg’s complaint are taken as true, and all reasonable inferences from the facts 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); see also Golden v. Gibrick, 561 B.R. 470, 473 (Bankr. N.D. Ill. 2016). There are no contested facts.
APPLICABLE STATUTES
To resolve this case, the meaning- of various statutes must be considered.
Section 553(a) recognizes a creditor’s right to offset a mutual debt and provides;
(a) Except as otherwise provided ... title [11] does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1) the claim of such creditor against the debtor is disallowed;
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(3) the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
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Section 553(b) restricts a creditor’s right to offset a mutual debt and reads:
(b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(b)(2) In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
Section 522(h) provides:
(h) The debtor may avoid a transfer of property of the debtor or recover a set-off to the extent that the debtor could have exempted such property qnder subsection (g)(1) of this section if the trustee had avoided such transfer, if—
(1) such transfer is .., recoverable by the trustee under section 553 of this title; and
(2) the trustee does not attempt to avoid such transfer.
The Court must also consider the statute that requires the SSA to reduce, by offset, an individual’s disability benefits when the individual has been overpaid. The authority of the SSA to address over-payments is in 42 U.S.C. §§ 404 and 1383. It permits the SSA to adjust future payments when there has been a past overpayment or underpayment. See 42 U.S.C. § 1383(b).
DISCUSSION
Generally, a creditor has a right to setoff under the Bankruptcy Code where four conditions are present: “ ‘(1) the creditor holds a ‘claim’ against the debtor that arose before the commencement of the *760ease; (2) the creditor owes a ‘debt’ to the debtor that also arose before the commencement of the case; (3) the claim and debt are ‘mutual’; and (4) the claim and debt are each valid and enforceable.’ ” St. Francis Physician Network v. Rush Prudential HMO (In re St. Francis Physician Network), 213 B.R. 710, 715 (Bankr. N.D. Ill. 1997) (quoting 5 Collier on Bankruptcy ¶ 553.01 (15th ed. Revised)). Each element is present in this case.
Turning to the first element, the SSA must hold a prepetition claim against Berg. A claim is a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 11 U.S.C. § 101(5). The SSA held a prepetition claim against Berg based on its overpayment of disability benefits. That claim was determined in December 2003. Thus, the SSA held a prepet-ition claim against Berg.
Next, the SSA must owe a prepetition debt to Berg. A debt is liability on a claim. 11 U.S.C. § 101(12). The SSA owed a pre-petition debt to Berg under her 2014 disability application. While the amount of the debt was not liquidated until the determination in July 2014, there was nonetheless a debt because there was a right to payment on an unliquidated, contingent claim when she filed the application in March 2014.
Berg filed her disability application approximately 159 days before the petition date. While the SSA’s amount of the debt was determined a mere 23 days before the petition date, the entitlement to payments dated back to November 17, 2012 — 263 days before the petition date. There was, indisputably, a debt owed prepetition by the SSA to Berg.
The Court now turns to whether the obligations owed by the parties are mutual. Mutuality is established “when the offsetting obligations are held by the same parties in the same capacity (that is, as obligor and obligee) and are valid and enforceable Meyer Med. Physicians Grp., Ltd. v. Health Care Serv. Corp., 385 F.3d 1039, 1041 (7th Cir. 2004) (citations omitted). These offsetting obligations may arise either prepetition or postpetition and may arise out of separate transactions. Id. Simply put, “Mutuality requires that the debt in question be owed in the same right and between the same parties standing in the same capacity” regardless of the debt’s character. Id. (citations omitted).
The SSA and Berg held mutual obligations in the same capacity as obligor and obligee, As described, in December 2003, the SSA determined it overpaid Berg disability benefits of $25,690.00, and in 2009 an administrative law judge adjusted that amount to $24,000.00, which Berg reduced to $19,400.00. On July 15, 2014, the SSA granted Berg’s application and determined she was disabled as that term is defined under the Social Security Act since November 17, 2012, and entitled to receive $20,307.00 in disability insurance benefits. Thus, the parties and their respective capacities have not changed.
■ Finally, there is no dispute over whether the claim and debt are each valid and enforceable. Thus, the Court finds the elements for setoff are present. However, that does not end the Court’s inquiry.
Section 553(b) of the Bankruptcy Code restricts a creditor’s ability to exercise its right of setoff within the 90-day period prior to a debtor’s bankruptcy filing. Section 563(b) reads:
(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 862(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) *761of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and
(B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
To begin, a trustee, or as is the case here, a debtor acting under 11 U.S.C, § 522(h), may recover a setoff under 11 U.S.C. § 553(b)(1) to the extent the creditor improved its position within the 90-day period preceding the debtor’s bankruptcy filing. As provided under section 553(b)(1), a trustee may recover the amount offset to the extent that any insufficiency on the setoff date is less than the insufficiency on the later of (A) 90 days before the petition date, and (B) the first date during the 90 days immediately preceding the petition date on which there is an insufficiency.
Section 553(b)(1) directs the Court to look at two separate dates to determine whether the SSA improved its' position relative to other creditors during the 90-day period prior to Berg’s bankruptcy. This calculation proceeds in four steps, and is “strictly mathematical.” See 5 Collier on Bankruptcy ¶ 553.09[2][a] (16th ed.); Braniff Airways v. Exxon Co., 814 F.2d 1030, 1040 (5th Cir. 1987).
First, section 553(b)(1) requires the Court to determine the SSA’s setoff position 90 days prior to Berg’s filing. To calculate the SSA’s position, the Court must compare the SSA’s claim with its debt, and calculate the extent to which its claim exceeds the amount of the debt, i.e., its “insufficiency.” “Insufficiency” is defined under section 553(b)(2) as the amount by which a creditor’s claim exceeds the amount of its debt. 11 U.S.C. § 553(b)(2).
As described, Berg filed a Chapter 7 petition on August 7, 2014. Ninety days prior to that date is May 9, 2014. In its Notice of Award letter dated July 30, 2014, the SSA informed Berg she was eligible to receive disability benefits relating back to November 17, 2012. The Award letter stated Berg’s benefits were subject to a five-month waiting period prior to receipt and explained benefits accrued since May 2013. Under 42 U.S.C. § 402(a) and 20 C.F.R. § 404.302(b)(4), disability insurance benefits are not paid until the recipient survives through the last day of the month. By illustration, benefits that accrue for the month of November are not paid until December, and so forth.
Relevant here, according to Berg’s Award letter, the SSA calculated her award of back benefits as follows: Between May 2013 and November 2013, her benefits accrued at $1,440.30 per month for a subtotal of $10,080.00. In December 2013, there was a cost of living adjustment to $1,461.90. Accordingly, between December 2013 and July 2014, the back benefits were $1,461.90 per month for a subtotal during that time of $10,227.00. Together, the SSA determined Berg had accrued benefits of $20,307.00 between May 2013 and July 2014. Because section 553(b) instructs the Court to determine the insufficiency on May 9, 2014, I must determine Berg’s accrued benefits for that particular date keeping in mind the May 2014 benefits were not accrued and payable until the *762first week of June 2014. Berg’s accrued benefits from May 2013 through April 2014 total $17,385.00. This is the total accrued as of May 9, 2014. On that same day, Berg owed the SSA $19,400.00.3 Netting $19,400.00 against $17,385.00, on May 9 there existed an insufficiency of $2,015.00
Step two applies only when there is no insufficiency on the ninetieth day prior to filing, which is not the case here. Step three directs the Court to determine the later to occur between (1) any insufficiency existing on the ninetieth day and (b) any insufficiency existing on the first day during the 90 days preceding the petition date, which includes the ninetieth day. 11 U.S.C. §§ 553(b)(1)(A) and (B); see also Collier, supra, ¶ 553.09[2][a]. Here, there existed an insufficiency of $2,015.00 on the ninetieth day prior to Berg’s bankruptcy petition. Thus, the Court will use that day as its initial reference point to compare whether on the setoff date the SSA decreased its insufficiency.
Under step four, the Court compares the SSA’s insufficiency on the ninetieth day with its insufficiency on the date of setoff. On the setoff date of July 30, 2014, no insufficiency existed. Berg owed the SSA $19,400.00 and the SSA owed Berg an accrued amount of $20,307.00. Using the accrual date instead of the date of payment more accurately reflects how the SSA calculates an individual’s benefits. Thus, on July 30, 2014, the SSA’s insufficiency was zero, resulting in a change of position of $2,015.00.
In applying section 563(b)’s improvement-in-position test, it is critical to remember that section 553(b) instructs the Court to look only at two dates: (1) the date of the first insufficiency during the 90 days prior to the petition date, and (2) the date of the actual prepetition setoff. Susan V. Kelley, Ginsburg & Martin on Bankruptcy, § 8.06[E] (5th Ed. Supp. 2016). “What happens between those two dates, or before or after them, is irrelevant.” Id.
Section 553(b) applies even if no insufficiency exists on the actual setoff date. See Braniff Airways, 814 F.2d at 1040 n.12. In that case, the Fifth Circuit reasoned that a creditor could certainly argue that section 553(b) does not apply when no insufficiency exists on the actual setoff date because the statute’s plain language refers only to a comparison of the insufficiencies on both dates. However, the court declined to adopt this argument. Id. And since neither the SSA nor Berg has made a similar argument, this Court will not address that argument here.
In essence, this case is similar to a setoff illustration provided by Collier:
Suppose a bank had a claim against a debtor for $15,000. At 90 days before the commencement of debtor’s bankruptcy case, the debtor had $10,000 on deposit with the bank. The “insufficiency” at 90 days was thus $5,000. On the 89th day, the debtor deposited $5,000, resulting in a balance of $15,000 and an insufficiency of zero. At 30 days before the commencement of the debtor’s bankruptcy case, the bank offset the entire deposit against its claim. In calculating any recoverable improvement, section 553(b) requires use of the later of the insufficiency at 90 days before the petition date and the first date on which there was any insufficiency during the 90 day period, in this case the insufficiency on the [ninetieth] day was $5,000. Because the insufficiency at the time of setoff (zero) was less than the insufficiency at *76390 days prior to filing ($5,000), the bank improved its position by ($5,000), but the bank may keep $10,000 from its setoff ($15,000 less the $5,000 recovered by the trustee).
5 Collier, supra, ¶ 553.09[2][b] (emphasis same).
Upon receipt of the SSA’s Award letter, on the ninetieth day prior to Berg’s filing, the SSA owed Berg $17,385.00 and Berg owed the SSA $19,400.00, creating an insufficiency of $2,015.00. On the actual day of setoff, the SSA’s debt to Berg exceeded its claim against her reducing the insufficiency to zero, which is less than the insufficiency 90 days prior to her filing. Thus, the SSA improved its position by $2,015.00.
Nonetheless, the SSA contends that under no circumstances could it inequitably improve its position in the 90 days before Berg’s bankruptcy filing. The SSA argues under Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984), that Congress’s concern that banks would foresee a debtor’s bankruptcy was imminent and “scramble to secure a better position for themselves by decreasing the ‘insufficiency,’ to the detriment of other creditors” does not apply because neither the SSA nor Berg can do anything to increase the amount of benefits that will accrue in the 90 days before the petition date. See id. at 877. As such, the SSA contends that it properly recovered the $19,400.00 in overpaid benefits.
This position overlooks the “purely mathematical” application of section 553(b) noted by the SSA and a variety of courts applying section 553. See Braniff Airways, Inc., 814 F.2d at 1040; Damas v. United States (In re Damas), 504 B.R. 290, 294-95 (Bankr. D. Mass. 2014) (concluding debtor could not recover offset of social security payments because there was no decrease in the SSA’s insufficiency position); In re Bass Mechanical Contractors, Inc., 88 B.R. 201, 203 n.2 (Bankr. W.D. Ark. 1988). Accordingly, considerations of a creditor’s intent or equity do not factor into the analysis.
Berg cites In re Goodman, Case No. 11-02760-8-JRL, 2012 WL 529574, 2012 Bankr. LEXIS 546 (Bankr. E.D.N.C. Feb. 17, 2012), for the proposition that an insufficiency did not exist on the ninetieth day because the SSA did not determine Berg was eligible to receive benefits until the actual date of setoff of July 30, 2014. As a result, section 553(b) instructs the Court to look to the first date upon which an insufficiency occurred, which was simultaneously the setoff date. Thus, according to Berg, the SSA’s position improved between the date the insufficiency arose and the date of setoff, entitling her to recover the full set-off amount. However, this Court finds the Third Circuit’s reasoning in Lee instructive. The court in Lee looked to when the benefits accrued as opposed to when the SSA’s obligation to pay arose. See Lee, 739 F.2d at 877. Here, on the ninetieth day before filing her petition, Berg had accrued disability benefits in the amount of $17,385.00, which created an insufficiency of $2,015.00. Berg continued to accrue benefits up to and through the actual setoff date of July 30, 2014. On that date, no insufficiency existed. When comparing the two dates, the SSA improved its position by $2,015.00 between May 9, 2014, and July 30, 2014.
In summary, on July 30, 2014, Berg owed the SSA $19,400.00. On that same day, the SSA owed Berg $20,307.00, and set off Berg’s debt of $19,400.00 against her back benefits of $20,307.00, issuing her a check for $907.00. Using the accrual method, on the ninetieth day (May 9, 2014) prior to filing her bankruptcy, Berg had accrued back benefits of $17,385.00, but owed the SSA $19,400.00. Netting $19,400.00 against $17,385.00, on May 9 there existed an insufficiency of $2,015.00. *764Between these two dates, the SSA improved its position in the amount of $2,015.00. Accordingly, Berg is entitled to recover $2,015.00. The SSA is entitled to retain $17,385.00,
CONCLUSION
For the foregoing reasons, judgment on the pleadings is granted in favor of Plaintiff Peggy A. Berg in the amount of $2,015.00. The Defendant, Social Security Administration, is entitled to retain $17,385.00 of the amount offset.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
A separate order consistent with this decision will be entered.
. This amount represented the monthly benefit remaining for July 2014 after deduction of the prior overpayment from the accrued benefits.
. May 9 is the 90th day.
. While the SSA states in its Brief that Berg owed it $19,425.00 on May 9, the stipulated facts do not mention that amount. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500638/ | RULING ON S & V TRUST’S THIRD-PARTY COMPLAINT AND S & V TRUST’S MOTION TO STRIKE
THAD J. COLLINS, CHIEF BANKRUPTCY JUDGE
This matter came on for trial on April 21, 2017 in Cedar Rapids. Chad Swanson and Dan Childers appeared for Lynn Kingery as executor of the Bernice Gill estate (“Ms. Kingery”). Tom Lawlor appeared for Lincoln Savings Bank as executor of the Irene Vorhes estate (“LSB”). Ron Martin, Joe Day, and Aaron Blair appeared for Jean Westendorf as Trustee of S & V Trust (“S & V Trust”). Eric Lam appeared for Chapter 7 Trustee David Sergeant. Pat Vickers appeared for Vorhes Ltd. The Court heard testimony and evidence. The parties filed briefs. Although their counsel appeared at trial, neither the Chapter 7 Trustee nor Vorhes Ltd. offered evidence, made argument, or filed briefs.
After the briefs were filed, S & V Trust filed a motion to strike portions of LSB’s brief. The Court held a hearing on that motion on May 25, 2017 and took it under advisement with the matters from trial. These are core proceedings under 28 U.S.C. § 157(b)(2).
STATEMENT OF THE CASE
This case is about the ownership of stock in Vorhes Ltd., a family farm company. In particular, the Court is called on to determine whether Bill Vorhes (Chapter 7 Debtor) owns any of the stock and, if so, how much. The parties disagree about who is a shareholder and, in turn, who owns and/or controls how many shares. In determining who is a shareholder, the parties disagree about whether two transactions, with respect to that stock, were effective. The first involves an alleged transfer of stock by Bill to a trust he purported to establish called S & V Trust. The second involves the alleged cancellation of some shares of stock by Vorhes Ltd.
The Court is also asked to resolve the issue of whether Vorhes stock that was specifically devised in the will of the family matriarch, Irene Vorhes, remains in Irene’s estate, or whether it automatically transferred to her children, including Bill, by operation of a statutory deadline under Iowa law. For the following reasons, the Court concludes the Bill Vorhes bankruptcy estate owns shares he attempted to transfer to S & V Trust, and the Irene Vorhes’ share of stock remained in her estate at the time relevant to the issues before this Court.
FINDINGS OF FACT
Vern and Irene Vorhes were married and had four children: Bill Vorhes; Pete Vorhes; Jean Vorhes Westendorf; and Bernice Vorhes Gill. Vern, Irene, and Bernice have all passed away and the estates of Irene (through LSB) and Bernice (through Lynn Kingery) are involved in this case.
In 1979, Vern and Irene created Vorhes Ltd. (“the company”) as an Iowa corporation for their family farming operation. Vern and Irene owned 20,000 shares in the *771company. During the 1980s, the four Vorhes children each received 2,121 shares of stock in the company through a series of gifts from Vern and Irene. After these transactions, Vern owned 5,758 shares, Irene owned 5,758 shares, and each child owned 2,121 shares.
When Vern died, his will provided that his 5,758 shares be split between his four children, subject to a life estate in favor of Irene. Irene died on December 11, 2010 and her life estate in Vern’s 5,758 shares terminated. As a result, Vern’s 5,758 shares were divided equally between Bill, Jean, Bernice, and Pete, under the terms of Vern’s will. Thus, each of the four Vorhes children then owned 3,560.5 shares consisting of the 2,121 they received previously plus 1,439.5, their quarter share of Vern’s 5,758.
Irene’s will specifically devised the 5,758 shares she owned to be divided between Bill, Jean, and Bernice. Pete was not included because he had previously agreed with the company to surrender all of his shares back to the company — including his shares from Vern — in exchange for some company farmland. Pete now has no stock or interest in the company and is not a part of the company or this dispute.
In January 2011, Bernice and Jean were appointed co-executors of Irene’s estate. In April 2011, Bill became President of Vorhes Ltd. Jean became Vice President and Treasurer.
On September 7, 2011, Bernice brought a shareholder derivative action on behalf of the company in Iowa District Court for Floyd County. Bernice argued that Bill owed the company hundreds of thousands of dollars on a number of personal loans he took and for use of the company’s farmland that he did not pay for.
On March 11, 2013, while the shareholder derivative litigation was still pending, Bill created the S & V Trust. The S & V Trust “Declaration of Trust” itself has some threshold problems. For example, it references an oil and gas lease, as well as a $1 million loan from Jean. The S & V Trust, however, has no interest in oil or gas leases and Jean has not loaned money to S & V Trust. Bill set up the S & V Trust with the assistance of Marvin Pullman, a non-lawyer. Mr. Pullman has since been found to have been engaged in the unauthorized practice of law in Iowa and has been permanently enjoined from doing so anymore.
Bill made himself general manager of S & V Trust. He made Jean a Trustee of S & V Trust. Bill’s grandchildren, Blake Vorhes and Elias Vorhes, are the only specified beneficiaries of S & V Trust. The S & V Trust is not court-supervised.
Bill testified that he transferred 2,121 of his shares of Vorhes Ltd. to S & V Trust when he created it. Bill testified that the 2,121 shares are S & V Trust’s only asset. Bill does not claim he transferred 3560.6 of shares, which is the 2,121 shares plus the 1,439.5 shares from Vern Vorhes. Bill claims all Vern and Irene stock shares were cancelled by the company.
Bill did not give Vorhes Ltd. any written notice of his transfer of Vorhes Ltd. stock to S & V Trust. Bill also did not receive written consent from the other Vorhes Ltd. shareholders to make the transfer. Bill also claims that he also transferred a $700,000 or $800,000 debt that he owed to Jean to the S & V Trust. Bill testified that S & V Trust now owes Jean that money and he does not.
On March 20, 2013, there was a Vorhes Ltd. shareholder meeting. The minutes from that meeting show that Bill did not have actual possession of his shares that he allegedly transferred to S & V Trust. The minutes indicate Bill was going to contact Bernice to get the shares out of a *772lockbox, Bernice eventually got the certificates and gave them to Jean or Bill. Jean assisted Bill .with the attempted transfer to S & V. Jean testified that the certificates issued to S & V Trust were backdated to March 11, 2013 because Bill did not have actual possession of the certificates at the time he transferred them to S & V Trust. The original certificates for Bill’s shares, however, have no notation indicating that they are no longer valid.
After his purported March 2013 transfer to S <& V Trust, Bill continued to attend Vorhes Ltd. meetings as a shareholder and voted his shares. Bill and Jean claim Bill was attending under his authority as General Manager of S & V Trust, and voting the S & V Trust shares he had transferred. -No documentation supports that assertion. The only relevant documents are the minutes from those meetings. The minutes never mention S & V Trust or show that Bill attended Vorhes Ltd. meetings as General Manager for S & V Trust. The minutes reference Bill only as himself and show he votes his shares. Bill asserts now that there was no reason to talk about the stock being in S & V Trust because “everyone knew” how he had set things up.
Vorhes Ltd. held another shareholder meeting on June 8, 2013. Jean claims that at that meeting all three of the shareholders agreed to “cancel” — or “retire”1 — all the share they received from their parents — the 5,758 from Vern and the 5,758 from Irene. Jean claimed this avoided the hassle of issuing new shares, which was not necessary. She noted each shareholder already owned an equal number of shares (2,121), By cancelling shares, she argues the value of their shares simply increased equally because it reduced the total number of outstanding shares. Bill claims he, Jean, and Bernice all agreed to retire the shares at this meeting. The executor of Bernice’s estate, her daughter Lynn King-ery, does not agree that this occurred.
The minutes from the June 8, 2013 meeting show that Bill, Jean, and Bernice all attended. The minutes, however, say nothing about an agreement to cancel or retire shares of stock. Jean claims that the secretary taking notes did not write it down but they all agreed. Jean admitted that there is no written document showing Bernice agreed to cancel or retire the shares.
At some point, Jean wrote “retired nonvoting stock” across the front of Irene’s and Vern’s stock certificates. Jean was not secretary of the company when she wrote this. Adding to the confusion, the back of the shares say they were transferred to the company and that new shares were issued to the company. It is undisputed, however, that new shares were never issued to the company.
In July 2013, Vorhes Ltd. answered interrogatories in the derivative action Bernice brought against Bill and the company. Interrogatory 12 from Bernice asked for the names of all parties who owned stock in the company and Vorhes Ltd. answered that Bernice, Jean, and Bill were the stockholders. The answer does not mention S & V Trust. Bill testified that he told the company attorney at the time that S & V Trust owned the stock, not him. The answer to Interrogatory 1, however, states that Bill and Jean were the ones answering and giving assistance in answering the interrogatories. When confronted with this fact, Bill testified that he had never seen the document before.
*773The trial on Bernice’s shareholder derivative suit took place in April 2014. Jean testified at the trial. When questioned about who owned stock in the company, Jean agreed that Bill, Jean, and Bernice each owned one third. Jean did not mention S & V Trust, even though she now claims she was a Trustee of S & V at that time.
On February 7, 2015, Jean and Bernice were removed as co-executors of Irene’s estate. LSB was appointed executor of the estate. LSB remains executor of Irene Vorhes estate. Julie Versluis works for LSB and was assigned to manage the estate. She testified at trial of this matter currently before the Court. She testified that Irene’s 5,758 shares (allegedly can-celled) are still in the possession of LSB for Irene’s estate, along with a $300,000 note from the company and $1000 cash. Irene’s estate still had possession of Irene’s 5,758 shares because LSB had seen no documents showing that Bernice, who was a co-executor, agreed to transfer the shares out of the estate. Versluis further testified that LSB needed to retain Irene’s 5,758 shares to fulfill its duties as executor to pay the estate’s debts and costs of administration. She testified that she does not know how much the costs of administration ultimately will be because the administration is ongoing. Costs are based on the value of estate assets and the stock has not been valued.
On April 6, 2015, the Judge Foy issued a written ruling on Bernice’s shareholder derivative suit. He entered judgment against Bill for unpaid loans from Vorhes Ltd. and rent totaling $462,581.70, along with attorney’s fees. Judge Foy gave Bill the option of either paying the judgment by July 31, 2015, or returning Vorhes Ltd. shares equal to the value of the judgment to the company as payment. Judge Foy also prohibited Bill from voting any shares or serving as an officer of Vorhes Ltd.
Vorhes Ltd. held a shareholder- meeting on April 6, 2015. Bill appeared at that meeting and, contrary to Judge Foy’s order, voted shares. Bill did not appear as General Manager for S & V Trust nor did he purport to be voting S & V Trust’s shares. Ms. Versluis attended that meeting as executor for Irene’s estate. Bill and Jean were present, but Bernice was not. The minutes do not show that Bill or Jean objected to Ms. Versluis’ attendance at that meeting, indicating further that Irene’s shares had not be cancelled, but were instead under control of LSB.
On July 15, 2015, there was another purported Vorhes Ltd. shareholder meeting. Before the meeting, there was a dispute about when the shareholders should hold a meeting. Ms. Versluis sent an email before the meeting stating that Irene’s estate was the majority shareholder and objecting to. the meeting for a number of reasons. Lynn Kingery, representing the estate of Bernice, responded to that email agreeing that the meeting should not go forward.
Bill and Jean held a meeting anyway. Only Bill, Jean, and Karen Powers, company secretary, were at this meeting. The minutes of the July 15, 2015 meeting say “Shareholders present were Bill Vorhes and Jean Westendorf. Shareholders absent were Bernice Gill and Julie Versluis, LSB, executor for Irene Vorhes’ estate.” There is no mention of S & V Trust. There also is no indication that Irene’s shares had been cancelled or LSB should not attend for Irene’s estate.
The meeting minutes state that Bill attended that meeting as a shareholder and voted shares, again contrary to Judge Foy’s order. The minutes say nothing about Bill purporting to vote S & V Trust shares. Jean and Bill voted to make Bill *774president of the company at the meeting. Bill reported at that meeting only that he was considering selling some of his shares in the company to pay debt. Bill also signed a Notice of Termination of Farm Tenancy on behalf of Vorhes Ltd. In his own handwriting, he signed as himself and described himself as a shareholder of the company.
On October 1, 2015, Bernice brought contempt proceedings against Bill. She alleged that Bill had violated the terms of Judge Foy’s order. She alleged specifically that Bill continued to attenjpt to vote his shares and act as an officer of the corporation, even though he had not paid the judgment entered against him.
In October 2015, Bernice died and her daughter, Lynn Kingery, became executor of her estate. The Bernice Gill estate holds shares of the company but Ms. Kingery testified that, because of the present dispute, she could not say for certain how many shares are in the estate. Ms. King-ery became president of Vorhes Ltd. in January 2016 and has remained president since.
On January 8, 2016, Judge Foy held a hearing on Bernice’s application to find Bill in contempt for violating Judge Foy’s order. Bill testified at that hearing. He admitted that he had participated at company meetings and voted his shares. When asked about his participation and voting as a shareholder, he never stated that he was attempting to vote S & V Trust’s shares. In fact, while there were many more questions about his ownership of the company and his actions in voting shares, he never even mentioned S & V Trust, his alleged role as General Manager of S & V Trust, or that he transferred his shares to S & V Trust. This testimony is nearly an admission by Bill that he continued to own company shares in his name, contrary to his present claims before this Court.
On February 22, 2016, Judge Foy issued an order finding Bill in contempt of the Iowa District Court. Judge Foy found that Bill did not follow the previous order. Bill had not paid the judgment or returned his shares to the company. Bill also continued to vote his shares in the Vorhes Ltd. and act as an officer of the company. Judge Foy found Bill did all of these things in direct violation of Judge Foy’s previous order. As a result, Judge Foy found Bill in contempt of court and expressly stated that if he did not pay the judgment or return his shares to the company, he would be sentenced to 20 days in jail and fined $350.
When confronted with the facts from the State Court contempt proceeding in the trial before this Court, Bill simply said that he did not remember the state court contempt hearing. Bill appeared to admit, however, that March 2016 was the first time he alleged in any public forum that S & V Trust owned the shares since 2013, and not Bill himself.
Bill filed Chapter 7 bankruptcy on December 15, 2016. His schedules show that he does not own any company stock. The Chapter 7 Trustee filed an adversary seeking to avoid any alleged transfer Bill claims to have made of 2,121 shares to S & V Trust as a fraudulent transfer. S & V Trust filed a third-party complaint seeking a determination of the number of outstanding shares, the ownership of the shares, and whether Bill’s Chapter 7 bankruptcy estate owns any shares. This Court held a trial only on S & V Trust’s third-party complaint, not the Chapter 7 Trustee’s fraudulent transfer case.
After trial, the parties filed briefs. On May 17, 2017, immediately after briefs were submitted, S & V Trust filed a motion to strike portions of LSB’s brief. The Court held a hearing on that motion on *775May 25, 2017. S & V Trust argued that some attachments and statements within the LSB brief contained evidence not offered or admitted at the trial. S & V Trust argued that the Court should not consider the documents. LSB argued that it was not offering the documents it attached to its brief as evidence, but were simply providing context for the arguments. The Court took that question under advisement with the matters raised at trial. The Court now denies the motion to strike, but will not consider any of the brief as evidence. Even if the Court were to grant the motion to strike, it would not change the ruling in any way.
ARGUMENTS
The disputes here are: (1) whether Bill’s alleged transfer of his Vorhes Ltd. stock to S & V Trust on March 11, 2013 was effective; (2) whether there was agreement between all the Vorhes Ltd. shareholders to cancel or retire Verris and Irene’s shares on June 8, 2013; and (3) whether Irene’s estate properly had possession of 5,758 shares at the relevant times to this case.
S & V Trust argues that Bill did not own any Vorhes Ltd. shares when he filed bankruptcy. It argues that he transferred his 2,121 shares to S '& V Trust on March 11, 2013. It argues that Verris shares and Irene’s shares — which went to Bill, Jean, and Bernice by operation of law — were retired by agreement of the shareholders on June 8, 2013. It also argues that LSB could not still own or control Irene’s shares as they were cancelled because they were delivered to the shareholders by operation of Iowa law. On the basis of these arguments, S & V Trust concludes that Bill does not own any shares of Vorhes Ltd., that there are currently 6,363 shares of stock, and S & V Trust, Jean, and the Estate of Bernice Gill each own 2,121 shares.
Ms. Kingery, as executor of Bernice Gill’s estate entirely disagrees with S & V Trust. She argues that Bill’s attempted transfer of his 2,121 shares to S & V Trust was not effective because it did not follow corporate requirements. She argues Bill and Jean have continued to act as though no S & V transfer occurred. She also argues that there is no credible evidence that all shareholders agreed to cancel or Retire the stock from Vern and Irene at the June 8, 2013 meeting.
LSB agrees with Ms. Kingery that the Irene’s shares were never cancelled. LSB argues Irene’s shares were not transferred by operation of Iowa law. LSB argues it retained possession of this specific bequest for cause because it must still pay estate debts and the costs of administration.
LSB and Ms. Kingery agree that there are currently 16,439.5 shares outstanding. They argue that the current ownership of outstanding stock is as follows: Bill owns 3,560.5 shares; Jean owns 3,560.5 shares; the Estate of Bernice Gill owns 3,560.5 shares; and the Estate of Irene Vorhes has possession of 5,758 shares.
CONCLUSIONS OF LAW AND ANALYSIS
The Court will address the parties’ arguments in the following sections.
I. S & V Trust
S & V Trust argues that stock transfer it received from Debtor is valid under Paragraph 7 of the Stock Purchase and Redemption Agreement. That paragraph has been referred to as the “related shareholder” transfer. It provides that any shareholders can transfer to “a Trustee for the exclusive benefit of ... one or more of his children.” This paragraph further provides that it “shall override any by-law in *776conflict with any provisions of this Agreement.” S & V Trust argues that the intent of the section is to authorize transfers to “relatives” and that Bill’s transfer to S & V Trust for the benefit of his grandchildren is such a transfer. S & V Trust argues that Vern and Irene intended to create Vorhes Ltd. for the maintenance and ownership of the farm as a family operation and that S & V’s interpretation of Paragraph 7 furthers that intent.
The Bernice Gill Estate argues that Bill created S & V Trust for the benefit of his grandchildren, not children, and Paragraph 7 does not apply. The Bernice Gill Estate argues simply that because Bill’s transfer to S & V Trust was for the benefit of his grandchildren, it does not meet the express and clear terms of Paragraph 7 addressing a transfer to “for the exclusive benefit of .., one or more of his children.”
“It is well established that the law of the state of incorporation should determine issues relating to a corporation’s internal affairs,” In re Uno Broad. Corp., 167 B.R. 189, 196 (Bankr. D. Ariz. 1994). This is an Iowa corporation. Iowa law provides that “[t]he articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of. shares of the corporation.” Iowa Code § 490.627. Such restrictions are “valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate .... ” Id.
“In general, the articles of incorporation and bylaws create a contractual relationship between the parties.” Oberbillig v. W. Grand Towers Condo. Ass’n, 807 N.W.2d 143, 149 (Iowa 2011) (internal quotation marks omitted). Accordingly, Iowa courts “apply the general rules for contracts to construe a corporation’s governing documents.” Id, “Under the cardinal rule of contract construction, the parties’ intent controls.” Lange v. Lange, 520 N.W.2d 113, 119 (Iowa 1994). “Except where ambiguity exists, intent is determined by what the contract itself says.” Id. (emphasis added) “In interpreting a contract, we give effect to language of the entire contract in accordance with its commonly accepted and ordinary meaning.” Id
“An ambiguity exists only if the language of the exclusion is susceptible to two interpretations.” Bituminous Cas. Corp. v. Sand Livestock Sys., Inc., 728 N.W.2d 216, 222 (Iowa 2007) (internal quotation marks omitted). “[A] contract is not ambiguous merely because the parties disagree over its meaning.” Hartig Dru Co. v. Hartig, 602 N.W.2d 794, 797 (Iowa 1999). The Court “may not refer to extrinsic evidence in order to create ambiguity,” id., or “rewrite bylaws in the guise of interpretation.” Oberbillig, 807 N.W.2d at 151. “When a contract is not ambiguous, [courts] are obliged to enforce it as written.” Lange, 520 N.W.2d at 119.
Here, Vorhes Ltd, is incorporated in Iowa. The company’s by-laws specify that no transfer of stock will be valid until 90 days after the company receives written notice of the proposed sale and has an opportunity to purchase the shares during those 90 days. On the front of each certificate of company stock, it says: “This stock certificate is subject to a by-law restricting its transfer.” In addition, Paragraph 3 of the Stock Purchase and Redemption Agreement says no transfer is effective until after the shareholders give their written consent or the transferring shareholder offers to sell to the company or the other shareholders.
*777It is essentially undisputed that the alleged transfer from Bill to S & V Trust was not completed in accordance with these provisions. Bill and Jean admitted during trial that they did not follow these requirements for a valid transfer of company stock. The 90-day notice period for a March 11, 2013 transfer would have started December 12, 2012. Bill never gave notice nor was there a company meeting held around this time. No written notice was ever provided. No shareholder meeting minutes show any consent was ever sought or given. Bill’s attempted transfer simply did not comply with the company bylaws or with Paragraph 3 of the Stock Purchase and Redemption Agreement. S & V Trust instead argues that the transfer from Bill was valid as a “related shareholder” transfer under Paragraph 7. S & V Trust, with support from Bill and Jean, argued that the language in Paragraph 7 addressing “children” should also be read to include “grandchildren.” The Court rejects this argument. The “commonly accepted and ordinary meaning” of words controls. Lange, 520 N.W.2d at 119. Under that standard, this Court concludes “children” does not include “grandchildren.” In the context of interpreting a will, the Iowa Supreme Court has held that, the term “children” does not include “grandchildren” in Iowa, “unless from the context of the will such appears to be the plain intent of the testator.” In re Fintel’s Estate, 239 Iowa 475, 481, 31 N.W.2d 892, 895 (1948).
S & V Trust argues that the intent behind Paragraph 7 was to enable transfers to all related family members. The Court need not even address that argument because the provision is not ambiguous. Even if the Court did consider it, there is no evidence to support S & V Trust’s assertions about the intent of Paragraph 7. Bill’s testimony that “children” includes “grandchildren” is his understanding of that paragraph, nothing more. It does not show that Irene and Vern intended that reading at the time they prepared the documents. The Court finds Bill’s testimony on this issue unpersuasive.
Bill’s testimony simply does not create an ambiguity where the language is clear. The term “children” is clear, and it does not include grandchildren. The Iowa Supreme Court has essentially rejected the exact same argument that “children” includes “grandchildren.” Lange, 520 N.W.2d at 119. The Court must enforce the agreement as written.
Contracts and documents are interpreted based on “the words chosen.” Walsh v. Nelson, 622 N.W.2d 499, 503 (Iowa 2001). Irene and Vern could easily have chosen the words “children, grandchildren,' and other family members” if they wanted to express their broad inclusion of family as S & V Trust argues. They did not do so. Their actual choice of words is controlling. Bill’s attempted transfer of Vorhes Ltd. stock to S & V Trust did not meet the requirements of Paragraph 7 and was barred by other applicable provisions of company documents. Bill remained in possession of those 2,121 shares of Vorhes Ltd., and they have become part of his bankruptcy estate.
A strong preponderance of the evidence, in fact, shows that Bill did not even believe he had properly made the stock transfer to S & V. Bill’s own actions and statements in the years since purportedly attempting to transfer the stock to S & V Trust in March 2013 are perhaps the strongest evidence against him. Bill continued to vote his shares as if they were his. The Vorhes Ltd, meeting minutes repeatedly show that Bill owned and voted the shares. There was never a mention of S & V Trust at all — let alone that it was controlling or voting shares. The ruling on the shareholder derivative suit and the ruling finding *778Bill in contempt of court show that Bill owned and owns the shares, not S & V Trust. In his testimony before the state court, Bill never claimed that S & V Trust owned the shares despite having multiple opportunities and incentives to make such a statement. This Court does not find Bill’s later self-serving testimony on these issues persuasive.
Bill claims that “everyone knew” he had made the transfer and that he was voting as General Manager of S & V Trust so it was not necessary to document it in the meeting minutes. This assertion rings hollow in light of the strong evidence to the contrary. Similarly, his claim that he did not know anything about the interrogatory answer in the derivative action that lists him, not S & V Trust, as a shareholder is simply not credible and certainly is not persuasive. Even the transactions purporting to create the S & V Trust are highly questionable given the involvement of Marvin Pullman. All these facts brings Bill’s motivation in creating the S & V Trust and his attempted transfer of his shares to S & V Trust into serious question. In sum, all this evidence supports the Court’s finding that Bill did not properly transfer any of his shares of stock in Vorhes Ltd. to S & V Trust. Those shares are now part of his bankruptcy estate.
II. Cancellation or Retirement of Shares
S & V Trust also argues that Vern’s 5,758 shares and Irene’s 5,758 shares were cancelled or retired at the June 8, 2013 Vorhes Ltd. shareholder meeting. S & V Trust argues that all of the shareholders — Bill, Jean, and Bernice— agreed to cancel or retire the stock at this meeting. S & V Trust argues this cancellation effectively constituted a distribution of the value of the cancelled shares to Bill, Jean, and Bernice. It reasons that, because those three were the only shareholders, the value of the shares would increase equally as other shares were eliminated.
LSB points out that Irene’s shares could not have been cancelled because it had possession and control of them when Bill and Jean claim to have voted to cancel or retire them. Even if Bill, Jean, and Bernice already had possession of Vern’s shares, Irene’s estate remained the single largest shareholder and had no notice of— and could not consent to — the cancellation. Moreover, the Estate of Bernice disputes Bill and Jean’s assertion that Bernice agreed to such a cancellation. Thus, Bernice and LSB (on behalf of Irene) could have simply out-voted Bill and Jean on the question if it had been properly presented.
Ms. Kingery disagrees with S & V Trust’s argument for a similar, but slightly different, reason. She argues that the minutes from the June 8, 2013 Vorhes Ltd. meeting do not show any cancellation agreement or action. She also argues that, before cancellation or retirement can be affective, the shares at issue must first be transferred back to the company — which never occurred. She argues that such a transfer would require written documentation from the shareholders that they transferred the disputed shares. No such document exists. Ms. Kingery notes that, even if 100% of the shares were represented at this June 8, 2013 shareholder meeting, there is simply no persuasive evidence in the record that the shareholders actually voted to cancel or retire shares at the June 8, 2013 meeting.
S & V Trust argues, in response, that a written agreement to cancel shares is not required under the company’s corporate documents. S & V Trust argues that the words “retired non-voting stock” written across stock certificates shows that the shareholders agreed to cancel the stock on June 8, 2013. S & V Trust argues that the *779meeting minutes are not conclusive with respect to what actually occurred at the meeting.
S & V Trust’s assertions are contrary to Iowa law properly applied here. Selley v. Am. Lubricator Co., 119 Iowa 591, 93 N.W. 590 (1903) (Corporate meeting minutes presumptively show actions taken at the meeting “but this presumption is not conclusive, and it may be shown by evidence [illuminating] what the directors in fact did.”); Iowa Drug. Co. v. Souers, 139 Iowa 72, 117 N.W. 300 (1908) (“[I]t is well settled that parol evidence is admissible to show formal action of a board of directors to have been in fact taken, although no record thereof is found in the minutes of its meetings.”). Under this authority, the Court finds there was no shareholder agreement on cancellation or retirement of Irene and Vem’s shares at the June 8, 2013 meeting. Minutes from meetings presumptively control. The minutes from the June 8, 2013 meeting do not even mention cancelling or retiring shares, let alone a shareholder agreement to do so. On its face, this indicates no such cancellation or retirement occurred. Such a major action surely would be recorded in even the most cursory recording of the meeting’s events.
The only evidence in the record that the shareholders agreed to cancel the stock was the testimony of Bill and Jean. This included the explanation of Jean’s handwriting on the subject stock certificates. The Court does not find their testimony on this issue to be credible.
Instead, the Court finds the actions of Bill and Jean since the June 8, 2013 meeting more accurately show shares were not cancelled or retired at that meeting. Since the June 8, 2013 meeting, Bill and Jean have never objected to LSB claiming possession of Irene’s shares. On April 6, 2015, Ms. Versluis attended a Vorhes Ltd. meeting for LSB as executor for Irene’s estate. Neither Bill nor Jean objected. In an email exchange, Ms. Versluis stated that the Irene Vorhes Estate was the majority shareholder of the company. Jean never disputed this statement. On July 15, 2015, there was a disputed shareholder meeting that only Bill and Jean attended. However, the minutes from that meeting specifically describe “Julie Versluis, LSB, executor for Irene Vorhes’ estate” as an absent “shareholder.” If Bill and Jean really believed they properly cancelled the shares of Irene, surely they would have objected to representatives of Irene being present at meetings or statements about Irene’s estate holding the largest number of shares. They also surely would not have described LSB as executor for Irene’s estate and shareholder, if they had cancelled those shares.
Jean’s handwriting on the shares is far from conclusive evidence of what happened at the June 8, '2013. Her handwriting on the certificates does not show that (1) Bernice agreed to cancel the shares or (2) that any such agreement occurred on June 8, 2013. There is no document showing Bernice’s agreement to cancel shares. In light of the Court’s finding on the lack of credibility of the testimony of Bill and Jean, the fact that the meeting minutes do not mention cancelling shares, and Bill and Jean’s actions since that meeting, the Court finds Jean’s handwriting on the shares insufficient to show a valid cancellation or retirement of shares. In sum, the Court concludes that there was no agreement by Vorhes Ltd. to cancel or retire Vern’s or Irene’s shares at the June 8, 2013 meeting.
III. Current Possession of Irene’s 5,758 shares
S & V Trust attempts to get around the problem of Vorhes Ltd. not having possession of Irene’s stock by arguing that LSB *780failed to deliver specifically devised property (Irene’s shares) within nine months from the date of LSB’s appointment as executors. Iowa Code § 633.355. S & V argues LSB’s failure to comply with § 633.355 means that the shares were transferred automatically by operation of Iowa law. Thus, S & V Trust argues that LSB did not properly have title, possession, or control of any stock in Vorhes Ltd. in June 2013.
S & V Trust argues Irene’s will provided a “specific devise” of her stock. It argues. LSB did not receive a court order entitling it to continue possession of the shares beyond the presumed 90-day period, S & V Trust concludes that, without such court order, the shares were automatically delivered to Bill, Jean, and Bernice by operation of Iowa law. Thus, it concludes the shareholders at the June 8, 2013 meeting could have cancelled (and in fact did cancel) the stock of Irene.
S & V argues that Iowa Law in effect at the time of Irene’s death was clear and provided:
Unless the court, for cause shown, determines that the possession of the personal representative shall continue for a longer period, the personal representative shall deliver all specifically devised property to the devisees entitled thereto after the expiration of nine months from the date of appointment of the personal representative.
Iowa Code § 633.355, “[Iowa] courts have consistently held that the term shall in a statute [creates] a mandatory duty, not discretion.” Braunschweig v. Bd. of Supervisors, 707 N.W.2d 338, 2005 WL 2989763, at *3 (Iowa Ct. App. 2005) (internal quotation marks omitted) (alternation in original). S & V further points out that where an executor retained possession of farmland past the time Iowa Code § 633.355 required him to deliver it; judgment was properly entered against the executor for the estate’s damages for his continued possession past the deadline. In re Estate of Anderson, 781 N.W.2d 303, 2010 WL 796925, at *2. (Iowa Ct. App. 2010).
Ms. Kingery and LSB disagree with S & Vs reading of law given the facts here. They first argue that Irene’s shares were not distributed through cancellation at the June 8, 2013 meeting. Thus, they argue that no action, nor operation of Iowa law, could render them cancelled. They also rely on In re Estate of Franzkowiak v. Wunschel, 290 N.W.2d 1 (Iowa 1980) to support their position that Iowa Code § 633.355 does not automatically deliver property at the 90-day deadline. The section allows for a showing of “cause” to retain such property. Id. LSB asserts that “cause” exists because it needed to retain possession in order to pay estate debts and costs of administration.
This issue was largely or entirely mooted by the determination in the previous section that no cancellation of Irene’s stock ever occurred. To the extent it was not fully resolved by those determinations, the Court addresses it now. A court may find “cause” to extend the § 633.355 deadline even after an executor has already retained property past the deadline. In re Estate of Franzkowiak, 290 N.W.2d at 6. This Court finds “cause” here to justify LSB retaining possession of Irene’s 5,758 shares past the 90-day period. There was a continuing need to assess and pay the outstanding expenses of the Irene Vorhes estate, including attorney fees. The fact that the shares of Vorhes Ltd. were tied up in litigation complicated the matter further because the value of the shares was hard to establish. However, whether that cause existed into 2014, 2015, or beyond remains an open question. The Court concludes only that “cause” existed *781in June 2013 for LSB to retain possession and control of Irene’s stock in Vorhes Ltd.
S & V Trust appears to argue that the duty imposed by § 633.355 is actually an automatic transfer by operation of Iowa law and “cause” cannot be made out “after the fact.” Under S & V Trust’s argument, it would be impossible for an executor to violate that 90-day duty, because delivery by operation of Iowa law would automatically occur. As noted in In re Estate of Franzkowiak, 290 N.W.2d at 6, the Iowa Supreme Court found cause for an executor to retain property past the deadline, even though the deadline had already passed. If S & V is correct that § 633.355 operated automatically, then Franzkowiak could not have been decided as it was. The property would have already left the estate and been delivered by operation of Iowa law. In short, the Court finds S & V Trust’s argument unpersuasive and inconsistent with Iowa case law.
The Court repeats that it makes no finding on whether there is currently “cause” under § 633.355 for LSB to continue to retain the shares. The Court only finds that § 633.355 did not automatically cause Irene’s 5,758 shares to be delivered to the devisees by June 8, 2013. Thus, cancellation or retirement of her stock was not effective (even if attempted) because Vorhes Ltd. and its shareholders did not possess the stock.
CONCLUSION
The Court finds that there are currently 16.439.5 shares of company stock outstanding: Bill owns 3,560.5 shares; Jean owns 3.560.5 shares; the Estate of Bernice Gill has possession of 3,560.5 shares; and the Estate of Irene Vorhes has possession of 5,758 shares. When Bill filed bankruptcy, his 3,560.5 shares became a part of his bankruptcy estate.
WHEREFORE, judgment is entered on S & V Trust’s Third-Party Complaint in accordance with this ruling.
FURTHER, S & V Trust’s Motion to Strike is DENIED.
. The parties used both "cancel” and "retire” at the hearing, but, in this case, they mean the same thing: transferring the shares to the company, thereby reducing the number of outstanding shares and increasing the value of outstanding shares. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500639/ | MEMORANDUM OF DECISION FINDING THAT THE PRINCIPLE OF EQUITABLE RECOUPMENT ENTITLED THE STATE OF CALIFORNIA TO WITHHOLD CERTAIN POST-PETITION PAYMENTS OWED TO THE DEBTOR TO RECOVER PRE-PETITION DEBT
Ernest M. Robles, United States Bankruptcy Judge
At issue is whether the principle of equitable recoupment permits the State of California to withhold a percentage of Medi-Cal payments and supplemental hospital quality assurance payments owed to the Debtor, for the purpose of recovering unpaid hospital quality assurance fees that the Debtor was required to pay to the State under the Medi-Cal Hospital Reimbursement Improvement Act of 2013.1 Because the Debtor’s and the State’s respective obligations arise from the same transaction or occurrence, the Court finds that the State’s withholding was a permissible recoupment.
I. Facts
The Medicaid and Medi-Cal Programs
Under the Medicaid program, the cost of providing healthcare to low-income people is shared between the state and federal governments. States administer the Medicaid program through their own specific plans. In California, Medicaid benefits are administered through the California Medical Assistance Program, more commonly *791known as Medi-Cal. The California Department of Healthcare Services (the “DHCS”) administers Medi-Cal. Cal. Code Regs. tit. 22, § 50004(b) (West 2017).
California is generally entitled to be reimbursed by the federal government for 50% of Medi-Cal costs. 42 U.S.C.A. § 1396b(a) (West 2016). To help cover its share of Medi-Cal costs, California enacted the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the “Reimbursement Improvement Act” or “Act”), codified at Cal. Welf. & Inst. Code §§ 14169.50-14169.76 (West 2017). The Act requires most general acute care hospitals to pay a quarterly Hospital Quality Assurance Fee (an “HQA Fee”),2 which is assessed regardless of whether the hospital participates in the Medi-Cal program. Cal. Welf. & Inst. Code § 14169.52(a) (imposing the HQA Fee upon “each general acute care hospital that is not an exempt facility”). The HQA Fee allows California to obtain more healthcare funds from the federal government, which generally matches state Medi-Cal contributions dollar-for-dollar.
The HQA Fee is calculated using a complex formula based primarily upon a hospital’s “patient days,” a term best defined by example. “One Medi-Cal day” means that a hospital treated one patient under the Medi-Cal program for one day; “two Medi-Cal days” means either that a hospital treated two patients under the MediCal program for one day each, or treated one patient under the Medi-Cal program for two days. The formula for calculating the HQA Fee takes into consideration a hospital’s annual fee-for-service days,3 annual managed care days,4 and annual Medi-Cal days.5 Id. at § 14169.51(as). The exact formula varies -depending upon whether the hospital is owned by a nonprofit public benefit corporation. Id.
After the HQA Fees are collected and augmented by federal matching funds, they are redistributed to the hospitals by the DHCS through various types of quality assurance payments, including:
1) direct grants to public hospitals in support of health care expenditures, id. at § 14169.58(a)(1);
*7922) supplemental quality assurance payments to private hospitals, id. at § 14169.54-55;
3) increased capitation payments6 to hospitals providing treatment pursuant to Medi-Cal managed health care plans, id. at § 14169.56; and
4) payments for children’s health care, id. at § 14169.53(b)(1)(B).
The formulas under which the HQA Fees are assessed differ from the formulas under which the HQA Fees and associated federal matching funds are distributed. As a result, some hospitals receive more money on account of their HQA Fee payments than others. Therefore, in addition to allowing California to receive more federal matching funds, the Reimbursement Improvement Act performs a redistributive function.
The Reimbursement Improvement Act is only one component of a complex statutory scheme governing Medi-Cal’s funding and administration. In addition to receiving various types of payments under the Act, hospitals are also reimbursed for providing Medi-Cal services primarily through two systems: a fee-for-service system and a managed care system.7 In the fee-for-service system, hospitals enter into contracts with DHCS to provide services to Medi-Cal beneficiaries, and DHCS makes direct payments to the hospitals. See generally id. at § 14132 et seq. (delineating the types of Medi-Cal benefits provided through the fee-for-service system). In the managed care system, managed care plans enter into agreements with DHCS to provide healthcare services to Medi-Cal beneficiaries. See generally id. at 14087.3 et seq. (setting forth standards governing agreements between DHCS and managed care providers); Cal. Code Regs, tit. 22, § 51190.5 (defining a “managed care plan” under Medi-Cal). The fee-for-service and managed care systems allow hospitals to receive a baseline reimbursement on account of the Medi-Cal services they provide. The Reimbursement Improvement Act supplements that baseline reimbursement — at least for hospitals that are eligible to receive payments under the Act.
DHCS’ Withholding from Payments Owed to the Debtor
On November 20, 2014, the Debtor entered into a Medi-Cal Provider Agreement (the “Provider Agreement”) with DHCS. As “a condition for participation ... as a provider in the Medi-Cal program,” the Debtor agreed to comply with all applicable provisions of Cal. Welf. & Inst. Code §§ 14000-14499.77 — including the requirement to pay HQA Fees, which is imposed by Cal. Welf. & Inst. Code § 14169.52(a). Provider Agreement at p. 1 [Ex. 1, Doc. No. 835], The Debtor provided healthcare to Medi-Cal beneficiaries on a fee-for-service basis, and as a result was entitled to receive Medi-Cal fee-for-service payments (the “Medi-Cal Payments”). Medi-Cal Payments are computed in accordance with the Medi-Cal fee schedule, based on the types of services that the Debtor provided. See generally Cal. Welf. & Inst. Code §§ 14131 et seq. (setting forth the types of healthcare services covered by Medi-Cal and the reimbursement schedule for those services). The Debtor was also entitled to receive supplemental quality assurance payments (the “Supplemental HQA Payments”) on account of certain services provided to Medi-Cal beneficiaries. The Supplemental HQA Payments *793are computed according to formulas set forth in the Reimbursement Improvement Act.
On March 2, 2015, the Debtor stopped paying its quarterly HQA Fees. As of June 6, 2016, the date of the filing of the petition, the Debtor’s unpaid HQA Fees equaled $699,173.15. To recover the unpaid prepetition HQA Fees, DHCS began withholding, subsequent to the petition, 20% of the Medi-Cal Payments owed to the Debt- or, and an unspecified percentage of the Supplemental HQA payments owed to the Debtor.8
By July 18, 2016, DHCS had recovered the $699,173.10 in prepetition HQA Fee debt as a result of the withholding. However, DHCS continued the withholding because the Debtor failed to pay the HQA Fees that came due post-petition. Throughout the course of this ease, DHCS has withheld a total of $4,306,426.18 from Supplemental HQA Payments and MediCal Payments owed the Debtor, and has applied the withheld funds to unpaid HQA Fees. DHCS contends that, even after the withholding, the Debtor’s HQA Fee delinquency is $2,550,667.39.
The Debtor argues that DHCS’ withholding was a setoff, that DHCS has willfully violated the automatic stay by failing to obtain stay-relief before effectuating the setoff, and that DHCS could not have effectuated the setoff even if it had obtained stay-relief because the Bankruptcy Code does not permit post-petition obligations to be setoff against pre-petition debt. The Debtor seeks an order compelling the return of the approximately $4.3 million in funds that DHCS withheld. DHCS argues that it was authorized to withhold the funds absent stay-relief under the equitable doctrine of recoupment, on the grounds that the HQA Fees, Supplemental HQA Payments, and Medi-Cal Payments all arise from the same transaction. In response, the Debtor argues that its HQA Fee obligation does not arise from the same transaction as its reimbursement entitlement, because the Debtor’s HQA Fee liability exists regardless of whether it participates in the Medi-Cal program, and because the HQA Fee liability and reimbursement entitlements are calculated using different formulas.
II. Discussion
Under certain circumstances, § 5539 permits a creditor holding a claim against a debtor to setoff that claim against debt that the creditor owes to the debtor. As the leading treatise explains:
Setoff is a right of equitable origin designed to facilitate the adjustment of mutual obligations. Its central premise is an ancient one well-grounded in practical logic: If A is indebted to B, and B is likewise indebted to A, it makes sense simply to apply one debt in satisfaction of the other rather than require A and B to satisfy their mutual liabilities separately.
Alan N. Resnick & Henry J. Sommer, 5 Collier on Bankruptcy ¶ 553.01 (16th ed. 2017).
To exercise setoff rights, a creditor must first obtain relief from the automatic stay. See § 362(a)(7) (providing that the filing of the petition “operates as a stay, applicable to all entities, of the setoff of any debt owing to the debtor that arose before the commencement of the case un*794der this title against any claim against the debtor”).
Recoupment is similar to setoff, but differs in important respects:
[Recoupment is an equitable doctrine that ‘exempts a debt from the automatic stay when the debt is inextricably tied up in the post-petition claim.’ Unlike setoff, recoupment is not limited to pre-petition claims and thus may be employed to recover across the petition date. The limitation of recoupment that balances this advantage is that the claims or rights giving rise to recoupment must arise from the same transaction or occurrence that gave rise to the liability sought to be enforced by the bankruptcy estate.
Sims v. U.S. Dep’t of Health and Hum. Servs. (In re TLC Hosps., Inc.), 224 F.3d 1008, 1011 (9th Cir. 2000) (internal citation omitted).
For recoupment purposes, a transaction “may include ‘a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship,’” id. at 1012 (internal citation omitted), provided that the “logical relationship” test is not “applied so loosely that multiple occurrences in any one continuous commercial relationship would constitute one transaction ...Id. “Under the ‘logical relationship’ test, the word ‘transaction’ is given a liberal and flexible construction.” Aetna U.S. Healthcare, Inc. v. Madigan (In re Madigan), 270 B.R. 749, 755 (9th Cir. BAP 2001). In the recoupment context, courts use the same definition of “transaction or occurrence” as is used to determine whether a counterclaim is compulsory:
The common-law claim for recoupment is analogous to a “compulsory counterclaim interposed solely to defeat or diminish plaintiffs recovery.” The “logical relationship test” is applied under Fed.R.Civ.P. 13(a) to determine a compulsory counterclaim, i.e., whether the claim “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.”
A logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant.
In applying this standard,' “courts have permitted a variety of obligations to be recouped against each other, requiring only that the obligations be sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party.”
Id. at 755 (internal citations omitted).
In addition, “[although an express contract is not necessary for the application of recoupment, courts often find that the ‘same transaction’ requirement is satisfied when corresponding liabilities arise under a single contract.” Id. at 758.
Under the Doctrine of Recoupment, DHCS Was Entitled to Withhold Supplemental HQA Payments Owed to the Debtor for the Purpose of Recovering Unpaid HQA Fees
Applying these standards to the present case, the Court finds that the Debtor’s obligation to pay HQA Fees to DHCS is logically related to DHCS’ obligation to make Supplemental HQA Payments to the Debtor. The HQA Fees and Supplemental HQA Payments therefore arise from the same transaction or occurrence, meaning that DHCS was entitled to recoup the unpaid HQA Fees from the *795postpetition Supplemental HQA Payments that it owed to the Debtor.
A major purpose of the Reimbursement Improvement Act, which provides for the levy of HQA Fees, is to enable California to obtain additional federal matching funds for its Medi-Cal program. That purpose is explicitly articulated in the Act:
The Legislature continues to recognize the essential role that hospitals play in serving the state’s Medi-Cal beneficiaries. To that end, it has been, and remains, the intent of the Legislature to improve funding for hospitals and obtain all available federal funds to make supplemental Medi-Cal payments to hospitals ....
It is the intent of the Legislature to impose a quality assurance fee to be paid by hospitals, which would be used to increase federal financial participation in order to make supplemental Medi-Cal payments to hospitals, and to help pay for health care coverage for low-income children.
Cal. Welf. & Inst. Code § 14169.50(a)-(d).
The logical relationship is present because without the federal matching funds facilitated by the Act, DHCS would not have the revenue to make Supplemental HQA Payments to hospitals such as the Debtor.
The Debtor argues that there is no logical relationship between its HQA Fee liabilities and the Supplemental HQA Payments it is owed, because the Debtor’s fee liabilities and payment entitlements are calculated using different formulas. By assuming a definition of “transaction” that is far too narrow, the Debtor’s'argument disregards the fact that Ninth Circuit courts have given the term “transaction” a “liberal and flexible construction, ... requiring only that the obligations be sufficiently interconnected so that it would be unjust to insist that one party fulfill its obligation without requiring the same of the other party.” Madigan, 270 B.R. at 755. At bottom, the Reimbursement Improvement Act is a means for California to obtain more federal funds to be paid out to hospitals for treating Medi-Cal patients. It is certainly true that there is nothing simple or straightforward about the Act’s formulas governing the collection and distribution of funds10; in this respect, the Act bears a similarity to the federal Medicare and Medicaid statutes, described by one court as “among the most completely impenetrable texts within human experience.” Rehab. Ass’n of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994). But the Act’s complex formulas — an inevitable byproduct of its redistributive function — do not sever the fundamental logical connection between hospitals’ HQA Fee payments and the reimbursements those hospitals receive for providing MediCal services. Without the HQA Fee payments, DHCS would not collect sufficient federal matching funds to reimburse the hospitals. Nor is this logical relationship diminished by the fact that the Act proves a far better deal for some hospitals than others, depending upon the type of hospital or its patient mix.
The Debtor makes much of the fact that certain types of hospitals are eligible to receive various types of payments under *796the Act even though they are exempt from paying the corresponding HQA Fees. According to the Debtor, the fact that some hospitals are exempt means that there is no logical relationship between the Debt- or’s HQA Fee liability and its entitlement to receive Supplemental HQA Payments. The Debtor places undue emphasis upon the Act’s exemptions, which are necessary to accomplish. its redistributive function. The Legislature exempted certain hospitals — such as rural hospitals and long term care hospitals — from paying the HQA Fee as a way of redistributing healthcare funds to the exempt hospitals. Redistribution is a core component of almost all healthcare financing and delivery. Most insurance plans, for example, redistribute funds from younger, healthier patients to older, sicker ones. The redistributive component of the Act does not change the reality that if hospitals, such as the Debtor, that are required to pay the HQA Fees did not do so, funding for the various payments made to hospitals under the Act would dry up. Accordingly, the Debtor’s HQA Fee liabilities are logically related to its entitlement to receive Supplemental HQA Payments.
The Doctrine of Recoupment Also Entitled DHCS to Withhold Medi-Cal Payments from the Debtor for the Purpose of Recovering Unpaid HQA Fees
Although the relationship between the Debtor’s HQA Fee liability and its entitlement to receive Medi-Cal Payments is somewhat more attenuated than the relationship between the Debtor’s HQA Fee liability and its entitlement to receive Supplemental HQA Payments, the Court nonetheless holds that under the Ninth Circuit’s “liberal and flexible” construction of the logical relationship test, Madigan, 270 B.R. at 755, DHCS was entitled to recoup unpaid HQA Fees from the Medi-Cal Payments it owed the Debtor.
To become entitled to receive Medi-Cal Payments for providing treatment to Medi-Cal beneficiaries, the Debtor was required to enter into a Provider Agreement with DHCS. See Provider Agreement at p. 1 (“Execution of this Provider Agreement between an Applicant or Provider ... and the [DHCS] .... is.mandatory for participation or continued participation as a provider in the Medi-Cal program ....”). The Provider Agreement states that “[a]s a condition for participation ... in the Medi-Cal program, Provider agrees to comply with all of the following terms and conditions ....” Id. Those terms and conditions include an obligation to comply with applicable law:
Provider agrees to comply with all applicable provisions of Chapters 7 and 8 of the Welfare and Institutions Code (commencing with Sections 14000 and 14200), and any applicable rules or regulations promulgated by DHCS pursuant to these Chapters. Provider further agrees that if it violates any of the provisions of Chapters 7 and 8 of the Welfare and Institutions Code, or any other regulations promulgated by DHCS pursuant to these Chapters, it may be subject to all sanctions or other remedies available to DHCS.
Id. at ¶ 2.
Cal. Welf. & Inst. Code § 14169.52(h) ■provides that “[w]hen a hospital fails to pay all or part of the quality assurance fee on or before the date that payment is due, the [DHCS] may immediately begin to deduct the unpaid assessment and interest from any Medi-Cal payments owed to the hospital .,.By agreeing to comply with applicable provisions of the California Welfare and Institutions Code in the Provider Agreement, the Debtor agreed that if it failed to pay its HQA Fees, DHCS could recover those fees from the Medi-Cal Payments owed the Debtor. The Debtor’s eli*797gibility to participate in the Medi-Cal program was conditioned on its agreement to this term of the Provider Agreement. Consequently, the Provider Agreement creates a sufficient logical relationship between the Debtor’s HQA Pee liability and its Medi-Cal Payment entitlements to enable DHCS to avail itself of the doctrine of recoupment.
The Debtor argues that the terms in the Provider Agreement requiring compliance with applicable law cannot create the requisite logical relationship between its HQA Fee liabilities and Medi-Cal Payment entitlements. The Debtor’s theory is that an agreement to comply with applicable law is a gratuitous promise, since the Debtor has an obligation to comply with the law in any event. Such a gratuitous promise, the Debtor asserts, cannot establish the logical relationship sufficient to allow DHCS to assert recoupment rights.
The Debtor is correct that an agreement to comply with applicable law is a gratuitous promise which does not provide the consideration necessary to make a contract enforceable. See, e.g., Auerbach v. Great W. Bank, 74 Cal. App. 4th 1172, 1185, 88 Cal.Rptr.2d 718, 727 (Cal. Ct. App. 1999) (“In contractual parlance, for example, doing or promising to do something one is already legally bound to do cannot constitute the consideration needed to support a binding contract.”). However, the issue here is not the enforceability of the Provider Agreement; it is whether the Provider Agreement creates a logical relationship between the Debtors’ HQA Fee liability and its entitlement to Medi-Cal Payments. There is no dispute that if the Debtor had refused to agree to the terms of the Provider Agreement requiring it to comply with applicable law, it simply would not have been allowed to enroll as a Medi-Cal provider. Thus, had it not agreed to be subject to DHCS’ recoupment rights, the Debtor would never have been eligible to perform the services entitling it to the Medi-Cal Payments. This fact compels the conclusion that the Debtor’s -HQA Fee debt “is inextricably tied up” in the Debt- or’s claim for the Medi-Cal Payments, such that recoupment applies. TLC Hosps., Inc., 224 F.3d at 1011.
The Debtor next argues that its obligation to pay HQA Fees is based on its licensure as an acute care hospital, that it would be required to pay HQA Fees regardless of whether it participated in the Medi-Cal program, and that accordingly no logical relationship exists between the Debtor’s HQA Fee liability and its entitlement to Medi-Cal Payments. It is true that the Debtor would be subject to HQA Fees regardless of whether it acted as a Medi-Cal provider. Howevér, the Debtor’s argument neglects to account for the point made above — namely that the Debtor never could have become a Medi-Cal provider without agreeing that its Medi-Cal Payment entitlements were subject to recoupment. The Debtor’s agreement that unpaid HQA Fees could be recovered from its Medi-Cal Payment entitlements is more than sufficient to establish a logical relationship between the HQA Fees and MediCal Payments.
Madigan is not to the contrary. In Ma-digan, the court considered whether insurer Aetna was entitled to recoup from long-term disability payments owed the debtor an overpayment that Aetna had made to the debtor in connection with a previous disability claim. Madigan, 270 B.R. at 751-53, In determining that recoupment did not apply, the court emphasized that the disability insurance policy at issue provided for the separate administration of multiple disability claims if the claims were separated by more than six months of active work. Id. at 759, The court noted that claims that were separately adminis*798tered required a different reimbursement agreement for each claim, and therefore founfl that the “separate disability periods were memorialized in separate contractual agreements ... with a different set of rights and obligations per eligibility period.” Id. Based on this finding, the court concluded that claims associated with separate disability periods could not be viewed as arising from the same transaction. Id. at 759-61.
Here, the Debtor executed a single Provider Agreement which governed the obligations of the Debtor and DHCS over the entire period of the parties’ relationship. Unlike in Madigan, there was not a succession of different Provider Agreements varying the parties’ rights and obligations. Consequently, Madigan does not apply.
The Debtor relies upon In re Saint Catherine Hosp. of Indiana, LLC, 511 B.R. 117, 127 (S.D. Ind. 2014), rev’d on other grounds, Saint Catherine Hosp. of Indiana, LLC v. Indiana Family & Soc. Servs. Admin., 800 F.3d 312 (7th Cir. 2015) for the proposition that the HQA Fees and Medi-Cal Payments are not part of the same transaction for recoupment purposes. St. Catherine involved an Indiana statute requiring hospitals to pay a Hospital Assurance Fee (“HAF”), a fee similar to the HQA Fee at issue here. 511 B.R. at 120. To recover the HAF that the debtor-hospital had failed to pay, Indiana withheld funds from the Medicaid reimbursement payments that it owed the hospital. Id. at 120-21. The St. Catherine court rejected Indiana’s argument that the withholding was a permissible recoupment. Id. at 126-28. The court found that the “HAF is distinct from the ‘ongoing stream of services, advances, and reconciliations’ that exists between [Indiana] and [the hospital] as a Medicaid provider.” Id. at 127 (internal citation omitted). The court reasoned that the HAF was a tax debt of the hospital that was unrelated to the hospital’s contract with Indiana to provide Medicaid services. Id. In reaching this conclusion, the court emphasized that the hospital’s Medicaid contract could have, but did not, contain “a provision expressly entitling the state to set off any taxes the hospital owed it against any Medicaid payments that it owed the hospital ....” Id. The court further noted that the parties had not identified any Indiana statute permitting the state to withhold Medicaid payments to recover the HAF. Id. at n. 9.
In contrast to St. Catherine, here the Provider Agreement did contain a provision entitling DHCS to recoup unpaid HQA Fees from Medi-Cal Payments. Specifically, the Debtor agreed in the Provider Agreement that it would be subject to applicable provisions of the California Welfare and Institutions Code — including the provision set forth in Cal. Welf. & Inst. Code § 14169.52(h) allowing DHCS to recoup unpaid HQA Fees. Further, the St. Catherine court reljed on the absence in Indiana law of any provision entitling the state to recoup unpaid HAF fees from Medicaid payments. In view of these differences, St. Catherine is inapposite.
The Debtor argues that St. Catherine still applies notwithstanding the Provider Agreement’s provision entitling DHCS to recoup unpaid HQA Fees. According to the Debtor, the fact that the Provider Agreement incorporated DHCS’ recoupment rights by reference to the statute— as opposed to setting forth the recoupment provisions in full — means that DHCS cannot exercise its recoupment rights. The Debtor’s theory is that a provision incorporating the statute by reference is not the type of express provision giving rise to recoupment that the St. Catherine court had in mind.
Debtor cites no authority for the proposition that terms incorporated into an *799agreement by reference somehow have less force than terms specifically set out in the agreement. Invalidating terms incorporated by reference, as proposed by the Debtor, would be illogical and unworkable. The DHCS Medi-Cal provider agreements, being unable to rely upon the shorthand of incorporation by reference, would swell in length from ten pages to hundreds of pages.
The Debtor contends that DHCS waived its ability to recoup the unpaid HQA Fees by failing to assert its recoupment rights in its proof of claim. The Debtor’s argument ignores the distinction between setoff and recoupment. Assuming without deciding that a creditor must assert its setoff rights in a proof of claim in order to preserve those rights, it does not follow that recoupment rights are waived if not asserted in a proof of claim. Setoff differs from recoupment in that the exercise of setoff rights is subject to the supervision of the Bankruptcy Court — a secured creditor must obtain stay-relief before effecting a setoff, § 362(a)(7). By contrast, a creditor may exercise recoupment rights free of Bankruptcy Court supervision. Since recoupment is an equitable doctrine that does not depend upon anything in the Bankruptcy Code, it is not necessary for creditors to take affirmative action, such as filing a proof of claim, to preserve their recoupment rights.
Finally, pointing to cases holding that obligations imposed by the same contract are more likely to be considered to arise from the same transaction for recoupment purposes,11 the Debtor argues that the Provider Agreement is not a contract, but is instead a license to receive reimbursement payments under the Medi-Cal program.12 The Court finds that, regardless of whether the Provider Agreement is considered a license or contract, the Debtor’s HQA Fee liability and entitlement to Medi-Cal Payments would still arise from the same transaction or occurrence. As discussed previously, the Debtor’s acknowledgment in the Provider Agreement that unpaid HQA Fees could be withheld from its Medi-Cal Payments establishes the necessary logical relationship between the Debtor’s fee liabilities and its payment entitlements. That logical relationship exists whether the Provider Agreement is classified as a license or a contract.. The Debtor’s reliance upon cases outside the Ninth Circuit for the proposition that the doctrine of recoupment cannot apply where the claim and debt arise under statute rather than contract is misplaced.13 In TLC Hospitals, the Ninth Circuit held that the doctrine of recoupment was applicable in the Medicare context, even though Medicare reimbursements are dictated by statute, not by contract. TLC Hospitals, 224 F.3d at 1013.
*800III. Conclusion
The doctrine of equitable recoupment allowed DHCS to withhold a percentage of the Supplemental HQA Payments and Medi-Cal Payments it owed to the Debtor, for the purpose of recovering unpaid HQA Pees. Accordingly, the Debtor’s motion to compel DHCS to turnover the withheld funds is denied.
. 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.
. The following types of hospitals are exempt from the HQA Fee: (1) hospitals owned by a local health care district, (2) hospitals designated as a specialty hospital, (3) hospitals satisfying the Medicare criteria to be a long-term care hospital, and (4) small and rural hospitals, as defined by Cal. Health & Safety Code § 124840. Cal. Welf. & Inst. Code § 14169.51(1).
. “Fee-for-service days” means “inpatient hospital days as reported on the days data source where the service type is reported as ‘acute care,’ 'psychiatric care,’ or 'rehabilitation care,’ and the payer category is reported as ‘Medicare traditional,’ ‘county indigent programs-traditional,’ 'other third parties-traditional,' 'other indigent,’ or 'other payers,' for purposes of the Annual Financial Disclosure Report submitted by hospitals to the Office of Statewide Health Planning and Development.” Id. at § 14169.51(o).
. "Managed care days” means “inpatient hospital days as reported on the days data source where the service type is reported as 'acute care,’ ‘psychiatric care,’ or ‘rehabilitation care,’ and the payer category is reported as 'Medicare managed care,’ ‘county indigent programs-managed care,’ or 'other third parties-managed care,’ for purposes of the Annual Financial Disclosure Report submitted by hospitals to the Office of Statewide Health Planning and Development.” Id. at § 14169.5 l(z).
. "Medi-Cal days” means “inpatient hospital days as reported on the days data source where the service type is reported as ‘acute care,’ 'psychiatric care,' or 'rehabilitation care,' and the payer category is reported as ‘Medi-Cal traditional’ or 'Medi-Cal managed care,’ for purposes of the Annual Financial Disclosure Report submitted by hospitals to the Office of Statewide Health Planning and Development.” Id. at § 14169.5l(ac). I
. A capitation payment is a per-month, per-person reimbursement on account of treatment provided to patients enrolled in managed care plans.
. This is a simplified description of how Medi-Cal services are funded and administered; a comprehensive description is beyond the scope of this opinion.
, The record reflects only the total amounts withheld by DHCS, and does not specify the amounts withheld from Supplemental HQA Payments versus the amounts withheld from Medi-Cal Payments.
. Unless otherwise indicated, all statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
. The Act is so complicated that even DHCS, which is charged with its administration, does not know the exact amount of Supplemental HQA Payments that were made to the Debtor. See Declaration of John Beshara at ¶ 8 [Doc. No. 835] ("The [DHCS] collects the managed care plan quality assurance fees for the health plan but does not know the quality assurance payment amounts that were distributed by health plan to the Debtor. However, the model managed care quality assurance payment amounts were created by [the] Safety Finance Division, and amount to estimates of [the] amounts paid.”).
. See, e.g., Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984) (“In bankruptcy, the re-coupment doctrine has been applied primarily where the creditor’s claim against the debt- or and the debtor’s claim against the creditor arise out of the same contract.”).
. For a discussion of whether Medicare Provider Agreements (which are similar in many respects to the Medi-Cal Provider Agreement at issue here) are licenses or contracts, see Samuel R. Maizel and Jody A. Bedenbaugh, The Medicare Provider Agreement: Is It a Contract or Not? And Why Does Anyone Care?, 71 Bus. Law. 1207 (2016).
. See, e.g., Tavenner v. U.S. (In re Vance), 298 B.R. 262, 267 (Bankr. E.D. Va. 2003) (“In order for the doctrine [of recoupment] to apply, two threshold issues must be satisfied. First, the source of the defendant’s claim must be a contract, as opposed to a government entitlement program. Second, the claims must arise out of the same contract.”); Delta Air Lines v. Bibb (In re Delta Air Lines), 359 B.R. 454, 465 (Bankr. S.D.N.Y. 2006) ("The right of recoupment arises only in the context of a single contract or a series of transactions constituting a single, integrated transaction or contract.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500640/ | AMENDED MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT
Robert J. Faris, United States Bankruptcy Judge
This adversary proceeding presents the question whether the defendants can seek reformation of a deed in the face of the trustee’s rights as a bona fide purchaser of real estate.
I. Background
Most of the historical facts are undisputed, with one important exception.
The defendants in this adversary proceeding, Philip and Barbara Henshaw, are the parents of Michael Dylan Henshaw, one of the debtors. In 2007, Mr. and Mrs. Henshaw and the debtors acquired property in Kailua-Kona.1 The deed stated that they took title as joint tenants.2
In 2010, the debtors quitclaimed their interest in the property to Mr. and Mrs. Henshaw.3 In 2011, the debtors filed a chapter 7 petition.
The only disputed issue has to do with whether the 2007 deed accurately reflected the parties’ intentions concerning their ownership shares. The 2007 deed specified that the parties took title as joint tenants; as a matter of law, this meant that their ownership shares were equal.4 But Mr. and Mrs. Henshaw claim that they paid virtually all of the purchase price for the property and most of the debt service and that they intended that their share of ownership would be in proportion to their contributions.
In December 2011, the bankruptcy trustee commenced an adversary proceeding (Adv. No. 11-90105, the “first adversary proceeding”) seeking to avoid the 2010 quitclaim deed as a fraudulent transfer. I granted the trustee’s motion for summary judgment in the first adversary proceeding, holding that: (1) the 2007 deed unambiguously stated that the debtors held a joint tenancy interest in the property; (2) the parol evidence rule bars the admission of extrinsic evidence to vary or contradict the deed’s plain terms; (3) as joint tenants, the debtors necessarily owned a half interest in the property; and (4) any value the debtors received in exchange for the transfer was not reasonably equivalent to the value of a half interest in the property.5 The district court and the Ninth Cir*803cuit Court of Appeals affirmed my order on appeal.6
In the meantime, the trustee commenced this adversary proceeding to sell the debtors’ interest in the property together with Mr. and Mrs. Henshaw’s interest, pursuant to section 363(h) of the Bankruptcy Code. The Henshaws filed a counterclaim seeking reformation of the 2007 deed to reflect what they say was their true intention (i.e., that they and the debtors would own the property in proportion to their contributions, and not in equal shares).7
I dismissed the Henshaws’ counterclaim based on the doctrine of issue preclusion. I held that the judgment in the first adversary proceeding decided all issues which the counterclaim presented.8 The district court affirmed, but the court of appeals reversed and remanded, holding (in summary) that the issues presented in the trustee’s avoidance complaint were not identical to the issues presented in the Henshaws’ reformation counterclaim.9
The trustee has now filed a motion for summary judgment based on the grounds that (1) the counterclaim fails as a matter of law because a deed cannot be reformed against a trustee who takes the position of a bona fide purchaser for value, and (2) the counterclaim is an impermissible collateral attack on the prior avoidance order in the first adversary proceeding.10
II. Jurisdiction
The bankruptcy court has personal jurisdiction over the parties and subject matter jurisdiction. The trustee’s complaint alleges that a claim under section 363(h) is a core proceeding, and the Hen-shaws admitted this allegation.11 The Hen-shaws’ counterclaim alleges that the bankruptcy court has jurisdiction but does not expressly state (despite the requirement of Fed. R. Bankr. P. 7008) whether the Hen-shaws consent to the entry of final judgment by the bankruptcy court. Because the Henshaws have litigated their counterclaim for over four years (including two levels of appeals) and have never expressly objected to the entry of a final judgment by the bankruptcy court, they have impliedly consented. The counterclaim for reformation is a core proceeding pursuant to 28 U.S.C. § 167(b)(2)(A) and (O).
III. Summary Judgment Standard
Summary judgment is proper when “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.”12 In resolving a summary judgment motion, the court views the evidence in the light most favorable to the nonmov-ing party and draws all reasonable inferences in favor of the nonmoving party.13 The court does not weigh evidence, but rather determines only whether there is a *804genuine issue for trial.14 Where the evidence could not lead a rational trier of fact ' to find for the nonmoving party, no genuine issue exists for trial.15
IV. Discussion
A. Trustee’s Status as a Bona Fide Purchaser For Value
The trustee argues that his rights as a deemed bona fide purchaser of the property precludé reformation of the 2007 deed. The Bankruptcy Code gives the trustee the status and rights of a bona fide purchaser of the estate’s real property as of the petition date.16 While federal law confers upon the trustee the status and rights of a bona fide purchaser, state law creates and defines those rights.17
Reformation is appropriate when a written instrument does not, through a mutual mistake of fact, conform to the intention of the parties to the instrument.18 Although neither party has cited any Hawaii authority on point, I predict that the Hawaii Supreme Court would follow the common law rule that a contract may not be reformed if doing so would unfairly affect the rights of a bona fide purchaser for value.19 This is consistent with the general rule in Hawaii that a good faith purchaser of real property for value takes the property free of any claims of which the buyer has neither actual nor constructive notice.20
Therefore, the trustee holds the property free of reformation claims unless a hypothetical bona fide purchaser would have taken subject to those claims.
A purchaser of real estate is charged with notice of any document in the real estate recording system and any fact which such document would lead a reasonably prudent person to inquire about and discover.21
A hypothetical buyer, who looked at the real estate records on the date of the debtors’ bankruptcy petition, would have found the 2007 deed and the 2010 quitclaim deed. Neither of these documents would have specifically alerted the buyer that the 2007 deed did not accurately reflect the Henshaws’ alleged intentions. The 2010 quitclaim deed would not have alerted the hypothetical buyer that the 2007 deed was wrong; the buyer could reasonably assume that the parties wished to change their ownership shares, rather than to correct them. The quitclaim deed would not have prompted a reasonably prudent buyer to inquire further into the debtors’ ownership interest in the property.
That the conveyance occurred via quitclaim deed rather than by warranty deed would not raise inherent suspicion' in a hypothetical buyer, A quitclaim deed indicates that the grantee acquired whatever interest the grantor may have had in the *805property,22 but neither warrants nor professes that the title is valid.23 The fact that the seller of real estate does not wish to give warranties of title does not necessarily mean that the title is defective.
Further, when a deed contains a mistake, the common practice in Hawaii is to record a correction deed. Such a deed makes it clear that the original deed contained an error.24 In this case, the Hen-shaws and the debtors did not execute a correction deed.25
A purchaser also “takes his title subject to the claims of parties in possession when he buys.”26 On the petition date, when the rights of the hypothetical bona fide purchaser are measured, the debtors, and not the Henshaws, were living in the property. But this would not have alerted the hypothetical buyer that the 2007 deed contained an error. If anything, it might have suggested that the debtors had a greater interest- in the property than they actually had at that time (after they gave up their entire interest under the quitclaim deed). In fact, it probably would not have raised any question in the minds of a hypothetical buyer; it would not be the least bit surprising to find the debtors residing in a home owned by the debtor-husband’s parents.
Because a hypothetical buyer would not have had sufficient notice of any mistake in the 2007 deed, the counterclaim is not viable, in light of § 544(a) of the Bankruptcy Code. The trustee’s bona fide purchaser status cuts off the Henshaws’ reformation claim. Therefore, the trustee is entitled to a summary judgment on this ground.
B. The Counterclaim is Not an Impermissible Collateral Attack
The trustee’s second ground in moving for summary judgment is that the Henshaws’ counterclaim is an impermissible collateral attack on the court’s prior judgment avoiding the 2010 quitclaim deed. The Henshaws point out that the court of appeals has decided that collateral estoppel does not bar their counterclaim. But the trustee correctly highlights that, under Hawaii law, the doctrines of collateral estoppel and collateral attack aré distinct.27 In other words, the doctrine of collateral attack can bar litigation of issues that the doctrine of collateral estoppel per*806mits.28
The application of the doctrine of collateral attack is a question of law.29 The doctrine has four elements:
The party asserting that an action constitutes an impermissible collateral attack on a judgment must establish that: (1) a party in the present action seeks to avoid, defeat, evade, or deny the force and effect of the prior final judgment, order, or decree in some manner other than a direct post-judgment motion, writ, or appeal; (2) the present action has an independent purpose and contemplates some other relief or result than the prior adjudication; (3) there was a final judgment on the merits in the prior adjudication; and (4) the party against whom the collateral attack doctrine is raised was a party or is in privity with a party in the prior action. Collateral attacks may be allowed under limited circumstances, such as when there is an allegation that the prior court lacked subject matter jurisdiction or that fraud was committed in the prior proceeding.30
The first requirement is not met. The trustee’s complaint sought avoidance of the 2010 quitclaim deed; in other words, the trustee sought to restore the status quo that existed before the quitclaim deed became effective. The Henshaws’ counterclaim asks the court to reform the 2007 deed; in other words, the Henshaws want the court to determine what was the status quo before the 2010 quitclaim deed. It is true that, if the Henshaws are successful, the trustee’s victory on his complaint will be less complete than he hoped, but the collateral attack doctrine is not meant to prevent that kind of disappointment.
In all of the Hawaii cases applying the doctrine of collateral attack, the claim in the subsequent case would have nullified the judgment in the first case. For example, in First Hawaiian Bank v. Weeks,31 the counterclaimants in a quiet title action argued that a probate court order entered over a century earljer had incorrectly interpreted a will. The Supreme Court held that this was an impermissible collateral attack because the counterclaimants sought to “nullify as evidence of title ... the probate court’s order of distribution » 32
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In Smallwood, the plaintiff filed an action related to the removal of a retaining wall as part of a large real estate development project.33 The trial court dismissed that action. The same plaintiff then filed a second action challenging another aspect of the same project (plans for the discharge of stormwater and runoff). The trial court dismissed that action under the doctrine of collateral attack. The Intermediate Court of Appeals (“ICA”) reversed because the two suits challenged two different elements of a real estate project; a judgment in the second suit determining that one element was unlawful would not overturn the judgment in the first case that another element was lawful.
In Gamino v. Greenwell, a party attempted to challenge a sale by filing a civil court case even though he had stipulated *807to an order of the family court providing for the sale.34 This unavoidable inconsistency between his stipulation in the family court case and his argument in the civil court case invoked the collateral attack doctrine.
Lastly, in Atcherly, in a suit to enforce a decree requiring a conveyance of land by a certain guardian of three minors, the defendant claimed that she, and not the guardian, held title to land.35 The defendant contended that the minors were not named parties in the decree and did not receive proper service of it so the decree could not be enforced. The Supreme Court held that the guardian sufficiently represented his minors’ interests and that mere errors or irregularities cannot be taken advantage of to establish a collateral attack, so the defendant’s attack on the title of the land did not nullify the original decree.
The Henshaws’ counterclaim, if sustained, would not “nullify” the judgment avoiding the 2010 quitclaim deed. It would only determine the extent of the debtor’s interest in the property before the quitclaim deed was signed. Because the first requirement is not met, the Henshaws’ reformation counterclaim is not an impermissible collateral attack. Therefore, the trustee is not entitled to summary judgment on this contention.
The trustee argues that the 2010 quitclaim deed should not affect a hypothetical buyer’s notice of the mistake because this court has already decided that the deed represented a fraudulent transfer. He argues that it would be anomalous and unjust to hold that a transferee of a fraudulent transfer gets any benefit from the very document that effected the fraudulent transfer. But the 2010 quitclaim deed was a matter of record when the debtors commenced their bankruptcy case. The subsequent avoidance of that deed does not negate the notice it imparted before it was avoided.
V. Conclusion
The trustee is entitled to summary judgment in his favor, providing that the Hen-shaws shall take nothing on the counterclaim. The trustee’s counsel shall submit a proposed separate judgment.
. Dane Field v. Philip and Barbara Henshaw (In re Henshaw), Case No. 11-00853, Adv. No. 12-90070, Dkt. 102 at 16-48 (Bankr. D. Hawaii 2011).
. Id.
. Id.
. In re Henshaw, 485 B.R. 412, 417 (D. Hawaii 2013), affirmed, 670 Fed.Appx. 563 (9th Cir. 2016).
. Dane Field v. Philip and Barbara Henshaw (In re Henshaw), Case No. 11-00853, Adv. No. 11-90105, Dkt. 26 (Bankr. D. Hawaii 2011).
. Id. at dkt. 48, 51.
. Field v. Henshaw, et al., Adv. No. 12-90070, Dkt. 9.
. Field v. Henshaw, et al. (In re Henshaw), No. 11-00853, 2013 WL 1005117 (Bankr. D. Haw. Mar. 13, 2013), aff'd, Adv. No. 12-90070, 2014 WL 185782 (D. Haw. Jan. 13, 2014), rev'd, 670 Fed.Appx. 594 (9th Cir. 2016).
. Id.
. Field v. Henshaw, et al., Adv. No. 12-90070, Dkt. 9.
. See Field v. Henshaw, et al., Adv. No. 12-90070, Dkt. 1 at 2-3; Dkt, 9 at 1.
. Fed. R. Civ. P. 56(c), made applicable by Fed. R. Bankr. P. 7056.
. Young v. United Parcel Serv., Inc., - U.S. -, 135 S.Ct. 1338, 1347, 191 L.Ed.2d 279 (2015); Scott v. Harris, 550 U.S. 372, 378, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 243, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
. 11 U.S.C. § 544(a)(3).
. 5 Collier on Bankruptcy ¶ 544.06[2], p. 544-24 (16th ed, 2017).
. State v. Kahua Ranch, Ltd., 47 Haw. 28, 33, 384 P.2d 581 (1963).
. See Restatement (Second) of Contracts § 155; 66 Am. Jur. 2d Reformation of Instruments § 68.
. Kau Agribusiness Co. v. Heirs of Ahulau, 105 Hawai’i 182, 193, 95 P.3d 613 (2004).
. SGM P’ship v. Nelson, 5 Haw.App. 526, 529, 705 P.2d 49 (Haw. App. 1985).
. Kondaur Cap. Corp. v. Matsuyoshi, 136 Hawai'i 227, 241, 361 P.3d 454 (2015).
. QUITCLAIM DEED, Black's Law Dictionary (10th ed. 2014).
. See Marjorie C. Y. Au, et al., Hawaii Conveyance Manual 2-8, 4a-49 (Hawaii State Bar Association, 5th ed. 2010).
.. The trustee argues that the 2010 quitclaim deed should not give notice of the mistake because this court has already decided that the deed represented a fraudulent transfer. He argues that it would be anomalous and unjust to hold that a transferee of a fraudulent transfer gets any benefit from the very document that effected the fraudulent transfer. I need not reach this argument because I hold that the 2010 quitclaim deed did not confer such notice. Nevertheless, I do not accept the trustee’s argument. The 2010 quitclaim was a matter of record when the debtors commenced their bankruptcy case; a hypothetical bona fide purchaser of the property on that date would have seen it. The subsequent avoidance of that deed does not negate any notice it imparted before it was avoided.
. Achi v. Kauwa, 5 Haw. 298, 299 (1885); see also Yee Hop v. Young Sale Cho, 25 Haw. 494, 505-06 (1920).
. Smallwood v. City and Cty. of Honolulu, 118 Hawai'i 139, 150, 185 P.3d 887 (Haw. App. 2008); see also In re Thomas H. Gentry Revocable Trust, 138 Hawai’i 158, 169, 378 P.3d 874 (2016) (where the Hawaii Supreme Court cited and quoted Smallwood with approval).
. Estate of Kam, 110 Hawai'i 8, 22, 129 P.3d 511 (2006)(citing Kapiolani Estate v. Atcherly, 14 Haw. 651, 661 (1903) (stating that a collateral attack on a judicial proceeding is an attempt to avoid, defeat, or evade it, or to deny its force and effect in some manner not provided by law).
. Smallwood, 118 Hawai'i at 146.
. Id. at 150.
. 70 Haw. 392, 772 P.2d 1187 (1989).
. Id. at 399, 772 P.2d 1187.
. 118 Hawai’i 139, 185 P.3d 887 (Haw. App. 2008).
. 2 Haw.App. 59, 625 P.2d 1055 (1981).
. 14 Haw. 651 (1903). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500641/ | MEMORANDUM DECISION
WILLIAM T. THURMAN, U.S. Bankruptcy Judge
Before the Court is the Motion for Summary Judgment (the “Motion”) filed May 16, 2017, by Defendant, Kyle Bringhurst (“Bringhurst” or “Defendant”) in the above-styled adversary proceeding.1 This Motion arises in connection with the complaint of Plaintiff, Utah Behavior Services, Inc., a Utah Corporation (“UTBS” or “Plaintiff’), objecting to the dischargeability of certain debts of Bringhurst pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6)2 and requesting injunctive relief.3 Through the Motion, Bringhurst seeks summary judgment in his favor on all five claims brought by UTBS.
On June 29, 2017, the Court held a hearing on the Motion (the “Hearing”). At the Hearing, Blake T. Ostler appeared on *818behalf of UTBS, Geoffrey L. Chesnut appeared on behalf of Bringhurst, and any other appearances were noted on the record.
After considering the relevant filings in this adversary proceeding including the Motion, the notice of hearing filed in connection with the Motion,4 the opposition to the Motion filed by UTBS (the “Objection”),5 and Bringhurst’s reply to the Objection;6 after considering the oral arguments of counsel; and after conducting an independent review of applicable law, the Court is prepared to rule.7
I. JURISDICTION
The Court’s jurisdiction over this adversary proceeding is properly invoked pursuant to 28 U.S.C. § 1334 and § 157(b)(1) except as hereinafter discussed. The matter herein, excluding counts 4 and 5, are determined to be core proceedings within the definition of 28 U.S.C. § 157(b)(2)(I), and the Court may enter a final order. Venue is appropriate under 28 U.S.C. § 1409.
II. FACTUAL BACKGROUND
For the purpose of ruling on the Motion, the Court finds that the following facts are not in genuine dispute:
On November 4, 2013, Bringhurst began his employment at UTBS as a part-time consultative and quality assurance employee.8 As a part-time employee, Bringhurst was only provided with HIPAA protected information in his responsibilities and only had access to what a supervisor would have access to.9 During this period, Brin-ghurst also worked for Wasatch Mental Health as a Program Manager receiving approximately $94,400.00 in total compensation.10
Bringhurst and his family lived in Spanish Fork, Utah, and spent upwards of $15,000.00 investing in their home.11 During the weekend of March 21, 2014, Brin-ghurst and his family were in St. George, Utah for a child’s athletic competition.12 Natalie Whatcott and Sarah Sanders, both Co-CEO’s for UTBS, had a scheduled meeting with Southwest Behavioral Health Center (“Southwest”) on Monday March 24, 2014, in St. George.13 Whatcott and Sanders discovered Bringhurst was in *819town, requested information from Brin-ghurst, and asked him to participate in the meeting with Southwest.14 A contract with Southwest was successfully negotiated.15 Thereafter, Whatcott and Sanders began serious negotiations with Bringhurst regarding his employment with UTBS.16
Bringhurst informed Whatcott and Sanders that he was interested in relocating to St. George with his family.17 After several negotiations, the parties agreed that Bringhurst would move to St. George with the help of UTBS.18
Bringhurst was tasked with expanding UTBS services in St. George, Washington, Utah and the surrounding areas.19 What-cott, Sanders, and Bringhurst discussed a profit share and other benefits for the growth of UTBS in St. George.20 Brin-ghurst would not have a legal ownership of UTBS.21
To assist with his move to St. George, Bringhurst requested a signing bonus to cover the cost of his tuition assistance received from his previous job at Wasatch Mental Health.22 UTBS paid Bringhurst $20,000.00 to cover certain moving and living expenses and also provided Bringhurst with an American Express card to cover certain expenses.23 The parties dispute whether Bringhurst had authorization to use this American Express card for personal expenses.
Bringhurst signed a compensation agreement with UTBS and began travel-ling to St. George weekly to open the new UTBS location, open new client accounts, and employ new staff.24 Bringhurst also moved his family to St. George.25 In his new position with UTBS, Bringhurst had managerial and officer level authority but was not authorized to obligate UTBS with respect to bank loans and contracts.26 The parties dispute whether Bringhurst assumed certain authorities formerly exclusively delegated to Whatcott and Sanders.
On June 15, 2014, Bringhurst signed a confidential nondisclosure agreement and a nonsolicitation agreement with UTBS.27 This agreement was similar to ones given to other employees of UTBS.28 Bringhurst was eventually given the title of chief clinical officer.29
*820Bringhurst became concerned with certain financial billings of UTBS and contacted the State of Utah and UTBS’s insurance company,30 Shortly thereafter, Bringhurst terminated his employment with UTBS on February 25, 2015, and his last day was February 27, 2015.31 Brin-ghurst immediately began employment at Summit Behavior Services with Wendell Anderson, also a former employee of UTBS.32 Summit Behavior Services is a competitor of UTBS.33
UTBS filed a state action against Brin-ghurst and Anderson and received an injunction on July 7, 2015.34 The state court issued a memorandum decision and made certain findings. Specifically, that “Brin-ghurst was in a unique position of trust and responsibility .... Both Bringhurst and Anderson breached their duties of loyalty and their fiduciary duty to [UTBS].”35 The state court also found that Bringhurst removed confidential information from UTBS to start a competing business which “violated both an express term of [his] employment contract, and [his] inherent fiduciary obligations.”36 Bringhurst was ordered to give certain documents back to UTBS and to refrain from competing or soliciting clients from UTBS in violation of his employment contract.37
Bringhurst and his spouse filed for relief under Chapter 7 on September 16, 2016.38 UTBS filed this adversary case on October II, 2016. UTBS asserts that it has suffered damages in the amount of $55,374.08 ($29,-029.08 used on the America Express Card + $20,000,00 for Bringhurst’s moving expenses + $6,345.00 in tuition reimbursement) plus additional damages.
III. DISCUSSION
A. Summary Judgment Standards
In Becker v. Bateman, the United States Court of Appeals of the Tenth Circuit stated:
Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “An issue is ‘genuine’ if there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way.” Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998). “An issue of fact is ‘material’ if under the substantive law it is essential to the proper disposition of the claim.” Id. Put differently, “[t]he question ... is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law,” Shero v. City of Grove, 510 F.3d 1196, 1200 (10th Cir. 2007) (quotation omitted). “On summary judgment the inferences to be drawn from the underlying facts must be viewed in the light *821most favorable to the party opposing the motion.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quotation omitted).39
With these guiding principles in mind, the Court turns to the Motion.
B. Legal Standard Under Section § 523(a)(4)
Debts arising from “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” áre excepted from the general discharge under 523(a)(4).40
1. Fraud or defalcation while acting in a fiduciary capacity
To prevail under § 523(a)(4), a creditor must establish three elements: (1) the debt resulted from a fiduciary’s fraud or defalcation under an express or technical trust involving the entrusting of money or other property to a fiduciary for the benefit of another; (2) the debtor acted in a fiduciary capacity with respect to the trust; and (3) the transaction in question was a “defalcation” within the meaning of bankruptcy law.41
The Tenth Circuit has taken a very narrow view of the concept of fiduciary duty under § 523(a)(4).42 The court must find that the money or property on which the debt at issue was based was entrusted to the debtor.43 An express or technical trust must be present for a fiduciary relationship to exist under § 523(a)(4).44 As stated by Judge Nugent in In re Bratt,
As a matter of bankruptcy law, § 523(a)(4) contemplates a trust relationship that is narrower than the general duty of one in a fiduciary relationship. It may be an express trust, defined in a written or oral agreement that created the relationship and identified the property held in trust (the res), the trustee, and the trustee’s duties with respect to the res. Or, it may be a technical trust that is imposed by statute. The statute must define the res, spell out the fiduciary duties of the party to whom the trust property is entrusted, and the trust must have arisen on the res before the debtor took the action that created the debt. The trust relationship must be imposed by the law rather than implied from it. Unless the trust is an express or technical one, other relationships from which general fiduciary duties might be implied by state law principles will not support a defalcation claim under § 523(a)(4). For example, a general attorney-client relationship has been found insufficient to establish the fiduciary relationship required .under § 523(a)(4). Neither is a partnership relationship unless there is an express agreement or a state law *822creating a trust relationship.45
The creditor has the burden of persuasion, which must be met by a preponderance of the evidence.46 Before addressing all elements required under § 523(a)(4), the Court will first turn to the threshold issue of whether Bringhurst was a “fiduciary’ for § 523(a)(4) purposes.
The Court finds that there is no genuine issue of fact as to whether there was an “express or technical trust” established between Bringhurst and UTBS. The state court found that Bringhurst was a fiduciary of UTBS for injunctive relief purposes based on his employment contract; but as Bringhurst argues, the standard for such determination under § 523(a)(4) is different.47 An “express or technical trust” cannot be implied or assumed based on Bringhurst’s actions while employed at UTBS. The parties did not have an express agreement creating a trust relationship and state law does not impose a trust relationship between the parties. Accordingly, summary judgment is appropriate on cause of actions one, two and three as to claims asserted by UTBS under § 523(a)(4) for fraud or defalcation while a fiduciary and those claims should be dismissed.
2. Embezzlement
Embezzlement under § 523(a)(4) is “the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.”48 “The-elements required to prove embezzlement are: (1) entrustment, (2) of property (3) of another (4) that is misappropriated (used or consumed for a purpose other than for which it was entrusted), (5) with fraudulent intent.”49 The fraudulent intent required for embezzlement is the “intention to steal.”50 Embezzlement also “requires fraud in fact, involving moral turpitude or intentional wrong, rather than implied or constructive fraud.”51
The Court finds that there is a genuine issue of material fact as to whether Bringhurst used the American Express card for a purpose other than for which it was entrusted. Bringhurst argues he was authorized to use the American Express card for personal use. This assertion by Bringhurst is based on handwritten negotiations and his understanding. UTBS argues the American Express card was only authorized for company expenses. UTBS states that Bringhurst’s handwritten notes did not give him authority to use the company American Express card for his personal expenses.
*823Bringhurst’s intent is unclear, although there seems to be very little indication of fraud as Bringhurst never took any steps to hide the fact from UTBS that he was using the company American Express card and sent reimbursement receipts to UTBS for the nine months he used the card. There is an issue of fact as to whether Bringhurst knew that the American Express card statements would be audited after his departure so that he could avoid responsibility for the alleged misuse of the American Express card. Accordingly, the Court denies summary judgment on cause of action two for embezzlement under § 523(a)(4).
3. Larceny
The Tenth Circuit adheres to the common-law definition of larceny.52 Larceny under § 523(a)(4) is the “felonious stealing, taking and carrying, leading, riding, or driving away another’s personal property, with intent to convert it or to deprive the owner thereof.”53 The difference between larceny and embezzlement is that, “with embezzlement, the debtor initially acquires the property lawfully whereas, with larceny, the property is unlawfully obtained.”54
The Court finds that summary judgment is appropriate under the claim of larceny as there is' no genuine issue of material fact supporting the required finding that Bringhurst acquired property of UTBS, the American Express card, by unlawful means. The parties do not dispute the fact that UTBS lawfully gave Brin-ghurst the American Express card. Accordingly, the Court grants summary judgment on cause of action two for larceny under § 523(a)(4) and those claim should be dismissed.
C. Legal Standard Under Section § 523(a)(6)
Debts arising from “willful and malicious injury by the debtor to another entity or to the property of another entity” are excepted from the general discharge.55 Nondischargeability under this subsection requires that the debtor’s actions be both willful and malicious.56 The “willful” element requires both an intentional act and an intended harm; an intentional act that leads to an unintended harm is not sufficient.57 - For a debtor’s actions to be malicious, they have to be intentional, wrongful, • and done without justification or excuse.58 The Tenth Circuit applies a subjective standard in determining whether a defendant desired to cause injury or believed the injury was substantially certain to occur.59 Evidence of the *824debtor’s state of mind may be inferred from the surrounding circumstances,60
The Court finds that summary judgment is not appropriate at to cause of action one as there is a genuine issue of material fact regarding whether Brin-ghurst’s conduct was intended to harm UTBS. There is a genuine issue of material fact as to whether Bringhurst knew or was substantially certain his actions would cause harm to UTBS. UTBS alleges that it suffered harm and damages by Brin-ghurst’s actions in leaving the company, starting his own company and reporting certain billing issues to the State of Utah and insurance companies which resulted in a month long investigation. It is unclear whether Bringhurst was willful and malicious in his actions. Accordingly, the Court denies summary judgment on cause of action one under § 523(a)(6).
D. Injunctive Relief
UTBS has requested permanent injunctive relief against Bringhurst in this Court to prevent Bringhurst from using UTBS’s confidential and trade secret information. Bringhurst states that UTBS’s claims are moot because the state court granted injunctive relief which expired after a period of time which the parties agreed has expired. The Court concludes that summary judgment is not appropriate under claims four and five as UTBS’s is seeking different relief in this Court than it sought in state court and therefore the claims cannot be rendered moot.
This ruling is -without prejudice to the Plaintiff seeking appropriate relief in the state court. Further, the Court determines that the jurisdictional link to this adversary case is tenuous for seeking injunctive relief. It is clearly not a core proceeding and at best, a related to claim. However, since the state court has already ruled on injunctive relief, it is more appropriate for the state court to determine what type of further injunctive relief is proper. As jurisdiction is a threshold issue which the Court can raise on its own, the Court does and determines it lacks jurisdiction on Counts four and five.
Accordingly, this Court determines it lacks jurisdiction over Counts four and five, which is consistent with a granting of the Defendant’s request for summary judgment.
IV. CONCLUSION
The Court concludes summary judgment is appropriate on cause of actions one, two and three as to claims asserted by UTBS under § 523(a)(4) and under the claim of larceny. Summary judgment is also appropriate on counts four and five for lack of jurisdiction. Summary judgment is not appropriate under cause of action one under § 523(a)(6) and cause of action two for embezzlement under § 523(a)(4).
The Court directs counsel for Defendant to submit a proposed form of order consistent with this Memorandum Decision for the Court’s consideration to sign.
. Adversary Case No. 16-02151, Docket No. 22. All future references to the Docket will be to Adversary Case No. 16-02151, unless otherwise specified.
. All subsequent statutory references are to title 11 of the United States Code unless otherwise indicated.
. Docket No. 1, Complaint. The Court notes that heading of the Complaint requests relief pursuant to § 523(a)(2) but the Complaint fails to list a claim for relief under § 523(a)(2) and the Motion does not request summary judgment on a claim under § 523(a)(2). Plaintiff argues, in the opposition to the Motion, that failure to plead a cause of action under § 523(a)(2)(A) was a scriveners error. Plaintiff has filed a Motion for Leave to file Amended Complaint [Docket No. 28] and that matter is set for hearing before this Court on July 20, 2017.
. Docket No. 23, Notice and Opportunity for Hearing on Motion for Summary Judgment.
. Docket No. 31, Memorandum in Opposition to Motion for Summary Judgment.
. Docket No. 37, Reply Memorandum. Plaintiff also filed a Motion to Strike [Docket No. 32]. The Court does not need to undertake a detailed analysis of the Plaintiff’s motions to strike because even if the Court granted them and did not consider the Statements of Undisputed Facts in question, the Court's decision herein would remain unchanged.
. The following discussion shall constitute findings of fact and conclusions of law under Fed.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a) for the limited purpose of ruling on the Motion. Any of the findings of fact herein are deemed, to the extent appropriate, to be conclusions of law, and any conclusions of law are similarly deemed, to the extent appropriate, to be findings of fact, and they shall be equally binding as both.
. Defendant's Statement of Undisputed Material Facts, ¶ 47.
. Defendant’s Statement of Undisputed Material Facts, ¶ 48, 49.
. Defendant’s Statement of Undisputed Material Facts, ¶ 50.
. Defendant’s Statement of Undisputed Material Facts, ¶ 51.
. Defendant’s Statement of Undisputed Material Facts, ¶ 52.
. Defendant’s Statement of Undisputed Material Facts, ¶ 53.
. Defendant’s Statement of Undisputed Material Facts, ¶ 54.
. Defendant’s Statement of Undisputed Material Facts, ¶ 55.
. Defendant’s Statement of Undisputed Material Facts, ¶ 56.
. Defendant’s Statement of Undisputed Material Facts, ¶ 57.
. Defendant’s Statement of Undisputed Material Facts, ¶ 48.
. Defendant's Statement of Undisputed Material Facts, ¶ 59.
. Defendant’s Statement of Undisputed Material Facts, ¶ 60.
. Defendant's Statement of Undisputed Material Facts, ¶ 60.
. Defendant’s Statement of Undisputed Material Facts, ¶ 61
. Defendant’s Statement of Undisputed Material Facts, ¶ 63
. Defendant's Statement of Undisputed Material Facts, ¶ 64.
. Defendant’s Statement of Undisputed Material Facts, ¶ 64.
. Defendant’s Statement of Undisputed Material Facts, ¶ 65.
. Defendant’s Statement of Undisputed Material Facts, ¶ 69, 71.
. Defendant’s Statement of Undisputed Material Facts, ¶ 69, 70.
. Defendant’s Statement of Undisputed Material Facts, ¶ 72.
. Defendant's Statement of Undisputed Material Facts, ¶ 74, 75.
. Defendant’s Statement of Undisputed Material Facts, ¶ 81.
. Defendant’s Statement of Undisputed Material Facts, ¶ 82.
. Defendant’s Statement of Undisputed Material Facts, ¶ 82.
. Defendant's Statement of Undisputed Material Facts, ¶ 95.
. Defendant’s Statement of Undisputed Material Facts, ¶ 97.
. Defendant’s Statement of Undisputed Material Facts, ¶ 97,
. Defendant’s Statement of Undisputed Material Facts, ¶ 97.
. Case No. 16-02151, Docket No. 1.
. Becker v. Bateman, 709 F.3d 1019, 1022 (10th Cir. 2013). See also Bird v. West Valley City, 832 F.3d 1188, 1199 (10th Cir. 2016) (summary judgment standard); Obermeyer Hydro Accessories, Inc. v. CSI Calendering, Inc., 852 F.3d 1008, 1014 (10th Cir. 2017) (same).
. 11 U.S.C. § 523(a)(4).
. Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir, 1996).
. Id.
. Id. See also Van De Water v. Van De Water (In re Van De Water), 180 B.R. 283, 289-90 (Bankr. D. N.M. 1995) (denying a discharge under § 523(a)(4) for breach of fiduciary obligations wherein "the debtor had been entrusted with property of another and then abused that trust.”),
. In re Young, 91 F.3d at 1371 (citing Romero v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir. 1976)).
. In re Bratt, 489 B.R. 414, 425-26 (Bankr. D. Kan. 2013).
. Grogan v. Garner, 498 U.S. 279, 290-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
. McDowell v. Stein, 415 B.R. 584, 595 (S.D. Fla. 2009) ("[w]hile the fact that a relationship is fiduciary under state law does not necessarily mean that it is a fiduciary relationship within the meaning of § 523(a)(4), if state law imposes the duties of a trustee on a party, then the party is a fiduciary for purposes of § 523(a)(4).”) (citing Quaif v. Johnson, 4 F.3d 950, 953 (11th Cir. 1993); In re Regan, 477 F.3d 1209, 1211 (10th Cir. 2007)).
. Hernandez v. Musgrave (In re Musgrave), No. AP. 09-01006, 2011 WL 312883, at *5 (10th Cir. BAP Feb. 2, 2011) (citing Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir. 1988)).
. Id. (citing Tulsa Spine Hosp., LLC v. Tucker (In re Tucker), 346 B.R. 844, 852 (Bankr.E.D. Okla. 2006)).
. Chenaille v. Palilla (In re Palilla), 493 B.R. 248, 252 (Bankr. D. Colo. 2013).
. Hill v. Putvin (In re Putvin), 332 B.R. 619, 627 (10th Cir. BAP 2005) (citation omitted).
. Hand v. United States, 227 F.2d 794, 795 (10th Cir. 1955).
. United States v. Smith, 156 F.3d 1046, 1056 (10th Cir. 1998) (citation omitted).
. Wonjoong Kim v. Hyungkeun Sun, 535 B.R. 358, 367 (10th Cir. BAP 2015) (citation omitted).
. 11 U.S.C. § 523(a)(6).
. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004) (stating that there must be both a "willful act” and "malicious injury” to establish nondischargeability under Section 523(a)(6)); Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 655 (10th Cir. BAP 1999) (stating, “[i]n the Tenth Circuit, the phrase ‘willful and malicious injury’ has been interpreted as requiring proof of two distinct elements — that the injury was both ‘willful’ and ‘malicious.’ ”).
. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).
. Fletcher v. Deerman (In re Deerman), 482 B.R. 344, 369 (Bankr. D. N.M. 2012).
. Via Christi Regional Medical Ctr. v. Englehart (In re Englehart), 229 F.3d 1163 (10th Cir. 2000) ("[T]he ‘willful and malicious injury’ exception to dischargeability in *824§ 523(a)(6) turns on the state of mind of the debtor, who must have wished to cause injury or at least believed it was substantially certain to occur,”),
. Nat'l Labor Relations Board v. Gordon (In re Gordon), 303 B.R. 645, 656 n. 2 (Bankr. D. Colo. 2003) (it is "absolutely permissible to infer ... actual intent to cause injury from ,.. evidentiary facts”) (citations omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500642/ | ORDER ON PLAINTIFF RMS TITANIC, INC.’S AMENDED MOTION FOR ENTRY OF CLERK’S DEFAULT AND AMENDED MOTION FOR DEFAULT JUDGMENT AGAINST DEFENDANT FRENCH REPUBLIC, a/k/a REPUBLIC OF FRANCE
PAUL M. GLENN, United States Bankruptcy Judge
THIS CASE came before the Court for hearing to consider the Plaintiff RMS Titanic, Ine.’s Amended Motion for Entry of Clerk’s Default and Amended Motion for Default Judgment against Defendant French Republic, a/k/a Republic of France. (Docs. 45, 46).
The Debtor, RMS Titanic, Inc., asserts that it holds unconditional title to approximately 2,100 artifacts that were recovered from the Titanic salvage site in 1987 (the French Artifacts). In this proceeding, the Debtor seeks a determination under § 105 and § 363 of the Bankruptcy Code that the French Republic and its agencies have “no interest in the French Artifacts.”
Under 28 U.S.C. § 1330 and the Foreign Sovereign Immunities Act, a foreign state is presumptively immune from the jurisdiction of a Court of the United States, unless a specified exception to sovereign immunity applies to the case. In order to exercise jurisdiction over a foreign state under 28 U.S.C. § 1330, a Bankruptcy Court must determine that the foreign state was properly served with process, and that a statutory exception to jurisdictional immunity applies to the foreign state.
*829In this case, the French Republic was properly served with process by delivery of a copy of the Summons and Complaint to France’s Ministry of Justice.
Additionally, the French Republic is excepted from jurisdictional immunity in this action, because of the statutory waiver or abrogation of immunity provided by § 106(a) of the Bankruptcy Code for actions against a foreign state that are brought under § 105 and § 363 of the Bankruptcy Code. Accordingly, the Court may exercise jurisdiction over the French Republic in this action under 28 U.S.C. § 1330.
Pursuant to 28 U.S.C. § 1608(e), however, the Court may not enter a default judgment against a foreign state unless the plaintiff establishes its right to relief “by evidence satisfactory to the court.” In this case, an evidentiary hearing should be scheduled on the Debtor’s Amended Motion for Default Judgment, because the current record does not contain satisfactory evidence that the French Republic has no interest in the French Artifacts.
I. Background
On June 14, 2016, the Debtor and seven affiliates filed petitions under Chapter 11 of the Bankruptcy Code. According to their Case Management Summary, the Debtors own approximately 5,500 artifacts recovered from the Titanic shipwreck, and present the artifacts to the public at their exhibitions and other venues. (Main Case, Doc. 8).
On June 20, 2016, the Debtors filed a Motion in the main bankruptcy case for an “Order Pursuant to Bankruptcy Code Sections 105 and 363 and Bankruptcy Rules 6003, 6004, and 9014 Authorizing the Debtors to Market and Sell Certain Titanic Artifacts Free and Clear of Liens, Claims, and Interests.” (Main Case, Doc. 28).
According to the Motion, the Debtors’ total Titanic collection consists of (1) the French Artifacts or French Collection, which includes approximately 2,100 artifacts that were recovered during a joint expedition with the French Government’s oceanographic institute in 1987, and (2) the American Artifacts or American Collection, which includes more than 3,000 additional artifacts that were recovered during expeditions in 1993, 1994, 1996, 1998, 2000, and 2004.
In the Motion to Market and Sell Certain Artifacts in the main case, the Debtors asserted that they sought “only to sell a narrow subset of artifacts from the French Collection to pay the creditors in full, return all equity positions to the Debtors’ shareholders, and possibly fund some or all of the Titanic reserve account.” (Main Case, Doc. 28, ¶ 25).
On July 22, 2016, the Court entered an Order denying the Debtors’ Motion, without prejudice to the Debtors’ right to file the request to market and sell the French Artifacts as an adversary proceeding pursuant to Rule 7001 of the Federal Rules of Bankruptcy Procedure. (Main Case, Doc. 102).
On August 17, 2016, the Debtor filed a Complaint against the French Republic. (Doc. 1). In the Complaint, the Debtor alleges that its predecessor in interest (Titanic Ventures Limited Partnership) conducted an expedition to the Titanic salvage site in 1987, with the assistance of France’s oceanographic institute, and recovered approximately 2,100 artifacts from the wreck (the French Artifacts). (Complaint, ¶ 11). The Debtor further alleges:
15. On October 20,1993, an Administrator in the French Office of Maritime Affairs (Ministry of Equipment, Transportation and Tourism) pursuant to the proces verbal awarded the Company ti-*830tie to the French Artifacts (the “Prqces Verbal”).
(Complaint, ¶ 15). The Debtor further alleges that the administrator’s award noted the “assurances” of the Debtor’s predecessor that the artifacts would not be sold or disbursed, except for the purposes of an exhibition. (Complaint, ¶ 19).
Finally, the Debtor alleges that (1) the Proces-Verbal is a legally enforceable decision that transferred legal title to the French Artifacts to the Debtor, (2) that the transfer of title was unconditional, and
(3)that the unconditional title is not encumbered by any liens or other interests. (Complaint, ¶¶ 25-28).
Accordingly, the Debtor seeks a declaration pursuant to § 105 and § 363 of the Bankruptcy Code, and Rule 7001(2) and Rule 7001(9) of the Federal Rules of Bankruptcy Procedure, that “France and all French government agencies have no interest in the French Artifacts.” (Complaint, ¶ 30).
II. Jurisdiction under the FSIA
The existence of subject matter jurisdiction in an action against a foreign state is governed by the Foreign Sovereign Immunities Act (FSIA), which provides the sole basis for jurisdiction over a foreign state in federal court. Continental Casualty Company v. Argentine Republic, 893 F.Supp.2d 747, 750 (E.D. Va. 2012). The FSIA “provides the sole basis for obtaining jurisdiction over a foreign state in the courts of this country.” SACE S.p.A. v. Republic of Paraguay, 243 F.Supp.3d 21, 31, 2017 WL 1066564, at *6 (D.D.C.).
The FSIA is codified at 28 U.S.C. §§ 1602 through 1611, and the jurisdictional provision related to the FSIA is found at 28 U.S.C. § 1330. Vermeulen v. Renault, U.S.A., Inc., 985 F.2d 1534, 1543 (11th Cir. 1993). Section 1330 is “the jurisdictional statute corresponding to the FSIA.” Coleman v. Alcolac, Inc., 888 F.Supp. 1388, 1399-1400 (S.D. Tex. 1995). Section 1330 provides:
§ 1330. Actions against foreign states
(a) The district courts shall have original jurisdiction without regard to amount in controversy of any nonjury civil action against a foreign state as defined in section 1603(a) of this title as to any claim for relief in personam with respect to which the foreign state is not entitled to immunity either under sections 1605-1607 of this title or under any applicable international agreement.
(b) Personal jurisdiction over a foreign state shall exist as to every claim for relief over which the district courts have jurisdiction under subsection (a) where service has been made under section 1608 of this title. '
28 U.S.C. § 1330(a),(b)(Emphasis supplied). Generally, a “foreign state” under § 1330 and the FSIA is an entity that has the attributes of statehood, meaning a defined territory and population, self-governance and foreign relations, and the capacity to wage war and enter international agreements. Kirschenbaum v. 650 Fifth Avenue and Related Properties, 830 F.3d 107, 123 (2d Cir. 2016).
In determining whether to exercise jurisdiction over a foreign state under § 1330(a) and (b), federal courts must conduct a two-part inquiry as to: “(1) whether service of the foreign state was accomplished properly, and (2) whether one of the statutory exceptions to sovereign immunity applies.” Jouanny v. Embassy of France in the United States, 220 F.Supp.3d 34, 38 (D.D.C. 2016)(quoting Abur v. Republic of Sudan, 437 F.Supp.2d 166, 171-72 (D.D.C. 2006)). The “interlocking provisions” of § 1330 “compress subject-matter jurisdiction and personal juris*831diction into a single, two-pronged inquiry: (1) whether service on the foreign state was accomplished properly, and (2) whether one of the statutory exceptions to sovereign immunity applies.” Abur v. Republic of Sudan, 2006 WL 1892066, at *3 (D.D.C. 2006)(quoted in Howe v. Embassy of Italy, 68 F.Supp.3d 26, 31 (D.D.C. 2014)).
Under § 1330, therefore, a Court may “consider the merits of a claim against a foreign state only if proper service is effectuated and one of the FSIA’s enumerated exceptions to sovereign immunity applies to that claim.” Abur v. Republic of Sudan, 2006 WL 1892066, at *3.
A. Service of process
Rule 4(j)(l) of the Federal Rules of Civil Procedure, as made applicable in bankruptcy proceedings by Rule 7004(a)(1) of the Federal Rules of Bankruptcy Procedure, provides that a foreign state must be served in accordance with 28 U.S.C. § 1608. F.R.Civ.P. 4(j)(l).
Section 1608 is part of the FSIA, and provides in part:
§ 1608. Service; time to answer; default
(a) Service in the courts of the United States and of the States shall be made upon a foreign state or political subdivision of a foreign state:
(1) by delivery of a copy of the summons and complaint in accordance with any special arrangement for service between the plaintiff and the foreign state or political subdivision; or
(2) if no special arrangement exists, by delivery of a copy of the summons and complaint in accordance with an applicable international convention on service of judicial documents;
28 U.S.C. § 1608(a)(1),(2)(Emphasis supplied).
With respect to the French Republic, the applicable “international convention is the Hague Convention on the Service Abroad of Judicial and Extrar-Judicial Documents in Civil or Commercial Matters (‘Hague Convention’), to which the United States and France are signatories. The Hague Convention requires signatory states ‘to designate a Central Authority’ to receive service.” Jouanny v. Embassy of France, 220 F.Supp.3d at 39.
The Central Authority designated by the French Republic to receive service js its Ministry of Justice. Id. See https://www. hcch.net/en/states/authorities/details3/? aid=256.
In this case, the Debtor delivered a copy of the Summons and Complaint to the French Republic’s Ministry of Justice. On December 16, 2016, the French Ministry of Justice issued a Certifícate attesting that the “undersigned authority has the honour to certify, in conformity with Article 6 of the Convention,' that the document has been served in accordance with the provisions of sub-paragraph a) of the first paragraph of Article 5 of the Convention.” The stamp of the Ministry of Justice appears on the Certificate. (Doc. 45, Exhibit A).
See also the correspondence from the Justice Attache of the Embassy of France dated January 19, 2017, in which the Justice Attache states that “I write to inform the Court that proper service has been done by RMS Titanic, Inc. via the Ministry of Justice of France on November 23, 2016.” (Doc. 34, p. 2).
The French Republic was properly served with process under 28 U.S.C. § 1608(a)(2) by delivery of a copy of the Summons and Complaint to the French Ministry of Justice in accordance with the Hague Convention.
*832B. An Exception to Sovereign Immunity
After determining that service was properly accomplished, the second step of the two-pronged inquiry regarding jurisdiction over a foreign state under § 1330 involves “whether one of the statutory exceptions to sovereign immunity applies.” Jouanny v. Embassy of France, 220 F.Supp.3d at 38.
1. Sovereign Immunity generally
As indicated above, § 1330 and the FSIA provide the sole basis for obtaining jurisdiction over a foreign state in federal court. Continental Casualty Company v. Argentine Republic, 893 F.Supp.2d at 750. “The starting point in the analysis is the general rule under the FSIA that foreign states and their instrumentalities are immune from the jurisdiction of United States courts.” Coleman v. Alcolac, Inc., 888 F.Supp. 1388, 1400 (S.D. Tex. 1995). Section 1604 of title 28 provides:
§ 1604. Immunity of a foreign state from jurisdiction
Subject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.
28 U.S.C. § 1604(Emphasis supplied). Under the FSIA, foreign states are presumptively immune from suit in the United States unless one of the statute’s exceptions applies to the action. Freund v. Republic of France, 592 F.Supp.2d 540, 552 (S.D.N.Y. 2008). See also SACE S.p.A. v. Republic of Paraguay, 243 F.Supp.3d at 31, 2017 1066564, at *7 (“In short, a foreign state is ‘presumptively immune from the jurisdiction of United States courts unless a specific exception applies.’ ”)(citations omitted).
2. An exception to sovereign immunity where the immunity is waived
Under § 1604, therefore, foreign states are generally immune from suit in United States courts. But § 1605 of the FSIA “outlines certain exceptions to foreign sovereign immunity.” Cortez Byrd v. Corporacion Forestal y Industrial de Olancho, S.A., 974 F.Supp.2d 264, 268 (S.D.N.Y. 2013). Section 1605(a) provides in part:
§ 1605. General exceptions to the jurisdictional immunity of a foreign state
(a) A foreign state shall not be immune from the jurisdiction of courts of the United States in any case—
(1) in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver;
28 U.S.C. § 1605(a)(l)(Emphasis supplied).
Under certain conditions, a foreign state’s sovereign immunity may be waived or abrogated by statute. Goldberg-Botvin v. Islamic Republic of Iran, 938 F.Supp.2d 1, 7 (D.D.C. 2013). In fact, it is a well-established principle of statutory construction that Congress may abrogate a sovereign’s immunity by enacting a statute that clearly establishes the abrogation. State of Florida v. Seminole Tribe of Florida, 181 F.3d 1237, 1242 (11th Cir. 1999).
Sovereign immunity has been waived or abrogated by statute, for example, with respect to suits against foreign states that have sponsored or supported acts of terrorism. Stansell v. Republic of Cuba, 217 F.Supp.3d 320, 337-38 (D.D.C. 2016)(citing 28 U.S.C. § 1605A(a)(l)). Courts may “obtain original jurisdiction for suits against foreign states, and those states’ general immunities are waived by *833operation of statute” under certain conditions, such as the statutory waiver for state-sponsored terrorism provided by 28 U.S.C. § 1605A(a)(1). Oveissi v. Islamic Republic of Iran, 879 F.Supp.2d 44, 51 (D.D.C. 2012).
3. Waiver or abrogation under § 106 of the Bankruptcy Code
Sovereign immunity has also been waived or abrogated by statute with respect to issues arising under certain sections of the Bankruptcy Code. Section 106(a) of the Bankruptcy Code provides:
11 U.S.C. § 106. Waiver of sovereign immunity
'(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 503, 505, 506, 510, 522, 523, 524, 525, 642, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 744, 749, 764, 901, 922, 926, 928, 929, 944, 1107, 1141, 1142, 1143, 1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305, and 1327 of this title.
(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.
11 U.S.C. § 106(a)(Emphasis supplied). The waiver or abrogation of sovereign immunity under § 106(a) applies to “governmental units,” which is expressly defined in § 101 of the Bankruptcy Code to include foreign states.
11 U.S.C. § 101. Definitions
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(27) 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.
11 U.S.C. § 101(27)(Emphasis supplied).
Pursuant to § 106(a) and § 101(27), “[fjoreign states can no longer assert sovereign immunity from liability for certain actions under the Bankruptcy Code” because “section 106 abrogates sovereign immunity as to a ‘governmental unit/ which the Bankruptcy Code specifically defines to include a foreign state or other foreign or domestic government.” In re Tuli, 172 F.3d 707, 711-12 (9th Cir. 1999). In Tuli, for example, the Court determined that “Iraq is not protected by sovereign immunity from Tuli’s adversary complaint under 11 U.S.C. § 542.” In re Tuli, 172 F.3d at 713.
See also In re Krystal Energy Co., Inc., 357 F.3d 1055 (9th Cir. 2004), reversing 308 B.R. 48, 54 (D. Ariz. 2002)(“Section 106(a) has been found to effectively abrogate the sovereign immunity of foreign states. ”)(Emphasis in original), and In re National Cattle Congress, 247 B.R. 259, 266 (Bankr. N.D. Iowa 2000)(Congress may abrogate sovereign immunity by express statutory language, and Section 106(a) has “been found to effectively abrogate the sovereign immunity of foreign states.”).
Further, the waiver or abrogation of sovereign immunity for foreign states under § 106(a) supports other sections of the Bankruptcy Code providing for the Court’s broad jurisdiction to determine matters involving property of a bankruptcy estate. Section 1334(e) of title 28, for example, provides that district courts “shall have exclusive jurisdiction — of all the property, wherever located, of the *834debtor as of the commencement of such case, and of property of the estate.” 28 U.S.C. § 1834(e).
Under § 1334(e), “Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate.” Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)(quoted in In re Ryan, 276 Fed.Appx. 963, 966 (11th Cir. 2008), and In re Marathe, 459 B.R. 850, 854 (Bankr. M.D. Fla. 2011)).
Section 1334(e) and § 106(a) address the principle that Courts should have the authority to administer insolvent estates that are brought before them, a principle that appears to possess international recognition. In this case, for example, the Debtor engaged David P. Stewart, an attorney and law professor specializing in international law, to provide an opinion on sovereign immunity issues in this adversary proceeding. According to Mr. Stewart:
9. That statutory waiver of immunity [under § 106(a) ] is consistent with the terms of Article 13 of the 2004 United Nations Convention on the Jurisdictional Immunities of States and Their Properties (the “2004 UN Convention”), to which France is a state party, having signed it on January 17, 2007 and approved (ratified) it on April 12, 2011. Article 13 of the 2004 UN Convention waives sovereign immunity for any State Party before a court of another State in any proceeding which relates to the administration of property, including trust property and the estate of a bankruptcy entity.
(Doc. 50, Declaration of David P. Stewart, ¶ 9)(Emphasis supplied). According to the Debtor, therefore, the French Republic has undertaken “international legal obligations regarding waiver of sovereign immunity for in rent bankruptcy proceedings.” (Doc. 49, p. 12).
C. Jurisdiction of this proceeding
In summary, § 1330 of title 28 provides for original jurisdiction of any action against a foreign state in which the foreign state is not entitled to sovereign immunity. Section 1605(a) of the FSIA provides an exception to a foreign state’s sovereign immunity in cases where the immunity is expressly or impliedly waived. 28 U.S.C. § 1605(a). With respect to specified actions under the Bankruptcy Code, a foreign state’s sovereign immunity is statutorily waived or abrogated by § 106(a) of the Bankruptcy Code.
Such a waiver is consistent with the Court’s expansive jurisdiction to determine all matters related to property of a bankruptcy estate, and is also consistent with the principle recognized by the French Republic that sovereign immunity may be waived for any proceeding that relates to the administration of a bankruptcy estate.
In this case, the Debtor’s action against the French Republic is brought under Bankruptcy Rule 7001 and Bankruptcy Code § 105 and § 363 for a determination that the French Republic has no interest in the French Artifacts claimed by the Debtor as property of its estate. Issues under § 105 and § 363 are listed in § 106(a) as actions that are subject to the waiver of immunity, and the French Republic’s sovereign immunity is statutorily waived or abrogated in this case pursuant to § 106 of the Bankruptcy Code.
The French Republic was properly served under 28 U.S.C. § 1608, and an exception to sovereign immunity applies to this proceeding by virtue of the statutory waiver or abrogation of immunity under 11 U.S.C. § 106. Accordingly, this Court has *835original jurisdiction of this proceeding pursuant to 28 U.S.C. § 1380.
III. The Motions
Federal courts are granted original jurisdiction in suits “against a foreign state ... as to any claim for relief ... with respect to which the foreign state is not entitled to immunity.” 28 U.S.C. § 1330(a). In this case, the Court may exercise jurisdiction over the French Republic under § 1330 because (1) service of process was properly accomplished, and (2) a statutory exception to sovereign immunity applies. Jouanny v. Embassy of France, 220 F.Supp.3d at 38.
The next issues for determination, therefore, are the specific matters before the Court: (1) the Debtor’s Amended Motion for Entry of Clerk’s Default, and (2) the Debtor’s Amended Motion for a Default Judgment against the French Republic. (Docs. 45, 46).
A. Motion for Default
The Court has ' determined that the French Republic was properly served under § 1608(a)(2) of the FSIA by delivery of a copy of the Summons and Complaint to the French Republic’s Ministry of Justice. On December 16, 2016, the French Ministry of Justice issued a Certificate attesting that the Summons and Complaint were served. (Doc. 45, Exhibit A).
Subsection (d) of § 1608 provides that a foreign state “shall serve an answer or other responsive pleading to the complaint within sixty days after service is made.” 28 U.S.C. § 1608(d).
As of the date of this Order, the French Republic has not filed an answer or other response to the Complaint filed and served by the Debtor. Rule 55(a) of the Federal Rules of Civil Procedure, as made applicable to this proceeding by Rule 7055 of the Federal Rules of Bankruptcy Procedure, provides:
Rule 55. Default; Default Judgment.
(a) Entering a Default. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party’s default.
F.R.Civ.P. 55(a). Accordingly, the Debtor’s Amended Motion for Default should be granted in this proceeding, and the Clerk should be directed to enter a default against the French Republic pursuant to Rule 55(a) of the Federal Rules of Civil Procedure.
B. Motion for Default Judgment
An evidentiary hearing should be scheduled on the Debtor’s Amended Motion for Default Judgment, however, because the current record does not contain satisfactory evidence to establish that the French Republic has no interest in the French Artifacts.
Section 1608(e) of the FSIA provides:
§ 1608. Service; time to answer; default
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(e) No judgment by default shall be entered by a court of the United States or of a State against a foreign state, a political subdivision thereof, or an agency or instrumentality of a foreign state, unless the claimant establishes his claim or right to relief by evidence satisfactory to the court.
28 U.S.C. § 1608(e)(Emphasis supplied). The section is intended to protect foreign states from unfounded judgments based solely on a procedural default. Fraenkel, et al., v. Islamic Republic of Iran, et al., — F.Supp.3d -, -, 2017 WL 1214353, at *6 (D.D.C. 2007).
*836Section 1608(e) “provides foreign sovereigns a special protection akin to that assured the federal government” by Rule 55(d) of the Federal Rules of Civil Procedure, which provides that a default judgment may be entered against the United States “only if the claimant establishes a claim or right to relief by evidence that satisfies the court.” Braun v. Islamic Republic of Iran, 228 F,Supp.3d 64, 74, 2017 WL 79937, at *5 (D.D.C. 2017); F.R.Civ.P. 55(d).
“The FSIA does not specify what kinds of evidence the plaintiff must submit to meet this evidentiary burden; it ‘leaves it to the court to determine precisely how much and what kinds of evidence the plaintiff must provide,’ ” Stansell v. Republic of Cuba, 217 F.Supp.3d 320, 336-37 (D.D.C, 2016)(quoting Han Kim v. Democratic People’s Republic of Korea, 774 F.3d 1044, 1047 (D.C.Cir. 2014)). The FSIA “leaves it to the court to determine precisely how much and what kinds of evidence the plaintiff must provide.” Braun v. Islamic Republic of Iran, 228 F.Supp.3d at 74, 2017 WL 79937, at *5.
Section 1608(e), however, obligates a court to make a thorough inquiry before entering a default judgment against a foreign state. Firebird Global Master Fund II Ltd., v. Republic of Nauru, 915 F.Supp.2d 124, 126 (D.D.C. 2013). Under § 1608(e), the court is obligated to satisfy itself that the plaintiff established a right to the relief that it requested. Fraenkel v. Islamic Republic of Iran, 228 F.Supp.3d at 75-76, 2017 WL 1214353, at *6.
In this case, the Debtor alleges that its predecessor conducted an expedition to the Titanic salvage site in 1987, with the assistance of France’s oceanographic institute, and recovered approximately 2,100 artifacts from the wreck. (Doc. 1, Complaint, ¶ 11). The Debtor further alleges that a French official awarded the Debtor unconditional title to the French Artifacts pursuant to a Proces-Verbal on October 20, 1993. (Doc. 1, Complaint, ¶ 15). The relief requested by the Debtor in its Complaint is a determination under § 105 and § 363 of the Bankruptcy Code that “France and all French government agencies have no interest in the French Artifacts.” (Doc. 1, Complaint, ¶ 30).
The Court has considered the documents submitted by the Debtor to support its claim of unconditional title, and cannot determine that the current record contains satisfactory evidence to establish that the French Republic has no interest in the French Artifacts, or that the Debtor is entitled at this time to the relief that it requests. The Court reaches this decision for the following reasons:
1. The Proces-Verbal
First, the Debtor’s assertion that it holds unconditional title to the French Artifacts, and its further assertion that the French Republic has no interest in the French Artifacts, depend primarily on the meaning and effect of the Proces-Verbal dated October 20,1993, The Proces-Verbal provides in its entirety:
In accordance with its decision dated October 12, 1993, taken pursuant to the provisions of the decree N 61-1547 dated December 26, 1961 determining the regime of the wreck at Sea, M. Chapa-lain, representing the Head of the Headquarter of Maritime Affairs of Lorient, has carried out this day the delivery of the artifacts recovered from the Titanic wreck in 1987 and whose legal owners or heirs have not been identified pursuant to the publicity measures implemented by the French Authorities, to Titanic Ventures Limited Partnership, in its capacity of salvager.
The list of the artifacts is exhibited to the present minutes together with the *837letter of intent of Titanic Ventures Limited Partnership dated September 22, 1993.
(Doc. 1, Complaint, Exhibit B)(Emphasis supplied). The Debtor contends that this document “constitutes a legally enforceable administrative decision that transferred to RMST legal title to the French Artifacts,” that the “transfer of title to RMST was unconditional,” that the title “contains no liens or encumbrances,” and that the French Republic “never had a beneficial interest in the French Artifacts.” (Doc. 1, Complaint, ¶¶ 25-28).
The English translation of the French Proces-Verbal, as quoted above, appears to provide that the French Maritime Affairs Administrator “carried out ... the delivery” of the French Artifacts to the Debtor’s predecessor as salvager of the Titanic wreck site. (Doc. 1, Complaint, Exhibit B). Within its text, the document does not expressly award unconditional title of the Artifacts to the Debtor’s predecessor, and the record does not clearly evidence the legal effect of the document or the nature of the interest in the Artifacts that was delivered to the Debtor by the Administrator. The Proces-Verbal does not indicate, for example, whether the Administrator’s prior “decision dated October 12, 1993” includes additional details regarding the delivery of the Artifacts.
2. The letter of intent
Second, the Proces-Verbal provides that the Debtor’s predecessor’s “letter of intent” dated September 22, 1993, is attached to the document, The letter of intent states in part:
On this occasion, I would like, on behalf of Titanic Ventures, of which I am the General Partner, to inform you of Titanic Ventures’ intent to use the objects collected from the wreck of the Titanic in a manner respecting the memory of these objects’ initial owners.
Along these lines, I would like to. indicate to you that these objects shall be used only for cultural purposes and shall accordingly not form the subject matter of any transaction leading to their dispersion (except for the purposes of an exhibition) and that no such object shall be sold.
(Doc. 1, Complaint, Exhibit C)(Emphasis supplied). The letter of intent is attached to and referenced in the Proces-Verbal, but the record does not explain whether the Proces-Verbal intended to substantively incorporate the terms of the letter, including the representation that the French Artifacts would not be sold or disbursed,
3. The Affidavits
Third, the Debtor submitted two affidavits in support of its position that the Proces-Verbal constituted an award of unconditional title to the French Artifacts.
The first Affidavit was furnished by Jerome Henshall, the “Chief Financial Officer, Director of Premier Exhibitions, Inc.” Premier Exhibitions, Inc. is an affiliate of the Debtor. (Case No, 3:16-bk-2232-PMG). This Affidavit identifies the Proces-Verbal and the letter of intent, but states only in conclusory fashion that (1) the Proces-Verbal was a legally enforceable administrative decision that transferred the French Artifacts to the Debtor unconditionally, and that (2) the French Republic has no beneficial interest in the Artifacts. (Doc. 12).
The second Affidavit is the Declaration of. Denis Mouralis, a law professor at Aix Marseille University in France, who was engaged by the Debtor “to advise on the legal significance under French law of the proces-verbal.” In his Declaration, Mr. Mouralis states:
10. This proces-verbal was executed pursuant to decree 61-1547 of 26 De*838cember 1961 (art. IB), in order to transfer property of some artefacts to Titanic Ventures Limited Partnership, as the entity that recovered those artefacts from the Titanic wreck.
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14. According to the provisions of decree 61-1547 (art. 13), such transfer of ownership is total and not conditional. Decree 61-1547 does not provide that any other entity than the rescuer should have any interest in the goods assigned. Decree 61-1547 does not provide that a third party should receive liens or encumbrances on the artefacts assigned to the rescuer.
(Doc. 49, Exhibit 5). The conclusions reached in the Mouralis Declaration appear to be based on the general purpose and operation of “decree 61-1547 of 26 December 1961.” The Declaration does not address whether decree 61-1547 allows an Administrator to modify an award in specific circumstances, such as by incorporating a salvager’s representations into a Proces-Verbal, or whether the attachment of the Debtor’s letter of intent to the Proces-Verbal in this case may have affected the property transferred to the Debtor.
4. The Note from the French Embassy
Finally, the record includes a Note from the Embassy of the Republic of France dated July 8, 2016. The Note is attached to the Debtor’s Complaint, and states in part:
France’s ownership of recovered artifacts dates back to the expedition on the site of the wreck in 1987, in which the Institut Francais de Recherche pour l’Exploitation de la Mer (IFREMER) played an active part, namely the use of its vessels by Oceanic Research and Exploration Ltd. to dive on “HMS TITANIC to promote the survey of the wreck and to recover objects from the Titanic”.
Under Article 20 “Recovery of objects” agreed upon in a Charter signed by both parties (IFREMER as the owner and Oceanic Research and Exploration as the Charterer), it was formally agreed that “Charterers shall not sell the objects collected by Owners but shall use them only for exhibition purposes”.
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Thus, in the attached letter from September 22, 1993, signed by the Director of TVLP, France was assured that “the artifacts will be used only for cultural purposes and will not, therefore, be part of any operations that would lead to their dispersion, with the exception of exhibition purposes, and none of the artifacts will be sold”.
With this understanding and signed guarantee, the French administration agreed to grant the title to TVLP in a Proces-Verbal of October 20,1993.
(Doc. 1, Complaint, Exhibit D)(Emphasis supplied). Based on these assertions, the French Embassy appears to contest the Debtor’s request for a determination that “France has no interest in the French artifacts,”
5. Right to reljef not established by satisfactory evidence
In summary, the Debtor contends that it holds unconditional title to the French Artifacts, and that the Artifacts are not subject to any claim or interest of the French Republic. The Debtor’s assertion of unconditional title is predicated on the Proces-Verbal of the Maritime Affairs Administrator dated October 20, 1993, but the Proces-Verbal does not expressly refer to such an award of unconditional title. Further, the Proces-Verbal “exhibits” a letter from the Debtor’s predecessor in interest representing that the Artifacts will not be sold. The Debtor’s supporting Affidavits do not adequately explain the terms of the *839Proces-Verbal or the impact of the attached letter. And finally, the French Embassy appears to view the Proces-Verbal as based on the Debtor’s “signed guarantee” that the Artifacts will not be sold, as contained in the letter.
For these reasons, the record at this time is not satisfactory to establish that the Debtor’s title to the French Artifacts is unconditional, or that the Debtor is entitled to a judgment by default determining that “France and all French government agencies have no interest in' the French Artifacts.” 28 U.S.C. § 1608(e). Accordingly, the Debtor’s Amended Motion for Default Judgment should be scheduled for an evidentiary hearing.
IV. Conclusion
The Debtor asserts that it holds unconditional title to approximately 2,100 artifacts that were recovered from the Titanic salvage site in 1987 (the French Artifacts). In this proceeding, the Debtor seeks a determination under Rule 7001(2) and Rule 7001(9) of the Federal Rules of Bankruptcy Procedure, and under § 105 and § 363 of the Bankruptcy Code, that France and its agencies have “no interest in the French Artifacts.”
Under 28 U.S.C. § 1330 and the Foreign Sovereign Immunities Act, a foreign state is presumptively immune from the jurisdiction of a Court of the United States, unless a specified exception to sovereign immunity applies to the case. In order to exercise jurisdiction over a foreign state under 28 U.S.C. § 1330, a Bankruptcy Court must determine that the foreign state was properly served with process, and that a statutory exception to jurisdictional immunity applies to the foreign state.
In this case, the French Republic was properly served with process by delivery of a copy of the Summons and Complaint to France’s Ministry of Justice.
Additionally, the French Republic is excepted from jurisdictional immunity in this action, because of the statutory waiver or abrogation of immunity provided by § 106(a) of the Bankruptcy Code for actions against a foreign state that are brought under § 105 and § 363 of the Bankruptcy Code. Accordingly, the Court may exercise jurisdiction over the French Republic in this action under 28 U.S.C. § 1330.
Pursuant to 28 U.S.C. § 1608(e), however, the Court may not enter a default judgment against a foreign state, unless the plaintiff establishes its right to relief “by evidence satisfactory to the court.” In this case, an evidentiary hearing should be scheduled on the Debtor’s Amended Motion for Default Judgment, because the current record does not contain satisfactory evidence that the French Republic has no interest in the French Artifacts.
Accordingly:
IT IS ORDERED that:
1. The Plaintiff RMS Titanic, Inc.’s Amended Motion for Entry of Clerk’s Default against Defendant French Republic, a/k/a Republic of France is granted, and the Clerk shall enter a default against the Defendant pursuant to Rule 55 of the Federal Rules of Civil Procedure, as made applicable to this proceeding by Rule 7055 of the Federal Rules of Bankruptcy Procedure.
2. The Plaintiff RMS Titanic, Inc.’s Amended Motion for Default Judgment against Defendant French Republic, a/k/a Republic of France shall be scheduled for an evidentiary hearing by separate Order.
3. A Pretrial Hearing will be conducted on June 22, 2017, at 1:30 o’clock p.m. at 300 North Hogan Street, 4th Floor — Courtroom 4A, Jacksonville, Florida 32202, to *840consider the scheduling of the evidentiary hearing and any related case management matters that may come before the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500643/ | ORDER AND MEMORANDUM OPINION APPROVING BRADLEY AR-ANTES FEE APPLICATION
Michael G. Williamson, Chief United States Bankruptcy Judge
Glenn Rasmussen previously filed a second interim fee application that included $11,622.50 in fees defending its first fee application against an objection by the U.S. Trustee. While Glenn Rasmussen’s second interim fee application was pending, the U.S. Supreme Court decided Baker Botts v. ASARCO,1 where it held that Bankruptcy Code § 330(a) does not authorize attorney’s fees for work performed defending a fee application. The Supreme Court’s ruling in Baker Botts was consistent with Eleventh Circuit precedent dating back 25 years. But the U.S. Trustee never asserted a Baker Botts objection.
The U.S. Trustee now asks the Court to set off the $11,622.50 in fees it awarded Glenn Rasmussen against a fee application filed by Glenn Rasmussen’s successor— Bradley Arant Boult Cummings — -because the $11,622.50 in fees were allegedly not recoverable under Baker Botts. Although the U.S. Trustee is right that the Court can revisit interim fee awards at any time, the Court concludes on the facts of this case that the U.S. Trustee waived its Baker Botts objection by failing to timely assert it.
Background
Ed Rice of the Glenn Rasmussen law firm served as special counsel to the Chapter 7 Trustee, principally handling a fraudulent transfer proceeding against the *842Debtor’s ex-wife.2 After negotiating a settlement that brought more than $6 million into the estate, Glenn Rasmussen filed an interim fee application seeking nearly $1 million in fees.3 The U.S. Trustee objected to Glenn Rasmussen’s initial fee application principally because (in the U.S. Trustee’s view) it lacked sufficient detail, in effect insisting on the level of detail for a fee application in a chapter 11 case even though this case is a converted chapter 7 case.4
To resolve the U.S, Trustee’s principal objection, Glenn Rasmussen supplemented its fee application to provide more detail. Of course, that takes time, which means attorney’s fees.5 When the firm filed its second interim fee application, it included $6,186 in fees for preparing its initial fee application and $11,622.50 in fees for “successfully defending” the fee application against the U.S. Trustee’s original objection.6
Glenn Rasmussen’s second interim fee application was filed on negative notice.7 Under the Court’s negative notice procedures, which are set forth in Local Rule 2002-4, the U.S. Trustee and any other party in interest had 21 days to object to the fee application. No party in interest objected to Glenn Rasmussen’s second interim fee application, so the Court granted it in its entirety.8
While Glenn Rasmussen’s second interim fee application was pending, however, the Supreme Court issued its decision in Baker Botts LLP v. ASARCO, which held that bankruptcy courts are not permitted to award attorney’s fees for work performed defending a fee application.9 But the U.S. Trustee did not raise a Baker Botts objection to Glenn Rasmussen’s second interim fee application seeking fees “defending” an earlier fee application, because the U.S. Trustee did not become aware of the case, which was decided just one week before the negative notice period expired, until after the deadline for objecting. Later, Bradley Arant, which acquired Glenn Rasmussen, filed its first interim fee application, seeking $15,572.50 in fees for the work Ed Rice did after joining Bradley Arant.10
The U.S. Trustee objected to Bradley Arant’s fee application — but not because the firm’s fees were unreasonable or otherwise objectionable.11 Instead, the U.S. Trustee seeks to set off the $11,622.50 in fees the Court awarded Glenn Rasmussen for “defending” its fee application against the $15,572 in fees Bradley Arant seeks, because the U.S. Trustee contends Glenn *843Rasmussen was not entitled to those fees under Baker Botts.
Conclusions of Law
This Court has already ruled that time spent by the Chapter 7 Trustee’s general counsel (Herb Donica) supplementing a fee application in response to a similar objection by the U.S. Trustee’s were, in fact, recoverable under Baker Botts.12 As this Court explained in a previous decision in this case, Baker Botts does not — as the U.S. Trustee contends— impose a temporal limitation on a professional’s ability to recover fees for work performed after an objection to a fee application. Baker Botts instead stands for the proposition that fees are only recoverable if they are incurred in service to the estate.13 Here, this Court ruled that the time the Chapter 7 Trustee’s counsel spent supplementing his fee application were incurred in service to the estate because, like fees incurred preparing the initial fee application, the additional detail allowed the Chapter 7 Trustee, U.S. Trustee, and other parties in interest to understand the work Trustee’s counsel performed and, if necessary, the ability to dispute his fees. The time Glenn Rasmussen spent supplementing its initial fee application is no different.
But the Court writes to address a more fundamental issue: Is the U.S. Trustee’s Baker Botts objection untimely? Ordinarily, a party cannot seek reconsideration of a court’s prior ruling absent (1) an intervening change in controlling law; (2) newly discovered evidence; or (3) the need to correct cleár error or prevent manifest injustice.14 An intervening change in controlling law occurs where a higher authority alters existing law, either by overruling it or creating a significant shift in a court’s analysis.15 Here, Baker Botts merely confirmed the Eleventh Circuit Court of Appeal’s decision in Grant v. George Schumann Tire & Battery Co., which held that trustee’s counsel was not entitled to fees incurred defending an appeal of a fee award because defense of the appeal “brought absolutely no benefit to the estate, the creditors, or the debtor.”16 Interim fee awards, however, are not subject to the general standard governing motions for reconsideration.
This Court can always revisit interim fee awards, regardless of a change in controlling law, newly discovered evidence, or clear error or manifest injustice. Interim fees awards under Bankruptcy Code § 331, which are intended to “alleviate the unwarranted financial burden on professionals that occurs when judicial scrutiny, allowance, and payment of fee applications is withheld until the conclusion of the *844case,”17 are not final.18 “Because interim awards are interlocutory and often require future adjustments, they are ‘always subject to the court’s reexamination and adjustment during the course of the case.’ ”19 So, as the U.S. Trustee argues, “fees previously awarded on an interim basis are subject to review at the final application stage.”20
But, while the Court is free to revisit its order on Glenn Rasmussen’s second interim fee application, the Court nonetheless concludes the U.S. Trustee waived his Baker Botts objection, “[W]aiver is the voluntary, intentional relinquishment of a known right.”21 Although waiver may be express or implied, the acts, conduct, or circumstances giving rise to an implied waiver must make out a clear case.”22 Here, the facts of this case make clear the U.S. Trustee voluntarily relinquished his Baker Botts objection.
At the outset, it’s worth noting that the U.S. Trustee created this predicament in the first place by asking for a more detailed fee application than is typically required in chapter 7 cases. Under Local Rule 2016-1, fee applications filed by chapter 7 professionals need only contain the name of the person doing the work; the amount of time expended for each item of work; the requested hourly rate; the date of employment; a discussion of the criteria relevant for determining compensation; a detail of reimbursable costs; and a verification that the fees and costs are reasonable and that the application is true and accurate.23 The U.S. Trustee, however, insisted on a detailed description of the time worked; that the time be itemized by project category; that the application contain a narrative of the services provided and the results obtained — items that are only required for chapter 11 cases.24
The Court does not fault the U.S. Trustee’s for insisting on heightened disclosure in this case given its complexity and the amount of fees requested (collectively, $1.7 million in the initial fee applications by Donica and Glenn Rasmussen) in this converted chapter 7 case. But the proper time to insist on that heightened disclosure would have been early on in the case when the Trustee retained Glenn Rasmussen.
In any event, Glenn Rasmussen filed its second fee application on negative notice. *845Under Bankruptcy Code § S30, the Court can only award compensation to professionals after notice and a hearing.25 But Bankruptcy Code § 102 defines “notice and a hearing” as authorizing an act without a hearing so long as notice is given and no party in interest requests a hearing.26 The “negative notice” procedure contemplated by § 102, and implemented by Local Rule 2002-4, shifts the burden to the interested party to evaluate whether an objection to the relief requested is warranted and whether a hearing would be helpful. The “negative notice” legend on Glenn Rasmussen’s second interim fee application notified the U.S. Trustee that the fee application would be granted unless the U.S. Trustee objected within 21 days, yet the U.S. Trustee chose not to do so.
At the time he chose not to object to Glenn Rasmussen’s fee application, the U.S. Trustee knew or should have known he had the right to assert a Baker Botts objection. To be fair, Baker Botts was decided only eight days before the negative notice deadline expired.27 And the Court accepts the U.S. Trustee’s representation that he did not learn of the Baker Botts decision until after the negative notice period ' expired. But, as discussed above, there was Eleventh Circuit case law supporting the proposition that fees incurred defending a fee application are not com-pensable—Grant v. George Schumann Tire & Battery Co.—dating back more than 25 years.28
Not to mention, the Fifth Circuit decision that the Supreme Court upheld in Baker Botts had been decided more than a year before Glenn Rasmussen filed its second interim fee application — and the Fifth Circuit relied on the Eleventh Circuit decision in Grant. Since there was no controlling Eleventh Circuit precedent to the contrary, the Fifth Circuit’s decision in Baker Botts would have supported an objection by the U.S. Trustee here. Given the existence of Eleventh Circuit authority for the proposition that fees defending fees are not compensable, and no Eleventh Circuit precedent to the contrary, it was incumbent upon the U.S. Trustee to object to Glenn Rasmussen’s fees for time spent supplementing its fee application.
Conclusion
The Court can imagine instances where the grounds for objecting to an interim fee award do not become known until later in the case. In those cases, the Court ought to be able to revisit an earlier interim fee award. But that is not this case. Here, the U.S. Trustee insisted on greater disclosure than is ordinarily required,- forcing Glenn Rasmussen to incur additional fees responding to the U.S. Trustee’s objection. When Glenn Rasmussen sought payment of those additional fees, Eleventh Circuit precedent would have supported — or at a minimum would not have foreclosed — an objection by the U.S. Trustee. It was not until a new firm acquired Glenn Rasmussen and sought fees for the work Ed Rice did while at the new firm that the U.S. Trustee raised its objection. On those facts, the Court concludes the U.S. Trustee waived its Baker Botts objection. Accordingly, it is
ORDERED:
*8461. Bradley Arant’s first interim fee application29 is APPROVED in its entirety. The U.S. Trustee’s objection30 is OVERRULED.
2. Bradley Arant is awarded $15,572.50 in fees and $17.60 in expenses, which the Chapter 7 Trustee is authorized to pay.
. — U.S. -, 135 S.Ct. 2158, 2163, 192 L.Ed. 2d 208 (2015).
. Doc. Nos. 208 & 231.
. Doc. No. 565. Specifically, Glenn Rasmussen sought $935,163 in fees. Id. The firm divided its time into two categories: fraudulent transfer litigation and "other matters.” The other matters only accounted for $51,901 of the fees Glenn Rasmussen sought. The bulk of Glenn Rasmussen's time — 1,770 hours— was spent on the fraudulent transfer proceeding. Glenn Rasmussen claimed $533,262 in hourly fees, with the remaining $350,000 coming from a 10% contingency fee. Id. at 6-13.
. Doc. No. 589. The U.S. Trustee also complained about how the firm calculated a 10% contingency fee.
. Ultimately, the Court approved Glenn Rasmussen’s fee application in its entirety. Doc. Nos. 603 & 625.
. Doc. No. 675.
. Id.
. Doc. No. 680.
. - U.S. -, 135 S.Ct. 2158, 2163, 192 L.Ed.2d 208 (2015).
. Doc. No. 684.
. Doc. No, 702.
. In re Stanton, 559 B.R. 781, 784-85 (Bankr. M.D. Fla. 2016).
. Id. (discussing Baker Botts, 135 S.Ct. at 2165-67).
. Fenello v. Bank of Am., N.A., 577 Fed.Appx. 899, 902 n.7 (11th Cir. 2014) (citing Richardson v. Johnson, 598 F.3d 734, 740 (11th Cir. 2010); Del. Valley Floral Grp., Inc. v. Shaw Rose Nets, LLC, 597 F.3d 1374, 1383 (Fed. Cir. 2010)).
. Teamsters Local 617 Pension & Welfare Funds v. Apollo Grp., Inc., 282 F.R.D. 216 (D. Ariz. 2012) (explaining that an intervening change in controlling law is limited to cases that “generally or substantively alter existing law, such as by overruling it, or creating a significant shift in a court’s analysis”),
. 908 F.2d 874, 883 (11th Cir. 1990). The Fifth Circuit Court of Appeals, in Baker Botts, relied on the Eleventh Circuit’s ruling in Grant.in support of the proposition that fees for defending a fee application are not com-pensable. In re ASARCO, LLC, 751 F.3d 291, 299 (5th Cir. 2014).
. In re Commercial Fin. Servs., Inc., 231 B.R. 351, 354 (Bankr. N.D. Okla. 1999); see also In re Evangeline Ref. Co., 890 F.2d 1312, 1321 (5th Cir. 1989); In re Pub. Serv. Co. of New Hampshire, 138 B.R. 660 (D.N.H. 1992).
. In re Stable Mews Assocs., 778 F.2d 121, 123 n.3 (2d Cir. 1985) ("Interim fee awards are, by definition, not final.”); In re Callister, 673 F.2d 305, 307 (10th Cir. 1982) ("Interim fee awards ... are in no respect final adjudications on the question of compensation.”); In re Evangeline Ref., 890 F.2d at 1321 (citing In re Stable Mews Assocs. and In re Callister).
. In re Evangeline Ref. Co., 890 F.2d at 1321 (quoting 2 Collier on Bankruptcy ¶ 331.03 (15th ed.)).
. Doc. No. 702 at 6-7 (citing In re Pearlman, 2014 WL 1100223, *2 (Bankr. M.D. Fla. 2014)). Of course, the U.S. Trustee's objection is to Bradley Arant’s first fee application. Arguably, Glenn Rasmussen's second interim fee application was its final one, in which case the U.S. Trustee (under its own argument) would be precluded from raising its Baker Botts objection. But the Court, for purposes of the U.S. Trustee’s objection, is treating Bradley Arant’s fee application as if it was Glenn Rasmussen’s final fee application.
. Griffin v. Habitat for Humanity Int'l, Inc., 641 Fed.Appx. 927, 932 (11th Cir. 2016) (citing Witt v. Metropolitan Life Ins. Co., 772 F.3d 1269, 1279 (11th Cir. 2014)).
. Id.
. Local Rule 2016-1.
. Id.
. 11 U.S.C, 330(a)(1). Notice must be given to interested parties and the U.S. Trustee. Id.
'. 11 U.S.C. § 102(1)(B); see also In re Henry, 2006 WL 1997710, at *1 (Bankr. M.D. Ala. June 16, 2006).
. The negative notice deadline expired on June 23, 2015. Baker Botts was decided June 15, 2015.
. Grant v. George Schumann Tire & Battery Co., 908 F.2d 874 (11th Cir. 1990).
. Doc. No. 684.
. Doc. No. 702. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500644/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW ON HOMESTEAD EXEMPTION
Michael G. Williamson, Chief United States Bankruptcy Judge
In order for real estate to qualify for the Florida homestead exemption,1 a debt- or must possess the intent to make the property a permanent homestead, and must couple that stated intention with evidence that even if the property is uninhabitable (as is the case here), the property is capable of occupancy and that the debtor has taken steps to make the property habitable for occupancy as a permanent homestead. In this case, the Debtor took title to the subject property over ten years ago, was not residing there at the time of his bankruptcy filing, and has only lived in the house a total of ten days because the property is uninhabitable. Given these circumstances, the property does not qualify under the Florida homestead exemption. Accordingly, the Debtor’s motion to avoid Cl Bank’s judicial lien on the property based on his claim of homestead will be denied.
Findings of Fact2
Dating back to the late 1800s, the Debt- or’s family has owned several parcels of land on Eunice Drive in Zephyrhills, Florida.3 From 1986 until 1990, the Debtor lived on one parcel located at 36415 Eunice Drive, the property he now claims as his exempt homestead. At that time, the property was owned by his grandmother. In 1990, the Debtor married his wife, Connie, and moved to an adjacent parcel located at 36343 Eunice Drive. The Debtor lived with his wife at 36343 Eunice Drive for more than 20 years, from 1990 until mid-2012.
Sometime in 2005, while the Debtor was living at 36343 Eunice Drive, the Debtor’s grandmother put his name on the title to the 36415 Eunice Drive property, apparently because she was in poor health. In 2006 or 2007, the Debtor’s grandmother passed away, and he took title to the 36415 Eunice Drive Property. When the Debtor and his wife began having marital problems in 2012, the Debtor moved out c>f the marital home at 36343 Eunice Drive and into an apartment briefly, before ultimately moving into a double-wide trailer on the 36415 Eunice Drive property.
His time at the 36415 Eunice Drive property, however, was short to say the least. According to the Debtor, he intended to make the 36415 Eunice Drive property his permanent home. But the property was *848unlivable.4 There were holes in the roof and mold throughout the trailer.5 So after ten days at the property, the Debtor moved back into the marital home located at 36343 Eunice Drive.
As it turns out, the Debtor’s ex-wife had been awarded the marital home as part of the couple’s divorce, but she later moved into an apartment in Wesley Chapel so her son could be in a desired school zone. Because the Debtor’s ex-wife was not living in the marital home, she offered to let the Debtor live there while he worked to fix up the 36415 Eunice Drive property. Over the years, the Debtor has sprayed some mold killer at the property and purchased some supplies to repair the trailer.6 But the Debtor continues to live at the former marital home because the 36415 Eunice property remains unlivable to this day.7
In March 2014, the Debtor filed for chapter 7 bankruptcy. Although he was living at the former marital home at the time he filed for bankruptcy, he listed the 36415 Eunice Drive property as his address and claimed it as exempt homestead on schedule C.8 The Debtor later moved to avoid an $84,935.31 judgment lien Cl Bank had obtained against him,9 The Court held a final evidentiary hearing on the Debtor’s motion to avoid Cl Bank’s judicial lien because it is impairing his homestead exemption.
Conclusions of Law
Florida’s homestead exemption, set forth in Article X, Section 4 of the Florida Constitution, protects a debtor’s homestead from forced sale.10 "The homestead character of a property ‘depends upon an. actual intention to reside thereon as a permanent place of residence, coupled with the fact of residence.’ ”11 So to be eligible for the homestead exemption, the Debtor must actually live at the 36415 Eunice Drive property and intend to make it his permanent residence.12
It is not clear that the Debtor has the actual intent to make the 36415 Eunice Drive property his permanent homestead. To be sure, the Debtor testified that he intended to make the property his home when he moved in for ten days back in 2012 and that he intends to move back once it is livable. But when it comes to subjective intent, which is naturally difficult to ascertain, actions speak louder— or at least as loudly — as words:
The intention of a person is a difficult matter to establish, and can only reliably be shown by circumstances and acts in support of expressions of intention.13
The circumstances of this case are inconsistent with the Debtor’s stated intent. It is true that the Debtor filed a notice of homestead in October 2012, not long after he stayed at the property for-*849ten days. And he has maintained electric and water at the 36415 Eunice Drive property. Significantly, however, the Debtor has not claimed the homestead exemption for ad valorem tax purposes.14 “The status of property as homestead for ad valorem tax exemption purposes is persuasive as to a debtor’s intent.”15 Nor does it appear the Debtor uses 36415 Eunice Drive as his mailing address. For instance, he uses a P.O. Box for his mailing address with the Pasco County Tax Collector. Likewise, his driver’s license contains an address other than 36415 Eunice Drive. Where, like here, an “owner acts inconsistently with a self-professed intention to establish a homestead, a claim for exemption may fail.”16
But even assuming the Court does credit the Debtor’s testimony that he intends to make the 36415 Eunice Drive property his homestead, the evidence at trial was undisputed that he was not actually living there as of the petition date. In fact, in the last decade the Debtor has owned the property, he has only lived there for ten days. The last time the Debtor resided at -the property was mid-2012, nearly two years before the petition date, and he has not returned since then.
At trial, the Debtor put on a compelling case that he cannot live at the 36415 Eunice Drive property because it is unlivable. In particular, the Debtor testified that mold is rampant in the trailer on the property. The Debtor also testified that there is a hole in the roof, which has allowed rodents to enter. The pictures the Debtor offered into evidence at trial17 certainly support his claim that the property is unlivable.
The problem, from the Debtor’s perspective, is that the more persuasive he is that the property is unlivable, the more his homestead claim is doomed. That is because more than 130 years ago, the Florida Supreme Court, in Drucker v. Rosenstein, explained that “a lot never occupied as a dwelling place, and incapable of such occupancy, is not homestead within the Constitution.” 18 The Florida Supreme Court ap-. plied that rule in the January 1882 term in Solary v. Hewlett,19 which is nearly identical to this case.
In Hewlett, a creditor obtained a judgment against Hewlett and then attempted to levy on property he had purchased in Jacksonville, Florida.20 Hewlett intended to make the property his home at the time he purchased it. But it was not in suitable condition for him, his wife, and their four children.21 So Hewlett and his family lived elsewhere on property owned by his wife while Hewlett saved up money from his job as a day laborer to repair the property. On those facts, the Florida Supreme Court reversed a trial court order declaring the property Hewlett’s homestead:
In this case, there is no evidence, save the allegation in the answer, that [Hewlett] intended to repair and reside on the premises. He had taken no steps, had done no act to impress it with the character of a homestead, although he owned it several months before contracting the debt, upon which the judgment was *850founded. His intention cannot avail him under these circumstances.22
Only one fact distinguishes this case from Hewlett. In Hewlett, the homeowner never resided at the claimed homestead. Here, the Debtor spent ten days at the 36415 Eunice Drive property. But that fact does not warrant a different outcome than in Hewlett.23
The Court, like the Debtor, is unable to locate any authority setting a minimum occupancy in order to establish the homestead exemption; nonetheless, the Court concludes that the Debtor’s ten-day “occupancy” here — if it can be called that — is not sufficient. During the decade he has owned the property, the Debtor has occupied the 36415 Eunice Drive property for (at most) ten days. This is not a case where some catastrophic event rendered the Debtor’s property unlivable shortly (or at any point) after he moved in. It was unlivable from the outset.24 If the Debtor’s “occupancy” were enough to establish homestead here, any judgment debtor could overcome the Florida Supreme Court’s long line of cases holding that vacant land cannot constitute homestead25 by simply erecting a ramshackle structure on the property and enduring it for a week or so.
Conclusion
As the objecting party, Cl Bank has the burden of proving that the Debtor is not entitled to claim the 36415 Eunice Drive property as exempt homestead.26 Under the undisputed objective facts of this case, Cl Bank has met that burden. By separate order, the Court will deny the Debtor’s motion to avoid the judgment lien of Cl Bank.
. Art. X, § 4, Florida Constitution.'
. The Court’s findings of fact are based on the Debtor’s testimony at a July 15, 2015 final evidentiary hearing on his motion to avoid Cl Bank’s judicial lien. At the July 15 final evi-dentiary hearing, the Court also received into evidence Debtor’s Exhibits 1 and 2, as well as Cl Bank’s Exhibits 1-3.
.Debtor’s Ex. 1.
. Debtor's Composite Ex. 2.
. Id.
. Id.
. Id.
. Doc. No. 1.
. Doc. No. 23.
. Art. X, § 4, Fla. Const,
. In re Bennett, 395 B.R. 781, 789 (Bankr. M.D. Fla. 2008) (quoting Hillsborough Inv. Co. v. Wilcox, 152 Fla. 889, 13 So.2d 448, 452 (1943)); see also Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So.2d 201 (Fla. 1962) (holding that "intent alone is not a sufficient basis for the establishment of a homestead") (emphasis added).
. In re Harle, 422 B.R. 310, 313-14 (Bankr. M.D, Fla, 2010).
. Semple v. Semple, 82 Fla. 138, 89 So. 638, 639 (1921) (emphasis added).
. Cl Bank’s Trial Ex. 2.
. In re McClain, 281 B.R. 769, 773-74 (Bankr. M.D. Fla. 2002).
. In re Bratty, 202 B.R. 1008, 1010 (Bankr. S.D. Fla, 1996) (citing Smith v. Hamilton, 428 So.2d 382 (Fla. 4th DCA 1983)).
. Debtor's Composite Ex. 2.
. 19 Fla. 191, 195-96 (Fla. 1882) (emphasis added).
. 18 Fla, 756 (Fla. 1882).
. Id, at 757.
. Id, at 758.
. Id. at 760.
. Arguably, there is one other distinguishing fact. In Hewlett, the homeowner failed to allege he had undertaken any repairs to make the claimed homestead livable. Here, by contrast, the Debtor ripped up the carpet, sprayed some mold killer, and purchased some minimal supplies to repair the property. Those minimal steps, taken over a three-year period, do not make this case meaningfully different from Hewlett.
. The Court is aware, from testimony elicited at trial, that a renter had been living at the 36415 Eunice Drive property at some point before the Debtor moved in for ten days. This fact does not change the Court's analysis. To the extent it belies the point that the property was unlivable when the Debtor moved it, it would likewise defeat the Debtor’s claim that he intends to make the property his permanent residence but is prevented from doing so by its state of disrepair.
. See, e.g., Drucker v. Rosenstein, 19 Fla. 191, 194 (Fla. 1882).
. In re Alexander, 346 B.R. 546, 549 (Bankr. M.D. Fla. 2006). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500645/ | ORDER SANCTIONING KENNETH A. FRANK PURSUANT TO 28 U.S.C. § 1927 FOR UNREASONABLY AND VEXATIOUSLY MULTIPLYING PROCEEDINGS, DIRECTING TRUSTEE YIP TO FILE A BILL OF COSTS, ETC., FINDING KENNETH A. FRANK TO HAVE ACTED IN BAD FAITH, PROHIBITING FILINGS BY HIM, AND DIRECTING CLERK TO TAKE CERTAIN ACTIONS
John K. Olson, Judge, United States Bankruptcy Court
This Chapter 7 case came on for hearing before the Court on January 19, 2017, on the Court’s Order to Show Cause [ECF 524], entered May 26, 2016, which directed Kenneth A. Frank to show cause why he should not be sanctioned pursuant to 28 U.S.C. § 1927 for unreasonably and vexatiously multiplying the proceedings in this bankruptcy case.
Frank has' challenged virtually every step of this case, starting during its time in Chapter 11 and continuing thereafter to stymie the case’s Chapter 7 liquidation process. He has relentlessly and falsely accused the Trustee, Maria Yip, and her counsel of nonfeasance and malfeasance. Even after his contentions have been *852found by this Court to be untrue, and those findings have been affirmed on appeal, he has continued to accuse the Trustee of wrongdoing without offering any evidence in support of his accusations. In doing so, he has gone so far beyond the reasonable boundaries of litigation that his actions have passed the high burden of unreasonable and vexatious multiplication of these proceedings as to warrant the imposition of sanctions under 28' U.S.C. § 1927.
Background
This case was filed [ECF 1] as a voluntary Chapter 11 case on June 2, 2013. The Debtor owned a beachfront hotel (the “Hotel”) in Lauderdale-by-the-Sea, Florida, with 147 guestrooms, a beachfront tiki bar and grill (the “Tiki Bar”), an adjoining restaurant and commercial kitchen, and on-site parking. The filing was precipitated by a mortgage foreclosure action brought by Comerica Bank and very extensive code violations asserted by the Town of Lauder-dale-by-the-Sea. Despite excellent representation by its counsel, Genovese, Joblove & Battista, P.A., the case quickly floundered over management issues beyond counsel’s control. Comerica Bank and the United States Trustee sought appointment' of a Chapter 11 Trustee by separate motions [ECF 52, 54, 55] filed July 9, -2013. With the Debtor’s acquiescence, the Court directed the United States Trustee to appoint a Chapter 11 Trustee by Order [ECF 56] entered July 10, 2013. Maria Yip was appointed [ECF 57] as Chapter 11 Trustee on July 12, 2013. The Court approved the appointment by Order [ECF 61] entered July 15, 2013. Trustee Yip promptly sought [ECF 68], and the Court authorized [ECF 70], the retention of Drew Dillworth, Esquire, and Stearns Weaver Miller Weissler Alhadeff & Sitter-son, P.A., as Trustee’s counsel.
The Tiki Bar Lease
The Trustee quickly concluded that the value of the Hotel was substantially depressed by the existence of a purported lease of the Tiki Bar by the Debtor to El Mar Associates, Inc., a Florida corporation owned by Frank. The Trustee accordingly moved to reject the lease by Motion [ECF 98] (the “Motion to Reject”) timely filed August 23, 2013. On September 3, 2013, the Trustee brought Adversary Proceeding 13-1641 against El Mar and Frank for declaratory judgment, determination of the validity of the El Mar lease, avoidance of a fraudulent transfer, and injunctive relief. After trial on the Motion to Reject in the Adversary Proceeding, the Court granted the Motion to Reject the Tiki Bar lease by Order [ECF 154] entered November 22, 2013, and determined that the Tiki Bar lease was invalid in Adversary Proceeding 13-1641 by Order [ECF 85] entered November 21, 2013, and Final Judgment [ECF 87] entered November 22, 2013. No notice of appeal was filed seeking appellate review of the Order [ECF 164] that granted the Motion to Reject. Frank, pro se and purporting to act only on behalf of himself (although he was not a party to the purported lease, which was solely between the Debtor and El Mar 1), timely filed a Notice of Appeal [ECF 100] in the Adversary Proceeding on December 2, 2013. Frank (again acting pro se and asserting that he “is a Director of El Mar Associates, Inc.”) simultaneously sought entry of a- stay pending appeal in a 155-page Motion for Stay Pending Appeal [ECF 101], filed December 2; 2013, in the Adversary Proceeding. On December 3, 2013, Frank withdrew the Motion for Stay [ECF 101] by formal Withdrawal [ECF 110], filed December 3, 2013, and simultaneously withdrew the Notice of Appeal by formal Withdrawal [ECF *853111]. No further review by way of motion for reconsideration or appeal was ever sought by Frank or El Mar, and the effect of the withdrawals of the Notice of Appeal and the Motion for Stay Pending Appeal was that this Court’s determination that the lease was both invalid and rejected became final.
Sale of the Hotel
Meanwhile, on October 29, 2013, the Trustee filed her motion (the “Motion to Sell”) [ECF 135] in the main case seeking to sell the Hotel, including the Tiki Bar, by competing bid and free and clear of ail liens, claims, encumbrances, and interests. The Court granted in part the Motion to Sell by Order [ECF 146] (the “Sale Procedures Order”) entered November 13, 2013, setting bidding and sale procedures and scheduling an auction sale hearing for December 3, 2013. On November 27, 2013, Frank and another of his entities, Oceanside Lauderdale, Inc., filed an Objection2 [ECF 158] to the Motion to Sell. El Mar, through counsel, also Objected [ECF 160] on November 30, 2013. Trustee Yip conducted the auction sale on December 3, 2013. Four bidders participated in the auction; their respective bids are produced on Trustee Yip’s Bidding Summary [ECF 173], filed December 3, 2013. The final winning bid was in the all-cash amount of $17 million. This price was several million dollars in excess of the parties’ expectations; the price obtained was greeted with universal jubilation from all parties, including Frank and his entities. The Objections of El Mar and of Frank and Oceanside were thereupon immediately withdrawn by formal Withdrawals [ECF 175, 176] filed by counsel on December 3, 2013. The Court approved the sale of the Hotel (including the Tiki Bar) by Order [ECF 178] (the “Final Sale Order”) entered December 12, 2013. Among other things, the Final Sale Order authorized Trustee Yip to pay certain real estate tax obligations (which exceeded $750,000), the break-up fee to the stalking horse bidder of $200,000, the broker’s commission of $595,000, and the sum of $11,941,376.29 to Comerica Bank for loan principal amounts outstanding, together with tax, insurance, and ground lease rent payment which had been advanced by Comerica. No motion for reconsideration or appeal was sought from the Final Sale Order, which became final by operation of law on December 26, 2013. The sale dosed in the final days of 2013, and Trustee Yip made the payments authorized in the Final Sale Order,
On February 24, 2014, the Trustee filed a Chapter 11 Plan [ECF 212] and a Motion to Waive Disclosure Statement Requirement [ECF 213], which indicated that there was approximately $3.6 million in remaining Sale proceeds. The Plan ultimately proved impossible to confirm because of Frank’s continuing obstruction. In order to minimize administrative expenses and to preserve as much value as possible for creditors, the Trustee moved to convert the case to Chapter 7 by Motion [ECF 331] filed September 22, 2014. The case was converted, by Order [ECF 340] entered October 3, 2014, to a case under Chapter 7 after hearing conducted September 30, 2014. Chapter 11 Trustee Yip was appointed [ECF 344] as Interim Chapter 7 Trustee by the United States Trustee on October 6,2014.
*854Valuation of Comerica’s Claim
On February 28, 2014, Comerica Bank filed its Motion to Value and Determine Secured Status of Lien (the “Motion to Value”) [ECF 228]. Comerica sought to recover $2.25 million as a secured claim in addition to the $11,941,876.29 that it had previously been paid on account of its secured claim. The additional amount sought included default interest and attorneys’ fees.
Trustee Yip filed a Preliminary Response [ECF 243] to the Motion to Value on March 28, 2014. Trustee Yip noted that, after payment of then-anticipated administrative expenses of some $1.35 million, the effect of payment to Comerica of the additional $2.25 million the Bank sought would be that “there will be virtually nothing available for any other constituency in this case.”
On March 28, 2014, Frank, El Mar, and Oceanside, through counsel, for the first time and “upon information and belief,” raised questions by Cross-Motion [ECF 244] concerning whether Comerica Bank had properly accounted for payments made to it by the Debtor under an interest rate swap agreement (the “Swap Agreement”) and whether Comerica had properly accounted for “any ‘profit’ ” on its disposition of allegedly cross-collateralized property owned by Tropic Ranch, Inc., an entity owned at relevant times by principals of the Debtor. These perfectly appropriate questions did not allege any wrongdoing by Comerica or the Trustee and were raised in the context of Comerica’s Motion (the “Motion to Value”) [ECF 228] seeking determination of the amount and allowance of its secured claim.
At a hearing on the Motion to Value conducted April 1, 2014, the Court was advised that the parties wished to pursue a mediated settlement. Accordingly, and by Order [ECF 256] entered April 14, 2014, the Court set a further status conference on the Motion to Value for May 14, 2014, and ordered:
At the status conference, the Court will consider what further discovery, briefing, evidentiary hearings and/or trial is required to resolve the Motion [to Value] and Responses. In the interim, all discovery among the parties regarding substantive matters raised by the Motion [to Value] is stayed.3
On May 12, 2014, Comerica filed an Agreed Motion [ECF 267] to continue the status conference set for May 14, 2014; the Court granted that motion by Order [ECF 268], which continued the status conference to June 12, 2014. That Order was silent as to whether a discovery ban remained in place.
Following mediation conducted on May 13, 2014, by retired Miami-Dade Circuit Judge Herbert Stettin4 [ECF 266, 269, 270], the Trustee and Comerica reached agreement to settle the amount of distribution to be made to Comerica on account of its secured claim, and Frank and his counsel knew on that same day that the Trustee and Comerica had settled. Frank, El Mar, and Oceanside reached impasse with Comerica and, thus, entered a Report of Mediation Impasse [ECF 270]. Following her settlement with Comerica, the Trustee filed her Motion (the “Comerica Settlement Motion”) [ECF 273] on May 20, 2014, seeking the Court’s approval of her compromise with the Bank. The Court scheduled an evidentiary hearing on the Comeri-*855ea Settlement Motion for June 12, 2014 [ECF 275, 279].
Frank has never asserted that he, El Mar, or Oceanside held any direct or independent claims against Comerica. Rather, his Cross-Motion [ECF 244] objecting to Comerica’s Motion to Value [ECF 228] sought to minimize the allowed amount of Comerica’s secured claim so as to enhance the funds available to satisfy other claims (including, a fortiori, his own, El Mar’s, and Oceanside’s). At no time has Frank, El Mar, nor Oceanside asserted any claim against the estate other than a general unsecured claim, which is entitled to pari passu distribution from the estate along with other general unsecured creditors and which is subordinate to those claims entitled to priority payment under the Bankruptcy Code distribution scheme.
As a matter of law, the Comerica Settlement Motion [ECF 273] created a Contested Matter within the meaning of Bankruptcy Rule 9014, thereby automatically triggering the discovery provisions of Bankruptcy Rules 7026 and 7028-7037 (essentially the same discovery rules as those provided in the Federal Rules of Civil Procedure).
The record reflects that Frank, El Mar, and Oceanside filed no objection to the Comerica Settlement Motion (although their Cross-Motion [ECF 244] to the Motion to Value remained pending and was also scheduled for hearing on June 12, 2014). Frank, El Mar, and Oceanside conducted no discovery in connection with the Comerica Settlement Motion.
At the hearing on June 12, 2014,5 to consider the Comerica Settlement Motion and about nine-other related motions, responses, and replies, then-counsel for Frank, El Mar, and Oceanside, Kevin C. Gleason, asserted that the status conference Orders [ECF 256, 268] had the effect of prohibiting his clients from conducting any discovery on the Comerica Settlement Motion. The status conference Orders could arguably be interpreted that way, although a fairer reading is that the stay on discovery only applied to the Motion to Value. Regardless, Frank, his entities, and Mr. Gleason knew on May 13, 20Í4, that a settlement had been reached between Trustee Yip and Comerica and received a copy of the settlement agreement and the Comerica Settlement Motion on May 20, 2014. As the Court stated on the record at the June 12 hearing, “Anybody unhappy with the settlement [between Trustee Yip and Comerica] would have come screaming in here and asked for discovery. And that didn’t happen.” Mr. Dillworth represented at the June 12, 2014 hearing that neither Mr. Gleason nor anyone else had issued or asked for discovery on- the Comerica Settlement Motion and that he and Trustee Yip would have immediately consented to such discovery had anybody asked. Counsel for Comerica Bank represented that his office had three banker’s boxes of loan and related documents that had first been gathered in connection with the Comerica foreclosure action that preceded the Debt- or’s bankruptcy filing, but that no party in interest had ever asked to look at them— and that Comerica and its counsel would have agreed to such review had it been sought. Had any party in interest asked, the Court would have immediately opened discovery on the Comerica Settlement Motion and shortened the time for responses on an ex parte basis as contemplated by Local Rule 9013-1(C)(7). Nobody asked.
*856The Court therefore concludes that Frank’s contention that he was prohibited from conducting discovery on the Comeri-ca Settlement Motion is a red herring and unworthy of serious consideration.
Following the evidentiary hearing conducted June 12, 2014, the Court approved the settlement by Order [ECF 286] entered June 13, 2014.
Up to this point, the actions of Frank, El Mar, and Oceanside, largely taken through counsel, were within the range of reasonable actions taken by creditors in a bankruptcy case — not necessarily well considered or well executed, but not unreasonable and certainly not sanctionable. That soon changed.
The Botched Appeal
Despite having filed no objection to the Comerica Settlement Motion, on July 2, 2014, Frank filed a Notice of Appeal [ECF 292] for himself, pro se, and purportedly on behalf of El Mar and Oceanside,6 together with a letter [ECF 291] that the Court treated as a motion to extend time to file a notice of appeal. The Trustee [ECF 308] and Comerica [ECF 309] responded to Frank’s Motion to Extend Time [ECF 291], correctly pointing out that Bankruptcy Rule 8002 required any notice of appeal to have been filed within 14 days of the entry of the Order [ECF 286] on June 13, 2014, i,e., by Friday, June 27, 2014. In addition, the Trustee pointed out in her Response [ECF 308] that Frank, El Mar, and Oceanside had failed to file any designation of the items to be included in the record on appeal and the issues on appeal, all of which are required by Bankruptcy Rule 8006 and all of which were due within 14 days of the filing of the (fatally late) Notice of Appeal on July 2, 2014, i.e., by July 16, 2014.
Frank Escalates Accusations
In the 28-page Response [ECF 310] filed July 28, 2014, by Frank pro se and purportedly on behalf of El Mar and Oceanside,7 Frank broadly expanded the questions first raised by his counsel on March 28, 2014 [ECF 244] to allege, for the first time, that Comerica had committed “a possible fraud upon the debtor, creditor [Frank et al] and this Court.” (Emphasis in original.) Frank alleged [ECF 310, p. 10-11] the following:
a. That Comerica Bank had a One Million Dollar Certificate of Deposit posted by the Debtor which the secured creditor retained and never credited the account of the Debtor by reducing the amount of principal of the loan or otherwise;
b. That Comerica Bank received an estimated payment of approximately One Million Dollars under a “swap agreement” connected with its loan to the Debtor. It appears the account of the Debtor was never credited for these payments;
c. That public records reveal that the secured creditor had cross-collateralized other property in connection with the loan to the Debtor. Comerica Bank failed to give the Debtor a credit upon the sale of the collateral, and
d. among other errors and omissions. Comerica Bank may have been overly enriched by millions of dollars. ALL of which funds could have enured to the benefit of the estate and its creditors. The Trustee failed in her fiduciary duty to the creditors in using poor business judgment in ignoring these factors. Likewise, the Court abused its discretion in approving the compromise under these circumstances.
*857Further, the Court denied the Creditors the opportunity of discovery8 before reaching its determination. Had the creditors been permitted discovery, it could have received an accounting and other evidence from the secured creditor which very possibly would have led to denial of the secured creditors remaining claim and direct financial benefit to the estate and its creditors.
Additionally, in approving the compromise, the secured creditor was allowed to forego the payment of any of the additional 1.5 Million Dollars in administrative expenses associated with the Chapter 11 case administration. The Debtors estate was forced to pay all the administrative expenses and the secured creditor in essence “rode the bus for free.”
Lastly, under [Bankruptcy] Rule 9019, a compromise of such significance required that it be handled through a plan and voted upon by the creditors to be approved.
The Court conducted a hearing on Frank’s Motion to Extend Time for Appeal on July 29, 2014 [ECF 291].9 At the hearing, El Mar and Oceanside, through counsel, withdrew the Motion as to them, and the hearing proceeded solely on Frank’s Motion, with Frank arguing pro se. he Court denied the Motion to Extend Time to Appeal [ECF 291] and struck the Notice of Appeal [ECF 292] because, pursuant to the provisions of Local Rule 87.4 of the District Court, the bankruptcy court is “authorized and directed” to dismiss an appeal if it is not timely filed under Bankruptcy Rule 8002 or if a designation of the record or the statement of the issues on appeal is not timely filed under Bankruptcy Rule 8006 and Bankruptcy Local Rule 8006-1. The Court accordingly did not reach the novel and elaborate allegations of fraud made by Frank in the Response [ECF 310].
Frank timely filed a Notice of Appeal [ECF 316] from the Order Denying Motion to Extend Time to Appeal and Striking Notice of Appeal as Untimely [ECF 311]. The appeal was docketed in the District Court on September 26, 2014, as Case No. 14-cv-62223-WJZ. By Order [ECF 10] entered August 28, 2015, Judge Zloch determined that this Court had not abused its discretion in denying the Motion [ECF 291] and dismissed the appeal. No appeal was taken from Judge Zloch’s Order, which is now final.
Trustee Yip’s Objections to Claims of El Mar, Oceanside, and Frank
1. El Mar’s Claim
The Debtor filed its initial Schedules and Statement of Financial Affairs (“SOFA”) [ECF 36] on June 20, 2013. El Mar was not listed on Schedule F as a creditor, but was listed on Schedule G as being party to a “Five (5) year Lease Agreement between the Debtor and El Mar Associates, Inc. for the Tiki Bar located on the Property.” [ECF 36, p. 25 of 36.] El Mar was not identified by the Debtor in SOFA Question 4 [ECF 36, p. 29 of 36] as a party to any litigation with the Debtor.
El Mar filed Claim 17-1 in the amount of $3,350,000 on September 30, 2013. On its face, Claim 17-1 is a “[c]ontingent claim for rejection of lease, breach of contract.” Claim 17-1 was executed by Frank as Director of El Mar. Attached to Claim 17-1 is the first page of a Second Amended Complaint in an action in the Circuit Court for Broward County, Florida, Case No. CACE 10-22268. According to the Second *858Amended Complaint, the Plaintiffs are Oceanside, Frank, and Angela DiPilato; El Mar is not a Plaintiff. The Defendants include the Debtor, its principals, and related entities. Also attached to Claim 17-1 is a single-page Calculation of Damages, which recites, in its entirety, the following:
The damages for beach [sic] of contract are calculated as follows:
Using an 8.5% discount rate, based on 10-year operating projections, conservatively $8,000,000 for future lost profits, not including any portion of 2013, plus the initial investment of approximately $350,000.
On May 20, 2014, El Mar filed Amended Claim 17-2 in the amount of $3,550,000, based upon “[l]ost profits, conversion of personal property, breach/rejection damages.” Claim 17-2 was also signed by Frank as Director of El Mar and had attached the same first page of the Second Amended Complaint in the above state court action (to which El Mar is not a party). Claim 17-2 also had attached the first page of a Commercial Lease purportedly between the Debtor and El Mar, and added to the Calculation of Damages contained in Claim 17-1 a single line which states, “The damages for sale of Creditors property is $200,000.”
2. Oceanside’s Claim
As noted above, the Debtor filed its initial Schedules and Statement of Financial Affairs [ECF 36] on June 20, 2013. Oceanside was listed on Schedule F as a creditor holding a contingent, unliquidated, and disputed claim in an unknown amount. [ECF 36, p. 22 of 36]. Oceanside was also identified as a party to litigation with the Debtor in SOFA Question 4 [ECF 36, p. 29, 30 of 36] in three cases pending in the Circuit Court for Broward County, Florida: Case Nos. CACE-10022268 (identified by the Debtor as a dispute involving “Contract and Indebtedness”), CACE-11022851 (identified by the Debtor as involving “Real Property”), and CACE-11022878 (identified by the Debtor as involving “Real Property”).
Oceanside filed Claim 18-1 in the amount of $4,392,000 on September 30, 2013. On its face, Claim 18-1 is for “Assault and Battery.” Claim 18-1 was executed by Frank as President of Oceanside. Attached to Claim 18-1 is the first page of a Second Amended Complaint in an action in the Circuit Court for Broward County, Florida, Case No. CACE 10-22268. According to the Second Amended Complaint, the Plaintiffs are Oceanside, Frank, and Angela DiPilato. The Defendants include the Debtor, its principals, and related entities. Also attached to Claim 18-1 is a single-page Calculation of Damages, which recites, in its entirety, the following:
The damages for breach of contract are calculated as follows:
Anticipated profits of $183,000 for 24 years = $4,392,000.
Initial investment was approximately $600,000.
On May 19, 2014, Oceanside filed Amended Claim 18-2 in the amount of $4,392,000 based upon “contract, property, fraud, etc., (see attached).” Claim 18-2 was also signed by Frank as President of Oceanside, attached the same first page of the Second Amended Complaint in the above state court action, and attached a single-page Calculation of Damages, which recites, in its entirety, the following:
The damages for breach of contract are calculated as follows:
Anticipated profits of $183,000.00 for 24 years = $4,392.00 [sic]
1. Initial Investment was approximately $600,000.00;
2. The damages for Sale of Creditors property is $500,000.00;
*8593. The damages for Fraud are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
4. The damages for Fraud In the Inducement are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
5. The damages for Fraudulent Misrepresentation are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
6. The damages for Negligent Misrepresentation are Anticipated profits of $183,000.00 for 24 years - = $4,392,000.00;
7. The damages for Wrongful Eviction are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
8. The damages for Constructive Eviction are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
9. The damages for Forcible Entry and Unlawful Detainer are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
10. The damages for Unjust Enrichment are $600,000.00;
11. The damages for Equitable Estoppel are $4,392,000.00;
12. The damages for Promissory Estop-pel are $4,392,000.00;
13. The damages for Tortious Interference with Business are Anticipated profits of $183,000.00 for 24 years = $4,392,000.00;
14. The damages for Conversion are $600,000.00.
Exactly how these damages are calculated is not specified in Claim 18-2, nor is how they aggregate to $4,392,000.00, as set forth on the face of Claim 18-2. From any objective standpoint, Oceanside Claim 18-2 is nonsense.
3. Frank’s Claim
As noted above, the Debtor filed its initial Schedules and Statement of Financial Affairs [ECF 36] on June 20, 2013. Frank was listed on Schedule F as a creditor holding a contingent, unliquidated, and disputed claim in an unknown amount. [ECF 36, p. 21 of 36]. Frank was also identified as a party to litigation with the Debtor in SOFA Question 4 [ECF 36, p. 29 of 36] in one case pending in the Circuit Court for Broward County, Florida: Case No. CACE-11020171 (identified by the Debtor as a dispute involving “Real Property Commercial Foreclosure”).
Frank filed Claim 19-1 in an unliquidat-ed amount on September 30, 2013. On its face, Claim 19-1 is for “Assault and Battery.” Claim 19-1 was executed by Frank pro se. Attached to Claim 19-1 is the first page of a Second Amended Complaint in an action in the Circuit Court for Broward County, Florida, Case No. CACE 10-22268. According to the Second Amended Complaint, the Plaintiffs are Oceanside, Frank, and Angela DiPilato. The Defendants include the Debtor, its principals, and related entities. Also attached to Claim 19-1 is a single-page Calculation of Damages, which recites, in its entirety, the following:
The damages for assault and battery are unliquidated and will have to be determined by a court or jury.
Trustee Yip’s Objection to Claims of El Mar, Oceanside, and Frank
On November 12, 2014, the Trustee filed her Second Omnibus Objection [ECF 351] to the Claims filed by El Mar (Claim 17), Oceanside (Claim 18), and Frank individually (Claim 19). Trustee Yip’s Objection to El Mar’s Claim 17 was that, because the Claim was for lost profits, conversion, and breach/rejection damages in connection with the Tiki Bar lease, the Court’s previ*860ous determination that the Tiki Bar lease was invalid and unenforceable in Adversary Proceeding 13-1641 meant that there was no allowable claim and that there are accordingly no actual damages associated with Claim 17.
Trustee Yip’s Objection to Oceanside’s Claim 18 was based in part upon the same logic relating to the Tiki Bar lease invalidation. In addition, Trustee Yip’s Objection was based upon Oceanside’s failure to file a copy of any restaurant lease, prosecute the relevant state court complaint, and establish any liability of the estate for the claims asserted in the state court litigation and because any damages are “remote, speculative and unsupported by record evidence.”
Trustee Yip’s Objection to Frank’s Claim 19 was substantially identical to her Objection to Oceanside’s Claim 18.10
Frank filed his 120-page Response [ECF 360] on December 9, 2014. In it, Frank again alleged that the Trustee had exhibited poor business judgment in connection with the Comerica Bank settlement and in settling “improper tax claims.” He accused the Trustee of having “managed the estate to her benefit, the benefit of her Attorney and professionals, and one select creditor. ALL to the detriment of the unsecured creditors.” Further, Frank alleged that her objection to Claim 19 “was brought about solely to advance Trustee Yip’s own interests, is a nullity, is insufficient, is improper, frivolous and without merit.” Frank further alleged that “Interim Trustee Yip would have known this if she did any research before filing her ‘bad faith’ and meritless objections.”
Frank asserted in his Response that the basis of his Claim 19 was as follows:
14. On June 02, 2013, the Debtor was liable to KENNETH FRANK for tor-tious acts, etc. Pending was Frank’s lawsuit against the Debtor and Debtors’ principals in State Court, * See, Oceanside Lauderdale, Inc and Kenneth Frank, et. al. v. Ocean 4660, LLC, et. al, (Case No.: CACE 10-22268(13), Circuit Court, Broward County). The 17 Count Complaint seeks damages against the Debtor for fraud, fraud in the inducement, fraudulent misrepresentation, negligent misrepresentations, unjust enrichment, equitable estoppel, promissory estoppel, tortious interference with business, conversion, conspiracy to commit assault, and conspiracy to commit battery, among other things.
Through Mr. Gleason, once again appearing in the case as their counsel,11 El *861Mar and Oceanside also filed a Response [ECF 362] to the Trustee’s Objection [ECF 351], One of three pages recited, in two sentences, the nature of their claims:
1. Creditors’ claims are based upon calculations of lost profits and/or actual funds expended in the improvement and/or operations of businesses.
2. Creditors have documentation supporting their claims.
This anodyne response starkly contrasts with the inflammatory nature of Frank’s pro se Response [ECF 360]. In the ultimate event, no documentation or other evidence was ever introduced providing any support for the Frank, El Mar, or Oceanside claims, let alone “calculations of lost profits and/or actual funds expended” or “documentation supporting their claims.” [ECF 362].
The Contested Trustee Election
Following conversion of the case to one under Chapter 7 [ECF 340] on October 3, 2014, the United States Trustee appointed [ECF 344] Maria Yip, who had served as Chapter 11 Trustee, as the interim Chapter 7 Trustee. At the Chapter 7 meeting of creditors, held pursuant to 11 U.S.C. § 341 on November 12, 2014, El Mar and Oceanside sought an election of a Chapter 7 Trustee and sought to elect as Trustee William A. Brandt, Jr.,12 in place of Maria Yip. Pursuant to the requirements of 28 U.S.C. § 586(a)(3), 11 U.S.C. § 702, and Bankruptcy Rule 2003(d), the United States Trustee reported [ECF 358] the disputed election to the Court. In his 50-page response (accompanied by 46 pages of exhibits) [ECF 361] filed December 9, 2014, Frank reiterated in somewhat modified form his allegations of fraud by Com-erica Bank and asserted “poor business judgment” by Trustee Yip. For the first time, Frank alleged that Trustee Yip had breached her fiduciary duties to the estate.13
The Court sua sponte directed then-interim Trustee Yip to respond to Frank’s allegations by Order [ECF 363] entered December 16, 2014, and authorized Frank to reply. Interim Trustee Yip Responded [ECF 364] on January 5, 2015, and Frank Replied [ECF 365] on January 20, 2015.
Pursuant to 11 U.S.C. § 702(a),
A creditor may vote for a candidate for trustee only if such creditor ... (1) holds an allowable, undisputed, fixed, liquidated, unsecured claim of a kind entitled to distribution under [Chapter 7],
A review of El Mar’s, Oceanside’s, and Frank’s claims, and Trustee Yip’s Objections to them, makes clear that those claims are ineligible to vote under § 702(a). On its face, El Mar’s Claim 17-1 is a “[c]ontingent claim for rejection of lease, breach of contract,” and its amount was facially calculated “based on 10-year operating projections, conservatively $3,000,000 for future lost profits.” Amend*862ed Claim 17-2 was facially based upon “Most profits, conversion of personal property, breach/rejection damages” and was based in part on claims pursuant to state court litigation to which El Mar was not even a party..
Oceanside’s Claim 18-1 is facially for “Assault and Battery” in the amount of $4,392,000, and in part based upon state court litigation. But the damage calculation attached to Claim 18-1 asserts damages for lost profits over a projected 24-year period. Claim 18-2 states that it is based upon “contract, property, fraud, etc.” Its damage calculation asserts a laundry list of 14 separate elements of damages, each of which asserts individual categorical damages in amounts ranging from $4,392 to $4,392,000 (including one of $4,392, one of $500,000, three of $600,000 each, and ten of $4,392,000) — all of which somehow add to $4,392,000.
Frank’s Claim 19-1 is for “Assault and Battery” and is, on its face, “unliquidated and will have to be determined by a court or jury.”
Even if then-interim Trustee Yip had not objected to Claims 17, 18, and 19, it is clear on the face of each of them that none of them is “an allowable, undisputed, fixed, liquidated, unsecured claim of a kind entitled to distribution under [chapter 7]” and to vote for a trustee pursuant to § 702(a).
Following a hearing conducted March 18, 2015, the Court determined by Order [ECF 389] (the “Election Order”) entered March 23, 2015, that neither El Mar nor Oceanside was eligible to request an election of a Chapter 7 trustee on November 12, 2014. Accordingly, the Court determined that no valid election occurred and that Interim Trustee Yip was the Chapter 7 Trustee in the case.14
On April 6, 2015, Frank,15 Oceanside, and El Mar, through counsel, filed a Notice of Appeal [ECF 397] from the Election Order. The District Court, by Order [ECF 17] entered March 30, 2016, in Case No. 15-cv-60732-WJZ, affirmed the Election Order. Judge Zloch found:
The real essence of Appellants’ position is that Trustee Yip’s objections were made for some nefarious purpose, and therefore were groundless. A review of the record below, however, refutes any such contention. Indeed, Trustee Yip had rational and legitimate bases to object to Appellants’ claims.
In a footnote, Judge Zloch expanded on his determination:
Appellants’ contention that Trustee Yip levied her objections for the purpose of enriching herself in the case to continue earning fees strikes the Court as frivolous. The case was converted to Chapter 7 upon Trustee Yip’s Motion, which she filed to protect the interest of the creditors by preventing her own fees and expenses from eating up the remaining estate property. As the Trustee put it: “Based on the continuous opposition from Frank, El Mar and Oceanside on virtually every matter in this case, it appears that proceeding with a confirmation process [in Chapter 11] would only serve to increase the administrative costs of this estate and thereby, decrease, if not eliminate, distributions to creditors.” Case No. 13-23165-BKC-JKO (DE 331, Sept. 22, 2014).
On further appeal to the Eleventh Circuit Court of Appeals, the Court affirmed the District Court’s judgment “based on *863its well-reasoned order.” Frank v. Yip, 673 Fed.Appx. 937 (11th Cir. 2016). The Court of Appeals’ mandate issued February 13, 2017.
Simply stated, Frank’s challenge to the Election Order was frivolous; it depleted the estate’s assets by forcing Trustee Yip to incur unnecessary litigation expenses, and three levels of the federal judiciary were forced to address idiotic claims.
Motion to Disqualify
Within a week of the entry of the Election Order, in a 36-page Motion [ECF 394] supported by a 35-page Affidavit [ECF 395] (both filed March 30, 2015), Frank moved to disqualify the Court “pursuant to 28 U.S.C. section(s) 14416 and 455, and the Due Process Clauses of the United States Constitution, Amendments V and IX.” Frank alleged that disqualification is required because (1) the Court’s “impartiality might be reasonably questioned”; (2) the Court “has a personal bias and prejudice concerning a party and/or counsel for the party”; (3) the Court “has a substantial association with the law firm representing the Chapter 7 Trustee, Maria Yip”; and (4) “the Court’s action from the inception display a deep-seated favoritism and antagonism that make fair judgment impossible.” The Court denied the disqualification Motion by Order [ECF 438] entered July 21, 2015, finding each of the asserted bases for disqualification frivolous or legally inadequate.
Frank promptly moved for reconsideration of the Order Denying Motion for Disqualification [ECF 438] in a 61-page Motion [ECF 445] filed July 31, 2015. The reconsideration Motion was denied by Order [ECF 449] entered August 13, 2015. Frank filed a notice of appeal [ECF 455] addressed to the Order Denying Disqualification and Order Denying Reconsideration [ECF 438, 449].
On appeal, in Case No. 15-cv-61786-KMW, Judge Williams held, citing the standards in U.S. v. Greenough, 782 F.2d 1556, 1558 (11th Cir. 1986), that “a judge’s impartiality must reasonably be questioned in order for the judge to recuse, because there is the need to prevent parties from manipulating the system for strategic reasons, perhaps to obtain a judge more to there [sic] liking,” and that, as such, “a charge of partiality must be supported by facts.” Judge Williams held that Frank’s complaints about this Court’s decision not to recuse “fall squarely in the ... category of ‘unsupported, irrational, or highly tenuous speculation.’ ” Accordingly, the District Court found that “there was no abuse of discretion in the Bankruptcy Court’s orders denying [Frank’s] motion to recuse and motion to reconsider the order denying [Frank’s] motion to recuse,” and thus affirmed. The Order on Appeal [ECF 18] was entered September 6, 2016. No appeal was taken to the Court of Appeals and Judge Williams’ Order on Appeal is now final.
It is notable in connection with the recu-sal motion that, although Frank made significant accusations, none of them were supported by a shred of evidence. They were, as Judge Williams found, “unsupported, irrational, or highly tenuous speculation.” This has been the hallmark of Frank’s accusations throughout this case: there has been no evidence whatsoever to support any of them.
Frank’s Complaint to the United States Trustee
United States Trustees are appointed by the Attorney General pursuant to 28 U.S.C. § 581 to serve in 21 regions in the United States. These regions cross state *864lines, judicial districts, and the jurisdictional boundaries of the Courts of Appeals.17 The system was created as part of the enactment of the Bankruptcy Code in 1978. The duties of each United States Trustee are set forth in 28 U.S.C. § 586, and include (among many pages of other listed duties) establishing, maintaining, and supervising a panel of private trustees who are eligible and available to serve as trustees in cases under Chapter 7 or Chapter 11, as well as supervising the administration of cases and trustees in cases under Chapters 7,11,12,13, and 15.
Thus, if a party in interest has a complaint about the handling or administration of a case by a panel trustee in a Chapter 7 or Chapter 11 case (as distinct from a legal, issue, which should be brought before the court) the proper place to take that complaint is to the Office of the United States Trustee.
By 32-page Notice of Similar or Related Actions [ECF 471], filed March 8, 2016, Frank gave notice in the Debtor’s case that he had made a formal complaint (the “Complaint to the UST”) against Trustee Yip to the Office of the United States Trustee.18 The Complaint to the UST accused Trustee Yip of malfeasance regarding her administration of the Debt- or’s estate and additionally accused her of having:
a. Looted the estate solely for the benefit of herself and the professionals she employed;
b. Charged excessive fees;
c. Misappropriated money from the estate;
d. Refused to be deposed by the unsecured creditors of the estate;
e. Inaccurate reporting;
f. Breached her fiduciary duty;
g. Filed illegal claims objections;
h. Improperly intefered [sic] with and obstructed a Trustee election;
i. Employed Attorneys’ [sic] to do work she was entrusted to do;
j. Failure [sic] to object to hundreds of thousands of dollars in tax claims that did not belong to the debtor. Despite, the unsecured creditors tendering evidence of this to Trustee Yip;
k. Repeated violations of the Bankruptcy Code;
l. Failure [sic] in the performance of her official duties;
m. [sic] Negligence and Gross Negligence, and
n. Otherwise negligently and willfully mis-administered the estate.
These allegations are both baseless and outrageous.
In response to this excoriating set of charges, Trustee Yip filed a Motion [ECF 474] seeking a hearing on Frank’s Complaint to the UST. Attached to the Motion was Trustee Yip’s formal response to the U.S. Trustee. The Court granted this Motion by Order [ECF 475], which set a hearing on Frank’s Notice [ECF 471] for May 18, 2016, at 10:00 a.m. and directed Frank to “appear at the preliminary hearing fully prepared to set forth and describe *865all of the facts supporting the allegations set forth in the Complaint [to the UST]. The Court will thereafter determine whether any further hearing on the Complaint is necessary or appropriate.”
At the hearing conducted on May 18, 2016, Frank appeared, as did counsel for Trustee Yip. The Court found that the Complaint to the UST [ECF 471] was insufficient on its face to state a basis for relief and ruled that it would be stricken under Bankruptcy Rule 7012, applying Fed. R. Civ. P. 12(f). Later that same day, at 2:14 p.m. and 2:46 p.m., respectivély, Frank filed a new Notice of Similar or Related Actions [ECF 478] and a Response to Scheduling Hearing [ECF 479]. These were documents of 258 and 280 pages, respectively. Following the hearing of May 18, 2016, and the filing of ECF 478 and ECF 479, the Court entered its Order [ECF 481] on May 26, 2016, which formally struck ECF 471 pursuant to Rule 12(f) and, although neither had been set for hearing, sua sponte struck ECF 478 and 479 for the same reasons, all as authorized by Rule 12(f)(1). The Court further ruled that “Frank may file a complaint pursuant to Federal Rule of Bankruptcy Procedure 7001, which satisfies Federal Rules of Bankruptcy Procedure 7008 and 7009 [which generally adopts Fed. R. Civ. P. 8 and adopts Fed. R. Civ. P. 9], relating to the matters set forth in ECF Nos. 471, 478, and 479 by no later than June 3, 2016”
Frank duly filed “on behalf of the estate of Ocean 4660, LLC” his 304-page “Complaint [ECF 487] for Breach of Fiduciary Duty; Negligence; Gross Negligence; Breach of Duties; Breach of Duty of Loyalty and Care; Wilful and Deliberate Misconduct; and Recovery on Bond and ‘Demand for Jury Trial’” on June 3, 2016. This Complaint initiated Adversary Proceeding 16-1248 (the “Frank Adversary”), discussed below.
The § 1927 Order to Show Cause [ECF 482]
Prior to filing of the Frank Adversary, while matters were' pending on Frank’s Notice of Similar or Related Actions [ECF 478] and Response to Scheduling Hearing [ECF 479], and- as a result of Frank’s repeated filings of pleadings containing extravagant and outrageous accusations of fraud and misconduct by the Trustee, the Court sua sponte entered its Order to Show Cause [ECF 482] on May 26, 2016, directing Frank to show cause under 28 U.S.C. § 1927 why he should not be sanctioned for “unreasonably and vexatiously” multiplying the proceedings in this case. This ultimately proved to be a vain attempt to rein in the litigation. Frank was authorized to file a response to the Order to Show Cause by June 16, 2016, any party in interest was authorized to reply by June 27, 2016, and Frank was ordered to appear on June 29,2016.
Frank filed a Response [ECF 489] on June 13, 2016. In it, Frank acknowledged that case law in the Eleventh Circuit holds that a pro se litigant may be sanctioned pursuant to 28 U.S.C. § 1927 and asserted that the facts in Smartt v. First Union National Bank, 245 F.Supp.2d 1229 (M.D. Fla. 2003), “are glaringly distinguishable from the facts in this case.” Specifically, Frank asserted:
Section 1927 requires a touchstone of bad faith, which is more than mere negligence or lack of merit. The 11th Circuit has held that an attorney who ‘knowingly or recklessly pursues a frivolous claim’ acts in bad faith. Id.19 Schwartz20 *866at 1225-1226. It has not been determined that Frank’s claims against Trustee Yip are frivolous. In fact, the opposite is true. This Court granted Frank permission to bring an Adversary Proceeding against Trustee Yip on these claims [ECF No. 481].
In her Reply [ECF 490] filed June 27, 2016, Trustee Yip asserted that the Court’s Order to Show Cause [ECF 482] “was appropriately based upon Mr. Frank’s three-year record of frivolous and vexatious conduct in this case. While Mr. Frank’s antics have generated nothing for himself, the estate and its legitimate creditors have suffered the consequences of unnecessary delay and increased administrative costs.” [Footnote omitted.] Trustee Yip noted that “[r]ather than accepting the OSC [Order to Show Cause] as an opportunity to step back and re-evaluate his conduct during the entire pendency of this bankruptcy case, Mr. Frank instead decided to double down on his failed litigation strategy.”
At the first hearing on the Order to Show Cause, held June 29, 2016, Frank asserted that he had acted in good faith throughout the main bankruptcy case and in the filing of Adversary Proceeding 16-1248. See Transcript at ECF 494. By contrast, Drew Dillworth, Trustee Yip’s counsel, made clear that Frank’s actions were enormously increasing the administrative costs of the estate and were ultimately pointless:
Nearly everything in [these] cases, since the final approval of the settlement with Comerica Bank, nearly every pleading filed by Mr. Frank has been an effort to just delay the inevitable distribution of these funds to the priority scheme in Section 726 of the Code.
At the time we reached that settlement, we had a very sizeable pile of money available to the estate, and its most [senior] creditor class, which is the priority class of unsecured claims, which exceed $2 million, and the goal which we expressed to the parties and the Court at the time was to engage in the same type of mediation process with the priority creditors as we engaged in with the secured and administrative claims, the non-professional administrative claims, with the goal ultimately of having some funds spilled down to unsecured claims, at which point in time we would reconcile those claims.
That entire process has been frustrated by Mr. Frank, and none of the pleadings that he’s filed really will do anything to put money in his pocket or in the pocket of unsecured creditors, because of the finality of everything that occurred prior to the conversion of this case, and in that I mean the sale of the property, which Mr. Frank still criticizes, and the settlement with the primary creditor in this case, Comerica Bank.
All of those proceedings that left the pot of money are final proceedings, are final orders of this Court, not subject to collateral attack. All we’ve heard today on the response Mr. Frank filed to the order to show cause, are his subjective beliefs. I heard the word “believe” counted seven times, eight times, but in every context in which he made an assertion, whether it be in the context of Trustee Yip’s behavior in presenting, for example, the Comerica settlement to this Court, he believes that there were misrepresentations made.
Well, you know, I believe a lot of things, but I didn’t act on those beliefs in a court of law without having some evidence to support them....
ECF 494, p. 9,1.10 — p. 10,1.24.
There was, however, ... some objection raised in connection with ultimately settling the Comerica Bank claim, that *867there was other collateral, or that Com-erica Bank failed to give a credit, but there was no evidence presented. There has never been any evidence presented and, in fact, your Honor may recall the bank officer standing before the Court telling your Honor that there was no other collateral supporting the debt here, and the assets, that the sale proceeds, was the last remaining bucket of collateral Comeriea had to satisfy its claim.
Those representations were made. They were unchallenged other than, again, subjective beliefs presented to the Court. So all those issues were raised, framed by Mr. Frank in connection with the settlement of Comeriea Bank’s claim. That order is final. Raising them again in an indirect way, by saying, well, Trustee Yip didn’t investigate the claim, that’s not appropriate, and frankly, Trustee Yip did investigate the claim.
ECF 494, p. 11,1.12 — p. 12,1.5.
So while Mr. Frank may be correct, that if there were evidence under a Rule 60 standard, he could come back and challenge the final rulings of this Court, if there was evidence of fraud, if there was evidence of misrepresentation, then not only should the Court re-examine, but I would be encouraging that process as well, but the problem is, ... you see in the complaint he filed June 2nd, all you [have are] Mr. Frank’s subjective feelings and beliefs, and that is not how we do things here.
ECF 494, p. 12,1.16 — 1.25.
In later colloquy between the Court and Frank regarding whether Comeriea Bank had obtained other collateral for the Ocean 4660 loan, Frank noted that a document, the loan commitment from Comeriea, which is in the record and attached as Exhibit D to the Complaint in Adversary Proceeding 16-1248, required that the Debtor post additional collateral for the loan:
MR. FRANK: And I believe that that’s why we wanted discovery then. I believe I have enough proof here that it’s not a wild allegation, your Honor, • when it’s in the form of commitment letters, and the mortgage itself requires ... that.
THE COURT: And did the debtor post it?
MR. FRANK: I can’t say for certain that the debtor posted it.
THE COURT: Okay.
MR. FRANK: But I can say this, I don’t think Comeriea — it’s in their commitment letter. Why would they give the loan if the debtor did not post it? They would have never closed the loan, your Honor.
THE COURT: That’s — that may be a leap too far, having closed a number of commercial transactions in which at closing some condition is waived. I’ll look at your Exhibit D, Mr. Frank, but here is the fundamental problem, the settlement with Comeriea Bank has long since been final and not subject to review.
The only way it could be undone is with a motion to set aside something for fraud. It would be under Rule 9024, applying Rule 60(b), and for relief under Rule 60(b)(3) for fraud, it has to be brought no more than a year after entry of judgment, or order, or the date of the proceeding. The settlement with Comer-ica Bank became final in 2014, more than two years ago. So I’m really struggling to figure out what kind of relief you could get.
MR. FRANK: Your Honor, if we’re talking about ... the trustee election. If the trustee election dispute, if the 11th Circuit did resolve it favorably, then that *868new trustee would have the power to look into these orders.
THE COURT: But could not bring an action to undo the settlement with Com-erica Bank on grounds of mistake, inadvertence, surprise or excusable neglect, or newly discovered evidence or fraud, because the transaction, the settlement was consummated more than two years ago.
So I don’t care if you hired an avenging angel as trustee, or the U.S. Trustee appointed a new trustee who was the avenging angel, or you elected a trustee, “you” being the creditor body, there is nothing that a new trustee could do to set aside the settlement with Comerica Bank, even for fraud.
And so I’m frustrated because you make allegations that there was fraud on the Court, perhaps fraud on the trustee, certainly misrepresentations made, but you let so much time pass without bringing the particulars of the fraud to the Court’s attention, that there is nothing that anybody could do about it, and it’s at the point where if there is nothing that can be done about it, and your principal objection is the failure to hold out for a better deal or to litigate with Comerica Bank, the time to do so that has long since past, and yet we’re here revisiting a question on which no Court could grant relief.
So, that’s what pro — that appears is what prompted me to enter the order to show cause, that you are literally beating a dead horse, and it’s taken up a lot of my time, it’s costing the estate a bloody fortune, because Mr. Dillworth is going to be paid for his work here,, and I just have the overwhelming sense that the delays which have been occasioned by you and nobody else have cost hundreds of thousands of dollars, and may well result in absolutely no money going to the benefit of unsecured creditors in this case, even though that is not what should have happened after the very successful $17 million sale.
And, you know, there was a wonderful cartoon published for years called Pogo, about politically wise creatures who live in the Okefenokee Swamp, ... and Pogo had a very great line that we have met the enemy and he is us.
By continuing to bring up matters that are now concluded in a way that there is nothing that could be done about them. You’re causing the trustee to incur fees and you’re wasting your time.
I would very much like it if you would reflect on that.
EOF 494, p. 22,1.22 — p. 26,1.5.
The record reflects that although Frank had previously objected to the Comerica secured claim, that objection did not raise any question of additional collateral in the form of a certificate of deposit.21 And between the Comerica Settlement Motion filed at ECF 273 and its approval by Order filed at ECF 285, not a single pleading was filed by Frank. As noted above, Frank could have taken discovery in connection with the Comerica Settlement Motion but did not do so.
The Court made a clear and explicit warning to Frank:
Mr. Frank, I will look at Exhibit D to your complaint filed in the adversary proceeding, Frank v. Yip, ... and I will set a hearing on that motion to dismiss. If I conclude that the motion to dismiss should be granted, and that there is no *869smoking gun in your complaint, I will award sanctions against you. They may well be significant sanctions against you because on the face of it you have unreasonably and vexatiously multiplied the proceedings in this case.
I’m not going to make such a ruling today. I will carry this over to a hearing on the motion to dismiss the adversary proceeding, 16-1248, ... and I will give you a shot to put on evidence and prove what you are alleging.
I plead with you to consider carefully whether you have enough to prove the allegations that you’ve been making, because if you don’t I will conclude on the basis of this entire three-year history of this case that you have attempted to thwart every step along the way, asserted crazy positions, lost every step of the way, lost on appeal in respect of everything that’s been finally decided on appeal, and I would not have entered the order to show cause lightly. I’ve never entered such an order before, and I been on this job for almost ten and a half years.22
So before we have the hearing on the motion to dismiss and the continued order to show cause, I would ask you to dig deep and consider carefully whether you want to proceed in the way that you have been proceeding, because if you do proceed, and if you lose, you will be whacked with sanctions.
If the adversary proceeding were dismissed with prejudice, I presume that the trustee — and if you stop interfering with the administration of the case, I suspect that the trustee will not seek sanctions against you. I would encourage her not to seek sanctions against you.
If she nonetheless sought them, I might not grant them, but if you keep going down the path you’re now going down, I do not foresee good things in your favor.
When I say “not interfere with the administration of the case,” I do not mean that if there are pending claims of El Mar, or Oceanside, or yourself that come on for-some kind of a contested matter, I don’t expect you to roll over and play dead.
What I mean is the broader engagement in this case in which you have tried, without notable success, to block every step on the cleanup of this case, which should have been closed a year and a half, maybe even two years ago, and instead Mr. Dillworth has spent a lot of time, his firm has spent a lot of time, the trustee, I suspect, has spent a lot of time and effort, and God knows I have, in trying to sort this stuff out.
So you have a big decision to make. I will réad your Exhibit D, and I will-before any further hearing, I will carefully reread your complaint and your ... preliminary response to the order to show cause.
I’m not prejudging things, but I’m telling you how they appear to me sitting here today, and you have to decide not only whether you’ve got enough to prevail, but whether at the end of the day you’re going to receive any monetary benefit from it, because if you have succeeded in causing the estate to incur such great amount of administrative expense that nothing will trickle down to the unsecured creditors, then you would have been far better off with a fishing pole on a bridge over the Intracoastal fishing for supper than you were in kill*870ing as many trees as you have in filing these lengthy pleadings.
I think you’ve been wasting your time. I am pretty sure you’ve been wasting Mr. Dillworth’s time, and I’m almost certain you’ve been wasting mine.
So, think it through carefully, Mr. Frank. We’ll have a hearing on the motion to dismiss and this continued order to show cause.
ECF 494, p. 30,1.6 — p. 33,1.7.
Following the hearing held June 29, 2Ó16, on the Order to Show Cause, the Court entered its Order [ECF 491] which noted Frank’s Response [ECF 489], Trustee Yip’s Reply [ECF 490], the Complaint filed in Adversary Proceeding 16-1248, and Trustee Yip’s Motion to Dismiss [ECF 6] in Adversary Proceeding 16-1248. The Court indicated its intent to have the Order to Show Cause and Adversary Proceeding 12-1248 move in tandem and continued the Order to Show Cause to September 15, 2016.
Regrettably, Frank did not reflect on the Court’s detailed admonition to him set forth above. Instead, he more than doubled down. The Order to Show Cause and the Trustee’s Motion [ECF 6] to Dismiss Adversary Proceeding 16-1248 were set for evidentiary hearing on September 15, 2016. On August 19, 2016, in the main bankruptcy case, Frank filed a 204-page Motion for Relief from Order for Fraud on the Court [ECF 497], seeking relief under Fed. R. Civ. P. 60(b)(3)23 for orders going back to the Order [ECF 178], which authorized the sale of the Hotel. Frank also filed a 150-page Response and Opposition [ECF 10] to the Trustee’s motion to dismiss the Adversary Proceeding. Frank’s preliminary statement in the latter filing is remarkable:
Since the inception of her tenure as Chapter 11 Trustee, Defendant Yip with the assistance of the professionals she employed has operated a scheme to defraud this court and the unsecured creditors of the estate. This scheme is complex with many facets, some that still remain to be uncovered during discovery. The scheme centralized around a conspiracy with j;he Secured Creditor Comerica Bank to allow their claim without opposition, investigation or examination while the Trustee was working as a liquidating-collection agent for the Secured Creditor Comerica Bank. The second phase of the scheme was to allow Trustee Yip and the Professionals she employed along with Comerica Bank to unjustly enrich themselves while the unsecured creditors of the estate were burdened with millions of dollars in administrative expenses. [Footnote omitted.] In order to effectuate the plan Trustee Yip realized from the inception of her tenure that she needed to eliminate the few unsecured creditors of the estate so no one would be looking over her shoulder. [Footnote omitted.] Trustee Yip is vigorously working to eliminate the unsecured creditors of this estate through improper, unlawful and unfounded claims objections she interposed to their claims. While effectuating this scheme to defraud, Trustee Yip has perpetrated a fraud on the court, a fraud on the unsecured creditors of the estate,24 breached her fiduciary duties, acted in reckless disregard for *871the truth, acted in reckless disregard for her duties, and was negligent, and fraudulently obtained Orders from this Court, inter alia.
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This scheme to defraud the court has depleted this estate of in excess of $20 Million Dollars25 [sic] and left the estate penniless.
Not a scintilla of evidence was ever provided in support of these outrageous allegations, despite repeated opportunities to do so, and not a word of them is true.
Because the pleadings filed by Frank in August 2016 raised new issues not previously before the Court, the Trustee sought, and the Court granted, a continuance of the various disputed matters. The Motion to Dismiss [ECF 6] and related pleadings in the Adversary Proceeding; the Fraud on the Court Motion [ECF 497] in the main case; the Order to Show Cause [ECF 482] in the main case; and Trustee Yip’s Objection [ECF 351] and Frank’s Responses [ECF 360 and 362] to Frank’s entities El Mar’s and Oceanside’s Claims 17 and 19, respectively, and Frank’s Claim 18 were continued for evi-dentiary hearing on December 15, 2016.
Frank filed Adversary Proceeding 16-1248 on June 3, 2016; the Summons [ECF 2] fixed the pretrial conference for September 28, 2016. Also on June 3, 2016, the Court issued its standard Order [ECF 3] Setting Filing and Disclosure Requirements for Pretrial and Trial, which, among other things, required Frank to make and serve the disclosures required by Bankruptcy Rule 7026 (applying Fed. R. Civ. P. 26) at least 20 days before the pretrial conference; it further required Frank to file and serve witness and exhibit lists. Frank failed to make any of the required pretrial disclosures or perform any of the other pretrial requirements. He also failed to appear at the pretrial conference. As a result, Adversary Proceeding 16-1248 was dismissed with prejudice by Order [ECF 17] entered November 17, 2016. Frank’s motion [ECF 23] for reconsideration of this Order was denied by Order [EC^ 24] entered December 9, 2016. Thereafter, Frank timely appealed; the matter on appeal in the District Court was docketed as Case No. 16-62929-WPD. Frank’s appeal was dismissed with prejudice by District Judge Dimitrouleas by Order [ECF 10] entered April 6, 2017. No appeal from the Order of dismissal was taken, and the Order is now final.
Following the dismissal of Adversary Proceeding 16-1248, Frank sought to continue the evidentiary hearing in the main bankruptcy case set for December 15, 2016, by Motion [ECF 503] filed November 22,2016. His grounds were that he had been unable to take Trustee Yip’s deposit tion in October because:
[He] began experiencing severe bouts of panic and anxiety disorder from which [he] has suffered on and off for years. Said attacks curtailed Frank’s ability to function for the past several months, let alone take Trustee Yip’s deposition. As a result of the panic and anxiety attacks Creditor Frank was dis-functional and is unable to meet the procedural deadlines for discovery set by this Honorable Court. [ECF 503].
*872In addition, Frank asserted in his Motion to Continue Hearing [ECF 503] that a ruling by Judge A. Jay Cristol in an unrelated adversary proceeding pending before him, Adversary Proceeding No. 14-1574, had criticized26 (at ECF 92) Trustee Yip’s conduct of that case:
Creditor Frank needs to make an extensive inquiry into this matter, including but not limited to, examining the entire file in the aforementioned case; ordering and examining deposition testimony of Maria Yip in said case; the taking of depositions of several not party’s to this action, those being the parties to the aforementioned case, and examining the results of this inquiry.
The bases for Frank’s Motion [ECF 503] to continue the evidentiary hearing scheduled for December 15, 2016, were bogus; the Motion was denied by Order [ECF 506] entered November 28, 2016, In the end, Frank chickened out: he failed to appear at the evidentiary hearing, and he failed utterly to produce a shred of evidence in support of his bold and outrageous allegations of fraud, collusion, negligence, and malfeasance. Trustee Yip and Comerica Bank appeared at the trial and established by overwhelming evidence27 that Frank’s multifarious allegations of misconduct were flat-out baseless and false.
Accordingly, the Court denied the Motion for Relief from Orders for Fraud on the Court [ECF 497] with prejudice by Order [ECF 529] entered December 19, 2016. Trustee Yip’s Objections [ECF 351] to the El Mar, Oceanside, and Frank Claims 17, 18, and 19 were sustained by Orders [ECF 527, 528] entered December 19, 2016, and those Claims were disallowed in their entirety.
Frank timely moved under Bankruptcy Rule 9023 (applying Fed. R. Civ. P. 59) by Motion [ECF 639] filed January 3,2017, to reconsider various substantive and procedural Orders [ECF 526, 527, 528, 529, 531, 532, 533, and 534], The Motion was based upon Frank’s claim that a healthcare issue suffered by his roommate, which “resulted in Frank having ... a bout of severe panic and anxiety order [sic] which disabled him on December 15, 2016 and he was unable to appear in court to prosecute his claims.” No supporting medical evidence regarding the alleged panic attack or his roommate’s healthcare issue was filed with the Motion. Under applicable Eleventh Circuit precedent, “the only grounds for granting a [Rule 9023] motion are newly-discovered evidence or manifest errors of law or fact.” Jacobs v. Tempur-Pedic Intern., Inc., 626 F.3d 1327, 1344 (11th Cir. 2010). The events cited by Frank did not provide this Court with any newly discovered evidence or point to any manifest error of fact or law, and the Motion was accordingly denied by Order [ECF 540] entered January 5, 2017.
Frank timely filed Notices of Appeal [ECF 544, 648, 552] on January 17, 2017, from various Orders entered following the hearing on December 15,2016. Each of the 'appeals was dismissed administratively by the Clerk [ECF 568, 569, 570] on February 1, 2017, as a result of Frank’s failure to pay any of the filing fees associated with the Notices of Appeal and for failure to file timely a designation of items for the record on appeal or a statement of issues on appeal, all as “authorized and directed” by Local Rule 87.4 of the District Court. Or*873ders entered by the Bankruptcy Court pursuant to Local Rule 87.4 “may be reviewed by the District Court on motion filed in the District Court within fourteen (14) days after entry of the order would to be reviewed pursuant to section (c) of this Local Rule.” No such motions have been filed by Frank; the time to do so has now expired; and the various Orders entered by this Court as to which Frank sought appellate review are now final.
Application of Controlling § 1927 Law to the Facts of this Case
28 U.S.C, § 1927 provides:
Any 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.
There are three elements that must be satisfied for sanctions pursuant to 28 U.S.C. § 1927: (1) whether Frank qualifies as “any attorney or other person admitted to conduct cases,” (2) whether this Court is considered “any court of the United States or any Territory thereof,” and (8) whether Frank has “unreasonably and vexatiously multiplied the proceedings.” Upon review of the facts and the relevant case law, it is clear that Frank is liable for such sanctions.
28 U.S.C. § 1927 Sanctions Can Apply to Pro Se Litigants in the Eleventh Circuit
Of course, Frank is decidedly not an attorney, even though his voluminous filings may give the appearance of being authored by someone who has studied, or at least parroted,28 the practice of law. A plain reading of 28 U.S.C, § 1927 would appear to limit these sanctions to attorneys and other legal professionals, but, as Frank himself acknowledged, Eleventh Circuit case law has at least extended the application of 28 U.S.C. § 1927 to “litigants.” Smartt, supra, 245 F.Supp.2d at 1229. In that case, the court noted that the “Eleventh Circuit has not explicitly addressed the issue of whether attorney’s fees may be awarded against pro se litigants, but has stated that Section 1927 allows district courts to ‘assess attorney’s fees against litigants, counsel and law firms who willfully abuse the judicial process by conduct tantamount to bad faith.’ ” Id. at 1235, citing Crenshaw v. City of Defuniak Springs, 891 F.Supp. 1548, 1559 (N.D. Fla. 1995) (quoting Avirgan v. Hull, 932 F.2d 1572, 1582 (11th Cir. 1991), cert denied, 502 U.S. 1048, 112 S.Ct. 913, 116 L.Ed.2d 813 (1992)) (emphasis in original). Accordingly, the Eleventh Circuit has left the door open for § 1927 sanctions to be applied to pro se litigants, which comports with the purpose of § 1927: to “deter frivolous litigation and abusive practices ... and to ensure that those who create unnecessary costs bear them.” O’Rear v. American Family Life Assurance Co. of Columbus, Inc., 144 F.R.D. 410, 413 (M.D. Fla. 1992).
An attorney has the ability and requisite knowledge to multiply proceedings vexatiously, but various ethics rules29 and, *874one hopes, a sense of professionalism30 generally prevent such practices from proceeding into the realm of action sanctiona-ble by § 1927, to where Frank has clearly traveled. The ethics rules that deter frivolous and vexatious filings by attorneys have no effect on a non-attorney litigant, and this Court reaches the conclusion that no other order could possibly rein in Frank’s litigious nature. This Court finds that Frank is the quintessential pro se litigant displaying a “serious and studied disregard for the orderly processes of justice”; lacking any other mechanism to stay the onslaught of frivolous filings, this Court’s power to impose sanctions under § 1927 should be exercised and extended to this pro se litigant. See Jerelds v. City of Orlando, 194 F.Supp.2d 1305, 1312 (M.D. Fla. 2002). This Court would certainly welcome review of this determination by the Eleventh Circuit to provide Circuit clarity as to whether § 1927 sanctions may definitively be imposed against a pro se litigant; if there was ever a time to extend such sanctions to a litigant proceeding pro se, now would be that time.
The Bankruptcy Court Is a “Court of the United States”
The specific language of § 1927 provides that a “court of the United States” may impose sanctions under this section. Some case law31 from other circuits holds that Bankruptcy Courts are not “courts of the United States” within the meaning of 28 U.S.C. § 451.32 The Eleventh Circuit has held in other contexts that bankruptcy courts are not “courts of the United States” and that only an Article III court can exercise the authority delegated in a variety of federal statutes, perhaps (by implication) including § 1927. See In re Brickell Inv. Corp., 922 F.2d 696 (11th Cir. 1991), see also In re Davis, 899 F.2d 1136 (11th Cir. 1990). This Court believes that this case law cannot, however, apply to § 1927, and that the structure of § 1927 makes that clear.
On its face, § 1927 applies to “cases in any court of the United States or any Territory thereof.” So-called Article III courts — the Supreme Court expressly created by Article III of the Constitution, as well as the circuit and district courts created by Act of Congress, the judges of which are appointed by the President, confirmed by the Senate, and entitled to hold office during good behavior — are clearly courts of the United States for purposes of § 1927. But judges of the United States District Courts for the territories of the United States, who also have express authority to impose sanctions under § 1927, are not appointed by the President, confirmed by the Senate, nor entitled to hold office during good behavior. Rather, judges of the United States District Court for the Territories are appointed by the President and confirmed by the Senate for *875a term of 10 years “unless sooner removed by the President for cause.” 48 U.S.C. § 1424b(a). (District Court of Guam). Such judges are not appointed by virtue of the authority of the Congress to create inferi- or courts under Article III, but rather under the Constitution’s grant of authority to Congress under Article IV, Section 3, Clause 2 “to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” See, e.g., 48 U.S.C. § 1424(b) (creating the United States District Court for the Territory of Guam); 48 U.S.C. § 1614 (creating the United States District Court for the Territory of the Virgin Islands); 48 U.S.C. § 1821(b) (creating the United States District Court for the Territory of the Northern Mariana Islands).
It is thus clear that § 1927 cannot be read to require that its sanction powers can only be exercised by an Article III judge.
The question of the exercise of § 1927 powers by the bankruptcy court has previously been addressed in this District in an order by visiting Bankruptcy Judge Thomas S. Utschig. See In re Lawrence, No. 97-14687-AJC, 2000 WL 33950028 (Bankr. S.D. Fla. 2000). In that case, Judge Ut-schig was persuaded by the reasoning presented by several cases33 holding that, for purposes of § 1927, bankruptcy courts are in fact divisions of district courts and thus have the same authority to, inter alia, impose sanctions as district courts. As Judge Utschig ruled in Lawrence:
While the objecting parties argue that Brickell Inv. Corp. and Davis are binding precedent which cannot be ignored, the Court is mindful of the fact that neither decision considers the analysis which is subsequently put forth in both Grewe and Brooks. See Brooks, 175 B.R. at 412. In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) [other citations omitted] the Supreme Court held that Congress had “imper-missibly removed” essential attributes of judicial power from the Article III district courts and vested those powers in Article I bankruptcy courts which were “functionally independent” from the district court. Id. at 87, 102 S.Ct. 2858. [other citations omitted]. In response to the ruling that this system was unconstitutional, Congress altered the bankruptcy code and made bankruptcy courts ‘units of the district court’ pursuant to 28 U.S.C. § 151.34
Unlike the Tax Court or other such Article I Courts, bankruptcy courts do not exist as separate and distinct judicial entities. All bankruptcy jurisdiction flows from the district court, which “refers” matters to the bankruptcy courts. As the Grewe court states, Congress intended that this jurisdictional scheme would “remedy the problems depicted in Marathon by eliminating the ‘functional independence’ of the bankruptcy court, and instead making it a mere division of the district court.” 4 F.3d at 304. Under this structure, federal district courts ex*876ercise original jurisdiction over all “matters and proceedings in bankruptcy,” 28 U.S.C. § 1334, and bankruptcy judges “serve as judicial officers of the United States District Court established under Article III of the Constitution.” 28 U.S.C. § 152(a)(1). Bankruptcy matters are then referred to the bankruptcy courts from the district courts. 28 U.S.C. § 157. Fur jurisdictional purposes, however, there is only one court-the district court. Grewe, 4 F.3d at 304, see also In re Yochum, 89 F.3d 661, 668 (9th Cir. 1996) (“because bankruptcy courts are units of the district court, they are covered under [the statute’s 28 U.S.C.] [§ 451] aegis”).
As such, the bankruptcy court’s ability to award sanctions under 28 U.S.C. § 1927 flows from its jurisdictional relationship with the district court. The district courts are clearly “courts of the United States,” and bankruptcy courts operate as units or divisions of that court. The failure to denominate bankruptcy courts in § 451 is irrelevant because, unlike the Tax Court and the Claims Court, bankruptcy courts do not exist for jurisdictional purposes outside the umbrella of the district court. Grewe, 4 F,3d at 304-5; In re Chambers, 140 B.R. 233, 237 (N.D. Ill. 1992). Accordingly, the Court concludes that the trastee may seek an award of sanctions under this provision.
Lawrence got it right: bankruptcy courts operate as units or divisions of the district courts; are, therefore, under the jurisdictional umbrella of the “courts of the United States”; and may, therefore, impose sanctions pursuant to § 1927. This is entirely consistent with the Eleventh Circuit’s repeated holdings that bankruptcy courts have the power to assess sanctions pursuant to their inherent powers. See, e.g., In re Mroz, 65 F.3d 1567 (11th Cir. 1995).
Whether Frank Violated 28 U.S.C. § 1927
Having determined that § 1927 is applicable to Frank as a pro se litigant and that this Court has the statutory power to impose sanctions pursuant to § 1927, the analysis turns to whether or not Frank actually violated § 1927.
Section 1927 has three essential requirements: (1) the litigant must engage in unreasonable and vexatious conduct, (2) the unreasonable and vexatious conduct must multiply the proceedings, and (3) the dollar amount of the sanction must bear a financial nexus to the excess proceedings. Peterson v. BMI Refractories, 124 F.3d 1386, 1396 (11th Cir. 1997). As the dollar amount of the sanction has yet to be determined by this Court (but it will be reasonable excess costs, expenses, and attorneys’ fees incurred as a result of Frank’s conduct),35 the key inquiry here is two-fold: whether Frank’s conduct was unreasonable and vexatious, and whether that conduct multiplied the proceedings.
As this lengthy order has provided in excruciating detail, Frank has inexorably multiplied these proceedings, dragging them on for years more than they should have taken, in a completely unreasonable, vexatious, and nonsensical manner. In this case (and associated adversary proceedings), Frank has, inter alia:36
*877• Routinely tried to represent corporate entities on a pro se basis despite repeated rulings that such representation was prohibited.
• Unreasonably obstructed a reasonable Chapter 11 plan to the point that conversion to Chapter 7 was required.
• Failed to timely request or conduct discovery and subsequently complained that there had been no discovery.
• Botched an appeal deadline.
• Asserted, for the first time on (purported) appeal, that Comerica had committed fraud and fraud on this Court without any evidence,
• Filed, and amended, a purported claim on behalf of El Mar on the basis of an underlying state court complaint, to which El Mar was not a party.
• Filed, and amended, a nonsensical claim on behalf of Oceanside,
• Failed to prosecute any conceivably related state court litigation.
• Repeatedly filed documents so voluminous, winding, and fantastical that reviewing each one was an adventure of Baumian proportions,37
• ' On numerous occasions, and without merit, accused the Trustee of breaching her fiduciary duties and perpetrating fraud on the Court and the Debtor’s estate.
• Somehow, in his outlandish calculation of damages, performed the following: 4,392 + 500,000 + (3 x 600,-000) + (10 x 4,392,000) = 4,392,000.
• Appealed an order disallowing an election of a trustee, even though he had not sought to participate in the election. Such ah appeal was determined to be “frivolous” by Judge Zloch; Frank appealed that order to the Eleventh Circuit, another fruitless endeavor; and the Court of Appeals affirmed on the basis of Judge Zloch’s opinion,
• Frivolously moved to disqualify this Court on four absurd bases, and his appeal was found to be unsupported, irrational, and highly tenuous speculation.
• Filed an outrageous complaint against the Trustee in the wrong forum, and, after a hearing at which the Court found his complaint was baseless, filed a 258-page motion supported by a 280-Jpage document, both of which were stricken.
• Filed a baseless and absurd 30k-page complaint against the Trustee, and, after an Order to Show Cause relating to Section 1927 sanctions, filed a 20k-page motion alleging that the Trustee had engaged in fraud on the court.
• Failed to make pre-trial disclosures.
• Failed to perform any other pre-trial requirements.
*878• Failed to appear at a pre-trial conference, and failed to appear at trial.
• Filed pointless appeals that were soon dismissed by the Clerk’s office for failing to pay the filing fees.
• Failed to provide a scintilla of evidence in support of his' bold and outrageous allegations of fraud, collusion, malfeasance, nonfeasance, negligence, and gross negligence at any time since the inception of this case.
As described in detail throughout this order, this case has been clogged with unreasonable emotions and appeals filed by Frank, none of which had sufficient basis in law or in fact. Although Frank claimed to have documentary evidence in support of his allegations, not a single such document was ever produced. Those frivolous and often outrageous actions have repeatedly multiplied these proceedings. This type of behavior cannot be allowed to continue and cannot be ignored. Each and every time that Frank filed a preposterous motion, this Court and the Trustee were inevitably forced to follow Frank “through the looking glass” and “down the rabbit hole,”38 where Frank believes that some broad conspiracy has been foisted upon him by the Trustee. In reality, the only conspiracy here seems to be one of Frank’s creation: if he won’t get paid, then he will drain the assets of the estate to the point that no unsecured creditor will get anything, even though the deus ex machi-na appeared in this saga in the form of an unexpected $17 million purchase back in 2013. The curtain should have fallen then.
This Court accordingly finds it appropriate, and even necessary, to sanction Frank pursuant to § 1927. If such sanctions are not appropriate here, then pro se litigants truly have a free pass to unreasonably and vexatiously multiply proceedings to the detriment of all parties involved, including the judiciary and the public at large.
Conclusion
Frank’s conduct over the last three years of this case consists of an ever-escalating assertion of misconduct by Trustee Yip, beginning with questions first raised by Frank, El Mar, and Oceanside by Cross-Motion [ECF 244] on March 28, 2014, concerning whether Comerica Bank had properly accounted for payments made to it by the Debtor under an interest rate swap agreement and whether Comeri-ca had properly accounted for “any ‘profit’” on its disposition of allegedly cross-collateralized property. These perfectly appropriate questions did not allege any wrongdoing by Comerica or the Trustee and were raised in the context of Comeri-ca’s Motion [ECF 228] seeking determination of the amount and allowance of its secured claim.
Beginning in July 2014, however, Frank’s counsel’s reasonable questions about Comerica’s secured position morphed into gross allegations of fraud, collusion, nonfeasance, and misfeasance lodged by Frank pro se against Trustee Yip. Each of the initial questions regarding Comerica’s secured status was fully and completely answered in unrebutted evidence. And each of Frank’s later allega*879tions was proven to be baseless and false; fact-free “alternative facts” which were, like most “alternative facts,” nothing more nor less than lies and innuendo.
Meanwhile, three years of litigation have cost the estate, Trustee Yip, the estate’s professionals, and this Court uncounted hours of pointless work and aggravation. This Court gave Frank opportunity .after opportunity to stop his evidence-free assertions of wrongdoing; the “Come to Jesus” talk that this Court gave to Frank at the hearing on June 29, 2016, [ECF 494, p. 30, 1.6-p. 33, 1.7] was the clearest advice this Court can imagine any judge anywhere giving to a litigant to straighten up and fly right.39
Frank didn’t.
It is beyond question that Frank has acted in complete bad faith and has multiplied the proceedings in this bankruptcy case and related Adversary Proceeding 16-1248 unreasonably and vexatiously within the meaning of 28 U.S.C. § 1927. Frank is, accordingly, personally liable for the excess costs, expenses, attorneys’ fees and other damages reasonably incurred because of his misconduct.
Accordingly, based upon the foregoing, it is
ORDERED:
1.Kenneth A. Frank is hereby DETERMINED to have acted in bad faith and to have unreasonably and vexatiously multiplied these proceedings to such a degree that he is personally liable for the excess costs, expenses, and attorneys’ fees reasonably incurred as a result pursuant to 28 U.S.C. § 1927.
2. Except as provided herein, Kenneth A. Frank is hereby PROHIBITED from filing any pleading or other paper in the main bankruptcy case of Ocean 4660, LLC, without prior written Order of .this Court granting him permission, in each instance, to file such a pleading or paper.
3. Except as provided herein, Kenneth A. Frank is hereby PROHIBITED from filing any Adversary Proceeding or Contested Matter arising in, arising under, or related to the bankruptcy case of Qcean 4660, LLC, without prior written Order of this Court granting him permission, in each instance, to file such a pleading or paper.
4. Except as provided herein, the Clerk is hereby DIRECTED to refuse to accept for filing any pleading or paper submitted by Kenneth A. Frank without prior written Order of this Court granting him permission, in each instance, to file such a pleading or paper.
5. Trustee Yip is DIRECTED to file and serve, within 21 days of the date of entry of this Order, an accounting (the “Accounting”) for costs, expenses, and attorneys’ fees incurred as a result of Kenneth A. Frank’s unreasonable and vexatious multiplication of these proceedings.
*8806. Kenneth A. Frank is AUTHORIZED to file and serve a Response to the Accounting within 14 days of its filing. Kenneth A. Frank is expressly authorized to file such a Response, and the Clerk shall accept it for filing.
7. Trustee Yip is AUTHORIZED to file and serve a Reply to the Response within 14 days of its filing.
8. Kenneth A. Frank is hereby AUTHORIZED to file a motion under Bankruptcy Rule 9023 or 9024 addressed to this Order, and is further AUTHORIZED to file papers under Part VIII of the Bankruptcy Rules addressed to this Order, and the Clerk shall accept such paper(s) for filing,
9.The Court will, in its discretion, set the Accounting, Response, and Reply for hearing or rule upon the papers.
. Exhibit A to Complaint [ECF 1] in Adv. Pro, 13-1641.
. Frank purported to file this pleading pro se on his own behalf and on behalf of Oceanside, a corporation, as its president. The law in the United States has been clear since at least 1824 that a corporation can be represented in federal courts only by an attorney licensed to practice in the jurisdiction. Osborn v. Bank of the United States, 22 U.S. 738, 829-30, 9 Wheat. 738, 6 L.Ed. 204 (1824), Palazzo v. Gulf Oil Corporation, 775 F.2d 304 (11th Cir. 1985), In re Las Colinas Dev. Corp., 585 F.2d 7 (1st Cir. 1978).
. This Court’s standard practice is to stay discovery in contested matters and adversary proceedings pending mediation.
. Former Judge Stettin is an extraordinarily skilled and universally respected mediator in complex commercial disputes.
. There is no transcript of the June 12, 2014, hearing on the docket. However, the Court has listened to the entire audio recording of that hearing in connection with preparing this Order. Any party in interest may, of course, order the transcription of the audio recording from the court reporter.-
. See footnote 2 above,
. See footnote 2 above.
. Discussed above at pp. 855-56.
. A transcript of that hearing is docketed at ECF 314.
. It is important to note here that, pursuant to 11 U.S.C. § 502(a), a claim filed in a bankruptcy case is "deemed allowed” unless a party in interest (such as the trustee in this case) objects. Bankruptcy Rule 3001(f) further clarifies that a proof of claim executed and filed "shall constitute prima facie evidence of the validity and amount of the claim.”
A trustee in a chapter 7 case has the duty, “if a purpose would be served, [to] examine proofs of claim and object to the allowance of any claim that is improper,” pursuant to 11 U.S.C, § 704(a)(5). A chapter 11 trustee has the same duty pursuant to 11 U.S.C, § 1106(a)(1).
When a claim objection is filed, the' objecting party has the burden of going forward with evidence that the claim is invalid; at that point, the burden shifts to the claimant to establish the validity of the claim. Claims 17, 18 and 19 here were ultimately tried by this Court on December 15, 2016, and disallowed following trial by Order [ECF 527] entered December 19, 2016,
. Mr, Gleason appeared in the main bankruptcy case on an in-and-out basis occasionally on behalf of Frank and somewhat more frequently on behalf of El Mar and Oceanside. It seems that his appearances and withdrawals were related to whether or not he was currently being paid. Because a bankruptcy case includes an evolving series of contested matters (within the meaning of Bankruptcy *861Rule 9014), rather than a singular adversary proceeding of a conventional Av.B litigation, the occasional appearance and disappearance of counsel is less bizarre than it might appear to an Article III court. Having said that, this Court is unlikely to allow such intermittent representation in any future case.
. Mr. Brandt is a nationally well-known and highly respected reorganization professional who has served as trustee in a large number of significant cases.
. Many of the issues relating to the disputed election deal with objections Trustee Yip filed to the claims of El Mar and Oceanside. Those objections were filed shortly before the Chapter 7 meeting of creditors under § 341. Trustee Yip’s claim objections were made in good faith and ultimately were determined to preclude El Mar and Oceanside from being eligible to call for an election or to vote in the contested trustee election.
. Pursuant to 11 U.S.C. § 702(d), "if a trustee is not elected under this section, then the interim trustee shall serve as trustee in the case.”
. Frank had not sought to participate in the trustee election but has nonetheless appealed.
. By its terms, § 144 is applicable only to the disqualification of district judges.
. Region 21 encompasses "[t]he judicial districts established for the States of Alabama, Florida, and Georgia and for the Commonwealth of Puerto Rico and the Virgin Islands of the United States,” thus encompassing the entire Eleventh Circuit and fragments of the First and Third Circuits,
. It was clearly inappropriate for Frank to file this Notice with the Court, since the Court has no direct administrative or supervisory role over a bankruptcy trustee. Nonetheless, the filing of the Notice of Similar or Related Actions had to be dealt with by the Court as a request for relief. The effect was to increase the expense and burden on the administration of the estate.
. Citing to Smartt.
. Schwartz v. Millon Air, Inc., 341 F.3d 1220, 1223 (11th Cir. 2003).
. See Motion Cross-Motion to Determine Claim of Comerica, Motion Setting Property Value [ECF 244].
. As of the entry of this Order, the Court has been on the bench eleven and a half years. Frank’s conduct remains nonpareil.
. Rule 60(b)(3) authorizes parties to seek relief for "fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party.” Rule 60 applies to proceedings in the bankruptcy court pursuant to Bankruptcy Rule 9024. A motion under Rule 60(b)(3) must be made within one year after entry of the order as to which complaint is made.
. Emphasis in original.
. This might be the single most ridiculous contention advanced by Frank: the sole asset of the estate, the Hotel and related properties, sold at auction for $17 million — an amount many millions more than any party expected those properties to bring. For Frank's claim that Trustee Yip "depleted this estate” of more than $20 million would mean that the estate had value in excess of $37 million, which is arguably the silliest and most outrageous assertion this Court has ever had to entertain.
. Judge Cristol subsequently withdrew all of his criticism of Trustee Yip but for his determination that "prosecuting this case was a mistake," See Order [ECF 106] in Adv, Pro. 14-1574, entered January 31, 2017.
. The applicable standard in such cases is preponderance; the evidence here would satisfy a far more rigorous standard.
. It has come to the Court’s attention that Frank was arrested on March 10, 2017, for misrepresenting himself as qualified to practice law (§ 454.23, Fla. Stat.), simulating legal process in fraudulent actions (§ 843.0855-3, Fla. Stat.), and various other fraud and grand theft charges, At the time of this filing, Frank remains incarcerated at the Joseph V. Conte Facility in Pompano Beach, Florida, a medium-security facility operated by the Broward County Sheriff's Office primarily to house inmates awaiting trial.
. See, e.g„ R. Regulating Fla, Bar 4-3.1 Meritorious Claims and Contentions ("A lawyer *874shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument or extension, modification, or reversal of existing law.''); 4-3.2 Expediting Litigation ("A lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client.”).
.No rules of professional conduct that govern attorneys apply to Mr. Frank; thus, they have no deterrent effect whatsoever on his actions.
. See In re Courtesy Inns, Ltd., 40 F.3d 1084 (10th Cir. 1994); In re Perroton, 958 F.2d 889 (9th Cir. 1992).
. The term "court of the United States” includes the Supreme Court of the United States, courts of appeals, district courts constituted by chapter 5 of this title, including the Court of International Trade and any court created by Act of Congress the judges of which are entitled to hold office during good behavior.
. See In re Grewe, 4 F.3d 299 (4th Cir. 1993), cert denied, 510 U.S. 1112, 114 S.Ct. 1056, 127 L.Ed.2d 377 (1994); In re Brooks, 175 B.R. 409 (Bankr. S.D. Ala. 1994).
. "In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.” 28 U.S.C. § 151.
. The appropriate dollar amount is reasonable excess costs, expenses, and attorneys' fees incurred as a result of Frank’s unreasonable and vexatious multiplication of these proceedings, In order to properly determine that amount, this Court will direct the Trustee to provide an accounting of such costs and give Frank the opportunity to contest that accounting,
. Some of Frank's doings have required direct intervention by this Court, as they have *877been framed as requests for relief. Other actions have simply extended the duration of • litigation needlessly.
. L. Frank Baum's seminal work, The Wonderful Wizard of Oz, follows a young farm girl named Dorothy on her adventures along a yellow brick road in the magical land of Oz. Along her way, Dorothy is joined by a tin man who is in search of a heart, a cowardly lion who seeks courage, and a scarecrow who lacks a brain. The team encounters all sorts of •troublesome nonsense, from flying monkeys to opiatic flowers to ornery doormen, In the end, Dorothy finds that there really is no place like home and suddenly awakens back in her bed in Kansas: it had all been just a dream, If only the same could be said about each and every frivolous filing from Frank.
. In Alice's Adventures in Wonderland (Lewis Carroll, 1865), a girl named Alice falls down a rabbit hole and enters a strange world filled with such creatures as a tardy rabbit, a chain-smoking caterpillar, and a Hatter sentenced to death for "murdering time.” Alice searches for her way home, but an unfortunate incident involving croquet, roses, and a devious cat ironically lead her to a trial where she can produce no evidence whatsoever. As with the Wizard of Oz, this tale is revealed to be nothing but a girl’s dream, and all is well in the real world. Unfortunately, there is no "waking up” from the nightmare that Frank has caused this Court, the Trustee, and the estate.
. Nat King Cole and Irving Mills, Straighten Up and Fly Right, 1943:
A buzzard took a monkey for a ride in the air. The monkey thought that everything was on the square.
The buzzard tried to throw the monkey off his back.
The monkey grabbed his neck and said, "Now listen, Jack,
Straighten up and fly right, straighten up and fly right,
Straighten up and fly right, cool down papa, don't you blow your top.
Ain’t no use in divin’. What's the use of jivin’? Straighten up and fly right, cool down, papa, don’t you blow your top.”
The buzzard told the monkey, "You are cho-kin’ me!
Release your hold and I'll set you free.”
The monkey looked the buzzard right dead in the eye and said
"Your story’s so touching, but it sounds like a lie.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500647/ | MEMORANDUM OPINION ON PERMANENT INJUNCTION
Michael G. Williamson, Chief United States Bankruptcy Judge
Phil: What would you do if you were stuck in one place and every day was exactly the same, and nothing that you did mattered?
Ralph: That about sums it up for me.
In the 1993 movie classic, Groundhog Day, Phil Connors, a Pittsburgh television weatherman played by Bill Murray, finds himself living the same day over and over again. After begrudgingly making the trip from Pittsburgh to Punxsutawney, Pennsylvania to cover the annual Groundhog Day festivities, Connors gets stuck in a blizzard on his way out of town and is forced to stay the night in Punxsutawney. When Connors awakens the next day, it is Groundhog Day again, which he is forced to relive over and over. The rest of the movie finds Connors desperately trying to break the Groundhog Day time loop:1 he kidnaps the groundhog and ends up dying during his getaway attempt; he electrocutes himself; he lets himself get hit by a truck; he jumps from a tall building. Not even death, however, can break the time loop. No matter what he does, Connors is *906stuck living the same day over and over.2 At times, Rubin Schron, a wealthy real estate investor from New York, must feel like Phil Connors in Groundhog Day.
Nearly six years ago, Schron woke up to find himself ensnared in state court proceedings supplementary that three probate estates initiated to collect on billions of dollars of empty-chair verdicts against Trans Health Management, Inc. (“THMI”), one of the Debtors in this case.3 For the past six years, Schron has desperately tried to extricate himself from the Probate Estates’ collection efforts.4 He obtained an injunction enjoining the state court claims against him and requiring all of those claims to be litigated in this proceeding so they could be resolved in a single forum; when the Probate Estates attempted to continue their collection efforts against him in state court while this proceeding was pending, Schron obtained an order preventing the Probate Estates from circumventing this Court’s injunction by recasting their claims under a different theory; and once all the claims against him were brought in this forum, Schron obtained a dismissal of those claims with prejudice. But not even dismissal of all of the Probate Estates’ claims against Schron with prejudice is enough to break the litigation loop. No matter what he does— whether obtain an injunction or prevail on the merits — Schron finds himself defending the Probate Estates’ efforts to go back to state court to pursue their proceedings supplementary.
The only way for the Court to break this loop is to enjoin the Probate Estates from pursuing claims that were or could have been litigated against Schron in this Court. An injunction is necessary to protect this Court’s final judgment in Schron’s favor. Absent an injunction, the Probate Estates will ignore this Court’s rulings and use repetitious state court litigation against Schron to extract a settlement out of him. Moreover, the injunction was an integral part of the Court’s finding that nearly $24 million in settlements — which brought an end to exceedingly complex litigation that has involved 25 lawsuits (including adversary proceedings) and 15 appeals before 11 courts and 17 judges in five states over 11 years — are fair and equitable. Accordingly, for the reasons discussed below, the Court has enjoined the Probate Estates from pursuing any claims against Schron arising out of the same nucleus of facts in their adversary complaint in this proceeding.
BACKGROUND
Rubin Schron is, by all accounts, an extremely wealthy real estate investor from New York. In 2002, Schron’s lawyer (Leonard Grunstein) and investment banker (Murray Forman) convinced Schron to fund the acquisition of 120 nursing homes from Integrated Health Services (“IHS”), *907which was in chapter 11 bankruptcy in Delaware. Abe Briarwood, the entity that actually acquired the IHS homes, leased them to THI of Baltimore, Inc. In March 2006, Forman and Grunstein devised a scheme that allowed them to acquire the former IHS homes from THI Baltimore, as well as the assets of THMI, a nursing home management company that managed the THI Baltimore homes, without acquiring THMI’s liabilities.5 There is no evidence Schron had any involvement in the March 2006 transaction that allowed For-man and Grunstein to divest THMI of its assets.6
Schron finds himself trapped in proceedings supplementary.
The Probate Estates claim the March 2006 transaction was an elaborate “bust-out” scheme intended to thwart their efforts to collect on personal injury claims they had filed against THMI. At the time of the March 2006 transaction, three of the Probate Estates had sued THMI and its former corporate parent, Trans Healthcare, Inc. (“THI”), for injuries that allegedly occurred at nursing homes THI owned and THMI managed.7 According to the Probate Estates, the March 2006 transactions resulted in hundreds of millions of dollars of THMI’s assets being transferred in exchange for $100,000. As a result of the transaction, THMI was left a liability-ridden shell with no assets to satisfy the Probate Estates’ claims.
After three of the Probate Estates obtained $1.2 billion in default judgments against THI and THMI,8 they initiated proceedings supplementary against Schron in state court to collect those judgments because THMI no longer had any assets and Schron was a “deep pocket.”9 *908The case against Schron was, to say the least, flimsy. It hinged on the allegation that he owned the two entities — Fundamental Long Term Care Holdings (“FLTCH”) and Fundamental Administrative Services (“FAS”) — that acquired or ultimately ended up with THMI’s assets for far less than they were worth as a result of the March 2006 transaction.10 But the exhibits the Probate Estates attached to their impleader motions to support that allegation, in fact, showed that (1) Forman and Grunstein — not Schron— owned FLTCH and FAS; and (2) Forman and Grunstein were acting in their own self-interest — not on behalf of Schron — in attempting to acquire THMI’s assets.11 Although the Probate Estates presented no evidence in the proceedings supplementary that Schron actually received or ben-efitted from the transfer of THMI’s assets, Schron was nonetheless ordered to show' cause why assets in his possession should not be used to satisfy one of the judgments (a $110 million judgment in the Jackson case)12 and added as a defendant to the second judgment (a $200 million judgment in the Numiata case).13
Schron obtains an injunction enjoining the proceedings supplementary.
After this involuntary bankruptcy case was filed, the Court enjoined the Probate Estates from pursuing their state court proceedings supplementary to collect the THI and THMI judgments from Schron.14 In the Court’s view, the proceedings supplementary affected property conceivably belonging to the bankruptcy estate because the Probate Estates acknowledged that the assets they were seeking to recover under fraudulent transfer and alter ego theories in state court belonged to THMI.15 But even if the assets did not belong to THMI, continuation of the proceedings supplementary interfered with the Trustee’s administration of the estate because the claims the Probate Estates were pursuing were identical to the claims the Trustee announced she would be pursuing in this casé, raising the possibility of inconsistent results. This Court ultimately ordered the Trustee and Probate Estates to bring any claims they had against Schron (and the others involved in the March 2006 transaction) here so all the claims could be resolved in a single proceeding:
Ideally, all of the fraudulent transfer and alter ego claims should be heard in one forum. The bankruptcy court is suited for exactly that purpose. And that process has already begun. More*909■over, one of the purposes of the bankruptcy court is to provide a centralized place for handling litigation related to the bankruptcy estate. Significantly, that is the forum the probate estates chose when filing this involuntary case. If parties want to litigate claims that conceivably affect property of the estate (such as claims over THMI’s assets), then those claims must be litigated in this Court.16
In all, the Trustee and Probate Estates sued seventeen Defendants: THI Holdings (which owned THI Baltimore); five entities referred to. as the “GTCR Group” (THI Holdings’ principal shareholder); Ned Jannotta (a GTCR principal who approved the March 2006 transaction); General Electric Capital Corporation, Ventas Limited, and Ventas Realty (THI’s major secured lenders who allegedly consented to the transaction); FLTCH (which acquired THI Baltimore’s stock); FAS (which ultimately ended up with THMI’s assets); Forman and Grunstein (who owned FLTCH); THI Baltimore (which was acquired by FLTCH); Fundamental Long Term Care, Inc. (which acquired THMI’s stock); and Schron.17 In their two pleading attempts, which totaled more than 300 pages and 1,600 numbered paragraphs, the Trustee and Probate Estates alleged 32 claims for relief against those seventeen Defendants.18
The initial complaint contained the following 22 claims for relief: substantive consolidation; breach of fiduciary duty (two counts); aiding and abetting a breach of fiduciary duty (four counts); successor liability; piercing the corporate veil (two counts); alter ego (three counts); fraudulent transfer (eight counts);, and conspiracy to commit fraudulent transfer. Of the 22 initial claims, eight were asserted against Schron.
Initially, the Trustee and Probate Estates sued Schron for aiding and abetting breach, of a fiduciary duty, successor liability, piercing the corporate veil, alter ego liability, fraudulent transfer, and conspiracy to commit a fraudulent transfer.19 Although those claims were principally premised on the allegation that Schron received THMI’s assets (supposedly worth hundreds of millions of dollars) for $100,000, the Probate Estates sought to hold Schron liable for the debts of THI and THMI. For instance, the Probate Estates sought a declaration that Schron was a successor to the “THI Enterprise,” which the Probate Estates specifically defined to include THI,20 The Probate Estates also sought a declaration that Schron was THI’s alter ego.21 The Court dismissed the initial claims against Schron because — despite 300 pages and 1,600 numbered paragraphs — the complaint failed to include a single plausible allegation that Schron received, participated in, or benefitted from *910the transfer of THMI’s assets.22
Schron prevents Probate Estates from circumventing injunction.
Unsuccessful on their initial claims against Schron in this forum, the Probate Estates attempted to circumvent this Court’s preliminary injunction and pursue its collection efforts against Schron back in state court, where, suffice it to say, they have had more success. In particular, this Court previously allowed three Probate Estates (the Estates of Townsend, Sasser, and Jones) to pursue their underlying negligence claims against THI in state court since those claims had not gone to trial prepetition.23 The Townsend Estate ultimately obtained a $1.1 billion judgment against THI, Despite this Court’s injunction barring any collection efforts that may conceivably implicate property of the estate, however, the Townsend Estate moved to add Schron to the $1.1 billion judgment under a purported “real party in interest” theory.24
Under this “real party in interest” theory, Schron is supposedly liable for the Townsend judgment because he (1) entered into a January 5, 2012 settlement agreement with others involved in the March 2006 transaction to ensure THI was defended in the underlying negligence claims; and (2) contributed money to that defense. In Sasser, the Sasser Estate sought to add Schron as a defendant before trial on the same theory. This Court enjoined the Probate Estates’ efforts to add Schron as a defendant in the Townsend and Sasser cases under the “real party in interest theory” because they violated the Court’s preliminary injunction.25
Schron obtains dismissal of claims against him with prejudice.
In their second amended complaint, the Probate Estates asserted seven claims for relief against Schron: three claims it previously asserted against him (alter ego, aiding and abetting a breach of fiduciary duty, and constructive fraud claims) and four new claims (abuse of process, conspiracy to commit abuse of process, negligence, and avoidance of postpetition transfer claims).26 The four new claims all hinged on an allegation that Schron and others involved in the March 2006 transaction took control of the defense of THI and THMI in the Probate Estates’ state court actions under the terms of the January 5 settlement agreement, which is the same allegation underlying the “real party in interest” theory in Townsend and Sasser. The Court dismisspd all of the claims against Schron a second time — this time with prejudice.27
*911Notably, Schron was the only defendant dismissed at the pleading stage. Three more Defendants — General Electric Capital Corporation, Ventas, and Ventas Realty — were dismissed at the summary judgment stage.28 The Court then went to trial on claims for substantive consolidation, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, successor liability, fraudulent transfer, and conspiracy to commit fraudulent transfer against the GTCR Group, THI Holdings, Jannotta, FLTCH, FAS, THI Baltimore, Forman, Grunstein, and FLTCI.29
At the conclusion of trial,30 the Court took an unusual step: the Court ruled in favor of the GTCR Group, THI Holdings, and Jannotta, but as to the remaining Defendants, the Court decided to announce tentative findings of fact and conclusions of law in an effort to bring this proceeding (and bankruptcy case) to a close. It was apparent at the conclusion of trial that the only potential wrongdoing in the March 2006 transaction was on the buyers’ side of the transaction. But the Trustee and Probate Estates could only establish liability on a successor liability theory, and the Court was unsure which of the Defendants on the buyers’ side would be liable under that theory, so it ordered FLTCH, FAS, THI Baltimore, Forman, and Grunstein, along with the Trustee and Probate Estates, to mediation in hopes the parties would reach a global resolution of this proceeding — and ultimately the bankruptcy case.31
The mediation was largely a success. It originally produced two settlements: one was an $18.5 million settlement among the Trustee, Probate Estates, FLTCH, FAS, THI Baltimore, Forman, and Grunstein (and others);32 the other was a $1.25 million settlement among the Trustee, the Probate Estates, and one of the law firms that defended THI and THMI against the Probate Estates’ claims.33 Since then, there have been three other settlements: a $1.5 million settlement with the GTCR Group; a $1.75 million settlement with General Electric Capital Corporation and the two Ventas entities; and a $700,000 settlement with THI’s state-court receiver, who was not a party to this adversary proceeding. All told, there were a total of $23.7 million in settlements.
Schron finds himself defending the Probate Estates’ efforts to relitigate the proceedings supplementary in state court all over again.
The sole non-settling Defendant was Schron. Not only did Schron refuse to settle, but he opposed the various settlements with the other Defendants unless *912they were conditioned on — or, at a minimum, accompanied by — a permanent injunction enjoining the Probate Estates from bringing any claims against him in state court that arose out of the March 2006 transactions.34 Schron’s need for an injunction is well founded.
Literally minutes after the Court concluded announcing its oral ruling against the Trustee and Probate Estates on all but one count, the Townsend Estate made an ore tenus motion to lift the Court’s preliminary injunction so it could pursue its “real party in interest” theory in state court.35 More recently, the Townsend Estate again sought to remand its removed adversary proceeding back to state court so it could pursue its “real party in interest theory” against Schron.36 When that request was denied,37 the Townsend Estate petitioned the district court for a writ of mandamus compelling this Court to remand the “real party in interest” issue back to state court.38
In addition to pursuing their real party in interest theory in Townsend and Sasser, the Probate Estates have indicated at various stages of this proceeding that they intend to continue pursuing the state court proceedings supplementary against Schron in Jackson, Webb, and Numiata, which were stayed by this Court’s preliminary injunction. At one point, the Probate Estates also threatened to sue Schron for RICO violations in New York district court. In short, the Probate Estates have threatened to sue Schron on claims that were or could have been litigated in this forum.
This Court ultimately entered an injunction in Schron’s favor.39 In order to approve the nearly $24 million in settlements, the Court was required to determine that the settlements were fair and equitable. One of the main factors in determining that the settlements were fair and equitable was the injunction the Court entered in Schron’s favor. That injunction enjoined the Probate Estates from pursing any claims against Schron arising out of the same nucleus of operative facts in their complaint, in this proceeding.40 In its injunction order, the Court reserved jurisdiction to explain the legal basis for the injunction.41 This opinion explains the basis for the Court’s permanent injunction in Schron’s favor.
CONCLUSIONS OF LAW
This Court’s authority to enjoin the Probate Estates from pursuing claims in state court is prescribed in the All Writs Act, which “codifie[s] ‘the long recognized power of courts of equity to effectuate their decrees by injunctions or writs of assistance.’ ”42 The Court’s authority un*913der the All Writs Act, however, is circumscribed by the Anti-Injunction Act.43 The Anti-Injunction Act prohibits a federal court from enjoining state court proceedings except (1) as authorized by Congress; (2) where necessary in aid of jurisdiction; or (3) to protect or effectuate its judgments.44 If an injunction falls within one the Anti-Injunction Act’s three exceptions, then it is authorized under the All Writs Acts.45
The proposed injunction is necessary to protect this Court’s prior judgments.
At a minimum, this Court has authority to enjoin the Probate Estates from pursuing claims it already decided in order to protect the judgment it entered in Schron’s favor.46 An injunction is appropriate under this exception — known as the “relitigation exception” — where state law claims would be precluded by the doctrine of res judicata,47 although this Court’s authority to issue an injunction under this exception is slightly narrower than traditional notions of res judicata. Only claims actually presented to and decided by a federal court may be enjoined under the “relitigation exception.”48
The Court concludes it is appropriate to enjoin the Probate Estates from asserting any claims against Schron that this Court has already decided — i.e., claims for aiding and abetting breach of a fiduciary duty, successor liability, piercing the corporate veil, alter ego liability, fraudulent transfer, conspiracy to commit a fraudulent transfer, abuse of process, conspiracy to commit an abuse of process, and negligence — to protect its judgments. There is no question these claims would be barred by res judicata if the Probate Estates attempted to reassert them in state court. To be sure, Schron could assert res judicata as a defense if the Probate Estates reassert their dismissed claims in state court.
But the relitigation exception was intended to alleviate successful federal litigants like Schron from having to go through that ordeal:
The purposes of the [relitigation] exception are to prevent relitigation of matters that a federal court has fully adjudicated and to prevent the harassment of successful federal litigants through repe-. titious state litigation.49
The Probate Estates chose this forum when one of them filed this involuntary bankruptcy case. And they were given ample opportunity to pursue all of their claims against Schron in them chosen forum. Despite years of discovery, however, the Probate Estates could not allege a single plausible claim for relief against Schron.
The Probate Estates have justified this facially obvious forum shopping by contending that, by pursuing their proceedings supplementary in Jackson, Webb, and *914Nunziata, they are not relitigating claims this Court already decided. According to the Probate Estates, the claims in this proceeding related to THMI, whereas the state court proceedings supplementary relate only to THI. But the Probate Estates’ attempts to distinguish the claims in this proceeding from those in the state court proceedings supplementary fall flat for several reasons.
For one, the Probate Estates’ attempt to pursue proceedings supplementary in Nunziata belies their entire argument. After all, THI is not even a defendant in Nunziata. Only THMI is. So how could the Nunziata proceedings supplementary relate to THI in any way? For another, the Probate Estates are not, as they imply, pursuing THI in the proceedings supplementary. They are pursuing Sehron on the same claims, arising out of the same facts, as those in this proceeding. The only purported difference is they are attempting to collect on the judgment against THI, as opposed to the same judgment against THMI. But even if there is some distinction between collecting on the THI judgment as opposed to the THMI judgment entered in the same case, that distinction is meaningless because the Probate Estates sought to hold Sehron liable for both judgments in this proceeding by seeking a declaration that he is THI’s alter ego and that he is liable for THI’s debts under a successor liability theory.50
If this Court’s final judgment in favor of Sehron is to mean anything, then this Court must enjoin the Probate Estates from pursing the same claims they alleged against Sehron in them complaint, which were presented to and decided by this Court. The state court proceedings supplementary, wherever they are pending, involve the same claims this Court already decided. For that reason, the Probate Estates are enjoined from pursuing the state court proceedings supplementary or otherwise pursuing the same claims this Court already decided.
The proposed injunction is necessary to aid this Court’s jurisdiction.
The problem is that enjoining the Probate Estates from pursuing claims this Court actually considered and disposed of is not sufficient. It is obvious that the Probate Estates will attempt to circumvent any injunction under the “relitigation exception,” which would only apply to claims, actually litigated, by recasting their dismissed claims under a new theory that was not actually litigated. In fact, the Probate Estates have already attempted to recast their abuse of process, conspiracy to commit abuse of process, and negligence claims under a “real party in interest theory” in state court — in defiance of this Court’s injunction — after this Court dismissed their initial claims. More recently, the Townsend Estate has sought a writ of mandamus irom district court ordering this Court to remand the Townsend ease back to state court. So there is no question the Probate Estates will attempt to assert claims against in Sehron in state court based on the same nucleus of operative facts in their complaint.
The Court’s authority to enjoin the Probate Estates from litigating claims that have not actually been decided by this Court is limited to cases where a state court’s exercise of jurisdiction over a case would “seriously impair the federal court’s flexibility and authority to decide” the federal court case.51 A federal court’s flexibility and authority to decide a case can be seriously impaired when the court has re*915tained jurisdiction over complex, in person-am lawsuits. The Eleventh Circuit first recognized this “complex litigation” scenario in Battle v. Liberty National Life Insurance Co.52
That case involved complicated and protracted class-action litigation between a funeral insurance provider and certain policyholders. The parties litigated the case for seven years — in state and federal court — before reaching a settlement that affected the rights of 300 funeral home owners and one million policyholders.53 After the district court entered a final judgment under the settlement, three sets of policyholders filed class-action lawsuits in state court based on claims involving the same issues that were resolved as part of the settlement.54 The district court in Battle enjoined the plaintiffs from pursuing claims that were substantially similar to those that were settled as part of the federal court action.55
On appeal, the Eleventh Circuit upheld the district court injunction under the “in aid of jurisdiction” exception to the Anti-Injunction Act. In doing so, the Battle court rejected the notion that the “in aid of jurisdiction” exception applies only to in rem cases.56 Instead, the Battle court explained that the “in rem” requirement is not binding because it was only the opinion of three justices in First Vendo Co. v. Lektro-Vend Corp.57 Even if the “in aid of jurisdiction” requirement only applied to in rem proceedings, the Eleventh Circuit reasoned that the litigation in that case was virtually equivalent to an in rem proceeding.58
In particular, the Battle court noted that the district court judgment resolved seven years of litigation over complicated antitrust issues.59 The case involved several weeks of court hearings, 2,300 pages of hearing transcripts, 200 exhibits, and 200 depositions (totaling 18,000 pages of deposition transcripts).60 And resolution of the case affected one million policyholders and 300 funeral home owners.61 More importantly, allowing the plaintiffs to pursue nearly identical claims in state court would have destroyed the settlement and threatened to waste the years of time and effort the district court devoted to the case:
Any state court judgment would destroy the settlement worked out over seven years, nullify this court’s work in refining its Final Judgment over the last ten years, add substantial confusion in the minds of a large segment of the state’s population, and subject the parties to added expense and conflicting orders. This lengthy, complicated litigation is the “virtual equivalent of a res.”62
Four years later, the Eleventh Circuit reached a similar conclusion in Wesch v. Folsom.63 Wesch involved an Alabama congressional redistricting plan administered by a three-judge court. After the three-*916judge court entered a final judgment approving a redistricting plan, a class-action lawsuit was filed in Alabama state court asserting substantially the same claims as those asserted in district court.64 The Wesch Court upheld a district court injunction barring the plaintiffs from pursuing substantially similar redistricting claims in state court because the district court had “invested a great deal of time and other resources in the arduous task of reapportioning Alabama’s congressional districts,” and all of that effort would have been wasted if the state court redistricting case was allowed to proceed.65
This case, although not involving a class action or multi-district litigation, falls squarely within the Eleventh Circuit’s decisions in Battle and Wesch. What started off as six negligence or wrongful death lawsuits has morphed into 25 lawsuits (including adversary proceedings) and 15 appeals before 11 courts and 17 judges in five states over 11 years. When this case was filed, it quickly became apparent the Probate Estates and Trustee were pursuing identical claims against identical parties arising out of the same nucleus of operative facts — i.e,, the March 2006 transactions — in more than one forum (state court, district court, and bankruptcy court). In an effort to avoid the possibility of inconsistent results, this Court ordered the Probate Estates and Trustee to bring all of their claims here since this was the one Court that had jurisdiction over all those claims.
This Court (and others) have devoted years of time and effort to this'exceedingly complex litigation. In this Court, alone, there have been nearly 100 days of hearings resulting in at least 21 reported decisions. The complaints in this proceeding, which totaled nearly 300 pages and contained more than 1,600 numbered paragraphs, alleged 32 claims for relief against 17 parties.66 And the trial involved nearly 100 hours of testimony (live or video deposition testimony submitted for review in chambers) and more than 3,000 trial exhibits. At the conclusion of the trial, the Court took the unusual step of issuing tentative findings of fact and conclusions of law and ordered the parties to mediation hoping to bring this decade-long saga to an end. The mediation produced four settlements that will bring nearly $24 million into the bankruptcy estate (the only recovery) and, perhaps more important, resolve this adversary proceeding and bankruptcy case in their entirety.
In approving the four settlements, the Court concluded there was really no question they were fair and equitable to the settling parties and in the best interests of the bankruptcy estate.67 No one disputes that the Justice Oaks factors — (i) the probability of success in the litigation between the settling parties; (ii) the difficulties, if any, to be encountered in collection; (iii) the complexity of the litigation involved and the expense, inconvenience, and delay necessarily attending it; and, (iv) the paramount interests of the creditors and a proper deference to their reasonable views — weighed in favor of approving the compromises.68
*917But the Court concluded it was not appropriate to approve the compromises until it first considered their impact on Schron. As Schron pointed out, when the rights of a non-settling third party are implicated by a proposed compromise, it is appropriate to consider the third-party’s rights in deciding whether to approve the compromise.69 At least one court has held that “fairness to the settling parties of a proposed settlement agreement may not warrant its approval if the rights of others who are not parties to the agreement are unduly prejudiced.”70 In looking at the compromises as a whole, there was no question they impacted Schron’s rights.
Schron and the other settling Defendants previously bargained for the right to have FAS defend THI and THMI against the Probate Estates’ claims in state court. As this Court has pointed out several times, that defense was intended to serve as an outer firewall to protect Schron and others from liability. If THI or THMI was not liable for negligence in the first place, then Schron and others would not be liable on any fraudulent transfer, alter ego, or other theory. Schron personally paid $200,000 for that outer firewall. But under the approved compromises, THI’s state-court receiver and FAS withdrew their defenses of the claims against THI, destroying the outer firewall, ánd THI’s receiver stipulated to the entry $65 million in judgments against THI, which has resulted in $49.5 million in judgments against THMI under the terms of a previous Court-approved compromise.
The compromises plainly state the Probate Estates intend to pursue collection of those judgments against Schron, and Schron’s only recourse in the event he is somehow found liable is to pursue indemnification or contribution claims against FAS (one of the few Defendants who would have potentially been liable), which is proposing to pay all of its money ($18.5 million) to fund the compromise and get out of this proceeding and case. So the Probate Estates’ intent to pursue collection against Schron in state court on its “real party in interest” or other theory unduly prejudices Schron. By granting the injunction in Schron’s favor, however, the Court has eliminated the prejudice to him.
It is worth noting, although not a requirement for entering an injunction under the “in aid of jurisdiction” exception, that the injunction does not harm the Probate Estates. The injunction only bars the Probate Estates from bringing claims arising out of the same nucleus of operative facts in their complaint. Those are claims that the Probate Estates have had every opportunity to bring here, as evidenced by the 300-page complaint and 32 claims for relief the Probate Estates filed here.
CONCLUSION
The analogy to Groundhog Day in this proceeding breaks down in one crucial respect: In Groundhog Day, the loop is finally broken when Connors uses his experiences reliving the same day over and over to better himself. Here, it is the Probate Estates that are learning from their experiences. But not for the better. Here, the Probate Estates are using their experience to perpetuate the loop until Schron capitu*918lates and settles claims he already prevailed on.
The only way the loop will be broken here is for the Court to use its authority under the Anti-Injunction Act’s “relitigation” and “in aid of jurisdiction exceptions” to enjoin the Probate Estates from relit-igating claims that were or could have litigated here. When the time loop is finally broken in Groundhog Day, Phil Connors happily remarks, after looking outside and noticing the Groundhog Day crowds are gone, “Today is tomorrow.” For Schron, the repeated claims arising out of the same alleged “bust-out” scheme are finally gone. This litigation loop is finally broken. For Schron, today is 'tomorrow.
. A "tíme loop” is a “plot device in which periods of time are repeated and re-experienced by the characters, and there is often some hope of breaking out of the cycle of repetition." https://en.wikipedia.brg/wiki/ Time-loop.
.Although the movie is deliberately vague about how long Connors is stuck in this time loop, it has been suggested it was years. According to the Internet Movie Database, one pop culture blog (Wolf Gnards) speculated Connors was trapped in Groundhog Day for eight years, eight months, and sixteen days; another pop culture website (Obsessed with Film) suggests it was nearly 34 years (12,403 days to be precise). See Internet Movie Database, http://www.imdb.com/title/ttO 107048/ trivia ?ref_=tL_trv_trv (last visited May 5, 2016).
. This involuntary bankruptcy case was initially filed against Fundamental Long Term Care, Inc. ('‘FLTCI"). The Court later substantively consolidated THMI into FLTCI. Doc. No. 1724.
. The Probate Estates are the Estate of Juanita Amelia Jackson, the Estate of Joseph Webb, the Estate of Elvira Nunziata, the Estate of Arlene Townsend, the Estate of Opal Lee Sas-ser, and the Estate of James Henry Jones.
. The March 2006 transaction is described in great detail in the Court’s memorandum opinion dismissing the Probate Estates’ initial complaint in this proceeding. Adv. No. 13-ap-893, Adv. Doc. No. 204 at 3-13. For purposes of this opinion, the March 2006 transaction can be summarized as follows: THI Holdings wholly owned Trans Healthcare, Inc. ("THI”) and THI Baltimore. THI, in turn, owned THMI. In March 2006, THI Holdings sold THI Baltimore to Fundamental Long Term Care Holdings, LLC ("FLTCH”). So as a result of the transaction, FLTCH ended up with the right to operate the former THI Baltimore homes. At the same time, THI sold THMI to FLTCI. Forman and Gran-stein, who had incorporated FLTCI, gave ownership of FLTCI to an elderly man living in a basement in New York. It is fair to say the elderly man (Barry Saacks) had no idea he owned FLTCI or that FLTCI acquired THMI’s stock. The Probate Estates contend that FLTCH, owned by Forman and Grun-stein, looted the assets from THMI without FLTCI’s knowledge.
. As discussed in more detail below, the Court conducted a two-week trial in this adversary proceeding. The March 2006 transaction was front and center at that trial. Yet, there was no evidence at trial that Schron played any role in the March 2006 transaction.
. The Jackson Estate sued THI and THMI on July 30, 2004; the Nunziata Estate sued THMI on December 23, 2005; and the Jones Estate sued THI and THMI on March 20, 2006. In addition to those three lawsuits, more than 150 other lawsuits were pending against THMI at the time of the March 2006 transaction.
. The three Probate Estates that obtained the judgments totaling more than $1.2 billion were the Jackson, Webb, and Nunziata Estates. The Jackson Estate obtained a $110 million judgment against THI and THMI on July 22, 2010. On January 11, 2012, the Nunziata Estate obtained a $200 million judgment against THMI. One month later, the Webb Estate obtained a $900 million judgment against THI and THMI. All three judgments were the product of empty-chair verdicts in which neither THI nor THMI was defended by counsel at trial.
. A copy of the impleader.motion filed in state court in Jackson was later filed with the district court when that impleader action was removed to the United States District Court *908for the Middle District of Florida, Tampa Division. Jackson-Platts v. Trans Health Management, Inc., et al., Case No. 8:10-cv-02937-VMC-TGW, Doc, No. 22-1, The Probate Estates also initiated proceedings supplementary against others involved in the March 2006 transactions.
. Id. at ¶¶ 21-35.
. Id. at Exs. B & D. Exhibits B & D can be found at Case No, 10-cv-2937, Doc. No. 23-2 and Doc. No, 23-4.
. Case No. 10-cv-2937, Doc. No. 22-2.
. Adv. No. 13-ap-893, Adv. Doc. No. 237-5.
. The injunction was entered in an adversary proceeding filed by the GTCR Group, styled GTCR Golder Rauner, LLC, et al. v. Scharrer, Adv. No. 8:13-ap-00928-MGW, Adv. Doc. No. 35. A similar order was also entered in the main bankruptcy case. Doc. No. 1272. The Court’s reasoning was set out in two reported memorandum opinions. Scharrer v. Fundamental Long Term Care Holdings, LLC (In re Fundamental Long Term Care, Inc.), 500 B.R. 147 (Bankr. M.D. Fla. 2013); GTCR Golder Rauner, LLC v. Scharrer (In re Fundamental Long Term Care, Inc.), 501 B.R. 770 (Bankr. M.D. Fla. 2013).
. In re Fundamental Long Term Care, 500 B.R. at 156-57.
. In re Fundamental Long Term Care, 501 B.R. at 784.
. Adv. No. 13-ap-893, Adv. Doc. No. 109. The procedural posture of this proceeding is somewhat confusing. The Probate Estates initiated this proceeding by filing a two-count complaint. Adv, Doc. No, 1. The Trustee sought to intervene to file her own complaint, which she did. Adv. Doc. Nos. 12 & 36. The Probate Estates and Trustee then filed a joint amended complaint. Adv. Doc, No, 72. They later filed a redacted version of the joint amended complaint, Adv. Doc. No. 109, The Court refers to that complaint as the "initial" complaint,
. Adv. No. 13-ap-893, Adv. Doc. Nos. 109 & 289.
. Adv. No. 13-ap-893, Adv, Doc. No, 109.
. Adv. No. 13-ap-893, Adv. Doc. No. 109 at ¶¶ 51 & 726-747.
. Id, at ¶¶ 800-23,
. Adv. No. 13-ap-893, Adv. Doc. No. 226. The reasoning for the Court's ruling was set forth in a reported decision, Estate of Jaclcson v. Gen. Elec. Capital Corp. (In re Fundamental Long Term Care, Inc.), 507 B.R. 359 (Bankr. M.D. Fla. 2014).
. Doc. No. 1039; see also Doc. Nos. 1027 & 1037. Everyone agreed the claims against THMI were stayed.
. Adv. No. 13-ap-893, Adv. Doc. No. 237-1 & 237-4. The circumstances surrounding the Townsend Estate’s efforts to add Schron and others to the judgment are set forth in Gen. Elec. Capital Corp. v. Shattuck, 132 So.3d 908, 910-11 (Fla. 2d DCA 2014).
. Adv. No. 13-ap-893, Adv. Doc. No. 476 at 106 & Adv. Doc. No. 1166.
. Adv. No. 13-ap-893, Adv. Doc. No. 289.
. Adv. No. 13-ap-893, Adv. Doc. No. 596. The Court’s reasoning is set forth in a reported decision, Estate of Jackson v. Gen. Elec. Capital Corp. (In re Fundamental Long Term Care, Inc.), 515 B.R. 352 (Bankr. M.D. Fla. 2014). In light of the dismissal with prejudice, the Court entered final judgment in Schron’s favor. Adv. Doc. No. 1168. The Court's final judgment is on appeal to the district court. Estate of Jackson, et al. v. Schron, Case No. 8:16-cv-00022-EAK, United *911States District Court, Middle District of Florida, Tampa Division.
. Adv. No. 13-ap-893, Adv. Doc. Nos. 907 & 908.
. After the Court dismissed the claims set forth in the second amended complaint, the Probate Estates and Trustee filed a restated second amended complaint that included only the counts that remained pending after the Court’s rulings on the various motions to dismiss. Adv. No. 13-ap-893, Adv. Doc. No, 620.
. The live testimony portion of the trial lasted two weeks. In addition to the live testimony, the Court reviewed video deposition testimony in chambers. In all, the Court considered more than 100 hours of (live and video) testimony and reviewed more than 3,000 exhibits.
. Adv. No. 13-ap-893, Adv. Doc. No. 1019 at 45-49, 59-62.
. Doc. No. 1805.
. Doc. No. 1596, Ex. 1 at ¶ 1. The settlement between the Trustee and the law firm — Quin-tamos, Prieto, Wood & Boyer — stems from a malpractice and breach of fiduciary duty action the Trustee had filed against the firm.
. Adv. No. 13-ap-893, Adv, Doc. Nos. 1062 & 1132,
. Adv. No. 13-ap-893, Adv. Doc. No. 1019 at p, 70, 1.25-p. 74, 1,25.
. Adv. No, 14-ap-251, Adv. Doc. No, 51.
. Id. In its order denying remand, the Court clarified that only the attempt to add Schron and others to the judgment had been removed to this Court. They underlying personal injury claims against THI remained pending in state court,
. In re Estate of Arlene Townsend, Case No. 8:16-cv-00615-JDW-MAP, United States District Court, Middle District of Florida, Tampa Division.
. Adv, No, 13-ap-893, Adv. Doc. No. 1167.
. Id.
. Id.
. Burr & Forman v. Blair, 470 F.3d 1019, 1026 (11th Cir, 2006); see also Wesch v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993) (explaining that the All Writs Act "also empowers federal courts to issue injunctions to protect or effectuate their judgments”); see also 28 U.S.C. § 1651(a),
. 28 U.S.C. § 2283.
. Id.
. Upper Chattahoochee Riverkeeper Fund, Inc. v. City of Atlanta, 701 F.3d 669, 675 (11th Cir. 2012); Burr & Forman, 470 F.3d at 1027-28.
. 28 U.S.C. § 2283.
. Burr & Forman, 470 F.3d at 1029 n.30 (explaining that "[i]n a sense, the relitigation exception empowers a federal court to be the final arbiter of the res judicata effects of its own judgments because it allows a litigant to seek an injunction from the federal court rather than arguing the res judicata defense in state court.”); Wesch, 6 F.3d at 1470.
. SFM Holdings, Ltd. v. Banc of Am. Sec., 764 F.3d 1327, 1336 (11th Cir. 2014).
. 17A James Wm. Moore et al,, Moore’s Federal Practice § 121,08[1] (3d ed.2010).
. Adv. No. 13-ap-893, Adv. Doc. No. 109 at ¶¶ 51, 726-747 & 800-823.
. Wesch, 6 F.3d at 1470.
. 877 F.2d 877 (11th Cir. 1989).
. Id. at 880.
. Id.
. Id.
. Id. at 881-82.
. Id. (discussing First Vendo Co. v. Lektro-Vend Corp., 433 U.S. 623, 97 S.Ct. 2881, 53 L.Ed.2d 1009 (1977)).
. Id.
. Id. at 880-81.
. Id.
. Id.
. Id. at 882 (quoting Battle v. Liberty Nat'l Life Ins. Co., 660 F.Supp. 1449, 1457 (N.D. Ala. 1987)) (internal citations omitted).
. 6 F.3d 1465, 1470-72 (11th Cir. 1993).
. Id. at 1468-69,
. Id. at 1471.
. Adv. Doc, Nos. 1, 289 & 620.
. The Court cannot approve a compromise unless it is fair and equitable and in the best interests of the estate. Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599, 602 (5th Cir. 1980).
. Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1549 (11th Cir. 1990).
. Doc. No. 1816 at 16 (citing In re Stanwich Fin. Servs. Corp., 377 B.R. 432, 437 (Bankr. D. Conn. 2007); In re BG Petroleum, LLC, 525 B.R. 260, 273 (Bankr. W.D. Pa. 2015); Urmann v. Walsh, 523 B.R. 472, 482 (W.D. Pa. 2014); In re Fleming Pkg. Corp., 2007 WL 4556981, at *3 (Bankr. C.D. Ill.Dec. 20, 2007)). That objection was actually filed by the GTCR Group. But Schron joined in it. Doc. No. 1818.
. In re Med. Asset Mgmt., Inc., 249 B.R. 659, 663 (Bankr. W.D. Pa. 2000). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500648/ | MEMORANDUM OPINION OVERRULING CREDITOR’S AMENDED OBJECTION TO DEBT< JR’S CLAIMED EXEMPTION IN FLORIDA HOMESTEAD
Karen S. Jennemann, United States Bankruptcy Judge
Creditor, Alice Migell, objects to the Debtor’s, Andrew Bruce Migell’s, claimed exemption for Florida homestead property located at 11 Timicuan Drive, Ormond *920Beach, Florida (“Homestead”).1 Finding that the Creditor failed to meet her burden of proof, the Court overrules Creditor’s Amended Objection to Debtor’s Florida Homestead. Debtor’s Homestead is exempt from creditor claims.
The Florida Constitution protects a debtor’s homestead from forced sale,2 “[T]he homestead character of a property depends upon an actual intention to reside thereon as a permanent place of residence, coupled with the fact of residence.” 3 A debtor’s homestead exemption claim is presumptively valid.4 Courts have emphasized that Florida’s “homestead exemption is to be liberally construed in the interest of protecting the family home.”5 “ ‘Any challenge to the homestead exemption claim places a burden on the objecting party to make a strong showing that the Debtor is not entitled to the claimed exemption.’ ”6 “[H]omeowners seeking to qualify for the homestead exemption must meet both an objective and subjective test. First, they must actually use and occupy the home. Second, they must express an actual intent to live permanently in the home.”7
The overwhelming weight of the evidence supports a conclusion that the Debtor has physically lived in his Homestead since 2011. The Court further finds the Debtor subjectively intends to remain a Florida resident for the foreseeable future. Creditor simply has failed to prove otherwise.
Debtor has filed two Chapter 11 bankruptcy petitions exactly one year apart— on December 22, 20148 and on December 22, 2015.9 In both cases, Debtor has listed his Homestead as exempt on his Schedule C.10 Debtor got a Florida driver’s license on July 1, 2011.11 Debtor’s minor daughter has attended a Florida school near the Homestead since 2011.12 Debtor, acting pro se, credibly and consistently testified that he has lived in the Homestead since 2011,13 and intends to continue residing in the home.
Creditor’s objection relates to a dispute pending in Massachusetts between the Debtor and the Guardian for his Mother, *921the Creditor Alice Migell. The Massachusetts State Court has found the Debtor culpable for stealing money rightfully belonging to his Mother and has entered a substantial judgment against the Debtor to recover these losses arising from a proven breach of the Debtor’s fiduciary duties.14 Much of this defalcation relates to the Debtor’s improper transfers to himself or related entities of real property located in Florida, Massachusetts, and New Hampshire that formerly belonged to his now deceased father.15 None of these transfers, however, directly relate to the Homestead. Debtor’s father never owned the Homestead. Debtor instead purchased the Homestead on May 23, 2005,16 five years before this litigation started in Massachusetts.17 Creditor presented absolutely no evidence directly connecting the Debtors purchase of his Homestead with the ongoing litigation in Massachusetts.
Rather, Creditor points to actions and statements made by the Debtor in the Massachusetts litigation to raise questions as to the legitimacy of the Debtor’s right to claim the Homestead exempt. For example, Debtor has received mail at four separate mailing addresses in recent years.18 Getting mail at more than one address is not determinative of homestead status. Many people who own multiple properties receive mail at several different addresses. And, here, Debtor consistently has gotten mail at his Homestead.
Creditor also suggests the Debtor may have relied on health insurance supplied only to residents of Massachusetts. Creditor, however, did not provide any credible evidence that the Debtor uses the health insurance program or details as to when he, if ever, acquired the health insurance. Debtor again credibly testified that neither he, nor his family, use the government subsidized health insurance provided by Massachusetts.19
The only plausible piece of evidence supporting Creditor’s objection is that the Debtor filed a homestead declaration exemption in Massachusetts in 2014.20 The Massachusetts Probate and Family Court found that this Declaration was an improper “encumbrance on real estate.”21 Earlier, in 2009, the Massachusetts Court had found the deed transferring this Massachusetts property to the Debtor to be null and void because of the Debtor’s defalcation in his fiduciary duties.22 Debtor’s ethics certainly are suspect, but this Court concludes that the filing of the Homestead Declaration in Massachusetts was a desperate attempt to keep real property about to be lost in the Massachusetts litigation. *922He likely committed an infraction of Massachusetts law, but the Massachusetts Declaration, even though very troubling, does not negate the fact that the Debtor has physically lived in Florida since 2011 and intends to stay in the state. Even bad actors, like the Debtor, get to claim a home exempt.
Creditor merely argues that the Debtor is not entitled to Florida homestead exemption because the Florida home is not his primary residence.23 Creditor offers no significant evidence that the Debtor did not use, occupy, or intend to remain in the Homestead.24 This Court must construe homestead rights liberally in favor of the Debtor. Creditor, who has the burden of proof, failed to make a ‘strong showing’ that the Debtor is not entitled to claim his Homestead exempt.
Alternatively, Creditor argues that, even if this Court finds that the Debtor physically lived in and intended to remain a Florida resident when he filed his bankruptcy petition, Section 522(b)(3)(A) of the Bankruptcy Code25 requires Massachusetts homestead exemption law to apply, which would limit the value of the exemption to $125,000. Under Section 522(b)(3)(A), a debtor is entitled to claim exemptions in the state “in which the debt- or’s domicile has been located for the 730-days immediately preceding the date of the filing of the petition.”26 If the debtor lived in more than one state during the 730-days preceding his bankruptcy petition, the Court looks at the debtor’s domicile during “the 180 days immediately preceding the 730-day period or for a longer portion of such 180-day period than any other place.”27
First, this Court already has found the Debtor has continuously resided in Florida since 2011, approximately 1,400 days before this bankruptcy case was filed. Second, both this Court and the Massachusetts Court have found the Debtor’s misguided filing of a Declaration of Homestead in Massachusetts invalid and less than credible. As such, there is no logical basis to calculate the Debtor’s residency from the filing of this fishy Declaration on June 24, 2014. Third, even if this Court were to find that the Debtor’s Massachusetts Declaration valid, the Creditor offered no evidence, to prove that the Debt- or’s domicile was not in Florida for the 180 days immediately preceding the 730 day period.28 Other than the skimpy evidence already rejected above, Creditor ut*923terly fails to demonstrate where the Debt- or resided, other than Florida, prior to December 22, 2013, 730 days before this bankruptcy case was filed. Section 522(b)(3)(A) of the Bankruptcy Code does not require the Debtor to use Massachusetts homestead provisions. Florida homestead exemption law applies.29
Creditor next argues that Section 522(q) of the Bankruptcy Code would limit the aggregate value of the Debtor’s homestead exemption to $160,375. “Section 522(q) prevents a debtor from claiming a home exempt if certain prerequisites or thresholds contained in Section 522(p) are met.”30 Section 522(q)(l) provides that a debtor may not exempt property “described in subparagraphs (A) ... of subsection (p)(l) which exceeds in the aggregate of $160,375 in value if ... (B) the debtor owes a debt arising from ... (ii) fraud, deceit, or manipulation in a fiduciary capacity.” In turn, Section 522(p)(l)(A) provides that a “debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $160,375 in value in (A) real or personal property that the debtor ... uses ás a residence.” The bottom line is that the Creditor must show that the Debtor acquired an interest in his Homestead within 1,215 days before the debtor filed this bankruptcy case. Here, the Debtor acquired his Homestead property on May 23, 2005, which is 3,865 days before he filed this bankruptcy petition.31 Creditor’s argument again fails. Debtor is entitled to exempt the full value of his Homestead.
Creditor’s final argument is that the Debtor bought the homestead property with ill-gotten funds stolen from parents. Creditor asserts that there is a constructive lien or trust on the homestead property for $153,066.67.32 Creditor states that Debtor converted funds from the Mockingbird Realty Trust to purchase the homestead.33
Once again, Creditor has failed to prove this allegation.34 Debtor states he paid for *924his Homestead with monies he received “directly from the father to which he was given prior to father’s death.”35 The Massachusetts Probate Court has not entered any judgment imposing a constructive or equitable lien36 on the Debtor’s Homestead, although such a trust was imposed on other real properties previously owned by the Debtor and his wife.37 Creditor did not prove by “clear and convincing evidence” that the Debtor bought the Homestead property with ill-gotten funds stolen from parents.38 No constructive trust exists that would limit the Debtor’s right to claim the Homestead exempt.
Creditor did not meet the burden of proof to find that the Florida homestead exemption does not apply to the Debtor’s Homestead property. Creditor’s Objection is overruled.39 A separate order consistent with this Memorandum Opinion shall be entered contemporaneously.
ORDERED.
. Doc, No. 126. The trial was held on April 13, 2017.
. Fla. Const, art. X, § 4.
. In re Harle, 422 B.R. 310, 314 (Bankr. M.D. Fla. 2010) (quoting In re Bennett, 395 B.R, 781, 789 (Bankr. M.D. Fla 2008) (quoting Hillsborough Investment Co. v. Wilcox, 152 Fla. 889, 13 So.2d 448, 452 (1943))) (internal quotation marks omitted).
. Colwell v. Royal Int’l Trading Corp. (In re Colwell), 196 F.3d 1225, 1226 (11th Cir. 1999).
. Havoco of Am., Ltd. v. Hill, 790 So.2d 1018, 1020 (Fla, 2001), opinion after certified question answered, 255 F.3d 1321 (11th Cir. 2001).
. In re Franzese, 383 B.R. 197, 202-03 (Bankr. M.D. Fla, 2008) (citing Trustee v. Robert Laing (In re Laing), 329 B.R, 761, 770 (Bankr. M.D. Fla. 2005). and quoting In re Harrison, 236 B.R. 788, 790 (Bankr. M.D. Fla. 1999)).
. In re Harle, 422 B.R. at 314.
. Case No. 6:14-bk-13714-KSJ, Doc. No. 1.
. Doc. No, 1.
. Doc. No. 185, p. 20; Case No. 6:14-bk-13714-KSJ, Doc. No. 17, p. 8.
. Debtor's Exh. No. 1. The license remains valid. Debtor’s prior Massachusetts driver’s license expired on December 13, 2016. Credi- ■ tor's Exh. No. 1.
. Creditor’s Exh. No. 15, p. 52, ¶¶ 13-22.
. Creditor’s Exh. No. 15, p, 50, ¶¶ 14-24. Debtor also sufficiently described the Homestead property, Creditor’s Exh, No. 14, p. 19, ¶¶ 1-23.
. Doc. No, 126-3; Creditor’s Exh, No. 4-6.
. Creditor’s Exh, No. 4-6.
. Creditor’s Exh. No. 7.
. Creditor's Exh. No. 9, p. 2.
. Creditor’s Exh. No. 14, p. 89, ¶¶ 2-23, and p. 90, ¶¶ 1-24. Debtor has received mail at the following addresses; (1) 323 Tremont Street, Massachusetts, (2) 215 Lakeshore Dr., Way-land, Massachusetts, (3) 11 Timicuan Drive, Florida, and (4) a P.O. Box in Waltham, Massachusetts. Id.
. Creditor's Exh, No. 15, p. 105-07, ¶¶ 20-24, ¶¶ 1-8, and ¶¶ 9-16.
. Creditor’s Exh. No. 2.
. Creditor’s Exh. No. 12.
. On June 24, 2009, the Massachusetts Probate Court found that the deed conveying the property located at 215 Lakeshore Dr. in Wayland, Massachusetts was null and void. Creditor’s Exh. No. 4, p. 1, ¶ 3. On November 2, 2016, the Appeals Court for the Commonwealth of Massachusetts upheld the original finding that the deed conveying the Wayland property was void. Creditor’s Exh. No. 6, pp. 4-6.
. Doc. No. 126.
. Creditor primarily relied on only four facts to prove that the Debtor was not entitled to Florida homestead, First, Debtor has a Massachusetts driver's license, which was issued on May 17, 1984 and expired on December 13, 2016. Creditor’s Exh. No.l. Second, Debtor filed a Massachusetts homestead exemption for 215 Lakeshore Drive, Wayland MA on June 24, 2014. Creditor’s Exh. No. 2. Third, Debtor receives mail at the Massachusetts home. Creditor's Exh, No. 14, p. 89, ¶¶ 2-23, and p. 90 ¶¶ 1-24. Lastly, Debtor may have a government subsidized healthcare plan provided by the State of Massachusetts. Creditor’s Exh. No. 15, p. 105-07, ¶¶ 20-24, ¶¶ 1-8, and ¶¶ 9-16.
. All references to the Bankruptcy Code refer to 11 U.S.C. §§ 101, etseq. (2012).
. 11 U.S.C. § 522(b)(3)(A).
. Id.; In re Crandall, 346 B.R. 220, 221 (Bankr. M.D. Fla. 2006).
. The date of this petition was December 22, 2015. Debtor filed a homestead protection form in Massachusetts on June 24, 2014. Creditor’s Exh. No. 2. The time period of 730-days preceding the date of filing is December 22, 2013. The time period of 180-days plus 730-days preceding the date of filing is June 25, 2013. Creditor did not prove that the Debtor was not domiciled in Florida from June 25, 2013 through December 22, 2013.
. Additionally, if this Court finds that the Massachusetts homestead exemption was valid, Debtor terminated any homestead rights he had when he filed bankruptcy and. expressed his intent to again make Florida his domicile and residence. Mass. Gen. Laws Ann. ch. 188, § 10(3). ‘‘[T]he Supreme Judicial Court [of Massachusetts’s] would rule that a homestead estate could be terminated by abandonment.” In re Marrama, 307 B.R. 332, 338 (Bankr. D. Mass. 2004). "Whether there has been an abandonment is largely a question of intention. Intent to abandon a homestead is difficult to determine. These cases strongly suggest that intention can be manifested by the outward acts of the declar-ant.” Id.
. Miller v. Burns (In re Burns), 395 B.R. 756, 763 (Bankr. M.D. Fla. 2008).
. Doc. No. 1. Debtor filed this petition on December 22, 2015.
. Doc. No. 126, p. 6, ¶22.
. Doc. 126-3, ¶¶91, 97-98. Creditor states that, at the meeting of creditors conducted by the United States Trustee on January 26, 2016, Debtor asserted privilege against self-incrimination declining to answer questions on whether money from the real estate he did not own was used to pay for his Homestead. Doc. No. 126, p. 6, ¶¶ 22, 14, 15. Debtor denies this allegation. Doc. No. 203, p. 1, ¶4. Creditor did not provide the transcript, even though the Creditor states this allegation in her amended Objection. Doc. No. 126, p. 6, ¶ 14. Without reviewing the transcript cited, the Court cannot give any weight to this argument.
. See White v. Weatherford (In re Abrass), 268 B.R. 665, 678 (Bankr. M.D. Fla. 2001) ("Florida courts have held that, to demonstrate a constructive trust, a plaintiff must prove four elements by clear and convincing evidence: 1) a promise, express or implied; 2) a transfer of property and reliance thereon; 3) a confidential relationship; and, 4) unjust enrichment.”).
. Doc. No. 203, p. 1, ¶4.
. Creditor’s Exh. No. 4, ¶¶4-10. Debtor and his wife were ordered to return the proceeds from the sales of two properties in New Hampshire, and that those proceeds would be held in a resulting trust or constructive trust. Id, Additionally, "[a]ny proceeds from the sales of the above properties [including 17 Wyola Road, Hull, Massachusetts and 215 Lakeshore Drive, Wayland, Massachusetts] are held ... by a resulting trust in favor of the Estate of Bruce A. Migell, and by constructive trust for the benefit of Alice Migell." Id. at ¶10.
.The Creditor’s Objection points to In re Harle case. In that case, the judgment against the Debtor was properly attached to the property and recorded with the Volusia County Clerk of Court. In re Harle, 422 B.R, at 313.
. Pelecanos v. City of Hallandale Beach, 914 So.2d 1044, 1047 (Fla. 4th Dist. Ct. App. 2005) (“We agree with the [T]hird [District’s recent interpretation of Havoco wherein it stated ‘an equitable lien is not permitted against homestead property unless the funds used to invest in, purchase or improve the homestead were obtained through fraud or egregious conduct....’”) (internal citations omitted),
. Doc. No. 126. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500649/ | MEMORANDUM OF DECISION
Elizabeth D. Katz, United States Bankruptcy Judge
Before this Court is an objection to confirmation of the Chapter 13 plan of reorganization proposed by Albert Sjogren, the debtor in this Chapter 13 bankruptcy case *2(the “Debtor”),1 filed by the standing Chapter 13 trustee (the “Trustee”). The issue to be resolved is whether the requirements for confirmation of a Chapter 13 plan can be satisfied if, as here, a debtor fails to include monthly police pension payments in the current monthly income calculation.
I. FACTS AND POSITIONS OF THE PARTIES
The Debtor filed a voluntary petition for relief under Chapter 13 of the bankruptcy Code on July 11, 2016. On Schedule B, the Debtor disclosed his interest in a pension plan with the City of Worcester (“Pension”), but listed that interest as having an “unknown” value. The Debtor also claimed an exemption in the Pension pursuant to Mass. Gen. Laws ch. 235, § 34(A) and Mass. Gen. Laws ch. 32, § 19, but he listed the amount exempted as “100% of fair market value, up to any applicable statutory limit.” On Schedule I, the Debtor stated that his household monthly net income is $10,309.64, consisting of $6,641.34 net income from employment, $3,284.30 from the Pension (the “Pension Payments”), $300.00 representing 1/12 of the Debtor’s anticipated tax refund, and $84.00 from “Uber.” On the expense side, however, the Debtor deducted the Pension Payments $3,28430, listing the expense as on account of “city of Worcester ret—exempt from estate.” After factoring in other monthly expenses, the Debtor lists his net disposable income available to fund a chapter 13 plan as $335.91. And on Official Form 122C-1, the “Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period'” (the “CMI calculation”), the Debtor did not account for the Pension Payments, and contends that he is below the applicable median income.
The Debtor’s proposed plan of reorganization (the “Plan”) provides for 36 monthly payments of $336.00. The only payments to be made under the Plan are $4,750 to be paid to Debtor’s counsel and $6,288.50 to general unsecured creditors, representing an approximate dividend of 6.86% (total unsecured claims are estimated at $74,980.93).
The Trustee objects to confirmation of the Debtor’s plan on two grounds. First, the Trustee says the Plan cannot be confirmed, because in omitting the Pension Payments from the CMI calculation, the Debtor failed to include all of his projected disposable income, as required by § 1325(b)(1)(B). Furthermore, accounting for the Pension Payments in the CMI calculation, results in total income above the applicable median, which requires the Debtor to propose a plan with a 5-year commitment period pursuant to § 1325(b)(4). Second, the Trustee says that the Plan is not proposed in good faith, as required by § 1325(a)(3) and (7), because it allows the Debtor to acquire $118,224.00 from his Pension over 36 months while requiring the Debtor to pay only $6,288.50 to unsecured creditors.
In response, the Debtor maintains that his interest in the Pension and the Pension Payments are not required to be contributed to his chapter 13 plan. First, the Debtor argues that the Pension Payments are not “income” as commonly defined and are not “current monthly income” as defined in the Bankruptcy Code. Further, the Debtor says, the Pension is not part of his bankruptcy estate because it is either excluded or exempt, and, therefore, the payments from it cannot be reached by the Trustee or creditors.
*3II. DISCUSSION
The Trustee and the Debtor agree that the Pension itself is not property of the bankruptcy estate (as it is either excluded or exempt). They disagree, however, as to whether the Pension Payments, which are derived from an asset otherwise unreachable by creditors, must be included in the CMI calculation.
Pursuant to § 1325(b)(1), a Chapter 13 plan must provide for the payment of “all of the debtor’s projected disposable income to be received in the applicable commitment period.” 11 U.S.C. § 1325(b)(1). “Disposable income” is defined in § 1325(b)(2) as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended” to support the debtor and the debtor’s dependents. “Current monthly income” is further defined as “the average monthly income from all sources that the debtor receives ... without regard to whether such income is taxable income,” with three specific exclusions, none of which are relevant here. 11 U.S.C. § 101(10A) (emphasis supplied). The term “income” itself, however, is not defined in the Bankruptcy Code.
The Court’s analysis “begins where all such inquiries must begin: with the language of the statute itself. ... [Wjhere ... the statute’s language is plain, ‘the sole function of the courts is to enforce it according to its terms.’ ” U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917)) (additional citations omitted). Here, the language of § 101(10A), including in current monthly income “income received from all sources,” is plain. Quite simply, the term “all” means “all.” See, e.g., In re Terzo, 502 B.R. 553, 558 (Bankr. N.D. Ill. 2013) (holding that pensions are included in the definition of “current monthly income” because it “is specifically defined as income received from all sources”) (internal citation omitted); In re Briggs, 440 B.R. 490, 495-96 (Bankr. N.D. Ohio 2010) (“All can only be taken to mean all, exempt income or not.”). And nothing in § 1325(b) further limits the sources of income to be included in a Chapter 13 debtor’s disposable income calculation. See Freeman v. Schulman (In re Freeman), 86 F.3d 478, 479 (6th Cir. 1996) (“The plain language of the statute makes no express or implied reference to the exempt status of income .... ”). The only qualification on the definition of “disposable income” is whether the income is “needed for the debtor’s (or his dependents’) maintenance or support.” In re Andrade, 2011 WL 1559241, *2 (Bankr. D.R.I. March 16, 2011) (quoting In re Launza, 337 B.R. 286, 290 (Bankr. N.D. Tex. 2005)); see also Stuart v. Koch (In re Koch), 109 F.3d 1285, 1289 (8th Cir. 1997) (“Chapter 13 contains no language suggesting that exempt post-petition revenues are not Chapter 13 ‘income,’ and § 1325(b)(2) expressly defines ‘disposable income’ to mean income not needed for debtor’s support.”). Accordingly, under the plain language of the applicable statutory definitions, the Pension Payments are not excluded from the Debtor’s disposable income and CMI calculation.
In addition, the Code explicitly excludes three types of income from being considered “current monthly income”: Social Security benefits, payments to victims of war crimes, and payments to victims of terrorism. 11 U.S.C. § 101(10A). “The general rule of statutory construction is that the enumeration of specific exclusions from the operation of a statute is an indication that the statute should apply to all cases not specifically excluded,” Blausey v. U.S. Trustee, 552 F.3d 1124, 1133 (9th Cir. 2009). The very specific and limiting language of § 101 (10A) precludes this *4Court from stretching the plain language of the statute to create, in essence, a judicial carve-out with regard to pension income. See In re Charron, 2016 WL 3003144, *2 (Bankr. E.D. Mich., May 13, 2016); Briggs, 440 B.R. at 495-96, “Some might see the result of this Court’s ruling as being somehow inequitable or unfair to recipients of such pensions, as compared to Social Security benefits,” but “equating them for purposes , involved in this case is a matter for Congress and not this Court.” Charron, 2016 WL 3003144 at *3; see also In re Moose, 2012 WL 964713, *2 (Bankr. M.D.N.C. Mar. 20, 2012). In addition, contrary to the Debtor’s assertion, “including [this] income ... does not make the [exempt Pension] ‘liable’ for payment of prepetition claims. ... [Debtors have an option for choosing a repayment plan or liquidation, and the disposable income test is simply the ‘terms upon which Congress has made the benefits of Chapter 13 available.’” In re Springer, 338 B.R. 515, 520 (Bankr. N.D. Ga. 2005) (citing Koch, 109 F.3d at 1289).
Finally, the Court notes that it does not write on a blank slate. While there was a small split among courts prior to 2005 as to whether exempt or excluded property must be included in a Chapter 13 debtor’s disposable income calculation,2 since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, there has been no debate: the disposable income/CMI calculation includes all current monthly income, which includes many forms of exempt or excluded assets. See In re Brah, 562 B.R. 922, 924 (Bankr. E.D. Wise. 2017) (collecting cases). Accordingly, the Court will sustain the Trustee’s objection to confirmation of the Debtor’s Chapter 13 Plan.3
III. CONCLUSION
For all the foregoing reasons, the Court will SUSTAIN the Trustee’s objection and will order the Debtor to file an amended Chapter 13 plan, amended schedules I and J, and an amended CMI calculation consistent with this Memorandum within 30 days. An order will issue forthwith.
. See 11 U.S.C. §§ 101 et seq. (“the Bankruptcy Code” or the “Code”). Unless otherwise specified, all statutory references are to the provisions of the Bankruptcy Code.
. See, e.g., In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. 1996); In re Baker, 194 B.R. 881 (Bankr. S.D. Ca. 1996); In re Tomasso, 98 B.R. 513 (Bankr. S.D. Ca. 1989).
. In light of the Court’s decision regarding the inclusion of the Pension Payments in the Debtor’s disposable income/CMI calculation, the Court need not decide whether Plan is also objectionable on grounds that the Debtor proposed the Plan in bad faith. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500650/ | MEMORANDUM OPINION
Bruce A. Harwood, Chief Bankruptcy Judge
I.INTRODUCTION
The matter before the Court is the “Motion to Alter or Amend Judgment Under Rule 9023 As It Incorporates Rule 59(e)”1 (the “Motion”) filed by the debtor Hanish, LLC (the “Debtor”) and the objection thereto2 (the “Objection”) filed by creditor Phoenix REO, LLC (“Phoenix). Through the Motion, the Debtor seeks reconsideration of the Court’s order dated May 31, 2017, denying approval of the “Debtor-in-Possession’s Third Disclosure Statement for Third Plan of Reorganization Dated March 15, 2017 (Second Amended)”3 (the “Amended Third Disclosure Statement”) based on the patent unconfirmability of the “Debtor-In-Possession[’s] Third Plan of Reorganization Dated March 15, 2017 (Second Amended)”4 (the “Amended Third Plan”) due to the improper classification of the Debtor’s unsecured creditors in violation of 11 U.S.C. §§ 1122 and 1129(a)(1).’ The Debtor contends the Court erred as a matter of law because 11 U.S.C. § 1123(a)(4) permits the Debtor to provide assenting claimholders • less favorable treatment, thus justifying separate classification along those lines. Phoenix objects, positing that Fed. R. Civ. P. 59(e) does not apply to interlocutory orders and asserting the Motion does not establish that the Court made a manifest error of law. For the reasons set forth below, the Court will deny the Motion.
II. JURISDICTION
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
III. FACTS
The Debtor filed a voluntary Chapter 11 petition on April 26, 2016. It owns and operates a Fairfield Inn and Suites by *8Marriot hotel in Hooksett, New Hampshire, The Debtor’s largest creditor is Phoenix, who holds two fully matured notes that are secured by the Debtor’s hotel property (the “Hotel”). The larger of the two notes is also guaranteed by Nayan Patel, the Debtor’s principal. The total amount of Phoenix’s allowed claim is $6,732,462.02.5 It is undisputed that Phoenix’s claim is undersecured, although the Debtor asserts that the value of the collateral has increased during the pendency of the case.
The classification and treatment of Phoenix’s claim in each formulation of the Debtor’s plan has been an ongoing point of contention between the parties. This is in no small part because Phoenix, to date, has refused to accept any of the Debtor’s plans, requiring the Debtor obtain the acceptance of another impaired class in order to achieve confirmation. See 11 U.S.C. § 1129(a)(10). Although the Motion seeks reconsideration of an order with respect to the Amended Third Disclosure Statement and Amended Third Plan, a brief history of the Debtor’s reorganization efforts is helpful to place the Court’s ruling and present dispute in context.
A. Phoenix Classified as Fully Secured
The first several iterations of the plan shared the following characteristics.6 Each placed Phoenix’s claim in a single class (Class 2), proposing to treat the entire claim as fully secured despite the fact that the Debtor estimated the Hotel’s value was only $5,000,000.00 at that time. The Debtor proposed to pay Phoenix in full through: (1) a lump sum payment of $4,000,000.00 on the effective date from a refinancing that would prime Phoenix’s position with respect to the Hotel; (2) interest only adequate protection payments for 10 years; and (3) a balloon payment of the remaining balance at the end of the 10 year period from a refinancing transaction. General unsecured claims were spilt among two classes: Class 4A, consisting of an administrative convenience class of unsecured claims under $5,000,00 which would be paid 80% of their claim on the effective date;7 and Class 4, consisting of unsecured claims over $5,000.00 which would be paid in 'full over 7-10 years. On December 1, 2016, the Court approved the Debtor’s second amended disclosure statement without objection from Phoenix and scheduled the second amended plan for a confirmation hearing.
On December 27, 2016, Phoenix filed an objection to confirmation, asserting, inter alia, that the Debtor’s classification scheme was designed for the sole purpose of gerrymandering an accepting impaired class.8 Specifically, Phoenix argued that the Debtor failed to offer a legitimate basis for a separate administrative convenience class, and curiously suggested that the true purpose was to avoid rejection by Phoenix “whose vote could control Class 4,” notwithstanding the fact that Phoenix’s claim was not fin Class 4.9 On January 5, 2017, Phoenix cast two votes against the second amended plan—one as a Class 2 secured creditor and one as a Class 4 general unsecured creditor—premised on its asserted undersecured status. In response, the Debtor moved to have Phoenix’s vote designated as solely a Class 2 *9vote, or, in the alternative, allow the Debt- or to separately classify Phoenix’s deficiency claim in “Class 4B” and designate Phoenix’s Class 4 vote as one in that class.10
The Court conducted a two day confirmation hearing on February 16 and 17, 2017. The Court ruled that it would not honor Phoenix’s Class 4 vote on the basis that Phoenix could not vote a classification scheme not reflected in the plan. At the conclusion of evidence, the Court found that the Debtor had not sustained its burden of demonstrating that the second amended plan was feasible. In light of this ruling and the need for the Debtor to re-conceptualize its plan, the Court declined to address how Phoenix ought to be classified in a future plan.
B. Phoenix Classified as Secured with an Unclassified Unsecured Claim
On March 15, 2017, the Debtor filed the first versions of its third disclosure statement and third plan of reorganization.11 Notably, the Debtor alleged that a recent appraisal indicated that the Hotel’s value had increased to $5,700,000.00 during the pendency of the case. The classification structure of the third plan remained the same as the prior iterations—Phoenix in Class 2; general unsecured claims under $5,000.00 in Class 4A; and general unsecured claims over $5,000.00 in Class 4. This time, the Debtor proposed to pay Phoenix in Class 2 as follows: (1) a payment of $1,000,000.00 in cash on the effective date via an equity infusion supplied by Nayan Patel; (2) application of $200,000.00 in adequate protection payments already made; and (3) payment of the remaining $5,532,462.02 in equal monthly installments of principal and interest (at 5%) for 79 months, with the balance paid off through a refinancing at the end of the term. The proposed treatment of Classes 4A and 4 also remained the same as the prior plans. Phoenix objected on various grounds,12 and the Debtor filed revised documents in an attempt to address some of the disclosure issues raised by Phoenix.13
On April 12, 2017, the Court conducted a hearing on the revised third disclosure statement. During the hearing, the Court questioned the proposed classification of Phoenix’s claim, noting that the third plan, based on the valuation contained therein, appeared to recognize the existence of a separate unsecured claim without classifying it as such outside Class 2. Phoenix concurred, asserting that the revised third plan classified its two claims in a manner inconsistent with the Bankruptcy Code. After a colloquy with Debtor’s counsel, the Court found that the revised third plan structurally required a classification scheme consistent with the de facto bifurcation of Phoenix’s claim and ordered the Debtor to file further amendments. In closing, the Court expressed its intent to address any classification issues, including any objection to Class 4A on the basis of gerrymandering, at the hearing on the further amended disclosure statement.
C. Phoenix Classified as Secured with a Separately Classified Unsecured Claim
On April 19, 2017, the Debtor filed the Amended Third Disclosure Statement and the Amended Third Plan. The Amended Third Plan is substantially similar to the prior plan except that Phoenix’s unsecured claim is separately classified in Class 2A. Thus, in relevant part, the Amended Third *10Plan provides that: (1) Phoenix’s secured claim in Class 2 will receive monthly payments of principal and interest for 78 months with the balance paid in full from a refinancing at the end of the term; (2) Phoenix’s unsecured claim in Class 2A will be paid in full on the effective date from an equity infusion by Nayan Patel; (3) general unsecured claims under $5,000.00 in Class 4A will be paid 80% of their claim on the effective date; and (4) general unsecured claims over $5,000.00 in Class 4 will be paid in full in six and a half years.14 Neither the Amended Third Disclosure Statement nor the Amended Third Plan explain why the Debtor has placed its unsecured creditors into three separate classes other than to note that Class 4A is “a separate administrative convenience class.”15 Nevertheless, both expressly provide that if separate classification of Class 4A is not permitted, claims in that class will be treated and paid under Class 4. As a result of this classification scheme, Classes 2, 4A, and 4 are impaired and entitled to vote to accept or reject the plan, see 11 U.S.C. § 1126(a), while Class 2A is unimpaired and deemed to have accepted the Amended Third Plan. See 11 U.S.C. § 1126(f).
On May 5, 2017, Phoenix filed an objection to the Amended Third Disclosure Statement, asserting that the Amended Third Plan improperly separately classifies unsecured claims and artificially impairs classes in order to secure the acceptance of an impaired class.16 In particular, Phoenix questioned why, in light of -the fact that Phoenix’s unsecured claim is now less than the $1,000,000.00 being supplied by Nayan Patel, Class 4A is not being paid in full from the remainder of that equity infusion. In sum, Phoenix argued that all general unsecured claims, including its own unsecured claim and the claims within the administrative convenience class which Phoenix contends the Debtor has failed to justify, must be placed together in Class 4. Given the size of Phoenix’s unsecured claim, there is no dispute that Phoenix’s vote would control the outcome of any class in which it is placed, assuming Phoenix could vote.
On May 24, 2017, the Debtor filed a response, urging the Court to defer ruling on classification until a confirmation hearing on the basis that evidence is required to properly weigh all considerations.17 The Debtor argued that Phoenix, as a secured creditor and an unimpaired unsecured creditor that will be paid in full on the effective date, lacks standing to object to the classification of other creditors.18 Moreover, the Debtor asserted that the classification structure is permissible given that the Bankruptcy Code expressly allows the Debtor to provide less favorable treat*11ment to assenting claimholders.19
D. The Hearing on the Amended Third Disclosure Statement
The Court held a hearing on the Amended Third Disclosure Statement on May 31, 2017. Prom the outset, the Court expressed concern that the classification of the unsecured claims in the Amended Third Plan appeared designed to engineer an impaired assenting class, particularly in light of the travel of the case. The Court noted that no information is offered in the Amended Third Disclosure Statement to justify the three separate classifications. The Court further questioned why a separate administrative convenience class receiving less than full payment on the effective date was necessary or appropriate, given that “Schedule E/F: Creditors Who Have Unsecured Claims” reflects that there are only thirteen known creditors with claims under $5,000.00, and those claims total little more than $6,000.00.20°
The Debtor’s position was that classification was not an issue in this case because an unimpaired class would, based on voting results for the previous plan, accept the Amended Third Plan, thus satisfying 11 U.S.C. § 1129(a)(10).21 For this reason and to resolve the objections to the Class 4A, the Debtor stated that it would collapse the administrative convenience class into Class 4. Nevertheless, the Debtor repeatedly urged the Court to conclude Phoenix’s unimpaired status and inability to vote deprived it of the requisite standing to object to the classification of other general unsecured claims. The primary thrust of the Debtor’s argument was that 11 U.S.C. § 1123(a)(4) allows the Debtor to provide less favorable treatment to Classes 4 and 4A than will be provided to Phoenix in Class 2A if the creditors in those classes agree, which the Debtor presumes they will, noting that none had objected to the Amended Third Disclosure Statement. The Debtor insisted that the disparate treatment of Phoenix from the other general unsecured creditors made the creation of Class 2A proper. Indeed, the Debtor posited that its reliance on 11 U.S.C. § 1123(a)(4) distinguished the present case from circuit precedent requiring that all creditors of equal rank with claims against the same property should be placed in the same class. Alternatively, the Debtor argued that the existence of the guaranty from Nayan Patel and Phoenix’s right to make an election under 11 U.S.C. § 1111(b) rendered Phoenix’s unsecured claim legally distinct from other general unsecured claims.
After hearing arguments from both the Debtor and Phoenix, the Court concluded that the classification scheme contained within the Amended Third Plan did *12not comply with the standards enunciated by the United States Court of Appeals for the First Circuit in Granada Wines v. New England Teamsters & Trucking Indus. Pension Fund, 748 F.2d 42 (1st Cir. 1984). In so ruling, the Court rejected the Debt- or’s contentions that the existence of a guaranty or rights under 11 U.S.C. § 1111(b) affords the unsecured claim a different legal character than other general unsecured claims.22 Accordingly, the Court denied approval of the Amended Third Disclosure Statement because the classification structure rendered the Amended Third Plan patently unconfirma-ble.23
The following day, the Debtor filed the Motion. On June 9, 2017, Phoenix filed the Objection, asserting that Fed. R. Civ. P. 59(e) does not apply to interlocutory orders and that the Motion merely rehashes arguments the Court heard and rejected. Having reviewed both, the Court finds that additional oral argument is not necessary for the determination of this matter.
IV. DISCUSSION
A. The Rule 59(e) Standard
Motions to alter or amend filed within fourteen days of the entry of an order are brought under Rule 59(e) of the Federal Rules of Civil Procedure (“Rule 59(e)”), which is made applicable in bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 9023. To succeed on a Rule 59(e) motion, a moving party must establish an intervening change in the controlling law, a clear legal error, or newly discovered evidence. Carrero-Ojeda v. Autoridad de Energia Electrica, 755 F.3d 711, 723 (1st Cir. 2014). “[A] party cannot use a Rule 59(e) motion to rehash arguments previously rejected.” Soto-Padro v. Pub. Bldgs. Auth., 675 F.3d 1, 9 (1st Cir. 2012); see Nat’l Metal Finishing Co. v. BarclaysAmerican/Commercial, Inc., 899 F.2d 119, 123 (1st Cir. 1990) (Rule 59(e) motions are not appropriate “to repeat old arguments previously considered and rejected.”). Indeed, “[disagreement with the original ruling of the Court, without more, does not constitute grounds for altering or amending an order.” In re Universal Golf Const. Corp., No. BK 05-11379 JMD, 2005 WL 3475777, at *2 (Bankr. D.N.H. Dec. 12, 2005). Nor does a Rule 59(e) motion provide a party a vehicle to undo its own procedural failures or advance arguments that it could have and should have presented prior to judgment. Aybar v. Crispin-Reyes, 118 F.3d 10, 16 (1st Cir. 1997).
As an initial matter, Phoenix argues that “Rule 59(e) does not apply to *13motions seeking reconsideration of interlocutory orders from which no immediate appeal is available.”24 Orders approving or denying approval of a disclosure statement are interlocutory orders. See Asbestos Claimants v. Aetna Casualty & Surety Co. (In re The Wallace & Gale Co.), 72 F.3d 21, 25 (4th Cir. 1995); Everett v. Perez (In re Perez), 30 F.3d 1209, 1217 (9th Cir. 1994); Adams v. First Fin. Dev. Corp. (In re First Fin. Dev. Corp,), 960 F.2d 23, 26 (5th Cir. 1992). Phoenix, however, reaches the erroneous conclusion that an interlocutory order cannot be reconsidered, quoting a single sentence of Nieves-Luciano v. Hernandez-Torres, 397 F.3d 1, 4 (1st Cir. 2005), out of context. In Nieves-Luciano, the United States Court of Appeals for the First Circuit stated in relevant part:
Rule 59(e) provides a party with ten days to move to alter or amend a judgment, and the district court may not enlarge the time frame. See Feinstein v. Moses, 951 F.2d 16, 19 (1st Cir. 1991). But Rule 59(e) does not apply to motions for reconsideration of interlocutory orders from which no immediate appeal .may be taken, see United States v. Martin 226 F.3d 1042, 1048 (9th Cir. 2000), including summary judgment denials, see Pacific Union Conf. of Seventh-Day Adventists v. Marshall, 434 U.S. 1305, 1306, 98 S.Ct. 2, 54 L.Ed.2d 17 (1977) (Rehnquist, J., in chambers). Interlocutory orders such as these “remain open to trial court reconsideration” until the entry of judgment. Geffon v. Micrion Corp., 249 F.3d 29, 38 (1st Cir. 2001) (quoting Pérez v. Crespo-Guillén, 25 F.3d 40, 42 (1st Cir. 1994)). Thus, the district court could reconsider its initial summary judgment ruling even though appellees did not seek reconsideration within ten days of the ruling.
397 F.3d at 4 (emphasis added). Thus, contrary to Phoenix’s assertions, the First Circuit’s holding was not that interlocutory orders can never be reconsidered, but the exact opposite—they remain open to reconsideration until entry of a final judgment.25
B. Phoenix’s Standing to Object to Classification
The Debtor continues to argue that Phoenix has no standing to object to classification. In support of its position, the Debtor relies on two cases, In re New Midland Plaza Assocs., 247 B.R. 877, 892 (Bankr. S.D. Fla. 2000), and In re Charles Street African Methodist Episcopal Church of Boston, 499 B.R. 66, 96 (Bankr. D. Mass. 2013). At best, those cases stand for the proposition that a secured creditor lacks standing to object to the classification of an unsecured claim it does not hold.26 As such, they are inapposite as Phoenix is both a secured creditor and an unsecured creditor. Moreover, the impropriety of the Debtor’s classification scheme does affect Phoenix as it is precisely the Debtor’s classification of unsecured claims into three separate classes that may allow the Debtor to cram down the Amended Third Plan pursuant to 11 U.S.C. § 1129(a)(10). The Debtor admits as much in the Motion when it suggests that it placed Phoenix in a class separate from other unsecured creditors because other*14wise it would be difficult to get achieve plan confirmation.27
Regardless of Phoenix’s standing, Court has an independent obligation to ensure that a plan complies with the applicable provisions of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1).
C. The Standards for Classification of Claims under Section 1122
Before addressing the Debtor’s argument that 11 U.S.C. § 1123(a)(4) permits the separate classification of unsecured claims based on their agreement to less favorable treatment, the Court must first consider the standards for the classification of claims under 11 U.S.C. § 1122. These standards, as described below, formed the basis for the Court’s bench ruling denying approval of the Amended Third Disclosure Statement on May 31, 2017. As a result, they will inform the analysis of whether the Court made a manifest error of law.
Section 1122 of the Bankruptcy Code provides:
(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.
11 U.S.C. § 1122. As observed by the United States Court of Appeals for the Sixth Circuit, “[t]he statute, by its express language, only addresses the problem of dissimilar claims being included in the same class. It does not address the correlative problem ... of similar claims being put in different classes.” Teamsters Nat’l Freight Indus. Negotiating Comm. v. U.S. Truck Co., Inc. (In re U.S. Truck Co., Inc.), 800 F.2d 581, 585 (6th Cir. 1986). Notably, subsection (a) uses the permissive “may,” suggesting that plan proponents enjoy broad freedom in classifying claims. But unbounded freedom of classification is inconsistent with subsection (b), which requires court approval of an administrative convenience class, and would otherwise render that section superfluous. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278 (5th Cir. 1991), on reh’g (Feb. 27, 1992) (“if § 1122(a) is wholly permissive • regarding the creation of such classes, there would be no need for § 1122(b) specifically to authorize a class of smaller unsecured claims .... ”). As a result, courts have struggled to discern the standard required by 11 U.S.C. § 1122(a), resulting in a split among the circuits. Cf. Granada Wines, 748 F.2d at 46 (all creditors of equal rank with claims against the same property should be placed in the same class) with Barakat v. Life Ins. Co. of Va. (In re Barakat), 99 F.3d 1520, 1526 (9th Cir. 1996) (“absent legitimate business or economic justification, it is impermissible for Debtor to classify [a] deficiency claim separately from general unsecured claims.”); Boston Post Rd. Ltd. P’ship v. FDIC (In re Boston Post Rd. Ltd. P’ship), 21 F.3d 477, 483 (2d Cir. 1994) (“debtor must adduce credible proof of a legitimate reason for separate classification of similar *15claims”); John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir. 1993) (interpreting 11 U.S.C. § 1122(a) to bar the debtor from “arbitrarily” designating classes or doing so in a manner that “would not serve any legitimate purpose”); In re Greystone III Joint Venture, 995 F.2d at 1278 (“One cannot conclude categorically that § 1122(a) prohibits the formation of different classes from similar types of claims.”); see also In re U.S. Truck Co., Inc., 800 F.2d at 585-86 (concluding that “Congress has sent mixed signals on the issue”).
The First Circuit follows what is known as the “strict approach” to classification. See Granada Wines, 748 F.2d at 46; see also In re River Valley Fitness One Ltd. P’ship, No. 01-12829-JMD, 2003 WL 22298573, at *8 (Bankr. D.N.H. Sept. 19, 2003); In re CGE Shattuck, LLC, 254 B.R. 5, 11 (Bankr. D.N.H. 2000); In re Barney & Carey Co., 170 B.R. 17, 24 (Bankr. D. Mass. 1994); but see In re Charles St. African Methodist Episcopal Church of Boston, 499 B.R. 66, 96 (Bankr. D. Mass. 2013) (concluding 11 U.S.C. § 1123(a)(4) permits separate classification of similar claims where the class receiving lesser treatment assents). In Granada Wines, the First Circuit announced that “[t]he general rule regarding classification is ‘all creditors of equal rank with claims against the same property should be placed in the same class.’ ” Id. at 46 (quoting In re Los Angeles Land and Inv., Ltd., 282 F.Supp. 448, 453 (1968)). The First Circuit stated further that “[sjeparate classifications for unsecured creditors are only justified ‘where the legal character of their claims is such as to accord them a status different from the other unsecured creditors ....’” Id (quoting Los Angeles Land and Inv., Ltd., 282 F.Supp. at 454).
Given that the First Circuit applies the strictest approach to classification, it necessarily follows that other courts have accepted justifications for separate classification that are simply inconsistent with Granada Wines. For example, in Steelcase, Inc. v. Johnston (In re Johnston), 21 F.3d 323, 328 (9th Cir. 1994), the United States Court of Appeals for the Ninth Circuit, which applies a business or economic justification standard, concluded that the existence of a personal guaranty from the debtor’s principal was a legal attribute that rendered the claim in question dissimilar to other claims. Although the Ninth Circuit stated its analysis was consistent with Granada Wines, see id., bankruptcy courts within the First Circuit have disagreed. The prevailing view in this circuit is that a personal guaranty does not alter the legal character of a claim as it relates to the assets of the debtor. See In re National/Northway Ltd. P’ship, 279 B.R. 17, 30 (Bankr. D. Mass. 2002) (noting “the existence of a personal guarantee, which provides the creditor a means to collecting payment not available to other unsecured creditors, does not affect the legal nature of the guaranteed claim”); Bjolmes Realty Trust, 134 B.R. at 1003 (“[T]he presence of personal guarantees ... are not enough. Granada Wines requires a difference in rank concerning rights against the debtor or its property.”). For this reason, the Court was not swayed by the Debtor’s guaranty argument at the hearing on the adequacy of the Amended Third Disclosure Statement.
Notably, the majority of courts, including those that apply less stringent standards than the First Circuit, hold that the ability to make an election under 11 U.S.C. § 1111(b) does not justify the separate classification of unsecured deficiency claims. See In re Boston Post Rd. Ltd. P’ship, 21 F.3d at 483; In re Greystone III Joint Venture, 995 F.2d at 1278; Travelers Ins. Co. v. Bryson Properties, XVIII (In re *16Bryson Properties, XVIII), 961 F.2d 496 (4th Cir. 1992). The United States Court of Appeals for the Fifth Circuit in In re Greystone III Joint Venture, the leading case on this issue, explained the problem with considering rights under 11 U.S.C. § 1111(b) as a legally distinct attribute of a deficiency thusly:
The purpose of § 1111(b) is to provide an undersecured creditor an election with respect to the treatment of its deficiency claim. Generally, the creditor may elect recourse status and obtain the right to vote in the unsecured class, or it may elect to forego recourse to gain an allowed secured claim for the entire amount of the debt. If separate classification of unsecured deficiency claims arising from non-recourse debt were permitted solely on the ground that the claim is non-recourse under state law, the right to vote in the unsecured class would be meaningless. Plan proponents could effectively disenfranchise the holders of such claims by placing them in a separate class and confirming the plan over their objection by cramdown. With its unsecured voting rights effectively eliminated, the electing creditor’s ability to negotiate a satisfactory settlement of either its secured or unsecured claims would be seriously undercut. It seems likely that the creditor would often have to “elect” to take an allowed secured claim under § 1111(b)(2) in the hope that the value of the collateral would increase after the case is closed. Thus, the election under § 1111(b) would be essentially meaningless. We believe Congress did not intend this result.
Id. at 1279-80 (footnote omitted).28 Most, though not all, courts within the First Circuit have sided with the majority. See Banc of Am. Commercial Fin. Corp. v. CGE Shattuck, LLC (In re CGE Shattuck, LLC), No. 99-12287-JMD, 1999 WL 38457789, at *4 (Bankr. D.N.H. Dec. 20, 1999); Barney & Carey Co., 170 B.R. at 24; In re Cranberry Hill Assocs. Ltd. P’ship, 150 B.R. 289, 290 (Bankr. D. Mass. 1993); In re Main Road Properties, Inc., 144 B.R. 217, 220-21 (Bankr. D.R.I. 1992); In re Cantonwood Assocs. Ltd. P’ship, 138 B.R. 648, 653-57 (Bankr. D. Mass. 1992); but see In re Gato Realty Trust Corp., 183 B.R. 15, 20 (Bankr. D. Mass. 1995); In re Bjolmes Realty Trust, 134 B.R. at 1002-04. At the hearing on the adequacy of the Amended Third Disclosure Statement, the Court adopted the majority view.
Whatever uncertainty exists in the caselaw, there is “one clear rule” to which all courts adhere—“thou shalt not classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan.” In re Greystone III Joint Venture, 995 F.2d at 1279 (citing In re U.S. Truck Co., 800 F.2d at 586) (emphasis added). While some courts have noted that this “one clear rule” may be difficult to apply because “[similarity is not a precise relationship,” see In re Woodbrook, Assocs., 19 F.3d 312, 318 (7th Cir. 1994), the First Circuit’s strict construction of 11 U.S.C. § 1122(a) makes detecting gerrymandering substantially easier by creating a strong presumption that facially similar claims should be classified together. That is not to say gerrymandering is not an issue at all.
Granada Wines’ strict approach does not apply to 11 U.S.C. § 1122(b), which statutorily authorizes the separate classification of small unsecured claims subject to court approval. To approve the separate classification, a court *17must find the claims are “less than or reduced to an amount that ... [is] reasonable and necessary for administrative convenience.” 11 U.S.C. § 1122(b). The legislative history of 11 U.S.C. § 1122(b) reflects that the intent was to permit the debtor avoid having to solicit acceptances from a multitude of small unsecured claimholders by simply paying them in full on the effective date. See S. Rep. No. 989, 95th Cong., 2d Sess. 118 n. 26 (1978); Mickelson v. Leser (In re Leser), 939 F.2d 669, 671 n.7 (8th Cir. 1991) (“‘[I]t has always been assumed that the purpose of § 1122(b) was to allow special treatment for small claims, so that they could be eliminated early and reduce the number of claims that would have to be paid over time.’ In re Storberg, 94 B.R. 144, 146 n.2 (Bankr. D. Minn. 1988)”). Nevertheless, courts have held that there is no restriction on creating an impaired administrative convenience class. See, e.g., In re United Marine, Inc., 197 B.R. 942, 949 (Bankr. S.D. Fla. 1996). Indeed, to the extent that some creditors are being paid well ahead of others, and thus not assuming the risk of plan failure, it may be appropriate to apply a discount factor to the administrative convenience class to account for the time-value of money and the relative risk. See, e.g., In re Nat’l/Northway Ltd. P’ship, 279 B.R. at 25. Nevertheless, the ability to impair an administrative convenience class potentially raises the specter of gerrymandering and thus requires the court to scrutinize the justification for the separate classification. This inquiry includes, inter alia, consideration of how many claims fall within the class, the individual amounts of those claims, the total amount of claims within the class, the debtor’s financial wherewithal to pay them at an accelerated rate, and a present value comparison of the payments to be received by the administrative convenience class and the general unsecured creditors. See Oxford Life Ins. Co. v. Tucson Self-Storage, Inc. (In re Tucson Self-Storage, Inc.), 166 B.R. 892, 898 (9th Cir. BAP 1994) (separate classification of four unsecured trade creditors owed $2,124.27 and paid sixty days after the effective date could not be justified as an impaired administrative convenience); In re Autterson, 547 B.R. 372, 396 (Bankr. D. Colo. 2016) (holding the separate classification of one purported administrative convenience claim can never be reasonable and necessary for administrative convenience); In re New Bride Missionary Baptist Church, 509 B.R. 85, 88 (Bankr. E.D. Mich. 2014) (debtor failed to justify an administrative convenience class where there were only seven unsecured claims other than the large deficiency claim that were neither so small in amount or large in number as to make a single classification burdensome); In re Nat’l/Northway Ltd. P’ship, 279 B.R. at 24-25 (finding no justification for an impaired administrative convenience class where the proposed class consisted of only one creditor and counsel could not explain how the present value of the payments to the convenience class compared to the payments to be .made to the general unsecured creditors).
In the present case, the impaired status of the proposed administrative convenience class (Class 4A) prompted a gerrymandering objection from Phoenix, requiring the Debtor to justify the separate classification. In response, the Debtor, rather than explaining the rationale and merit behind Class 4A, instead argued that Phoenix lacked standing to object and emphasized Phoenix’s inability to vote its unsecured claim. When the Court took up the issue on its own, noting that the classification scheme appeared to be designed to secure the acceptance of an impaired class, particularly in light of the class composition, the *18Debtor abandoned the classification entirely, a possibility that was expressly built into the Amended Third Disclosure Statement. Ultimately, the Debtor’s withdrawal of administrative convenience class obviated the need for the Court to rule on the gerrymandering objection, so it is unclear whether the Debtor could have provided an appropriate justification.29
Ultimately, the Debtor does not challenge the Court’s rulings that the unsecured claims in this case are not legally distinct enough to warrant separate classification.30
D. Classification and “Less Favorable Treatment” under Section 1123(a)(4)
On reconsideration, the Debtor attempts to save its proposed separate classification structure by focusing on 11 U.S.C. § 1123(a)(4), which provides:
(a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall— ⅜ $ ⅜
(4) 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). The purpose of this subsection is to ensure equal opportunity for recovery among creditors of the same class. See In re The Vaughan Co., Realtors, 543 B.R. 325, 338 (Bankr. D.N.M. 2015) (“The ‘same treatment’ requirement of § 1123(a)(4) operates to protect individual claimants within the same class even when the class has accepted the plan.”). Nevertheless, the Debtor asserts that 11 U.S.C. § 1123(a)(4) authorizes the separate classification of claims that agree to less favorable treatment. On its face, the Debtor’s reliance on the second clause of 11 U.S.C. § 1123(a)(4) to permit “less favorable treatment” of particular claims is misguided because the first clause refers to claims and interests “of a particular class.” Under the Amended Third Plan, the unsecured creditors have been placed in three separate classes, not one “particular class.” Thus, even assuming Classes 4 and 4A were to vote in favor of the Amended Third Plan, Classes 4 and 4A will not have agreed to less favorable treatment than other creditors in their particular class, but rather to the treatment of a creditor in a completely different class.
The Debtor cites In re Charles St. African Methodist Episcopal Church of Boston (the “Charles St. decision”) in support of its contention. In that case, the debtor’s *19largest secured creditor objected to the classification of a junior lienholder as fully-secured because, in reality, the junior lien-holder was wholly unsecured. 499 B.R. at 95. Notably, both the junior lienholder and the class of general unsecured creditors into which the secured creditor wanted the junior lienholder placed voted to accept the debtor’s plan. Id at 74. The Court overruled the objection, reasoning that because 11 U.S.C. § 1122(a) does not expressly require that substantially similar claims be classified together, and 11 U.S.C. § 1123(a)(4) permits creditors to accept less favorable treatment than other creditors, the debtor could provide the same treatment to the junior lienholder and general unsecured creditors even if they were in the same class. Id. at 95-96. The court distinguished Granada Wines on the basis that the creditor in that case did not assent to disparate, lesser treatment. Id at 96.
Contrary to the Debtor’s assertions, the Charles St. decision does not support separate classification of the unsecured claims in this case. The lynchpin of that decision is that separate classification of the junior lienholder from the general unsecured claims did not change the outcome of the case because both class.es were impaired and accepted the plan. The court’s invocation of 11 U.S.C. § 1123(a)(4) was to emphasize the fact that these creditors could, and presumably would in light of their votes, agree to the same treatment even if they were in the same class, rendering classification irrelevant. The critical factor distinguishing the Charles St. decision from the present case is that the voting results were not altered by the classification scheme. Here, the Debtor’s classification of the unsecured claims substantially impacts voting because only two of the three classes are impaired and the dissenting creditor has been disenfranchised.
The Debtor posits that this is a distinction without a difference, asserting that “regardless of whether there is one, two or three classes of unsecured claims, at least one impaired class would vote for the Plan and the Debtor could proceed to confirmation,”31 This contention appears premised on the idea that Phoenix, if placed in Class 4 with all other unsecured claims, is still unimpaired and unable to vote due to the proposed payment of its claim on the effective date. In contrast, the remaining creditors, who must wait for payment, are impaired and may vote to accept the plan. Ultimately, this argument is flawed because the Debtor is conflating classification and treatment, which is made worse by the Debtor’s insistence that the Court assume that the non-Phoenix unsecured creditors, if given the chance, will agree to less favorable treatment than Phoenix by voting to accept the plan. This, in turn, conflates voting with agreement to less favorable treatment by assuming that the non-Phoenix unsecured creditors if placed in a single class with Phoenix could vote at all.
Impairment, and thus voting rights, is determined on a class by class basis, prior to solicitation. See 11 U.S.C. §§ 1123(a)(2), 1125(b). Indeed, although the holders of allowed claims may accept or reject a plan, 11 U.S.C. § 1126(a), 11 U.S.C. § 1126(f) provides that notwithstanding any other provision of that section, if “a class ... is not impaired under a plan,” the class and the claimholders within such class “are conclusively presumed to have accepted the plan,” and solicitation of that class is not required. 11 U.S.C. § 1126(f) (emphasis added). Therefore, unimpaired classes are neither solicited nor vote.
*20Section 1124 of the Bankruptcy Code describes when a class of claims or interests is impaired. Generally, “a class of claims or interests” is presumed to be impaired under 11 U.S.C. § 1124 “unless, with respect to each claim or interest of such class, the plan ,.. leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.” 11 U.S.C. § 1124(1) (emphasis added). In other words, unless the rights of each claimholder within a class are left unaltered, the entire class will be impaired. An exception to that general rule, however, is contained in the introductory clause of 11 U.S.C. § 1124—“[e]xcept as provided in section 1123(a)(4) of this title.” 11 U.S.C. § 1124(a). Read together, these sections provide that the agreement or consent by a claimholder to a less favorable treatment than will otherwise be enjoyed by the class, as permitted by 11 U.S.C. § 1123(a)(4), “removes the claim from the presumption of impairment” and “the claim of this creditor is deemed unimpaired under § 1124.” In re K Lunde, LLC, 513 B.R. 587, 595 n.5 (Bankr. D. Colo. 2014). Put simply, an agreement to less favorable treatment under 11 U.S.C. § 1123(a)(4) does not create an impairment, it removes one.
To illustrate these problems, a single class in a hypothetical plan containing both Phoenix’s unsecured claim and all non-Phoenix unsecured claims is, upon filing, either impaired or unimpaired. To gauge the impairment of this hypothetical class, the Court must look to the proposed treatment. Section 1123(a)(4) of the Bankruptcy Code requires the plan to “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.” Because the non-Phoenix unsecured claimholders have not yet agreed to less favorable treatment than Phoenix, and might never do so, 11 U.S.C. § 1123(a)(4) would require that they be ■ afforded the same treatment as Phoenix— payment in full on the effective date. Therefore, the entire class, not simply Phoenix, would be unimpaired and would be deemed to have accepted the plan, 11 U.S.C. § 1126(f). Even if the Debtor were to propose a plan providing three separate treatments to sub-classes of unsecured claims in hopes that the non-Phoenix claimholders would agree to less favorable treatment, the best treatment enjoyed by a member of the class, i.e., Phoenix, would define the character of the class and their voting rights under 11 U.S.C. §' 1126(f), changing nothing. In such a circumstance, agreement under 11 U.S.C. § 1123(a)(4) would not be measured by voting, because the class is deemed to have accepted the plan without solicitation, but by whether the impacted claimholders object to their treatment.
Ultimately, the Debtor’s reliance on 11 U.S.C. § 1123(a)(4) to justify separate classification in this case is unavailing. Section 1123(a)(4) of the Bankruptcy Code can neither be used to impair a subset of claims within an unimpaired class nor artificially disenfranchise a deficiency claim-holder.
V. CONCLUSION
For the reasons stated, the Court finds that the Debtor has failed to demonstrate any intervening change in the controlling law, newly discovered evidence, or a clear legal error that would warrant altering or amending the Court’s order under Rule 59(e). Accordingly, the Motion is denied. This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052. The *21Court will issue a separate order consistent with this opinion.
. Doc. No. 265.
. Doc. No. 269.
. Doc. No. 254.
. Doc. No. 253.
. See Doc. No. 215.
. See Doc. Nos. 75, 76, 94, 95, 138, 139, 144.
. The Debtor’s first plan contemplated a payment of 70% of these claims, but each subsequent plan has increased the dividend to 80%,
. Doc. No, 165.
, Doc. No, 165 at ¶ 40.
. Doc. No. 190.
. Doc. Nos, 228, 229.
. Doc. No. 243.
. Doc, No. 246, 247.
. Presumably, the Debtor does not believe any unsecured claims total exactly $5,000.00 as no formulation of the plan has ever provided for them in either Class 4 or Class 4A.
. Indeed, neither the Amended Third Plan nor the Amended Third Disclosure Statement even estimate the number of creditors or the total amount of claims included in Class 4A.
. Doc. No. 258.
. Doc. No. 263.
.As a brief aside, the Court notes that in footnote 2 of the response, the Debtor suggests that Phoenix’s unsecured claim "could also be paid in full prior to confirmation, leaving only the secured claim.’’ This note stands in stark contrast to the Debtor’s stated position that Nayan Patel will not contribute the $1,000,000.00 necessary to pay Phoenix’s unsecured claim unless the Court approves the third party injunction contained within the Amended Third Plan that will prevent Phoenix from continuing its collection efforts against Mr. Patel's guaranty.
.The Debtor assumes that because Classes 4 and 4A voted in favor of the Debtor’s previous plan (which provided the same or substantially similar treatment of their claims as the current plan), they will vote in favor of the Amended Third Plan. This assumption, however, may not be justified in light of the fact that Phoenix was not previously classified as holding an unsecured claim, and Class 2A will receive substantially better treatment than either Class 4 or 4A. Regardless, the voting preference of these classes does not affect the Court's analysis of the classification scheme of the Amended Third Plan.
. Doc. No. 31.
. At the hearing, the Court understood this to mean that it regardless of whether Class 4A is separate from or included in Class 4, Class 4 remains impaired and will accept the Amended Third Plan. Indeed, the Debtor indicated that it would willing to fold Class 4A into Class 4 if necessary. As will be discussed below, however, it is now clear that the Debt- or actually meant that Class 4 will vote to accept the Amended Third Plan even if Phoenix’s unsecured claim is placed in Class 4.
. Although the Court did not make this finding, Phoenix argued at the hearing that the unsecured claim is not subject to a guaranty because the Debtor’s principal only guaranteed the earlier of the two notes.
. Courts have discretion to deny approval of a disclosure statement, even if it contains adequate information, if the related chapter 11 plan of reorganization cannot be confirmed, In re Felicity Assocs., Inc., 197 B.R. 12, 14 (Bankr. D.R.I. 1996) ("It has become standard Chapter 11 practice that 'when an objection raises substantive plan issues that are normally addressed at confirmation, it is proper to consider and rule upon such issues prior to confirmation, where the proposed plan is arguably unconfirmable on its face.' ”) (quoting In re Main Road Props., Inc., 144 B.R. 217, 219 (Bankr. D.R.I. 1992)); In re Bjolmes Realty Trust, 134 B.R. 1000, 1002 (Bankr. D. Mass. 1991) ("It is permissible, moreover, for the court to pass upon confirmation issues where, as here, it is contended that the plan is so fatally and obviously flawed that confirmation is impossible.”); In re Eastern Maine Electric Co-Op, Inc., 125 B.R. 329, 333 (Bankr. D. Me. 1991) (“Such an exercise of discretion is appropriate because undertaking the burden and expense of plan distribution and vote solicitation is unwise and inappropriate if the proposed plan could never legally be confirmed").
. Doc. No. 269 at ¶ 12,
. It is difficult to imagine an order that could neither be appealed to an appellate court as a matter of right nor reconsidered by the trial court.
.Notably, in each case, the objected-to classification was one of several accepting impaired classes such as to render any claim of gerrymandering moot. Thus, the proposition may be even narrower than the Court has articulated.
. Doc. No. 265 at ¶ 14 ("The Debtor placed Phoenix in a different class because it was being paid in full, is unimpaired, and its vote, if counted at all, is automatically considered an acceptance of the Plan under the Code (no matter what class Phoenix is in), but that does not help the Debtor to get to confirmation.”),
. Phoenix argued in its objection and at the hearing that-the Debtor has made an election under 11 U.S.C. § 1111(b) illusory in this case because the Debtor proposes to pay Phoenix's unsecured claim in full on the proposed effective date of the Plan.
. The Court notes, however, that the Debt- or’s focus on Phoenix’s standing to object and Phoenix’s voting rights in response to the Court's inquiry does nothing to alleviate the Court's concerns that the Debtor’s purpose was to manufacture an impaired accepting class solely in order to cram down Phoenix.
. The Court is mindful that these rulings may make it substantially more difficult for a debtor to confirm a Chapter 11 plan in single-asset realty cases, but as observed by the United States Court of Appeals for the Second Circuit:
[Ajlthough Debtor protests that prohibiting it from separating the unsecured claims of the FDIC from those of its trade creditors will effectively bar single asset debtors from utilizing the Code’s cramdown provisions, Debtor fails to persuade that a single-asset debtor should be able to cramdown a plan that is designed to disadvantage its overwhelmingly largest creditor. Chapter 11 is far better served by allowing those creditors with the largest unsecured claims to have a significant degree of input and participation in the reorganization process, since they stand to gain or lose the most from the reorganization of the debtor.
In re Boston Post Rd. Ltd. P’ship, 21 F.3d at 483 (emphasis in original).
. Doc. No. 265 at ¶ 7 (footnote omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500651/ | MEMORA3SDUM OF DECISION
Rejecting the Debtors’ Claim That § 329 is Unconstitutional and Granting, in Part, the U.S, Trustee’s Motion for Disgorgement of Attorneys’ Fees
Colleen A. Brown, United States Bankruptcy Judge
The U.S. Trustee seeks disgorgement of all attorneys’ fees paid in this case, based upon the excessiveness of the fees the Debtors’ attorney received and that attorney’s failure to comply with the disclosure requirements of the Bankruptcy Code and Rules. The attorney denies his fees are excessive, concedes he failed to disclose fees properly, but opposes full disgorgement as a sanction, on several grounds. He also alleges the controlling statute, § 329 of the Bankruptcy Code, is unconstitutionally overbroad and vague.
For the reasons articulated below, the Court determines, first, that the Debtors’ attorney’s constitutional arguments are without merit; second, that the fees paid to the Debtors’ attorney were not excessive; third, that the Debtors’ attorney’s failure to timely and fully disclose all fees is a violation of the Bankruptcy Code and Rules; and finally, that the appropriate sanction in this case is to require the Debtors’ attorney to disgorge one-half of all fees paid.
Jurisdiction
This Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference Chief Judge Christina Reiss entered on June 22, 2012. The Court declares the legal issues raised by the instant motions and objections to be core matters under 28 U.S.C. § 157(b)(2)(A) and (O), over which this Court has constitutional authority to enter a final judgment.
Procedural History
The Debtors have a significant history of bankruptcy filings in this District. In the past fourteen years, the Debtors have filed for Chapter 13 relief five times, both jointly and individually.1 The instant case, filed on May 20, 2015, was the Debtors’ sixth attempt at reorganization under Chapter *2213.2 After filing their petition in the instant case pro se, the Debtors retained attorney Jacob Durell (“Attorney Durell") to represent them; he filed a notice of appearance on May 29, 2015.3
On June 9, 2016, the U.S. Trustee filed a motion seeking the disgorgement of all attorneys’ fees received in this case, in the amount of $20,500, based upon the exces-siveness of Attorney Durell’s fees and his repeated failure to disclose fees pursuant to § 3294 and Rule 2016(b) (doc. #165, the “Motion to Disgorge”). On July 1, 2016, Attorney Durell filed an objection to the Motion to Disgorge5 (doc. # 176, the “Objection”). The Objection asserts: (i) § 329 is unconstitutionally vague and overbroad; (ii) most or all of the payments at issue were not made “in connection with” bankruptcy, and therefore are not subject to the disclosure requirements of § 329; (iii) payments from a third party are outside the bankruptcy estate and thus are not subject to disclosure or disgorgement; (iv) any disgorgement of fees as a sanction for non-disclosure should be limited due to the extraordinary circumstances present in the case; and (v) the payments he received are not excessive given the amount of work he performed.
On July 20, 2016, the Court held a hearing on the Motion to Disgorge and Objection, and set a schedule for the filing of supplemental papers. After multiple extensions of time, the U.S. Trustee and the United States Attorney filed a joint reply to the Objection, responding to each of Attorney Durell’s arguments (doc. #205, the “Reply”). On January 3,2017, Attorney Durell filed a sur-reply (doc. #206, the “Sur-Reply”), supplementing the arguments he presented in the Objection.
Factual History
Based upon the written record in the case, and the arguments presented at the July 20, 2016 hearing, the Court finds there is no dispute as to the following facts, and relies upon them for purposes of this memorandum of decision.
1. On May 4, 2015, the Debtors entered into a legal services agreement with Attorney Durell (doc. # 165, Ex. A, the “Legal Services Agreement”). It specified that legal services included “development of reorganization plan for return to bankruptcy” (doc. # 165, Ex. A, 111).
2. The Ipegal Services Agreement required a $2,500 retainer fee. The Debtors’ son, Jeffrey Frye, paid that amount to Attorney Durell on June 12, 2Q15 (doc. # 189-1, p. 3).
3. On May 20, 2015, the Debtors filed a Chapter 13 petition pro se (doc. # 1).
4. On May 29, 2015, Attorney Durell first appeared in the case, through the filing of a notice of appearance on behalf of the Debtors.6
*235. On July 10, 2015, Attorney Durell filed a Chapter 13 plan on behalf of the Debtors, which included a priority claim of $5,000 for attorney’s fees (doc. # 41, p. 1).
6. On July 9, 2015, and again on July 21, 2015, Jeffrey Frye made a payment of $2,500 to Attorney Durell. These payments are categorized as “Deposit/Retainer” on Attorney Du-rell’s Invoice # 35 (doc. # 189-1, p. 3).
7. In early September of 2015, Attorney Durell joined the Stevens Law Office (“SLO”).
8. On September 28, 2015, Attorney Durell received a payment of $1,500 from the Debtors, which is categorized as “Deposit/Retainer” in Invoice #50; that invoice indicates this sum was the remaining amount due to satisfy a $3,000 retainer (doc. # 189-1, p. 6).7
9. On October 14, 2015, the Debtors entered into a retainer agreement with Attorney Harold Stevens (“Attorney Stevens”) of SLO. The subject line of the agreement is: “General Representation re: consultation and potential settlement regarding Foreclosure/bankruptcy = Community National Bank, Vermont Community Loan Fund, Northeastern Vermont Development Association and Northern Community Investment Corporation” (doc. # 132-2, p. 3).8 The retainer fee set out in this agreement is $1,000.
10. On December 8, 2015, Attorney Durell filed an amended Chapter 13 plan on behalf of the Debtors which included a priority claim of $3,000 for attorney’s fees (i.e., $2,000 less than the fee request in the prior Chapter 13 plan); he provided no explanation for the change in amount (doc. # 112).
11. On February 2, 2016, Attorney Du-rell filed a notice regarding attorneys’ fees (doc. # 132), with two Form 2030’s attached.
a. The first Form 2030, dated January 26, 2016 and signed by Attorney Stevens, discloses a total charge of $5,468.61 and references the October 14th SLO agreement (doc. # 132-2, p. 1, “First Disclosure Statement”). It shows $1,000 as having already been paid by the Debtors and $4,468.61 outstanding.9 It further specifies the services he rendered focused on a *24consultation regarding settlement of foreclosure litigation.
b. The second Form 2030, dated February 2, 2016 and signed by Attorney Durell, discloses a total charge of $20,500 for services rendered (doc. # 132-1, p. 1, “Second Disclosure Statement”). It indicates that as of October 30, 2015, Attorney Durell had received payments totaling $19,500; the Debtors paid $1,500 of that amount, and a family member (presumably, Jeffrey Frye) paid the remaining $18,000. The Second Disclosure Statement claims a balance due of $1,000 and specifies that only $4,050 of the total $20,500 fee is attributable to services related to the bankruptcy case.
12. The fee disclosure statements Attorney Durell filed on February 2, 2016 were the first and only disclosure statements filed in this ease.
Discussion
I. Constitutionality of § 329
Section 329 of the Bankruptcy Code governs debtors’ transactions with attorneys. It provides:
(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11,12, or 13 of this title; or
(2) the entity that made' such payment.
11 U.S.C. § 329 (emphasis added). This statute requires a debtor’s attorney to file a statement of all compensation paid or agreed to be paid for services “in contemplation of’ and “in connection with” the case, as well as the source the compensation. The requirement exists because “[p]ayments to a debtor’s attorney provide serious potential for evasion of creditor protection provisions of the bankruptcy laws, and serious potential for overreaching by the debtor’s attorney, and should be subject to careful scrutiny.” S. Rep. No. 95-989, at 39 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 6285.
Attorney Durell challenges the constitutionality of § 329(a) based on its alleged overbreadth and vagueness (doc. # 176), In arguing § 329 is unconstitutionally overbroad, Attorney Durell relies on two contentions. First, he contends the statute violates the Debtors’ and a third party’s right to free speech (doc. # 176-2, p. 11). Second, he contends the statute interferes with the Debtors’ right to counsel (doc. # 176-2, p. 11). Next, Attorney Durell asserts the statute is unconstitutionally vague, as-applied, because it fails to provide sufficient notice and does not place *25adequate limits on its enforcement (doc. #176-2, p. 11). The United States counters each of these arguments, citing well-established Supreme Court jurisprudence and emphasizing Attorney Durell’s failure to provide legal support for his arguments.
A law is unconstitutionally overbroad under the First Amendment if “‘a substantial number’ of its applications are unconstitutional, ‘judged in relation to the statute’s plainly legitimate sweep.’” Vt. Right to Life Comm., Inc. v. Sorrell, 875 F.Supp.2d 376, 391 (D. Vt. 2012) (citing Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442, 450 n.6, 128 S.Ct. 1184, 170 L.Ed.2d 151 (2008)); see Virginia v. Hicks, 539 U.S. 113, 118-20, 123 S.Ct. 2191, 156 L.Ed.2d 148 (2003). Said differently, an unconstitutionally overbroad statute violates the First Amendment if the statute poses a direct and substantial limitation on protected First Amendment activity. See Vill. of Schaumburg v. Citizens for a Better Env’t, 444 U.S. 620, 636-37, 100 S.Ct. 826, 63 L.Ed.2d 73 (1980). “The overbreadth claimant bears the burden of demonstrating, ‘from the text of [the law] and from actual fact,’ that substantial over-breadth exists.” Virginia v. Hicks, 539 U.S. at 122, 123 S.Ct. 2191.
In its Reply, the United States argues Attorney Durell has failed to demonstrate any connection between the duty to disclose attorney’s fees pursuant to § 329(a) and the Debtors’ individual right to free speech. Moreover, the United States correctly points out that this statute’s disclosure requirements involve commercial speech (as opposed to noncommercial speech), and that this invokes the rational basis test. See Conn. Bar Ass’n v. United States, 620 F.3d 81, 93 (2d Cir. 2010). Bankruptcy disclosures constitute commercial speech because (1) they provide “a consumer debtor with information about what to expect in a commercial transaction,” (2) “the speech is situated in the federal bankruptcy system, a creature of law pervaded by commerce [and which] allows debtors to refashion commercial transactions in order to discharge debt obligations,” and (3) “[a] lawyer’s procurement of remunerative employment is a subject only marginally affected with First Amendment concerns ... and falls within the ... proper sphere of economic and professional regulation.” Id. at 94-95, 100. Additionally, this particular type of commercial speech is certainly subject to rational basis review as it “impose[s] a disclosure requirement rather than an affirmative limitation on speech.” Id. at 95 (citing Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 249, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010)). Here, § 329 is rationally related to a legitimate government interest, as indicated by the legislative history quoted above—to prevent overreaching by a debtor’s attorney. Attorney Durell also fails to show how the statute infringes on the Debtors’ right to counsel when, as the United States accurately observes, disgorgement of fees would “not deprive the Debtors of the assistance of counsel of their choice because they already received this assistance” (doc. # 205, p. 7). In sum, Attorney Durell has failed to meet his burden of proof that § 329 is unconstitutionally overbroad.
Turning to Attorney Durell’s constitutional vagueness argument, it is well settled that to prevail on a claim that a statute is impermissibly vague, as-applied, a movant must show the statute fails to provide “people of ordinary intelligence a reasonable opportunity to understand what conduct it prohibits” or it “authorizes or even encourages arbitrary and discriminatory enforcement.” Farrell v. Burke, 449 F.3d 470, 485 (2d Cir. 2006) (citing Hill v. Colorado, 530 U.S. 703, 732, 120 S.Ct. 2480, 147 L.Ed.2d 597 (2000)); see also *26Dickerson v. Napolitano, 604 F.3d 732 (2d Cir. 2010). Attorney Durell asserts § 329 is vague because it “does not provide fair notice of what work and payments should have been disclosed—except perhaps as to the obvious filings and appearances in Bankruptcy” (doc. # 176-2, p. II).10 However, the statute unequivocally identifies what payments must be disclosed: all fees for services “in contemplation of’ and “in connection with” bankruptcy, from all sources. If Attorney Durell found these phrases to be unclear, it was his responsibility to consult case law, the Bankruptcy Code, the Bankruptcy Rules, and this Court’s Local Rules, to determine the scope and impact of the disclosure requirements and ensure his compliance with them. See Milavetz, 559 U.S. at 247, 130 S.Ct. 1324 (“Attorneys and other professionals who give debtors bankruptcy advice must know of [Code] provisions and their consequences... ”). Attorney Durell also argues “enforcement of § 329 is unpredictable” because the Debtors were “embroiled in much litigation” (doc. # 176-2, p. 11), yet fails to articulate how the Debtors’ multiple lawsuits bear any relation to the enforcement of the statute. For these reasons, the Court finds Attorney Durell has also failed to meet his burden of proof that § 329 is unconstitutionally vague.
II. Disgorgement of Fees Based on Their Excessiveness
The U.S. Trustee seeks an order directing disgorgement of all of the $20,500 paid in attorneys’ fees, based upon the exces-siveness of Attorney Durell’s fees and his failure to properly disclose all fees. In arguing the fees Attorney Durell received are excessive,11 the U.S. Trustee relies upon § 329(b) and Local Bankruptcy Rule 2016-2 (doc. # 165, p. 2).
Section 329(b) provides:
If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate, if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11,12, or 13 of this title; or
(2) the entity that made such payment.
11 U.S.C. § 329(b) (emphasis added). In order to determine whether an attorney’s fees are excessive, the Court must first determine whether the fees are reasonable in light of the services rendered. “What constitutes reasonableness is a question of fact to be determined by the particular circumstances of each case. The requested compensation may be reduced if the court finds that the work done was excessive or of poor quality.” 3 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 329.04 [1] (16th ed. 2016). Courts apply a totality of the circumstances test to determine the reasonableness of fees under § 329(b), and usually consider the following factors: (1) the amount of time expended on the case, (2) the manner in which the attorney rendered services, (3) the nature of the services and the compe-*27fence of the performance, (4) the ultimate conclusion in the case, and (5) the lack of complaint from debtors or case trustee. See In re McDermitt, No. 05-11710, 2006 WL 1582390, at *8 (Bankr. D. Vt. May 30, 2006) (finding attorney’s fees were not unreasonable after examining the amount of time the attorney spent in the case, the ultimate conclusion of the case, and lack of complaint from either the debtors or the case trastee). “Once a question of the reasonableness of counsel’s fees is raised by a party in interest bringing a motion, the attorney bears the burden of proving his fee was reasonable.” In re Chez, 441 B.R. 724 (Bankr. D. Conn. 2010) (citing In re Wood, 408 B.R. 841, 848 (Bankr. D. Kan. 2009)).
Here, the U.S. Trustee argues the fees Attorney Durell received are excessive, primarily because he failed to comply with Local Rule 2016-2 (the “Local Rule”). That rale establishes the presumed reasonable fee for debtors’ attorneys in chapter 13 cases and requires an application and explanation for any fees sought in excess of the presumed reasonable fee. While it is true that Attorney Durell failed to file a motion for leave to accept fees in excess of the presumed reasonable fee, his. failure to comply with this requirement does not address the salient question of whether the fees he received were reasonable under § 329(b).
Rather, the inquiry is whether Attorney Durell has shown these fees are reasonable based upon the factors itemized above. Attorney Durell has repeatedly affirmed that he devoted a significant amount of time on this case due to its complex, multi-dimensional nature, billed at a below-market hourly rate, billed for only a portion of the services he provided and, with the help of co-counsel, reached a settlement with the Debtors’ four mortgagees. That settlement allowed the Debtors’ son sufficient time to close on the sale of the Debtors’ property and resulted in one of the mortgagees forgiving significant loans (doc. # 176-2, pp.7-8). Additionally, the Debtors and their son have expressed their. satisfaction with the quality and timeliness of Attorney Durell’s services, and have requested that the Court deny the Motion to Disgorge (doc. #176-1, p. 1). Based on these considerations, the Court finds Attorney Durell has met his burden of proof that the fees received in this case were reasonable, and the U.S. Trustee has failed to demonstrate cause for relief under the Motion to Disgorge based on excessiveness of fees.
III. Disgorgement of Fees Based on Failure to Disclose
The U.S. Trustee’s other argument in support of an order directing disgorgement of fees is based on Attorney Durell’s repeated failure to file the fee disclosure statements as 'required by § 329(a) and Bankruptcy Rule 2016(b). That Rule mandates the following disclosure of fees:
Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 14 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code including whether the attorney has shared or agreed to share the compensation with any other entity.... A supplemental statement shall be filed and transmitted to the United States trustee within 14 days after any payment or agreement not previously disclosed.
Fed. R. Bankr. P. 2016(b).
“[T]he approach within the Second Circuit has uniformly been to decide Bankruptcy Code and Rule disclosure violations with an inflexible standard. No exceptions are to be made based upon inadvertency *28(slipshodness) or good faith.” In re Hall, 518 B.R. 202, 207 (Bankr. N.D.N.Y. 2014) (quoting In re Laferriere, 286 B.R. 520, 526 (Bankr. D. Vt. 2002)). Failure to comply with the disclosure requirements under § 329(a) is sanctionable behavior. In re Gorski, 519 B.R. 67, 73 (Bankr. S.D.N.Y. 2014). The court’s broad discretion in awarding and denying fees paid in connection with bankruptcy proceedings empowers the bankruptcy court to order debtor’s counsel to disgorge fees for failure to disclose, In re Prudhomme, 43 F.3d 1000, 1003 (5th Cir. 1995).
There is no question Attorney Durell failed to meet the disclosure requirements under § 329 and Rule 2016(b). He filed a notice of appearance in the case on May 29, 2015 and did not file any disclosure of fees statement until February 2, 2016 (doc. # 132). Attorney Durell acknowledges his mistake in failing to timely disclose fees: “Whether through oversight or misinterpretation, Debtors’ Counsel was not triggered to report fees paid” (doc. # 176-2, p. 4). Nevertheless, Attorney Durell asserts he should not be sanctioned for this failure because (1) most or all of the payments at issue are not made “in connection with” bankruptcy, and (2) fees paid from non-debtor third parties are not subject to notice or disgorgement. Neither of these arguments withstands scrutiny.
1. Services were in contemplation of, or in connection with, the bankruptcy case.
The scope of fees a debtor’s attorney must disclose under § 329(a) is broad: It includes all compensation paid, or agreed to be paid, for services rendered, or to be rendered, in contemplation of, or in connection with, the bankruptcy case. Courts have broadly interpreted the phrases “in contemplation of’ and “in connection with.” See In re Laferriere, 286 B.R. 520 (Bankr. D. Vt. 2002) (citing In re Ostas, 158 B.R. 312 (N.D.N.Y. 1993)). “If a debtor pays a fee for underlying professional services at a time he or she is thinking about or ‘contemplating’ bankruptcy, then the payment is said to be made ‘in contemplation of the bankruptcy case. Whether a debtor is contemplating bankruptcy is a subjective test, based upon the debtor’s state of mind ‘i.e., whether, in making the transfer, the debtor is influenced by the possibility or imminence of a bankruptcy proceeding.’ ” In re Laferriere, 286 B.R. at 527 (citations omitted).
Attorney Durell asserts the $19,500 he received from the Fryes is attributable to more than just bankruptcy work. He states $15,308.94 was for litigation of the pending foreclosure cases, preliminary insurance work, the VTSC appeal, general counsel work, and business planning; $1,141.06 was for expenses; and only the remaining $4,050 was for bankruptcy related services he performed. However, the Court cannot rely on this allocation of fees because it is clear the filed invoices are incomplete and do not reflect the entire amount of time the attorney spent.12
What is evident from the record is that based on the Legal Services Agreement dated May 4, 2015, the Debtors were contemplating bankruptcy as early as that date, more than two weeks before the Debtors filed a petition on May 20, 2015. That agreement states:
Services. The following agreement shall pertain to all general practice legal services rendered to [the Debtors] by Attorney in pursuit of the following *29matters, and any potential claims or defenses available therein (“Services”):
• VT Comm. Loan Fund, North. Comm. Invest, v. Berton & Virginia Frye (Docket No. 363-12-10 Cacv)
• CERTAIN UNDERWRITERS AT LLOYD’S LONDON SUBSCRIBING- SEVERALLY TO POLICY NO. WSH108007 v. BERTON FRYE, VIRGINIA FRYE, and COMMUNITY NATIONAL BANK (CIVIL ACTION NO. 5:14-cv-227)
o Including coordination with planned insurance litigation
• Development of reorganization plan for return to Bankruptcy
Doc. # 132-1, p. 3 (emphasis added). Attorney Durell insists this explicit mention of bankruptcy should not be determinative. However, he also acknowledges the Debtors had the filing of a bankruptcy case in mind when they signed the agreement: “In [the Legal Services Agreement], bankruptcy is a list of one of many things that debtors were thinking about” (doc. # 206, p. 6) (emphasis added). This description of the circumstances falls squarely within the meaning of the phrase “in contemplation of bankruptcy” under applicable case law. See In re Laferriere, 286 B.R. at 627. For these reasons, the Court finds all fees Attorney Durell received for services rendered from the date of this agreement (May 4, 2016) through the petition filing date (May 20, 2015) were performed in contemplation of bankruptcy, and he was therefore required to disclose those fees, under the mandates of § 329 and Bankruptcy Rule 2016(b).
To determine whether services are “in connection with” the bankruptcy case, courts apply an objective standard: “[I]f it can be objectively determined that the services rendered or to be rendered by the attorney have or will have an impact on the bankruptcy case,” then such services are deemed to have been rendered in connection with the bankruptcy case. In re Gorski, 519 B.R. 67, 72 (Bankr. S.D.N.Y. 2014).
Attorney Durell argues most of the fees he received were categorically not for services “in connection with” a bankruptcy case, because the services he rendered would have occurred regardless of the Debtors’ bankruptcy filing (doc. # 176-2, p. 10). This argument underestimates the broad application of the phrase “in connection with” and understates the extent to which ths legal services he rendered, during the pendency of the bankruptcy case, were intertwined with the interests of the bankruptcy estate. See In re Gorski, 519 B.R. at 73. All services Attorney Durell rendered after May 20, 2015 were in connection with the bankruptcy case since he was representing the Debtors while their bankruptcy case was pending. Furthermore, based on the record, it is indisputable that the so-called non-bankruptcy legal services were for litigation that was crucial to the Debtors’ attempts to reorganize under Chapter 13 and cannot be disentangled from the bankruptcy legal work. Based on these considerations, the relevant case law, the extensive reach of the phrase “in connection with,” and Attorney Durell’s failure to establish facts to the contrary, the Court finds all fees paid to Attorney Durell from May 20th forward were for services rendered in connection with the bankruptcy case.
Next, the Court turns to the question of whether the $1,000 fee the Debtors paid to Attorney Stevens was likewise for services rendered in connection with the bankrupt*30cy case.13 The subject line of the October 14, 2015 retainer agreement with SLO is: “General Representation re: consultation and potential settlement regarding foreclosure/bankruptcy—Community National Bank, Vermont Community Loan Fund, Northeastern Vermont Development Association and Northern Community Investment Corporation” (doc. # 132-2, p. 3) (emphasis added). Attorney Durell again asserts this explicit mention of bankruptcy does not indicate Attorney Stevens’ intent to perform services in. the bankruptcy case, as it was included in the subject line merely to indicate the Debtors had a pending bankruptcy case. Attorney Durell further argues most of the legal work Attorney Stevens performed under that agreement was done “in the context of the foreclosure related proceedings which the [Bankruptcy] Court had allowed to take their own course once it granted relief from stay” (doc. # 206, p. 6). However, the record does not support this position. The motion for relief from stay, filed by secured creditors Vermont Community Loan Fund, Northern Community Investment Corporation, and Northeastern Vermont Development Association, was initially filed on October 2, 2015. The Debtors filed an objection to that motion on October 21, 2015, and the Court held hearings on the motion and objection in October and November of 2015. Ultimately, the Debtors were able to reach a settlement with those secured creditors and certain underwriters, the Debtors filed a motion to approve that settlement on December 4, 2015 (doc. # 109), and the secured creditors withdrew their motion for relief from stay on December 7, 2015. The invoices attached to the October 14th retainer agreement clearly indicate Attorney Stevens played a part in the filing of these documents in the bankruptcy case.14 Moreover, the finalization of this settlement was a seminal point in the bankruptcy case’s progress. Thus, contrary to Attorney Durell’s assertions, the $1,000 Attorney Stevens received was a fee charged for services rendered “in connection with bankruptcy,” which was subject to the disclosure requirements.
Since all of the $20,500 in fees was paid either in contemplation of, or in connection with, this bankruptcy case, they were all subject to the disclosure requirements of § 329 and Rule 2016(b).15
2. Payments from third parties are subject to disclosure.
Attorney Durell argues fees paid by third parties are not subject to disclosure *31requirements. However, the language of § 329(a) provides otherwise. It requires a debtor’s attorney to disclose the source of payments received, regardless of what that source is: “An attorney representing a debtor.. .shall file with the court a statement of the compensation paid or agreed to be paid.. .for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.” 11 U.S.C. 329(a) (emphasis added). “The bankruptcy court may order the disgorgement of any payment made to an attorney representing the debtor in connection with a bankruptcy proceeding, irrespective of the payment’s source.” In re Gorski, 519 B.R. at 73 (quoting In re Lewis, 113 F.3d 1040, 1046 (9th Cir. 1997)).
The fact that it was the Debtors’ son, Jeffrey Frye, who paid some of the attorney’s fees does not alter Attorney Durell’s duty to disclose his receipt of those fees. Under the plain language of § 329(a), and pertinent case law, Attorney Durell was obliged to disclose all payments, regardless of the source. In sum, Jeffrey Frye’s payment of $18,000 in fees was subject to the same disclosure requirements as the Debtors’ payment of $2,500 in fees.
For these reasons, the Court determines the full $20,500, regardless of the source, was subject to the disclosure requirements of § 329(a) and Rule 2016(b), and the attorneys’ failure to comply with those requirements warrants entry of a disgorgement order.
IV. Appropriate Sanction for NonDisclosure
The U.S. Trustee argues that Attorney Durell’s “material and repeated failures” to disclose fees warrant disgorgement of all fees paid in this case (doc. # 165, p. 15). Attorney Durell counters that sanctions for his failure to comply with § 329 should be limited or denied because of the extraordinary circumstances present in this case. Attorney Durell points in particular to (i) his below-market billing rate (of $100 per hour), (ii) the substantial amount of uncompensated work he performed for the Debtors, (iii) the fact that the payments were from outside of the estate, (iv) his lack of concealment of any payments, (v) the Debtors’ and their son’s opposition to disgorgement, (vi) his limited bankruptcy experience and reluctance to enter his appearance in bankruptcy court, and (vii) the Debtors’ limited options for counsel (due to the significant number of attorneys conflicted out of the case) (doc. # 176-2, pp. 14-15).16
It is well settled that “[a] bankruptcy court may deny an attorney all compensation based upon the failure to satisfy § 329(a) and Rule 2016(b).” In re Chatkhan, 496 B.R. 687, 696 (Bankr. E.D.N.Y. 2012) (emphasis added). Full disgorgement of fees is not automatic, and the bankruptcy court has the “latitude to tailor a sanction that is appropriate under the unique circumstances” of the case. In re McCrary & Dunlap Const. Co., LLC, 79 Fed.Appx. 770 (6th Cir. 2003) (noting that even in cases involving willful disregard of disclosure obligations, some courts require partial—as opposed to full—disgorgement). In determining the appropriate type and amount of sanction, the court exercises its discretion and examines the particular facts of the case, including whether any unusual difficulties existed. See In re East Hill Mfg. Corp., No. 97-11884, 2001 WL *3234808428, at *5 (Bankr. D. Vt. Jan. 25, 2001) (“unusual difficulties” attorneys faced in practicing before four different bankruptcy judges in one year—judges who had different styles and conflicting perspectives on enforcing disclosure requirements—warranted court’s use of its equitable powers to allow attorney’s fees, despite attorneys’ failure to comply with mandatory disclosure requirements). Additionally, the sanction should be carefully tailored to be sufficient to punish the misconduct but no more than is reasonably necessary to deter the culpable conduct. See Vasbinder v. Scott, 976 F.2d 118 (2d Cir. 1992).
In arguing that Attorney Durell’s failure to disclose all fees warrants the sanction of full disgorgement, the U.S. Trustee relies on several cases in which a court directed the attorney to disgorge all fees. However, the underlying facts in those cases are readily distinguishable from the facts and circumstances of this case. In In re Prudhomme, 43 F.3d 1000 (5th Cir. 1995), the circuit court ordered full disgorgement because in addition to finding the attorney did not comply with the disclosure requirements, it found the attorney’s services were unsatisfactory, did not benefit any of the debtors or their estates, and hurt the debtors more than helped them. In In re Chatkhan, 496 B.R. 687 (Bankr. E.D.N.Y. 2012), the court found the attorney’s failure to disclose was more than a mere “technical breach” as the attorney also failed to disclose the pre-petition retainer and violated a separate court order directing disclosure. In In re Wood, 408 B.R. 841 (Bankr. D. Kan. 2009), the court not only found the attorney’s fees were excessive in light of the services rendered, but also that the attorney had engaged in the unauthorized practice of law and had filed a false disclosure statement. In In re Laferriere, 286 B.R. 520 (Bankr. D. Vt. 2002), this Court directed the attorney to disgorge all fees where, in addition to the attorney’s failure to disclose fees, there was irrefutable evidence demonstrating the attorney had concealed some payments. Lastly, in In re Kero-Sun, Inc., 58 B.R. 770 (Bankr. D. Conn. 1986), the court found the law firm’s shoddy conduct did not represent “even minimal efforts of a law firm with its exceptional qualifications in the field of bankruptcy law” and that, in addition to the firm’s violation of the disclosure requirements, warranted full disgorgement.
Here, there is no indication Attorney Durell misled the Court, sought to conceal any fees, engaged in the unauthorized practice of law, or performed services below the minimum acceptable level—nor does the U.S. Trustee or case trustee make such allegations. Rather, the record reveals Attorney Durell devoted substantial time and energy to this bankruptcy case in spite of his charging a below-market rate and the Debtors’ inability to pay for all services. The record also indicates he continued to represent the Debtors and to do whatever he could to help the Debtors keep their home-even when the Debtors’ failure to pay him was having significant financial and emotional impact on his personal life—because the Debtors could find no other counsel. From the outset, Attorney Durell candidly expressed to this Court the great reluctance he had in agreeing to represent the Debtors, and how most of his time and resources were consumed by this case. However, due to the Debtors’ considerable history in bankruptcy cases, the vast majority of the Vermont bankruptcy bar had conflicts of interest. As a result, the Debtors had a difficult time retaining competent attorney to represent them, and this created an access to justice issue to which Attorney Durell responded. Attorney Durell’s efforts in representing the Debtors despite the sometimes overwhelming demands the case *33placed upon him, at a time when no other attorney would take this case, are important considerations in determining the appropriate amount the attorney must disgorge. They weigh in favor of a lighter sanction than what the U.S. Trustee seeks.
Balancing Attorney Durell’s failure to properly disclose fees on one hand against the unique circumstances and valuable services Attorney Durell provided on the other, the Court determines justice is best served by requiring him to disgorge one-half of the fees paid in this case. The Court intends this sanction to underscore the gravity of the attorneys’ violations of bankruptcy fee disclosure requirements and to deter future violations, and also to reflect the unusual difficulties and circumstances Attorney Durell encountered in representing these Debtors.
Therefore, Attorney Durell shall be required to disgorge $10,250, to the Debtors and Jeffrey Frye, pro rata, according to the percentage each paid towards the total amount of fees (i.e., 12 % or $1,230 to the Debtors and 88% or $9,020 to Jeffrey Frye).17
Conclusion
Based upon the record in this case, and the extensive arguments presented by all parties, the Court determines (i) § 329 is not unconstitutionally overbroad or vague, (ii) the fees paid to Attorney Durell were not excessive, (iii) Attorney Durell has failed to comply with the applicable fee disclosure requirements of the Bankruptcy Code and Rules, and (iv) the appropriate sanction for this failure to disclose, in light of the specific facts and circumstances of this case, is disgorgement of one-half of the fees paid.
■ This memorandum' constitutes the Court’s findings of fact and conclusions of law.
. The Debtors filed their first Chapter 13 case on May 7, 2003 (case # 03-10710). The Court thereafter severed that joint case to be in the name of Mrs. Frye only, and allowed Mr. Frye to continue with his own Chapter 13 case (case # 03-10959). Subsequently, on Jánuary 3. 2005, Mrs. Frye filed a second Chapter 13 petition (case # 05-10004). Seven years later, on May 28, 2013, Mr. Frye again filed for Chapter 13 relief (case # 13-10381), and on August 30, 2013, Mrs. Frye filed her third Chapter 13 case (case # 13-10602).
. The instant case was subsequently converted to Chapter 7 on February 10, 2016 (doc. # 135).
. On January 8, 2016, Attorney Durell filed a motion to withdraw as attorney (docs. # 123, 131) and the Court granted the motion on February 19, 2016 (doc. # 147). Currently, Nancy Geise, Esq. represents the Debtors.
. All statutory citations refer to Title 11 of the United States Code (the "Bankruptcy Code”), unless otherwise indicated.
. Only Attorney Durell has responded to the Motion to Disgorge; he has raised defenses on behalf of both himself and Attorney Harold Stevens where applicable.
. Attorney Durell’s invoice dated May 6, 2015 (doc. # 189-1, p. 1) indicates that on May 20, 2015, the petition date, he met with the Debtors. It also indicates he performed legal services regarding the Debtors’ bankruptcy case on May 27⅜* and May 28, before he filed his notice of appearance on May 29th (doc. # 189-1, p. 2). However, Attorney Durell con*23tends he did not render advice regarding the initial petition (doc. # 176-2, p. 3).
.In his Affidavit of Fees Earned (doc. # 189), Attorney Durell supplements his invoices and states he received a $3,000 retainer fee from Jeffrey Frye in early August of 2015, and turned over $1,500 of that sum to an attorney handling the Debtors' insurance dispute. He also states he received additional payments totaling $4,000 from Jeffrey Frye in September 2015 (doc. # 189, p, 3). None of these transactions appears on the invoices. Attorney Durell further states the $1,500 payment shown on Invoice #50 (doc. # 189-1, p. 6) was made by the Debtors, and this is consistent with the payment shown on the disclosure statement dated February 2, 2016 (doc. # 132-1).
. In his supplemental motion to withdraw, Attorney Durell states the reference to bankruptcy representation in the SLO agreement was limited: “The SLO agreement referenced the bankruptcy action as a settlement might have covered some bankruptcy issues, but we did not agree expressly that the agreement covered my work in bankruptcy” (doc. #131, P- 2).
. The record appears to indicate this $1,000 payment was the retainer fee required by the October 14th agreement.
. Attorney Durell does admit he might not have read § 329 at the beginning of the case.
. The Motion to Disgorge is not entirely clear as to whose fees are allegedly excessive. The preliminary statement appears to include the fees of both Attorney Durell and Attorney Stevens, but the section discussing excessiveness addresses only Attorney Durell’s fees. Hence, the Court interprets this set of allegations as aimed solely at Attorney Durell.
. Attorney Durell explains the invoices are not precise because the Debtors specifically asked him to "focus on getting as much work done as possible and not to focus on detailed invoicing” (doc, # 189, p. 2).
. The Court considers this question because the U.S. Trustee seeks disgorgement of both the $1,000 fee Attorney Stevens received and the $19,500 fee Attorney Durell received. However, the U.S. Trustee points only to Attorney Durell’s conduct to support that relief (Mr. Durell's alleged excessive fee and failure to disclose fees). Therefore, the Court addresses Attorney Stevens’ fees exclusively to determine whether the services he rendered were "in connection with” the bankruptcy case and thus subject to the disclosure requirements.
. In the invoice dated November 2, 2015 (doc. # 188, pp. 6-7), SLO charged the Debtors for services that dealt directly with the motion for relief from stay. For instance, Attorney Stevens billed the Debtors for his email correspondence with the secured creditors regarding settlement positions; review of the notes, mortgages, security agreements, and judgments; and research regarding exemptions for insurance. The Debtors made a $1,000 payment toward the amount due for these services (doc. # 188).
.Pursuaqt to Vt. LBR 2014-l(a), "it is the duty of primary counsel for the [debtors] to ... advise [other professionals in the case] of the requirements and risks, if any, pertaining to [that] professional's ability to obtain compensation,” Attorney Durell had a duty to inform and assist Attorney Stevens with regard to compensation and disclosure requirements.
. The United States counters that no extraordinary circumstances excuse Attorney Durell’s failure to disclose fees, but Attorney Durell’s argument addresses a distinct and separate issue: whether the extraordinary circumstances of this case justify a sanction less harsh than full disgorgement.
. At the hearing held on July 20, 2016, the U.S. Trustee argued, for the first time, that if the Court orders disgorgement of all fees, and the Debtors and their son decline the money or return it to counsel, then Attorney Durell should be required to deliver $15,500 of the $20,500 to the Chapter 7 Trustee, as an estate asset under § 541(a)(7) (doc. # 184). The U.S. Trustee did not provide any case law or legal argument to support this position The Court finds this request for relief is beyond the scope of the motion, unsupported, and not properly before the Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500654/ | MEMORANDUM OPINION
DEBORAH L. THORNE, UNITED .STATES BANKRUPTCY JUDGE
Before the court is the disputed election of chapter 7 trustee Patrick J. O’Malley. Under 11 U.S.C. § 702(b), Fund Recovery Services, LLC elected O’Malley over the objections of the interim trustee and two insider creditors. As explained below, the court finds that Fund Recovery Sendees was ineligible to vote because its interest is materially adverse to other creditors’ interests.
Factual Background1
Argon X, LLC (“Argon X”) and Argon Credit, LLC (“Argon Credit”) were in the business of making near-prime consumer loans. The loans were sourced through non-debtor affiliates, then purchased by Argon X and serviced by Argon Credit. Princeton Alternative Funds, LLC (“Princeton”) provided Argon X with a line of credit for $37 million secured by the loan portfolio. Although it is not completely clear to the court, it appears that Argon Credit at a minimum guaranteed Argon X’s obligation. On December 7, 2016, Princeton declared the loan in default and assigned it to Fund Recovery Services, Inc. (“FRS”).2 Before the default, Princeton had already received several payments totaling about $1.2 million from Argon Credit on account of the debt.
Several days after the default, Argon Credit and Argon X filed voluntary petitions under chapter 11 of the Bankruptcy Code.3 It is at this point that the dance between FRS and Debtors began. As a successor in interest, FRS filed a secured claim of $37 million in each case. FRS did not agree to the Debtors’ request to use cash collateral and, after extensive hearings, this court denied the motion to use cash collateral. The Debtors converted their cases to chapter 7 and the UST appointed Deborah Ebner interim trustee. A short time later, Ebner resigned due to a conflict of interest. The UST then appointed Eugene Crane interim trustee. FRS amended its claims to reflect an unsecured claim in Argon Credit and a partially unsecured claim in Argon X,4 It then elected a new trustee at the next 341 meeting.5 Although Crane and two insider creditors, Little Owl Argon, LLC (“Little Owl”) and Margon LLC (“Margon”) objected, FRS, as the only voting creditor elected Patrick O’Malley. The UST reported the dispute to the court and this dispute is now ready for disposition.
Discussion6
A qualified creditor, holding at least twenty percent of the claims, may *73call for a chapter 7 trustee election at a 341 meeting. 11 U.S.C. § 702(b). Qualified creditors must (1) hold an allowable, undisputed, fixed, liquidated, unsecured claim, (2) not hold an interest materially adverse to the interest of creditors entitled to distributions, and (3) not be insiders. 11 U.S.C. § 702(a). To vote in the election, the creditor must file a proof of claim or a writing demonstrating that it has met the requirements under section 702(a). Fed. R. Bankr. P. 2003(b)(3). The UST tabulates the votes and files a report in the event of a dispute. Id. Unless a party files a motion for resolution of the dispute, the interim trustee becomes the permanent trustee. Fed. R. Bankr. P. 2003(d)(2). In the event of such motion, the election objector bears the burden of proof.7
Here, FRS filed proofs of claims in both cases prior to the election. Eugene Crane, Little Owl, and Margon objected to FRS’ right to vote.8 Accordingly, the UST filed a report of disputed election. FRS now asks the court to resolve the dispute. The objectors raise several arguments to support the theory that FRS was not eligible to vote. The court only needs one. Due to the credible allegations of preference liability, the court finds FRS’ interest materially adverse to other creditors.
The Bankruptcy Code does not define a material adverse interest. The court must look outside the Code for guidance. Merriam-Webster defines adverse as “acting against or in a contrary direction.” By this definition, most creditors have an adverse interest. The court would not be remiss in assuming that the majority of creditors want to maximize their interests with little to no thought given to any other estate interest. But, the inquiry does not end here. Section 702 requires a finding of material adversity. A creditor’s interest is materially adverse when, “[a]t the time of the election, a creditor [has] the prospective ability to enhance its recovery at the estate’s expense.” In re Klein, 119 B.R. 971, 974-975 (N.D. Ill. 1990). Hence, courts tend to agree that potential preference liability often rises to the level of material adversity. In re Amherst Technologies, LLC, 335 B.R. 502, 508 (Bankr. D.N.H. 2006) (collecting cases); In re Lang Cartage Corp., 20 B.R. 534, 536-37 (Bankr. E.D. Wis. 1982). The court adopts this viewpoint.
Under section 547(b), which provides for recovery of preferential transfers, a trustee may recover certain payments made to a creditor within 90 days of the bankruptcy.9 If a voting creditor is also *74a potential preference defendant, then that creditor may not want the trustee to maximize value to the estate at its expense. “The participation of a potential preference defendant in choosing the trustee who will investigate, prosecute and settle any preference claim against it creates at least the appearance of impropriety.” Amherst, 335 B.R. at 508. Trustees are to ensure a transparent recovery and administration of estate assets. Consequently, credible allegations of preference liability will almost always provide cause for a finding of a material adverse interest unless the preference amount is negligible.
Here, Crane alleges that Argon Credit made several preference payments totaling around $1.2 million to Princeton, an insider and potential alter ego of FRS. While FRS challenges these allegations as “unsupported speculation and nothing more,” Crane provides an excerpt from Argon Credit’s general ledger, listing the transfers to Princeton and relevant dates. Crane does not have to definitively prove FRS’ preference liability at this stage. The objection need only to have a sufficient basis to rise above the mere suspicion threshold. Amherst, 335 B.R. at 509 (citing In re San Diego Symphony Orchestra Ass’n, 201 B.R. 978, 983 (Bankr. S.D. Cal. 1996)). The evidence before the court establishes a sufficient basis concerning FRS’ preference exposure. The possibility of this preference liability demonstrates that FRS’ interest is materially adverse to other unsecured creditors, disqualifying it from voting in the trustee election.10
Conclusion
For the foregoing reasons, the court resolves the disputed election in favor of the objectors. FRS’ potential preference liability makes it materially adverse to other creditors’ interest which disqualifies it from voting. Thus, the interim trustee, Eugene Crane, will serve as the permanent trustee in these cases.
. This factual background does not constitute findings of fact.
. It is not clear to the court exactly how Princeton and FRS are related but, parties appear to agree that FRS is the successor in interest.
. These cases are jointly administered.
. The court casts no aspersions on FRS’ motive in amending its claims but these amendments did allow FRS to participate in the election because it held over twenty percent of the claims and an unsecured claim in Argon Credit and a partially unsecured claim in Argon X,
, Fed. R. Bankr, P. 2009(a) (Creditors may elect a single trustee for the estates being jointly administered)
. The court has subject matter jurisdiction over these cases pursuant to 28 U.S.C. § 1334(a) and § 157(a) and the Northern Dis*73trict of Illinois’ LR40.3.1. These matters are core proceedings under 28 U.S.C. § 157(b)(2)(A).
. In re New York Produce Am. & Korean Auction Corp., 106 B.R. 42, 47 (Bankr. S.D.N.Y. 1989); In re Poage, 92 B.R. 659, 665 (Bankr. N.D. Tex. 1988).
. Standing is not an issue in this case because neither 11 U.S.C. § 702 nor Fed. R. Bankr. P. ' 2003(b)(3) specify who may object to an election. It follows that because any party in interest may object to a claim under 11 U.S.C. § 502, the same principle follows for objecting to a creditor's eligibility to vote. Crane, Little Owl and Margon are all parties in interest and may dispute the election.
.11 U.S.C. § 547(b) provides:
Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property—(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
*74(A) the case was a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
. This court is aware of allegations that FRS engaged in other questionable activities that may support a finding of material adverse interest, although the court makes no such finding at this point. For example, FRS attempted to offer litigation funding in exchange for a fully allowed claim. FRS also appears to have repeatedly amended their proofs of claims to its advantage without providing additional documentation in support of the amendments. See Fed. R. Bankr, P. 3001(c), (d), (f) (a properly filed proof of claim must include support documents.) Lastly, FRS is an adverse target in potential lender liability claims including breaching the commitment to provide a $75 million line of credit, barring debtors from making new loans and foisting upon debtors an incompetent loan servicer. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500655/ | DECISION
Robert E. Grant, Chief Judge, United States Bankruptcy Court
This adversary proceeding is round two of a dispute between debtors’ counsel and the chapter 7 trustee in the debtors’ subsequent case, regarding who is entitled to the funds held by the chapter 13 trustee in this case. Matter of Kerr, Case No. 15-12515, Decision and Order dated Sept. 15, 2016. The debtors filed a case under chapter 13 on October 28, 2015, which was dismissed at their request on April 12, 2016. See, 11 U.S.C. § 1307(b). No plan was ever confirmed. While that case was pending, the debtors made payments to the chapter 13 trustee, see, 11 U.S.C. § 1326(a)(1), who held $10,877.67 when this adversary proceeding was filed. The chapter 7 trustee contends those funds revested in the debtor upon dismissal of *76the chapter 13, 11 U.S.C. § 349(b)(3), and so constituted property in which the debtors had an interest, on April 21, 2017, when they filed their chapter 7 case; therefore, they are property of the chapter 7 bankruptcy estate, 11 U.S.C. § 541(a), and should be turned over to him. 11 U.S.C. § 542. Debtors’ counsel argues that before that happens, he should be paid his allowed attorney fees on account of the unsuccessful chapter 13.1 Debtors’ counsel filed this adversary proceeding to resolve that dispute, seeking an order requiring the chapter 13 trustee to pay his fees. See, Fed. R. Bankr. P. Rule 7001(1, 7, 9).2 Those issues have been presented to the court on stipulations of fact and the briefs of counsel.
The answer to the parties’ debate is largely a matter of statutory construction, which starts with § 1326 of the United States Bankruptcy Code. 11 U.S.C. § 1326. It requires chapter 13 debtors to begin making payments to the trustee before the court confirms a proposed plan. 11 U.S.C. § 1326(a)(1). If a plan is confirmed, those payments are distributed in accordance with the plan. “If a plan is not confirmed, the trustee shall return such payments ... to the debtor, after deducting any unpaid claim allowed under section 503(b).” 11 U.S.C. § 1326(a)(2). The claims allowed under § 503(b) are the estate’s administrative expenses, and they include “compensation and reimbursement under ■ section 330(a).” 11 U.S.C. § 503(b)(2). Following the statutory trail on to § 330(a), leads to the “reasonable compensation to the debt- or’s attorney for representing the interests. of the debtor” in cases under chapter 13. 11 U.S.C. § 330(a)(4)(B). So, looking back down the trail to § 1326(a)(2), before the chapter 13 trustee returns any payments to the debtors, the allowed administrative claims of debtors’ counsel are paid first. Stated somewhat differently, what the debtors are entitled to receive from the chapter 13 trustee are the payments they made, less the fees awarded to their counsel (and any other administrative expenses).
Both § 349 and § 1326(a)(2) come into play when a case is dismissed prior to confirmation. Yet, § 349 applies to all debtors and their property under any chapter of the Bankruptcy Code, 11 U.S.C. § 103(a), while § 1326(a)(2) applies only to debtors under chapter 13, 11 U.S.C. § 103(i), and then only to the payments they made to the trustee prior to confirmation. Section 1326(a)(2) is the more specific of the two statutory provisions and so, when a case is dismissed without a plan being confirmed, it controls over the more general provisions of § 349 as to the funds in possession of the chapter 13 trustee. Matter of Kirk, 537 B.R. 856, 860-61 (Bankr. N.D. Ohio 2015); In re Brandon, 537 B.R. 231, 235 (Bankr. D. Md. 2015). See also, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 132 S.Ct. 2065, 2071, 182 L.Ed.2d 967 (2012).
When the language of the statute is clear, all that remains to be done is to *77enforce it. Matter of Voelker, 42 F.3d 1050 (7th Cir. 1994). While the chapter 7 trustee is entitled to all property of the chapter 7 bankruptcy estate, that estate only includes the debtors’ interests in property as of the date of the petition; so, whatever rights the trustee may have in the property are limited to what the debtors had at that time. See, Matter of Jones, 768 F.2d 923, 927 (7th Cir. 1985) (estate’s rights in property are limited to those had by debt- or—no more, no less). Where the funds in possession of the chapter 13 trustee are concerned, debtors are only entitled to the return of what they paid “after deducting any unpaid [administrative] claim,” 11 U.S.C. § 1326(a)(2), which includes counsel’s allowed fees. Since that is what they are entitled to receive, that is what their chapter 7 trustee is entitled to as well. Kirk, 537 B.R. at 861 quoting, Mass v. Pappalardo, 307 B.R. 732, 738 (1st Cir. BAP 2004) (“before the funds may be returned to the debtor, the Chapter 13 trustee must complete the administration of the case, including making payments for expenses related to administration of the estate”). See also, Brandon, 537 B.R. at 235 (“the applicable statutory scheme expressly directs Chapter 13 trustees to return funds on hand to the debtor. ... but only after payment of the allowed fees of the debtor’s attorney.”).
The trustee also argues that counsel’s claim is barred by laches. It is one of the arguments he unsuccessfully made in opposition to counsel’s application for fees. See, Matter of Kerr, Case No. 15-12515, Trustee’s Brief, filed Aug. 22, 2016, pp. 2-3. Laches can rarely be invoked where, as here, there was a specific deadline by which something had to be done, Cf., Petrella v. Metro-Goldwyn-Mayer, — U.S. -, 134 S.Ct. 1962, 1973-74, 188 L.Ed.2d 979 (2014) (laches did not bar claim brought within the applicable statute of limitations), and the order dismissing the chapter 13 case set a 14-day deadline for requesting payment of administrative expenses, see, Matter of Kerr, Case No. 15-12515, Order Dismissing Case, dated Apr. 12, 2016; a deadline which counsel met. It is difficult, if not impossible, to find unreasonable delay when one complies with a required deadline. Furthermore, the stipulated facts fail to demonstrate how the trustee (or the debtors in whose shoes he stands) may have been prejudiced by any delay: his rights as trustee were not altered by the timing of the application; the chapter 13 trustee’s duties regarding the funds in question remained the same; and there was no change in the value of counsel’s services. So, whether counsel’s application was filed when the chapter 13 case was dismissed, the very next day or ten days later (as it was) makes no difference in the amount of those fees or how they are to be treated.
Out of the funds deposited with the clerk of the court in this case, $4,527.17 shall be paid to the Plaintiff, Fred Wehr-wein. The remainder shall be paid to the Defendant, Dustin Roach, Trustee in Case No. 16-10830. Plaintiff may recover his costs.
Judgment will be entered accordingly.
. If debtors’ counsel is correct, he will be paid in full for his services in the chapter 13 before anything is paid to the chapter 7 trustee. If the chapter 7 trustee is correct, he will receive all of the funds in question and debtors' counsel may file a claim in the chapter 7 case, as a general unsecured creditor, for his unpaid fees, to share whatever might be available with other creditors.
. As the holder of the funds in question, the chapter 13 trustee was originally named as a defendant, but she claimed no interest in them. As a result, at the initial scheduling conference, it was agreed by all that she could deposit the disputed funds with the clerk of the court and, upon doing so, be dismissed as a party, without further notice. See, Order dated March 24, 2017. That has been done. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500656/ | OPINION AND ORDER GRANTING MOTION TO INTERVENE
CHRISTOPHER M. KLEIN, Bankruptcy Judge:
The question is whether to permit intervention in this adversary proceeding as either intervention “of right” or “permissive” intervention under Federal Rule of Civil Procedure 24, as incorporated by Federal Rule of Bankruptcy Procedure 7024.
The question of intervention arises in the wake of this court’s judgment enjoining the plaintiffs to deliver to the interve-nors a portion of the $45 million punitive damages awarded against Bank of America, N.A. Sundquist v. Bank of America, N.A. (In re Sundquist), 566 B.R. 563 (Bankr. E.D. Cal. 2017).
The pendency of a motion by Bank of America to alter or amend the findings has forestalled the time in which to appeal.
For the reasons—set forth here, the motion to intervene will be GRANTED on adequate, independent theories of intervention “of right” under Rule 24(a)(2) and *95“permissive” intervention under Rule 24(c).
Procedural Background
A motion titled Interested Parties’ Motion To Intervene seeking to intervene in this adversary proceeding was filed on May 9,2017. Docket No. 332.
The Interested Parties are the National Consumer Law Center, the National Consumer Bankruptcy Rights Center, The Regents of the University of California (on behalf of: University of California, Davis School of Law; Berkeley Law, University of California; University of California, Irvine School of Law; and University of California, Los Angeles School of Law), and the University of California, Hastings College of Law.
All of the Interested Parties are intended third-party beneficiaries of this court’s punitive damages judgment in favor of the plaintiffs, a provision of which judgment enjoined the plaintiffs to deliver to the Interested Parties the sum of $40 million, minus applicable taxes.
That judgment is not yet final because Bank of America timely filed a Motion to Amend Findings and Amend the Judgment pursuant to Federal Rule of Civil Procedure 52(b), as incorporated by Federal Rule of Bankruptcy Procedure 7052. Docket No. 275. That motion elicited a counter-motion from the Sundquists under Federal Rules of Civil Procedure 52 and 59 (as incorporated by Federal Rule of Bankruptcy Procedure 9023) seeking to reopen the evidentiary phase of the trial to permit the plaintiffs to present a better evidentia-ry record than that which was made by now-former counsel, potentially warranting increased compensatory and punitive damages, and amend the judgment accordingly. Docket No. 347.
The procedural consequence of Bank of America’s timely motion is to suspend the time for appeal until 14 days after entry of the order disposing of the last such motion. Fed. R. Bankr. P. 8002(b)(1). Argument on those motions has not yet occurred.
Until those motions are decided," this court continues to have jurisdiction over the entire dispute.
The Interested Parties do not seek relief different from, or greater than, the relief sought by the Sundquists.
They gave notice on May 9, 2017, consistent with Local Bankruptcy Rule 9014, to all other parties in this adversary proceeding that written responses or oppositions were required to be filed by May 23, 2017. Docket No. 333.
The Motion and the Notice of Motion were served by electronic means on May 9, 2017, on all parties to this adversary proceeding and to counsel for the plaintiffs’ former counsel (who has filed a notice of appeal on account of this court’s cancellation of her contingent fee agreement). Docket No. 334.
Defendant Bank of America, N.A., filed an opposition to the motion to intervene. Docket No. 354. No other opposition was filed.
The movants filed a reply to Bank of America’s opposition. Docket No. 363.
The Motion to Intervene is ripe for decision. No facts are controverted that would warrant the taking of evidence pertinent to intervention. Oral argument is not needed as the briefs adequately address the intervention issues.
Analysis
The salient fact is that this court’s judgment in favor of plaintiffs for $45 million in punitive damages includes an injunction that enjoins the plaintiffs to deliver to the Interested Parties the post-tax residue of $40 million.
*96I
Regardless of whether the Interested Parties had standing to participate in the initial liability and damages phase of the underlying litigation, the Interested Parties acquired standing concurrent with entry of the injunction that made them third-party beneficiaries of the punitive damages award. They do not seek relief different from, or greater than, that which has already been awarded.
If the punitive damages award is later reduced or disapproved, then they will be adversely and pecuniarily affected within the meaning of conventional understandings of standing.
The decision of the U.S. Supreme Court in Town of Chester, New York v. Laroe Estates, Inc., — U.S. —, 137 S.Ct. 1645; 198 L.Ed.2d 64 (2017), invoked by Bank of America in its opposition, does not compel a contrary conclusion. The Supreme Court held that every item of relief sought in a litigation must be backed by a party with Article III standing and that “an intervenor of right must have Article III standing to pursue [any] relief that is different from that which is sought by a party with [Article III] standing." Id. at 1651. As the record in that case was ambiguous (the intervenor having talked out of both sides of its mouth) as to whether the putative intervenor of right was seeking any different relief, the Court remanded in order to permit a determination on that point to be made. Id. at 1651-52.
This court, in its opinion issued in conjunction with the judgment, definitively ruled that the Interested Parties have standing to participate in all post-trial proceedings and appeals. The premise and context of that ruling is that the interested parties would be able to defend the judgment in post-trial proceedings and on appeal but would not be seeking independent relief. That ruling established as law of the case that the Interested Parties have standing to participate in post-trial proceedings and appeals.
II
Since Federal Rule of Civil Procedure 24 is incorporated by Federal Rule of Bankruptcy Procedure 7024 without modification, the analysis of intervention in an adversary proceeding in a bankruptcy case is no different than the analysis of intervention in an ordinary federal civil action. Bustos v. Molasky, 843 F.3d 1179, 1184 n.4 (9th Cir. 2016),
A
The controlling analysis of intervention “of right” under Rule 24(a) involves a four-part test that contemplates construction of practical and equitable considerations in a manner sympathetic to proposed intervenors: the motion must be timely; the intervenor must have a significantly protectable interest; disposition of the action could, as a practical matter, impair the intervenor’s ability to protect that interest; and the intervenor’s interest must be inadequately represented by other parties in the action. Wilderness Soc. v. U.S. Forest Serv., 630 F.3d 1173, 1177 (9th Cir. 2011).
1
The Wilderness Society test is satisfied here.
The Motion is timely. The Interested Parties obtained no interest and had no idea that the post-tax residue of punitive damages might be channeled to them until this court sua sponte fashioned that measure in an effort to address what it perceived as an unresolved anomaly in the law of punitive damages. They appeared promptly, attended all status conferences, and have done nothing that could be construed as dallying. Nor has the time in which to appeal expired.
*97The significantly protectable interest of the Interested Parties is beyond cavil. They expressly are intended third-party beneficiaries of this court’s judgment enjoining the plaintiffs to deliver to them the post-tax residue of $40 million.
This court previously ruled that the Interested Parties have standing to participate in post-trial and appellate proceedings. Intervention is a logical corollary.
Similarly, an unfavorable disposition of this adversary proceeding and any appeal will as a practical matter impair the ability of the Interested Parties to realize the benefit conferred upon them by this court’s judgment.
Finally, only the Interested Parties are in a position fully to protect their interests as intended third-party beneficiaries of this court’s judgment. As their direct adversary, it is understandable that Bank of America would want to block intervention by what could be formidable opponents. The plaintiffs and their former counsel (who has appealed the cancellation of her contingent fee agreement pursuant to 11 U.S.C. § 329(b)) each have economic incentives to appropriate as much of the punitive damages award as possible to themselves or to bargain away punitive damages not directed to them.
2
The law of the case doctrine dooms the assertion by Bank of America that the Interested Parties lack a legally-protected interest.
a
Bank of America’s position fallaciously assumes that Bank of America ultimately will prevail in its appellate position that this court erred when it fashioned a remedy that added an injunction directed at the plaintiffs in order to achieve a just punitive damages result that is analogous to the unexceptionable concept that sanctions should be sufficient to deter repetition of such conduct or comparable conduct by others similarly, situated. Cf. Fed. R. Bankr. P. 9011(c)(2); Fed. R. Civ. P. 11(c)(4).
This Bank of America argument presents the formal fallacy of “begging the question” (petitio principii) according to which the premises assume the conclusion that is to be demonstrated. See “Fallacy,” Encyclopedia. Britannica, http://academic. eb.com,1 In order to believe Bank of America’s assertion that the Interested Parties lack a legally-protected interest, one must already agree that an appellate court will conclude they lack a legally-protected interest.
To the extent that Bank of America’s fallacious assertion constitutes an ersatz motion for some form of reconsideration, it is rejected.
b
As explained in this court’s opinion on the merits, an anomaly in the law of punitive damages has emerged in which awards of punitive damages fully-appropriate to capture the societal interest component inherent to punitive damages are- disapproved as too high in the hands of a private plaintiff. It is anomalous because bad actors are thereby able to evade full financial responsibility for their conduct, the consequence of which is to create an economic incentive for more bad conduct.
*98The fate of this court’s punitive damages award turns on what the appellate courts rule in the appeal that has not yet commenced because the time to appeal has been delayed by Bank of America’s as yet unresolved Motion to Amend Findings and Judgment.
For the time being, the law of the case is that the Interested Parties are parties to this adversary proceeding.
This is an example of the trial-level version of the law of the case doctrine, according to which the parties are bound by the trial court’s rulings even though that trial court has discretion to revisit its prior rulings.
The authorities are uniform that when there is not a mandate from an appellate court triggering the Mandate Rule, the trial court has the discretion to change its prior rulings so long as the trial court continues to have jurisdiction over the matter. E.g., City of Los Angeles v. Santa Monica BayKeeper, 254 F.3d 882, 888-89 (9th Cir. 2001); Johnson v. Burken, 930 F.2d 1202, 1207 (7th Cir. 1991); 18 James Wm. Moore, et al., Moore’s Federal Practice § 134.21[1] (3d ed. 2016); 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4478.1 (2d ed. 2002).
As this court presently continues to exercise jurisdiction over this adversary proceeding, it elects to exercise its discretion to adhere to its prior ruling regarding the Interested Parties as establishing the law of the case to which it will adhere until it is persuaded otherwise or an appellate court rules otherwise. The Interested Parties have a legally-protected interest.
Hence, intervention of right pursuant to Rule 24(a) is appropriate.
B
If intervention of right is for any reason determined to be not available, this court nevertheless, and in the alternative, is persuaded as a matter of discretion seasoned with common sense that permissive intervention under Rule 24(b) is appropriate. This court’s injunction makes the Interested Parties beneficiaries of most of the punitive damages judgment in a manner that affords them claims and defenses that share common questions of law and fact with the claims and defenses in this adversary proceeding.
The intervention will not unduly delay or prejudice the adjudication of the original parties’ rights. To the contrary, this court is persuaded that the intervention will facilitate the ultimate resolution of this litigation.
IT IS ORDERED that the Motion is GRANTED. The Interested Parties are entitled to intervene of right pursuant to Federal Rule of Civil Procedure 24(a). Even if they are not entitled to intervene of right, this court exercises its discretion to permit the requested intervention pursuant to Federal Rule of Civil Procedure 24(b).
. The Brittanica article on applied logic explains:
The fallacy known as begging the question—in Latin petitio principi—originally meant answering the "big” or principal question that an entire inquiry is supposed to answer by means of answers to several "small” questions. It can be considered a violation of the strategic rules of an interrogative game. Later, however, begging the question came to mean circular reasoning, or curculus in probando.
"Applied Logic,” Encyclopedia Britannica. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500657/ | ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT [DOCS. 14, 15] AND SUPPLEMENT TO PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT [DOC. 27]
Sarah A. Hall, United States Bankruptcy Judge
Before the Court are the:
1. Complaint [Doc. 1], filed by plaintiffs Robert S. Grassmann and Laura Grassmann (“Plaintiffs”) on April 1, 2016;
2. Defendant’s [sic] Answer to Complaint to Determine Exception to Discharge [Doc. 7], filed by defendants Thomas W. Brown (“T Brown”) and Sandra D. Brown (“S Brown”; T Brown and S Brown collectively, “Defendants”) on May 4, 2016;
*1053. Defendant’s [sic] Motion for Summary Judgment, Supporting Brief and Notice of Opportunity for Hearing [Doc. 14], filed by Defendants on October 7, 2016 (“Defendants Motion”);
4. Plaintiffs [sic] Motion for Summary Judgment, Brief in Support and Notice of Opportunity for Hearing [Doc. 15], filed by Plaintiffs on October 13, 2016 (“Plaintiffs Motion”);
5. Response of the Plaintiffs to Defendants [sic] Motion for Summary Judgment [Doc. 19], filed by Plaintiffs on October 21, 2016 (“Plaintiffs Response”);
6. Defendant’s [sic] Objection to Plaintiffs [sic] Motion for Summary Judgment and Supporting Brief [Doc. 21], filed by Defendants on October 27, 2016 (“Defendants Response”);
7. Supplement to Plaintiffs [sic] Motion for Summary Judgment [Doc. 27], filed by Plaintiffs on April 7, 2017 (“Plaintiffs Supplement”); and
8. Defendants [sic] Objection to Plaintiffs [sic] Motion for Summary Judgment and Supporting Brief [Doc. 29], filed by Defendants on April 19, 2017.
JURISDICTION
The Court has jurisdiction to hear this Complaint pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409. Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a), and this is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(H). Furthermore, Plaintiffs and Defendants consent to entry of final orders and judgment by the Court in this adversary proceeding [Doc. 10].
INTRODUCTION
Plaintiffs purchased real property from Defendants by warranty deed, purportedly free and clear of all liens and encumbrances. In reality, however, Defendants failed to disclose a valid existing lien on the property and further did not pay off the lien with the proceeds following the sale. Therefore, Plaintiffs sued Defendants in state court for breach of contract and fraud, but Defendants filed their chapter 7 petition before a final judgment could be entered. After Plaintiffs filed this adversary proceeding, the Court granted relief from the automatic stay to allow the state court litigation to be concluded. Plaintiffs now have a final state court judgment against Defendants and seek a nondis-chargeability determination with respect thereto pursuant to 11 U.S.C. § 523(a)(2). Plaintiffs also seek to deny Defendants their discharge pursuant to 11 U.S.C. § 727(a)(2), (4) and (5).1
UNDISPUTED MATERIAL FACTS
For purposes of Plaintiffs Motion and Defendants Motion, the Court finds that no genuine dispute exists as to the following material facts:
1. Defendants, via their business Brown’s Funeral Parlor, LLC, previously owned a funeral home in Wellston. The real property was foreclosed upon by Stroud National Bank and sold through a sheriffs sale in April 2014. Defendants Response, Exhibits 2, 6, 7, and 8. On their 2015 federal tax return, Defendants reported the transaction and also claimed depreciation deductions with respect to the *106real property. Plaintiffs Motion, Exhibit 17.
2. On February 23, 2015, Defendants sold and conveyed certain real property located on Highway 66 in Chandler, Oklahoma (the “Property”) to Plaintiffs, representing and warranting the Property to be free and clear of all judgments, liens, and encumbrances. Plaintiffs Motion, Exhibits 1 and 2.
3. On February 23, 2015, Defendants received net proceeds from the sale of the Property (after payment of a first mortgage) in the amount of $143,468.09 (the “Sale Proceeds”). The Sale Proceeds were divided between T Brown and S Brown at closing, with each receiving approximately $71,734.05. Plaintiffs Motion, Exhibits 3 and 4.
4. At the time of the sale, the State of Oklahoma, specifically the Oklahoma Funeral Board (“OFB”), held a judgment lien on the Property (the “OFB Lien”). The OFB Lien arose from a default judgment in the amount of $42,000 entered against T Brown on June 14, 2004..Plaintiffs Motion, Exhibit 5.
5. Defendants failed to pay off the OFB Lien following sale of the Property. Defendants Response at 2, ¶ 6.
6. On April 22, 2015, S Brown gave a cashier’s check to her son Carson Brown in the amount of $81,639.24, which included her share of the Sale Proceeds. The check was subsequently endorsed over to T Brown who cashed it. Plaintiffs Motion, Exhibits 9 and-10; Defendants Response, Exhibit 2.
7. On April 23, 2015, Plaintiffs filed suit in the District Court of Lincoln County, Oklahoma (the “State Court”) to recover the amount required to release the OFB Lien (the “State Court Action”). Plaintiffs Motion, Exhibit 6.
8. On May 7, 2015, the State Court entered a restraining order directing Defendants to deposit the Sale Proceeds into court and to provide an accounting of any funds that were missing thereafter. Plaintiffs Motion, Exhibit 7.
9. Defendants did not deposit any funds into court, and the accounting they provided (the “Accounting”) indicated the Sale Proceeds had been spent within ninety (90) days after the sale. Plaintiffs Motion, Exhibit 8.
10. The expenditures from the Sale Proceeds identified by Defendants on the Accounting include: home purchase $30,000; automobile purchase $5,000; repayment of loans from various individual persons totaling $26,320.50; payments to or on behalf of Defendants’ son totaling $5,602; vacation and fishing trip expenses totaling $5,600; and “gambling losses at Chandler, Shawnee, and Watonga of approximately $30,000 to $40,000.” Plaintiffs Motion, Exhibit 8. In all, the Accounting filed by Defendants generally lists expenditures totaling approximately $132,069 and otherwise states the remainder of the Sale Proceeds was spent on miscellaneous “expenses for sons and day to day living expenses, meals, travel and entertainment.” Plaintiffs Motion, Exhibit 8. However, the Accounting contains no details and is supported by no documentation whatsoever.
11. The “home purchase” identified on the Accounting was a single family dwelling located at 321 West First Street in Chandler, Oklahoma (the “Chandler House”), purchased for $30,000, on April 10, 2015, by T Brown in the name of the Sandra Delane Brown Revocable Trust. Defendants Response, Exhibit 2 at ¶ 6.
12. Two transfers from the Sale Proceeds were not specifically disclosed on the Accounting:
*107a. On April 23, 2015, S Brown gave $4,000 to her son Isaac Brown to purchase a vehicle. Plaintiffs Motion, Exhibit 10.
b. During the period March to May 2015, T Brown made gifts of cash to his son Isaac Brown in the approximate amount of $9,300. Plaintiffs Motion, Exhibit 11. The Accounting states only “Advancement for business expenses.” Plaintiffs Motion, Exhibit 8.
13. On October 12, 2015, First American Title Insurance Company (“First American”), a nonparty to this case, paid $25,000 to the OFB to secure a release2 of the OFB Lien. Defendants Motion, Exhibits 5 and 6.
14. Plaintiffs have been reimbursed for any payment they may have made to OFB. Plaintiffs Response at 4, ¶¶ 5 and 6; Defendants Motion, Exhibit 6.
15. Plaintiffs filed a motion for summary judgment in the State Court Action, and a hearing was held on November 4, 2015. Plaintiffs Supplement, Exhibit 18.
16. Defendants filed their chapter 7 petition (“Petition”) on November 9, 2015 (the “Petition Date”). [Doc. 1, Bky. Dkt.]. T Brown filed a joint bankruptcy case using his power of attorney for S Brown without her knowledge. S Brown was not aware of the bankruptcy filing until shortly before the Section 341 meeting on December 8, 2015. Defendants Response, Exhibit 2.
17. The Petition listed the residential address for both Defendants as the Chandler House, with respect to which a homestead exemption was claimed on Schedule C. [Doc. 1, Bky. Dkt.]. However, neither Defendant ever resided in the Chandler House. Plaintiffs Motion, Exhibit 12.
18. Defendants scheduled Plaintiffs as unsecured creditors [Doc. 1 at 18, Bky. Dkt.], and Plaintiffs filed a proof of claim on June 15,2016. Claim 2-1 [Claims Register, Bky. Dkt.]. Defendants did not file an objection to Plaintiffs’ proof of claim, and it is deemed allowed.3 Trustee’s Final Report [Bky. Dkt. 39].
19. Defendants did not schedule the following assets:
a. A 2012 Nissan owned by S Brown that is encumbered by a loan, in favor of Tinker Credit Union in the amount of $20,490. Plaintiffs Motion, Exhibit 14.
b. A 2001 (or 2002) Suburban purchased in the Spring of 2015 for between $5,000 and $5,500 by T Brown. However, according to him, the Suburban is owned by Stems and Stones, a business in which T Brown has an interest. Plaintiffs Motion, Exhibit 16.
c. Various items of office equipment and furnishings under the control of T Brown. Defendants Response, Exhibit 2 at ¶ 7.
20. On November 12, 2015, three days after Defendants filed their Petition, the State Court, without knowledge of the bankruptcy filing, mistakenly entered a Final Journal Entry of Judgment in favor of Plaintiffs and against Defendants in the amount of $25,000 plus costs of $273.70, and attorneys fees of $5,000. Defendants Motion, Exhibit 2.
*10821. On February 8, 2016, Defendants filed an amended petition, schedules, and statement of financial affairs (“Amended Petition”), correcting some of the mistakes which came to light at their original and continued Section 341 meeting of creditors. [Docs. 19, 20 and 21, Bky. Dkt.].
22. Plaintiffs filed their Complaint on April 1, 2016, seeking a nondischargeability determination of Defendants’ debt pursuant to Section 523(a)(2) and a denial of Defendants’ discharge pursuant to Section 727(a)(2), (4) and (5). [Doc. 1].
23. After the Defendants Motion and Plaintiffs Motion were filed, the Court lifted the automatic stay because consideration of such motions would be greatly aided by entry of a final judgment in the State Court Action. Therefore, the Court entered its Order on Cross Motions for Summary Judgment [Doc. 14,15], Holding Adversary Proceeding in Abeyance, Granting Relief from the Automatic Stay and Directing Filing of Supplements to Summary Judgment Motions and Quarterly Status Reports on November 1, 2016 [Doc. 22].
25. The State Court entered its Order Entering Final Journal Entry of Judgment on January 9, 2017, incorporating by reference the order previously entered on November 12, 2015, which granted Plaintiffs judgment in the amount of $25,000 plus costs of $273.70, and attorneys fees of $6,000 (the “Judgment”). Plaintiffs Supplement, Exhibit 18,
SUMMARY JUDGMENT STANDARD
Summary judgment is proper if the movant proves that there is no genuine issue as to any material fact and that it is entitled to summary judgment as a matter of law. Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Fed. R. Civ. P. 56(c)). The movant bears the burden of demonstrating the absence of disputed material facts warranting summary judgment. Gough v. Lincoln Cnty. Bd. of Cnty. Comm’rs, 2016 WL 164632, *1 (W.D. Okla. 2016) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 91 L,Ed.2d 265 (1986)). If the movant has the burden of proof on the claim, the movant must establish each element of its claim or defense by sufficient, competent evidence to set forth a prima facie case. Reynolds v. Haskins (In re Git-N-Go, Inc.), 2007 WL 2816215 (Bankr. N.D. Okla. 2007) (citing In re Ribozyme Pharm., Inc., Sec. Litig., 209 F.Supp.2d 1106, 1111 (D. Colo. 2002)).
However, a movant who does not bear the burden of persuasion at trial is not required to negate the nonmovant’s claim or defense. Thom, 353 F.3d at 851 (citing Celotex, 477 U.S. at 325, 106 S.Ct. 2548). Such a movant will satisfy its burden if it demonstrates the lack of evidence for the nonmovant on an essential element of the nonmovant’s claim or defense. Thom, 353 F.3d at 851 (citing Celotex, 477 U.S. at 325, 106 S.Ct. 2548). If the movant carries this initial burden, the nonmovant bearing the burden of persuasion at trial cannot simply rest on its pleadings; rather, the burden shifts to the nonmovant to go beyond the pleadings and set forth specific facts from which a rational trier of fact could find for the nonmovant. Thom, 353 F.3d at 851 (citing Fed. R. Civ. P. 56(e)). “The Court’s inquiry is whether the facts and evidence identified by the parties present ‘a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.’ ” Gough, 2016 WL 164632, *1 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 LEd.2d 202 (1986)).
“A dispute over a material fact is “genuine” if a rational [fact finder] could find in favor of the nonmoving party on the evi*109dence presented.” Equal Emp’t Opportunity Comm’n v. Horizon/CMS Healthcare Corp., 220 F.3d 1184, 1190 (10th Cir. 2000) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). Further, the record must be considered in the light most favorable to the party opposing summary judgment. Garrett v. Vaughan (In re Vaughan), 342 B.R. 385, *2 (10th Cir. BAP 2006) (unpub.) (citing Bee v. Greaves, 744 F.2d 1387, 1396 (10th Cir. 1984)).
In deciding a motion for summary judgment, the Court must first determine which material facts are undisputed. “Necessary to the effective rebuttal of a summary judgment motion is the non-moving party’s demonstration that genuine issues of fact remain. Non-moving parties raise genuine issues of material fact by controverting the moving party’s factual aver-ments with particularity.” Vaughan, 342 B.R. 385, *3; see also Fed. R. Civ. P. 56(c). The non-moving party may not rest on its pleadings but rather must set forth specific facts that it contends are disputed. Vaughan, 342 B.R. 385, *2 (citing Applied Genetics Int’l, Inc. v. First Affiliated Secs., Inc., 912 F.2d 1238, 1241 (10th Cir. 1990)).
Generally speaking, the issue of intent involving a person’s state of mind is a question of fact that may preclude summary judgment, but there is no per se rule that summary judgment is improper under § 727(a) where intent is an issue. Therefore, summary judgment is still appropriate if the facts and circumstances of the case so warrant. Vaughan, 342 B.R. 385, *5. Neither is it per se inappropriate to grant summary judgment when intent is an element of proof for a nondischargeability determination under Section 523(a)(2). Kansas ex rel Gordon v. Oliver (In re Oliver), 554 B.R. 493, 501 (Bankr. D. Kan. 2016).
BURDEN OF PROOF AND RULES OF CONSTRUCTION
A creditor has the burden of proving the elements of a Section 523 or Section 727 claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); First Nat’l Bank of Gordon v. Serafini (In re Serafini), 938 F.2d 1156, 1157 (10th Cir. 1991). Once a creditor establishes the acts complained of, the debtor must then come forward with a credible explanation of his actions. Cobra Well Testers, LLC v. Carlson (In re Carlson), 356 B.R. 787, *2 (10th Cir. BAP 2008) (citing In re Martin, 88 B.R. 319, 321 (D. Colo. 1988) (unpub.)). See also Geyer & Assoc. CPA’s, P.C. v. Stewart (In re Stewart), 421 B.R. 603, *2 (10th Cir. BAP 2009). The ultimate burden, however, remains with the plaintiff seeking to deny a debtor a discharge. Wieland v. Miller (In re Miller), 448 B.R. 551, 555 (Bankr. N.D. Okla. 2011).
The exceptions to discharge contained in Section 523(a) are to be narrowly construed and, because of the fresh start objectives of bankruptcy, doubt is to be resolved in a defendant’s favor. Carlson, 356 B.R. 787, *6 (citing Bellco First Fed. Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir. 1997)). Similarly, the Court must construe the denial of discharge provisions in Section 727 “liberally in favor of the debtor, and strictly against the creditor.” Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir. 1997) (citation omitted); Kansas State Bank & Trust v. Vickers (In re Vickers), 577 F.2d 683, 687 (10th Cir. 1978); Stewart, 421 B.R. 603, *2. However, a fresh start via bankruptcy discharge is a privilege, not a right, and is reserved for the honest but unfortunate debtor. Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 357 (8th Cir. BAP 2003) (citing Grogan v. Gar*110ner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).
CONCLUSIONS OF LAW
I. DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT IS WITHOUT MERIT.
In the Defendants Motion, Defendants contend Plaintiffs are not their creditors and, therefore, have no standing to bring this adversary proceeding. Defendants’ argument is premised on them assertions that: (i) Plaintiffs held only a “void judgment” as of the date Defendants filed for bankruptcy protection; and (ii) Defendants owe Plaintiffs no debt because the OFB Lien on the Property was paid off by First American under a title insurance policy. Both lines of argument are non-starters and, accordingly, Defendants Motion must be denied.
A. Plaintiffs Have Standing as They were Creditors of Defendants as of the Petition Date.
The Court agrees with Defendants that the judgment entered in the State Court Action on November 12, 2015, was void and ineffective because Defendants filed their Petition three days earlier on November 9, 2015, thereby triggering the automatic stay under 11 U.S.C. § 362. Ellis v. Consolidated Diesel Elec. Corp., 894 F.2d 371, 373 (10th Cir. 1990); Rushton v. Bank of Utah (In re C.W. Mining Co.), 477 B.R. 176, 191 (10th Cir. BAP 2012), aff'd 749 F.3d 895 (10th Cir. 2014). However, Defendants overlook the very basic point that it is not necessary for Plaintiffs to possess a judgment in order to have standing to file this adversary proceeding.
Standing to pursue a discharge objection or a discharge exception depends on whether the plaintiff is a creditor of the debtor. Lincoln Nat’l Life Ins. Co. v. Silver (In re Silver), 378 B.R. 418 (10th Cir. BAP 2007) (citing 11 U.S.C. § 727(a)); In re Linn, 88 B.R. 365, 366 (Bankr. W.D. Okla. 1988) (citing Fed. R. Bankr. P. 4007(a)). In order for Plaintiffs to be creditors, the Bankruptcy Code requires only that they hold a claim against Defendants as of the Petition Date. Under 11 U.S.C. § 101(10)(A) (emphasis added), “creditor” is defined as an entity (which includes a person) that has a “claim against the debt- or that arose at the time of or before the order for relief concerning the debtor.” In turn, a “claim” is defined by Section 101(5)(A) as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed contingent, matured, unmatured, disputed, undisputed, legal equitable, secured, or unsecured.” Legislative history indicates that Congress intended the Bankruptcy Code’s definition of claim to be the broadest possible to “ensure that ‘all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.’ ” Jaurdon v. Cricket Commc’ns, Inc., 412 F.3d 1156, 1158 (10th Cir. 2005) (quoting Laura B. Bartell, Due Process for the Unknown Future Claim in Bankruptcy-Is This Notice Really Necessary?, 78 Am. Bankr. L.J. 339, 340-41 (2004)).
In this case, about seven months prior to the Petition Date, Defendants sold Plaintiffs the Property by warranty deed representing it was not encumbered in any way when, in fact, it was clearly subject to the OFB Lien. Plaintiffs’ claim against Defendants arose at the time of their discovery of the misrepresentation and conveyance via the faulty deed and, therefore, Plaintiffs are pife-petition creditors of Defendants. Horton v. Hamilton, 345 P.3d 367, 363 (Okla. 2015). Furthermore, Plaintiffs filed a proof of claim which, absent any objection, is allowed. See Undisputed Material Fact ¶ 18.
As a result, Plaintiffs have standing to bring this adversary proceeding because *111they are creditors of Defendants to whom a debt is owed within the meaning of Section 523(c) and Rule 4007(a). Likewise, Plaintiffs are creditors within the meaning of Section 727(c)(1), who may object to Defendants being granted a discharge. See Bankers Healthcare Group, Inc. v. Bilfield (In re Bilfield), 493 B.R. 748, 752 (Bankr. N.D. Ohio 2013).
B. Under the Collateral Source Rule, Defendants Still Owe Plaintiffs a Debt.
Defendants also assert Plaintiffs have no standing to bring this adversary proceeding because First American paid off the OFB Lien and, consequently, they owe Plaintiffs no debt. Specifically, Defendants argue:
The undisputed facts here are that Plaintiffs are not the party to whom a debt may be owed. They admit in answer to Interrogatories Nos. 18 through 21, First American paid the OFB to secure a partial release of its judgment lien and, if they (Plaintiffs) had paid any money, they were reimbursed and made whole for such payment by First American. Further, Exhibit 5 is the actual check showing the $25,000.00 was paid directly by First American to the OFB. It is undisputed that Plaintiffs are not the party to whom a debt may be owed and, under the clear terms of Section 523(c)(1) are not entitled to prosecute an action for exception to discharge.
Defendants Motion at 5-6. Critically, Defendants ignore the collateral source rule.
In this case, Plaintiffs’ claim, and the Judgment entered against Defendants, are based, in part, on both breach of contract and fraudulent misrepresentation, with the misrepresentation claim being an independent, willful tort under Oklahoma law. Okland Oil Co. v. Conoco Inc., 144 F.3d 1308, 1315 (10th Cir. 1998).
However, under Oklahoma statutes, the measure of a tort victim’s damages “is the amount which will compensate for all detriment proximately caused thereby.” Okla. Stat. tit. 23, § 61. In Oklahoma, the collateral source rule provides:
Upon commission of a tort it is the duty of the wrongdoer to answer for the damages wrought by his wrongful act, and that is measured by the whole loss so caused and the receipt of compensation by the injured party from a collateral source wholly independent of the wrongdoer does not operate to lessen the damages recoverable from the person causing the injury.
Denco Bus Lines v. Hargis, 204 Okla. 339, 229 P.2d 560, 561 (Syllabus by the Court) (1951). See also Blythe v. University of Oklahoma, 82 P.3d 1021, 1026 (Okla. 2003). Insurance is a common form of collateral source compensation, and “it is well settled that damages recoverable for a wrong are not diminished by the fact that the party injured has been wholly or partially indemnified for loss by insurance effected by the party and to the procurement of which the wrongdoer did not contribute.” Estrada v. Port City Props., Inc., 258 P.3d 495, 506 n.39 (Okla. 2011).
Under the collateral source rule, the fact that Plaintiffs procured title insurance from First American and it ultimately paid off the OFB Lien does not alter their status as creditors holding a claim against Defendants. Thus, Plaintiffs have standing to bring this adversary proceeding.
II. WITHOUT THE JUDGMENT ROLL, PLAINTIFFS MOTION MUST BE DENIED WITH RESPECT TO THE SECTION 523(A)(2)(A) CLAIM.
Under Section 523(a)(2)(A), debts may be excepted from discharge if they *112are for money, property, or services obtained by a debtor’s false pretenses, false representations, or actual fraud (other than a statement respecting the debtor’s or an insider’s financial condition). To prevail on a Section 523(a)(2)(A) claim, a creditor must prove the following elements by a preponderance of the evidence: (1) the debtor made a false representation; (2) the debtor made the representation with the intent to deceive the creditor; (3) the creditor relied on the representation; (4) the creditor’s reliance was justifiable; and (5) the debtor’s representation caused the creditor to sustain a loss. Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10th Cir. 2009) (citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996)); Copper v. Lemke (In re Lemke), 423 B.R. 917, 921-22 (10th Cir. BAP 2010).
In this case, Plaintiffs allege they are entitled to summary judgment on their Section 523(a)(2) claim by virtue of the collateral estoppel or issue preclusive effect of the Judgment rendered in the State Court Action. Specifically, Plaintiffs argue:
The [Jjudgment entered by the [Sjtate [Cjourt included specific findings of fact which support a determination in this case that the [Defendants] knowingly made false representations regarding title to the [Property that were relied upon by the Plaintiffs in purchasing the [Property, including
1.) The [Defendants] entered into a contract to convey the real property free and clear of all liens and encumbrances.
2.) The [Defendants] signed an Affidavit at the closing representing that the property had no judgment liens.
3.) The [Defendants] executed a Warranty Deed representing and warranting the title as being free and discharged of all liens.
4.) The representations made by the [Defendants] were false. The [Property was encumbered by a judgment lien in favor of the State of Oklahoma.
5.) The [Defendants] were fully aware of the judgment lien at the time the representations were made.
6.) The Plaintiffs relied upon the representations.
7.) The [Defendants] received net proceeds from the sale sufficient to pay the judgment lien, but used the funds for their personal use.
Plaintiffs Supplement at 4-5. Plaintiffs, therefore, argue “[t]he findings of fact support a determination that the Defendants obtained money through false pretenses under 11 U.S.C. § 523(a)(2)(A),” and that they are entitled to “judgment as a matter of law against the [Defendants] determining that the indebtedness due the Plaintiffs] is not subject to discharge under 11 U.S.C. § 523(a)(2)(A).” Plaintiffs Supplement at 5.
The Court agrees that, in some instances, the elements of a bankruptcy nondischargeability claim may be established by collateral estoppel or issue preclusion. See Grogan, 498 U.S. at 284 n.11, 111 S.Ct. 654 (“principles of collateral es-toppel apply in bankruptcy proceedings”). However, federal bankruptcy courts must look to state law, he. Oklahoma law, in determining whether it is appropriate to give preclusive effect to a prior state court judgment. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 379-80, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Unfortunately, Plaintiffs have overlooked an important detail of Oklahoma law that is dispositive of their motion. Optima Oil & Gas Co., LLC v. Mewbourne Oil Co., 2009 WL 1773198, *3 (W.D. Okla. 2009).
In Oklahoma, the doctrine of collateral estoppel is known as issue pre-*113elusion. Oklahoma law establishes that “[t]he party relying on the defense of issue preclusion bears the burden of establishing that the issue to be precluded was actually litigated and determined in the prior action between the parties or their privies, and that its resolution was essential to a decision in that action.” Salazar v. City of Oklahoma City, 976 P.2d 1056, 1060-61 (Okla. 1999). Additionally, the party seeking preclusive effect is required to produce proof of the terms of the prior judgment. In particular, “[t]hose who rely on a judgment for its issue-preclusive force ... are duty-bound to produce—as proof of its terms, effect and validity—the entire judgment roll for the case which culminated in the decision invoked as a bar to relitigation.” Hall v. Bolton (In re Bolton), 2017 WL 535265, *2 (Bankr. E.D. Okla. 2017) (quoting Salazar, 976 P.2d at 1061 (footnote omitted)); Optima, 2009 WL 1773198 (quoting Salazar, 976 P.2d at 1061)). The “judgment roll” is defined in Section 32.1 of Title 12 of the Oklahoma Statutes as “the petition, the process, return, the pleadings subsequent thereto, reports, verdicts, orders, judgments, and all material acts and proceedings of the court[.]”
Without the entire judgment roll, it is not possible for this Court to determine what issues were actually litigated and the legal standards employed by the State Court. As no preclusive effect can be given to the Judgment, Plaintiffs have not satisfied their burden of proof. See Hagmaier v. Cooley (In re Cooley), 551 B.R. 498, 501 n.2 (Bankr. W.D. Okla. 2016). Therefore, Plaintiffs Motion must be denied with respect to their Section 523(a)(2)(A) claim.
Ill, PLAINTIFFS’ MOTION WITH RESPECT TO THE SECTION 727 CLAIMS IS DENIED IN PART AND GRANTED IN PART.
Plaintiffs allege Defendants are not entitled to receive a bankruptcy discharge on numerous grounds. First, Plaintiffs argue Defendants should be denied a discharge pursuant to Section 727(a)(2)(A) for transferring or concealing their property within one year prior to the Petition Date with the intent to defraud their creditors. Second, Plaintiffs contend Defendants made material false oaths or accounts in connection with their bankruptcy filing and, therefore, should be denied a discharge pursuant to Section 727(a)(4). Third and finally, Plaintiffs assert Section 727(a)(5) prevents Defendants from receiving a discharge because they have not satisfactorily explained the disappearance of the Sale Proceeds in the approximately eight months between that transaction and the Petition Date. As detailed below, the Court concludes Plaintiffs are not entitled to judgment as a matter of law on any of their denial of discharge claims against S Brown, nor their Section 727(a)(2) and (4) claims against T Brown, but should be granted summary judgment on their Section 727(a)(5) claim against T Brown.
A. Summary Judgment on Plaintiffs’ Section 727(a)(2)(A) Claim Must be Denied.
11 U.S.C. § 727(a)(2)(A) Code provides that a discharge may be denied where
the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition[.]
Therefore, in order for Plaintiffs to establish a claim to deny Defendants a dis*114charge pursuant to Section 727(a)(2)(A), they must prove: (1) Defendants or their duly authorized agent; (2) with intent to hinder, delay or defraud a creditor; (3) took action within one year prior to the Petition Date; (4) that consisted of transferring, removing, destroying or concealing Defendants’ property, or permitting any of these acts to be done. Stewart, 421 B.R. 603, *2.
In their Motion, Plaintiffs allege “substantial gifts to the children were made by [Defendants] within six (6) months of the date of filing. The transfers were made without consideration during a time that [Plaintiffs] were pursuing action to recover the sale proceeds.” Plaintiffs Motion at 9. Plaintiffs further argue that these facts satisfy the above requirements for denial of discharge under Section 727(a)(2)(A). Plaintiffs Motion at 10. The Court disagrees.
The alleged “gifts” Plaintiffs base their claim on are:
a. Gift of money in the amount of $81,639.24 made by S Brown to Carson Brown on or about April 22, 2015.
b. Gift of money in the amount of $4,000.00 from S Brown to Isaac Brown to purchase an automobile on or about April 23,2015.
c. Gift of money made by T Brown to Isaac Brown in the approximate amount of $9,300.00.
Plaintiffs Motion at 6, ¶ 9. Regarding the $81,639.75 alleged gift from S Brown to her son, that check was immediately endorsed over to and cashed by T Brown. See Undisputed Material Pact ¶ 6. Therefore, it is difficult to characterize that transaction as a gift for purposes of Plaintiffs’ denial of discharge claim, as it was ultimately a transfer between S Brown and T Brown and, thus, remained “property of the debtor[s].”
Problems also exist with respect to the elements of Plaintiffs’ claim as to the other gifts. Importantly, to deny a discharge under Section 727(a)(2)(A), Plaintiffs must demonstrate that Defendants, in making the transfers to their children, possessed “actual intent to defraud creditors.” Marine Midland Bus. Loans, Inc. v. Carey (In re Carey), 938 F.2d 1073, 1077 (10th Cir. 1991). Of course, debtors rarely admit intent so courts often rely on circumstantial evidence or on inferences drawn from a course of conduct. Mathai v. Warren (In re Warren), 512 F.3d 1241, 1249 (10th Cir. 2008). In such situations, courts often look to so-called “badges of fraud” to determine intent for purposes of Section 727(a)(2). Stewart, 421 B.R. 603, *3.
Among others, the “badges of fraud” factors include: (1) whether the transfer was made gratuitously; (2) whether the debtor continues to use the transferred property; (3) whether the property was transferred to a family member; (4) whether the transfer was concealed; (5) whether the transfer occurred immediately before the filing of the bankruptcy; (6) whether the conversion of assets resulted in the insolvency of the debtor; and (7) the value of the converted assets. Carey, 938 F.2d at 1077. Some of these factors, such as a gratuitous transfer to a family member, are clearly present. But other factors—such as continued use of the property by Defendants, concealment of the transfers, and insolvency of Defendants— are not present or have not been sufficiently proven by Plaintiffs.
Moreover, although Plaintiffs seem to suggest Defendants’ gifts to their sons were an inappropriate response to Plaintiffs filing suit, Plaintiffs have not alleged any facts that specifically connect the timing of the transfers of the Sale *115Proceeds with the State Court Action in any meaningful way.4 For example, Plaintiffs do not assert that, at the time of the transfers of the Sale Proceeds, Defendants had actual knowledge of Plaintiffs’ objections to the OFB Lien with respect thereto, or that Plaintiffs had made demand on Defendants for damages caused by the OFB Lien by such times. Viewing the limited facts in the light most favorable to Defendants, the Court simply cannot conclude that S Brown’s transfer of $4,000 (for purposes of purchasing a vehicle) and T Brown’s transfer of $9,300 (for purposes of growing a business) to their son, Isaac Brown, were done with an intent to defraud creditors. Because more development of the facts is necessary to establish intent, summary judgment on Plaintiffs’ Section 727(a)(2)(A) claim must be denied.
B. Summary Judgment on Plaintiffs’ Section 727(a)(4)(A) Claim Must Be Denied.
Section 727(a)(4)(A) provides that a discharge may be denied where the debtor “knowingly and fraudulently, in or in connection with the case ... made a false oath or account[.]” The false oath or omission must be material and willfully made with intent to defraud. Job v. Calder (In re Calder), 907 F.2d 953, 955 (10th Cir. 1990). “The subject matter of a false oath is ‘material,’ and thus sufficient to bar discharge, if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.” United States Trustee v. Garland (In re Garland), 417 B.R. 805, 814 (10th Cir. BAP 2009) (quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)). A statement made in a debtor’s schedules or statement of affairs, or the omission of assets from the same, may constitute a false oath for purposes of denying a discharge under Section 727(a)(4)(A). Calder, 907 F.2d at 955.
Though it may appear to be a harsh penalty, the purpose underlying Section 727(a)(4)(A) is to ‘“require[] nothing less than a full and complete disclosure of any and all apparent interests of any kind.’ ” Korte v. United States of America Internal Revenue Serv. (In re Korte), 262 B.R. 464, 474 (8th Cir. BAP 2001) (quoting Fokkena v. Tripp (In re Tripp), 224 B.R. 95, 98 (Bankr. N.D. Iowa 1998)). “The debtor’s duty of disclosure requires updating the schedules as soon as reasonably practical after he or she becomes aware of any inaccuracies or omissions.” Doeling v. Berger (In re Berger), 497 B.R. 47, 62 (Bankr. D. N.D. 2013) (citing Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 357 (8th Cir. BAP 2003)).
According to the Tenth Circuit Court of Appeals:
In order to deny a debtor’s discharge pursuant to this provision, a creditor must demonstrate by a preponderance of the evidence that the debtor knowingly and fraudulently made an oath and that the oath relates to a material fact.... A debtor will not be denied discharge if a false statement is due to mere mistake or inadvertence. Moreover, an honest error or mere inaccuracy is not a proper basis for denial of discharge.
Brown, 108 F.3d at 1294-95 (citations omitted). However, courts consistently *116treat reckless indifference to the truth, i.e., “not caring whether some representation is true or false,” as the functional equivalent of fraud for purposes of Section 727(a)(4)(A). Freelife Int'l, LLC v. Butler (In re Butler), 377 B.R. 895, 922-23 (Bankr. D. Utah 2006). Failure to amend schedules after becoming aware of their inaccuracies is additional indicia of a debt- or’s reckless indifference to the truth. Berger, 497 B.R. at 70 (citing Kaler v. Danduran (In re Danduran), 2011 WL 3664436 (Bankr. D.N.D. Aug. 19, 2011)).
Plaintiffs identify five inaccuracies or omissions from Defendants’ bankruptcy documents that they assert are false oaths justifying a denial of Defendants’ discharge under Section 727(a)(4)(A). The alleged false oaths relate to: (1) the status of the Chandler House as Defendants’ residence and homestead; (2) the non-disclosure of the Sandra Delane Brown Revocable Trust which owned the Chandler House; (3) unscheduled office equipment, furnishings, and supplies under control of T Brown; (4) the purported sale of a funeral home in Wellston; and (5) the Defendants’ unscheduled vehicles. Plaintiffs Motion at 12-13. For the various reasons discussed below, the Court concludes Plaintiffs have not met their burden of proving the alleged false oaths were knowingly and intentionally done with the intent to defraud creditors or made with reckless indifference to the truth.
First, the Petition indicates Defendants resided in the Chandler House at the time of the bankruptcy filing, and it is listed as homestead property on Schedule A and claimed exempt on Schedule C. See Undisputed Material Fact ¶ 17. The Amended Petition stated the Chandler House as the residence of only T Brown. In fact, neither Defendant resided there. Further, the Chandler House was purchased and owned by the Sandra Delane Brown Revocable Trust, which was not originally disclosed but was disclosed when the Amended Petition was filed. See Undisputed Material Fact ¶ 11; Defendants Response, Exhibit 4. However, these false oaths cannot be attributed to S Brown as she did not participate in filing the Petition. With respect to T Brown, there is evidence that he intended to live in the Chandler House as his homestead, but it was in need of repair, and therefore he was temporarily residing with one of his sons. Defendants Response, Exhibit 2 at ¶ 6, Plaintiffs Motion, Exhibit 11.
Next, Plaintiffs argue that neither the Petition nor the Amended Petition scheduled any office equipment, furnishings, or supplies, yet at his deposition, T Brown admitted to owning such assets worth between $10,000 and $20,000. According to T Brown, S Brown had no knowledge of the assets. See Defendants Response, Exhibit 2 at ¶ 7. As a result, this false oath also cannot be attributed to her. Furthermore, T Brown claims that the assets were in storage, and he inadvertently neglected to list them on the bankruptcy schedules, which claim is undisputed and otherwise not controverted.
Plaintiffs also claim Defendants sold a commercial budding (the Wellston Funeral Home) on July 1, 2015, and did not report the sale or disposition of proceeds in them bankruptcy filing. Defendants responded that the property had been sold, pre-petition, in a sheriff’s sale after being foreclosed upon by Stroud National Bank in 2014. Undisputed Material Fact ¶ 1. Further, T Brown stated that the “inclusion of a sale of that property on our 2015 [tax return] was done by my accountant to finalize depreciation he believed we were entitled to.” Defendants Response, Exhibit 2 at ¶8. Accordingly, as to the Wellston Funeral Home, there is no evidence Defendants ever received any sale *117proceeds that should be accounted for but were not.5
Next, Plaintiffs complain Defendants neglected to schedule certain vehicles. First, a 2012 Nissan that S Brown purchased in October 2014 was not scheduled on the Petition or the Amended Petition. Although S Brown is not responsible for any omission in the Petition, her vehicle should have been included on the Amended Petition. However, at this time, the record contains nothing to suggest she knowingly and fraudulently failed to schedule the 2012 Nissan in the Amended Petition.
With respect to the 2001 or 2002 Suburban purchased by T Brown between March and May of 2015, it also was not scheduled on either the Petition or the Amended Petition. However, according to T Brown, that vehicle was not owned by him but instead by Stems and Stones, a business in which he has an interest. Plaintiffs Motion, Exhibit 15. This creates a factual issue regarding whether the omission of the Suburban was an intentional false oath as ownership by an entity would negate the obligation to schedule the Suburban.
Although the Court finds the inaccuracies and omissions in Defendants’ schedules and statement of financial affairs troubling, it is not convinced Plaintiffs, at this time, have met their burden of proving the discrepancies rise to the level of false oaths or accounts made intentionally and fraudulently. As indicated above, T Brown filed the joint bankruptcy case without S Brown’s knowledge, utilizing the power of attorney she had executed some years earlier. Undisputed Material Fact ¶ 16. In fact, S Brown did not know about the bankruptcy filing until shortly before the Section 341 meeting. This fact alone negates much of Plaintiffs’ purported wrongdoing by S Brown.
Additionally, there is evidence to support the Court’s conclusion that an issue of fact exists with respect to the requisite fraudulent intent of T Brown. In response to Plaintiffs Motion, T Brown submitted an affidavit (the “Affidavit”) that Plaintiffs have not controverted. The Affidavit states in pertinent part as follows:
During the entire time described above, I was suffering an “adult brain disorder,” sleep apnea, high blood pressure, uncontrolled Type II diabetes with kidney complications, chronic kidney disease, transient ischemic attack involving my right carotid artery and migraine headaches, all of which culminated in a stroke I suffered on approximately October 2, 2015. Many of the things I did described above, I do not remember.
Defendants Exhibit 2 at ¶ 9. This uncon-troverted statement necessarily raises issues of fact with respect to T Brown’s intent.
Summary judgment is not appropriate when different ultimate inferences may be drawn from the facts. Davis v. Weddington (In re Weddington), 457 B.R. 102, 111 (Bankr. D. Kan. 2011) (citing Sec. Nat. Bank v. Belleville Livestock Comm’n Co., 619 F.2d 840, 847 (10th Cir. 1979)). Because the facts here are subject to multiple interpretations as to intent, the Court concludes Plaintiffs are not entitled to summary judgment on their Section 727(a)(4)(A) claim against T Brown or S Brown.
*118C. Summary Judgment on Plaintiffs’ Section 727(a)(5) Claim Must be Denied with Respect to S Brown but is Granted with Respect to T Brown.
A bankruptcy court has broad power under Section 727(a)(5) to decline to grant a discharge where a debtor inadequately explains a shortage, loss, or disappearance of assets. In re Carlson, 2008 WL 8677441 at *5 (10th Cir. Jan. 23, 2008) (quoting In re D’Agnese, 86 F.3d 732, 734 (7th Cir. 1996)). Section 727(a)(5) provides in pertinent part:
(a) The court shall grant the debtor a discharge, unless—
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(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities^]
§ 727(a)(5). The purpose underlying Section 727(a)(5) is to ensure that, prior to being granted a discharge, the debtor provides a full and accurate picture of his financial transactions and activities prior to bankruptcy, thereby preventing the burden of discovering, locating, and recovering assets from being shifted to the trustee and creditors. Crane v. Morris (In re Morris), 302 B.R. 728, 742-43 (Bankr. N.D. Okla. 2003). A prima facie case under Section 727(a)(5) exists where a creditor shows that there was an unusual and unexplained disappearance of assets shortly before the debtor filed bankruptcy. Carlson, 2008 WL 8677441 at *5.
After the objecting party demonstrates a disappearance of assets, Section 727(a)(5) requires the debtor to come forward with “a satisfactory explanation which must consist of more than vague, indefinite and uncorroborated assertions by the debtor.” Carlson, 2008 WL 8677441 at *5 (quoting Damon v. Chadwick (In re Chadwick), 335 B.R. 694, 703 (W.D. Wis. 2005)). In other words, a debtor’s explanation regarding loss, of assets should satisfy two concerns. It must be supported by at least some corroboration, and that corroboration must be sufficient to eliminate the need for any speculation as to what happened to the assets.” In re Simmons, 810 F.3d 852, 859 (1st Cir. 2016) (quoting Aoki v. Atto Corp. (In re Aoki), 323 B.R. 803, 817 (1st Cir. BAP 2005)).
Courts have generally determined that what constitutes a satisfactory explanation under Section 727(a)(5) is left to the soured discretion of the court. See Martinez v. Sears (In re Sears), 565 B.R. 184, 192 (10th Cir. BAP 2017) (citing Blackwell Oil Co. v. Potts (In re Potts), 501 B.R. 711, 726 (Bankr. D. Colo. 2013) (and cases cited therein)). But, a determination as to whether an explanation is satisfactory does not take into account whether what happened to the assets was improper. Carlson, 2008 WL 8677441 at *5 (quoting Shappell’s Inc. v. Perry (In re Perry), 252 B.R. 541, 550 (Bankr. M.D. Fla. 2000)). That is because it is not necessary for a creditor to demonstrate a fraudulent intent on debtor’s part for purposes of denying a discharge under Section 727(a)(5). Carlson, 2008 WL 8677441 at *5.
In their Motion, Plaintiffs allege:
In the present case, [Defendants] have the burden of establishing the loss of the sale proceeds ($143,468.09). A substantial portion was given to the children of [Defendants], The remaining funds are generally unaccounted for. In particular, [Defendants] arbitrarily claim that between $30,000.00 and $40,000.00 was lost in gambling. However, [Defendants] have failed to produce any documents, records of corroboration of the losses.
Plaintiffs Motion at 1-1. Although Plaintiffs’ argument in this regard lumps Defendants *119together for purposes of their Section 727(a)(5) claim, the Court finds that Plaintiffs’ claim against S Brown must be analyzed separately from their claim against T Brown.
S Brown
On April 22, 2015, S Brown purchased a cashier’s check made payable to Carson Brown in the amount of $81,639.24, which amount included her entire share of the Sale Proceeds. In his sworn Affidavit, T Brown declared that Carson Brown immediately endorsed the check over to him and he then cashed the cheek. See Undisputed Material Fact ¶ 6. Thus, S Brown has satisfactorily explained the “disappearance” of her share of the Sale Proceeds, and her explanation has been corroborated by T Brown. As a result, Plaintiffs are not entitled to summary judgment on Plaintiffs’ Section 727(a)(5) claim against S Brown.
T Brown
While the argument section of Defendants Response asserts Plaintiffs have no Section 727(a)(5) claim against S Brown because she has fully accounted for the claimed loss of assets, see Defendants Response at 9, Defendants Response is completely silent with respect to T Brown’s failure to account for the loss of assets. Instead, Defendants Response offers only the general defense that T Brown suffered from various medical issues “during the time period complained of by Plaintiffs,” which impacted “his mental competency in performing the actions he admits he did or must have committed.” Defendants Response at 11. As an explanation for T Brown’s loss of assets, it is sorely insufficient as it literally explains nothing about how, when or why the Sale Proceeds were completely expended prior to the Petition Date. The Affidavit declares T Brown used $30,000 of the proceeds in question to purchase the Chandler House and lost between $30,000 and $40,000 gambling at various Indian casinos. However, there are no records of the gambling losses, and- the remainder of the proceeds remain completely unaccounted for. Once Plaintiffs met their initial burden of establishing a loss or reduction of assets, the burden of satisfactorily explaining the loss or deficiency shifted to T Brown. He failed to offer any explanation whatsoever with respect to over one-half of the Sale Proceeds that Plaintiffs argue disappeared.
Culpability under Section 727(a)(5), is on a strict liability basis as, short of explaining where the assets went, it contains no defense to an unexplained loss or deficiency. Crocker v. McWhorter (In re McWhorter), 557 B.R. 543, 558 (Bankr. E.D. Ky. 2016); United States Trustee v. Ross (In re Ross), 2013 WL 414474 (Bankr. N.D. Ohio 2013). Moreover, incompeteney due to health problems, chemicals or mental illness alone is not sufficient to overcome an otherwise unsatisfactory explanation of .a loss of assets. Ross, 2013 WL 414474 (citing Dolin v. N. Petrochemical Co., 799 F.2d 251, 253 (6th Cir. 1986)). T Brown’s purported explanation is nothing more than an excuse for the loss as it is a “ ‘vague explanation’ unsupported by ‘documentation or some other corroboration,’ ” and is plainly inadequate to allow proper investigation into the circumstances surrounding the loss. Redmond v. Karr (In re Karr), 442 B.R. 785, 800 (Bankr. D. Kan. 2011).
The Court concludes Plaintiffs are entitled to summary judgment on their Section 727(a)(5) claim against T Brown based on his failure to satisfactorily explain the undisputed loss of the Sale Proceeds.
CONCLUSION
Plaintiffs are pre-Petition creditors of Defendants-who filed a proof of claim evi*120dencing their claim against Defendants, which claim has now been allowed. Therefore, they have the requisite standing to bring this adversary proceeding, which means Defendants Motion must be denied.
Plaintiffs Motion is DENIED IN PART and GRANTED IN PART:
a. Summary judgment on their Section 523(a)(2)(A) claim is DENIED because Plaintiffs did not provide the judgment roll as required by Oklahoma law governing issue preclusion.
b. Summary judgment with respect to Plaintiffs’ Section 727(a)(2)(A) and (a)(4) claims against both S Brown and T Brown is DENIED because Plaintiffs failed to prove the requisite intent.
c. Plaintiffs’ Section 727(a)(5) claim against S Brown is DENIED because she adequately accounted for all of her share of the Sale Proceeds.
d.Plaintiffs’ Section 727(a)(5) claim against T Brown is GRANTED because he failed to explain the proven disappearance of a large portion of the Sale Proceeds.
A separate judgment will be entered. Unless Plaintiffs dismiss their claims on which summary judgment was not granted on or before July 10, 2017, the Court will enter a scheduling order setting this matter for trial.
IT IS SO ORDERED.
. Unless otherwise indicated, hereafter all references to sections are to the Bankruptcy Code, Title 11 of the United States Code.
. The Court notes that the document releasing the OFB Lien is titled "Partial Release of Judgment Lien”. Plaintiffs Motion, Exhibit 5. On its face, however, it fully releases the Property from the OFB Lien. Plaintiffs Motion, Exhibit 5.
. Agricredit Corp. v. Harrison (In re Harrison), 987 F.2d 677, 680 (10th Cir. 1993); State of Kansas ex rel Gordon v. Oliver (In re Oliver), 554 B.R. 493, 503 (Bankr. D. Kan. 2016); In re Kerrigan-Ronan-Prew, 2013 WL 1191243 (Bankr. D. Colo. 2013).
. For instance, the Sale Proceeds were received February 23, 2015, but the State Court Action was not commenced until April 25, 2015, and the Accounting was filed therein on May 19, 2015, but no dates are available for the bulk of the expenditures from the Sale Proceeds.
. Moreover, while it may be a good practice for the assets of a debtor’s solely owned entity to appear on that debtor’s individual bankruptcy schedules, where the existence and ownership of the entity itself is disclosed, there is no fraud in the omission of individual assets belonging, not to the debtor, but to the debtor's entity. BTE Concrete Formwork, LLC v. Arbaney (In re Arbaney), 345 B.R. 293, 310 (Bankr. D. Colo. 2006). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500659/ | OPINION & ORDER
Brian K. Tester, U.S. Bankruptcy Judge
Before the court is Co-Defendant Moto-rambar, Incorporated’s Summary Judgment Motion (hereinafter “Motorambar”) [Dkt. No. 66]; PlaintiffiDebtor Shylene Marie Cox Santiago’s Reply to Motion for Summary Judgment DKT 68 (hereinafter “Cox Santiago”) [Dkt. No. 80]; Motoram-bar’s Tendered Reply to Opposition to Summary Judgment Motion [Dkt. No. 84] and Co-Defendant Scotiabank de Puerto Rico’s Motion to Submit Position as to Co-Defendant’s Summary Judgment Motion, Plaintiff’s Opposition, and Co-Defendant’s Reply (hereinafter “Scotiabank) [Dkt. No. 106].
Factual Background
The court determines that the following facts are not in dispute:
1. On July 2, 2010, Cox Santiago and Motorambar signed a purchase order for a new 2010 Infinity FX35 (“Infinity”)1 bearing 'vehicle identification number JNBAS1MUX- ' AM801891.
2. At the time, Cox Santiago owned a 2007 BMW X 5 with 83,251 miles.
3. The BMW had been financed by First Bank and the outstanding *125lease balance was $37,856, with monthly lease payments of $1,281.
4. The BMW’s trade-in value was $27,000, approximately.
5. At Cox Santiago’s request, Motoram-bar agreed to take the BMW as a trade-in and to cancel the debt owed to First Bank.
6. The $10,856 difference between the BMW’s $27,000 trade-in value and the $37,856 owed on the lease were rolled-over onto the new lease that Cox Santiago took out to finance the Infinity.
7. On July 2, 2010, Cox Santiago and Motorambar executed a Retail Installment Sales Contract (“Contract”) with financing to be provided by Scotiabank.
8. In total, Cox Santiago’s Contract for the Infinity amounted to $68,750, payable in seven years, through equal monthly installments of $1,092.63. The annual interest rate was 8.45%.
9. The Contract stated that Motoram-bar would assign its rights to Scotia-bank, and it delineated in plain language the terms of the assignment in a section captioned ‘CONDITIONS OF THE ASSIGNMENT.’ Motorambar rubberstamped the signature space of the assignment section of the Contract with a black-ink stamp that read as follows: ‘Moto-rambar, Inc. PO Box 366239, San Juan, PR00920-6239.’ Cox Santiago and a sales executive from Motoram-bar signed the Contract in a space immediately below the assignment section bearing Motorambar’s rub-berstamp.
10. Cox Santiago disbursed no cash in the transaction with Motorambar. Nor did she provide Motorambar with an advance payment for the purchase of the Infinity.
11. On August 12, 2014, Cox Santiago filed for chapter 13 bankruptcy protection. Bankruptcy Case No. 14-06617, Docket No. 1.
12. At the time of the filing, Cox Santiago owed $37,420 to Scotiabank for the Infinity as per proof of claim number 3-1.
Cox Santiago commenced the present adversary proceeding on July 29,2015 pursuant to 11 U.S.C. § 547, seeking to avoid a lien over a vehicle she purchased on credit in July 2, 2010. The vehicle was sold by Motorambar, who, within the same transaction, assigned all its rights and credits to Scotiabank. Although, Motoram-bar is not a creditor of Cox Santiago, it was included as a Co-defendant in this case through an Amended Complaint [Dkt. No. 23] prompted by a motion to dismiss Scotiabank filed on lack of indispensable party grounds. As to Motorambar, the Amended Complaint makes three claims: (i) that the assignment of credits is invalid, because the Contract was rubberstamped, rather than signed; (ii) that the lien over the vehicle was not perfected within the timeframe provided under 11 U.S.C. § 547, because Motorambar allegedly failed to file the necessary paperwork with the Puerto Rico Department of Transportation and Public Works; and (iii) that the Contract is invalid because it failed to disclose the amount allegedly credited in the transaction for a BMW Cox Santiago gave as trade-in.
Standard of Review: Summary Judgment
The role of summary judgment is to look behind the facade of the pleadings and assess the parties’ proof in order to determine whether a trial is required. Mulvihill v. Top-Flite Golf Co., 335 F.3d 15, 19 (1st Cir. 2003). Pursuant to Fed. R. Civ. P. *126Rule 56(c), made applicable in bankruptcy by Fed. R. Bankr. P. 7056, a summary judgment is available if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 4 (1st Cir. 2010). As to issues on which the Movant, at trial, would be compelled to carry the burden of proof, it must identify those portions of the pleadings that it believes demonstrate there is no genuine issue of material fact. In re Edgardo Ryan Rijos & Julia E. Cruz Nieves v. Banco Bilbao Vizcaya & Citibank, 263 B.R. 382, 388 (1st Cir. BAP 2001). A fact is deemed “material” if it could potentially affect the outcome of the suit. Borges, 605 F.3d at 5. Moreover, there will only be a “genuine” or “trial worthy” issue as to such a “material fact,” “if a reasonable fact-finder, examining the evidence and drawing all reasonable inferences helpful to the party resisting summary judgment, could resolve the dispute in that party’s favor.” Id. at 4. The court must view the evidence in the light most favorable to the nonmoving party. Alt. Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 26 (1st Cir. 2004).
Therefore, summary judgment is “inappropriate if inferences are necessary for the judgment and those inferences are not mandated by the record.” Rijos, 263 B.R. at 388. Although this perspective is favorable to the nonmoving party, she still must demonstrate, “through submissions of evi-dentiary quality, that a trial worthy issue persists.” Iverson v. City of Boston, 452 F.3d 94, 98 (1st Cir. 2006). Moreover, “[o]n issues where the non Movant bears the ultimate burden of proof, [she] must present definite, competent evidence to rebut the motion.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991). These showings may not rest upon “conclusory allegations, improbable inferences, and unsupported speculation.” Medina-Muñoz v. R. J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990). The evidence offered by the non-moving party “cannot be merely colorable, but must be sufficiently probative to show differing versions of fact which justify a trial.” Id.; See also Horta v. Sullivan, 4 F.3d 2, 7-8 (1st Cir. 1993) (holding that the materials attached to the motion for summary judgment must be admissible and usable at trial). “The mere existence of a scintilla of qvidence” in the nonmoving party’s favor is insufficient to defeat summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); González-Pina v. Rodriguez, 407 F.3d 425, 431 (1st Cir. 2005).
Legal Analysis
The court will take each allegation against Motorambar in turn. Cox Santiago argues that the assignment of the Contract was ineffective because it was not signed by Motorambar, the assignor, but rather a rubber stamp was placed instead of the signature, in the assignment section of the Contract. In Puerto Rico, parties to a contract “may make the agreement and establish the clauses and conditions that they deem advisable, provided they are not in contravention of law, morals or public order”. P.R. Laws Ann. tit. 31, § 3372. Contracts are perfected by mere consent, and once perfected, the contracting parties are bound, not only to fulfill the express terms of the agreement, but also to respond for any damages that may arise from a breach. P.R. Laws Ann. tit. 31, § 3376; Unisys v. Ramallo Brothers., 129 D.P.R. 13 (1991); Producciones Tommy Muñiz v. COPAN, 113 D.P.R. 517, 526-27 (1982). A valid contract need not be executed in accordance with any prescribed form; thus, “[contracts are normally bind*127ing regardless of the ‘form in which they may have been executed, provided the essential conditions required for their validity exist.’ ” Garita Hotel Ltd. Partnership v. Ponce Federal Bank, F.S.B., 954 F.Supp. 438, 452-454 (D.P.R. 1996), affirmed, by 122 F.3d 88, 89 (1st Cir.1997) (P.R. Laws Ann. tit. 31, § 3451. No formalities are necessary for an assignment contract to be valid and binding. See Celta Agencies, Inc. v. Denizcilksanayi Ve Ticaaret, A.S., 396 F.Supp.2d 106, 111 (D.P.R.2005) (“under Puerto Rico legal provisions there are no formal requirements to an assignment nor must it appear in writing- ....”) (citing, Consejo de Titulares v. C.R.U.V., 132 D.P.R. 707, 729 (1993)). And, unless otherwise stated by contract, a debtor need not approve or even be made aware of an assignment of a credit owed by him. P.R. Law Ann. tit. 31 § 3942; see also, Consejo de Titulares, 132 D.P.R. 707.
In the present ease, the evidence of record shows that Motorambar validly assigned the Contract to Scotiabank. Under Puerto Rico law, creditors such as Moto-rambar are free to assign their contractual rights at will. P.R. Law Ann. Tit. 31 § 3029; see also, Consejo de Titulares, 132 D.P.R. 707. It is well settled that no formalities must be followed for that purpose. Id. Therefore, rubberstamped or not, the assignment of the Contract to Scotiabank is on par with the applicable law. Cox Santiago’s assertions as to the differences in the location of the rubber stamps and the signatures on the Contract filed by Scotiabank with the proof of claim, and by Motorambar in their summary judgment motion are not borne out by the evidence.
Under 11 U.S.C. § 547(b) of the Bankruptcy Code, a trustee or debtor may avoid as a preference, a transfer of a debt- or’s interest in property which satisfies each of the following elements:
a) The transfer was made to or for the benefit of a creditor (11 U.S.C. § 547(b)(1));
b) The transfer was made for or on account of an antecedent debt owed by the debtor at the time the transfer was made (11 U.S.C. § 547(b)(2));
c) The transfer was made when the debtor was insolvent based on the balance sheet definition of liabilities exceeding assets (11 U.S.C. § 547(b)(3));
d) The transfer was made during the ninety day preference period in the case of transfers to non-insider creditors, and within one year of the bankruptcy filing for transfers to the debtor’s insiders, such as the debtor’s officers, directors, controlling shareholders and affiliated companies (11 U.S.C. § 547(b)(4)); and
e) The transfer enabled the creditor to receive more than the creditor would have recovered on the subject claim in a chapter 7 liquidation of the debtor (11 U.S.C. § 547(b)(5)).
Once a trustee proves the statutory elements of 11 U.S.C. § 547(b), the burden shifts to the creditor defending a preference claim to prove one or more of the affirmative defenses contained in 11 U.S.C. § 547(c) to reduce or completely eliminate its preference exposure. Whether a transfer is made within the preferential period is a threshold inquiry for the application of Section 547. See, e.g., In re Chancellor, 20 B.R. 316, 318 (Bankr. W.D. Ky. 1982). In this case, the evidence provided demonstrates that the lien over Cox Santiago’s Infinity was perfected several years before the preferential period. The court fails to see the applicability of Section 547 to the facts of this case.
Plaintiffs last allegation, citing the Truth in Lending Act 15 U.S.C. §§ 1601 et. seq., states that the Contract is invalid because it fails to disclose the amount *128credited in the transaction for a BMW Cox Santiago gave as trade-in. The Contract briefly describes the BMW automobile as required by law. Motorambar, in its motion and supporting documentation, asserts that the BMW vehicle had a balance owing which debt was rolled into the new loan with Scotiabank. Therefore the Contract properly lists the BMW vehicle, but provides no amount in credit, since none was given.
The court will address one last matter with regards to Co-defendant Scotiabank. The court determines that the documents provided by the parties, specifically the Certificate of Ownership issued by the Puerto Rico Department of Transportation (“Title”) shows that the vehicle was registered on July 2, 2010. The date of August 11, 2011, which is frequently cited by Cox Santiago as the date the lien was perfected, refers to the date the Title was issued. There is no evidence to show that, the date of August 11, 2011 has any other significance.
Conclusion
Therefore, for the reasons stated Co-Defendant Motorambar, Incorporated’s Summary Judgment Motion [Dkt. No. 66] is GRANTED. Moreover, the court takes into consideration Scotiabank de Puerto Rico’s Motion to Submit Position as to Co-Defendant’s Summary Judgment Motion, Plaintiffs Opposition, and Co-Defendant’s Reply [Dkt. No. 106] and GRANTS Scotiabank summary judgment on all allegations in the Complaint and the Amended Complaint.
SO ORDERED | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500887/ | ORDER OF JUDGMENT
Thomas P. Agresti, Judge United States Bankruptcy Court
AND NOW, this 22nd day of August, 2017, for the reasons stated in the Memorandum Opinion filed this date at Doc. No. 77, it ⅛ ORDERED, ADJUDGED and DECREED that,
(1) The Motion for Summary Judgment filed by the Trustee is GRANTED.
(2) The Motion for Summary Judgment filed by the United States of America is DENIED.
(3) Judgment is entered in favor of the Trustee and against Community Chevrolet, Inc. in the amount of $100,000.
(4) Proof of Claim 1-1 filed by Community Chevrolet, Inc. is DISALLOWED effective September 21, 2017, unless prior to that date it satisfies the judgment entered by Paragraph 3, such disallowance being without prejudice to reconsideration if said judgment is satisfied on a date thereafter but prior to the closure of the case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500888/ | ORDER
Thomas P. Agresti, Judge, United States Bankruptcy Court
AND NOW, this 22nd day of August, 2017, for the reasons set forth in the Memorandum Opinion filed this date at Doc. No. 88. it is ORDERED, ADJUDGED and DECREED that,
(1) The Expedited Motion to Dismiss Chapter 11 Bankruptcy Petition (“Motion”) filed by Citizens and Northern Bank at Doc. No. 17 is GRANTED, and the case is DISMISSED effective September 6, 2017.
*614(2) If on or before September 5, 2017, the Debtor files a motion for reconsideration that calls into question the “fitness” of Shaner Holding Company to serve as the Receiver of the Debtor by reason of bias, dereliction of duty, or some other ground that creates an improper impediment to the Debtor’s ability to access the Bankruptcy Court as described in the above referenced Memorandum Opinion, the Court may further delay the effectiveness of the dismissal and schedule an evidentia-ry hearing limited to the issues raised in such motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500894/ | MEMORANDUM OPINION
TONY M. DAVIS, UNITED STATES BANKRUPTCY JUDGE
Did Neal Richards Group, LLC (“NRG”), the managing member of the general partner of the Debtor, make a “substantial contribution” to this bankruptcy case and, if so, can it collect $2,875 million?
I. BACKGROUND AND FACTS
A. The parties.
The Debtor, a Texas limited partnership, owned a short-term acute care hospital and medical office building, together with a 445 stall adjacent parking garage (collectively, the “Property”) and various pieces of personal property.1 The Property was advertised as “one of the most desirable locations in Texas.”2
Neal Richards Development Group Austin Development, LLC (“General Partner”) is the general partner of the Debtor,3 and paid $100 for its general partnership interest.4 NRG, the party seeking the substantial contribution award, did not produce copies of the operating and other organizational governance documents showing the connections between and duties of NRG, the General Partner, and the managers and members of those entities, even though CH Realty sought those documents in discovery.5 The General Partner also has five managers: (1) Todd Furniss; (2) Dr. David Genecov; (3) Dr. Robert Wyatt; (4) Dr. Wade Barker; and (5) Mary Hatch-er.6
*681The managing member of the General Partner is NRG.7 NRG is also is a creditor of the Debtor.8
One of NRG’s managers, Mr. Furniss, is the founder, CEO, and managing partner of glendonTodd, a private equity fund.9 Mr. Furniss is also the acting CEO of NRG.10 He took over as the acting CEO of NRG in May of 2015 amidst allegations of fraud and mismanagement by NRG’s prior CEO, Derrick Evers.11
The Debtor has eighty limited partners.12 Twenty-four of the eighty limited partners, including CH Realty, filed objections to NRG’s application for a substantial contribution award.13 CH Realty invested $13.5 million—the largest of any limited partner—in December 2013 in exchange for 45% ownership of the Debtor.14 The total amount of equity capital raised by the Debtor was $30 million.15
The Debtor used this $30 million in capital, together with $57.5 million borrowed from Frost Bank, to develop the Property.16 The Debtor obtained certificates of occupancy, but unpaid contractor bills, together with an impending foreclosure threat from Frost Bank, led the Debtor to file this bankruptcy case on January 5, 2016 (the “Petition Date”).17
B. NRG contracts with glendonTodd.
Two somewhat different stories were told about NRG’s retention of glendon-Todd. According to Mr. Furniss, NRG was financially distressed at the time he took over as CEO, which happened about eight months prior to the Petition Date.18 Contractors were not being paid and liens were being placed on the Property.19 Furthermore, the General Partner had insufficient operating capital to pay employees.20 In the face of these uninviting financial prospects, according to Mr. Furniss, NRG contracted with glendonTodd to provide consulting services.21 NRG and glendon-Todd also discussed paying additional compensation to glendonTodd for selling the Property, but this was never a certainty and no formal written agreement was signed.22 NRG and glendonTodd also entered into a consulting agreement whereby *682NRG agreed to pay glendonTodd a monthly fee of $125,000 per month in exchange for its services in connection with not just the Property, but also its involvement in other facilities and properties owned' by NRG in Texas.23 Mr. Furniss further testified that for most months, however, NRG either failed to pay that consulting fee to glendonTodd or only paid a portion of it.24 According to Mr. Furniss, NRG’s failure to pay these consulting fees resulted in glen-donTodd’s inability to pay or retain employees, or finance glendonTodd’s obligations.25
A somewhat different take on the retention of glendonTodd was offered by Carlos Rainwater, who has overall responsibility for the office and land investment activities of CH Realty, the Debtor’s biggest limited partner. According to Mr. Rainwater, when CH Realty made its investment, it specifically negotiated a supplemental rights agreement that, among other things, prevented NRG’s CEO, Mr. Evers, from being removed from control of NRG without CH Realty’s consent.26 CH Realty wanted Mr. Evers involved because it understood that Mr. Evers was a real estate professional.27 But Mr. Evers was placed on administrative leave—without CH Realty’s consent—-when NRG appointed Mr. Furniss as the interim CEO of NRG.28 NRG retained glendonTodd at the same time.29
CH Realty was not happy with the removal of Mr. Evers, expressed its disapproval in writing, but elected to deal with Mr. Furniss under a reservation of rights.30 Mr. Rainwater generally agreed that the Debtor encountered financial difficulties, but placed at least some blame on the fact that the tenant, yet another NRG entity, failed to pay rent.31
What seems clear from the emails, the testimony,32 and the chronology of events is that (i) Mr. Furniss was discharging the duties of the debtor in possession in this case; (ii) everyone believed he was in control of the Debtor; and (iii) he was in fact in control of the Debtor, notwithstanding that the General Partner had four other managers.
C. The Limited Partnership Agreement.
The Debtor is governed by a limited partnership agreement (the “Limited Partnership Agreement”) dated April 3, 2012.33 The Limited Partnership Agreement provides for payment to the General Partner for various activities, and specifically disclaims any limits on the activities of the Debtor’s affiliates.34 The Limited Partnership Agreement does not allow or prohibit payment to a creditor such as NRG for expenses incurred in substantially benefit-ting the Debtor’s estate in connection with a bankruptcy.35 In fact, the Limited Part*683nership Agreement does not explicitly address the present circumstance.36
On the other hand, the Limited Partnership Agreement allows the General Partner to recover a “development fee of five percent (5%) of the total hard and soft costs for the development of the Property, an annual asset management fee of two percent (2%) of the aggregate capital contributions of the • limited partners under management each year, and forty percent (40%) of all distributions made after the limited partners receive distributions equal to one hundred percent (100%) of their original investment plus a nine percent (9%) ‘preferred return,’”37 According to Mr. Rainwater, the “waterfall” that contains these fees and the 40% split is a standard structure within the real estate industry, and is set up to incent the General Partner to perform well.38 In particular, the 40% split is designed to compensate the General Partner for extraordinary success, and according to Mr. Rainwater, 40% is at the upper end of a market where 20% is more typical.39
D. Pre-petition offers for the Property fail.
Before the Petition Date, the Property did not have a paying tenant and was not generating any revenue, thus complicating any potential sale of the Property.40 Accordingly, the limited partners, including CH Realty, were concerned about whether they would be able to recoup their investments.41 Indeed, CH Realty described the circumstances as “clearly a distressed situation” and had expressed “a strong desire to divest itself of the Property.”42 According to Mr. Furniss, “There was a very real chance that the investors would not recoup their investments.”43
Four months prior to the Petition Date, the Debtor entered into a non-binding letter of intent to sell the Property for $95 million with MedEquities Realty Trust, Inc., in association with Surgical Development Partners, LLC (collectively, “Me-dEquities”), which was approximately what the Debtor had spent on the Property.44 CH Realty expressed a desire to close the deal for $95 million because the lender was in a position to foreclose.45 This would have resulted in a meager return for the limited partners.46 Yet, CH Realty thought that to get out at cost, with the many difficulties associated with the Property at that time, would be acceptable and in line with the value that CH Realty then plaeed on the Property.47 Regardless, MedEqui*684ties defaulted on the deal later in 2015 and the sale to MedEquities never closed.48
Just before the Petition Date, the Debt- or received a letter of intent from Mayco Development, LLC (“Mayco”) for $104 million.49 However, after meeting with Mayco, both Mr. Furniss and CH Realty believed that Mayco was not a “real” buyer, and unlikely to purchase the Property because Mayco’s interest was contingent upon a credit-worthy, operating tenant occupying the Property.50
E. The Debtor files this bankruptcy case.
On the Petition Date of January 5, 2016, the Debtor filed for relief under chapter 11 of the Bankruptcy Code.51 A few weeks later, the Debtor filed an application to employ Ray Battaglia as bankruptcy counsel,52 but the Debtor never filed an application to employ Mr. Furniss or glendon-Todd as managers under section 327 of the Bankruptcy Code. The Debtor did file applications and obtained authority to employ two real estate brokers; CBRE Inc. and KOA Partners, LLC.53 The Debtor also sought and obtained approval to retain Ereader Mitchell, PLLC as special real estate counsel to assist the Debtor with the sale to the eventual buyer.54
F. Mr. Furniss pursues offers for the Property.
Immediately after the Petition Date, Mr. Furniss began contacting and soliciting offers from entities that might be interested in purchasing the Property.55 In February 2016, Mr. Furniss contacted the Vice President of Development for Hospital Corporation of America (“HCA”), Jeffrey Stone, to persuade him to consider buying the Property.56 Because HCA believed that Mr, Furniss was the decision-maker for the Debtor, HCA negotiated with Mr. Fur-niss directly in order to see if they could reach a deal.57 Between February and May 2016, Mr. Furniss was on multiple telephone calls each week with HCA, and exchanged hundreds of emails with HCA concerning the Property and the deal itself.58 He testified that he was available on nights, evenings, and weekends to answer questions, and when questions arose, HCA would contact Mr. Furniss to get a direct answer.59 Mr. Furniss’s calendar reflects eight separate meetings with HCA and Mr. Furniss claimed that there were *685countless other conferences and calls that he did not put on his calendar.60 Mr. Fur-niss also served as the point of contact for other prospective purchasers, even after brokers became involved.61
Meanwhile, in early March, another FPMC property in San Antonio was foreclosed upon, and its equity investors lost their entire investment as a result.62 CH Realty acknowledged the possibility that its investment in the Austin Property could have been lost in the same manner.63
By mid-March 2016, Mr. Furniss had obtained the following offers for the Property:
Mayco $101.5 million64
HCA $60 million65
Winstead/S eton $90 million66
Mr. Furniss was concerned, however, that neither Mayco nor Winstead/Seton would actually close the sale.67 The only offer of the three that seemed genuine to Mr. Fur-niss was the $60 million offer from HCA— a sale price that would have left numerous constituencies unpaid.68
G. Mr. Furniss persuades HCA to increase offer to $100 million.
Accordingly, Mr. Furniss continued his discussions with HCA to convince them to make another offer on the Property.69 During a telephone call with HCA, he “emphasized the virtues of the Property, its location, the contiguous land, and the chance to take advantage of this strategic opportunity in a growing market.”70 The real estate brokers employed by the Debtors were not on this telephone call between Mr. Furniss' and HCA.71
On March 29, 2016, following this telephone call, HCA submitted a revised offer for $100 million.72 Mr. Stone acknowledged that “Mr. Furniss had a clear hand in causing HCA’s offer to increase from $60 [million] to $100 [million].”73 That same day, CBRE told HCA that the Debtor had selected HCA’s offer to purchase the Property for $100 million.74
Then, just two days later, the Debtor received a revised offer from Winstead/Se-ton for $105 million.75 But Mr. Furniss was *686concerned that this increased offer was not legitimate.76
H. A point of inflection: whether to have an auction at the risk of losing HCA’s offer.
At this point, the Debtor, Mr. Furniss, and his team at glendonTodd were faced with the difficult decision of whether to move forward with HCA at $100 million and potentially leave a higher bid on the table, or to re-open the bidding process and risk having HCA leave the process altogether.77
Mr. Furniss believes that, had HCA dropped out of the bidding, the Debtor would have been “lucky to get $70,75 million,” and the limited partners “would have lost virtually everything.”78 Fearful of the result of losing their entire investment, some of the limited partners threatened to harm Mr. Furniss physically and professionally if the Debtor did not move forward with HCA’s $100 million offer.79 Other limited partners characterized the potential of HCA walking away as a financial and professional “tragedy” and encouraged the Debtor to close the sale at $100 million.80 On the other hand, Mr. Rainwater, who—unlike the physician limited partners81—was experienced in real estate sale negotiations, believed that the $100 million HCA offer should not be accepted while a $105 million offer was on the table.82
I. Mr. Furniss convinces HCA to continue negotiating despite rejection of offer.
Mr. Furniss believed that he would be able to inform HCA that the Debtor would not be moving forward with the $100 million offer and still keep HCA at the negotiating table.83 Indeed, Mr. Stone acknowledged that Mr. Furniss’s professionalism and credibility throughout the sale process was a positive factor in their negotiations.84 Mr. Stone characterized Mr. Furniss as the “focal point for all things related to the [FPMC] projects,” that Mr. Furniss used “straight up conversation [and] direct dealings,” and that Mr. Furniss was efficient in conducting negotiations.85
Mr. Furniss “ultimately explained to HCA that the Property would not be sold” for $100 million, and “that an auction process would be engaged in order to maximize the purchase price for all creditors and limited partners.”86 Mr. Stone testified *687that HCA was unsure whether they would continue to engage in negotiations after HCA was told that its $100 million offer was no longer sufficient, but that Mr. Fur-niss persuaded HCA to stay in the negotiations.87 While HCA was not happy, Mr. Furniss’s positive relationship and professionalism with HCA “allowed the process to continue in an efficient, meaningful, and deliberate manner.”88 Of course, as Mr. Rainwater testified, prospective purchasers will often complain when faced with the threat of an auction.89
J. HCA increases offer to $115 million, but only if the Debtor agrees to take the property off the market.
On April 6, 2016, HCA advised that it was willing to engage in an auction process on certain conditions.90 Mr. Fumiss and his team at glendonTodd organized a meeting with HCA (without any brokers) on April 21, 2016, where the parties discussed transaction logistics, concerns, and questions.91 At the meeting, Mr. Furniss sought to negotiate a sales price of $115 million for HCA’s purchase of the property.92 HCA agreed to this price, but only if the Debtor agreed to take the Property off the market.93
Between April 21, 2016 and May 4, 2016, Mr. Furniss negotiated a purchase and sale agreement, obtained necessary consents, communicated- with creditors, and communicated with the owners of the General Partner and limited partners to close the deal with HCA.94 Mr. Stone testified that Mr. Furniss was instrumental in helping HCA increase its offer to $115 million.95 CH Realty consented to the sale to HCA for $115 million on May 4, 2016.96
K. The parties provide conflicting testimony regarding the complexity of the sale.
Mr. Stone testified that he had experience with more than 20 transactions involving the purchase and sale of hospital facilities, and that he generally considered them complex transactions.97 Then he-suggested that this transaction was no more complex than an ordinary real estate transaction because the facility was not yet operating.98 But he later agreed, in response to leading questions, that this sale was complex because there were multiple bidders, a bankruptcy, and the price was over $100 million.99 Mr. Fumiss described the transaction as “complex,” and that the bankruptcy “further complicated” the transaction.100 He also stated that the narrow .use of the property narrowed the number of potential purchasers, but he did not explain how fewer buyers would complicate the transaction.101 Mr. Rainwater, on the other hand, testified consistently with Mr. Stone’s initial testimony by stat*688ing that selling a vacant building is not complicated.102
L. The sale to HCA is approved.
On May 10, 2016, the Debtor filed a motion to sell the Property to HCA for $115 million.103 It is unusual to sell property in bankruptcy cases without an auction when there are multiple interested bidders, simply because an auction is usually the best way to encourage those bidders to increase the ultimate purchase price.104 Recently, an auction conducted in bankruptcy court for a limited partnership interest drew bids that more than doubled the starting bid.105 In fact, after receipt of the HCA $115 million offer, the Debtor received notice of an intent by another bidder to make a higher offer.106 Even after being informed about the possibility of a higher offer, the limited partners nonetheless approved the HCA sale.107 Since the creditors were being paid in full, and the Debtor’s owners approved the transaction in accordance with the Debtor’s governance structure, the motion to sell the property to HCA was approved on May 17, ,2016.108
M. The deal was praised by brokers and limited partners.
Harry Lake—the CEO of one of the brokers retained by the Debtor and holder of a small limited partnership interest in the Debtor—described the efforts of the glendonTodd team as an “amazing accomplishment.”109 He further described the efforts by Mr. Furniss and Ms. Hatcher by stating, “you two are machines and your leadership on this was amazing.”110 In a subsequent email, Mr. Lake characterized the efforts of the glendonTodd team as “heroic” and stated that ,“[t]he investors are going to be very excited once [the sale] is official.”111 On May 18,2016, a representative from CH Realty described the closing as “outstanding” and congratulated Mr. Furniss.112
On the other hand, it is quite customary to exchange laudatory and congratulatory messages after a successful closing.
Mr. Stone testified that there was no one more important to the sale process than Mr. Furniss,113 and that without Mr. Furniss’s involvement, a deal may have never been reached for the Property.114 Mr. Stone agreed that Mr. Furniss had a *689diverse knowledge base relating to the Property, the sale, and the structure, that Mr. Furniss was available on nights and weekends, and that Mr. Furniss was a formidable negotiator.115 As stated above, Mr. Stone described Mr. Furniss as the “focal point” for all things relating to the Property.116 During the negotiation period, Mr. Stone acknowledged that he would have routine calls with Mr. Furniss (sometimes multiple calls each day), and that those calls were more often with only Mr. Furniss, and did not include brokers or attorneys.117 Indeed, Mr. Stone characterized the number of discussions he had with CBRE as “a handful,” had never heard of KOA, and did not remember ever speaking to KOA.118
On the other hand, when asked to agree with the praise in favor of Mr. Furniss offered by Mr. Lake,' Mr. Stone said this: “I believe he was consistent and supportive of the process, and instrumental to getting the transaction done. Whether he had all of these other superlatives, I don’t know.”119 Mr. Stone’s deposition statements indicate that he perceived that Mr. Furniss worked in a professional manner,120 and was a very good negotiator,121 but that the efforts invested by Mr. Fur-niss were typical of what would be expected by someone in Mr. Furniss’s position.122
N. Evaluations of the sale.
In this case, 100% of secured creditors have been paid in full, 100% of unsecured creditors have been paid in full, 100% of the equity owners received a full return on their investment, and the equity holders will receive approximately 1.47 times the money they invested in less than three years (even after accounting for NRG’s substantial contribution expenses).123
As proof of benefit, NRG points out that the ultimate purchase price of $115 million is $20 million higher than the $95 million offer identified in the September 2015 letter of intent with MedEquities.124 If the MedEquities offer had been accepted, “the limited partners would have received almost no return on their investment.”125 Specifically, argues NRG, CH Realty would have received a total of $18,880,863 for their investment of $13.5 million.126 However, with the sale price of $115 million, CH Realty will receive approximately $19,838,405.127 The other limited partners will likewise benefit from the higher sale price for the Property.128 This result is also better than the result in In re FPMC San Antonio Realty Partners129 case, where the property was foreclosed upon and there was little, if any, recovery for the unsecured creditors and no recovery for the equity holders.130
*690On the other hand, Mr. Rainwater testified that when CH Realty made the initial investment, it expected to achieve a return of 2.8 to 3 times its investment, instead of the 1.47 times investment actually achieved.131 He further testified that he believes NRG might have achieved a better return if Mr. Fumiss had removed the NRG affiliate that was not paying rent, installed a paying tenant, and then held the Property for a few years before selling it.132 And he testified that the. 1.4 times investment achieved was an average result when compared with the results achieved by the other 59 properties held by the more than $3 billion fund of which the CH Realty’s investment in the Debtor was a part.133
If the Application is not granted, the $2,875 million will be paid to the limited partners and the General Partner under the last tranche of the Limited Partnership Agreement waterfall.134 The limited partners’ portion of the $2,875 million would be $1,725 million and CH Realty’s portion of that (45%) would be $776,250.135
If the Application is granted, the limited partners will not receive the amounts they would have otherwise received under the Limited Partnership Agreement.136 The General Partner has already received approximately $4 million in pre-petition fees and approximately another $4 million in post-petition distributions.137
O. Documenting NRG’s “expense.”
On June 29, 2016, glendonTodd submitted an invoice to NRG totaling $2.875 million for “Services Rendered Per Agreement” (the “Invoice”).138 No other description or itemization of those services is included in the Invoice. Mr. Fur-niss has not calculated how many hours he spent in connection with the services referenced in the Invoice.139 The agreement refers to two written consents executed by NRG’s owners in June 2016 purporting to affirm earlier “written and verbal agreements.”140 There are no earlier written agreements.141 The consents were prepared by in-house counsel for glendonTodd after the sale of the Property in this case and the sale of two other FPMC properties (one in Fort Worth and one in Dallas).142 The consents “authorize” Mr. Furniss to file substantial contribution claims for $5 million in “expenses” and assign certain arbitrary percentages based on the sale prices of the three assets to achieve that total.143 The percentage assigned to the Austin Property was 2.5% of the sales price, which equals $2.875 million.144 Mr. Furniss testified that if the substantial contribution claims recover less than the amounts authorized *691in the consents, NRG will look to the General Partner for the difference.145
On July 26, 2016, NRG filed the Application, attaching the $2.875 million invoice and a declaration by Mr. Furniss in support.146 Mr. Furniss never asked the limited partners for their consent to file the Application even though he had multiple opportunities to do so during the numerous investor calls he organized and led from January 2016 until the sale.147 Further, Mr. Furniss did not even notify all the limited partners of the filing of the Application.148 The first conversation that the Debtor’s counsel had with anyone about the Application was with Arthur Stewart, an in-house lawyer with glendon-Todd, after the sale.149
II. ANALYSIS
A. Bankruptcy courts have broad discretion in ruling on substantial contribution requests.
CH Realty and NRG have both argued that the seven-factor test promulgated in In re Mirant Corporation150 should govern whether granting a substantial contribution claim is appropriate. Unsurprisingly, they reach opposite conclusions about the result compelled by application of the seven factors, likely because the seven factors were drawn from cases with facts very different from the facts of this case.
Here, a substantial contribution award is sought for activities engaged in by the person responsible for discharging the duties of the debtor in possession. In most of the published cases, someone who is not a case fiduciary seeks a substantial contribution award for engaging in activities that benefited the case.151 The Fifth Circuit has recognized that the policy aim of this provision is to incent parties to participate in the reorganization process,152 and case fiduciaries should need no extra incentives to fulfill their fiduciary duties.
But a safer place to start, before getting to multi-factor tests or policy, is with the language of the statute and Fifth Circuit cases interpreting the statute. The statute provides that a creditor, indenture trustee, or an equity security holder that has made a “substantial contribution” to a chapter 11 case can recover its “actual, necessary expenses.”153 It cannot be disputed that NRG is a creditor of the Debtor.154 What is in dispute is whether the fee sought by NRG in order to pay glendonTodd was an “actual, necessary” expense and whether a “substantial contribution” has been made.
*692The Fifth Circuit has ruled twice on this statutory provision in published cases.155 In In re Consolidated Bancshares, a group of shareholders sought a substantial contribution award, to recover for attorney fees they incurred, for their pursuit of a derivative action, and their activities in connection with confirmation.156 The Fifth Circuit stated that “[t]he question of substantial contribution is one of fact.”157 The Fifth Circuit also noted that bankruptcy courts have broad discretion in determining attorney fee awards.158 The Fifth Circuit went on to rule that the bankruptcy court did not abuse its discretion in ascribing a “minimal” value to the .derivative suit, and in finding that the actions of the group in connection with the confirmation proceedings were duplicative of the efforts of the official equity security committee.159
The Fifth Circuit’s second published case, In re DP Partners, affirmed that bankruptcy courts have broad discretion in ruling on substantial contribution requests.160 The Fifth Circuit went on to suggest that, in exercising that discretion, bankruptcy courts should (i) measure whether the contribution is “considerable in amount, value, or worth,”161 and (ii) “weigh the cost of the claimed fees and expenses against the benefits conferred upon the estate.”162
And although the word “contribution” would seem to suggest a focus on result as opposed to effort, this court arid others have stated that substantial contribution awards should not be made for services that are merely “routine” or “expected.”163 In In re American Plumbing and Mechanical, Inc., the court found that the activities of the lawyers representing the company’s founders in negotiating key reorganization documents were not a substantial contribution, because “negotiating is an expected and routine activity in Chapter 11 cases[.]”164
B. NRG did not carry its burden of showing that the contribution was “substantial.”
That NRG had the burden is not in doubt.165 The parties appropriately provided evidence both on what glendonTodd did, as well as on what resulted from those *693activities. In measuring whether the activities undertaken by glendonTodd in general, and Mr. Furniss in particular, rose above the expected or routine, the standard to apply is not the standard applicable to an interested creditor or indenture trustee, the more typical substantial contribution applicants. Rather, the standard must be that applicable to a fiduciary, and this is an exacting standard.166 At a minimum, when faced with the potential of a motion to lift stay by Frost Bank, Mr. Furniss should have attempted to pursue a prompt sale at the best price available.
Mr. Stone spoke some to the efforts engaged in by Mr. Furniss, but this testimony came in by deposition excerpt, and was mixed. For the most part Mr. Stone affirmed that Mr. Furniss was the point of contact for the Debtor, and that he worked diligently and professionally.167 However, he also testified that Mr. Furniss’s efforts were neither extraordinary nor unusual.168 'Mr. Furniss testified that he did more than the brokers in that he “identified potential purchasers... brought them into conversations; [glendonTodd] did 100% of the negotiation; we managed the process; we negotiated the purchase agreements and closed the transaction.”169 There is no doubt that Mr.- Furniss engaged in these activities, and did so proficiently. But these are all steps that are routine and expected when pursuing and closing a sale.
Mr. Furniss testified that: “the General Partner could have met its fiduciary obligations without seeking out purchasers and without taking the lead role in negotiations.”170 It is potentially troubling, and certainly disappointing, that someone in the role of a fiduciary who has knowledge and ability to contribute, would consider not doing so. But Mr. Furniss is probably right; he could have let the brokers and the attorney handle the transaction and simply made decisions based on their advice without breaching his fiduciary duty. (Though it’s hard to see how glendonTodd could then justify its $125,000 per month fee.)171
*694But there is another reason more was expected of the General Partner. Chapter 11 abhors a leadership vacuum. A passive, unengaged General Partner here, with an impatient Frost Bank ready to seek stay relief and foreclose, and • a vigilant CH Realty looking over the General Partner’s shoulder, would likely have faced a motion to appoint a trustee or examiner, which would likely have been granted.172
There was a harmony between Mr. Stone’s opinion that Mr. Furniss’s actions were neither extraordinary nor unusual,173 and Mr. Rainwater’s opinion that the sale was not complicated.174 Moreover, both had demonstrable experience in real estate transactions.175 These two opinions compel the conclusion that Mr. Furniss’s activities were, like those of the founders’ lawyers in In re American Plumbing and Mechanical, Inc.,176 no more than would have been expected of someone engaged to fulfill the duties of a general partner charged with selling the assets of the partnership.
In assessing the results of the sale, to see if the contribution was “considerable in amount, value, or worth,”177 the laudatory emails are not persuasive; they are often sent around when a deal closes, and mostly as a , matter of professional courtesy. Ultimately, the test of whether the contribution, or the result achieved, was substantial comes down to the credibility of Mr. Furniss and Mr. Rainwater. Both were intelligent, articulate, poised on the stand, and professional in demeanor, and both were precise, direct, and credible in responding to questions about facts and documents. Mr. Furniss views his contribution as substantial because he was able to raise the purchase price from $95 million to $115 million. But this is why assets are put out for bid; to allow bidders to compete against one another and thereby increase the ultimate selling price. Also, as Mr. Furniss' acknowledged, offers are not evidence of value.178 The only evidence of value adduced at the hearing was the purchase price of $115 million.179
*695Moreover, it is hard to assess the value of the high opinion held by Mr. Furniss concerning the results of his efforts. The record is practically void of any mention of the qualifications or experience possessed by Mr. Furniss. According to the proffer submitted by Mr. Furniss, “GlendonTodd is a private equity fund whose owners and operating partners have a differentiating competence of substantial operational skills in restructuring and operations across a range of industries.”180 But this tells us nothing about Mr. Furniss’s specific experience with selling real estate inside or outside bankruptcy cases.181 Mr. Stone did testify that Mr. Furniss had experience in transactions of this type, and that he knew about the Austin property, but did not point to any specific transactions that Mr. Furniss worked on.182
In contrast, Mr. Rainwater’s real estate background and experience is substantial. He has worked in real estate for 28 years.183 The $3 billion fund that made this particular investment, one of sixty made by the fund, is only one of seven funds managed by Mr. Rainwater’s real estate firm.184 He has been involved with hundreds of real estate transactions.185 And while none of those involved a bankruptcy,186 the decision by NRG to take the HCA bid and forgo the auction took this transaction largely outside the typical bankruptcy sale process.
Although Mr. Rainwater was not objecting to the sale to HCA—indeed, he consented to the sale for CH Realty—his overall opinion was that the sale was at best average, and even somewhat disappointing from the standpoint of what CH Realty was hoping for at the start of the investment.187
Because Mr. Rainwater has demonstrably greater experience with real estate transactions, his testimony about the contribution made by glendonTodd is more probative than the testimony of Mr. Fur-niss; NRG therefore did not carry its burden of establishing that the contribution was substantial, and certainly did not prove that the cost of the fee—$2.875 million—outweighed the benefit of selling the Property at market value.
C. The fee sought here is neither “actual” nor “necessary.”
The limited partners who filed objections to the Application also argue that the expense of the fee sought by the application does not satisfy the statute’s “actual, necessary” requirement.188 As they note, NRG took the position that Mr. Furniss, glendonTodd and NRG did not act with the intent to be paid for their services.189 If *696they did not act with the intent to be paid, then there could not have been a preexisting agreement by NRG to pay glen-donTodd, which means the payment by NRG of the glendonTodd invoice is not “necessary.” Further, the “agreement” referenced in the invoice are the two consents signed by NRG after the sale.190 There was no agreement in place prior to the sale.191 That being the case, the “expense” represented by the invoice was not “actually” incurred in order to get Mr. Furniss to take the actions necessary to complete the sale. Indeed, Mr. Furniss himself, and NRG’s opening brief, both affirm that Mr. Furniss attempted to get the best price possible without a guarantee of payment from NRG.192
In contrast, the monthly fee NRG previously contracted to pay to glendonTodd was an “actual, necessary” expense, and could have been the basis for a substantial contribution award. But NRG did not include a request for reimbursement of this monthly fee in its substantial contribution claim.193
III. CONCLUSION
For the foregoing reasons, the Application will be denied by separate order.194
. Furniss Proffer 4:10, ECF 222. Citations to documents filed in the electronic case filing ("ECF”) system will refer to the page number stamped at the top of the document.
. Ex. 113 at 8. Citations to trial exhibits will refer to the page number stamped on the . bottom of the document by the parties.
. Ex. 58 at 32.
. Ex. 1 at 12.
. Hr’g Tr. 8:3-9:9, ECF 244.
. The Debtor’s Statement of Financial Affairs says these five people are "managers” of the Debtor. Ex. 58 at 32. But this is likely wrong, as the Debtor is a limited partnership^ not an LLC. See Ex. 1 at 19 (The General Partner has the "exclusive right and power” to manage Partnership’s affairs). Due to NRG's failure to produce, the inference will be made that these five individuals were managers of the General Partner, which seems more likely.
. According to the Debtor’s Schedules, Ex. 58 at 26-27. The proffer made by Mr. Furniss is cagey about this. It says that "NRG is a manager of [the General Partner]” and that "The General Partner has a number of other members other than NRG.” Furniss Proffer 3:7, ECF 222. But are the other members also managers? More precision about these relationships could not be gleaned because of NRG’s failure to produce. Based on this failure to produce, and the reference in the Debt- or’s schedules, the adverse inference will be made that NRG is the managing member of the Debtor’s General Partner.
. Ex. 57 at 5; Ex. 58 at 15; Ex. 126 (support for NRG’s claim).
. Furniss Proffer 2:5, ECF 222.
. Furniss Proffer 3:7, ECF 222.
. Hr’g Tr. 97:8-98:2, ECF 244.
. Furniss Proffer 3:9, ECF 222.
. Furniss Proffer 3:9, ECF 222; CH Realty Obj., ECF 212; Limited Partners Obj., ECF 211.
. Rainwater Proffer 4:8-10, ECF 224; Fur-niss Proffer 4:11, ECF 222.
. Rainwater Proffer 4:9, ECF 224.
. Hr’g Tr. 65:18-24, ECF 244; Ex. 58 at 9.
. Ex. 63 at 2-3.
. Furniss Proffer 4:13, ECF 222.
. Furniss Proffer 4:13, ECF 222; Hr’g Tr. 98:3-11, ECF 244.
. Furniss Proffer 4:14, ECF 222; Hr’g Tr. 98:19-22, ECF 244.
. Furniss Proffer 5:15, ECF 222; Hr’g Tr. 111:19-112:14, ECF 244 (Furniss's testimony regarding the consulting agreement between NRG and glendonTodd).
. Furniss Proffer 5:15, ECF 222.
. Furniss Proffer 5:15, ECF 222.
. Furniss Proffer 5:15, ECF 222.
. Furniss Proffer 5:15, ECF 222.
. Hr’g Tr. 52:21-53:13, ECF 244.
. Hr’g Tr. 60:25-61:10, ECF 244.
. Hr’g Tr. 52:21-53:13, 97:24-98:2, ECF 244; Ex. 78.
. Hr’g Tr. 96:15-98:2, ECF 244.
. Hr’g Tr. 54:2-55:6, ECF 244.
. Hr’g Tr. 60:18-62:1, ECF 244.
. Hr’g Tr. 56:9-20, 73:3-15, 78:4-79:15, 108:19-22, 166:21-167:5, ECF 244; Stone Dep. 18:8-18; 52:17-53:6; 54:23-55:2, ECF 220-1.
. Ex. 1.
. Ex. 1 at 19-22.
. Ex. 1 at 19-22; Hr’g Tr. 69:18-70:6, ECF 244 (Rainwater testimony: "Q; Are you aware of any provision in the partnership agreement that would prohibit the filing of an *683application for substantial contribution and increasing the value of bankruptcy estate? A: I’m not aware of any.... ”).
. Hr'g Tr. 69:18-70:6, ECF 244.
. Rainwater Proffer 4:20-25, ECF 224; Ex. 1 at 17, 20.
. Rainwater Proffer 5:1-9, ECF 224.
. Rainwater Proffer 5:9-12, ECF 224.
. Furniss Proffer 6:21, ECF 222.
. Furniss Proffer 6:20, ECF 222; Hr’g Tr. 27:4-8: 162:15-163:14, ECF 244.
. Furniss Proffer 5:17-6:20, ECF 222.
. Furniss Proffer 6:20, ECF 222; Hr’g Tr. 41:9-10 (Rainwater testimony describing possibility of losing entire equity investment like in San Antonio), 244.
. Ex. 3; Rainwater Proffer 6:4-17, ECF 224.
. Ex. 5 at 1 (“Hopefully, the Austin LOI can be turned into a definitive P & S Agreement and cash closing.”); Hr’g Tr. 25:22-26:3, ECF 244.
. Hr'g Tr. 26:4-27:1 (Rainwater testimony describing how CH Realty would not have received a full return on equity and would not have received a preferred return), ECF 244.
. Rainwater Proffer 6:12-17, ECF 224.
. Furniss Proffer 6:22, ECF 222.
. Furniss Proffer 6:23, ECF 222.
. Furniss Proffer 7:24-26, ECF 222; Rainwater Proffer 6:18-7:2, ECF 224.
. Ex. 57.
. Ex. 59.
. Order Authorizing Employment of CBRE and KOA Partners, ECF 60,
. Order Authorizing Employment of Kreager Mitchell, PLLC, ECF 77.
. Furniss Proffer 8:32, ECF 222,
. Furniss Proffer 10:37, ECF 222.
. Furniss Proffer 10:37, ECF 222; Hr'g Tr. 108:19-23 (Furniss testimony: ''[W]e did 100 percent of the negotiations.”), 43:7-9 (Rainwater testimony: ''[Mr, Furniss] kept HCA at bay, he kept them interested.”), ECF 244; Stone Dep. 18:8-18 (describing Mr. Furniss as the “focal point” for HCA in connection with their negotiations for Forest Park projects), 19:2-7 (HCA generally approached Mr, Furniss instead of someone else when it needed answers in connection with the Property.), 21:14-18 (“Q; In other words, every time— every time you had a question on the property, you didn’t try to get attorneys involved, brokers involved; you went straight to Mr, Furniss? A: Yes.”), ECF 220-1
. Furniss Proffer 10:38, ECF 222.
. Furniss Proffer 10:38, ECF 222; Stone Dep. 13:5-16:13, ECF 220-1,
. Furniss Proffer 10:38, ECF 222.
. Furniss Proffer 13:51-52, ECF 222; Ex. 17 at 1.
. Furniss Proffer 10:39, ECF 222; Rainwater Proffer 8:4-5, ECF 224.
. Hr’g Tr. 29:10-24 (Rainwater testimony: “I didn't want... to lose all of our equity on Austin like it happened at San Antonio .... ”), ECF 244; Ex. 8 at 1.
. Ex. 13 at 1, Ex. 18 at 7.
. Ex. 12 at 3 (this offer excluded the sale of the medical office building).
. Ex. 11 at 1-3.
. Furniss Proffer 13:50, 14:56, ECF 222.
. Furniss Proffer 14:57, ECF 222.
. Furniss Proffer 15:60, ECF 222.
. Furniss Proffer 15:60, ECF 222.
. Furniss Proffer 15:60, ECF 222.
. Ex. 24 at 1.
. Stone Dep. 34:3-6, ECF 220-1.
. ⅛. 25 at 2.
. Furniss Proffer 15:63, ECF 222,
. Furniss Proffer 15-16:63, ECF 222.
. Hr’g Tr. 159:8-160:18 (Furniss testimony: "There was a concern [HCA] would fall out of the bidding process.”), 74:22-76:4 (Silverberg testimony: "Our concern was that at some point in time [HCA was] going to get frustrated and retract their offer. And, you know, this was—-to us this is a lot of money.”), ECF 244.
. Hr'g Tr. 15 8:23-160:4, ECF 244.
. Hr’g Tr. 158:7-22 (Furniss testimony: ”[S]ome of [the threats] were particularly vulgar in nature, some of them were physical in nature, some of them were legal in nature. ...”), ECF 244.
. Furniss Proffer 16:65, ECF 222; Ex. 27; see Hr’g Tr. 76:10-12 (Silverberg testimony: "Obviously a financial tragedy, but the other reason it would be a tragedy is that we would like to work with somebody who we knew.”), ECF 244.
. Dr. Kaylen Silverberg and Dr. Thomas Vaughan testified on behalf of the limited partners who are physicians who invested money with the hope of opening a practice at the Property. Hr'g Tr. 72:11-14, 79:21-25, ECF 244.
. Hr’g Tr. 35:15-36:11; 40:6-41:6, ECF 244.
. Furniss Proffer 17:68, ECF 222.
. Stone Dep. 11:5-25, ECF 220-1.
. Stone Dep. 18:2-12, 19:11-24, ECF 220-1.
. Furniss Proffer 17:68, ECF 222; Hr’g Tr. 160:5-18, ECF 244.
. Stone Dep. 35:17-36:15, ECF 220-1.
. Fumiss Proffer 17:68, ECF 222.
. Hr’g Tr. 58:20-24, ECF 244.
. Ex. 29 at 2.
. Ex. 33, Ex. 34.
. Fumiss Proffer 18:74, ECF 222; Hr'g Tr. 86:20-87:4, ECF 244.
. Hr’g Tr. 152:20-23, ECF 244.
. Fumiss Proffer 18-19:74, ECF 222.
. Stone Dep. 43:7-13, ECF 220-1.
. Ex. 36 at 44.
. Stone Dep. 8:7-24, ECF 220-1.
. Stone Dep, 8:25-9:5, ECF 220-1.
. Stone Dep. 9:11-25, 10:4-16, ECF 220-1.
. Fumiss Proffer 8:30, ECF 222.
. Furniss Proffer 8:30, ECF 222.
. Hr’g Tr. 63:14-21, ECF 244.
. Ex. 67.
. Kelly E. Porcelli, Finality of Section 363 Sales in the Face of an Upset Bid, 24 AM. Bankr. Inst. L. Rev, 497, 498 n.4 (2016) (citing Richard G, Mason & Saish R. Setty, Bidding Procedures—Stalking-Horse Protections and Collusion, Lawrence P. King and Charles Selig-son Workshop On Bankruptcy & Business Reorganization 2013 299, 300 (2013), http://www. weil.com/=/media/files/pdfs/363salestopics. pdf (discussing trend toward asset sales in bankruptcy and noting "a competitive auction allows the debtor and its creditors to test the market and obtain a sale price that is potentially higher than what could be obtained through other means.”).
. In re Davila, No. 10-11776 (Bankr. W.D. Tex. hr’g held Jan. 6, 2017) (Davis, J.), ECF 35, 46. The trustee’s motion proposed to sell the property for $20,000 or to the highest bidder at an auction. The highest bid at the end of the auction was $58,500.
. Ex. 67 at 5.
. Ex. 67 at 5.
. Ex. 39.
. Ex. 40 at 2.
. Ex. 40 at 2.
. Ex. 41 at 1.
. Ex. 43.
. Stone Dep. 60:12-17, ECF 220-1.
. Stone Dep. 30:9-12, ECF 220-1.
. Stone Dep. 13:2-14:6, ECF 220-1.
. Stone Dep. 18:8-12, ECF 220-1.
. Stone Dep. 22:15-23:1, ECF 220-1.
. Stone Dep. 27:4-20, ECF 220-1.
. Stone Dep. 45:10-46:14, ECF 220-1.
. Stone Dep. 19:11-20:3, ECF 220-1.
. Stone Dep. 13:10-12, ECF 220-1.
. Stone Dep. 50:19-52:16, ECF 220-1.
. Furniss Proffer 2:4, 20:81, ECF 222; Hr’g Tr. 47:2-24, ECF 244.
.Furniss Proffer 21-22:85.
. Furniss Proffer 22:86, ECF 222.
. Furniss Proffer 22:86, ECF 222.
. Furniss Proffer 22-23:86, ECF 222.
. Furniss Proffer 23:86, ECF 222.
. In re FPMC San Antonio Realty Partners, LP, No. 15-52462 (Bankr. W.D. Tex. filed Oct. 6, 2015) (Gargotta, J.).
. Furniss Proffer 20:81, ECF 222.
. Rainwater Proffer 4:11-14, ECF 224.
. Rainwater Proffer 7:21-8:2, ECF 224. Mr. Fumiss disagreed with this, stating that it reflected Mr. Rainwater’s "naiveté” about the healthcare industry and suggested that Mr. Rainwater did not understand the "nuances.” However, he never explained what those nuances were. Hr’g Tr. 105:4-16, ECF 244.
. Rainwater Proffer 3:22-4:2, 5:13-6:2, ECF 224.
. Hr’gTr. 118:16-120:4, ECF 244.
. Rainwater Proffer 5:13-22, ECF 224.
. Hr'gTr. 119:5-19, ECF 244.
. Hr’g Tr. 118:3-20, ECF 244.
. Ex. 46.
. Hr'g Tr. 109:18-20, ECF 244.
. See Ex. 44, Ex. 122.
. Hr’gTr. 136:17-20.
. Hr'gTr. 140:15-17; Ex. 44, 122.
. Ex. 44 at 1-2; Ex. 122 at 1-2.
. Ex. 44 at 1-2.
. Hr’g Tr. 142:8-12, ECF 244.
. Appl. for Allowance of Admin. Expense, ECF 145.
. Hr’g Tr. 56:9-57:13, ECF 244.
. Hr’g Tr. 114:9-15, ECF 244.
. Hr’g Tr. 167:23-168:22, ECF 244.
. In re Mirant Corp., 354 B.R. 113, 131-34 (Bankr. N.D. Tex. 2006).
. See, e.g., In re DP Partners Ltd., 106 F.3d 667, 670 (5th Cir. 1997) (award sought by creditor); In re Energy Partners, Ltd., 422 B.R. 68, 71 (Bankr. S.D. Tex. 2009) (award sought by an equity holder); In re Gen. Electrodynamics Corp., 368 B.R. 543, 547 and 554-55 (Bankr. N.D. Tex. 2007) (awarding a substantial contribution to an unsecured creditor). The exception is In re Am. Plumbing & Mech., Inc., 327 B.R. 273, 276 (Bankr. W.D. Tex. 2005) (reviewing applications for substantial contributions filed by the debtors' founders and an indenture trustee).
. In re Consol. Bancshares Inc., 785 F.2d 1249, 1253 (5th Cir. 1986).
. 11 U.S.C. § 503(b)(3)(D).
. Although CH Realty initially argued NRG’s status as a "true creditor,” CH Realty Obj. 16-17, ECF 212, NRG’s position as a creditor is supported by the record. See Ex. 57 at 5; Ex. 58 at 15; Ex. 126 (support for NRG's claim).
. In an unpublished case, the Fifth Circuit granted an award to a creditor that proposed a plan that prompted the debtor to improve the payout proposed in the debtor's plan. In re Bodin Concrete, L.P., 616 Fed.Appx. 738, 741-42 (5th Cir. 2015).
. In re Consol. Bancshares Inc., 785 F.2d 1249, 1252 (5th Cir. 1986).
. Id. at 1253.
. Id. at 1252.
. Id. at 1253-54.
. In re DP Partners, 106 F.3d 667, 673-74 (5th Cir. 1997).
. In re DP Partners, 106 F.3d 667, 673 (5th Cir. 1997) (quoting Webster’s Third New International Dictionary 2280 (4th ed.1976)).
. Id.
. The clearest rule courts have settled on is that expected or routine activities in a Chapter 11 case do not constitute substantial contribution. See, e.g., In re The Columbia Gas Sys., Inc., 224 B.R. 540, 548 (Bankr.D.Del. 1998). By the same token, expected or routine activities in the guise of extensive or active participation also cannot establish substantial contribution. See In re Granite Partners, 213 B.R. 440, 445 (Bankr.S.D.N.Y.1997) (citing cases), The efforts and activities of the applicant or its attorney may be admirable, excellent, or done with professionalism, but that cannot elevate expected or routine activities to the level of substantial contribution. See Columbia Gas, 224 B.R. at 555 ("admirable"); Granite Partners, 213 B.R. at 450 ("excellent”); Matter of Baldwin-United Corp., 79 B.R. 321, 341 (Bankr.S.D.Ohio 1987) ("professionalism”),
In re Am. Plumbing & Mech., Inc., 327 B.R. 273, 283 (Bankr. W.D. Tex. 2005).
. Id. at 291.
. In re TransAmerican Nat. Gas. Corp., 978 F.2d 1409, 1416 (5th Cir. 1992)(party seeking administrative expense claim has burden); In *693re Tropicana Entm’t LLC, 498 Fed.Appx. 150, 152 (3d Cir. 2012) ("[T]he party seeking [a substantial contribution claim] bears the burden of proving to the Bankruptcy Court that it is so entitled.”); Am. Plumbing & Mech., Inc., 327 B.R. at 279 ("The applicant must prove by a preponderance of the evidence that he rendered a substantial contribution.”); In re Canton Jubilee, Inc., 253 B.R. 770, 775 (Bankr. E.D. Tex. 2000) (same); In re Am. 3001 Telecomm., Inc., 79 B.R. 271, 273 (Bankr. N.D. Tex. 1987) (“The burden of proof of substantial benefit to the estate is squarely on the party claiming the expense.”).
.Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion” of particular exceptions. (Wendt v. Fischer, 243 N.Y. 439, 444, 154 N.E. 303 (1926)). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd, It will not consciously be lowered by any judgment of this court.
Meinhard v. Salmon, 249 N.Y. 458, 463-64, 164 N.E. 545 (N.Y. 1928).
. Stone Dep. 19:11-24, 29:13-20, ECF 220-1.
. Stone Dep. 50:8-15, 50:19-52:16, ECF 220-1.
. Hr’g Tr, 108:16-23, ECF 244.
. Furniss Proffer 9:34, ECF 222.
. Mr. Furniss also said that in order to pull off this sale, he had to "understand the financial, legal, industry dynamic, macroeconomic *694and organizational dynamics issues associated with a complex purchase and sale like this.” Hr’g Tr. 161:25-162:3, ECF 244. But beyond the recitation of these abstract concepts, the only specific example he gave was to explain the need to understand at what point you could say a particular buyer was actually bound to purchase—a concern that, as Mr. Rainwater pointed out, would apply to any potential buyer. Hr’g Tr. 36:16-22, ECF 244.
.11 U.S.C. § 1104 (a)(1) and (2) (a trustee can be appointed for “cause” or if the appointment is in the best interests of the estate); In re Eurospark Indus., Inc., 424 B.R. 621, 627 (Bankr. E.D.N.Y. 2010) (standard for appointing a trustee is flexible); In re Patman Drilling Int’l, Inc., No. 07-34622, 2008 WL 724086, at *6 (N.D. Tex. Mar. 14, 2008) (the appointment of trustee pursuant to § 1104(a)(2) was appropriate where the management held conflicts of interest, the majority of creditors supported the appointment of a trustee, and the creditor body lost confidence in the debtor's management); In re Tahkenitch Tree Farm P’ship, 156 B.R. 525, 528 (Bankr. E.D. La. 1993) (appointment of a trastee to be in the best interest of the estate because the debtor’s two partners were effectively deadlocked on management issues); and In re Ionosphere Clubs, Inc., 113 B.R. 164, 168 (Bankr. S.D.N.Y. 1990) (court should consider confidence of business community and creditors in present management).
. Stone Dep. 50:19-52:16, ECF 220-1.
. Hr’g Tr. 63:14-21, ECF 244.
. Stone Dep, 8:1-20, ECF 220-1; Rainwater Proffer 3:7-20, ECF 224.
. In re Am. Plumbing & Mech., Inc., 327 B.R. 273, 291 (Bankr. W.D. Tex 2005).
. In re DP Partners, 106 F.3d 667, 673 (5th Cir. 1997) (quoting Webster’s Third New International Dictionary 2280 (4th ed.1976)).
. Hr’g Tr. 144:12-16, ECF 244.
. Hr’g Tr. 147:19-148:10, ECF 244. There was also mention of an appraisal, but this was *695apparently obtained by HCA to satisfy a regulatory requirement. Hr'g Tr. 148:3-7, ECF 244; Huffstutler Proffer 2:6, ECF 102.
. Furniss Proffer 2:5, ECF 222.
. Although no one drew the Court’s attention to Exhibit 127, which is apparently a copy of pages from the glendonTodd website, it contained extensive information on glen-donTodd and its principles. According to this document, Mr. Furniss has held a number of positions that sound impressive. But no details were offered about these positions, or the other content of Exhibit 127, so no weight can be put on Exhibit 127.
. Stone Dep. 13:2-4, ECF 220-1.
. Rainwater Proffer 3:7-20, ECF 224.
. Hr’g Tr. 57:14-58:3, ECF 244; Rainwater Proffer 3:22-4:2.
. Hr’g Tr. 20:2-3, ECF 244.
. Hr’g Tr. 20:4-9, ECF 244.
. Rainwater Proffer 5:23-6:2, ECF 224.
. CH Realty Obj. 10, ECF 212; Limited Partners Obj. 4, ECF 270.
. NRG Reply 9:17-10:19, ECF 221.
. Hr'g Tr. 136:4-20, ECF 244.
. Hr'g Tr. 127:4-13, ECF 244,
. Furniss .Proffer 9:34; NRG Brief 29, ECF 264.
. Ex. 46.
. CH Realty argues that because NRG, Mr. Furniss, and glendonTodd are insiders of the Debtor, the fee sought is precluded by section 503(c)(3) of the Bankruptcy Code. CH Realty Obj. 22-33, ECF 212. "Section 503(c) was enacted to limit a debtor’s ability to favor powerful insiders economically and at estate expense during a chapter 11 case." In re Pilgrim's Pride Corp., 401 B.R. 229, 234 (Bankr. N.D. Tex. 2009). Since NRG has not carried its burden in establishing a "substantial contribution," there is no need to decide whether the payment of the fee is precluded,
The objecting limited partners have also argued that whatever success has been achieved in the sale by NRG, that success has been rewarded and compensated by the 40% return over the limited partner's preferred return, and this reward is what the parties have agreed to as a matter of contract, Hr'g Tr. 49:24-50:6, ECF 244. To be sure, courts are not free to revise the terms of parties’ contacts. In re WBH Energy, LP., 2016 WL 3049666 at *15 (Bankr. W.D. Tex. May 20, 2016). But this question, too, does not need to be decided.
Finally, and also not decided, is CH Realty’s cogent argument that as a fiduciary, NRG/glendonTodd cannot now be compensated for a fee for which advance court approval was not sought, CH Realty Obj. 7, ECF 212. See In re Consol. Bancshares Inc., 785 F.2d 1249, 1254 (5th Cir. 1986) (failure to obtain advance approval for fees incurred in performing services “parallel to but not coordinated with” a case fiduciary results in denial of those fees as a later substantial contribution claim). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500895/ | ORDER DENYING TRUSTEE’S OBJECTION TO THE DEBTOR’S AMENDED SCHEDULE C— PROPERTY CLAIMED AS EXEMPT (ECF NO. 51)
CRAIG A. GARGOTTA, UNITED STATES BANKRUPTCY JUDGE
Before the Court is Trustee’s Objection to the Debtor’s Amended Schedule C— Property Claimed as exempt (the “Objection”) (ECF No. 511). Debtor filed Debt- or’s Response to Trustee’s Objection to the Debtor’s Amended Schedule C—Property Claimed as Exempt (the “Response”) (ECF No. 58). A hearing was held on the Objection and Response on March 21, 2017. Having considered the arguments presented by counsel and the applicable law, the Court finds that the claim of exemption in the inherited individual retirement account (“Inherited IRA”) is a valid use of state exemptions under 11 U.S.C. § 522(b)(3). Therefore, the Objection should be denied and overruled, and Debtor’s claim of exemption in the Inherited IRA is sustained.
Background
This case involves Debtor’s claim of exemption regarding her Inherited IRA. On May 3, 2016, Debtor filed her chapter 7 bankruptcy case (ECF No. 1). Debtor filed her original schedules on May 17, 2016, which included a claim of exemptions based on “state exemptions” under § 522(b)(3) (ECF No. 6). Debtor’s schedules were then amended on July 28, 2016, to modify the selection of exemptions to “bankruptcy exemptions” pursuant to § 522(b)(2) (ECF No. 16). On August 2, 2016, Debtor testified at the meeting of creditors that she inherited the IRA from her aunt. Trustee first objected to Debt- *698or’s claim of exemption in the Inherited IRA on August 8, 2016 (ECF No. 19), which resulted in an Agreed Order sustaining the Trustee’s objection (ECF No. 45). The Agreed Order denied Debtor’s claim of exemption in the Inherited IRA with prejudice to refiling under § 522(b)(2), but without prejudice to refiling under § 522(b)(3). Debtor amended her claim of exemptions for a second time, changing her election of exemptions back to “state exemptions” pursuant to § 522(b)(3) in order to argue that the Inherited IRA was indeed exempt (ECF No. 41). Debtor based her state law claim of exemption in the Inherited IRA on Section 42.0021 of the Texas Property Code. Trustee filed his Objection (ECF No. 51).
Legal Analysis
Trustee submits two reasons for why his Objection should be sustained. First, Trustee asserts that in Clark v. Rameker, the Supreme Court held that an individual retirement account that was inherited from a non-spouse did not meet the definition of “retirement funds” within the plain meaning of § 522(b)(3). — U.S. -, 134 S.Ct. 2242, 2246, 189 L.Ed.2d 157 (2014). Trustee’s second argument is that § 42.0021 of the Texas Property Code does not protect this account as exempt. The Court, however, is not convinced by either arguments. The Court reviewed In re Pacheco, 537 B.R. 935 (Bankr. D. Ariz. 2015), and finds that Debtor’s state law claim of exemption in the Inherited IRA is valid as the holding in Clark is not dispositive of the issue presented in the case at bar. As to Trustee’s second argument, the court agrees with Debtor’s analysis of In re Enloe, 542 B.R. 414 (Bankr. S.D. Tex. 2015), and finds that Debtor’s Inherited IRA falls within the purview of § 42.0021 of the Texas Property Code.
A. Does Clark Provide a Blanket Prohibition to Exemption of Inherited IRAs
In Clark v. Rameker, the debtor’s mother established a traditional2 individual retirement account (“IRA”) and named debtor as the sole beneficiary. Once the debtor inherited the account, it became classified as an inherited IRA. Debtor and her husband filed for Chapter 7 bankruptcy in October 2010 and exempted debtor’s inherited IRA under § 522(b)(3)(C). Subsequently, the Chapter 7 Trustee and unsecured creditors objected to the exemption, because the inherited IRA did not qualify as a- “retirement fund” under § 522(b)(3)(C). The issue presented to the Supreme Court was whether funds contained in an inherited IRA qualify as “retirement funds” within the meaning of the bankruptcy exemption under § 522(b)(3)(C). The Court opined that funds must meet two requirements in order to qualify for exemption under 11 U.S.C. § 522(b)(3)(C): (1) account funds must qualify as “retirement funds,” and (2) funds must be held in a tax-exempt account recognized in the Internal Revenue Code. Clark, 134 S.Ct. at 2248. If both requirements are not met, accountholders may not exempt the funds under § 522(b)(3)(C). Id.
The Court employed an objective standard to determine whether the IRA could be could be considered “retirement funds” pursuant to § 522(b)(3)(C). Id. at 2246. To answer this question, the Court analyzed three legal characteristics of an inherited *699IRA to determine if “the account is one set aside for the day when an individual stops working.” Id.
The first legal characteristic of an inherited IRA the Court scrutinized was the inability for an accountholder to contribute money to the account. Id. While a traditional or Roth IRA allows for qualified contributions, an inherited IRA does not. See 26 U.S.C. § 219(d)(4) (“No deduction shall be allowed under this section with respect to any amount paid to an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)(ii))”). Thus, the purpose of setting aside funds for retirement would not be achievable for inherited IRA accountholders. Clark, 134 S.Ct. at 2247.
The Court then looked at the requirement of inherited IRA accountholders to withdraw all account funds as the second legal characteristic. Id. Because account-holders are required to withdraw all account funds within five years or receive minimum annual account distributions under 26 C.F.R. § 1.408-8, accountholders are unable to set aside the funds for retirement purposes. Id.
The third characteristic of an inherited IRA was particularly crucial to the Court’s analysis. The ability of an inherited IRA accountholder to withdraw unlimited funds from the account at any given time and without penalty contrasts with the limitations placed on traditional and Roth IRAs. Id. While penalties for early withdrawal from traditional and Roth IRAs encourage accountholders to leave the funds untouched until retirement, inherited IRA holders are able to withdraw funds freely at any time and for immediate use without penalty. Id. The immediate usage and free withdrawal of account funds therefore, defeats the purpose of exempting for “retirement funds” under § 622(b)(3)(C). Id.
Examining these three legal characteristics of inherited IRAs, the Court concluded that the funds held in an inherited IRA “are not objectively set aside for the purpose of retirement.” Id. As such, a unanimous Supreme Court concluded that finds contained in an inherited IRA do not qualify as “retirement funds” subject to exemption under § 522(b)(3)(C).
The Court, however, is not convinced that the Clark opinion addresses the specific issue presented in this case and therefore declines to find that Clark is determinative of the case at bar. The facts before the court in Clark differ from that of Pacheco and the case at bar. In Clark the Court was considering a claimed inherited IRA exemption under § 522(b)(3)(C) alone as no state law exemption was claimed. The issue presented here more closely resembles the facts contained in Pacheco.
B. In Re Pacheco
The Pacheco is instructive to this Court as it clearly distinguishes Clark from applicability to state exemptions. In Pacheco, the chapter 7 debtor claimed an exemption for an inherited IRA pursuant to Arizona Revised Statute (A. R. S.) § 33-1126. The statute provides:
Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under § 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under § 457 of the United States internal revenue code [“I.R.C.”] of 1986, as amended, whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise, is exempt from all claims of creditors of the beneficiary or participant.
Ariz. Rev. Stat. Ann. § 33-1126 (2017). The trustee, however, objected to the exemption and argued that, based on the holding in Clark, inherited IRA’s are not exempt as a matter of law. In re Pacheco, *700537 B.R. at 937. The trustee made two arguments in support of his position: (1) § 522(b)(8)(C) preempts the Arizona IRA exemption statute and, (2) even if the Arizona statute does apply, no exemption is available as the account in question was created to comply with I.R.C. § 401(k), which is not encompassed within the Arizona statute. Id.
The Pacheco court took both issues in turn, first addressing §'522(b)(3)(C) preemption of the Arizona statute. The court first examined the doctrine of preemption and noted that “[tjhere are three ways in which a state law may be preempted: (1) When Congress has legislated so comprehensively in an area so as to ‘occupy the field’ of regulation and leaving states no room to legislate; (2) When federal legislation expressly declares such intent; or (3) When state law actually conflicts with federal law.” Id. (citing In re Applebaum, 422 B.R. 684, 688 (9th Cir. BAP 2009)). None of these situations existed in the Pacheco case. The court noted that Arizona is an opt-out state, meaning that Arizona residents are required by law to use Arizona statutory exemptions, Id. at 938. The trustee argued that the inclusion of § 522(b)(3)(C) in the Bankruptcy Code, preempts the Arizona exemption statute. Id, The court, however, disagreed noting that “[njothing in § 522 expresses an intent to occupy the field or otherwise restrict a state from providing a state exemption for a retirement fund.” Id,
Section 522(b)(3)(C) exemption is available to all debtors regardless of whether the debtor’s state has opted out of federal exemptions. Id. (citing In re Hamlin, 465 B.R. 863, 870-71 (9th Cir. BAP 2012) (stating that debtors in opt-out states may claim the § 522(b)(3)(C) exemption)). The Pacheco court concluded that the goal of § 522(b)(3)(C) is to ensure that debtors are able to exempt a certain amount of retirement funds even where the debtor’s state has opted out of the federal exemption scheme. In re Pacheco, 537 B.R. at 939. The court noted that the fact that the language of the federal exemption and Arizona statute differ does not mean that the state statute conflicts with the federal exemption as “[ejxemptions in opt-out states routinely differ significantly from the federal bankruptcy exemptions, whether they are more liberal or more restrictive.” Id. Indeed, federal exemptions do not serve as a minimum but as an available alternative in states that have not opted-out of federal exemptions. Id, (citation omitted). Thus, the Pacheco court concluded that § 522(b)(3)(C) serves as the floor for exemptions for retirement funds, not the ceiling. Id.; see also In re Walker, 959 F.2d 894, 901 (10th Cir. 1992) (“The Oklahoma exemption statute is not inconsistent with the alternate federal list in 11 U.S.C. § 522; it simply is more favorable to debtors.”).
The court went on to discuss the Clark opinion and concluded that its holding was inapplicable to the ruling in Pacheco. In re Pacheco, 537 B.R. at 939. Again, the issue in Clark was whether “funds contained in an inherited individual retirement account (IRA) qualify as ‘retirement funds’ within the meaning” of § 522(b)(3)(C). Id. at 939-40. (quoting Clark, 134 S.Ct. at 2246). The court concluded that inherited IRA retirement funds are no longer funds put aside for when an individual stops working. As such, an inherited IRA could never qualify within the meaning of § 522(b)(3)(C).
' The Pacheco court then discussed the reason why applying Clark to the instant case was problematic, as the issue presented in the Clark case was “whether section 522(b)(3)(C) applies to inherited IRAs by non-spouses. It did not address Arizona’s exemption statute and certainly did not address preemption.” Id. at 940. Under Arizona’s exemption law, a debtor is al*701lowed to keep more than would be allowed under the Bankruptcy Code, and this is a choice that Congress envisioned that states would be allowed to make when § 522(b)(3)(C) was enacted. Id. Thus, the Clark opinion left open the possibility that a broader state statute, in terms of allowed exempt assets, could allow debtors to keep an inherited IRA and still not run afoul to Supreme Court precedent.
C. Applying Pacheco to the Case at Bar
The case at bar mirrors the fact pattern presented in Pacheco. At the outset, it is important to note that, unlike Pacheco, Texas is an opt-in state, meaning that Texas residents may use either state exemptions, or the federal exemption scheme. In re Bounds, 491 B.R. 440, 444 (Bankr. W.D. Tex. 2013). This, however, does not change the analysis as opt-in status merely means that the Debtor in this case had the choice to use federal instead of state exemptions. As noted above, Debtor, like in Pacheco, used state exemptions.
While the Texas statute at issue is similar to the Arizona statute in effect, it is even more direct in its protection of inherited IRAs. The statute provides the following:
(a) In addition to the exemption prescribed by Section 42.001, a person’s right to j;he assets held in or to receive payments, whether vested or not, under any stock bonus, pension, annuity, deferred compensation, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, or a simplified employee pension plan, an individual retirement account or individual retirement annuity, including an inherited individual retirement account, individual retirement annuity, Roth IRA, or inherited Roth IRA, or a health savings account, and under any annuity or similar contract purchased with assets distributed from that type of plan or account, is exempt from attachment, execution, and seizure for the satisfaction of debts to the extent the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income tax on the person’s interest is deferred until actual payment of benefits to the person under Section 223, 401(a), 403(a), 403(b), 408(a), 408A, 457(b), or 501(a), Internal Revenue Code of 1986,1 including a government plan or church plan described by Section 414(d) or (e), Internal Revenue Code of 1986.2.
Tex. Prop. Code Ann. § 42.0021(a) (West 2017) (emphasis added). Unlike in Pacheco, the Texas legislature chose to specifically state that “an inherited individual retirement account .... is exempt from attachment, execution, and seizure for the satisfaction of debts.” Id. Similar to the Arizona statute at issue in the Pacheco opinion, the Texas Legislature sought to allow Texans to keep inherited IRAs exempt to the fullest extent possible. Whether this legislation was enacted specifically to address bankruptcy debtors and the Clark opinion is not the operative question. As explained in Pacheco, Congress did not create § 522(b)(3)(C) to be so limiting as Trustee in this case would prefer. Texas law allows debtors to exempt a broader category of funds than would be allowed under the Bankruptcy Code. In re Pacheco, 537 B.R. at 940. The effect of the Texas Legislature’s enactment is to go beyond the established minimum level of protection that Congress created when it enacted § 522(b)(3)(C).
To hold differently would have this Court incorrectly extend the ruling of Clark in a way that the Supreme Court did not intend. The Clark opinion did not address state law preemption or provide guidance as to how a more protective state law exemption should be treated in a post-*702Clark world. As such, this Court can only conclude that a broader and more protective state statute can allow for exemption of an inherited IRA without violating the holding in Clark. The Trustee in this case relies on footnote 1 of the Clark opinion to support his claim that Debtor’s inherited IRA should be held as nonexempt. The Court disagrees. Footnote 1 of Clark states that “debtors may elect to claim exemptions under federal law, see section 522(b)(2), or. state law, see. Section 522(b)(3).” Clark, 134 S.Ct. at 2250, n. 1. Reliance on this quote is completely unfounded. This quote serves only to explain that the Debtor had a choice of either state or federal exemptions. It fails to take into account that no state statute was applicable in the Clark opinion, and therefore, the Court did not need to address preemption or the availability of more generous state statutes.
For the reasons listed above, the Court finds that the Trustee’s first argument for denial of exemption fails. The Clark holding is not applicable to the set of facts in the instant case.
D. Application of Texas Property Code Section 42.0021
For his second contention, Trustee argues that Section 42.0021 of the Texas Property Code does not protect the Inherited IRA and cites to In re Jarboe for support. 365 B.R. 717 (Bankr. S.D. Tex. 2007). In Jarboe, Judge Bohm held that an individual retirement account inherited from a non-spouse was not qualified under the Internal Revenue Code (IRC), and therefore, not exempt. Id. at 725. As the Trustee correctly points out, the Jarboe court relied on the 2006 version of Section 42.0021. Id. at 721. The statute was amended on April 1, 2013, and provided that inherited individual retirement accounts and annuities “to the extent the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income tax on the person’s interest is deferred until actual payment of benefits to the person under Section 223, 401(a), 403(a), 403(b), 408(a), 408A, 457(b), or 501(a), Internal Revenue Code of 1986.” Tex. Prop. Code Ann. § 42.0021(a) (West 2017). Trustee contends that the current version of Section 42.0021 cannot apply in this case because the individual retirement account is not exempt from federal income tax, nor is federal income tax on the Debt- or’s interest deferred until payment of the benefits to Debtor. At least one court, however, disagrees. In In re Énloe, Judge Isgur examined the treatment of Section 42.0021 and inherited IRAs in bankruptcy. The court stated the following:
Section 42.0021(a) of the Texas Property Code states that “a person’s right to the assets held in or to receive payments, whether vested or not, under any ... individual retirement account or individual retirement annuity, including an inherited individual retirement account ... is exempt .from attachment, execution, and seizure for the satisfaction of debts to the extent the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income tax on the person’s interest is deferred until actual payment of benefits .... ” There is no dispute that the IRA in question was an “inherited individual retirement account”, as defined by 26 U.S.C. § 408(d)(3)(C). As an inherited IRA, it was exempt from taxation pursuant to 26 U.S.C. § 408(e) at the time of the transfer. Accordingly, the inherited IRA fell within the language of Tex. Prop. Code § 42.0021(a).
In re Enloe, 542 B.R. at 429, n. 4 (emphasis added). This Court agrees with the Enloe court and finds that the Inherited IRA in this case falls within the purview of Section 42.0021(a). In the present case, there has been no dispute put forward over whether or not the inherited IRA is a *703valid “inherited individual retirement account” as defined in 21 U.S.C. § 408(d)(3)(C). As such, the inherited IRA is exempt from taxation pursuant to 26 U.S.C. § 408(e) at the time of transfer and therefore falls within the language of Section 42.0021.
Conclusion
IT IS THEREFORE ORDERED that Trustee’s Objection to the Debtor’s Amended Schedule C—Property Claimed as Exempt (the “Objection”) (ECF No. 51) is DENIED and OVERRULED.
All other relief not specifically granted herein is DENIED.
. Unless otherwise noted, all references to "ECF" herein refer to documents filed in Bankruptcy Case 16-51059-cag.
. A traditional IRA is created under 26 U.S.C. § 408 to encourage individuals to save for retirement and possesses the following characteristics:
1. Tax-deductible qualified contributions;
2. Withdrawals taken before accountholder reaches age 59 ½ are subject to a 10% penalty; and
3. Capital gains and dividends on contributions are taxed upon withdrawal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500897/ | MEMORANDUM OPINION
Gregory R. Schaaf, Bankruptcy Judge
This matter is before the Court on the Defendant United Cumberland Bank’s Motion to Dismiss for Failure to State a Claim [ECF No. 19], the Plaintiff Debtor Anthony Ball’s Response [ECF No. 22] and the Bank’s Reply [ECF No. 23.] The Court held a hearing on June 28, 2017, and took the matter under submission. For the reasons stated more fully below, the Motion to Dismiss is granted.
I. Facts.
A. The Chapter 13 Bankruptcy.
Ball filed for chapter 13 relief on March 7, 2016. [Main Case No. 16-60245, ECF No. 1.] Ball listed three claims due to the Bank on Schedule D: (1) $77,035.00 secured by his residence; (2) $52,676.00 also secured by his residence; and (3) $12,826.00 secured by two vehicles. [Id at ECF No. 17.]
On April 28, 2016, the Bank filed three proofs of claim: (1) Proof of Claim No. 2 for $51,442.71 secured by a mortgage lien on Ball’s mobile home and land; (2) Proof of Claim No. 3 for $9,831.90 secured by a lien on a 2009 Nissan Sentra, Polaris 4-wheeler, and a 2010 Polaris Ranger ATV; and (3) Proof of Claim No. 4 for $70,946.23 also secured by a mortgage lien on Ball’s mobile home and land.
Ball’s bankruptcy case has not proceeded smoothly. Examples of some of the problems are described in the Order entered December 21, 2017, which directed Ball’s counsel to pay more attention, among other things. [Main Case No. 16-60245, ECF No. 137.] The problems continued through and after confirmation, which will likely result in additional action by the Court related to Ball’s counsel’s performance in this case.
The problems began with the application to pay filing fees in installments tendered on the first- day. [Id. at ECF No. 2.] The application was denied because it proposed to tender the final installment more than 120 days after the petition date in violation of a local rule. [Id at ECF No 8 (KYEB LBR 1006-1).] An amended application was granted on March 11, 2016. [Main Case No. 16-60245, ECF Nos. 9 and 14.]
Unfortunately, the first installment was not paid, so the case was dismissed on June 1, 2016. [Id. at ECF No. 32.] The dismissal was set aside on June 24, 2016, after the fee was paid. [Id. at ECF No. 48.]
The case then slogged along until it was again dismissed on November 8, 2016. [Id. at ECF No. 110.] The basis for the dismissal this time was the failure of counsel to comply with federal and local bankruptcy rules. [See id. at ECF No. 102 (Fed. R. Banks. P. 1008; KYEB LBR 1009-1).] The dismissal was set aside for the second time on November 28, 2016, after Ball’s counsel resolved the deficiency. [Id. at ECF No. 120.]
On January 4, 2017, Ball filed a Motion for Avoidance of Preferential Transfer of Debtor’s Property and Turnover of Preferentially Transferred Property Held by Bank. [Id. at ECF No. 140.] In November 2016, the Bank offset $10,946.91 against Ball’s obligations while his bankruptcy case was dismissed (hereinafter the “Funds”). Ball sought to avoid “an involuntary preferential transfer of Ball prior to the petition date” because the Funds came from Social Security payments. [M] The Bank objected because Ball was not in bankruptcy when the offset occurred. [Id at ECF No. 155.] An adversary proceeding is required for a request to recover money so Ball’s Motion was denied on January 18, 2017. [Id at ECF No. 156; see also Fed R. Bankr. P. 7001.]
*711B. The Adversary Proceeding and the Bank’s First Motion to Dismiss.
On March 20, 2017, Ball filed this adversary proceeding to recover the Funds from the Bank. [ECF No. 1.] Ball amended the Complaint on March 28, 2017, to add language that states he consents to entry of final order or judgment by this Court. [ECF No. 5 (the “Initial Complaint”).] The Initial Complaint makes only the following allegations before the prayer for relief:
1. On March 7, 2015, the Plaintiff/Debtor commenced a voluntary case under Chapter 13 of the Bankruptcy Code, by filing a petition which has been assigned No. 16-60245 by the Court.
2. The Court has jurisdiction to hear this matter under 28 U.S.C. § 1334, because it arising in that case and is related to it. This proceeding is a core proceeding.
3. The Defendant was named in Schedule D of the petition as a secured creditor.
4. The Defendant is also a creditor with the meaning of KRS § 367.170.
5. On or about December, 2016 Defendant notified Debtor by four offset notices that they were offsetting Debtor’s checking account in the total amount of $10, 491.96.
6. Debtors filed a Voluntary Petition on March 7, 2016.
7. In October, 2016 Debtor received a Social Security backpay ' amount which was deposited into their account in October, 2016.
8. The funds offset are exempt under the Social Security Act under Section 207.
[M] Ball concluded the Initial Complaint by asking the Court to: (1) order the Bank to return the Funds; (2) declare the Bank knowingly violated “the rights of the Debt- or” by “offsetting funds known to be exempt under federal and state law;” (3) award compensatory and punitive damages plus attorney fees and costs pursuant to K.R.S. § 367.170; and (4) grant any additional relief that would be necessary or proper. [Id.]
The Bank moved to dismiss the Initial Complaint because it was “unintelligible” and failed to state a claim upon which relief may be granted. [ECF No. 7.] The Bank again argued that nothing prevented it from offsetting the Funds in Ball’s account against his debts while the bankruptcy case was dismissed. The Bank further highlighted a series of problems with the Initial Complaint, including:
• Ball alleged the Bank was a creditor within the meaning of K.R.S. § 367.170 (commonly referred to as the Kentucky Consumer Protection Act), but Ball did not assert a cause of action under that statutory provision.
• Section 207 of the Social Security Act does not exist and even if it did, Ball did not plead a cause of action based on the Act.
• Ball alleged the Funds were exempt, but had not claimed an exemption in the Funds on Schedule C.
[Id.] The Bank concluded by arguing that Ball had failed to assert any viable cause of action. [Id.]
Ball filed a response arguing the Funds are exempt from offset pursuant to 42 U.S.C. § 407(a)1 and relevant case law. *712[ECF No. 8.] Ball further clarified that § 207 was passed in 1983 and is currently codified as 42 U.S.C. § 407. [Id.] The Bank replied that the case law cited by Ball is superseded by subsequent law. [ECF No. 9.]
A hearing was held on April 19, 2017. The problems with the Initial Complaint were discussed and Ball’s counsel said he only intended to seek relief based on 42 U.S.C. § 407. The Court granted the Bank’s motion, but gave Ball 14 days to amend. [ECF No. 14.] The audio file confirms the Court informed Ball’s counsel that he needed to ensure that he stated a claim in the amended complaint because he would not get another chance. [ECF No. 11.] The Court specifically recognized Ball’s counsel had a history of problems and the Initial Complaint was another example because much of it was nonsensical. [Id.]
C. The Amended Complaint and the Bank’s Second Motion to Dismiss.
Ball timely filed an amended complaint on May 4, 2017, and later amended it a third time on May 10, 2017. [ECF Nos. 15 and 17 (the “Amended Complaint”).] This time, Ball alleged the Court’s jurisdictional basis and identified the parties before further alleging the following facts:
9. That sometime in 2015, subsequent to the Debtor’s filing of his Ch. 13 bankruptcy Petition, Debtor received a large lump sum payment from the Social Security Administration as part of their determination that Debtor was qualified for Social Security Disability benefits.
10. That said lump sum was direct deposited into Debtor’s bank account at Defendant bank in October, 2015.
11. That in December, 2015 Debtor received four notices form Defendant informing him that a total of $10,491.96 had been attached and/or set off from his account to pay for four other debts unrelated to Debtor’s account. 100% of the fund attached from Debtor’s bank account were from either the Social Security lump sum payment or from the monthly Social Security payment to debtor in November and December, 2015.
12. 42 U.S.C. § 407 states that Social Security funds shall not “be subject to execution, levy, attachment, garnishment or other legal process ...”
[ECF No. 17 at ¶¶ 9-12.]
Count One, the. only count in the Amended Complaint, is titled: “Turnover and Recovery of Social Security benefits pursuant to 11 U.S.C. § 542 and 11 U.S.C. § 105 of the Bankruptcy Code.” [Id. at p. 2 (the heading is left as drafted because the inconsistent capital letter usage, lack of a section symbols and spacing problems emphasize the haphazard drafting).] The three allegations in Count One follow:
13. Debtor repeats, re-alleges, and incorporates as though fully set forth herein paragraphs 1 through 12.
That subsequent to the filing of the Petition, Defendant set off and/or attached $10,491.96 from the bank account of Debtor. The bank account held Social Security funds and were exempt pursuant to 11 U.S.C. § 522.
14. Pursuant to 11 U.S.C. § 542 and 11 U.S.C. § 105, that amount may be recovered from Defendant.
15. That Plaintiff/Debtor consents to any entry of final order or judgment from the Bankruptcy Court.
[Id. at ¶1¶ 13-15 (again, the grammar and formatting is left as submitted to show the lack of attention to detail).]
*713Ball’s prayer for relief requested turnover of the Funds pursuant to “11 U.S.C. § 542 and 11 U.S.C. § 105.” [Id. at p. 3.] He did not repeat § 522, despite including that statute as part of his allegations in Count One. While this is not, by itself, fatal, it reinforces the careless drafting of the Amended Complaint.
The Bank now seeks dismissal of the Amended Complaint for failure to state a claim upon which relief can be granted. [ECF No. 19.] The Bank first recognizes the factual allegations are inaccurate because the events occurred in 2016, not 2015 as alleged. [Id. (yet another example of careless drafting).] Also, the Amended Complaint does not acknowledge the offset occurred when the case was dismissed. [Id.] The Bank’s primary argument is that the statutes cited, § 522, § 542, and § 105, do not provide any substantive cause of action and, regardless, current case law would not support Ball’s contention that the setoff was improper under 42 U.S.C. § 407. [Id.]
Following briefing and a hearing, the matter was taken under submission and is now ripe for a decision.
II. Jurisdiction.
The Court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper pursuant to 28 U.S.C. § 1409.
III. Discussion.
A. Fed. R. Bankr. P. 7012.
The Bank seeks dismissal of the Amended Complaint because it fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable in adversary proceedings pursuant to* Federal Rule of Bankruptcy Procedure 7012(b).2
Civil Rule 8(a)(2), made applicable in adversary proceedings pursuant to Bankruptcy Rule 7008(a), requires a “short and plain statement of the claim showing that the pleader is entitled to relief.” In analyzing the pleading requirement of Civil Rule 8(a)(2) in connection with a CM Rule 12(b)(6) motion to dismiss, the Supreme Court has stated, “To survive a motion to' dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 677, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ ” Id. (quoting Twombly, 550 U.S. at 555, 557, 127 S.Ct. 1955).
In defining the “plausibility” standard, the Supreme Court stated,
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.
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In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings *714that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
Id. at 678-79, 129 S.Ct. 1937 (citations omitted) (internal quotations marks omitted).
“If it appears beyond doubt that the plaintiffs complaint does not state facts sufficient to ‘state a claim that is plausible on its face,’ then the claim must be dismissed.” Preferred Auto. Sales, Inc. v. DCFS USA, LLC, 625 F.Supp.2d 459, 462 (E.D. Ky. 2009) (citations omitted). “[D]is-missal with prejudice and without leave to amend is ... appropriate [if] it is clear on de novo review- that the complaint could not be saved by amendment.” Newberry v. Silverman, 789 F.3d 636, 646 (6th Cir. 2015) (quoting Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003)).
B. Ball Fails to State a Claim Upon Which Relief Can Be Granted.
The facts are simple and undisputed. The Bank offset the Funds in November 2016 when Ball’s bankruptcy case was dismissed. Upon dismissal, the protections of the automatic stay ended, the bankruptcy estate was terminated, and the Funds re-vested in Ball. See 11 U.S.C. § 349(b)(3) and § 362(c)(2)(B); Lomagno v. Salomon Brothers Realty Corp. (In re Lomagno), 320 B.R. 473 (1st Cir. BAP 2005); In re Hill, 305 B.R. 100, 104-105 (Bankr. M.D. Fla. 2003). The Bank could then exercise its state law contractual rights to setoff the Funds without fear of violating the Bankruptcy Code. The Notes3 executed by Ball and the Bank memorialize the Bank’s right of setoff:
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all my accounts with Lender [whether checking, savings, or some other account]. This includes all accounts I hold jointly with someone else and all accounts I may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. I authorize Lender, to the extent permitted by applicable law, to charge or setoff all sums on the indebtedness against any and all such accounts and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.
[See, e.g„ EOF No. 19, at Exh. 1.]
Contractual rights of setoff are enforceable under Kentucky law against the parties to the agreements. See Morganfield Nat. Bank v. Damien Elder & Sons, 836 S.W.2d 893 (Ky. 1992). Further, the reinstatement of Ball’s case did not retroactively reinstate the stay, invalidate the Bank’s action, or otherwise restore the bankruptcy estate to its pre-dismissal condition. In re Lomango, 320 B.R. at 478-79; In re Hill, 305 B.R. at 109-110.
The Funds rightfully belong to the Bank as a result of the setoff and are no longer property of the estate. See In re Quade, 482 B.R. 217, 229 (Bankr. N.D. Ill. 2012) (setoff effectuates a transfer that *715prevents the subject property from becoming property of the estate); Barber v. Princeville State Bank (In re Ostrom-Martin Inc.), 161 B.R. 800, 806 (Bankr. C.D. Ill. 1993) (setoff funds are not property of the estate). Therefore, Ball must assert a cause of action that would bring the assets back into the estate. The Amended Complaint seeks relief pursuant to § 622, § 542, and/or § 105, which do not provide the required relief.
Section 522 describes property exemptions that debtors may claim. But § 522 only applies to property of the estate. 11 U.S.C. § 522(b)(1) (“Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate. ..”). The Funds are no longer part of the estate as a result of the setoff. Further, Ball has not even claimed the Funds as exempt on Schedule C in the main case. Section 522 does not support the relief sought.
Section 542 also does not help. Section 542(a) provides:
an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee' and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
11 U.S.C. § 542(a).
. Based on the plain language of the statute, Ball may only seek turnover of property the trustee “may use sell or lease under section 363” or property “the debtor may exempt under section 522.” Id, Ball cannot seek turnover of the Funds because they are not the type of property that the Trustee may use, sell or lease under § 363. See 11 U.S.C. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, ‘property of the estate...”) (emphasis added). Ball also cannot seek turnover of the Funds because he cannot exempt them pursuant to § 522. Therefore, § 542 does not provide Ball a basis for relief.
This leaves the. Court’s equitable powers under § 105 as Ball’s only remaining theory for relief. Section 105 allows the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of title.” 11 U.S.C. § 105. Although the language of § 105 appears broad, the Court’s equitable power under § 105 is narrow. Law v. Siegel, — U.S. -, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) (a court cannot use § 105 to eontrar vene express conditions of the Code). Ball does not explain how § 105 gives the Court authority to order the Bank to return the Funds. Further, even if the Court could exercise its equitable power in this way, the equities are not on Ball’s side. See Section I.A supra; see also Section I.B supra (Ball’s counsel was warned that he would not have another opportunity to amend). Section 105 does not provide Ball the relief he seeks.
Ball has failed to allege a cause of action under § 522, § 542, or § 105. Therefore his Amended Complaint is dismissed. •
C. Ball is Not Entitled to Amend.
Ball was told he would not get another chance to amend when the Initial Complaint was dismissed and he was allowed time to fix the deficiencies. • Also, Ball did not ask for leave to amend, so that should end the matter. But because leave to amend is freely given “when justice so requires,” a few additional comments' are warranted to show justice weighs against a further opportunity to amend. Fed. R. Civ. P. 15(a)(2) (incorporated by Fed. R. Banks. P. 7015); Gen. Elec. Co. v. Sargent & Lundy, 916 F.2d 1119, 1130 (6th Cir. 1990) *716(citations omitted) (a court has discretion to allow amendment, subject to the liberal policies of permitting amendments to ensure a determination of claims on the merits).
Courts may consider “[u]ndue delay in filing, lack of notice to the opposing party, bad faith by the moving party, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of amendment” when deciding whether to permit additional amendments. Hageman v. Signal L. P. Gas, Inc., 486 F.2d 479, 484 (6th Cir. 1973). The Bankruptcy Appellate Panel for this Circuit has discussed when amendment to cure deficiencies should be granted: “ ‘The relevant issues in our inquiry are (1) whether [the party seeking amendment] had sufficient notice that his amended complaint was deficient, and (2) if so, whether [he] had an adequate opportunity to cure the deficiencies.’” Lyon v. Rappaport (In re ClassicStar, LLC), Case No. 10-8509, 2011 WL 652744, at *5 (6th Cir. BAP Feb. 24, 2011) (quoting U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 644 (6th Cir. 2003)).
The Initial Complaint and the Amended Complaint were poorly drafted and contained obvious mistakes. See supra at Sections I.B and I.C. The Bank’s original Motion to Dismiss highlighted these mistakes, which were also discussed in detail at the April 19 hearing. Despite the poor quality of the pleading, the Court gave Ball an opportunity to amend. Ball amended the complaint three times, once before the Court ordered Ball to amend and twice after. He still fails to state a claim upon which relief can be granted. Ball was given adequate notice of the deficiencies and an adequate opportunity to cure them. Allowing another chance to amend is unduly prejudicial to the Bank.
It is also clear any amendment is futile anyway. The prevailing law provides that a contractual setoff is not a judicial or quasi-judicial' process that would violate 42 U.S.C. § 407. See United States Supreme Court in Washington State Dept. of Social and Health Services v. Keffeler, 537 U.S. 371, 123 S.Ct. 1017, 154 L.Ed.2d 972 (2003) (the phrase “other legal process” refers to, at a minimum, formal procedures that involve some form of judicial or quasi-judicial mechanism). The contractual right of setoff was freely given by Ball when he executed the loan documents and exercised by the Bank at a time when there was no bankruptcy proceeding. Therefore, § 407 is not applicable.
Ball cites two cases to avoid this conclusion, neither of which is persuasive. See Hambrick v. First Security Bank, 336 F.Supp.2d 890 (E.D. Ark. 2004); In re Brewer, Case No. 02-32068, 2002 WL 32917680 (Bankr. S.D. Ill. 2002). Brewer was' decided prior to Keffeler. Further, the court in Hambrick does not discuss Keffeler and relies on case law decided prior to the Supreme Court decision. Ball has failed to allege any cause of action that can support his attempt to recover the Funds.
IY. Conclusion.
Ball has not stated a claim that is plausible on its face despite multiple attempts to do so. Therefore, it is ORDERED the Bank’s Motion to Dismiss is GRANTED and the adversary proceeding shall be dismissed with prejudice by separate order.
. 42 U.S.C. § 407 provides that “the right of any person to any future payment under this subchapter shall not be transferrable or assignable at law or in equity,- and none of the monies paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process or to the operation of any bankruptcy or insolvency law."
. Hereinafter references to the Federal Rules of Civil Procedure will appear as "Civil Rule _” and reference to the Federal Rules of Bankruptcy Procedure will appear as "Bankruptcy Rule_”
. A court may take judicial notice of matters of public record and consider documents referred to in a complaint and central to a claim, as well as documents attached to the motion to dismiss, in deciding whether to dismiss pursuant to Civil Rule 12(b)(6). Shirk v. JPMorgan Chase Bank, N.A. (In re Shirk), 437 B.R. 592, 596 n.1 (Bankr. S.D. Ohio 2010). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500900/ | MEMORANDUM OPINION AND ORDER ON UNITED STATES TRUSTEE’S AMENDED COMPLAINT TO REVOKE DISCHARGE (DOC. NO. 4) Judge Caldwell This Memorandum Opinion and Order serves as the Court’s findings of fact and conclusions of law for the United States Trustee’s Amended Complaint to Revoke Discharge (Plaintiff), and the Answer filed by the Debtor, John E. Fonner (Defendant). In the Amended Complaint, Plaintiff charges Defendant with eight counts of alleged violations of United States Bankruptcy Code (Code) Section 727(d)(1). The Defendant filed this Chapter 7 bankruptcy case on July 9, 2015, and Clyde C. Hardesty, III is the case trustee (Trustee). The fraud allegations relate to estate assets, and Defendant’s actions and omissions from 2014 to 2015. Specifically, Plaintiff contends that Defendant’s failure to fully disclose, under oath and on paper, seven oil and gas leases and related income, as well as funds from the sale of musical instruments, amounts to fraud sufficient to revoke Defendant’s discharge. Based upon the evidence, including credibility assessments, the Court finds and concludes that Plaintiff has proven its case, and the Court revokes the discharge. The bases for this decision follow. Defendant’s father died in 2013, leaving him an interest in an estate which included land in West Virginia, subject to oil and gas leases. In 2014 and 2015 preceding the bankruptcy filing, Defendant entered into seven additional oil and gas leases. All of the leases concern land located in Tyler County, West Virginia. The first three of these leases were all between Defendant and Antero Resources Corporation (Antero). Defendant and Antero executed their first lease on January 15, 2014, covering 102.33 acres. Defendant and Antero executed their second lease on June 5, 2014, involving 26.5 acres. Defendant and Antero executed their third lease also on June 5, 2014, and it covered 60 acres. Between these three Antero leases, Defendant received $26,668.76 in signing bonuses. Approximately five months after the execution of the last Antero lease, Defendant and Triad Hunter, LLC, (Triad) executed an oil and gas lease on November 19, 2014, covering 304.79 acres. From this transaction, Defendant received a $2,963.94 signing bonus. Early the following year, on January 5, 2015, Defendant sold two musical instruments to a shop in Lansing, Michigan called Elderly Instruments. The sales included a banjo for a gross price of $2,800.00, and $2,253.00 after expenses, and a Tiple for a gross price of $1,100.00 ($760.58 after expenses). Then on June 18, 2015, less than a month prior to filing bankruptcy, the Defendant signed three additional oil and gas leases, this time with Statoil USA Onshore Properties, Inc. (Sta-toil). The leases respectively covered 41.25 acres, 6.00 acres, and 34.75 acres. Altogether, Defendant received $55,859.38 in signing bonuses. Less than a month later on July 9, 2015, when Defendant filed his Chapter 7 bankruptcy case, he did not disclose any of these oil and gas leases, the related signing bonuses, or the profits from the sale of the musical instruments. At a minimum, this information should have been included on Defendant’s Chapter 7 Means Test Calculation form (Means Test), in response to Questions lor 2 of the Statement of Financial Affairs (Income from employment or business operations, or other), on Schedule G (Executory contracts and unexpired leases), and on Schedule I (Income). Further, after the bankruptcy filing Defendant signed at least two additional oil and gas leases. As part of its statutory duties, Plaintiffs office reviewed Defendant’s Means Test form and found that there was no presumption of abuse under Section 707(b)(2) of the Code. Plaintiffs paralegal testified that if Defendant had accurately completed the Means Test form, there may have been grounds to move for dismissal for abuse, pursuant to Section 707(b)(1) of the Code. Yet, on July 21, 2015, Defendant’s Counsel sent an email to Plaintiff that appears to have included pay advices for 60 days, along with a 2014 tax return. Plaintiffs paralegal credibly testified, however, that he did not receive this communication. A month later, Defendant appeared for questioning at the meeting of creditors conducted on August 18, 2015. At that time, the Defendant testified under oath that there were no errors in his bankruptcy filing, and that he disclosed all assets on the schedules. Only after questioning by the Trustee, Defendant finally revealed the existence of some oil and gas leases and related income. There was no mention, however, of the instrument sales. In response, Defendant was instructed by the Trustee not to cash any further checks from the leases. However, Defendant did just that on November 9, 2016, with a $1,500.00 check. Defendant explained he used the funds to provide Christmas presents for his children. In addition, during the meeting of creditors the Trustee asked Defendant if he had read, signed, and understood all of the documents concerning his bankruptcy filing, and his rights and responsibilities. Defendant responded in the affirmative. The Trustee instructed Defendant that he had to turn over any additional monies he received, post-petition. Finally, the Trustee directed the Defendant to take with him written instructions titled a “Post 341 Responsibilities Sheet”, which reads in relevant part, “... If after today, you discover that as of the date your petition was filed, you owned or had an interest in property or had money, or had any claim against some other person or entity, which was not disclosed in your schedules or in your answers to questions today, you must immediately notify the Trustee of the existence and details of such a claim.” Approximately a month after the meeting of creditors an attorney for Defendant, Denis Blasius, sent the Trustee an email on September 11, 2015. It stated that Defendant had at least two previously undisclosed oil and gas leases. In addition the email stated that “we believe there are additional leases out there,” but was not any more specific. The following month on October 22, 2015, the Trustee received additional correspondence from another attorney for Defendant, Darlene E. Fierle. It included two August 12, 2015, checks for oil and gas leases from Statoil—a check for $9,750.00, and another for $17,875.00. A month later, on November 10, 2015, Defendant received his discharge. Exactly a year later, Plaintiff filed its Amended Complaint under Section 727(d)(1) of the Code that mandates revocation of discharge if it “was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge ....” To prevail Plaintiff must establish actual fraud by a preponderance of the evidence, including the intentional omission of assets from bankruptcy schedules. Humphreys v. Stedham (In re Stedham), 327 B.R. 889, 897 (Bankr. W.D. Tenn. 2005); Sicherman v. Rivera (In re Rivera), 356 B.R. 786 at *5 (6th Cir. BAP Jan. 11, 2007); Johnson v. Meabon, et. al (In re Meabon), 508 B.R. 626, 630-31 (Bankr. W.D.N.C. 2014), aff'd, 514 B.R. 446 (W.D.N.C. 2014). Plaintiff also must prove lack of knowledge of the fraud in sufficient time to oppose the entry of a discharge. In re Meabon, at 630; Lowe v. King (In re King), 2006 WL 3861097, at *3 (Bankr.W.D.Tex. 2006). The Court finds and concludes that Plaintiff has sustained its burden on all counts. Five factors have been most persuasive. First, our bankruptcy system remains a marvel of balance between a “fresh start” for honest but battered debtors, and the hope of recovery for creditors. Schwarz v. Liechti (In re Liechti), 543 B.R. 26, 39 (Bankr. D. MT. 2015). Debtors, however, have duties of candor in their disclosure of assets and liabilities, in exchange for a discharge. 11 U.S.C. § 521(a)(1). Moreover, when represented by counsel, the selected attorney shoulders a significant measure of this responsibility in the form of restrictions, disclosures, and requirements imposed upon attorneys as “debt relief’ providers. 11 U.S.C. §§ 526(a), 527(a), and 528(a). Further, upon filing, all existing legal and equitable interests are fair game for trustee liquidation, subject only to a limited amount of exemptions intended to strike a balance between debtors and creditors. 11 U.S.C. §§ 541(a)(1) and 522(a). This case is singularly noteworthy, however, for the utter failure to grasp and respect this balance. The evident slow-drip provision of information not only impedes administration, but also projects a lack of credibility and intent to deceive through acts and omissions. All this leaves the distinct taste of dishonesty that covers and swallows the whole. Second, Plaintiff proved that Defendant failed to disclose the oil and gas leases, signing bonuses, and the sale of musical instruments on the bankruptcy schedules, means test form, and statement of financial affairs. At best, Defendant provides a cryptic reference on the original Schedule B that he is one of four heirs inheriting land with oil and gas leases- value “Unknown”. Only under questioning from the Trustee did Defendant disclose some of the leases, but leaving out the music instrument sales. Third, Defendant waited until February 9, 2017, to file amended schedules, means test form, and statement of financial affairs. This more than eighteen month hiatus between the initial filing and the amendments demonstrates a lack of candor, appreciation of the discharge privilege, and respect for the interests of creditors. Indeed, Defendant had so little concern that he cashed a $1,500.00 signing bonus check, after being told not to do so by the Trustee. In addition, Plaintiffs paralegal credibly testified that more compléte information on the Means Test form may have altered the related presumption of abused culminating in the filing of a Code Section 707(b)(1) motion to dismiss. Fourth, Defendant swore under oath at the meeting of creditors that his bankruptcy filing was true and accurate, and that he disclosed all assets. To support revocation, parties must demonstrate the existence of a known, intentional, and materially false statement under oath. Saviano v. Tylee (In re Tylee), 512 B.R. 409, 416 (Bankr. E.D.N.Y. 2014). It is not credible that Defendant forgot the oil and gas leases and related signing bonuses, and the music instrument sales, or somehow failed to understand their significance to the bankruptcy filing. The sheer weight of the undisclosed transactions and the glacial revelation amply demonstrate a fraudulent intent to shield and/or delay the administration of significant assets. Fifth, Plaintiff maintains that it did not know of such fraud until after the granting of the discharge. To meet the knowledge requirement pursuant to Code Section 727(d)(1), Plaintiff must establish that it neither knew, nor had reason to know, of the fraud prior to discharge. 11 U.S.C. § 727(d)(1); In re Tylee, at 418-19. On this point, Plaintiffs representative credibly testified that he. never received a Jbly 21, 2015, e-mail from Defendant’s Counsel that appears to include pay advices for 60 days and Defendant’s 2014 tax return. This information, if received, may have provided some indication of the leases and other undisclosed assets. Further, the Trustee first became aware of some of the undisclosed assets during the meeting of creditors, and continued to receive trickles of information from Defendant’s counsel. However, for purposes of revocation of discharge a case trustee is not considered an agent, and his knowledge is not imputed to other parties to the case, including the Plaintiff at hand. McDermott v. Larson (In re Larson), 553 B.R. 646, 654 (Bankr. W.D. Mich. 2016). For all these reasons, the Court finds and concludes Plaintiff has sustained its burden of proof on all counts, and the Court REVOKES Defendant’s discharge. IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500901/ | MEMORANDUM OPINION
Marian F. Harrison, U.S. Bankruptcy Judge
HST Corporate Interiors, LLC (“HST”) filed the above-styled adversary complaint to determine whether its claim against Paul W. Sherrick (“debtor”) is nondis-chargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(14). For the following reasons, which represent the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a)(1), as incorporated by Federal Rule of Bankruptcy Procedure 7052, the Court finds that HST’s claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
I. FACTS
The debtor was the president and sole owner of Sherrick Construction, a Tennessee corporation and certified Small Business Administration 8(a) (“SBA 8(a)”) contractor authorized to obtain federal contracts as a socially or economically disadvantaged business. HST is an Alabama limited liability company in the business of procuring and installing office furniture and equipment in connection with commercial construction projects.
*751In June 2011, HST was negotiating a contract with the United States for the installation of furniture, equipment, and related items at the Hurlburt Field Child Development Center East in Hurlburt Field, Florida (“Hurlburt Field Project”) when it was directed to team with a SBA 8(a) contractor to sign the contract. Because HST had previously tried to partner with Sherrick Construction on a SBA 8(a) contract, Larry Carr (“Mr. Carr”) of HST contacted the debtor by telephone to see if Sherrick Construction was interested in teaming up on the Hurlburt Field Project. Mr. Carr testified that during that telephone conversation, HST entered into a verbal contract with the debtor and Sher-rick Construction whereby HST would procure and install the items for the Hurl-burt Field Project. On July 28, 2011, Brenda Pond (“Ms. Pond”), the contract administrator for HST, emailed a 91-page attachment that provided all the information regarding the Hurlburt Field Project to the debtor, including a detailed invoice, the proposed amount to be paid to Sher-rick Construction ($8960), and the amount of the total contract ($314,500). Later that day, Ms. Pond emailed the debtor to let him know that the contract had been awarded. The government contract was attached, and Ms. Pond asked that the debt- or sign the contract and forward it back to her, which the debtor did that same day. As proposed, Sherrick Construction served as the named SBA 8(a) contractor, and HST purchased and installed the equipment, furniture, and related items for the project. In November 2011, the government asked for some changes. Ms. Pond forwarded the changes to the debt- or, and he signed the amended agreement on November 29, 2011.1 Again, the debtor never asked any questions or expressed any reservations about the agreement or his proposed SBA 8(a) fee. There was never a signed, written agreement between HST and Sherrick Construction or the debtor.
On February 8, 2012, Ms. Pond informed the debtor that there were two small punch items to be completed as well as two pieces of product awaiting arrival before the project would be 100% complete. On February 13, 2012, the debtor emailed Ms. Pond that he thought the project should be invoiced with two billings, the first one at 98% and the second at 2%, because the government is slow to pay final bills. The debtor stated that he was concerned about vendors wanting their money sooner rather than later. Ms. Pond responded on February 28, 2012, that HST had been paying all vendors, so no one was waiting on their money. She further stated “if you are going to invoice now for 98% of the total, once you receive the payment from the government, then those dollars will actually come to us since we have been paying the vendors and you will invoice us for your project management fee of $8960.00. If you want to go ahead and invoice us the $8960.00, we will eertainly cut you a check!”
Velzetta Conyers (“Ms. Conyers”), who coordinated federal contract projects for Sherrick Construction, had no knowledge or involvement in the Hurlburt Field Project until Ms. Pond sent her the information for invoicing the government for the project on February 28, 2012. Ms. Conyers invoiced the government on March 20, 2012. Tammy Holzapfel (“Ms. Hozapfel”), Sherrick Construction’s bookkeeper, had no knowledge of the Hurlburt Field Project until right before Ms. Conyers billed the government. When Ms. Hozapfel asked *752what project the invoice covered, Ms. Co-nyers informed her that the project belonged to the debtor. At that time, either the debtor or Ms. Conyers printed out a copy of the government contract so Ms. Hozapfel could open a file for it. Both Ms. Conyers and Ms. Hozapfel testified that normally they were involved in the contract process but that the debtor handled this project mostly himself.
Sherrick Construction invoiced the government the contract amount of $314,500 in two separate batches on March 20, 2012, and July 19, 2012, which amounts were paid directly into Sherrick Construction’s operating account on April 18, 2012 ($280,-190.83) and August 1, 2012 ($34,309.17).
On July 7, 2012, Ms. Pond emailed the debtor and Ms. Conyers, informing them that HST had not received payment from the project and asking if Sherrick Construction had been paid. Ms. Conyers responded on July 9, 2012, asking for an invoice from HST. Ms. Conyers emailed Ms. Pond again on August 8, 2012, asking about the invoice. Ms. Pond responded that the invoice was attached. Ms. Pond again emailed the debtor and Ms. Conyers on January 24, 2013, stating that the accounting department had informed her that Sherrick Construction had never paid the invoice and requesting that they contact her immediately to discuss when to expect full payment.
Sherrick Construction never paid any amounts associated with the Hurlburt Field Project to HST. In fact, by the time Ms. Pond made inquiries regarding payment and provided the invoice, the proof indicates that Sherrick Construction np longer had the funds to pay HST. From the testimony, it appears that the debtor regularly made transfers from Sherrick Construction’s bank account to his personal bank account. These transfers were in addition to his salary of $2454.54 every two weeks. On May 31, 2012, the debtor transferred $73,161 from Sherrick Construction’s account to his account to pay past due personal income taxes for 2010. From July 2012 to September 2012, the debtor transferred another $24,550 from Sherrick Construction to pay his personal income tax debt. In addition, according to Ms. Holzapfel, Sherrick Construction paid between $75,000 to $100,000 in the first part of 2012 for payroll taxes because the company did not have the money to pay them as they came due. Sherrick Construction was also subject to an insurance audit which cost the company between $45,000 to $50,000.
HST filed a lawsuit against the debtor and Sherrick Construction in the Chancery Court for the State of Tennessee at Davidson County, Case No. 13-1613-IV. The Chancery Court case was set for trial on November 2, 2015, then again on January 13, 2016. On January 12, 2016, the debtor and Sherrick Construction filed for relief under Chapter 11 and proceeded ás debtors-in-possession. The petitions for bankruptcy relief stayed the pending Chancery Court litigation. On March 17, 2016, the debtor and Sherrick Construction moved to convert their cases to proceedings under Chapter 7. On May 3, 2016, this Court granted the motions to convert. Prior to conversion, HST filed adversary complaints to determine the dischargeability of the debt owed by the debtor and Sherrick Construction to HST. The dischargeability action against Sherrick Construction was dismissed by agreed order on September 7, 2016.
II. DISCUSSION
A. Piercing the Corporate Veil
In Tennessee, a shareholder is usually not liable personally for the acts of the corporation. Rogers v. Louisville Land Co., 367 S.W.3d 196, 214 (Tenn. 2012); Oceanics Sch., Inc. v. Barbour, *753112 S.W.3d 135, 140 (Tenn. Ct. App. 2003) (citation omitted) (“A corporation is presumptively treated as a distinct entity, separate from its shareholders, officers, and directors.”). Under appropriate circumstances, a court of equity may disregard the separate legal identity of the corporation. In such a case, the shareholders, as owners of the entity, are considered identical to the corporation and may be held individually responsible for corporate liabilities. Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc., 908 S.W.2d 211, 213 (Tenn. Ct. App. 1995). “The party wishing to pierce the corporate veil has the burden of presenting facts demonstrating that it is entitled to this equitable relief.” Oceanics, 112 S.W.3d at 140 (citation omitted). Because there is a presumption of corporate regularity, “[t]he principle of piercing the corporate veil is to be applied with great caution and not precipitately,” and each case “must rest upon its special facts.” Muroll Gesellschaft, 908 S.W.2d at 213 (citation omitted); Pamperin v. Streamline Mfg., Inc., 276 S.W.3d 428, 437 (Tenn. Ct. App. 2008) (“Piercing the corporate veil is an equitable doctrine applied in extreme circumstances to prevent the use of a corporate entity to defraud or perform illegal acts”).
The evidence presented must show that “the separate corporate entity ‘is a sham or a dummy* or that disregarding the separate corporate entity is ‘necessary to accomplish justice.’” CAO Holdings, Inc. v. Trost, 333 S.W.3d 73, 88 (Tenn. 2010) (quoting Oceanics, 112 S.W.3d at 140); see also Boles v. Nat’l Development Co., Inc., 175 S.W.3d 226, 245-46 (Tenn. Ct. App. 2005) (quoting Fed. Deposit Ins. Co. v. Allen, 584 F.Supp. 386, 397 (E.D. Tenn. 1984) (The fundamental question is whether the corporation is a sham or dummy, and whether the corporation’s separate existence “ ‘has been used to work a fraud or injustice in contravention of public policy.’”); Pamperin, 276 S.W.3d at 437 (“When piercing the corporate veil, a court may disregard the corporate entity in order to impose liability against a related entity, such as a parent corporation or a controlling shareholder, where the two entities are in fact identical or indistinguishable and where necessary to accomplish justice.”). The “[conditions under which the corporate entity will be disregarded vary according to the circumstances present in the case, and the matter is particularly within the province of the [t]rial [c]ourt.” Muroll Gesellschaft, 908 S.W.2d at 213 (citation omitted) (in an appropriate case and in furtherance of the ends of justice, a corporation and individuals owning all its stock will be treated as identical).
There are a number of factors to consider when deciding whether to remove the corporate protection. Rogers, 367 S.W.3d at 215. These include:
(1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities.
Trost, 333 S.W.3d at 88 n.13 (quoting FDIC v. Allen, 584 F.Supp. 386, 397 (E.D. *754Tenn. 1984)). “No single factor among those listed is conclusive, nor is it required that all of these factors support piercing the corporate veil; typically, courts will rely on a combination of the factors in deciding the issue.” Rogers, 367 S.W.3d at 215 (citation omitted). “Even though corporate formalities have been observed, one may still challenge the corporate entity by showing that he has been the victim of some basically unfair device by which the corporate form of business organization has been used to achieve an inequitable result.” Schlater v. Haynie, 833 S.W.2d 919, 925 (Tenn. App. 1991). “However ... the equities must substantially favor the party requesting relief, and the presumption of the corporation’s separate identity should be set aside only with great caution.” Rogers, 367 S.W.3d at 215 (internal citations, omitted). See also Schlater, 833 S.W.2d at 925 (The corporate veil will be pierced “where the corporation is created or used for an improper purpose, or where the corporate form has been abused, as when used to an end subversive of the corporation’s policy.”).
In finding that HST is entitled to pierce the corporate veil to hold the debtor personally liable for Sherrick Construction’s debt, the debtor’s sole ownership of Sherrick Construction and his diversion of corporate funds to pay his personal income taxes are key. At the time the debtor transferred funds to pay his personal tax debt, Sherrick Construction had already received payments on the Hurlburt Field Project. Looking at Sherrick Construction’s bank records, at the end of April 2012, Sherrick Construction’s balance was less than the amount received from the initial payment on the Hurlburt Field Project. The bank balance continued to go down each month until by the end. of October 2012, Sherrick Construction only had a balance of $14,316.36. The debtor testified that the reason he was unable to pay HST’s debt is because he was losing his SBA 8(a) contractor status and because of a sequester on all such jobs. Although the debtor could not have foreseen the sequester, it did not occur until December 2012, approximately seven months after the majority of the payment on the Hurlburt Field Project had been received by Sher-rick Construction and over six months after HST had made inquiries regarding payment. In addition, the debtor clearly knew that Sherrick Construction’s SBA 8(a) contractor status was coming to an end. As he testified, SBA 8(a) status is only good for nine years, and Sherrick Construction’s certification was set to expire in September of 2011. In fact, by the time payments on the Hurlburt Field Project were received, Sherrick Construction no longer had its SBA 8(a) status.
The facts of this case justify piercing the corporate veil. Moreover, as pointed out by the Sixth Circuit Court of. Appeals, a creditor does not have to prove that “the debtor directly and personally received every dollar lost by the creditor.” Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172 (6th Cir. 1996). Instead, a debtor may be liable even when he has only indirectly obtained some tangible or intangible financial benefit. See Ash v. Hahn (In re Hahn), No. 11-3146, 2012 WL 392867, at *4 (Bankr. N.D. Ohio Feb. 6, 2012) (citing Brady).
Having determined that the corporate veil can be pierced in this particular case, the Court now turns to the issues of dis-chargeability.
B. Dischargeability
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 particular debt is nondischargeable. Grogan v. *755Garner, 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, 867, 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).
C. 11 U.S.C. § 523(a)(2)(A)
HST asserts first that the debt is nondischargeable under 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 the following elements:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998) (citing Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir.1993)). When there is evidence of “actual fraud,” a false representation is not a necessary element when considering a dischargeability claim under 11 U.S.C. § 523(a)(2)(A), Husky Internat’l Elecs., Inc. v. Ritz, 578 U.S. —, —, 136 S.Ct. 1581, 1590, 194 L.Ed.2d 655 (2016).
In the present case, there is no proof that the debtor made any material misrepresentation to HST or that any fraudulent scheme took place at the time of the oral agreement. Nor is there any proof that the debtor intended to deceive HST. At the time the debtor agreed to and signed the documents required for the project, there is no indication that the debtor did not intend to pay HST. The debtor testified that the business was doing well at that time, and there was no proof to the contrary.2 Accordingly, the Court finds that HST’s claim of nondischargeability pursuant to 11 U.S.C. § 523(a)(2)(A) is not well taken.
C. 11 U.S.C. § 523(a)(4)
Next, HST asserts that its claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(4). Under 11 U.S.C. § 523(a)(4), 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 defalca*756tion while acting in a fiduciary capacity, and (2) embezzlement or larceny whether or not acting in a fiduciary capacity. Grible v. Carlton (In re Carlton), 26 B.R. 202, 205 (Bankr. M.D. Tenn. 1982) (citations omitted).
1. Fiduciary Duty
In order to find a debt nondis-chargeable under § 523(a)(4) for fraud or defalcation, the Sixth Circuit requires, by a preponderance of the evidence: “(1) a preexisting 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 omit ted). The question of who is a fiduciary is a matter of federal law, although state law gives guidance as to when a trust relationship exists. Carlisle Cashway v. Johnson (In re Johnson), 691 F.2d 249, 251 (6th Cir. 1982) (citation omitted). The Sixth Circuit Court of Appeals has held that federal law places an additional requirement on the “fiduciary” component of § 523(a)(4); it exists only in specific instances “involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor.” R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176, 180 (6th Cir. 1997) (citation omitted). There was no proof of an express or technical trust relationship. Accordingly, no fiduciary relationship existed between the debtor and/or Sherrick Construction with HST.
2. Embezzlement
Embezzlement, on the other hand, does not require the existence of a fiduciary relationship. Under 11 U.S.C. § 523(a)(4), embezzlement is defined as “ ‘the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.’ ” Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir. 1996) (quoting In re Carlton, 26 B.R. at 205)). In order to show embezzlement, a creditor must prove three elements by a preponderance of the evidence: (1) the property of the creditor was entrusted to the debtor; (2) the debtor appropriated the pi'operty for a use other than that for which it was entrusted; and (3) the circumstances indicate fraud. Id. at 1173 (citation omitted). The fraud element may be satisfied by a showing of deceit. See Nat’l City Bank v. Imbody (In re Imbody), 104 B.R. 830, 841 (Bankr. N.D. Ohio 1989) (citations omitted) (“[m]ost courts that have considered the issue have held that acting with deceit will satisfy the fraudulent intent requirement” of embezzlement). The fraud element of 11 U.S.C. § 523(a)(4) is “‘fraud in fact, involving moral turpitude or intentional wrong1 ” and requires “ ‘proof of the debtor’s fraudulent intent in taking the [creditor’s] property.’” Cash Am. Fin. Servs., Inc. v. Fox (In re Fox), 370 B.R. 104, 116 (6th Cir. BAP 2007) (citations omitted). A “debtor’s fraudulent intent may often be shown by circumstantial evidence.” Id. (citation omitted).
In the present case, the proof supports a finding of embezzlement. There can be no dispute that the funds were lawfully entrusted to the debtor and Sher-rick Construction and that the funds were used for other purposes. Moreover, the circumstantial evidence supports a showing of deceit. While no agreement was signed between Sherrick Construction and HST, the debtor implicitly agreed that Sherrick Construction would serve as the SB A 8(a) contractor on the project for a fee. Being the SBA 8(a) contractor meant signing the contract and billing the government, while HST would perform and coordinate all the work on the project. When payments were received for the Hurlburt Field Project, the debtor knew that Sherrick Construction was not enti-*757tied to keep the entire amount. The debt- or, who was proactive in how the government should be billed, made no effort to notify HST when payments were received. The circumstantial evidence suggests that the reason is because at that time, the debtor needed those funds to pay his overdue personal income taxes, Sherrick Construction’s payroll taxes, and significant penalties from an insurance audit. As discussed earlier, the majority of the funds, $280,190.83, were received on April 18, 2012, and yet, Sherrick Construction’s bank account only had a balance of $257,200.47 on April 80, 2012. By the time HST requested information about payment on July 7, 2012, Sherrick Construction’s bank account was further depleted. In response to this inquiry, HST was told that it needed to provide an invoice. This could only be described as a delay tactic because at that time, Sherrick Construction did not have the ability to pay HST what it was owed. Sherrick Construction received the final payment on the project, $34,309.17, on August 1, 2012. By the end of August 2012, the balance of Sherrick Construction’s bank account was at $24,131.82. This was well before the unforeseen sequester in December 2012. Accordingly, the Court finds that HST’s claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
D. 11 U.S.C. § 523(a)(6)
Pursuant to 11 U.S.C. § 523(a)(6), a debt is nondischargeable when the debt is “for willful 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). “[U]nless ‘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 nondischargeable 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).
HST has not shown that the debt- or maliciously intended to harm it. The proof showed that Sherrick Construction and the debtor failed to notify HST when payments were received and that the debt- or instituted stall tactics when HST inquired into whether payments had been received. The proof did not show that the debtor acted maliciously toward HST.
E. 11 U.S.C. § 523(a)(14)
Finally, HST asserts that the debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(14). Section 523(a)(14) has two elements: “(1) the debt must be incurred to pay a tax owed to the United States; and (2) the tax owed to the United States must otherwise be nondischargeable under 11 U.S.C. § 523(a)(1).” Ramey v. Barton (In re Barton), 321 B.R. 869, 876 (Bankr. N.D. Ohio 2004). The Court finds that 11 U.S.C. § 523(a)(14) does not apply in this case. Even if there had been proof that the debt was incurred for the purpose *758of paying the debtor’s personal income taxes and Sherrick Construction’s payroll taxes, such taxes would have been dischargea-ble even if they had not been paid pre-petition.
Sections 523(a)(1)(A) and (B) apply to taxes for which returns were filed, or due, in the three years or two years, respectively, preceding the bankruptcy petition. The debtor filed for bankruptcy relief in 2016, making the appropriate look-back time lines ending in 2013 and 2014, and applying to the taxable years 2012 and 2013, respectively. HST points to tax payments made in 2012 for taxable years no later than 2011. The tax payments which HST identifies were made in 2012, for taxable years no later than 2011. Accordingly, even if HST had shown that the debtor incurred the debt to HST for the purpose of paying tax liabilities, it would still be dischargea-ble under 11 U.S.C. § 523(a)(14).
III. CONCLUSION
Accordingly, the Court finds that the debt owed to HST is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
An appropriate order will enter.
. At this point, Sherrick Construction’s SBA 8(a) certification had expired. As the debtor testified, SBA 8(a) status is only good for nine years, and Sherrick Construction’s certification expired in September of 2011.
. HST also argues that under Tennessee law, a presumption of intent to defraud has been established. The Court rejects this argument. The Tennessee statutory scheme for contractors in T.C.A. § 66-11-140 provides:
Use of the proceeds as enumerated in §§ 66-11-137—66-11-139 for any purpose other than either payment pursuant to written agreement between the parties or in accordance with the allocation of costs and profits under generally accepted accounting principles for construction projects shall be prima facie evidence of intent to defraud. Use of a single business bank account for multiple projects shall not be evidence of intent to defraud.
Under T.C.A. § 66-11-140, a prima facie case of intent to defraud is created, thus shifting the burden of proof to the contractor to show lack of intent. However, nondischarge-ability of a debt under 11 U.S.C. § 523(a)(2)(A) is governed by federal law. Wilson v. Mettetal (In re Mettetal), 41 B.R. 80, 86 (Bankr. E.D. Tenn. 1984) (citation omitted). Thus, the prima facie case set out in T.C.A. § 66-11-140 does not suffice for non-dischargeability under 11 U.S.C. § 523(a)(2)(A). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500902/ | DECISION Brett H. Ludwig, United States Bankruptcy Judge This case involves the court’s power to prevent a debtor’s continuing abuse of the bankruptcy system. Ignacio Mendiola is a repeat filer. Over the last six years, he has filed six Chapter 13 bankruptcy petitions, either individually or jointly with his wife. All five prior cases were dismissed after the debtor failed to make plan payments or otherwise did not comply with his obligations under the Bankruptcy Code. When he again failed to make any payments in this latest case, U.S. Bank National Association, as Trustee for Citigroup Mortgage Loan Trust 2007-WFHE1, Asset-Backed Pass-Through Certificates, Series 2007-WPHE1, (“U.S. Bank”) moved for relief from the automatic stay under 11 U.S.C. § 362(d), and the Chapter 13 trustee moved to have the case dismissed under 11 U.S.C. § 1307(c). Both U.S. Bank and the Chapter 13 trustee contend the debtor’s conduct in this case is so egregious that the court should grant extraordinary forms of relief. In addition to wanting the automatic stay lifted so it can continue foreclosure proceedings on a duplex owned by the debtor and his spouse, U.S. Bank asks the court to order “m rem” relief under 11 U.S.C. § 362(d)(4), precluding the automatic stay from applying to the duplex in any bankruptcy cases filed within the next two years. Similarly, the Chapter 13 trustee seeks not only the dismissal of this case based on the debtor’s failure to make payments, but also an order barring the debt- or from refiling another bankruptcy petition for Í80 days. Both U.S. Bank’s and the Chapter 13 trustee’s requests go beyond the relief typically granted when a debtor fails to make required payments under the code. At a July 25, 2017 hearing, the court granted U.S. Bank’s motion in part, lifting the stay as to the duplex in this case and taking under advisement the bank’s request for section 362(d)(4) in rem relief. After hearing testimony and further argument on August 22, 2017, the court granted the relief requested by both the bank and the Chapter 13 trustee. (See ECF Doc. 41, Order Granting U.S. Bank National Association’s Motion for In Rem Relief From the Automatic Stay, entered 8/23/2017; and ECF Doc. 42, Order Granting Chapter 13 Trustee’s Motion to Dismiss and Enjoin the Debtor From Filing Another Bankruptcy Case for a Period of 180 Days, entered 8/23/2017.) This decision supplements the court’s earlier rulings. BACKGROUND The debtor holds an interest in a duplex located at 918-920 South 14th Street in Sheboygan, Wisconsin. The property is not the debtor’s homestead; it is an income-producing rental property. Depending on whether one believes the debtor’s hearing testimony or the sworn statement in his Official Form 122C-1, the debtor and his wife receive either $950 or $1,100 each month in rents from the duplex’s tenants. Either way, it is clear the property provides significant income that the debtor could use to fund a Chapter 13 plan. He has repeatedly chosen not to do so. U.S. Bank is the current holder of a promissory note and mortgage on the duplex. The debtor’s spouse signed the original note and mortgage on October 18, 2006. The original loan amount was $31,500, and it appears the debtor and his spouse made payments during the first several years of the note. Beginning in 2011, however, the debtor and his wife embarked on a course of conduct through which they filed repeated bankruptcy petitions, forestalling U.S. Bank’s efforts to collect on the note, while collecting significant rental income, precious little of which found its way to U.S. Bank. At the same time, U.S. Bank incurred additional costs to protect its mortgage interest, paying real estate taxes and insurance costs on the duplex property. As a result, today, nearly 11 years after the loan originated, the unpaid principal balance on the note is $28,563.22, with additional interest, fees, costs and escrow deficiencies bringing the total debt owed U.S. Bank to $42,971.40. As the debt was increasing, the debtor and his spouse collected more than $120,000 in rental income from the property. According to the debtor’s schedules, the duplex is worth $40,700, slightly less than the amount the debtors owe the bank. The debtor filed his first Chapter 13 bankruptcy petition, jointly with his spouse, on June 6, 2011. His bankruptcy schedules listed the duplex as a non-homestead, income-producing property, generating $1,000 each month in rental income. Even with this rental income, the debtor and his spouse made no post-petition mortgage payments to U.S. Bank. Less than five months after the case began, the bank moved for and received relief from the automatic stay, giving it the ability to pursue state court remedies with respect to the duplex. At about the same time, on November 28, 2011, the bankruptcy court dismissed the entire ease based on the debtor’s failure to make other required payments. With the stay lifted and the bankruptcy case dismissed, on January 6, 2012, U.S. Bank filed a foreclosure lawsuit. That lawsuit had not proceeded far, when, on February 17, 2012, the debtor and his spouse filed a second Chapter 13 petition, successfully halting the bank’s foreclosure efforts. Having still not received mortgage payments for months, U.S. Bank moved for relief from stay again. In response, the debtor urged the bankruptcy court to keep the stay in place, claiming he failed to pay the bank because he misunderstood whether he or the trustee was supposed to disburse the payments. The court denied U.S. Bank’s motion, but subjected the debtor to a six-month “doomsday order,” under which U.S. Bank could obtain relief from the stay if the debtor missed any of his next six monthly mortgage payments. By August of 2012, the Chapter 13 trustee was already seeking dismissal of the debt- or’s bankruptcy case, this time based on the debtor’s failure to file his tax returns as required by 11 U.S.C. § 1308. The court granted the trustee’s motion, dismissing the second case on September 24, 2012. With the debtor’s second bankruptcy case dismissed, U.S. Bank tried to resume its foreclosure action, then still pending in state court. But on November 12,2012, the debtor thwarted the bank’s efforts by filing his third Chapter 13 petition, this one again filed jointly with his spouse. Of the debtor’s bankruptcy cases, this effort lasted the longest, and the debtor made some mortgage payments to U.S. Bank. On July 8, 2014, the bankruptcy court dismissed the debtor’s third case after the debtor violated a court order requiring him to remit half of his 2012 tax refund to the Chapter 13 trustee for distribution to creditors. By this time, the state court had dismissed U.S. Bank’s first foreclosure action, requiring the bank to file a new foreclosure lawsuit, which it did on November 26, 2014. The new foreclosure filing prompted the debtor to file his fourth Chapter 13 petition on February 17, 2015. This fourth bankruptcy case lasted less than a year, ending when the debtor failed to make required payments, and the court, on October 5, 2015, dismissed that case too. Unlike his prior petitions, the debtor filed this fourth bankruptcy case, and all subsequent cases, individually and was not joined by his spouse. After the dismissal of the debtor’s fourth bankruptcy case, U.S. Bank finally got as far as obtaining a default judgment of foreclosure from the state court. Before the bank could take action on that judgment, however, the debtor filed his fifth Chapter 13 petition on January 13, 2016, a filing that appears to have successfully caused the state court to vacate the default judgment. It is otherwise hard to characterize the debtor’s fifth bankruptcy as a “success.” On December 22, 2016, the bankruptcy court dismissed that case too, after the debtor again failed to make required payments. With the fifth bankruptcy ended, U.S. Bank started its third foreclosure action on February 9, 2017. Shortly thereafter, the debtor filed his sixth Chapter 13 petition on April 19, 2017. In this latest case, the provisions of 11 U.S.C. § 362(c)(3)(B) would have caused the automatic stay to expire as a matter of law thirty days after the debtor filed his bankruptcy petition. To avoid this, the debtor filed a timely motion to continue the stay, a motion that neither U.S. Bank nor any other creditor opposed. The court required the debtor to testify at a May 16, 2017 hearing, and while ordering the stay continued, specifically cautioned the debtor on the importance of complying with the terms of his plan, the requirements of Chapter 13, and all other obligations under the Bankruptcy Code. Notwithstanding the court’s warning, the debtor has not complied with his post-petition obligations to U.S. Bank or with his bankruptcy obligations in general. The debtor has made no post-petition mortgage payments to U.S. Bank or to the Chapter 13 trustee, leading to the bank’s motion for relief from the stay and the trustee’s motion to dismiss. ANALYSIS Both U.S. Bank and the Chapter 13 trustee contend that the debtor’s history of repeated filings warrants the ordering of extraordinary remedies to protect the bankruptcy system from abuse. U.S. Bank invokes the court’s power to grant in rem relief from the automatic stay under 11 U.S.C. § 362(d)(4). The Chapter 13 trustee asks the court to dismiss this latest case under 11 U.S.C. § 1307(c) and to order a 180-day ban on the debtor filing another bankruptcy petition under 11 U.S.C. §§ 105(a) and 349(a). Because the record establishes that this case presents particularly égregious circumstances, the court will grant both requests. A. The Court’s Power to Grant In Rem Relief under Section 362(d)(4). Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition results in an automatic stay barring creditors from proceeding with most collections efforts. A creditor who wishes to continue a collections action can ask the bankruptcy court for an order under section 362(d)(1) “terminating, annulling, modifying, or conditioning” the stay if the creditor can establish “cause.” U.S. Bank has done so here. It has shown that the debtor failed to make any postpe-tition payments to U.S. Bank under the terms of the note secured by the duplex. The court agrees that this failure constitutes cause sufficient to terminate the automatic stay with respect to the. duplex. See In re Borm, 508 B.R. 104 (8th Cir. BAP 2014) (holding bankruptcy court abused its discretion in denying motion for relief from stay where debtors admittedly failed to make post-confirmation mortgage payments); In re Lopez, 446 B.R. 12 (Bankr. D. Mass. 2011) (concluding “cause” existed for lifting stay where debtor was three months in arrears on his postpetition mortgage payments and had no equity in property). U.S. Bank seeks additional in rem relief under 11 U.S.C. § 362(d)(4). This subsection empowers the court to provide additional relief in circumstances where an ordinary order granting relief from the automatic stay will be ineffective to protect the secured creditor’s rights. 9B Am. Jur. 2d Bankruptcy § 1849 (2017). An order granting relief under section 362(d)(4), if properly recorded under state law, remains “binding” on the property in any future bankruptcy case filed in the next two years. Thus, the automatic stay remains lifted as to the real property subject to the order, even if the debtor files further bankruptcy petitions. 11 U.S.C. § 362(d)(4). To obtain a new stay of collections proceedings, the debtor must affirmatively seek court relief from the in rem-order in the later case. Relief under section 362(d)(4) is an extraordinary remedy that is available only in limited situations. First, the creditor seeking relief must have a claim secured by an interest in real property. Second, the debtor’s bankruptcy petition must have been “part of a scheme to delay, hinder, or defraud creditors.” Third, the scheme must have been one involving either “(A) transfer of all or part ownership of, or other interest in, [the] real property without the consent of the secured creditor or court approval; or (B) multiple bankruptcy filings affecting such real property.” 11 U.S.C. § 362(d)(4). U.S. Bank readily satisfies the first and third conditions. It is a secured creditor with a claim secured by real property—the debtor’s duplex. And, as the background section of this decision details, the debtor has a long history of multiple bankruptcy filings affecting the duplex. The more complicated question is whether the debtor’s bankruptcy filing is part of a “scheme to delay, hinder, or defraud creditors.” U.S. Bank’s burden in establishing a “scheme” under section 362(d)(4) was clarified in 2010, when Congress amended the statute to make the terms “delay,” “hinder,” and “defraud” disjunctive. The amendment made clear that to warrant in rem relief, a creditor need only show a scheme to delay, or to hinder, or to defraud—the creditor need not prove all three. In re Spencer, 531 B.R. 208, 217 (Bankr. W.D. Wis. 2015). The debtor argues there is no proof that his bankruptcy filing was part of a scheme. Instead, he maintains, the i’ecord simply shows a series of repeated filings and “screw-ups” on his part as he stumbled along without an intent to delay, hinder or defraud creditors. The evidence shows otherwise. The number and timing of the debtor’s Chapter 13 petitions compels the conclusion that the, debtor’s bankruptcy petition was part of a scheme as that term is used in section 362(d)(4). The debtor has now filed six Chapter 13 petitions since June of 2011. The timing of the filings and dismissals of those cases over the past six years shows a scheme to delay and hinder U.S. Bank. After his first bankruptcy was dismissed, U.S. Bank began its first foreclosure action, only to have its effort thwarted when, just one month later, the debtor filed his second bankruptcy petition. When that second bankruptcy case was dismissed, and U.S. Bank tried to proceed with its foreclosure action, the debtor filed a third bankruptcy petition just two months later. When the third bankruptcy case was dismissed, and U.S. Bank filed a new foreclosure action, the debtor filed his fourth bankruptcy case. When the fourth bankruptcy case was dismissed, and U.S. Bank finally obtained a default judgment of foreclosure, the debtor filed his fifth bankruptcy case. And, when the fifth bankruptcy case was dismissed, and U.S. Bank filed its third foreclosure action, the debtor filed this, his sixth bankruptcy case. This pattern suggests something beyond mere inadvertence, as the debtor suggests; it is evidence of a scheme to delay and hinder the bank. The court is mindful that repeated filings on the brink of a creditor’s collections efforts are not necessarily disposi-tive. The Code does not prohibit a debtor from filing multiple bankruptcy petitions. And, it is often the case that a debtor resorts to bankruptcy only when forced to do so by a creditor’s impending collections efforts. A court should not presume that a debtor is acting in bad faith or that a second or even a third successive filing is necessarily part of a “scheme.” See In re Danley, 540 B.R. 468, 476 (Bankr. M.D. Ala. 2015). But here the record contains additional facts that refute the debtor’s contention that he was acting innocently. First, the number and pattern of Chapter 13 filings is significant. This case is not the second or third bankruptcy case that the debtor filed to stop a creditor’s collections efforts. It is the sixth case in just six years, and the debtor timed all of the filings to thwart U.S. Bank’s efforts to collect on its note and foreclose on the duplex. The greater the number of filings that fit this pattern, the more things look like a scheme. Second, the record shows a lack of any serious' effort by the debtor to see his cases through to completion. All of his Chapter 13 cases have been of limited duration. Four of the six cases, including this latest case, were dismissed within eight months of being filed. Most of the dismissals resulted from the debtor’s failure to make required payments. That the debtor repeatedly filed and then repeatedly failed to make payments, allowing his cases to be dismissed, only to file again, supports a finding that his petition was part of a scheme to delay or hinder U.S. Bank. Third, the property that is the subject of the motion for in rein relief is a non-homestead rental property. During the six-year period since his first bankruptcy filing, the debtor and his spouse collected thousands of dollars of rental income each year from the duplex. The debtor could have used that income to pay U.S. Bank or fund his Chapter 13 plans. But he chose not to do so. Instead, the debtor misused the bankruptcy system so that he could retain a non-homestead property, and the substantial rental income that it generated, without having to pay U.S. Bank, the creditor that provided the funds with which the income-producing property was purchased to begin with. If this is not a scheme to defraud U.S. Bank, it certainly comes close. And, even if it is not a scheme to defraud, it is plainly a scheme to hinder or delay the bank. Section 362(d)(4) allows the court to provide relief that will prevent this scheme from continuing. The' court’s order will apply to all parties having an interest in the subject real property, including subsequent ownership interests. See In re Alakozai, 499 B.R. 698, 704-05 (9th Cir. BAP 2013). While the debtor filed some of his prior bankruptcy petitions jointly with his wife, who also has an interest in the duplex, he filed this one individually. The debtor offered no explanation for the different bases for his filings. U.S. Bank points out that because this latest case was not filed jointly, even if the court were to grant relief from the stay to U.S. Bank and grant the Chapter 13 trustee’s motion to dismiss with a 180-day refiling bar (more on that below), U.S. Bank would remain at risk that a new foi*eclosure proceeding would be derailed by a new bankruptcy filing by the debtor’s spouse. By ordering in rem relief, the court ensures that the game of hindrance and delay will end. B. The Court’s Power to Dismiss a Case and Prohibit Refiling. Bankruptcy Code section 1307(e) permits a bankruptcy court to dismiss a Chapter 13 case for “cause,” including the “failure to commence making timely payments under section 1326 of this title.” 11 U.S.C. § 1307(c)(4). Here, the debtor failed to begin making plan payments within 30 days after the petition was filed. The debt- or also failed to make regular plan payments thereafter. Both failures violate 11 U.S.C. § 1326 and plainly constitute “cause” for dismissal under 11 U.S.C. § 1307(c). The court thus grants that portion of the trustee’s motion. The trustee asks the court to go further and to enjoin “the debtor from filing another bankruptcy case in this district or any other district, without leave of this court for a period of 180 days.” This additional request for relief necessitates a more robust analysis. Generally, the dismissal of a debt- or’s bankruptcy ease does not “prejudice the debtor with regard to the filing of a subsequent petition.” 11 U.S.C. § 349(a). The statute qualifies this general rule, allowing the court to order otherwise “for cause.” While “cause” is not defined, the statute provides guidance. Section 349(a) refers to section 109(g), for example. Section 109(g) provides for a 180-day bar against refiling in two situations: (1) where a dismissal results from the debtor’s willful failure to abide by court orders or to appear before the court; or (2) where “the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.” 11 U.S.C. § 109(g). While neither subsection is directly applicable—-the current dismissal is for failure to make plan payments, not violations of court orders or failure to appear at a hearing, and the dismissal is on motion from the Chapter 13 trustee, not a voluntary request from the debtor in the face of a motion for relief from stay—both subsections are instructive. They demonstrate a desire to prevent debtors from disrespecting or abusing the bankruptcy system and give the court discretion, in those settings, to hold that a debtor has forfeited the right to file another bankruptcy petition for six months or even longer1 Bankruptcy courts are not powerless to stop such abuses, even if they do not fall directly within the instances set forth in section 109(g). Indeed, section 105(a) specifically gives the court general equitable powers to take actions “necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” 11 U.S.C. § 105(a). The court agrees with the Chapter 13 trustee that the circumstances of this case show an abuse of the system, warranting departure from the ordinarily non-prejudicial nature of a dismissal order. The debtor is a serial filer who has repeatedly sought the protections of bankruptcy in an effort to thwart the foreclosure efforts of U.S. Bank. Along with repeatedly defaulting on the terms of his mortgage,' the debtor has failed to make plan payments for a sustained period in any of his five previous cases. See In re Grischkan, 320 B.R. 654 (Bankr. N.D. Ohio 2005) (barring repeat debtor from refiling a case for 180 days based on debt- or’s repeated failure to fund plans while the cases were pending). The debtor pre-sented no credible evidence to rebut or explain any of the abuses evident by the chronology. The court will therefore impose a 180-day ban on re-fíling. Separate orders consistent with this decision have been entered. . See, e.g., In re Dempsey, 247 Fed.Appx. 21 (7th Cir. 2007) (holding that the bankruptcy court had authority to bar refiling for one year pursuant to sections 109(g) and 105(a)); In re Casse, 198 F.3d 327, 337-38 (2d Cir. 1999) ("Indeed, in all circuits but the Tenth, bankruptcy courts and district courts invariably derive from § 105(a) or § 349(a) of the Code, or from both sections in some cases, the power to sanction bad-faith serial filers [...] by prohibiting further bankruptcy filings for longer periods of time than the 180 days specified by § 109(g).”); In re Gonzalez-Ruiz, 341 B.R. 371, 386 (1st Cir. BAP 2006) ("[T]he better reasoned approach is that articulated by the many courts which have ruled that the bankruptcy court has the power in an appropriate case to prohibit a serial filer from filing petitions for reasons other than lack of eligibility under § 109(g) and for periods of time exceeding 180 days”); In re Garcia, 479 B.R. 488 (Bankr. N.D. Ind. 2012) (applying a three-year ban). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500903/ | *767MEMORANDUM DECISION
Catherine J. Furay, U.S. Bankruptcy Judge
The Debtor, Cindy L. Kitzerow, moves the Court to allow her to file a proof of claim on behalf of Summit Credit Union (“Summit”) approximately six (6) months after the claims bar date. For the reasons described below, the Debtor’s motion to allow an untimely proof of claim for Summit’s secured claim is denied. Further, however, the terms and provisions of the confirmed plan shall be enforced.
Background
On September 23, 2015, the Debtor filed a voluntary Chapter 7 petition. Her case was converted to a Chapter 13 on December 1,2015.
A new meeting of creditors under section 341(a) of title 11 was set for January 15, 2016. Notice of that meeting was sent to the Debtor, all creditors—including Summit—and to the Trustee. By operation of Rule 3002(e), the date for filing a proof of claim was set as April 14, 2016.
The Debtor filed the requisite Chapter 13 Plan and Schedules on December 3, 2015. Schedule D listed Summit as a secured creditor holding a lien against a 2007 Jeep Grand Cherokee in the amount of $7,950, and an unsecured claim in the amount of $10,601. The Plan specifically, and separately, classified the Summit secured claim. It provided for retention of the lien and for payment of the secured amount of $7,950 with an interest rate of 5% in installments of $125 per month. The Plan did not itemize the unsecured claims. It simply provided for pro-rata distribution to unsecured creditors.
Summit received notice of the Debtor’s Plan on December ,6, 2015. January 15, 2016, was the last day to object to confirmation of the Debtor’s Chapter 13 Plan. No objections were filed. The Court confirmed the Debtor’s- Plan on January 25, 2016.
The claims bar date of April 14, 2016, passed without Summit filing a proof of claim for this secured claim. The additional 30 days permitting a debtor to file a proof of claim on behalf of a creditor also passed without the filing of a claim for the Summit secured claim.1 On October 26, 2016, a proof of claim for Summit was filed. On December 12, 2016, the Debtor filed a motion to allow that claim. The Trustee objected and requested a hearing on the motion. In the absence of a proof of claim, the Trustee has not made distributions to Summit on the secured claim as provided in the confirmed Plan.
Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157(a). 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. Western District of Wisconsin Administrative Order 161 (July 12, 1984).
This matter concerns 1) the allowance or disallowance of a claim against the Debt- or’s bankruptcy estate and 2) the effect of a confirmed Chapter 13 plan. As a result, this is a core proceeding under 28 U.S.C. §§ 157(b)(2)(B) and (L).
Discussion
The goal of any Chapter 13 debtor is to have the bankruptcy court confirm their plan. “[Pjlan confirmation ... alters the status quo [of a case] and fixes the rights and obligations of the parties.” Bullard v. Blue Hills Bank, — U.S. —, *768135 S.Ct. 1686, 1692, 191 L.Ed.2d 621 (2015). Pursuant to section 1327(a) of title 11, confirmation of a plan binds “the debt- or and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.” 11 U.S.C. § 1327(a). Importantly, Section 1326(a)(2) provides inter alia that “[i]f a plan is confirmed, the trustee shall distribute such payment in accordance with the plan as soon as practicable.”
The issue raised by the Trustee balances on the interplay between an “allowed” claim under section 502(a) and the binding effect of a confirmed plan under section 1327(a). The objection of the Trustee is based on the Pajian decision. To receive payments under a debtor’s Chapter 13 plan, a creditor must hold an “allowed” claim. In re Pajian, 785 F.3d 1161, 1163 (7th Cir. 2015); see also Fed. R. Bankr. P. 3021, Once filed, the claim is allowed unless a party in interest objects. 11 U.S.C. § 502(a). However, in the event no exception applies and a proof of claim is not timely filed, courts have determined that no hearing on a claim objection is required because the' claim is time barred. Section 502(b)(9).
The issue in Pajian centered on the narrow issue of whether Fed. R. Bankr. P. 3002(c)’s deadline applied only to unsecured creditors. Id. at 1163. In finding Rule 3002(c)’s deadline applies to both unsecured and secured creditors, the court concluded that Rule 3002(c)’s deadline allows the debtor to finalize a Chapter 13 plan without creditor interference. Id. To this end, the court in Pajian underscored a distinction between cases in which there is no confirmed plan on file and a creditor files a proof of claim after the bar date with cases in which a creditor attempts to file a proof of claim after confirmation. See id. at 1164. This case is neither. Nothing in Pajian prevents a debtor from proposing treatment of a secured claim through a plan and giving notice of that proposal to the creditor. The creditor then has a right to object to the proposed treatment. If the creditor fails to object, it will be bound by the provisions of the plan. 11 U.S.C. § 1327.
The policy decisions underlying Pajian further illustrate the narrow scope of the holding in that case. In Pajian, a debtor filed a Chapter 13 petition triggering notice of the claims bar date to all of the debtor’s creditors. In re Pajian, 785 F.3d at 1162. There was not a confirmed plan, and the amended plan proposed only post-petition mortgage payments and nothing more to the secured creditor despite the fact there was an acknowledged prepetition arrearage. The secured creditor objected to the plan and filed a proof of claim three months after the claims bar date. Id. Unsurprisingly, the debtor objected to the untimely filed claim. Id. In determining that the claims bar date applied equally to secured and unsecured claims, the Seventh Circuit said:
Requiring all creditors to file claims by the same date allows the debtor to craft and finalize a Chapter 13 plan without the concern that other creditors might swoop in at the last minute and upend a carefully constructed repayment schedule. If we held otherwise, secured creditors could wreak havoc on the ability of the debtor and the bankruptcy court to assemble and approve an effective plan. Each tardy filing from a secured creditor would likely require the debtor to file a modified plan, which would have to be served on all interested parties and considered by the court. All this would often lead to disruptive delays in plan confirmation hearings and would ulti*769mately hinder the bankruptcy court’s ability to manage its docket.
Id. at 1163.
Contrary to the facts in Pajian, here there is a confirmed Plan, and Summit received notice of the Plan. The Plan detailed the specific treatment of Summit’s secured claim. Summit did not object to the Plan. In fact, -with regard to the secured portion of the claim sought to be allowed at this time, the proof of claim and schedules provide for a secured claim in the exact amount contained in the Plan, for interest at the rate stated in the Plan, and for payments identical to the amounts stated in the Plan.
The Pajian decision did not address the provisions of the Code and Rules that apply to the effect of a confirmed plan on specifically identified claims for which detailed provision is made. Section 1326(a)(2) commands the trustee to distribute payments in accordance with the confirmed plan. The section does not distinguish between filed and unfiled claims. The confirmed Plan in this case directs precise payments to be made to Summit on account of its secured claim.
Rule 3021 provides that once the bankruptcy court confirms a plan, “distribution shall be made to creditors whose claims have been allowed .... ” Fed. R. Bankr. P. 3021. Rule 3021 is a generic rule in that it does not distinguish between a Chapter 11, 12, or 13 plan, nor does it specifically reference an allowed claim under Code sections 502(a) and (b)(9). Further, section 1326(a)(2) does not direct the trustee to distribute payments in accordance with Rule 3021.
Courts have a duty to harmonize conflicts between statutes or statutes and rules. See Norman J. Singer, et al., Sutherland Statutory Construction § 53:1, at 375-76 (7th ed. 2012). In this case, the question is whether there is a conflict between Rule 3002, Rule 3021, and section 1326(a)(2).
The bankruptcy court in In re Dennis, 230 B.R. 244, 252 (Bankr. D.N.J. 1999) (quoted at length in In re Hrubec, 544 B.R. 397 (Bankr. N.D. Ill. 2016)), succinctly reconciled the apparent conflict by reasoning that section 1327(a) binds both the creditor 'and debtor to the debtor’s proposal to pay a certain amount to the creditor. Id. at 252. This proposal constitutes an admission on behalf- of the debtor that “such creditor has an allowed secured claim to the extent provided by the plan.” Id. Accordingly, confirmation “allows” the secured claim to the extent provided for in the plan under section 1327(a), and the trustée is required to pay the secured creditor pursuant to section 1326(a)(2) and Rule 3021 without consideration of whether a claim was filed pursuant to Rule 3002. Id. This also harmonizes the directive of section 1326 commanding the trustee to make distributions as provided in the plan.
This finding does not disrupt the Seventh Circuit’s reasoning in Pajian. It is also consistent with the clear analysis of the Hrubec court. There, as here, a Chapter 13 debtor listed a creditor’s secured claim on his bankruptcy schedules. In re Hrubec, 544 B.R. at 398. As in Pajian, the claims bar date came and passed without the creditor filing a proof of claim. Id. However, in his proposed Chapter 13 plan, the Hrubec debtor included payments to the creditor on account of that secured debt. Id. The standing Chapter 13 trustee recommended against confirmation, and moved to dismiss. Id. The Hrubec court concluded that since the creditor did not object to the debtor’s plan, it was not necessary for it to file a proof of claim rendering the debtor’s plan “not uncon-firmable.” Id. Further, nothing in section 502(a) explicitly requires the filing of a claim as a prerequisite to allowance. 9 *770Collier on Bankruptcy ¶ 3002.01[2], n.12 (16th ed.).
As the Seventh Circuit recognized in Pajian, a confirmed plan alters the landscape of a bankruptcy case. See id. at 1164. Summit had notice and the opportunity to file a proof of claim or to object to the proposed plan treatment of its secured claim. While the better practice would have been for Summit (or the Debtor or Trustee on its behalf) to file a claim, it did not do so. The Plan included an amount for the secured claim and payment terms for the claim. No objections were filed and the Plan was confirmed, thus binding Summit and the Debtor to an established payment to satisfy the Summit secured claim.
The Pajian case deals only with the potentially disruptive effect on the plan process of late filed secured claims. It does not deal with the potentially disruptive effect on a confirmed plan and the distribution process that a failure to file a secured claim might have, or the potential for abuse that refusing to file such a claim could have.
Secured creditors are protected by their liens to the extent provided in the plan. It is well established that secured creditors will not forfeit their liens if they merely fail to file a proof of claim. Susan V. Kelly, Ginsberg & Martin on Bankruptcy § 15.03[G]; see also Shelton v. Citi-mortgage, Inc. (In re Shelton), 735 F.3d 747 (8th Cir. 2013), cert. denied (finding secured creditor’s lien cannot be avoided even when creditor filed an untimely claim). It is equally well established that when there is specific notice of the treatment of a secured creditor’s claim in a proposed plan, the plan confirmation process may function to determine the secured claim and its treatment. The critical factor is whether the creditor has notice of the specifics of its treatment and of what is at stake for it. See, e.g., Green Tree Fin. Servicing Corp. v. Karbel (In re Karbel), 220 B.R. 108 (10th Cir. BAP 1998); In re Tirone, 2012 Bankr. LEXIS 3661 (Bankr. N.D. Ohio 2012); In re Franklin, 448 B.R. 744, 747 (Bankr. M.D. La. 2011). This provides debtors with an effective way of dealing with secured creditors and providing for such creditors even if they do not file a claim. See In re Harvey, 213 F.3d 318 (7th Cir. 2000).
Conclusion
Summit retains its lien on the Debtor’s Jeep until completion of the Plan and discharge. The Debtor and Summit are bound by the confirmed Plan. Accordingly, once the Debtor completes the plan, Summit’s lien will be satisfied and released if the Debtor completes the payments under the confirmed Plan. Summit is entitled to no more payment on its secured claim beyond that contained in the Plan. The Plan provides for payment of $7,950 as the Summit secured claim, and directs payment of that amount with interest at 5% simple annual interest in monthly installments of $125.00. By operation of section 1327(a), the parties are bound by the Plan treatment of the secured claim, and the Trustee is directed to disburse Plan payments in accordance with section 1326(a)(2). Having failed to file a timely claim for the unsecured portion of the car loan, that claim is barred and upon receipt of a discharge, that unsecured claim will be discharged.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
A separate order consistent with this decision will be entered.
. Summit was well aware of the bar date as illustrated by the filing of an unsecured claim for an unrelated debt in the amount of $4,345.61 before the expiration of the bar date. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500904/ | Eddward P. Ballinger Jr., Bankruptcy Judge
On December 27, 2015, this Court approved Debtors’ request to employ BGC Real Estate of Arizona, LLC, dba New-mark Grubb Knight Frank, and its agents, Geoffrey M. Waldrom and Dan Dobric (jointly referred to hereinafter as “BGC”), to market and sell certain real estate of Debtors. Debtors sought BGC’s employment pursuant to 11 U.S.C. § 327 and agreed to pay BGC a fixed commission based on a percentage of the selling price as provided in the listing agreement executed between the parties. The Court retained the right to adjust the commission pursuant to Local Bankruptcy Rule 2014-1 *772and 11 U.S.C. § 828(a). In addition, BGC was required to file an application for expense reimbursement pursuant to ■ 11 U.S.C. § 330(a)(1)(B). Notably, the listing agreement also contained a prevailing party provision: “In the event a claim or controversy arises between the parties, the prevailing party shall, be entitled to its costs and reasonable attorneys’ fees in any legal action.” Exhibit A, Docket 179.
After the sale of the property, Debtors objected to BGC’s commission. The Court overruled Debtors’ objection and concluded that BGC was entitled to a 4% sales commission and permitted BGC to file an application for attorney’s fees and costs pursuant to the listing agreement and Arizona Revised Statute (“A.R.S.”) § 12-341.01. BGC filed its application seeking fees under the listing agreement’s prevailing party provision, A.R.S. § 12-341.01, and 11 U.S.C. § 330(a)(3). Debtors objected on a variety of grounds that the Court rejected during the hearing held on April 11, 2017. However, at that hearing, the United States Trustee questioned whether the fees were prohibited by the United States Supreme Court’s decision in Baker Botts L.L.P. v. ASARCO LLC, — U.S. —, 135 S.Ct. 2158, 192 L.Ed.2d 208 (2015) and its progeny. The Court granted the parties the opportunity to brief the issue.
The Court has reviewed the parties’ briefs and additional relevant case law.
I. Baker Botts L.L.P. v. Asarco LLC
The issue in Baker Botts was whether 11 U.S.C. § 330(a)(1) permits a bankruptcy court to award a professional employed under 11 U.S.C. § 327(a) legal fees incurred in defending its fee application (“defense fees”). 135 S.Ct. at 2162-63. The debtor in Baker Botts hired two law firms to represent it in its Chapter 11 bankruptcy proceeding. Both firms sought compensation under § 330(a)(1)(A), which allows for “reasonable compensation for actual, necessary services rendered by ... a professional person, or attorney.” The bankruptcy court awarded the law firms approximately $120 million for the work performed and an additional $5 million for fees incurred defending their fee applications. Debtor appealed, inter alia, the defense fee award.
The Supreme Court’s opinion begins by recognizing the well-settled American Rule that each litigant pays its own attorneys’ fees unless a statute or contract explicitly provides otherwise. The question presented was whether 11 U.S.C. § 330(a)(1)(A) is an explicit statutory exception to this rule. The Court held that it was not because professionals employed pursuant to § 327 are employed to “serve'the administrator of the estate for the benefit of the estate.” Id. at 2164. In turn, § 330(a)(1)(A) provides that a “court may award ... a professional employed under section 327 ... reasonable compensation for actual, necessary services rendered by” the professional. The Court concluded that attorneys’ fees incurred defending a fee application are not incurred for the benefit of the estate or in service of the estate. They are incurred only for the benefit of the professional. Id. at 2165.
While in this case BGC initially sought its defense fees pursuant to § 330(a)(3), as opposed to § 330(a)(1), the Baker Botts analysis equally applies to a request under that subsection. Subsection (a)(3) defines what constitutes reasonable compensation for purposes of subsection (a)(1) and similarly relies on the fees being necessary and for the benefit of the administration of the estate.
II. In. re Boomerang Tube, Inc.
Alternatively, BGC argues that Baker Botts expressly recognizes that a contractual exception to the American Rule may *773also exist. Thus, under the prevailing party provision in the listing agreement, BGC believes it is entitled to its defense fees. Debtors argue that In re Boomerang Tube, Inc., 548 B.R. 69 (Bankr. D. Del. 2016), rejects contracting around Baker Botts. Debtors are somewhat correct. The UST in Boomerang made the very argument Debtors make here—that Baker Botts per se barred fee defense provisions, but the court in fact recognized that contractual exceptions continue to exist post-Baker Botts: “[T]he Court agrees with the Committee’s argument that the contract exception to the American Rule is not precluded by the ruling in ASARCO [Baker Botts].”1 Id. at 73. The practical effect of Boomerang, however, suggests that contracting around Baker Botts will be difficult, if not impossible.
In Boomerang, the UST appointed an Official Committee of Unsecured Creditors, which in turn retained legal counsel. Committee counsel sought approval under § 328 of a provision in the retention agreements requiring the estate to indemnify counsel for expenses incurred in successfully defending their fees, subject to court approval under §§ 330 and 331. The court sustained the UST’s objections to these provisions, concluding that the indemnification provisions were not generally recognized exceptions to the American Rule. Id. at 74-75. Unlike a true prevailing party provision, the subject indemnification provisions were unilateral, requiring only debtor’s estate to reimburse the defense fees. Committee counsel owed no reciprocal obligation to the estate. Additionally, the agreements were between the Committee and counsel. The estate was not a party. Yet they purported to require payment from the bankruptcy estate regardless of who objected to counsel’s fees.2 The Court then addressed whether the fee defense provision was permissible under 11 U.S.C. § 328(a), which requires the employment of a professional be on “reasonable terms and conditions” and concluded such a provision was not reasonable because it could benefit only the professional and not the estate.3
In a subsequent Delaware case, In re Nortel Networks, Inc., 2017 WL 932947 *774(Bankr. D. Del. 2007), the court permitted the recovery by the indenture trustees’ attorneys of their defense fees against the debtor based on a provision in the bond indenture obligating debtor to pay the attorneys’ defense fees. In rather conclusory fashion, the court held that, unlike the retention agreement in Boomerang, the indenture in Nortel Networks provided “for payment of the Indenture Trustees’ and its attorneys’ fees incurred in the fee dispute” because it required “Debtors ... to indemnify the Indenture Trustee for ‘costs and expenses of defending itself” and entitled “the Indenture Trustee to exercise a charging lien against distributions to secure payment.” Id. at *9. Accordingly, the court ruled that the indenture “is clearly outside the circumstances of AS-ARCO and Boomerang.” Id.
Diverging post-Baker Botts cases do little to resolve the issue here. And there does not appear to be any citable Ninth Circuit precedent. It is noteworthy that the Baker Botts and Boomerang cases involved requests for defense fees incurred by professionals employed pursuant to § 327. In the case at hand, only BGC was employed in its role as a commercial real estate broker. In-house counsel for BGC was not employed. Our case is more similar to that in In re Walker Land & Cattle, LLC, 535 B.R. 348 (Bankr. D. Idaho 2015)(post-Baker Botts) and Max Rouse & Sons, Inc. v. Specialty Plywood, Inc. (In re Specialty Plywood, Inc.), 160 B.R. 627 (9th Cir. BAP 1993), opinion withdrawn following settlement, 166 B.R. 153 (9th Cir. BAP 1994).4
III. In re Walker Land & Cattle, LLC and In re Specialty Plywood, Inc.
In both Walker and Specialty Plywood, the courts refused to award professionals their legal fees pursuant to § 330(a)(1) because the fees were not those of court-employed professionals. Rather, they were fees of the attorneys hired “by” the court-approved professionals. Consistent with Baker Botts, neither court found the fees reimbursable under § 330(a)(1)(B) as “actual, necessary expenses” of the court-approved professionals despite the fact that the retention and engagement letters between debtors and the professionals explicitly provided for recovery of such attorneys’ fees under certain circumstances.
In Walker, the bankruptcy court approved debtor’s application to employ an auditor to prepare financial statements. The employment application did not indicate that the auditor might retain counsel to advise her in connection with the audit, but the engagement letter between the auditor and debtor did. It specifically provided that if the auditor were required by court order or subpoena, to produce documents or witnesses with respect, to its engagement, debtor would be obligated to reimburse the auditor for her time and expenses, as well as any fees and expenses of legal counsel retained to respond to those requests. A creditor subsequently subpoenaed the auditor’s records, and the auditor hired legal counsel. The auditor sought reimbursement of her attorneys’ fees in her subsequent application and debtor objected.
As a preliminary matter, the court pointed out that the attorney itself would have no authority to seek its fees directly from debtor pursuant to § 330(a) because it was not employed as a professional pursuant to § 327(a). 535 B.R. at 351-52. Courts require strict compliance with §§ 327 and 330 so that professionals “ ‘cannot recover fees for services rendered to *775the [bankruptcy] estate unless those services have been previously authorized by a court order.’” Id. at 351 (citing In re Melton, 353 B.R. 901, 903 (Bankr. D. Idaho 2006)(quoting Atkins v. Wain, Samuel & Co. (In re Atkins), 69 F.3d 970, 973 (9th Cir. 1995)). While not expressly saying so, the court apparently distinguished the facts of its case from those presented in Baker Botts, which the Walker court cited only once for the holding that reasonable compensation will be paid to those professionals employed under § 327 as long as compensation requested was for actual, necessary services rendered or expenses incurred. Id.
The auditor argued that her attorneys’ fees were reimbursable under § 330(a)(1)(B) as expenses and pointed to the fact that the debtor agreed in the retention agreement to reimburse such expenses. After surveying divided case law on the subject, the court, relying in part on Specialty Plywood, denied the auditor’s attorneys’ fees, concluding (as in Baker Botts) that the fees were not necessary to accomplish the task for which the auditor was hired.
Without such a limitation, potentially, whenever a bankruptcy court-approved professional deems it necessary to employ another professional to protect its interests in the bankruptcy case, that cost would be taxed to the bankruptcy estate, effectively negating the Code’s regimen requiring prior notice to other interested parties, and the necessary scrutiny by the court, before committing the limited resources of the bankruptcy estate to the payment of professional compensation.
Id. at 356-57.
Also pertinent to this case, the Walker court noted that the language in the retention agreement expressly permitting recovery of fees was not applicable because the order approving the auditor’s employment was limited to only those amounts allowed under § 330.
This result obtains despite the authority ostensibly granted to [the applicant] in the engagement letter to hire a lawyer, and to charge Debtor for the fees [she] thereby incurred. While the terms of the engagement letter are clear enough to cover the ... fees, as noted above, the Court’s order approving ... employment limited her entitlement to payment of compensation and expenses to only those amounts allowed under § 330. Moreover, only the bankruptcy court, not the debtor in possession and professional, can determine, applying the standard embodied in § 330(a)(1)(B), as developed in the case law, what expenses were necessary.
Id. at 357. Similarly here, the order approving BGC’s employment expressly provided only for BGC’s percentage commission as set forth in the retention agreement and those expenses allowed under § 330(a)(1)(B). Docket 196.
In Specialty Plywood, debtor employed an auctioneer pursuant to § 327. The property sold for less than debtor anticipated, and debtor objected to the auctioneer’s fees. The auctioneer hired counsel to defend its fee application and requested approval of those attorneys’ fees as a reimbursable expense. The BAP denied the auctioneer’s request on several grounds. First, it concluded that the contractual right to fees did not provide for fees in this particular circumstance because the contract required the fees to arise out of a breach or failure of a condition of the contract. According to the court, the auctioneer incurred its fees in filing its fee application and not in an action to enforce the agreement. “The litigated issues in the fee application process were federal bankruptcy law issues, the litigation of which does not give rise to any rights to recover *776fees under a contractual fee provision such as the one at issue in this appeal.” 160 B.R. at 632. Second, it concluded that § 330(a) did not provide a statutory basis because the fees requested were not those of an approved professional. Id. Third, even if counsel were an approved professional, the fees were not “actual, necessary expenses” pursuant to § 330(a)(1)(B) because they were not incurred “to accomplish the task for which the professional was employed.” Id. The auctioneer had already completed the auction and only hired counsel afterward to defend its application for payment.
Based on the foregoing, the Court concludes that BGC is not entitled to an award of its attorneys’ fees incurred defending its commission. Bankruptcy is highly regulated, and Congress has placed significant limits and controls on the employment and payment of professionals to prevent dissipation of limited estate assets. To this end, courts require strict compliance with these rules and Code provisions. To allow professionals to contract around the requirements of sections 327, 328 and 330 in this situation would eviscerate the requirement that professionals be paid for the actual, necessary services they provided and expenses they incurred on behalf of the estate. Although this case involves in-house counsel for BGC, that does not mean counsel was employed as a professional pursuant to § 327.
Additionally, the defense fees were not actual or necessary to the work for which BGC was specifically employed. The defense fees in no way benefitted the estate. The prevailing party provision in the listing agreement is very broad and does not suggest that defense fees could or would be sought in this case and the purported right to receive these fees was not considered by this Court. The order approving BGC’s employment made no mention of the prevailing party provision. The parties referred solely to BGC’s right to receive its commission as set forth in the listing agreement and that any reimbursement of expenses would be made pursuant to § 330(a)(1)(B). While Baker Botts recognizes that contractual fee provisions may provide an exception to the American Rule for purposes of sections 327, 328 and 330, it is difficult to see a situation in which such a prevailing party provision could be upheld at least with respect to attorneys’ fees incurred defending a professional’s compensation. At minimum, such a provision would need to be brought to the Court’s attention during consideration of the professional’s application to e¡mploy.
Finally, BGC argues that application of Baker Botts merely reduces its fees because a good portion of the fees was incurred in preparing its request for fees, as opposed to defending its commission. The Court disagrees. A review of the billing statements attached to the fee application all relate to the dispute over BGC’s commission. An award of fees against the estate for preparing that fee application constitutes overreaching.
For these reasons,
IT IS HEREBY ORDERED denying BGC’s Application for Attorney’s Fees and Costs. Counsel for BGC shall lodge a form of order consistent with this decision.
SO ORDERED.
. The Committee counsel in Boomerang also sought to recover its defense fees pursuant to 11 U.S.C. § 328(a). The Boomerang court concluded, relying on Baker Botts, that § 328(a), like § 330(a)(1), is not an explicit statute authorizing the award of defense fees to a professional. Rather, § 328 simply provides that a court may approve employment of a professional on "any reasonable terms and conditions.” Further, and also in line with Baker Botts, the court concluded that such defense fees were not rendered in service to the Committee, but were only for counsel's benefit. Id. at 75.
. The court noted in a footnote, however, that even if the agreements required payment by one of the contracting parties, it still would not uphold the provisions because "[s]uch provisions are not statutory or contractual exceptions to the American Rule and are not reasonable terms of employment of professionals.” Id. at 79, n.6.
.Several Delaware courts have relied on Boomerang to deny applications to employ that contained more traditional prevailing party and fee defense reimbursement provisions. See Joseph C. Barsalon II, Delaware Bankruptcy Court Denies "Fees on Fees” Provision in Retention Application, American Bar Association, Section of Litigation: Bankruptcy & Insolvency (June 1, 2016), http://www. americanbar.org (citing In re New Gulf, No. 15-12566 (BLS)(letter ruling to counsel); In re Taylor-Wharton, No. 15-12075 (BLS)(same); In re Samson, No. 15-11934 (CSS) (same)); see also Natasha Congonuga, Delaware Bankruptcy Court Finds Contractual Workarounds to ASARCO to be Unworkable, The Business Advisor (March 30, 2016), http://www.gibbonslaw.com; Carmen Ger-maine, Kirkland Can’t Collect Fee Fight Costs in Samson Ch. 11, Law360 (Feb. 9, 2016), http ;//www.law360, com/articles/756842.
. While the 9th Circuit BAP subsequently withdrew its opinion in Specialty Plywood due to the parties’ settlement, the analysis is instructive and prescient of the analysis to come later in Baker Botts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500905/ | MEMORANDUM DECISION AFTER TRIAL
Charles Novack, U.S, Bankruptcy Judge
Over a five day period, this court conducted a trial in the above adversary proceeding in which plaintiff United States Trustee (the “Trustee”) sought to deny debtor and defendant Joshua Hedlund’s Chapter 7 discharge under Bankruptcy Code §§ 727(a)(2)(A) and (a)(4). While this adversary proceeding was filed more than seven years ago and has had its fair share of twists and turns, the Trustee’s arguments are straightforward: Hedlund committed numerous false oaths by failing to disclose all of his property interests on his bankruptcy schedules and statement of financial affairs, and he concealed his ownership interest in numerous assets with the intent to hinder, delay or defraud his creditors. Hedlund denies the Trustee’s allegations, and argues, among other things, that he was incarcerated when his bankruptcy was filed and did not authorize or ratify his bankruptcy filing, that he was represented by incompetent counsel who repeatedly failed to obtain the information necessary to complete his Chapter 11 and (later) his Chapter 7 bankruptcy documents, and that he cooperated with the Chapter 7 trustee and tried to disclose all necessary information to him and the Chapter 7 trustee’s counsel. The Trustee has met her burden of proof, and for the reasons stated below, this court denies Hedlund’s Chapter 7 discharge.
The following constitutes this court’s findings of fact and conclusions of law under F.R.B.P. 7052(b). Defendant Joshua Hedlund is a college educated, experienced real estate investor who, in the early 2000s, owned for development (either directly or through various limited liability entities) significant acreage in Humboldt and Mendocino County in Northern California. Hedlund also owned a house and adjacent, undeveloped land in Santa Cruz, California. While Hedlund employed a bookkeeper, Stacy Speelman (who also provided some property management services), and frequently used the services of a real estate loan broker, Wendy Feltzer, to address the financial needs of his real estate holdings, Hedlund was the controlling figure in all of his real estate enterprises, which involved several limited liability companies and trusts. Hedlund was the sole person who fully understood their organizational structure, holdings, and liabilities. To a third party, be it this court or a Chapter 7 trustee, his real estate investments are difficult to decipher.
Hedlund’s financial difficulties began in 2006 when he was indicted on numerous criminal offenses by the U.S. Attorney’s Office for the Northern District of California for allegedly participating in a marijuana grow and distribution scheme. Hedlund eventually pled guilty to reduced charges and began serving a thirty three month sentence in May 2009. Until he was released in December 2011, Hedlund’s ability to manage his real estate holdings was *780significantly curtailed. While Speelman initially visited Hedlund several times a month in the Lompoc, California federal prison camp, Hedlund was subsequently placed in solitary confinement and moved to a federal prison in Minnesota. His communication privileges were restricted for several months, and when restored, were essentially limited to emails and phone calls to counsel.
Before surrendering, Hedlund took some steps to ensure that his real estate holdings would remain intact. For example, Hedlund executed certain limited power of attorneys to his brother (Ben Hed-lund), mother, and his long-time girlfriend. He did not, however, provide Speelman with a power of attorney.
Hedlund’s Chapter 11 case was filed on September 4, 2009 as a “skeletal” bankruptcy filing to stay the foreclosure of Hedlund’s Santa Cruz properties. Judson Farley, a long-time bankruptcy attorney, filed the bankruptcy on his behalf. Hed-lund was incarcerated when Farley filed the Chapter 11, and Hedlund did not review the bankruptcy petition or initial bankruptcy schedules and statement of financial affairs before they were filed. There is little question, however, that Hed-lund orchestrated his bankruptcy filing. Speelman testified that Hedlund instructed her to file a Chapter 11 bankruptcy for him if she could not prevent the foreclosure of his Santa Cruz properties, and to provide all necessary information to the bankruptcy attorney that she hired. After notices of sale were posted on the Santa Cruz properties, Speelman hired Farley and provided him with the information that he used to complete the original bankruptcy petition, schedules,- and statement of financial affairs, Speelman did not, however, sign the bankruptcy petition, schedules, or statement of financial affairs on Hed-lund’s behalf, and she informed Farley that he needed to discuss this directly with Hedlund. Speelman also testified that Hed-lund wanted to work with Farley directly, and that he never asked her to sign the bankruptcy documents prepared by Farley.
Hedlund’s original bankruptcy schedules and statement of financial affairs were woefully incomplete. While his Bankruptcy Schedule A listed his Santa Cruz properties, his Schedule B and Statement of Financial Affairs listed interests in only three LLCs—Schmook Ranch, LLC, H & H Management, LLC (“H & H Capital”), and Ruby Creek Ranch, LLC—and his Schedule B did not list any vehicles or equipment. Hedlund actually held or claimed membership or equitable interests in several unscheduled real estate LLCs or trusts which controlled thousands of acres of land in Northern California. These unscheduled entities included the Larabee Land and Cattle Trust and Villica LLC.1 Hedlund believed that these real estate entities had substantial equity. Hedlund also owned an all terrain Mercedes Benz Unimog vehicle used in his land development projects, and further claimed—but failed to disclose on his Schedule B—that Schmook Ranch LLC owed him $1,4 million. See Trustee’s Exh. 82. The poor quality of Hedlund’s original bankruptcy documents is not surprising, Speelman was not privy to all of the intricate specifics of Hedlund’s real estate holdings and invest*781ments, and Farley did not contact Hedlund before he filed these documents to verify that he was authorized to file Hedlund’s Chapter 11 or to confirm the accuracy of the bankruptcy schedules and statement of financial affairs2.
Hedlund promptly contacted Farley after he learned of his Chapter 11 bankruptcy filing. This correspondence, if nothing else, demonstrates that Hedlund sought and supported the bankruptcy filing and wanted his schedules to be accurate in order to obtain the full protection afforded by the automatic stay. For example, in a September 9, 2009 letter to . Farley, Hed-lund writes: Dear Judson: Stacy [Speel-man] filed Chapter 11 bankruptcy with you on my behalf. Please send me a copy of all documents that have been filed. Please request copies of all financial documents from Stacy that I filed in my federal criminal case, please send them as well.... I just sent Stacy a long letter which I would like to be sent by you to Washington Mutual: Chase Bank. Please contact her ... to get a copy of the letter. I look forward to meeting 'you on the phone or otherwise, and thank you for representing me. As soon as I am in possession of financial documents (sent by you) showing my current assets and liabilities, as well as my current credit report, I will lay out a plan of action to ensure all creditors are paid.”
Hedlund repeated his request for all filed documents in a short letter to Farley dated September 23, 2009, in which he also stated his “concern[ ] that some properties I hold in a living trust may not have been submitted.” He repeated this concern in a September 29, 2009 letter to Farley, in which he advised Farley that he had received a three day notice for his commercial tenancy in Santa Cruz, and that “this lease should be in my personal bankruptcy. I still have not received a copy of what was submitted to the court. I want to make sure that my bankruptcy is true and correct. Please send me what has been submitted at your earliest convenience.”
While there is no evidence that Farley responded to Hedlund’s document requests, Speelman testified that she sent the petition, schedules and statement of financial affairs to Hedlund immediately after Farley filed them. There is little reason for this court to question Speelman’s testimony on this point. Speelman had worked for Hedlund for several years before his Chapter 11 bankruptcy filing, and was, by all accounts, a trusted employee. She assisted Hedlund not only in his personal bankruptcy, but also in the 2010 Chapter 11 bankruptcy filings' of several LLCs in which Hedlund was the controlling member. Moreover, Hedlund acknowledged that he reviewed (in some form or fashion) his bankruptcy documents while he was incarcerated. His familiarity with these documents is manifested in numerous letters and pro se bankruptcy pleadings (that he wrote and/or filed within a year of his bankruptcy filing), all of which state that his bankruptcy documents were inaccurate and required significant amendments. See, e.g., Trustee’s Exhs. 11, 12, 120, and 122. Indeed, in a June 15, 2010 letter to Richardson, Hedlund informed him that he is “currently attempting to reproduce accurate bankruptcy schedules of my personal debts.”
Despite these admissions and representations, Hedlund only amended his Bank*782ruptcy Schedules A and D once (on November 18, 2010) to list an interest in real property located at 1777 Sprowell Creek Road, Garberville, California and the associated secured debt. See Trustee’s Exh. 43. Hedlund admitted at trial that he filed these amendments after learning that the Garberville property was subject to foreclosure proceedings. Tellingly, H & H Capital owned the Garberville property up until November 2010, when it transferred title to Hedlund who promptly sought to use the automatic stay to prevent its foreclosure. See Trustee’s Exh. 34.4 Hedlund never amended his Schedule B or Statement of Financial Affairs to list any additional LLC memberships or equitable interests in any trusts.
Hedlund’s Chapter 11 case was converted to Chapter 7 on March 12, 2010. John Richardson was appointed as the Chapter 7 trustee, and he retained Charles Maher, an experienced trustee counsel (then with the Luce Forward law firm) to represent him. Maher’s investigation into Hedlund’s assets was stymied by Hedlund’s failure to amend his bankruptcy schedules. Rather than file amended schedules A and B to list his interest in his numerous real estate entities and personal property, Hedlund contended that he had disclosed all of his holdings to the United States Probation Department and Department of Justice as part of his guilty plea, and that Maher should obtain the necessary information from these entities. This disclosure was an inadequate substitute for amended bankruptcy schedules, as the United States government refused to release this information to Maher. Hedlund also informed Maher that the Baker & McKenzie law firm had conducted a thorough tax audit which also would disclose his assets and liabilities. In an August 5, 2010 email, Hed-lund instructed Scott Frewing (a Baker & McKenzie tax attorney) to release his personal tax returns and certain LLC returns to Maher and Richardson. While Frewing’s reply email indicates that he sent the returns for two LLCs and Hedlund’s personal 2005 and 2006 tax returns to Richardson and Maher, Maher testified that he did not specifically recall receiving them. Moreover, this court does not know how useful these returns would have been to Maher. Simply, rather than file amended bankruptcy schedules to list all of his real and personal property, Hedlund required Maher and Richardson to ferret out this information. While Hedlund did provide Maher with some specific information regarding assets and liabilities, the release of information was sometimes associated with a pending foreclosure. For example, on May 21, 2010, Hedlund informed Maher by letter that he and H & H Capital had “significant equity in heavy industrial construction equipment that was purchased from Komatsu Financial. My understanding is that this equipment has been repossessed *783by agents of Komatsu. I believe that- the automatic stay in my personal bankruptcy proceeding should extend to this equipment and any related lawsuit.... I want to make sure that the equity in this equipment is used to pay my Unsecured Creditors. I am concerned that Judson Farley has not accurately disclosed in the schedules that I have multiple unsecured creditors. I have made a complete disclosure to the DOJ and US Probation in my criminal case.” Maher thereafter investigated this matter, only to learn that H & H Capital owned the equipment and that Hedlund had only guaranteed the debt. Hedlund also informed Maher that he. had an equitable interest in the Garberville property, for which he did amend his Schedule A in November 2010. Maher thereafter filed an adversary proceeding to stay the foreclosure, which he later dismissed. None of the property pursued by Maher in reliance on Hedlund’s statements generated any funds for the bankruptcy estate. While Maher continued to work on the Hedlund Chapter 7, he eventually stopped recording his time due to the futility of his efforts.5
Hedlund also testified that he spent a significant amount of time at county recorder offices locating documentation which he provided to Maher or the trustees in the bankruptcies filed by some of his entities. Again, what he failed to do, however, is simply amend his bankruptcy schedules and statement of financial affairs and allow Maher to investigate these assets in his own manner.
1. Ratification-of the Chapter 11 Filing
Hedlund argues that this court should dismiss this adversary proceeding because he never authorized his Chapter 11 filing. This court declines to so, and instead finds that he ratified the Chapter 11 bankruptcy filing. Ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons,.is to treat the act as if originally authorized by him. Rakestraw v. Rodrigues, 8 Cal.3d 67, 73, 104 Cal.Rptr. 57, 500 P.2d 1401 (1972). An unauthorized bank ruptcy filing may be ratified by the debt- or’s subsequent conduct. See Hager v. Gibson, 108 F.3d 35, 39-40 (4th Cir. 1997). The record is replete with facts substantiating that Hedlund sought and approved of the bankruptcy filing. Hedlund instructed Speelman to file a bankruptcy if his secured creditors posted his Santa Cruz properties, thanked Farley for filing the Chapter 11 and sought to direct his actions in the case, regularly participated in his Chapter 11 and then his Chapter 7 case by submitting pleadings and making telephonic appearances (see Farley’s deposition testimony), and used his personal bankruptcy filing when it benefitted him to do so.6 The *784more critical question, is whether his conduct justifies the denial of his discharge.
2. Denial of Discharge
Bankruptcy Code § 727(a)(4)(A) provides in pertinent part that “The court shall grant the debtor a discharge unless ... the debtor knowingly and fraudulently, in or in connection with the case—(A) made a false oath or account....” This court may deny a Chapter 7 debtor’s discharge if 1) the debtor made a false oath in connection with the case; 2) the oath related to a material fact; 3) the oath was made knowingly; and 4) the oath was made fraudulently. Plaintiffs must establish these elements by a preponderance of the evidence. In re Retz, 606 F.3d 1189, 1197 (9th Cir. 2010) (citing Roberts v. Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005)); In re Coombs, 193 B.R. 557, 560 (Bankr. S.D. Cal. 1996) (citing In re Bodenstein, 168 B.R. 23, 27 (Bankr. E.D.N.Y.1994)). This code section is liberally construed in a debtor’s favor and strictly against the party seeking to deny the discharge. In re Retz, 606 F.3d 1189 (9th Cir. 2010).
A false oath may involve an affirmatively false statement or an omission from a debtor’s bankruptcy schedules of statement of financial affairs. Searles v. Riley (In re Searles), 317 B.R. 368, 377 (9th Cir. BAP 2004) (citations omitted), aff'd, 212 Fed.Appx. 589 (9th Cir.2006). A material fact is one that “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.” In re Khalil, 379 B.R. 163, 173 (9th Cir. BAP 2007). Notwithstanding this broad definition, a “false statement or omission that has no impact on the bankruptcy case is not material and does not provide grounds for relief for denial of a discharge under § 727(a)(4). Id. at 172. An act is done “knowingly” when the debtor acts “deliberately or consciously.” Id at 173. Finally, a false oath or omission is fraudulent when the debtor makes a misrepresentation or an omission that at the time he or she knew was false with the intention and purpose of deceiving creditors. Ibid. Courts typically rely on circumstantial evidence to demonstrate this intent. In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985). Recklessness alone does not establish a debtor’s fraudulent intent. It can, however, form a part of the circumstantial evidence typically used to establish fraudulent intent, along with a pattern of falsity. Khalil, 379 B.R. at 174-75.
The goal of . § 727(a)(4) is transparency. “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.” Khalil, 379 B.R. at 172. Bankruptcy schedules “call for the truth and an accurate itemization of the debtor’s assets and of the values of debtor’s assets,” and “a debtor has a continuing duty to assure the accuracy of his schedules; the proper method of correction is a formal amendment of the schedules.” In re Pynn, 546 B.R. 425, 430 (Bankr.C.D.Cal. 2016).
This court could not find any case where a debtor who ratified his bankruptcy filing was denied his Chapter 7 discharge because his original schedules, which were prepared without his assistance, contained false oaths.7 Hedlund craved control and privacy, and his ability *785to manage his personal bankruptcy filing and submit accurate bankruptcy documents was compromised by his stint in solitary confinement, overall communication restrictions, and Farley’s breathtakingly inadequate legal work. Regardless, the Trustee has met her burden of proof.
Typically, a false oath is complete when made, i.e. when the offending bankruptcy schedule or statement of financial affairs is filed. Here, the false oath was “made” by Hedlund after he reviewed the bankruptcy schedules and statement of financial affairs, acknowledged that they were incorrect, and then failed to file or attempt to file accurate schedules and statement of financial affairs. Hedlund cannot reap the benefits of the bankruptcy (the automatic stay, among others) without accepting its burdens, which include filing accurate bankruptcy documents. Hedlund repeatedly acknowledged- that his schedules were inaccurate, yet he filed only one amendment to Schedule A, which sought to include an asset which was not property of his bankruptcy estate.8 Moreover, Hed-lund’s incarceration did not prevent him from correcting his schedules. Hedlund prepared and filed numerous pleadings in his personal bankruptcy (and the bankruptcies of his related LLCs and trusts) while in prison, and he surely could have amended his schedules after he was released in December 2011. Accordingly, the Trustee has proven that Hedlund made false oaths.
Hedlund’s false oaths also related to material facts. Hedlund believed that the assets omitted from his bankruptcy schedules and statement of financial affairs had significant value. The same is true with regard to the Garberville property amendment. Hedlund valued the Garberville property on his amended Schedule A at $640,000, with $540,000 of debt against it.
Furthermore, there is little question that Hedlund knowingly omitted to list a) his interests in Villica LLC, Larabee Land and Cattle Trust, and b) Unimog vehicle, and c) his substantial dollar claim against Schmook Ranch, LLC, and knowingly sought to include the Garberville property in his Chapter 7.
Finally, the Trustee has proven that Hedlund’s conduct was fraudulent. Hed-lund amended his Schedule A to include the Garberville property even though he was never on title before his case was converted to Chapter 7, all in an effort to stop its foreclosure. Such action is the epitome of deceptive conduct, and it alone is sufficient to deny Hedlund’s discharge under § 727(a)(4)(A). Hedlund’s material omissions, while more perplexing, were also deceptive. Despite his stated desire to pay his creditors in full, Hedlund disclosed his real and personal property interests only in a manner and order that he deemed appropriate. Hedlund’s Chapter 7 case was the means by which to satisfy his creditors, and his failure to file accurate schedules underscores that his real desire was to reveal as little as possible in order to retain as much control as possible over the outcome. While the Trustee did not fully explain why Hedlund’s conduct did not match his words, this court need not ascertain his true motivation. See Khalil at 176. Hedlund indicated during trial that his unease with amending his schedules and statement of financial affairs related to the conditions of his supervised release from federal prison, and the possibility *786(real or imagined) that his jail term would be extended if some one argued that his bankruptcy schedules and statement of financial affairs were inconsistent with the information he provided to the Department of Justice. While this court understands Hedlund’s self-described “paranoia” about avoiding a prolonged incarceration, this does not excuse his failure to comply with another federal decree—the Bankruptcy Code. Moreover, the only District Court order admitted into evidence that addressed this issue is an “Order For Modification Of Supervised Release” signed by United States District Court Judge Yvonne Gonzalez Rogers on July 25, 2013—almost four years after Farley filed the Chapter 11. Simply, the scale of his omissions, combined with his repeated failure to amend his schedules and statement of financial affairs, his several statements to Maher that Maher should seek out the information on his own, his attempts to list property which he did not own to improperly invoke the automatic stay, along with his propensity for privacy and control, lead this court to find that Hedlund intentionally and knowingly failed to disclose all of his financial holdings to Maher and Richardson in order to somehow retain control over their disposition. This is deceptive conduct. The court takes judicial notice that six years after the case was converted to Chapter 7, Richardson filed a “no asset” report.
Accordingly, Hedlund’s Chapter 7 discharge is denied under Bankruptcy Code § 707(a)(4)(A).
The Trustee also seeks to deny Hed-lund’s discharge under Bankruptcy Code § 727(a)(2)(A). This code section authorizes the denial of a discharge if the debtor transferred, removed, destroyed, mutilated, or concealed his/her property within one year of the petition date with the intent to hinder, delay or defraud creditors.
The Trustee has not met her burden of proof on this claim for relief. The Trustee has not demonstrated by a preponderance of the evidence which personal assets Hed-lund (allegedly) concealed from creditors with the intent to hinder, delay or defraud within a year before the petition date9.
The Trustee shall prepare an appropriate judgment.
. Of these entities, Schmook Ranch, LLC filed a Chapter 11 in June 2009, Larabee Land and Cattle Trust filed a Chapter 11 in February 2010, and Vilica, LLC filed a Chapter 11 in February 2011. These cases were filed by Speelman or Hedlund's brother, Benjamin Hedlund. The evidence strongly suggests that Hedlund instigated and directed these entities while they were in Chapter 11. See, e.g„ Trustee’s Request For Judicial Notice No. 6. These bankruptcy filings demonstrate that Hedlund was well aware of his responsibilities as a debtor and debtor-in-possession in his bankruptcy. ,
. The Trustee argues in her closing brief that Hedlund may also have interests in several other trusts and LLCs, and failed to disclose some assets which he listed in a pre-petition loan application that he submitted to Stone-crest Financial. The Trustee never proved by a preponderance of the evidence that Hed-lund held any property interest (cognizable under Bankruptcy Code § 541(a)) in any of these other entities or in the disputed property listed on the loan application.
. Hedlund also instructed Farley to amend the schedules to add his interest in a Santa Cruz commercial lease to address an unlawful detainer action filed by the landlord. Farley complied with this request and filed an amended Schedule G on November 2, 2009. See Trustee’s Exhs. 3 and 7.
. The Trustee also asserts that Hedlund claimed to have interests in several promissory notes and real property parcels purportedly held by or in some of the various LLCs and trusts that he managed. See, e.g., Trustee’s Exh. 119B. Exhibit 119B is a December 23, 2009 email from Hedlund to Wendy Fetzer in which he lists various assets which could be sold or refinanced to "generate enough funds to bring current all of our lenders.” This email certainly illustrates the complexity of his real estate investments and his absolute control over the various entities which owned these assets. Given his use of the word "We” when describing them, this email does not, however, prove that he was on title to the real estate in question or was the payee of the notes. The Trustee concedes as much in her closing brief,
. The complexity of Hedlund’s real estate related holdings and the need for complete bankruptcy schedules are fully detailed in Hedlund’s "Opposition to Motion For Order For Substantive Consolidation” that he filed pro se from Sandstone federal prison in August 2010 (Trustee's Exh. 24). The consolidation motion was filed by Richardson, who sought to consolidate Hedlund’s bankruptcy estate with H & H Capital, Vilica, LLC, San Gerónimo Salmon Trust, Fire Hill Conservation Trust, Full Recourse Payment Trust, Schmook Ranch Trust, and the West Family Trust (all of which are entities in which Hed-lund held an interest or is thought to have held an interest). Richardson later withdrew the motion.
. As stated above, Hedlund amended his Schedules A and D to list the Garberville • property and avoid a foreclosure. Hedlund also executed—but apparently did not file— another amendment to his Schedule A to protect real property owned by the West Family Trust in which he claimed a "percentage” interest. See Trustee’s Exh. 119. Hedlund testified that he created the West -Family Trust for his children.
. The only case that the court located where a debtor ratified a bankruptcy filing and then was denied a Chapter 7 discharge is First State Bank of Newport v. Beshears (In re Beshears), 196 B.R. 468 (Bankr.E.D.Ark. 1996). The debtor who lost her discharge in this joint bankruptcy was not accused, however, of a false oath under § 727(a)(4)(A).
. H & H Capital, LLC transferred the Garber-ville property to Hedlund after his Chapter 11 was converted to Chapter 7. The property therefore was not property of his Chapter 7 bankruptcy estate under Bankruptcy Code § 541. This amendment was also an "affirmative” false oath, since the Garberville property was not property of the estate and the amendment was made solely to stay the Garberville property’s foreclosure.
. The evidence submitted by the Trustee presumably was meant to address a claim for relief under § 727(a)(2)(B). The Trustee's complaint, however, included a claim under § 727(a)(2)(A), and the Trustee’s motion for a default judgment and the Trustee’s post-trial brief similarly referred to § 727(a)(2)(A). The Trustee filed this adversary proceeding in September 2010 and never moved to amend her complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500906/ | MEMORANDUM OF OPINION ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT, OR, ALTERNATIVELY, PARTIAL SUMMARY ADJUDICATION REGARDING NONDISCHARGEABILITY OF DEBT PURSUANT TO 11 U.S.C. § 523
Geraldine Mund, United States Bankruptcy Judge
Plaintiff ZB, N.A. dba California Bank & Trust (“Plaintiff’ or “CB & T”) moves for summary judgment against Defendants John and Susan Licursi (“Defendants,” “Debtors,” or the “Licursis” and individually as “John” and “Susan”) in this nondis-chargeability action under Bankruptcy Code §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). CB & T seeks judgment against the Licursis in the amount of $602,652.91 plus attorneys’ fees and costs exceeding $300,000. Alternatively, CB & T requests the Court enter partial summary judgment against Defendants for each of the elements under §§ 523(a)(2), (a)(4), and (a)(6) for which CB & T has established that no genuine issues of material fact exists.
CB & T’s Motion for Summary Judgment:
CB & T and the Licursis agree to the following undisputed facts:1
1. ■ On September 25, 2008, Alliance Bank and Spectrum Glass & Aluminum (“Spectrum Aluminum”) entered into a business loan agreement and related documents including a Commercial Security Agreement (“Loan Agreement”) whereby Alliance Bank provided Spectrum Aluminum with a loan in the amount of $393,892. [SSGI # 1-3]
2. Also on September 25, 2008, John Licursi made, executed, and delivered a Commercial Guaranty of the Loan and both Susan and John Li-cursi made, executed and delivered a Commercial Guaranty as trustees for the John and Susan Licursi 2005 Trust. [SSGI # 10,11]
3. On May 23, 2005, Alliance had filed a U.C.C. Financing Statement with the Delaware Department of State and with the California Secretary of State. This covered the Collateral, which consists of all inventory, equipment, accounts, money, general intangibles, etc., as well as proceeds thereof. The Collateral does not in-*791elude motor vehicles. [SSGI ## 5, 6; Toal, dkt. 28, Ex. 5, 6, pp. 33-37.] [Per the Toal Declaration, dkt. 28, par. 9, there was a prior .revolving line of credit between Spectrum Aluminum and Alliance, which was converted into a five year loan in September 25, 2008. Thus, it appears that the 2005 U.C.C. arose as part of the documentation for the line of credit. The Licursis do not dispute the validity or effect of these Financing Statements.]
4. On February 6, 2009, CB & T acquired the assets of Alliance from the FDIC. On January 28, 2010, CB & T filed a UCC Financing Statement Amendment in Delaware and in California, identifying CB & T as the secured party. [SSGI ##7-9]
5. On June 1, 2009, Spectrum Aluminum defaulted under the terms of the Loan Agreement by failing to make the payment due, as well as all other payments due thereafter. [SSGI # 12]
6. During the next months, CB &' T and Spectrum Aluminum attempted to reach an agreement, but none was arrived at. [SSGI # 14]
7. On May 28, 2010, CB & T filed a lawsuit in the Los Angeles Superior Court against Spectrum Aluminum and the Licursis for breach of contract, conversion, money due, and account stated. LASC Case #BC438702. This accelerated the balance due under the Loan Agreement and sought immediate delivery of possession of the Collateral. [SSGI # 15]
8. On May 18, 2010, the Licursi Trust, John and Susan Licursi, and Spectrum Aluminum filed a complaint against Alliance Bank, CB & T, and Zion’s First National Bank to reform the loan documents—at least concerning the real property at 1801 W. Burbank Blvd., Burbank, CA. Spectrum Aluminum did business at this address. LASC EC053012 [Muse-Fisher, dkt. 27, ex. 3, 4; SSGI ## 26, 42]
9. On June 4, 2010, Spectrum Aluminum filed bankruptcy but the bankruptcy was dismissed on July 8, 2010 because Spectrum Aluminum failed to retain counsel. 2:10-bk-32803-BB.. [SSGI ##22, 27]'
10. In the Spectrum Aluminum bankruptcy, John Licursi was identified as the owner of 100% of Spectrum Aluminum, a construction company specializing in glass and window installation. He was also identified as a director, president, secretary, and CFO. [2:10-bk-32803, dkt. 10, p. 31]
11. Spectrum Aluminum failed to include CB & T as a creditor on its bankruptcy schedules and CB & T received no notice of the bankruptcy. [SSGI ## 23-25]
12. -On December 28, 2010, the Licursis filed the instant bankruptcy case which stayed the Spectrum Aluminum state court case against the Debtors only, but not as to Spectrum Aluminum.
13. On December 31, 2010, John dissolved Spectrum Aluminum. [SSGI #56]
14. On January 18, 2011, the Superior Court entered judgment against Spectrum Aluminum in the total amount of $418,195.21 and for recovery of the Collateral. This judgment is still outstanding and interest is accruing at 10% per annum. [LASC BC438702; SSGI ##17, Í9]
15. On January 19, 2010, Spectrum Glass & Mirror (“Spectrum Mir*792ror”) was incorporated. At that time, John and Susan were the sole shareholders of Spectrum Mirror, jointly owning 100% of the shares. They also were the sole directors and Susan was president and CEO while John was treasurer, secretary, and CFO. [SSGI ##30-33]
16. After the formation of Spectrum Mirror, in 2010 and 2012 Susan signed documents with HSBC Bank certifying that she was the secretary of Spectrum Mirror and that John was the president. John also signed these representations. They also stated that John was the 100% shareholder of Spectrum Mirror. [These were untrue statements at the time that they were made.] [SSGI # 45; Muse-Fisher, dkt. 27-2, ex. 23, pp. 7-18]
17. On February 1, 2010, Spectrum Aluminum entered into an Asset Purchase Agreement [“APA”] with Spectrum Mirror whereby Spectrum Mirror purchased the assets of Spectrum Aluminum. [SSGI # 34] Susan signed the APA under the surname “Marshall,” which was a name she used in some other contexts. [SSGI # 35]
18. Spectrum Aluminum retained CMA Auction & Appraisal Services, which prepared an appraisal as of April 15, 2010 in the total amount of $25,710 (+/- 10%), based on “forced auction value.” [SSGI # 36] [There is a dispute as to whether using a “forced auction value" was the independent decision of CMA, but no evidence has been put forward to the contrary.]
19. Although the Asset Purchase Agreement included intellectual property such as trade names and web designs and domains, these were not reflected in the CMA appraisal. Goodwill was valued at $0. [Appendix, dkt. 29-2, p. 28 et. seq]
20. On April 15, 2010, most assets of Spectrum Aluminum were transferred to Spectrum Mirror, free and clear of liens, via a Bill of Sale signed by John Licursi. Spectrum Aluminum retained contracts in progress as well as the accounts receivable that those would generate. [SSGI ## 38, 39]
21. CB & T was not aware of the transfer until September 2012 and never consented to the transfer. None of the collateral was ever turned over to CB & T. [SSGI ## 70, 71, 73]
22. After the transfer, CB & T retained a lien on the proceeds of its Collateral. [Toal, dkt. 28, Ex. 5, 6, p. 33-37] In Defendant’s Undisputed Facts they contend that the security interest also covered “replacement assets.” [Defendants’ Undisputed Facts, dkt. 41, #89]
23. The exact amount that Spectrum Mirror paid for the assets is disputed, but it was approximately $25,715. Spectrum Mirror did not pay money directly to Spectrum Aluminum, but undertook some obligations of Spectrum Aluminum and paid off some of the creditors of Spectrum Aluminum. Ño payment was made on the CB & T obligation. [SSGI # 40]
24. On May 1, 2010, the Licursis executed a lease agreement to Spectrum Mirror for 1801 Burbank Blvd., Burbank, CA pursuant to which Spectrum Mirror assumed the lease of Spectrum Aluminum and then sublet one-half of the property back to Spectrum Aluminum. From the time that it was incorporated, Spectrum Mirror has *793done business at 1801 Burbank Blvd., Burbank, CA. [SSGI ## 41, 43]
25. In December 2010, the Licursis— on behalf of Spectrum Aluminum— sent CB & T a “hardship letter” and various financial information. In the letter John wrote: “Our ability to attract work is the only way through which Spectrum Glass and Aluminum, Inc. will be able to survive this recession and continue paying on our financial responsibilities.” [Muse-Fisher, dkt. 27-1, ex. 22, p. 92]
26. In December 2010, the Licursis provided CB & T with an individual financial statement as of Nov. 30, 2010 that claimed they owned an asset of “Investment in Spectrum Glass and Aluminum” of $500,000. It did not reveal Spectrum Mirror. [Appendix, dkt. 29-3, p. 154] Also, they provided a Spectrum Aluminum balance sheet as of Dec. 31, 2009 that showed the following assets which were later transferred to Spectrum Mirror. There was an identical balance sheet as this one for November 30, 2010: [Appendix, dkt. 29-3, p. 155,160].
Glazing materials and supplies— $41,500
Computer—$16,435
Furniture and Fixtures—$29,002
Machinery and Equipment—$58,019
Taking accumulated depreciation into account, the balance sheet showed total fixed assets of $211,466.79, which included a value of $360,543.31 for vehicles with no breakdown or identification of the vehicles referred to.
It is unclear whether the assets (other than the vehicles) were all free and clear of liens, but they appear to be.
27. The appraisal included as assets the computer, the furniture and fix- ■ tures and the machinery and equipment and this totaled the $25,715. On the balance sheet for Nov. 30, 2010 and Dec. 31, 2009, these three categories totaled $103,456. The appraisal did not include glazing materials and supplies, but some or all of these were transferred to Spectrum Mirror, with a balance sheet value of $41,500. [Since Spectrum Aluminum asserts that they were completing some projects, it is possible that they held back some of these materials, but there is no evidence as to this.] As to the vehicles, CB & T has not claimed a lien and it appears that some or most may have been leased and thus they are not being considered at this time. Thus the actual value received for the Collateral was substantially less than that presented by the Licursis to CB & T ($144,956 per the balance sheet versus $25,715 which Spectrum Mirror paid).
28. Spectrum Mirror did not investigate to see whether the assets it purchased from Spectrum Aluminum had any liens or encumbrances. [SSGI # 68]
29. On July 8, 2010, Spectrum Aluminum’s contractor’s license was suspended because Spectrum Aluminum had not satisfied a judgment obtained by Vision Builders Group, Inc. LASC # PS012283. The Court takes judicial notice that Visions Builders Group filed the lawsuit on December 10, 2009 and obtained a judgment on February 2j, 2010 for $US,389.32.
30. At or about that same time in July 2010, Spectrum Aluminum fired all nine of its employees and Spectrum Mirror hired eight of them. [SSGI ## 20, 21, 46] The Licursis did not advise CB & T of the license sus*794pension of Spectrum Aluminum or of the firing of all of its employees. [SSGI #47]
31. The license suspension did not prevent Spectrum Aluminum from working as a construction manager or owner’s representative. Had it paid off the judgment for which it was suspended, it could have regained its license. [Defendant’s Undisputed Pacts, dkt. 41, # 91] [However, there is no showing that Spectrum Aluminum paid off the judgment or that it sought and obtained work as a construction manager or owner’s representative. It probably continued to collect the accounts receivable that it did not transfer to Spectrum Mirror.]
'32. Even after the termination of employees and suspension of the license, through December 2010 Susan continued sending documents to CB & T on behalf of Spectrum Aluminum. [SSGI # 48]
33. In May 2010, Susan filed a Fictitious Business Name Statement that Spectrum Mirror “is doing business as” Spectrum Aluminum and that this commenced on April 15, 2010. [Muse-Fisher, dkt. 27, ex. 20; SSGI # 77]
34. In October 2010, John recorded a Fictitious Business Name Statement that he is conducting business under the d/b/a “Spectrum Glass & Mirror.” [SSGI # 78]
35. SBS Corporation, a general contractor who hired Spectrum Aluminum on numerous projects, continued to hire that company but “may have not been aware that Spectrum Aluminum may have changed its name to Spectrum Mirror.” [SSGI # 54, Defendants’ response]
36. In Fall 2010, John executed a subcontractor agreement with RIC Construction Co., Inc. on behalf of Spectrum Aluminum and another subcontractor agreement with RIC Construction Co., Inc. on behalf of Spectrum Mirror. [SSGI # 51]
37. Although Spectrum Mirror was able to operate on and bid for the same projects as Spectrum Aluminum, it was also positioned to seek other work in the public sector as a woman-owned business. [SSGI # 58, Defendants’ response]
38. Spectrum Aluminum held both Class B (General Building) and C-17 (Specialty Glass and Glazing) licenses. Spectrum Mirror only held a C-17 license. [Defendant’s Undisputed Facts, dkt. 41, # 93]
39. After purchasing the assets of Spectrum Aluminum, Spectrum Mirror used the Spectrum Aluminum name, email address, and website for its own business. [Defendants’ Response/Genuine Issues, SSGI # 59]
40. The books and records of Spectrum Aluminum and Spectrum Mirror were somewhat confused and the information for each corporation was not separately entered in a way that the accountant could easily unwind. On December 11, 2011, the tax preparer sent an email to Susan stating: “We are trying to unwind .and clean up the accounting for each entity and we cannot do it if these pieces are not handled properly. It is up to you, but I suggest respecting each corporate entity separately and not mixing it around. Your lawyer could better advise you. But failing to do so puts you at risk of creditors being able to pierce the corporate veil.” [SSGI #67]
*79541. On October 11, 2013, CB & T filed a complaint against Spectrum Mirror and demanded that Spectrum Mirror deliver its collateral to CB & T. It filed its first amended complaint on March 3, 2015. CB & T alleged that Spectrum Aluminum transferred all of its assets, including CB & T’s collateral, to Spectrum Mirror without adequate consideration, and that Spectrum Mirror is simply a continuation of Spectrum Aluminum. [LASC BC524292; SSGI ##72, 83, 84],
42. On June 26, 2015, the Superior Court granted summary judgment in favor of CB & T on the successor liability cause of action. The Superior Court found that the undisputed facts suggest the following:
Spectrum Mirror is the successor or mere continuation of Spectrum Aluminum;
Spectrum Mirror did not pay adequate consideration for Spectrum Aluminum’s assets;
Spectrum Aluminum and Spectrum Mirror are owned by John and Susan Licursi;
a majority of Spectrum Aluminum’s former employees (8 out of 9) are employed by Spectrum Mirror;
Spectrum Mirror holds itself out as Spectrum Aluminum;
Spectrum Aluminum held itself out as the owner of the website www. spectrumglassinc.com and email domain @spectrumglassinc.com (in 2009-December 2010);
other contractors/vendors believed Spectrum Aluminum and Spectrum Mirror were the same company;
Spectrum Mirror conducts the same type of business as Spectrum Aluminum. [LASC BC524292; Muse-Fisher, dkt. 27-2, ex. 24]
43.Thereafter, on August 5, 2015, judgment was entered in favor of CB & T holding Spectrum Mirror liable for Spectrum Aluminum’s judgment entered in 2011. [LASC BC524292; SSGI ## 85-87; Muse-Fisher, dkt. 27-2, ex. 24]
CB & T moves for summary judgment under §§ 523(a)(2)(A) and (B), § 523(a)(4), and § 523(a)(6). Specifically and with respect to Section 523(a)(2)(A), CB & T argues that the following prima facie elements are satisfied:
(a) Debtors continued misrepresentations that Spectrum Aluminum was doing business despite having been shut down Spectrum Aluminum and despite the apparent transfer of all of its assets to Spectrum Mirror.
(b) Debtors knew that Spectrum Aluminum had sold all of its assets to Spectrum Mirror.
(c) Debtors’ intent to deceive CB & T is clear in that they concealed the transfer from CB & T and provided CB & T with misleading financial statements, all the while never informing CB & T of Spectrum Aluminum’s transfer of assets to Spectrum Mirror.
(d) CB & T justifiably relied on Debtors’ representations and sustained significant losses including costs in pursuing its claims against Spectrum Aluminum and Spectrum Mirror.
Further, CB & T contends that since it is evident that it justifiably relied on the Debtors’ material misrepresentations, CB & T is not only entitled to entry of a nondischargeable judgment under Section 523(a)(2)(A), but also under Section 523(a)(2)(B).
*796CB & T also argues that the Licursis committed fraud and defalcation while acting in a fiduciary capacity and also committed larceny. Therefore, CB & T asks the Court to enter judgment under Section 523(a)(4). More specifically, as officers of Spectrum Aluminum, Debtors had a duty to protect Spectrum Aluminum’s assets. However, they committed a fraud and larceny by transferring its assets to Spectrum Mirror for inadequate consideration and providing CB & T with false information that Spectrum Aluminum was still a viable business.
Finally, CB & T argues that the Licursis are clearly liable under Section 523(a)(6). The Licursis’ actions as described above— including intentional misrepresentations, fraud, and larceny—-all support a finding that Debtors committed the acts with specific intent to deceive CB & T. As a result, CB & T suffered economic harm. Opposition:
The Section 523(a)(2)(A) and (a)(2)(B) Claims
The Licursis oppose CB <& T’s Motion for Summary Judgment (“Motion”). Of primary relevance to their opposition is their contention that the alleged misrepresentations were not made at the time the debt between CB & T’s predecessor and Debtors was incurred. This timing issue is crucial as a claim under Section 523(a)(2)(A) will survive where there is evidence that the debtor used fraudulent means to obtain money, property, services, or credit. Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 219 (4th Cir. 2007). Here, Debtors assert there is no evidence or allegation, for that matter, that the fraud or misrepresentation was made at the time the loan was entered into, or when Alliance Bank’s interest was purchased by CB & T. Rather, CB & T asserts the alleged misrepresentation was made in connection with the undisclosed sale of Spectrum Aluminum’s assets to Spectrum Mirror and the period after the sale on or about February 1, 2010. This sale was one year and a half after the initial loan agreement with Alliance Bank and a year after CB & T purchased Alliance Bank’s rights to the loan agreement.
Moreover, CB & T cannot demonstrate that the Licursis received any additional money from CB & T based on any representations or omissions with respect to the Spectrum sale, [See, Defendants’ Opposition, p. 5] Instead, upon Spectrum Aluminum’s default, CB & T accelerated the entire unpaid balance on the loan. CB & T then filed a lawsuit against Spectrum Aluminum, Thus, CB & T cannot prove that the Licursis received any benefit from the alleged misrepresentations as there is no evidence of any actual transfer of property or forbearance agreement. [See, Opposition, p, 5]
Defendants assert that they reasonably believed that their December 2010 financial estimations concerning Spectrum Aluminum were accurate. Further, Defendants argue CB & T cannot demonstrate any fraudulent intent on the part of Defendants in their Spectrum sale involvement. The value paid by Spectrum Mirror to Spectrum Aluminum was fair and was determined by an independent third party. CB & T was not damaged by this sale. In fact, it received replacement collateral equal in value to the personal property that was sold. Thus, CB & T’s interest was not harmed.
The Section 523(a)(4) Claim
Here, CB & T fails to show that a fraud was committed at the time the loan documents were entered into. Further, CB & T fails to demonstrate that Defendants owed it a fiduciary duty as officers of Spectrum Aluminum. Defendants rely on Swimmer v. Moeller (In re Moeller), 466 B.R. 525, 538 (Bankr. S.D. Cal. 2012) for the proposition that the duty owed to creditors by *797officers of an insolvent corporation does not support a section 523(a)(4) exception to discharge. [Opposition, p. 11] '
Finally, there are no facts to support a claim of larceny. Defendants did not •wrongfully take CB & T’s property. Moreover, there was no intent to deprive CB & T of its security interest. In fact, Defendants provided replacement collateral when the Spectrum Aluminum assets were sold.
Since no fiduciary relationship existed between the parties and no larceny was committed, CB & T’s Section 523(a)(4) claim cannot stand.
The Section 523(a)(6) Claim
CB & T fails to show any willful and malicious injury caused by the Lieursis in connection with the Spectrum Aluminum sale. The Lieursis have demonstrated that CB & T received replacement collateral equal in value to the property that was sold. CB & T has not provided any evidence to show the replacement collateral was inferior. Moreover, even if the Section 523(a)(6) claim can be upheld, the amount of any potential judgment would be limited to the depreciation of the value of the collateral sold, but not the entire loan amount due.
Reply:
CB & T argues that Defendants, in their Opposition, misconstrue Section 523(a)(2). CB & T asserts that an action under Section 523(a)(2) may stand where the false representations were made in connection with an extension of credit or forbearance of credit. Just because there are no allegations of misrepresentations at the time of the origination of the loan does not mean a Section 523(a)(2) claim will fail. CB & T asserts that Defendants provided false information in writing (i.e. financial statements claiming Spectrum Aluminum assets were valued at $326,020.65 and had a going concern value of $500,000) in an effort to keep CB & T from enforcing its rights against Spectrum Aluminum for the breach of the loan agreement. As a result, CB & T did not proceed expeditiously with a foreclosure sale of the business or seek appointment of a receiver following the initial default in June 2009.
Further, CB & T disputes Defendants’ proposition that they did not intend to deceive CB & T. Intent can be proven from the circumstances of this case. For instance, CB & T asserts there was a side agreement between Spectrum Aluminum and Spectrum Mirror whereby Spectrum Mirror would pay the purchase price of the assets by paying off Spectrum Aluminum’s trade creditors and that this agreement should have been a part of the original Asset Purchase Agreement. Further fraudulent intent can be shown by the fact that Susan Licursi signed the Asset Purchase Agreement using her maiden name of Susan Marshall. However, the Statements of Information submitted to the California Secretary of State indicate Susan Licursi was the CEO and director of Spectrum Mirror. Thus, based on the above, CB & T argues it is entitled.to a nondis-chargeable judgment under Section 523(a)(2)(A) and (B).
With respect to its Section 523(a)(4) claim, Plaintiff disputes the Lieursis’ argument that there is no fiduciary relationship between the Lieursis and the Plaintiff. The Lieursis, as officers of Spectrum Aluminum, owed a fiduciary duty to CB & T. Moreover, the statute does not limit the relief to the origination of the loan. Therefore, when Defendants provided CB & T with the false financial information, when Defendants sold Spectrum Aluminum’s assets to Spectrum Mirror at a forced auction value, and when Defendants paid Spectrum Aluminum’s trade creditors over other creditors, Defendants breached their fiduciary duty to CB & T.
*798Beyond that, Defendants committed a larceny by selling the assets to Spectrum Mirror. CB & T had a blanket security interest over these assets, therefore Defendants unlawfully converted these assets. As such, CB & T is entitled to a nondischargeable judgment under Section 523(a)(4).
With respect to its Section 523(a)(6) claim, CB & T relies on Nahman v. Jacks (In re Jacks), 266 B.R. 728 (9th Cir. BAP 2001)) for the proposition that a transfer of collateral in breach of a security agreement is actionable under Section 523(a)(6). Defendants knew what they were doing when they sold Spectrum Aluminum’s assets to Spectrum Mirror and knew it would cause harm to CB & T. Therefore, CB & T is entitled to a nondischargeable judgment under Section 523(a)(6).
Analysis:
Standard for Summary Judgment
Summary judgment is proper when the pleading, discovery, and affidavits show that there is “no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Material facts are those which may affect the outcome of the proceedings. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The party moving for summary judgment bears the burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of a material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
On an issue for which the opposing party will have the burden of proof at trial, the moving party need only point out “that there is an absence of evidence to support the nonmoving party’s case.” Id. at 325, 106 S.Ct. 2548. The facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 249, 106 S.Ct. 2505; Masson v. New Yorker Magazine, 501 U.S. 496, 520, 111 S.Ct. 2419, 115 L.Ed.2d 447 (1991). Mere allegations or denials do not defeat a moving party’s allegations. See Gasaway v. Northwestern Mut. Life Ins. Co., 26 F.3d 957, 960 (9th Cir. 1994).
Section 523(a)(2)(A)
11 U.S.C. § 523(a)(2)(A) provides:
A discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—false pretenses,' a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition ....
The required elements under § 523(a)(2)(A) consist of the following: (1) the defendant made false representations; (2) the defendant knew the representations were false at the time made; (3) the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representations; and (5) the plaintiff sustained damages as a proximate result of these representations. See, e.g., Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000); American Express Travel Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125-26 (9th Cir. Cal. 1996); In re Younie, 211 B.R. 367, 373-74 (9th Cir. BAP 1997), aff'd 163 F.3d 609 (9th Cir. 1998) (noting that the elements of fraud under § 523(a)(2)(A) match the elements of common law fraud under California law). The Plaintiffs must prove each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
*799Intent to deceive may be inferred from the totality of the circumstances. See, e.g., Hashemi, 104 F.3d at 1125.
Section 523(a)(2)(A) renders non-dischargeable a debt for money “to the extent obtained by” misrepresentation, fraudulent omission, or deceptive conduct. The operative phrase here is “to the extent obtained by.” This certainly applies when the prescribed conduct occurred before the debtor receives the money. Hopper v. Lewis (In re Lewis), 551 B.R. 41, 48 (Bankr. E.D. Cal. 2016). But it also applies if the action of the creditor is to forebear in its collection of the debt. This, too, can be seen as an extension of credit. Field v. Mans, 157 F.3d 35 (1st Cir. 1998)
The Court finds these facts are undisputed: 2 Alliance Bank and Spectrum Aluminum entered into a business loan in September 2008 (“Loan Agreement”); CB & T acquired the assets of Alliance from the FDIC in February 2009; Spectrum Aluminum breached the Loan Agreement in June 2009; and CB & T made demand on Spectrum Aluminum to cure the defaults under the Loan Agreement. Thus, it is absolutely clear that a debt was incurred by the Defendants, it was owed to Alliance, and then subsequently owed to CB & T. But there is no contention that the original loan from Alliance was obtained by Defendants via alleged misrepresentations.
In its adversary complaint, Plaintiff asserts a claim under Section 523(a)(2)(A) by contending “Debtors knowingly made false representations to Plaintiff in connection with the workout of the underlying Spectrum Aluminum Loan...” [Complaint, p. 9, par. 52] Plaintiff further states in its Motion that “Defendants made several misrepresentations to CB & T in connection with their undisclosed sale of Spectrum Aluminum’s assets to Spectrum Mirror and the ensuing period after such sale where the Defendants repeatedly represented that Spectrum Aluminum was conducting business notwithstanding that it had been shut down.” [Motion, p. 14]
Defendants, on the other hand, argue that CB & T’s allegations cannot uphold a claim under Section 523(a)(2)(A) because the alleged misrepresentations arose after the debt was already incurred. As noted by the Hopper court, “prescribed conduct that occurs after the debtor obtains money does not count and will not support a nondis-chargeability claim under Section 523(a)(2)(A).” Id.; citing Houng v. Tatung, Co., Ltd. (In re Houng), 499 B.R. 751, 766 (Bankr. C.D. Cal. 2013).
The Court must look to the text of Section 523(a)(2)(A) as the starting point for analysis and for the basis of this decision. Field v. Mans, 157 F.3d 35, 43 (1st Cir. 1998); citing Shawmut Bank, N.A. v. Goodrich (In re Goodrich), 999 F.2d 22, 24 (1st Cir. 1993). In Mans, the First Circuit looked at the meaning of the word “extension” in Section 523(a)(2)(A). The First Circuit found that the word “extension” has at least two meanings. The meaning that the First Circuit found acceptable and relevant to the Mans case is a meaning this Court finds relevant to the instant case. The First Circuit noted that an extension may be an “increase in length of time” or “an agreement on or concession of additional time (as for meeting an overdue debt or fulfilling a legal formality).” Id.
Here the Court finds that Defendants failed to (1) inform CB & T of the Asset Purchase Agreement between Spectrum Aluminum and Spectrum Mirror in February 2010; (2) inform CB & T of the transfer of the Spectrum Aluminum assets to Spectrum Mirror in April 2010; and (3) inform CB & T that Spectrum Aluminum was no longer operating in July 2010. This *800caused CB & ■ T to delay exercising its rights under the Loan Agreement. This constitutes an extension of credit since— but for Defendants’ failure to fully disclose and their misrepresentations—CB & T could have withdrawn the credit previously extended, terminated the agreement and may also have sought recourse from Spectrum Mirror sooner rather than waiting until October 2013. Beyond that, CB & T could have demanded that the $25,000 + paid by Spectrum Mirror be paid to CB & T rather than to the unsecured creditors of Spectrum Aluminum, thus reducing the outstanding balance on its loan. It might also have challenged the appraisal and received even more from Spectrum Mirror or required that Spectrum Mirror enter into a security agreement with CB & T. All of these avenues of recovery were denied to CB & T due to the misrepresentations and lack of notice by Defendants. See Mans, 157 F.3d at 43 (“the fraudulently concealed sale did not alter the existing terms of credit, assuming the loan was not called. Instead, it undermined the Fields’ right to have forthwith terminated that credit—because of the unpermitted sale— had they wished to do so.., While the existing sale was not technically a new ‘agreement’ concerning the existing credit, it triggered legal rights under the existing credit agreement which markedly altered the credit relationship between the parties. We, therefore, agree with the Fields that, by deceiving them into continuing a credit arrangement they now had the right to terminate, the fraud related to what can properly be called an extension of credit.”)
Thus, based on the above, the following required elements for liability under Section 523(a)(2)(A) have been established. The circumstances demonstrate that (1) the Licursis made material false representations by failing to disclose the sale of the assets of Spectrum Aluminum to Spectrum Mirror, as well as by failing to disclose Spectrum Aluminum’s close of business, Spectrum Aluminum’s bankruptcy, and their misrepresentations in the December 2010 financial statements; (2) the Licursis were aware of the false representations evident since John Licursi is both an officer and director of both Spectrum Aluminum and Spectrum Mirror and Susan Li-cursi is intimately involved in the running of Spectrum Aluminum and an officer and director of Spectrum Mirror; (3) the Li-cursis’ intent to deceive is evident since they facilitated the transfer of the assets and took an active role in the creation and set-up of Spectrum Mirror; and (4) CB & T’s justifiable reliance is reasonable since it had no knowledge of the transfer of assets or of the Licursis’ continued potions concerning both Spectrum Aluminum and Spectrum Mirror.
The issue of damages suffered by CB & T is discussed separately below.
Section 523(a)(2)(B)
11 U.S.C. § 523(a)(2)(B) provides:
A discharge under section 727... of this title does not discharge an- individual debtor from any debt... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... use of a statement in writing-© that is materially false; (©respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive.
The elements of Section 523(a)(2)(B) are the same as Section 523(a)(2)(A) with the additional requirement that the alleged fraud stem from a false statement in writing concerning the debtor’s or an insider’s financial condition. Bacino v. FDIC (In re Bacino), 2015 WL 9591904, *16, 2015 Bankr. LEXIS 4398, *48 (9th Cir. BAP December 31, 2015); citing Gertsch v. *801Johnson & Johnson (In re Gertsch), 237 B.R. 160, 167 (9th Cir. BAP 1999).
As with the Section 523(a)(2)(A) claim, Plaintiff contends that the Licursis materially misrepresented Spectrum Aluminum’s financial condition in connection with the work out of the Spectrum Aluminum loan. [Motion, p. 17] The evidence shows that in December 2010 Defendants sent a letter to CB & T to which they attached an individual financial statement that valued their current investment in “Spectrum Glass & Aluminum” at $500,000. [Appendix, dkt. 29-3, p. 154] This was clearly misleading and led CB <& T to believe that Spectrum Aluminum was still an operating company with a going concern value in that amount.
As to the timing (as discussed above concerning § 523(a)(2)(A), Plaintiff contends that since this was done as part of Defendants’ attempt at achieving a work out of the Spectrum Aluminum loan, this induced its reliance and forced CB & T to delay any exercise of its rights under the Spectrum Aluminum loan. Defendants argue that no money or forbearance agreement was obtained from CB & T in response to this 2010 letter. Further, any alleged misrepresentation described by CB & T occurred over one and a half years after the initial debt was incurred. Thus, Defendants argue that a Section 523(a)(2)(B) claim cannot stand.
The Court finds that the § 523(a)(2)(B) claim rides on the same occurrences as the action under § 523(a)(2)(A) but for the fact that there is an actual writing respecting the financial condition of the Debtor or of the insider of the Debtor: the December 2010 financial statements.
The Tenth Circuit has previously examined the meaning of the term “financial condition”:
We hold that such false statements are those that purport to present a picture of the debtor’s overall financial health. Statements that present a picture of a debtor’s overall financial health include those analogous to balance sheets, income statements, statements of changes in overall financial position, or income and debt statements that present the debtor or insider’s net worth, overall financial health, or equation of assets and liabilities. However, such statements need not carry the formality of a balance sheet, income ‘statement, statement of changes in financial position, or income and debt statement. What is important is not the formality of the statement, but the information contained within it—information as to the debtor’s or insider’s overall net worth or overall income flow.
Cadwell v. Joelson (In re Joelson), 427 F.3d 700, 714 (10th Cir. Wyo. 2005); Adopted by Barnes v. Belice (In re Belice), 461 B.R. 564, 578 (9th Cir. BAP 2011). As the BAP noted, “in other words, the writing must be a complete or comprehensive statement, regarding a debtor’s income and expenses.” Id.
Here, the Licursis submitted various documents to CB & T on or about December 17,2010. The documents include the following: (1) a letter dated December 17, 2010 from John M. Licursi as President of Spectrum Aluminum, which seeks to explain the company’s “hardship situation;” (2) a letter dated December 17, 2010 from John and Susan Licursi which ah taches various financial documents “in an effort to expedite the review of the all-cash offer we received on our building;” (3) purchase contract for the building; (4) Debtors’ individual financial statement including assets and liabilities as of November 30, 2010, which shows Debtors’ investment in Spectrum ' Aluminum to be $500,000; (5) Spectrum Aluminum’s balance sheet including assets and liabilities as of December 31, 2009; (6) Spectrum Aluminum’s 2009 Profit and Loss statement; (7) Spectrum Aluminum’s balance *802sheet including assets and liabilities as of November 30, 2010; (8) Spectrum Aluminum’s 2010 Profit and Loss statement; (9) Spectrum Aluminum’s 2009 tax return; and (10) Debtors’ 2009 tax return.
The Court finds these documents reference an overall picture of the Debtors’ financial health, as well as the Debtors’ company’s financial health. The documents refer to both income and expenses, as well as assets and liabilities. There is no question that these documents are comprehensive in nature. Further, these documents show that Spectrum Aluminum continued to do business and continued to hold CB & T’s collateral, per the Loan Agreement. There is no reference in this package of documents to Spectrum Mirror or to the Asset Purchase Agreement between Spec.trum Aluminum and Spectrum Mirror, which had been entered into some ten months earlier and consummated over 6 months earlier. The Court finds CB & T did in fact delay in exercising its rights under the loan agreement based on these written representations from Debtors.
The insider of a corporate debtor is defined as a director or officer or person in control of the debtor or a relative of a director, officer, or person in control of the debtor. 11 USC § 101(31)(B). The Court has not been given evidence of Susan’s actual status in Spectrum Aluminum, but it is clear that John is an officer and that Susan is his wife. Thus the December 2010 financial statements and her letters to CB & T impose liability on Susan as well as John.
Therefore, for purposes of liability, the requisite writing element of Section 523(a)(2)(B) is present in this case, as are the remaining elements of Section 523(a)(2)(B) as discussed above under Section 523(a)(2)(A).
Section 523(a)(4)
11 U.S.C. § 523(a)(4) provides:
A discharge under section 727... of this title does not discharge an individual debtor from any debt.. .for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.
A creditor must establish three elements to render a claim nondischargeable under section 523(a)(4): (1) express (or technical) trust; (2) that the debt was caused by fraud or defalcation; and (3) that the debtor was a fiduciary to the creditor at the time the debt was created. Swimmer v. Moeller (In re Moeller), 466 B.R. 525, 531 (Bankr. S.D. Cal. 2012); citing Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997); Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996). Whether someone is a fiduciary for purposes of Section 523(a)(4) is a question of federal law. Houng v. Tatung Company (In re Houng), 636 Fed.Appx. 396, 398 (9th Cir. 2016). Further, although the defi nition of fiduciary is a matter of federal law, state law is to be consulted to determine when a trust in this strict sense exists. Houng, 636 Fed.Appx. at 398.
Plaintiff argues that the debt incurred was based on Defendants’ fraud and defalcation while acting in a fiduciary capacity. Plaintiff also asserts that Defendants are liable for larceny. Plaintiff relies on In re Jacks to demonstrate that its claim firmly falls under Section 523(a)(4) as a fiduciary relationship was established between Defendants and Plaintiff because Defendants were officers of an insolvent corporation, Spectrum Aluminum. Nahman v. Jacks (In re Jacks), 266 B.R. 728 (9th Cir. BAP 2001).
On the other hand, Defendants contend there are no facts substantiating a fiduciary relationship or act of defalcation. Moreover, Defendants argue Plaintiffs reliance on In re Jacks is misplaced and no longer appropriate. Defendants point to the case of Cal-Micro, Inc. v. Cantrell (In re Can*803trell), 329 F.3d 1119, 1127 (9th Cir. 2003) for the proposition that a corporate officer is only an agent and not a fiduciary within the meaning of Section 523(a)(4). [Opposition, p. 11]
To begin with, the Court is lacking evidence of the status of Susan as either a corporate officer or director (or both) of Spectrum Aluminum. The Court has not been given any corporate documents or filings identifying her as such. The Spectrum Aluminum bankruptcy petition was signed solely by John as president. Therefore, without such evidence, the Court cannot hold Susan liable for breach of fiduciary duty.3
There is a dispute amongst the parties as to whether John Licursi, as president of Spectrum Aluminum, acted in a fiduciary capacity as is applicable in the discharge-ability context. This legal argument is based on the following decisions:
Jacks, a Ninth Circuit B.A.P. decision from 2001, concerned a creditor of an insolvent corporation of which Jacks was an officer and director. Jacks was found to have used corporate assets for his own personal benefit. Determining whether an officer or director of an insolvent corporation is liable as a fiduciary under § 523(a)(4), the B.A.P. held:
Section 523(a)(4) requires an express or technical trust in existence before and independently of the defalcation. Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996) (citing Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986)). A trust arising as a consequence of wrongdoing, such as a constructive, resulting, or implied trust, is outside the purview of § 523(a)(4). Evans v. Pollard (In re Evans), 161 B.R. 474, 477 (9th Cir. BAP 1993). Whether a fiduciary is the trustee of an express trust depends on state law, and an express trust may be imposed by common law. Lewis, 97 F.3d at 1185-86 (holding that Arizona case law imposes express trust on partners).
California courts have recognized that “all of the assets of a corporation, immediately on its becoming insolvent, become a trust fund for the benefit of all of its creditors.” Saracco Tank & Welding Co., Ltd. v. Platz, 65 Cal.App.2d 306, 315, 150 P.2d 918, 923 (1944) (citation omitted). See also Pepper [v. Litton], 308 U.S. [295] at 307 [60 S.Ct. 238, 84 L.Ed. 281 (1939) ].
Here, the bankruptcy court rejected the notion that Jacks had any relevant common law fiduciary duties to Nahman and other creditors, concluding that Cal. Corp. Code §§ 166, 500, and 501 (prohibiting unauthorized distributions by directors) “covers the field” of these duties. Jacks, 243 B.R. [385] at 392-393 [ (Bkrtcy.C.D.Cal. 1999) ]. This is consistent with some recent commentary and case law, which cast doubt on whether the California trust fund doctrine continues to provide a basis for the technical trust necessary for § 523(a)(4) nondis-chargeability. See generally 15A William Meade Fletcher et. al., Fletcher Cyclopedia of the Law of Private Corporations § 7373 (perm, ed., rev. vol. 2000); see also Pacific Scene, Inc. v. Penasquitos, Inc., 46 Cal.3d 407, 250 Cal.Rptr. 651, 758 P.2d 1182 (1988). In Pacific Scene, the California Supreme Court held that, by codifying “detailed statutory remedies” against shareholders of dissolved corporations (Cal. Corp. Code §§ 2009 and 2011), the California legislature had “occupied the field and precluded resort to dormant common law *804doctrines for the provision of extra-statutory relief.” Id. at 413, 250 Cal.Rptr. at 655, 758 P.2d at 1185. See also United States v. Oil Resources, Inc., 817 F.2d 1429, 1432-33 (9th Cir. 1987).
Nevertheless, the bankruptcy court concluded that the fiduciary relationship between an insolvent corporation’s officers and directors and its creditors was a “sufficient trust relationship for the application of § 523(a)(4).” Jacks, 243 B.R. at 394 (citing Berres v. Bruning (In re Bruning), 143 B.R. 253 (D. Colo. 1992) (applying Colorado law); Committee v. Haverty (In re Xonics, Inc.), 99 B.R. 870 (Bankr. N.D. Ill. 1989) (applying Delaware law); and Bay 511 Corp. v. Thorsen (In re Thorsen & Co.), 98 B.R. 527 (Bankr. D. Colo. 1989) (applying Colorado law)).
We read this apparent discontinuity in the bankruptcy court’s opinion as recognizing that California’s Corporation Code provides a remedy for an insolvent corporation’s director’s violations of fiduciary duties to creditors. This is consistent with the notion that “the common law is not repealed by implication or otherwise, if there is no repugnancy between it and the statute, and it does not appear that the legislature intended to cover the whole subject.” Gray v. Sutherland, 124 Cal.App.2d 280, 290, 268 P.2d 754, 761 (1954) (citation omitted). California’s corporate statutes, while modifying remedies, do not eliminate the 'trust comprised of corporate assets that arises upon a corporation’s insolvency.
We agree with the bankruptcy court, and note that this Panel has held that Oregon’s parallel “trust fund doctrine” imposes an express trust sufficient for the application of § 523(a)(4). Flegel v. Burt & Associates, P.C. (In re Kallmeyer), 242 B.R. 492, 496 (9th Cir. BAP 1999).
Jacks, 266 B.R. 728, 736-737.
Two years later, in 2003, the Ninth Circuit ruled that under California law [as it then existed] a corporate officer is not a fiduciary to the corporation or its shareholders for purposes of § 523(a)(4). Rather the relationship is one of agency rather than of trust, Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003). Cantrell did not deal with the holding of Jacks since the plaintiff was the corporation itself and not a creditor of the corporation. The court found that under California law, although Cantrell was in a fiduciary relationship to the corporation, he was not a trustee, but was an agent with certain duties of a trustee. However, he was not a trustee with respect to corporate assets. Nor was this corporation insolvent, so that was never discussed.
In 2009, the California Court of Appeal ruled on the fiduciary duty that a corporate officer or director has to creditors when a corporation is insolvent. It held that under these circumstances, the “trust fund doctrine” creates a duty on directors and officers to the creditors only if they divert, dissipate, or unduly risk the insolvent corporation’s assets. Berg & Berg Enterprises, LLC v. Boyle et seq., 178 Cal. App.4th 1020, 1039, 100 Cal.Rptr.3d 875 (Cal. Ct. of App. 6th App. Dist. 2009).
Thereafter, Judge Laura Taylor in the Southern District of California Bankruptcy Court, came down with a strong analysis of the effect of Berg and Cantrell on the Jacks opinion. She ruled that under California law as explicated by Berg, the “trust fund doctrine” does not give rise to the express or technical trust relationship required by § 523(a)(4). Swimmer v. Moeller (In re Moeller), 466 B.R. 525 (Bankr. SD Cal. 2012).
*805In 2013, Judge Margaret Morrow of the Central District of California District Court issued an opinion critical of Moeller and leading to the exact opposite result. Jacks was to be followed and Berg had not changed this. Yin-Ching Houng v. Tatung Co. (In re Yin-Ching Houng), 499 B.R. 751 (Dist. C.D. Cal. 2013). Judge Morrow was affirmed by the Ninth Circuit, which found that
the duties created by the trust fund doctrine satisfy the criteria for a “fiduciary” relationship for purposes of non-dischargeability under § 523(a)(4). The trust fund doctrine “clearly and expressly impose[s] trust-like obligations” on the controllers of an insolvent entity. 4 Collier on Bankruptcy, ¶ 523.10. Because the duties arise at insolvency, see Berg, 100 Cal.Rptr.3d at 893, and require the avoidance of “diverting], dissipating], or unduly risking] corporate assets,” id. at 894, the fiduciary relationship exists “prior to any wrongdoing” and “without reference to [the wrong],” as required by § 523(a)(4). Ragsdale, 780 F.2d at 796. This is in contrast to a trust “ex maleficio,” i.e., a trust that arises “by operation of law upon a wrongful act,” that we have held is outside of § 523(a)(4)’s purview. Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189-90 (9th Cir. 2001)... .Here, because California’s common law trust fund doctrine imposes “true fiduciary responsibilities” prior to “the act of wrongdoing and not as a result of the act of wrongdoing,” In re Pedrazzini, 644 F.2d [756] at 758, 758 n.2 [ (9th Cir. 1981) ], the “express or technical” trust requirement for nondischargeability is satisfied.
Yin-Ching Houng, 636 Fed.Appx. 396, 399-400.
Yin-Ching Houng is the current state of the law and the Court will abide by that ruling.
Thus, if the Court finds that Spectrum Aluminum was insolvent during the relevant period, then a fiduciary relationship existed between John Licursi, as an officer of Spectrum Aluminum, and CB & T, a creditor of Spectrum Aluminum, because the insolvency of a corporation creates an express trust under California’s trust fund doctrine. The burden is on CB & T to convince the Court that Spectrum Aluminum was insolvent at the requisite time for the fiduciary requirement under Section 523(a)(4) to be established.
At the March 28, 2017 hearing, CB & T argued that there is sufficient evidence to demonstrate Spectrum Aluminum’s insolvency from June 2009 through the end of 2010. CB <¾ T contends this is the operative time frame in regards to insolvency since June 2009 is when Spectrum Aluminum initially defaulted on the loan. Thereafter, in February 2010, Spectrum Mirror bought Spectrum Aluminum’s assets without any disclosure of this sale to CB & T. Finally, Spectrum Aluminum filed bankruptcy in December 2010.
On the other hand, Debtors argue that the operative time frame is between February 2010 and April 2010. This is when the transfer of the assets of Spectrum Aluminum to Spectrum Mirror occurred. Debtors assert that the evidence presented by CB & T fails to support insolvency during this time period.
The Court finds that CB & T has presented sufficient evidence to demonstrate insolvency from December 31, 2009 through the end of 2010. As CB & T correctly points out, from a balance sheet standpoint, Spectrum Aluminum’s liabilities clearly exceeded assets in both 2009 and 2010. In 2009, Spectrum Aluminum’s assets amounted to $879,719.58 and liabilities amounted to $1,559,445.58. In 2010, Spectrum Aluminum’s assets amounted to $328,020.65 and liabilities totaled *806$1,487,075.23. Moreover, the attached 2009 tax returns show Spectrum Aluminum operated at a loss during that time. [See, Muse-Fisher, dkt. 27-1, Ex. 22] Finally, CB & T provides a December 17, 2010 letter from John to CB & T specifically referenced as “hardship letter.” In this “hardship letter,” Debtor explains Spectrum Aluminum became delinquent on the account and has been unable to become current due to the economic downturn. [See, Toal, dkt. 28, Ex. 13.] This letter attaches various financial documents including balance sheets and tax returns.
When a corporation becomes insolvent, California’s trust fund doctrine imposes an additional, albeit limited, fiduciary duty on the corporation’s directors. Houng, 636 Fed.Appx. at 399-400. The insolvency of a corporation creates an express trust under California’s trust fund doctrine. Therefore, in this case, Spectrum Aluminum’s insolvency gave rise to an express trtist for the benefit of its creditors, including CB & T This took place before the APA was entered into in February 2010 and the actual transfer, which took place in April 2010. Thus the Court finds that Spectrum Aluminum’s insolvency predated the APA and the transfer of assets and that the officers and directors of Spectrum Aluminum were fiduciaries to CB & T and to the other creditors of Spectrum Aluminum prior to the wrongdoing
The evidence has established (1) the requisite trust exists, (2) Spectrum Aluminum was insolvent during the required period, and (3) a fiduciary duty, therefore, was owed by Spectrum Aluminum’s officers and directors to CB & T under Section 523(a)(4). However, before the Court can find that all of the elements of a Section 523(a)(4) claim exist, CB & T must demonstrate that a fraud or defalcation occurred. Essentially, CB & T argues that Defendants failed to advise CB & T of the sale of Spectrum Aluminum’s assets to Spectrum Mirror in February 2010. The alleged fraudulent misrepresentations of Defendants in connection with this sale of assets leads to Defendants’ liability for depleting assets that were part of CB & T’s security interest.
Defendants, on the other hand, argue that there was no fraud involved with respect to the sale of the Collateral to Spectrum Mirror. In their Opposition, Defendants assert the assets were transferred only after an independent third party valuation was obtained for the transferred assets. Also, Defendants argue CB & T received replacement collateral in the form of the money paid by Spectrum Mirror [referring to Defendant’s response to SSIG # 61, in which they state that “Defendants were not aware that they had to identify the transfer to CB & T as value was exchanged for value and the security interest of CB & T applied to the replacement asset. Spectrum Mirror did not convert CB & T’s property interest as the value of the equipment sold' was replaced by the value of the purchase price paid. The value received by Spectrum Aluminum was subject to CB & T’s security interest.”]
Further, at the hearing, Defendants asserted that the sale of the assets occurred as a result of the lawsuit Spectrum Aluminum was facing. The creation of Spectrum Mirror and the sale of the assets to Spectrum Mirror were Defendants’ attempts at salvaging some of Spectrum Aluminum’s business.
While Defendants’ may have been attempting to save their business, they did this at the expense of CB & T. It is clear that Defendants’ transfer of the assets to Spectrum Mirror from Spectrum Aluminum was Defendants way of keeping the assets free from any potential future judgment against Spectrum Aluminum. Further, the use of the assets to pay off other *807creditors to the detriment of CB & T was a breach of their duty to the secured creditor.
Although the Court has already found fraud under section 523(a)(2), defalcation also exists in this case. Defalcation involves either bad faith, moral turpitude, or other immoral conduct or it requires an intentional wrong. The fiduciary must know that it is improper or it can be so reckless that it is due to a conscious disregard or willful blindness to a substantial and unjustifiable risk that the conduct will turn out to violate a fiduciary duty. Bullock v. BankChampaign, N.A., 569 U.S. 267, 133 S.Ct. 1754, 185 L.Ed.2d 922, 928 (2013)
The Court finds that there is no triable issue of fact as to the bad faith of the sale of the assets without paying CB & T and without CB & T’s knowledge. This meets the test of defalcation. The argument that CB & T received a replacement lien is totally without merit as the money was immediately disbursed to others and CB & T’s lien disappeared.
Therefore, the Court finds that there is no triable issue of fact as to whether or not John Licursi is liable for fraud and for defalcation. The Court finds that Plaintiff is entitled to summary judgment on this claim as to John Licursi.
Section 523(a)(6)
11 U.S.C. § 523(a)(6) provides:
A discharge under section 727... of this title does not discharge an individual debtor from any debt—(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.
Nondischargeability under § 523(a)(6) requires that an injury to the plaintiff be both willful and malicious, with the requirement of each to be considered separately. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146 (9th Cir. 2002). Both willfulness and maliciousness must be proven to block discharge under Section 523(a)(6). Lewis, 551 B.R. at 51; (citing Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)). The plaintiff must establish the elements of each requirement by a preponderance of the evidence. Lewis, 551 B.R. at 51.
The four elements are as follows:
(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse. Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1207 (9th Cir. 2010), citing Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001) (quoting In re Bammer, 131 F.3d at 791). The main difference is the standard used by the Court—objective or subjective.
1, Malicious Injury
A “willful” injury is a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (emphasis in original). “A ‘malicious’ injury involves ‘(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.’ ” In re Su, 290 F.3d at 1146—47 (quoting Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001)).
Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008).
This four-part definition does not require a showing of biblical malice, i.e., personal hatred, spite, or ill-will. Id. at 1442-43. Nor does it require a showing of an intent to injure, but rather it requires only an intentional act which causes injury.
*808Murray v. Bammer (In re Bammer), 131 F.3d 788, 791 (9th Cir. 1997) citing In re Cecchini, 780 F.2d 1440, 1442-3 (9th Cir. 1986).
Thus, the intent required in the “maliciousness” prong is the intent to do the act at issue, not the intent to injure the victim.
The undisputed facts show that the Defendants executed an Asset Purchase Agreement between Spectrum Aluminum and Spectrum Mirror; that this transfer caused Spectrum Mirror to pay some of Spectrum Aluminum’s obligations but not those owed to CB & T; that Defendants provided CB & T with financial statements in December 2010 on behalf of Spectrum Aluminum that failed to disclose the asset transfer to Spectrum Mirror which had taken place over six months earlier; and that CB & T was unaware of the asset transfer until approximately September 2012.
Although CB & T filed suit against Spectrum Aluminum in May 2010, there were no significant assets remaining and the collateral had already been transferred the previous month. CB & T was delayed in filing a complaint against Spectrum Mirror until 2013. Based on the facts, the Court determines Defendants’ acts were wrongful in that they misused CB & T’s collateral without its permission and caused CB & T to delay seeking a judgment against Spectrum Mirror.
Moreover, the transfer of the assets without disclosing the information to CB & T shows Defendants acted intentionally in an effort to prevent CB & T from seeking collection on the obligation while they were able to continue to operate—now under the name of Spectrum Mirror. It can also be inferred that the only reason that the money received from Spectrum Mirror for the' Spectrum Aluminum assets was used to pay unsecured creditors of Spectrum Aluminum was so that those trade creditors would continue to do business with the Licursis operating as Spectrum Mirror.
Theáe wrongful acts necessarily caused injury to CB & T because its collateral was dissipated, Spectrum Aluminum failed to function and Spectrum Mirror took over the business that Spectrum Aluminum had previously conducted.
Although the Debtors seek to explain this so as to demonstrate a just cause or excuse, none exists.
The undisputed facts further demonstrate that Defendants’ transfer of the assets, as well as Defendants’ failure to disclose the transfer of the assets, necessarily caused injury to CB & T. Here, it is undisputed that CB & T learned of the transfer in September 2012 [SSGI #70], Thus, there was a period of over two years whereby CB & T did not pursue legal remedies against Spectrum Mirror, did not have possession of its collateral, and did not receive any payments on its claim. Defendants’ acts undoubtedly caused injury to CB & T.
Finally, Plaintiff must demonstrate the acts were done without just cause or excuse. In their Opposition, Defendants explain:
the intent behind the Spectrum Sale was to salvage business operations by the sale of certain assets to Spectrum Mirror which in turn assumed certain obligations in connection with those assets and relieved Spectrum Aluminum of those liabilities. The purpose was not to deprive CB & T of its security interest or the collateral.
At best, Defendants could argue that the sale was an attempt to make money in the new business—Spectrum Mirror—in order to repay the loan. However, Defendants have not provided evidence to support this conclusion. The Court finds that there is no just cause or excuse for Defendants’ *809failure to notify CB & T of the transfer of assets and no just cause or excuse for the written misrepresentations in their December 2010 letters and financial statements. Had they intended to continue CB & T’s secured interest, they would either have paid the proceeds to CB & T or given CB & T a lien on the assets of Spectrum Mirror. They did neither, nor did they make any payments to CB & T once Spectrum Mirror was operating.
The Court finds that these -acts were done to deceive Plaintiff so that Plaintiff would not pursue an action against Spectrum Aluminum or collect, should a judgment against Spectrum Aluminum be entered. Therefore, the Court finds that there are no genuine issues of material fact and finds that the Defendants acted maliciously.
2. Willfulness
An injury is “willful” when it is shown that either the debtor had a subjec- . five motive to inflict injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct. Jercich, 238 F.3d at 1208.
In its Motion, Plaintiff argues that Defendants formed Spectrum Mirror to acquire the assets of Spectrum Aluminum in order to avoid the consequences of CB & T’s lien in such assets and its enforcement rights and remedies against those assets. [See, Motion, p, 20.] The Defendants not only failed to provide notice to CB & T of the transfer of assets, but also misrepresented to CB & T that Spectrum Aluminum was still a going concern. [Motion, p. 20.]
Defendants contend that this was not a wrongful act that would necessarily cause injury since the CB & T lien transferred to the proceeds of the sale (the replacement collateral) and, as such, CB <& T’s security interest was not extinguished by virtue of the transfer. [See, Opposition, p. 13.] Therefore, Defendants assert there was no conversion of CB & T’s interest and, thus, no damages. Defendants contend that this establishes that Plaintiffs Section 523(a)(6) claim must fail.
This Court must decide whether the undisputed facts show that Defendants acted willfully within the meaning of Section 523(a)(6) because they had a subjective motive to inflict injury or that they believed the injury was substantially certain to occur as a result of their conduct.
The Ninth Circuit Court of Appeals has described the intent level required for willfulness as follows:
The holding in In re Jercich is clear: § 523(a)(6) renders debt nondischargeable when there is either a subjective intent to harm, or a subjective belief that harm is substantially certain.... We believe, further, that failure to adhere strictly to the limitation expressly laid down by In re Jercich will expand the scope of nondischargeable debt under § 523(a)(6) far beyond what Congress intended. By its very terms, the objective standard disregards the particular debtor’s state of mind and considers whether an objective, reasonable person would have known that the actions in question were substantially certain to injure the creditor. In its application, this standard looks very much like the “reckless disregard” standard used, in negligence. That the Bankruptcy Code’s legislative history makes it clear that Congress did not intend § 523(a)(6)’s willful injury requirement to be applied so as to render nondischargeable any debt incurred by reckless behavior, reinforces application of the subjective standard. The subjective standard correctly focuses on the debtor’s state of mind and precludes application of § 523(a)(6)’s nondischargeability provision short of the debtor’s actual knowl*810edge that harm to the creditor was substantially certain.
Carrillo v. Su, 290 F.3d at 1144-46.
The undisputed facts show that Defendants executed an Asset Purchase Agreement between Spectrum Aluminum and Spectrum Mirror on February 1, 2010. Spectrum Mirror paid some amount in the range of $25,000. Some may have been cash, which the Licursis did not use to pay down the CB & T debt, but disbursed it to the unsecured creditors of Spectrum Aluminum in total disregard to the security interest held by CB <& T. Some may have been the assumption by Spectrum Mirror of trade debt of Spectrum Aluminum. As a result of this transaction, CB & T was left with little collateral for its loan—merely some outstanding receivables and work-in-progress worth an undisclosed amount. And even those remaining assets were later dissipated and never identified to the CB & T lien or paid to CB & T. The assertion that there was replacement collateral is fallacious since that supposed collateral (the $25,000 +/- paid by Spectrum Mirror) was used for other purposes and any secured interest that CB & T may have had evaporated when it was disbursed to other creditors.
Based on the facts presented to this Court, Defendants never disclosed the asset transfer to CB & T. Further, in December 2010, the Licursis submitted letters on Spectrum Aluminum letterhead with attached financials for Spectrum Aluminum to CB & T which make no reference to the asset transfer to Spectrum Mirror or of the Defendants’ intention to dissolve Spectrum Aluminum under the laws of Delaware. All of this occurred when Spectrum Aluminum was in default to CB & T under its loan.
The transfer of the assets from Spectrum Aluminum to Spectrum Mirror and the Defendants’ continued failure to disclose this transfer to CB & T brings the Court to conclude that the transfer of the assets was an attempt to keep the assets out of CB & T’s reach should a judgment ultimately be entered against Spectrum Aluminum and to allow the Licursis to operate Spectrum Mirror without regard to the CB & T lien. It is clear that the Defendants intended to remove the collateral from the reach of CB & T and to make sure it would not be able to collect on any future, possible judgment.
Although it appears that the creation of Spectrum Mirror was actually triggered by the Vision Builder Group judgment and the suspension of Spectrum Aluminum’s contractor’s license, it had to be clear to the Licursis that CB & T would necessarily suffer injury because the Licursis hid this transfer, used the Spectrum Aluminum assets to pay off lower priority creditors, did not give CB & T a lien on Spectrum Mirror’s assets, and misrepresented the assets of Spectrum Aluminum.
Therefore, the Court finds that based on undisputed findings and by a preponderance of that evidence it is clear that Defendants had a subjective motive to inflict injury on the Plaintiff and therefore the willfulness element for a Section 523(a)(6) claim has been satisfied.
Ruling:
Based on the foregoing, the Court determines that there are no genuine issues of material fact and that Plaintiff is entitled to summary judgment as to liability on each of its § 523(a) claims as follows;
Summary judgment is granted as to liability under § 523(a)(2)(A) as to Susan Li-cursi and John Licursi;
Summary judgment is granted as to liability under § 523(a)(2)(B) as to Susan Li-cursi and John Licursi;
Summary judgment is granted as to liability under § 523(a)(4) as to John Licursi;
*811Summary judgment is granted as to liability under § 523(a)(6) as to Susan Licursi and John Licursi
Liability of Susan Licursi under § 523(a)(4) has yet to be resolved as no evidence of her status within Spectrum Aluminum is in the record.
The measure of damages has yet to be resolved. There is insufficient undisputed evidence to determine this issue. CB & T insists that the entry on the financial statements valuing the Licursi investment in Spectrum Aluminum at $500,000 means that Spectrum Aluminum had assets worth $500,000 in 2009 and 2010. While this was clearly misleading and led CB & T to believe that Spectrum Aluminum was still an operating company with a going concern value in that amount, it is not relevant for valuing the actual assets of Spectrum Aluminum at the time of the sale to Spectrum Mirror.
. Unless otherwise noted, these undisputed facts are gleaned from the Defendants' Separate Statement of Genuine Issues.. .dkt. #41 and identified as "SSGI #—.” Exhibits attached to the Declaration of Michael Muse-Fisher are identified as "Muse-Fisher, dkt. 27, Ex.-, p.-” Exhibits attached to the Declaration of Michael Toal are identified as "Toal, dkt.28, Ex.-, p.-” Exhibits attached to the Appendix of Transcripts are identified as "Appendix, diet. 29, Ex.-, p. -." Disputed facts or comments by the Court are in italics.
. The Undisputed Facts found by the Court are laid out above.
. Although there is no evidence of liability of Susan Licursi unless it is shown that she was an officer or director of Spectrum Aluminum, the Court speaks of Debtors and Defendants in the plural since once that evidence is presented, Susan will also be subject to liability. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500907/ | MEMORANDUM OF DECISION DENYING THE DEPARTMENT OF HEALTHCARE SERVICES’ MOTION FOR ALLOWANCE OF AN ADMINISTRATIVE PRIORITY CLAIM Ernest M. Robles, United States Bankruptcy Judge At issue is whether an exaction assessed against the estate by the California Department of Health Care Services (“DHCS”), pursuant to the hospital quality assurance fee program, is properly characterized as a tax entitled to payment as an administrative priority claim pursuant to § 503(b)(1)(B)(i), or whether instead the exaction is a fee not entitled to administrative priority status.1 The Court finds that the exaction is a fee, not a tax. Further, the Court finds that even if the exaction did qualify as a tax, DHCS’ claim on account of the exaction would not be entitled to administrative priority, because the claim arose prepetition. I. Facts Gardens Regional Hospital and Medical Center (the “Debtor”) commenced a voluntary Chapter 11 petition on June 6, 2016. As of the filing of the petition, the Debtor operated a 137-bed general acute care hospital located in Hawaiian Gardens, California (the “Hospital”). The Hospital served a high number of indigent patients and was operated as a non-profit entity. On January 20, 2017, the Court granted the Debtor’s emergency motion to close the Hospital.2 As of February 2, 2017, all patients in the Hospital had been discharged or relocated, and the Hospital was completely closed.3 On May 15, 2017, the Court granted the Debtor’s motion to sell certain assets of the closed Hospital (the “Assets”) to American Specialty Management Group, Inc, (“ASMG”) for $6.7 million.4 The Court rejected the California Attorney General’s contention that he was entitled to impose conditions upon the terms of the sale and/or the use of the Assets subsequent to the sale, and denied the Attorney General’s motion for a stay pending appeal of the order approving the sale. See In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 567 B.R. 820, 825-833 (Bankr. C.D. Cal. 2017) (“Gardens I”). On May 18, 2017, the Debtor filed a notice5 stating thqt the sale of the Assets to ASMG had closed.6 Prior to the closure of the Hospital, the Debtor provided services to patients under the California Medical Assistance Program, more commonly known as Medi-Cal. In exchange for providing these services, the Debtor received reimbursements from DHCS, the state agency charged with administering Medi-Cal, The costs of the Medi-Cal program are shared between the state and federal governments. palifornia is generally entitled to be reimbursed by the federal government for 50% of Medi-Cal costs. 42 U.S.C.A. § 1396b(a) (West 2016). To help cover its share of Medi-Cal costs, California enactecj the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the “Reimbursement Improvement Act” or “Act”), codified at Cal. Welf. & Inst. Code §§ 14169.50-14169.76 (West 2017). The Act requires most general acute care hospitals to pay a quarterly Hospital Quality Assurance Fee (an “HQA Fee”),7 which is assessed regardless of whether the hospital participates in the Medi-Cal program. Cal. Welf. & Inst. Code § 14169.52(a) (imposing the HQA Fee upon “each general acute care hospital that is not an exempt facility”). The HQA Fee allows California to obtain more healthcare funds from the federal government, which generally matches state Medi-Cal contributions dollar-for-dollar. The HQA Fee is collected by DHCS and is assessed quarterly. On March 2, 2015, the Debtor stopped paying its quarterly HQA Fees. As of June 6, 2016, the date of the filing of the petition, the Debtor’s unpaid HQA Fees equaled $699,173.15. To recover the unpaid prepetition HQA Fees, DHCS began withholding, subsequent to the petition, approximately 20% of the payments owed to the Debtor for providing healthcare services to Medi-Cal beneficiaries (such payments, the “Medi-Cal Payments”).8 On June 21, 2017, the Court denied the Debtor’s motion seeking to hold DHCS and the State of California in civil contempt for withholding a percentage of the Medi-Cal Payments. The Debtor argued that the withholding was an improper set-off in violation of the automatic stay. The Court found that under principles of equitable recoupment, the State was authorized to withhold a percentage of Medi-Cal Payments owed the Debtor, for the purpose of recovering unpaid hospital quality assurance fees that the Debtor was required to pay to the State under the Reimbursement Improvement Act. See In re Gardens Reg’l Hosp. & Med. Ctr., Inc., 569 B.R. 788 (Bankr. C.D. Cal. 2017) (“Gardens II”). The Debtor’s appeal of Gardens II is currently pending before the Bankruptcy Appellate Panel. Throughout the course of this case, DHCS has withheld a total of $4,306,426.18 from the Medi-Cal Payments owed the Debtor, for the purpose of recovering the unpaid HQA Fees. DHCS contends that, even after the withholding, the Debtor’s HQA Fee delinquency is $2,537,513.19. DHCS argues that it is entitled to an administrative priority expense claim, pursuant to § 503(b)(1)(B)(i), on account of the unpaid HQA Fees. According to DHCS, the HQA Fees qualify as a tax within the meaning of § 503(b)(1)(B)(i). The Debtor asserts that its HQA Fee obligation is a fee, not a tax, and therefore does not .qualify for administrative priority status. In the alternative, the Debtor argues that even if the HQA Fees are a tax, the obligation arose prepetition and consequently is not entitled to priority status. The unpaid HQA Fee debt pertains to two postpetition billing periods, which DHCS denominates as “Cycle 11” and “Cycle 12.” The following table sets forth the Debtor’s HQA Fee delinquency by cycle: [[Image here]] II. Discussion A. For Bankruptcy Purposes, The Debtor’s HQA Liability is a Fee, Not a Tax Section 503(b)(1)(B)(i) provides in relevant part: “After notice and a hearing, there shall be allowed administrative expenses, ... including any tax incurred by the estate, whether secured or unsecured The Ninth Circuit has held that for bankruptcy purposes, an exaction qualifies as a tax, rather than a fee, if it is: a) an involuntary pecuniary burden, regardless of name, laid upon individuals or property; b) imposed by or under the authority of the legislature; c) for public purposes, including the purposes of defraying expenses of government or undertakings authorized by it; and d) under the police or taxing power of the state. California Self-Insurers’ Security Fund v. Lorber Indus. of California (In re Lorber Indus. of California), 564 F.3d 1098, 1101 (9th Cir. 2009) ("Lorber II"). An “involuntary pecuniary burden” is “a non-contractual obligation imposed by state statute upon taxpayers who had not consented to its imposition.” County Sanitation Dist. No. 2 of Los Angeles County v. Lorber Indus. of California, Inc. (In re Lorber Indus. of California, Inc.), 675 F.2d 1062, 1066 (9th Cir. 1982) (“Lorber I”). The Supreme Court has distinguished taxes from fees as follows: Taxation is a legislative function, and Congress, which is the sole organ for levying taxes, may act arbitrarily and disregard benefits bestowed by the Government on a taxpayer and go solely on ability to pay, based on property or income. A fee, however, is incident to a voluntary act, e.g., a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. The public agency performing those services normally may exact a fee for a grant which, presumably, bestows a benefit on the applicant, not shared by other members of society. Nat'l Cable Television Ass’n, Inc. v. United States, 415 U.S. 336, 340-41, 94 S.Ct. 1146, 39 L.Ed.2d 370 (1974). The nomenclature used to describe the exaction does not control whether the exaction is a tax or a fee for bankruptcy purposes. In United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996), the Supreme Court held that an exaction denominated as a tax under the Internal Revenue Code did not qualify as an “excise tax” within the meaning of the Bankruptcy Code. Id. at 224, 116 S.Ct. 2106; see also George v. Uninsured Employers Fund (In re George), 361 F.3d 1157, 1160 (9th Cir. 2004) (“Federal courts apply a ‘functional examination’ to the exaction, regardless of how it is labeled, to determine whether it is a tax, a penalty, a debt, or something else.”). The HQA Exactions Are Not Imposed for a Public Purpose The primary issue in dispute is whether the HQA exactions are imposed for a public purpose. The Debtor argues that the Reimbursement Improvement Act, under which the HQA exactions are imposed, was enacted primarily to increase the federal funds available to hospitals within California. Under the Debtor’s theory, it is the hospitals themselves—not the patients that are the end users of the hospitals’ services—that principally benefit from the Act, because the Act makes additional funds available that shore up the hospitals’ balance sheets. In contrast, DHCS argues that the Act’s principal beneficiaries are the Medi-Cal patients who receive treatment from the hospitals that receive reimbursements under the Act. DHCS asserts that the exactions are imposed for the public purpose of expanding access to healthcare. The hybrid healthcare system used in the United States—which combines elements of private enterprise and government support—makes application of the “public purpose” test difficult. Much of the healthcare delivered in the United States is provided by way of an extensive social safety net, supported by tax revenues, which exists to provide healthcare to those who could not otherwise afford it. For example, government funds are channeled through hospitals who participate in the Medi-Cal program. Yet the hospitals who form a vital link in this social safety net are also permitted to operate as for-profit entities, and these hospitals benefit from the government’s support of healthcare.10 As one scholar has noted: A huge swath of the American economy—over one-sixth—is related to health care and therefore benefits from an injection of revenues through government health care programs. Within this economic sector are hospitals, outpatient clinics, physicians, allied health professionals, insurance companies, and pharmaceutical firms—to name only the larger participants.... Each of these players owes a significant portion of its income to government programs. For some, that portion is well over half. What appears on the surface to be a market-based system is actually a huge public-private partnership in which the two sides form a symbiotic pair. Private health care organizations and professionals could not function as they do without government-imposed structure and funding. In the absence of government involvement, the industry would be significantly smaller overall, and the range of medical services available to Americans would be much more limited. Robert I. Field, Government As the Crucible for Free Market Health Care: Regulation, Reimbursement, and Reform, 159 U. Pa. L. Rev. 1669, 1673-74 (2011) [hereinafter Government as the Crucible]. As a result of this hybrid system, healthcare legislation that benefits' the public often benefits private entities as well. The Patient Protection and Affordable Care Act of 2010 (the “ACA”) is a good example. By prohibiting insurers from denying coverage to those with pre-existing conditions or other health issues, 42 U.S.C. §§ 300gg et seq., the ACA benefits the public at large. But by requiring most Americans to maintain “minimum essential” health insurance coverage, 26 U.S.C. § 5000A, the ACA also benefits private insurance companies by increasing their customer base. See Government as the Crucible, 159 U. Pa. L. Rev at 1723 (“With [the ACA] mandating that everyone have health insurance, [insurance] companies stand to enjoy substantial new business. Moreover) many of the new customers will receive government subsidies to help defray the cost”). This duality of benefits is present in the Reimbursement Improvement Act as well. The Act benefits hospitals by injecting additional cash onto their balance sheets. The public, however, benefits as well, because if hospitals did not receive the additional funds under the Act, they would not be able to provide treatment to as many Medi-Cal patients. In determining whether the HQA exactions serve a public purpose, the Court must assess whether it is hospitals or the public at large that receives the preponderance of the benefits under the Act. Though the question is a close one, in the Court’s view, the HQA exactions are best seen as operating to strengthen hospitals’ balance sheets. This means that for the purpose of determining whether the exactions are best characterized as a fee or tax, the exactions are imposed to benefit hospitals, not the public at large. Several features of the Act drive this conclusion. First, the Act’s purpose is to increase the total amount of funding available to California hospitals by ensuring that California receives the maximum amount of matching federal dollars under the Medicare program. Roughly every dollar collected by way of the HQA exaction yields an additional dollar in matching funds from the federal government. From the perspective of the hospitals, the exaction therefore more closely resembles an investment than a tax. The hospitals receive back the funds they pay in HQA exactions, plus additional matching funds from the federal government. It was for this reason that the Act was sponsored by an industry group, the California Hospital Association, The legislative history reflects the Act’s benefits to the hospital industry; Benefit to hospital industry from hospital fee. As part of the establishment of the fee and related payment provisions, the California Hospital Association (CHA, the bill’s sponsor) developed a model that estimates the revenue generated by the fee, payments made to hospitals, payments made to the state for program administration and children’s health coverage, and the net benefit to the hospital industry. CHA’s model uses 2010 data to determine the payment amounts each hospital will receive under the bill. CHA estimates that over the three year period the bill is in effect (January 1, 2014 through December 31, 2016), $13.1 billion dollars in revenue would be raised from the fee, which would provide total payments to hospitals (after federal matching funds are drawn down) of $23.1 billion. The state would receive nearly $2.4 billion for children’s coverage and administration, and the fee would provide a net benefit to the hospital industry of $9.9 billion (total payments to hospitals minus fees paid). The primary beneficiaries of the fee program are private hospitals (which pay the fee to draw down federal funds) as they receive $22.6 billion from the fee (this is a gross amount and does not deduct the amounts paid in fees by these facilities). Senate Floor Analysis, Senate Bill 239, at 10 (available at <http://leginfo.ca.gov/pub/ 13-14/bill/sen/sb_0201-0250/sb_239_cfa_ 20130912_183324_sen_floor.html>). Other provisions of the Act reinforce its purpose of supporting the hospital industry. DHCS is required to “work in consultation with the hospital community to implement” the Act’s provisions. Cal. Welf. & Inst. Code § 14169.52(j). If a hospital fails to timely pay its HQA obligations, DHCS has discretion to waive the interest and penalties assessed as a result of the late payments, provided the hospital makes a showing of financial hardship. Id. at § 14169.52(l)(1). Any excess HQA Fees collected must be refunded to hospitals. Id. at § 14169.53(c). A certain amount of the funds distributed under the Act must be used “to minimize uncompensated care provided by hospitals to uninsured patients .... ” Id. at § 14169.53(b)(1) (emphasis added). As noted, the hybrid public/private nature of the healthcare system means that the public also benefits from the HQA Fees—the additional funds that hospitals receive as a result of the Act allow them to treat more Medi-Cal patients. In determining that the preponderance of the benefit is to the hospitals, the Court finds it significant that hospitals are reimbursed directly for healthcare services they provide. A hospital that devises a more efficient way of providing healthcare services can use the funds it saves for other purposes; it is not required to use that money to treat additional Medi-Cal patients. Further, hospitals "with an emergency department are required to provide care to any person who comes to the emergency department seeking treatment, regardless of that person’s ability to pay. 42 U.S.C. § 1395dd. The fact that emergency department patients would receive treatment even if the Act did not exist supports the Court’s finding that it is hospitals who receive the preponderance of benefits under the Act. California Law Does Not Dictate the Determination of Whether the Exaction is a Fee or a Tax DHCS’ other arguments are disposed of more easily. DHCS cites various California cases holding that the HQA Fees are a tax. However, those cases are not controlling because they address whether the HQA Fees constitute a tax for purposes of California law, not whether the obligation is a tax for bankruptcy purposes. Federal law controls for purposes of determining whether the HQA Fees qualify as a tax within the meaning of § 503(b)(1) (B) (i). DHCS also asserts that the HQA Fees qualify as a tax pursuant to the definition of “tax” added to the California Constitution pursuant to Proposition 26. Once again, whether an exaction qualifies as a tax for bankruptcy purpose is an issue of federal law that is not controlled by the California Constitution. B. Even if the Debtor’s HQA Liability is a Tax, DHCS’ Claim is Not Entitled to Administrative Priority Because it Arose Prepetition Section 503(b)(1)(B)(i) accords administrative priority to a claim arising on account of “any tax incurred by the estate .... ” The estate does not spring into existence until the filing of the petition, § 541(a), so a tax claim arising prepetition cannot be entitled to administrative priority. Because DHCS’ claim arose prepetition, the claim is not entitled to administrative priority even if the Debtor’s HQA obligation is a tax. Section 101(5)(A) defines a “claim” as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured .... ” “This ‘broadest possible definition’ of ‘claim’- is designed to ensure that ‘all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.’ ” Cal. Dep’t of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929 (9th Cir. 1993) (emphasis in original) (citing H.R.Rep. No. 595, 95th Cong., 2d Sess. 1, 309 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S.Rep. No. 598, 95th Cong., 2d Sess. 1, 22, reprinted in 1978 U.S.C.C.A.N. 5787, 5808). “[Fjederal law determines when a claim arises under the Bankruptcy Code.” SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 839 (9th Cir. 2009). The Ninth Circuit uses the “fair contemplation” test to determine whether a claim arose prepetition. Picerne Construction Corp. v. Castellino Villas, A.K.F. LLC (In re Castellino Villas, A. K. F. LLC), 836 F.3d 1028, 1034 (9th Cir. 2016) (internal citations omitted). Under the fair contemplation test, “a claim arises when a claimant can fairly or reasonably contemplate the claim’s existence even if a cause of action has not yet accrued under nonbank-ruptcy law.” For instance, in Jensen we held that when a state environmental regulatory agency was aware that the groundwater at the debtors’ site was seriously contaminated before the debtors filed a bankruptcy petition, a contingent claim for cleanup costs was in the “fair contemplation” of the state at the time the debtors filed their Chapter 7 petition. The state’s claim for cleanup costs was therefore discharged in bankruptcy, even though the state incurred nearly a million dollars in cleanup costs after the discharge. Id. (internal citations omitted). DHCS argues that it could not have reasonably' contemplated its HQA Fee claim against the Debtor prior to the petition, because DHCS did not know the exact amount of the Debtor’s' HQA Fee liability until August 2016, after the petition was filed. DHCS’ argument is not persuasive. A claim remains within the fair contemplation of the claimant even if the claimant cannot specify the exact amount of the claim. In Jensen, for example, a claim for environmental cleanup costs was within the fair contemplation of the relevant state regulatory agency prior to the petition, even though it was not until after the date of the petition that the full extent of the environmental contamination was discovered and the cleanup work performed. Jensen, 995 F.2d at 927-28 Here, DHCS had a far better estimate of its claim prepetition than the claimant in Jensen. Pursuant to the Reimbursement Improvement Act, quality, assurance fees are assessed based on a DHCS-developed fee model that must be approved by a federal agency, the Centers for Medicare and Medicaid Services (the “CMS”)- Cal. Welf. & Inst. Code §§ 14169.51(m), 14169.52(c), 14169.52(e), and 14169.58(f); Beshara Deck [Doc. No. 929] at ¶¶ 12-14. The relevant fee model (the “Fee Model”) was approved by CMS prepetition, in January 2015. Beshara Decl. at ¶ 15. After DHCS obtains CMS approval of the Fee Model, it then calculates the HQA Fees that are owed by each hospital, using data that the hospitals are required to supply. Beshara Deck at ¶ 15; see also Gardens II, 569 B.R. at 791 (describing how a hospital’s HQA Fee obligation is calculated). The Debtor’s HQA Fee obligation could change if the number of hospitals subject to HQA Fee liabilities changed—for example, an increase in the total number of hospitals subject to the fee would result in a corresponding decrease in the amount of fees assessed against each individual hospital. Nonetheless, prior to the petition, DHCS still had a far better idea of the amount of its claim against the Debtor than the claimant in Jensen. The Jensen claimant did not even know the full extent of the environmental contamination giving rise to its claim until after the petition. Further, even if DHCS could not have accurately estimated the amount of its claim prepetition, what matters for purposes of the fair contemplation test is not whether the claimant knows the amount of its claim, but rather whether the claimant can fairly contemplate the existence of its claim. In sum, DHCS could fairly contemplate its claim against the Debtor prepetition even though it did not know the exact amount of the claim.11 ÍII. Conclusion Because the HQA. Fees do not qualify as a tax for bankruptcy purposes, DHCS is not entitled to an administrative claim pursuant to § 503(b)(1)(B)(i). Even if the HQA Fees did qualify as a tax, DHCS would still not be entitled to an administrative claim, since any claim DHCS may have on account of the Debtor’s unpaid HQA Fee obligation arose prepetition. . 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. . See Order on Debtor’s Emergency Motion to Authorize Closure of Hospital [Doc. No. 633], . See Second Interim Report of Patient Care Ombudsman Pursuant to 11 U.S.C. § 333(b)(2) [Doc. No. 657] (describing the orderly shutdown of the Hospital), .See Order (A) Authorizing the Sale of Certain of the Debtor's Assets to Winning Bidder American Specialty Management Group, Inc. [or Backup Bidder Promise Hospital of East Los Angeles, L.P. in the Event that the Sale to the Winning Bidder is Not Consummated], Free and Clear of Liens, Claims, Encumbrances, and Other Interests; (B) Approving the Assumption and Assignment of An Unexpired Lease Related Thereto; and (C) Granting Related Relief (the “Sale Order") [Doc. No. 813], . See Notice of Closing of Sale of Assets of Gardens Regional Hospital and Medical Center, Inc., to American Specialty Management Group, Inc, [Doc. No. 831], . In connection with his appeal of the Sale Order, the Attorney General disputes whether the sale to ASMG has actually closed. The Court makes no findings as to whether the sale has closed. . The following types of hospitals are exempt from the HQA Fee: (1) hospitals owned by a local health care district, (2) hospitals designated as a specialty hospital, (3) hospitals satisfying the Medicare criteria to be a long-term care hospital, and (4) small and rural hospitals, as defined by Cal. Health & Safely Code § 124840. Cal. Welf. & Inst. Code § 14169.51(l). .The Debtor was entitled to receive reimbursements for providing treatment to patients on a fee-for-service basis (the “MediCal Fee-for-Service Payments"), but was also entitled to receive supplemental quality assurance payments (the "Supplemental HQA Payments") computed according to formulas set forth in the Reimbursement Improvement Act. As used herein, the term "Medi-Cal Payments” refers to the sum of the Medi-Cal Fee-for-Service Payments and the Supplemental HQA Payments owed the Debtor. The record reflects that DHCS withheld 20% of the MediCal Payments owed the Debtor but does not reflect the percentage of Supplemental HQA Payments that DHCS withheld. . In this case, the Debtor operated the Hospital as a non-profit entity. However, the ef-feet of the Act upon for-profit hospitals sheds light on the “public purpose" test. . Nothing in this opinion constitutes a determination as to whether DHCS holds an allowable prepetition claim on account of the Debt- or's unpaid HQA Fee obligation. . For Cycle 11, the Debtor’s HQA Fee obligation was $1,595,092.00. Because DHCS withheld $640,673.77 from Medi-Cal Payments owed the Debtor, the Debtor's outstanding obligation for Cycle 11 has been reduced to $954,418.23. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500908/ | MEMORANDUM OPINION AND DECISION
Ronald H. Sargis, Judge United States Bankruptcy Court
This Adversary Proceeding was commenced by Robert and Stephanie Achter-berg (“Plaintiff-Debtors”) with the filing of the Complaint on July 23, 2016., In the Complaint Plaintiff-Debtors assert that Creditors Trade Association (“Defendant”) violated both the automatic stay and discharge injunction that arose in Plaintiff-Debtors’ Chapter 7 bankruptcy case.1 In addition to damages relating to such violations, Plaintiff-Debtors request a determination that the state court judgment issued by the California Superior Court, County of San Francisco (“SF Superior Court”) Case No. CGC-08-480700 (“SF Void Judgment”), obtained by Defendant after Plaintiff-Debtors filed their Chapter 7 bankruptcy case, is void.2 Defendant filed an Answer, denying specific allegations in the Complaint, and asserted affirmative defenses that its conduct was not willful or in reckless disregard, nor done with malice or intent to oppress the Plaintiff-Debtors.3
Trial was conducted on September 26, 2016. Though filing an Answer and providing rebuttal testimony at trial, Defendant elected not to present any exhibits or provide any testimony as part of its defense case in chief.4 Defendant did file evidentia-ry objections and a trial brief as provided in the Trial Scheduling Order. The court’s rulings on the evidentiary objections are stated orally on the record for the September 26,2016 trial.
Trial having been conducted, the court determines that Defendant knowingly, willfully, and intentionally violated the automatic stay and the discharge injunction by failing to vacate (until after making Plaintiff-Debtors file and serve the Complaint in this Adversary Proceeding) the SF 'Void Judgment that Defendant obtained in violation of the automatic stay in February 2009. The court does not determine that obtaining the entry of the default judgment in February 2009 itself was a knowing and willful violation of the automatic stay. However, no later than March 2009 and continuing thereafter Defendant had actual knowledge of the December 2008 bankruptcy filing,5 the automatic stay *825going into effect in December 2008 with the filing of the bankruptcy case,6 that the issuance of the SF Void Judgment was issued in violation of the automatic stay, and the subsequent entry of the discharge with the discharge injunction going into effect in March 2009.7
The court determines that the actual damages awarded Plaintiff-Debtors for the continuing violation of the automatic stay by Defendant, as well as the violation of the discharge injunction, beginning in 2009 are: (1) $1,250.00 for having to extend escrow, (2) $1,850.00 for emotional distress, and $18,261.29 in attorneys’ fees and costs.8
In addition, the court awards $15,000.00 in punitive damages to be paid to Plaintiff-Debtors by Defendant. The court determines that the failure to vacate the default judgment was intentional, as well as both reckless and in callous disregard for the rights of the Plaintiff-Debtors and Defendant’s obligations under the Bankruptcy Code to remedy violations of the automatic stay.
The Damages awarded total $36,361.29.
HISTORY OF CHAPTER 7 BANKRUPTCY CASE AND EVENTS LEADING TO FILING OF ADVERSARY PROCEEDING
Plaintiff-Debtors commenced the Chapter 7 Bankruptcy Case on December 1, 2008. Defendant is listed on the Schedules and Mailing Matrix. As admitted by Defendant at trial, Defendant received notice of the bankruptcy filing and the subsequent March 2009 issuance of Plaintiff-Debtors’ discharge being entered. It was presented to the court by Defendant that the likely turn of events was that Defendant filed the SF Superior Court action against Plaintiff-Debtors and requested entry of the default judgment before Defendant then learned of the bankruptcy filing and discharge.9
It was argued by Defendant, with no evidence other than the rebuttal testimony of Gary Looney (president of Defendant), that Defendant closed its “file” and sent the “file” to storage when it learned of the Plaintiff-Debtors’ December 2008 bankruptcy filing. Then, after the file was closed, the SF Void Judgment was received by Defendant in February 2009. When received, it is contended that the SF Void Judgment was not linked to the closed file that had been sent to storage. Thus, Defendant argues, that is the reason *826it took no action to immediately vacate the SF Void Judgment in February 2009 or at anytime thereafter until August 2015. For unstated reasons (based on only the rebuttal testimony of Mr. Looney), it was argued that the file could not be recovered from storage at the time of trial. However, there is no credible dispute that Defendant knew of thé bankruptcy case being filed prior to the SF Void Judgment being entered, and then the debt being discharged after receiving the SF Void Judgment.
Further, Defendant offered no credible evidence for the proposition that when the SF Void Judgment was received it could not be linked to records of Defendant relating to Plaintiff-Debtors. While making the assertion that the “file” had been sent to storage and could not be recovered (with no testimony provided by the storage facility or Defendant’s file storage procedures), no evidence was offered by Defendant about its computer records or its attorney’s records concerning Plaintiff-Debtors. No credible evidence was presented how sending a “file” to storage rendered Defendant completely unable to link the SF Void Judgment to Plaintiff-Debtors’ bankruptcy filing. Finally, no credible evidence was presented explaining why a creditor would “close a file” merely because a debtor filed bankruptcy or how a creditor could have obtained a judgment and then apparently made no effort to try and collect such judgment (after having incurred the cost and expense of obtaining that judgment).10 ■
Plaintiff-Debtors provided testimony of the financial events leading up to the Chapter 7 case being filed in December 2008. These include the Plaintiff-Debtors deciding to open a restaurant, borrowing $200,000.00 using their home as equity to fund the restaurant endeavor, and then the restaurant failing after approximately eighteen months. The Chapter 7 case ensued due to the debts owed, with one of the outcomes being the Plaintiff-Debtors losing their pre-bankruptcy home to creditors.
Plaintiff-Debtors obtained their discharge and proceeded with their bankruptcy “Fresh Start” in March 2009. By 2015 Plaintiff-Debtors were financially ready to purchase a new residence. In the Spring of 2015, Plaintiff-Debtors entered into a contract to purchase real property commonly known as 1956 Altessa Lane, Ceres, California (the “Ceres Property”).11 Escrow was opened and Plaintiff-Debtors’ loan officer provided them with a copy of their credit report-noting that the credit report showed there being an outstanding judgment from the SF Superior Court owed by Plaintiff-Debtors to Defendant that dated back to 2009.
A copy of the Old Republic Credit Services Report is provided as Exhibit 2 at trial. On “Page 7/10” (upper right-hand corner, actual page 3 of Exhibit 2), the following information is provided:
*827[[Image here]]
The only dispute raised by Defendant as to the item appearing on the credit report was whether Plaintiff-Debtors asserted that Defendant placed the information on the credit report. As pointed out by counsel for Defendant, the information on the credit report is under the “Public Records” section of the creditor report. This indicates that the credit reporting agencies obtained the information from public records (the SF Superior Court public records), as opposed to it being reported by Defendant.
The evidence presented does not show that Defendant affirmatively reported the judgment to any of the credit reporting agencies. However, the Complaint and claims focus first on the entry of the SF Void Judgment against Plaintiff-Debtors in violation of the automatic stay. Then, on Defendant’s failure to correct the continuing violation of the automatic stay from the time Defendant:
(1) learned in December 2008 or February 2009 of the bankruptcy case being filed,
(2) obtained the entry of the SF Void Judgment in 2009 after the filing of the bankruptcy case,
(3) allowed the SF Void Judgment continuing to be of record at the time of and after the discharge being entered for Plaintiff-Debtors in 2009,
(4) took no action to correct the continuing violation of the automatic stay and the discharge injunction during the period March 2009 through May 2015, and
(5)took no action to vacate the SF Void Judgment from May 2015 (when Defendant’s counsel of record in the SF Superior Court Action first sent the demand to correct the continuing violation of the automatic stay) through early August 2015,
until after Plaintiff-Debtors were compelled to file and serve the Complaint in this Adversary Proceeding to address the continuing violation of the automatic stay and discharge injunction.
Plaintiff-Debtors present evidence that the pending purchase of the Ceres Property was put at peril due to the SF Void Judgment obtained by Defendant continuing to be of public record at the SF Superior Court. The Exhibits include communications with Plaintiff-Debtors’ loan broker stating that the loan documents were good until August 6, 2015, after which 'they would have to be redrawn.12 Ms. Silva again contacted counsel for Plaintiff-Debtors on July 20, 2015, advising him: 13
I just wanted to let you know that our borrower [Plaintiff-Debtors] is in a position of losing this transaction [Ceres Property purchase], if there is anything that you can help with this, we are still waiting on my end for the underwriter to find out if HUD is going to accept the documentation, buy my fear is that they will want it [the San Francisco County judgment] to be vacated or released.
*828Ms. Silva subsequently communicated on July 22, 2015, that the loan broker needed proof that the motion to vacate the San Francisco Superior Court Judgment had been filed!14
Robert Achterberg, one of the Plaintiff-Debtors, provides his testimony that the escrow to close the Ceres Property purchase was stalled because of the San Francisco Superior Court Judgment that appeared of record on his credit report. This forced Plaintiff-Debtors to pay a $1,250.00 extension fee to maintain their existing contract rights to purchase the Ceres Property while they attempted to get Defendant to vacate the SF Void Judgment. Robert Achterberg further testified that if the extension was not obtained and the Purchase Contract lapsed, Plaintiff-Debtors would have lost the $2,800.00 that they had already deposited into the purchase escrow.
COMMUNICATIONS STATING TO BE FROM DEFENDANT’S COUNSEL CONCERNING THE CONTINUING VIOLATION OF THE AUTOMATIC STAY
Before discussing the events of 2015 and communications from the current attorney for Defendant, the court reviews the evidence presented about various attorneys for Defendant. The undisputed testimony is that Defendant had several “in-house counsel”15 who represented it from the time the SF Void Judgment was obtained in violation of the automatic stay through this trial. The original “in-house counsel” was Stephen M. Kappos, Esq., whose office is located in Granite Bay, California.16 Mr. Looney, Defendant’s president, testified that the “in-house counsel” services of Mr. Kappos started around 2007 and terminated in April 2014.
Mr. Kappos was replaced as “in-house counsel” by Ralph Pollard, an attorney who has his office in Concord, California.17 On the Substitution of Attorney18 and pleadings filed by Mr. Pollard, the address of 3785 Brickway Boulevard, Suite 201, Santa Rosa, California (Defendant’s business address) is stated as the address for Law Offices of Ralph L. Pollard. However, Mr. Looney testified that Defendant makes space available for Mr. Pollard to provide his services as “in-house counsel,” with no credible evidence presented that Mr. Pollard operates the Law Offices of Ralph Pollard from Defendant’s offices. See Answer to Interrogatories 2 and 4 of the Special Interrogatories, Exhibit 24.
In reviewing the Exhibits, all written communications from the Law Office of Ralph L. Pollard concerning the violations of the automatic stay and discharge injunction are sent from the Defendant’s 3785 *829Brickway Boulevard, Suite 210, Santa Rosa, California. All communications from the Law Offices of Ralph L. Pollard are signed by Gary Looney bearing the title “Case Administrator” for the Law Offices of Ralph L. Pollard. See Exhibits 5, 6, 9, 11,12, and 14. Mr. Looney testified that he is not an employee of the Law Offices of Ralph L. Pollard and offered no testimony as to why or how he was authorized to execute letters and communicate in the name of the Law Office of Ralph L. Pollard. Rather, Ralph L. Pollard was expressly stated to be the “in-house counsel” for Defendant. Ralph L. Pollard volunteered at trial (not testifying as a witness) that he serves as such “in-house counsel” for several collection agencies, in addition to his law practice at the Law Office of Ralph L. Pollard.
From the evidence presented, while it appears that Mr. Looney could be a “case manager” (which position was never defined) for Defendant, no credible evidence was presented • that Mr. Looney was an employee of or authorized agent for the Law Office of Ralph L. Pollard. Further, the testimony is that Mr. Pollard was “in-house counsel,” not a third-party law firm representing Defendant. No credible evidence was presented of any action taken by Ralph L. Pollard, personally, as “in-house counsel” (or in any attorney role) in connection with this violation of the automatic stay and discharge injunction. Though afforded the opportunity to provide evidence and testimony in opposition and as rebuttal, the only testimony provided for Defendant was by Gary Looney, who was called as a hostile witness by Plaintiff. Such testimony was stated by Defendant to serve as any rebuttal witnesses that Defendant would want to present.
At best, this “in-house counsel” relationship appears to be one in which Mr. Pollard relied upon the services of Gary Looney to do everything for Mr. Pollard’s law firm. At worst, it could be a situation where Mr. Pollard gave Mr. Looney his letterhead and law license, empowering Mr. Looney (who is not licensed to practice law19) to act as a lawyer and engage in the unlicensed practice of law under the name of the Law Offices of Ralph L. Pollard.
VIOLATION OF THE AUTOMATIC STAY, DETERMINATION THAT CONDUCT VIOLATING THE STAY IS VOID, AND OBLIGATIONS ARISING FOR A CREDITOR WHOSE CONDUCT HAS VIOLATED THE AUTOMATIC STAY
Congress and the Ninth Circuit Court of Appeals have made it clear that a violation of the automatic stay is a very serious matter. A creditor who violates the stay has an affirmative obligation to correct the violation and cannot assert a defense based on the lack of action by a debtor to force the remedy of that creditor’s violation. Congress has enacted a statutory stay that arises, automatically, upon the commencement of a bankruptcy case that prevents creditors from taking many acts, including the following:
A. “(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; ... ”20
*830B. “(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; »21
As established by the evidence presented, Defendant knowingly obtained a default judgment against Plaintiff-Debtors in February 2009, which occurred after commencement of the Plaintiff-Debtor’s bankruptcy case in December 2008. Defendant received notice of the December 2008 filing of Plaintiff-Debtors’ bankruptcy casé prior to obtaining the SF Void Judgment. Defendant, with knowledge of the filing of the bankruptcy case, purports to have “closed” the file and sent it to storage before the SF Void Judgment was issued. Defendant states that the reason the judgment was not “caught” is because the file had been “closed” and did not get associated to it by the time the SF Void Judgment was issued in February 2009. As discussed above, no credible evidence is presented how the “closing of a file” sometime after December 2008 (when the bankruptcy notice was received) and prior to obtaining the SF Void Judgment in February 2009 (barely two months later) rendered Defendant incapable of linking the SF Void Judgment to the Plaintiff-Debtors’ bankruptcy case, the automatic stay, the discharge, and the discharge injunction in Plaintiff-Debtors’ December 2008 filed bankruptcy case.
What Defendant admits is that it had full knowledge of the bankruptcy case by the time it received the SF Void Judgment, having “closed” the file because Defendant received notice of the bankruptcy case being filed. The evidence also establishes that since February 2009 Defendant has had actual knowledge of the Plaintiff-Debtors’ 2008 bankruptcy case and since March 2009 the entry of Plaintiff-Debtors’ discharge, which includes the debt that is the subject of the SF Void Judgment.22
The Person Violating the Automatic Stay Has the Burden of Avoiding the Violation, and When a Violation Occurs, to Remedy Such Violation
The automatic stay is just that, automatic, with no obligation on a debtor to affirmatively enforce the stay for it to be effective. When a creditor has notice of a bankruptcy case, it is the creditor’s burden to determine the extent of the automatic stay and seek such relief as is appropriate.23
The automatic stay imposes an affirmative duty of compliance by the creditor.24 As one of the fundamental principles girding the Bankruptcy Code, “the automatic stay requires a creditor to maintain the status quo ante and to remediate acts taken in ignorance of the stay.”25 The automatic stay imposes an affirmative duty to discontinue actions in violation of the *831stay.26 A creditor cannot use the state court enforcement action as leverage in negotiations once the bankruptcy case has been commenced.27
Once the creditor learns or has notice of a bankruptcy case having been filed, any actions that it intentionally undertakes are deemed willful.28 As the Ninth Circuit Court of Appeals explained in Goichman v. Bloom: 29
A “willful violation” does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional. Whether the party believes in good faith that it had a right to the property is not relevant to whether the act was “willful” or whether compensation must be awarded.
It is well established that an “ignorance of the law” or advice of counsel is not a bona fide defense to a willful violation of the automatic stay.30
Though ignorance of a bankruptcy case being filed may be a defense to liability for damages (not taking a willful act with knowledge of a bankruptcy case), such “innocent” violation does not absolve the creditor of liability for failing to correct the violation once the creditor learns of the bankruptcy case having been filed.31 A party who takes an action in violation of the stay not only has an obligation to cease the continuing violation, but also has an affirmative duty to remedy the violation.32 It is not for the debtor, debtor-in-possession, Chapter 7 trustee, or Chapter 11 trustee to chase the creditor and correct the continuing violation and force the creditor to begrudgingly comply with federal law.33 “The Responsibility is placed on the creditor to address the continuing violation of the automatic stay because to place the burden on the debtor to undo the violation ‘would subject the debtor to the financial pressures the automatic stay was designed to temporally abate.’,34
Acts Taken in Violation of the Automatic Stay Are Void, Not Voidable
That an act taken in violation of the automatic stay is void, not merely voidable, is. well-established law in the Ninth Circuit as addressed by the court in Far Out Productions, Inc. v. Oskar et al.: 35
*832In fact, the automatic stay provision is so central to the functioning of the bankruptcy system that this circuit regards judgments obtained 'in violation of the provision as void rather than merely voidable on the motion of the debtor. See [In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992)]. Courts regularly void state court default judgments against debtors when the judgments are obtained in violation of the automatic stay provision, even where the debtor filed for bankruptcy in the midst of the state court proceedings. See, e.g., In re Fillion, 181 F.3d 859, 861 (7th Cir. 1999); In re Graves, 83 F.3d 242, 247 (3d Cir. 1994).
Creditors who wish to take action against a debtor or property that is subject to the automatic stay “[h]ave the burden of obtaining relief from the automatic stay.”36
The Ninth Circuit revisited this issue in 40235 Washington Street Corporation v. Lusardi (In re Lusardi), 329 F.3d 1076 (9th Cir. 2003), addressing a county tax sale of real property that occurred after a bankruptcy case was filed, with neither the county nor the purchaser having any knowledge of the bankruptcy case. The Ninth Circuit concluded that because the tax sale occurred while the bankruptcy case was pending, the sale was void, and that the debtor, not the purchaser, was the owner of the real property. This ruling finding that the sale was void was issued more than 12 years after the sale had occurred and the county not having refunded the purchase money paid by the buyer at the tax sale.
At trial, Defendant (weakly) advanced an argument that because the automatic-stay rendered the SF Void Judgment void, Defendant’s continuing violation of the automatic stay really did not harm the Plaintiff-Debtors. This contention advanced by Defendant does not just miss the mark, but foreshadows a more sinister motive behind Defendant’s conduct. Though knowing that the Bankruptcy Case had been filed, Defendant allowed the SF Void Judgment to remain in the public records of the SF Superior Court—falsely telling the world (including consumer reporting agencies) that Defendant held a judgment against Plaintiff-Debtors.
Liability for Violations of the Automatic Stay
A violation of the automatic stay is addressed as “ordinary civil contempt.” For individual debtors Congress has created additional statutory remedies pursuant to 11 U.S.C. § 362(k).37
The basic analysis as discussed by the Ninth Circuit Court of Appeals in Dyer v. Lindblade38 for considering civil contempt is stated as follows:
*833“The standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court.” [Renwick v. ]Bennett [ (In re Bennett) ], 298 F.3d [1059,] at 1069 ([2002]). Because the “metes and bounds of the automatic stay are provided by statute and systematically applied to all cases,” Jove Eng’g v. IRS (In re Jove Eng’g), 92 F.3d 1539, 1546 (11th Cir. 1996), there can be no doubt that the automatic stay qualifies as a specific and definite court order.
In determining whether the contem-nor violated the stay, the focus ⅛ not on the subjective beliefs or intent of the contemnors in complying with the order, but whether in fact their conduct complied with the order at issue.’ Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996) (internal citations omitted); accord McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 S.Ct. 497, 93 L.Ed. 599 (1949). (Because civil contempt serves a remedial purpose, “it matters not with what intent the defendant did the prohibited act.”)
The threshold standard for imposing a civil contempt sanction in the context of an automatic stay violation therefore dovetails with the threshold standard for awarding damages under § 362(h). [Havelock v. Taxel (in re] Pace[)], 67 F.3d [187,] at 191 [(9th Cir.1995)] (incorporating the willfulness standard of § 362(h) as explicated by Pinkstaff v. United States (In re Pinkstaff), 974 F.2d 113, 115 (9th Cir. 1992)). Under both statutes, the threshold question regarding the propriety of an award turns not on a finding of ‘bad faith’ or subjective intent, but rather on a finding of ‘willfulness,’ where willfulness has a particularized meaning in this context:
‘[W]illful violation’ does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional,
Pace, 67 F.3d at 191; see also Pinkstaff, 974 F.2d at 115; Hardy, 97 F.3d at 1390; cf. Bennett, 298 F.3d at 1069 (describing standard for imposing civil contempt sanctions under § 105(a) for violation of discharge injunction).
Congress has created the additional statutory remedies for an individual debtor who asserts claims for violation of the automatic stay, providing in 11 U.S.C. § 362(k) [emphasis added]:
(k) (1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
(2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (l) of this subsection against such entity shall be limited to actual damages.
Actual Damages
The basic measure of damages for violation of the automatic stay is the amount of economic loss the debtor has suffered as the proximate result of the defendant’s violation. The court takes into account the fair market value of the property that was disposed of in violation of the automatic stay.39 Actual damages for violation of the automatic stay include emotional distress damages.40 For a debtor to *834state a claim for emotional distress damages, the individual must (1) suffer significant harm, (2) clearly establish the significant harm, and (3) demonstrate a causal connection between the significant harm and the violation of the automatic stay.41 Medical evidence of emotional distress is not required; the testimony of family members, friends, and co-workers is sufficient to establish an emotional distress claim.42 In some cases no corroborating evidence is required. An example cited in Dawson is where the egregious conduct was the creditor pretending to hold a gun to the debtor’s head.43 Additionally, the court in Dawson stated that even when the conduct was not egregious, the court could award emotional distress damages where the circumstances make it obvious that a reasonable person would suffer emotional harm, such as the emotional distress of having to cancel a child’s birthday party because the debtor’s checking account was frozen.44
Congress has also provided that the “actual damages” for an individual debtor seeking to redress a violation of the automatic stay “shall” include “costs and attorneys’ fees.” 11 U.S.C. § 862(k)(1). The costs and attorneys’ fees include those incurred in the individual debtor in having to prosecute the action to recover the damages caused by the violation of the stay even after the violation has been abated, but the violating party fails to pay the then existing damages (as with the violation now before the court).45
Punitive Damages
In addition to actual damages, 11 U.S.C. § 362(k)(1) permits the recovery of punitive damages “in appropriate circumstances.” The Ninth Circuit has cautioned that punitive damages are only appropriate if there has been some showing of “reckless or callous disregard for the law or rights of others.”46 The bankruptcy court is given considerable discretion in granting or denying punitive damages under 362(k).47 Punitive damages are properly awarded to punish unlawful conduct and deter its repetition.48
A debtor entitled to actual damages does not automatically qualify under § 362(k)(1) to recover punitive damages. The court must decide whether the circumstances of each case warrant punitive damages.49 When considering an award for damages, the court considers *835the gravity of the offense and sets the amount of punitive damages to assure that they will both punish and deter.50 A creditor’s good faith or lack thereof is relevant to sanctions under § 362(k)(1).51 In determining the appropriate amount of punitive damages, the court usually considers the following factors: (1) the nature of the defendants’ acts; (2) the amount of compensatory damages awarded; and (3) the wealth of the defendants.52
In evaluating the “nature” of the Defendant’s acts, the court considers the purpose of the automatic stay and the role it serves in the bankruptcy process. The automatic stay, as stated by Congress, is a fundamental protection given the debt- or and creditors.53 Violations of the automatic stay are not something with which a creditor may trifle. Even when a violation occurs, the creditor can purge the improper conduct and avoid more significant damages by correcting the violation.
The court also considers the proportionality of the punitive damages to the compensatory damages awarded to the Plaintiff-Debtors. The rule in both the Ninth Circuit and in California is that punitive damages must be proportional and be reasonably related to compensatory damages.54 However, there is no fixed ratio or formula for determining the proper proportion between the two.55 In a 2004 decision, State Farm Mutual Auto Insurance Company v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003), the Supreme Court discussed the Constitutional reasonableness requirement in determining the amount of punitive damages. While not setting a maximum ratio between punitive damages and compensatory damages, the Supreme Court stated that punitive damage awards that are a single digit multiple of the compensatory damages are more likely to withstand constitutional scrutiny.56 The Court in State Farm cited to its earlier holding in BMW of North America v. Gore57 that a punitive damage award (that in Gore was 500 times the compensatory damages) in excess of four times the compensatory damages might be close to the line of constitutional impropriety.
*836DETERMINATION THAT CONDUCT OF DEFENDANT WAS WILLFUL AND IN CALLOUS DISREGARD FOR THE RIGHTS OF PLAINTIFF-DEBTORS AND THE OBLIGATIONS OF DEFENDANT UNDER 11 U.S.C. § 362(a)
Though the evidence does not show that Defendant was aware of the bankruptcy filing when the motion for entry of default judgment in the San Francisco State Court Action was filed, it is clear that Defendant had actual knowledge of the December 2008 bankruptcy filing when the SF Void Judgment was entered and received by Defendant in February 2009. It is further clear that Defendant had knowledge that any obligation to Defendant was discharged and the imposition of the discharge injunction in March 2009 when Defendant was served with the Discharge issued by this court, From the period February 2009 through July 2015, Defendant took no action to vacate the SF Void Judgment obtained in violation of the automatic stay or to correct the false public recording stating that Defendant had a judgment against Plaintiff-Debtors.58
With full knowledge of the bankruptcy case and discharge, Defendant failed to act for:
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until Defendant forced Plaintiff-Debtors to file this Adversary Proceeding (and incur all of the costs and expenses relating thereto) to address Defendant’s continuing violation of the automatic stay. Only after the Adversary Proceeding was filed did Defendant take action to correct the SF Void Judgment. During the above period, the SF Void Judgment was allowed by Defendant to be a continuing false statement to the world (including consumer reporting agencies) in the SF Superior Court public record that Defendant held an en-, forceable judgment against Plaintiff-Debtors.
The action, and inaction, of Defendant in 2015 manifests conduct that goes beyond merely “willful,” but that was in reckless or callous disregard of the law and the rights of Plaintiff-Debtors. From Defendant’s conduct in May through August 2015, as well as the inaction in February 2009 through April 2015, the court con-*837eludes that Defendant intentionally failed to vacate the SF Void Judgment. Defendant knew that the SF Void Judgment was obtained and allowed to continue as a matter of public record falsely stating that a judgment existed in violation of the automatic stay during that six-year period. Additionally, in the May to August 2015 period, Defendant failed to act in response to the direct requests to correct the continuing violation of the automatic stay, forcing Plaintiff-Debtors to incur further costs, expenses, and damages in having to file and prosecute the present Adversary Proceeding. The Adversary Proceeding was first necessary to compel Defendant to first correct the continuing violation of the automatic stay and discharge injunction. Then, even though Defendant showed it could quickly vacate the SF Void Judgment (but only after being served with the summons and Complaint), the prosecution of this Adversary Proceeding was necessary to enforce Plaintiff-Debtors’ right to recover damages caused by the continuing violation of the automatic stay and discharge injunction.
It appears that Defendant may have believed that if it failed to act to correct the continuing violation, Plaintiff-Debtors’ counsel would give up and not file the Complaint given the cost and expense of such litigation. This would allow Defendant to continue in the violation of the automatic stay and maintain the false appearance of having a judgment against Plaintiff-Debtors, who Defendant may have perceived as desperate to purchase their new home.
It also may have been that Defendant believed that Plaintiff-Debtors’ counsel might suggest that Plaintiff-Debtors take a “financially expedient route,” forgo filing the Complaint (and incurring tens of thousands of dollars in attorneys’ fees for years of litigation) and throw a couple thousand dollars at Defendant to “buy” a correction of the false public record and continuing violation of the automatic stay. In this matter now before the court, Plaintiff-Debtors’ counsel did not give advice to throw money at Defendant to “buy” a correct credit report and “buy” the correction to the continuing violation of the automatic stay. Plaintiff-Debtors did not take the easy way out, instead electing to enforce the rights provided for by Congress in the Bankruptcy Code.
The court also notes that Plaintiff-Debtors and Plaintiff-Debtors’ counsel went to great lengths to afford Defendant the opportunity to correct the continuing violation of the automatic stay. Even when the counsel of record who obtained the SF Void Judgment failed to respond to Plaintiff-Debtors’ counsel, Defendant and its current counsel (with all communications being with and through Mr. Looney, president of Defendant, making the communications for Defendant’s attorney) were given more time to correct the continuing violation. Even though given additional time and opportunities, while Defendant and Defendant’s counsel (as communicated by Mr. Looney) promised the SF Void Judgment would be vacated, no action was taken by Defendant.
That Defendant could quickly and easily vacate the SF Void Judgment is demonstrated by Defendant doing that-but only after being served with the summons and Complaint in this Adversary Proceeding. Once sued, Defendant had the SF Void Judgment vacated within days. The Certificate of Service states that Defendant was served by mail with the Summons and Complaint by it being placed in the United States Mail, postage prepaid, on July 29, 2015, Dckt. 9; and testimony of Malcolm Gross. July 29, 2015, was a Wednesday, and assuming prompt delivery of the mail, the Summons and Complaint would have been received by Defendant on Friday, *838July 31, 2016. By Monday, August 3, 2015, the Law Offices of Ralph L. Pollard, in a correspondence written by Gary Looney, states that Defendant has arranged to present the motion to vacate at an ex parte hearing on Friday, August 7—just four days later. Exhibit 11.
Defendant has demonstrated that it had the ability, if it wanted to act, to have the SF Void Judgment vacated within days of having actual knowledge of the bankruptcy case and discharge in 2009. More significantly, Defendant had the ability to have the SF Void Judgment vacated within days of the July 2, 2015 letter sent to Stephen Kappos (as Defendant’s State Court counsel) and Defendant, and the July 14, 2015 response from the Law Offices of Ralph Pollard as the attorney for Defendant (which is signed by Gary Looney) stating that the motion to vacate will be filed.59 No explanation is given as to why and how Defendant did not promptly act to immediately vacate the SF Void Judgment in the first week or two of July 2015, rather than forcing Plaintiff-Debtors to file the Adversary Proceeding and serve the Summons and Complaint on July 29, 2015.
The less than business reasonable conduct (reasonable conduct being that intended to minimize litigation and avoid incurring otherwise unnecessary expense and cost) continued by Defendant through trial. In connection with the determination of attorneys’ fees and costs awarded as part of Plaintiff-Debtor’s actual damages, Defendant argued that $4,346.00 was the maximum amount of reasonable fees because that is the amount that existed as of August 2015, when Defendant finally acted to vacate the SF Void Judgment. Therefore, Defendant argues that Plaintiff-Debtor should be denied all of the actual damages legal fees incurred in trying to recover the financial, emotional distress, and attorneys’ fees actual damages which admittedly existed as of August 2015. This contention that the actual damages attorneys’ fees do not include the attorneys’ fees in having to litigate this action is without legal support as shown by the ruling of the Ninth Circuit Court of Appeals in America’s Servicing Co. v. Schwartz-Tallard discussed supra.
To the extent that Defendant seeks to contend that .having to incur any legal fees past the August 2015 vacating of the SF Void Judgment was unnecessary, Defendant’s conduct is to the contrary. Defendant fails to present any evidence that it ever made an offer to pay the actual damages in August 2015, or at any time during the period from August 2015 through the December 2016 hearing to determine the amount of attorneys’ fees and costs as actual damages. No evidence is presented of any monies being tendered for the actual damages which existed as of August 2015 or at any time thereafter. No evidence is presented that Defendant made a Federal Rule of Civil Procedure 68 and Federal Rule of Bankruptcy Procedure 7068 offer to base a contention that any further attorneys’ fees and costs are unreasonable in light of such an offer to have judgment entered against Defendant.
Defendant’s Opposition to the Motion to Determine Attorneys’ Fees60 demonstrates a continuing pattern of attempting to leverage the cost of Plaintiff-Debtors having to enforce their rights to letting Defendant avoid paying what it owed. Defendant’s contention that the Plaintiff-Debtors should not be awarded attorneys’ fees for having to prosecute litigation to obtain a judgment for damages that Defendant did not or would not pay, is without merit. Further, it manifests a systemic problem with Defendant’s conduct in fail*839ing to address the continuing violation of the automatic stay and the damages caused by it. It manifests a coordinated, willful scheme to violate the automatic stay and the rights of Plaintiff-Debtors.
DAMAGES FROM WILLFUL CONDUCT OF DEFENDANT
Actual Damages
The Actual Damages awarded Plaintiff in this Adversary Proceeding total $21,361.29 and are comprised of the following parts.
Economic Damages. The evidence establishes that due to the SF Void Judgment not being vacated, and Defendant ignoring and failing to affirmatively act to correct its continuing, knowing violation of the automatic stay, Plaintiff-Debtors were forced to pay $1,250.00 to extend the escrow to not only avoid losing the ability to purchase the house, but also not lose the $2,800.00 escrow deposit they had made as part of the purchase contract.61 The undisputed evidence shows that the escrow for the purchase of the home by Plaintiff-Debtors was delayed because the SF Void Judgment continued to be reported in. the official records of the San Francisco Superior Court.62 These damages flow directly from Defendant continuing to violate the automatic stay by allowing the SF Void Judgment to remain of public record and failing to act in the May—August 2015 period to correct the continuing violations of the stay.
Defendant’s argument that because it did not “report” the item to credit reporting agencies, the fact that it appeared on the Plaintiff-Debtors’ credit report having been obtained from the public record (SF Superior Court) could not be Defendant’s “fault,”63 is not only without merit on these facts, but demonstrates continuing intentional conduct to avoid the legal obligations of Defendant. The judgment was requested by Defendant. The judgment was obtained in violation of the automatic stay by Defendant. Defendant knew it was in the public record, being told of the credit report problem, and failed to act.
Emotional Distress Damages. Plaintiff-Debtors have requested emotional distress damages for the delay in being able to close escrow to purchase their home and the stress of that purchase being in peril by the SF Void Judgment that Defendant did not have vacated. The knowledge of this SF Void Judgment putting the purchase of Plaintiff-Debtors’ home in jeopardy occurred during the period of May 2015 through August 7, 2015, when the SF Void Judgment was vacated (after this Adversary Proceeding was commenced) by Defendant.
The evidence of emotional distress damages is provided in the testimony of Robert Achterberg. He testifies that having found the home they desired purchase (having finally rehabilitated Plaintiff-Debtors’ credit and recovered from the financial losses that necessitated the 2008 bankruptcy), Plaintiff-Debtors had to “deal” to *840keep the escrow alive. For Mr. Achter-berg, Plaintiff-Debtors’ last resort was to have their attorney file this Adversary Proceeding (and incur all the costs and expenses relating thereto) to try and save the escrow after Defendant failed to have Void SF Judgment vacated pursuant to Plaintiff-Debtor’s multiple requests. The court observed Mr. Achterberg at trial during his testimony. He is a credible witness and demonstrated how significantly the impediment the SF Void Judgment, and Defendant’s failure to vacate the SF Void Judgment, caused with the possible loss of the house the Plaintiff-Debtors were attempting to purchase as their new home.
It is obvious to a reasonable person that, having weathered the Chapter 7 bankruptcy, rehabilitating their credit, and finding a house to be Plaintiff-Debtors’ home, and then the purchase of that home being blocked by a void judgment, Plaintiff-Debtors would suffer emotional distress. While not causing Plaintiff-Debtors to cease working or suffer a mental breakdown, it did cause emotional distress. For ninety-three (93) days of emotional distress of having the loss of the future family home and the $2,850.00 escrow deposit, the court awards $1,850.00 of emotional distress damages. This works out to $19.89 a day of damages, a very modest, reasonable amount.
Costs and Attorneys’ Fees Damages. Congress mandates that the costs and attorneys’ fees incurred by an individual debtor from an automatic stay violation, including the litigation to recover damages, shall be awarded the individual debtor. After conducting the trial, the court had a separate hearing on December 15, 2016, to determine the amount of costs and attorneys’ fees to be awarded as actual damages. The separate hearing for the costs and attorneys’ fees served several purposes. First, going into the trial the actual legal fees for the “trial” could not be stated with any certainty. Having a separate hearing on that issue allowed the parties to present clear evidence and arguments on the issue of what proper costs and fees should be allowed. Additionally, it afforded Defendant an opportunity (after participating in the trial and hearing the court’s comments at the conclusion of the trial) to try and resolve this dispute, limiting further costs and expenses.
At the hearing on December 15, 2016, the court determined that the reasonable and necessary costs and attorneys’ fees incurred as part of the 11 U.S.C. § 362(k)(l) actual damages are $18,261.29 ($17,589.00 in attorneys’ fees and $672.29 in costs).64 No serious argument was made that the attorneys’ fees requested were not necessary and reasonable for the litigation of Adversary Proceeding through judgment by Plaintiff-Debtors.65 The only argument advanced by Defendant was the unreasonable contention that the actual damages attorneys’ fees do not include the fees that an individual debtor has to incur to enforce the right to recover the damages already caused by the violation of the automatic stay.
Punitive Damages
The evidence establishes that Defendant intentionally acted with recklessness (at least in 2009 through April 2015) and intentionally and in callous disregard (clearly for May 2015 into August 2015) of the law, the rights of Plaintiff-Debtors, *841and the obligations of Defendant arising under the Bankruptcy Code for the automatic stay (11 U.S.C. § 362(a)) and the discharge injunction (11 U.S.C. § 524(a)(2), (3)) in failing to act to vacate the SF Void Judgment, Arguably, this .callous disregard continued through trial, with Defendant not presenting any evidence of attempts to pay for the damages caused and contending it is unreasonable to pay the mandatory attorneys’ fees for making Plaintiff-Debtor to endure more than a year of litigation to recover the statutorily mandated damages in 11 U.S.C. § 362(k).
The court concludes from the Evidence that in July 2015, Defendant intentionally chose not to vacate the SF Void Judgment. The court further determines that in failing to act Defendant did so intentionally, in an apparent attempt to exert pressure on the Plaintiff-Debtors by using the SF Void Judgment to block the purchase of Plaintiff-Debtors’ home.
This intentional conduct, both reckless and in callous disregard of Plaintiff-Debtors’ rights under the automatic stay and the discharge injunction, warrants the award of punitive damages to correct the conduct of Defendant. Additionally, Defendant and other similarly situated persons must be deterred from trying to use void judgments and violations of the automatic stay to leverage a debtor into forgoing his or her rights because of the costs and expenses of having to seek remedy the creditor’s continuing violations through litigation. Defendant has demonstrated that it pushed Plaintiff-Debtors into having to incur the costs and expenses of litigation to remedy Defendant improperly impairing Plaintiff-Debtors’ ability to purchase of a home. Though afforded multiple opportunities to act to vacate the SF Void Judgment, Defendant, failed to act. Only after it put significant economic burdens on Plaintiff-Debtors (cost of commencing the litigation), Defendant finally acted to correct the continuing violation-which remedy only took less than one week. Then, Defendant complains that Plaintiff-Debtor proceeded with the litigation to recover the statutory damages that Defendant’s failure to act caused.
Not to award punitive damages would give Defendant and similarly situated creditors the green light to knowingly continue to violate the stay, and refuse and fail to remedy that continuing violation.
Plaintiff-Debtors have not provided the court with financial information of the Defendant to be used in determining how large the punitive damages need to be to have the desired deterrent effect. However, sufficient information has been provided for the court to determine appropriate punitive damages. First, Defendant presents itself to this court as an active debt collector of sufficient size that it has for years maintained an "in-house counsel” to represent it. In this Adversary Proceeding alone, Defendant has chosen to be represented by multiple law firms.66 This demonstrates a level of ongoing business operations of significant economic size. The amount of the SF Void Judgment obtained *842in violation of the automatic stay was $8,405.65 when obtained in February 6, 2009.67 Using only whole months and computing post-judgment interest from March 2009 through July 2015, the SF Void Judgment Defendant allowed to continuously be represented to the public as a valid judgment totaling $13,779.24 as of July 2015 (including post-judgment simple interest of 10% per annum pursuant to Cal. C.C.P. § 685.010.)
Given the intentional conduct of Defendant and the callous disregard of the rights of Plaintiff-Debtors and Defendant’s obligation to remedy the continuing violation of the automatic stay, the court determines that punitive damages in the amount of $15,000.00 is necessary and appropriate. It is necessary to deter Defendant from continuing to engage in such conduct, ignoring its obligations under the automatic stay, and make it clear that there is no economic incentive to violate the stay and not correct a continuing violation of the automatic stay. Further, it is an appropriate amount to deter similarly situated creditors from “gambling” that a debtor may elect to pay a creditor to remedy a continuing violation of the stay rather than pursuing the debtor’s rights under 11 U.S.C. § 362(k).
Punitive damages in the amount of $15,000.00 is a relatively modest amount, both in the amount of absolute dollars and the financial facts of the violation. The SF Void Judgment Defendant left hanging over Plaintiff-Debtors’ heads and impairing the home purchase escrow had grown to $13,779.24 as of July 2015. The $15,000.00 is only slightly more than the amount of the SF Void Judgment when it was finally vacated in 2015.
Additionally, the actual damages required by Congress to be awarded Plaintiff-Debtors total $21,361.29. The $15,000.00 punitive damage award is less than the actual damages, well within the single digit multiple guidelines of the Supreme Court.
Even if the court were to consider only the economic and emotional distress damages which total $3,100.00, the $15,000.00 is less than 5-times those damages, well within the single digit multiple guidelines of the Supreme Court.
While modest, the $15,000.00 in punitive damages should be sufficient to deter Defendant and other similarly situated persons who are or have violated the automatic stay from forcing debtors to commence litigation to stop continuing violations of the automatic stay. It will also deter Defendant and other similarly situated persons from trying to “hardball” a debtor into walking away from enforcing his or her right to recover damages by failing to make a good faith offer to settle the dispute, pay the damages, or at least make a Federal Rule of Civil Procedure 68 offer for judgment to cap the liability. The $15,000.00 punitive damages reasonably make Defendant’s practices demonstrated in connection with this violation make such a stay violation game not worth the damages candle.68
DISCHARGE INJUNCTION VIOLATIONS
In addition to the asserted violations of the automatic stay, Plaintiff-Debtors assert that Defendant has also violated the discharge injunction. Congress has provided in 11 U.S.C. § 524(a) that a discharge *843granted in a case under Title 11 (Bankruptcy Code):
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and
(3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.
As discussed in Collier on Bankruptcy, Sixteenth Edition, ¶ 524.02[a], an act to try and collect or obtain payment on a discharged debt violates the discharge injunction. This includes attempts to have a debtor “voluntarily” pay a discharged debt in order to obtain a future loan (such as a home purchase) by leaving a discharged debt being reported as a current obligation on a credit report. Id., ¶ 524.02[b].
A party who knowingly violates the discharge injunction can be held in contempt under 11 U.S.C. § 105(a). ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir. 2005). It must be shown that the party asserted to have violated the discharge injunction: (1) knew the discharge injunction was applicable and (2) intention the actions which violated the injunction. Id. From the evidence presented the court concludes that Defendant knew of the discharge, was aware of the discharge injunction, failed to act to correct the void judgment after learning of the discharge in 2009, and then in 2015 when expressly told that the void judgment was impairing Plaintiff-Debtors’ fresh start and ability to buy a home, Defendant failed to take any action to correct this violation until forcing Plaintiff-Debtors to sue it. No good faith reason was shown by Defendant for failing to act or why only after forcing Plaintiff-Debtors to incur the cost and expense of actually having to sue Defendant that Defendant could get the void judgment vacated in just a couple of days.
DEFENDANT’S CONDUCT ALSO CONSTITUTES CONTEMPT IN THE VIOLATION OF THE AUTOMATIC STAY AND VIOLATION OF THE DISCHARGE INJUNCTION
Plaintiff-Debtors have presented clear and convincing evidence of Defendant’s violation of both the automatic stay and discharge injunction. It is undisputed that Defendant was not only aware of the bankruptcy case being filed but Plaintiff-Debtors having obtained their bankruptcy discharges in March of 2009. Defendant purports to not having known it needed to *844vacate the SF Void Judgment because it had “closed the file” because Plaintiff-Debtors had filed bankruptcy. Defendant offers no explanation how a judgment just sat around its office orphaned from any client and any consumer debtor.
Defendant offers no credible, good faith explanation as to why it failed to act in the Summer of 2015, though promising to vacate the judgment. Defendant’s intention to continue in the violation of the automatic stay and violate the discharge injunction are shown by its failure to act. This occurred even though Defendant and its attorneys, the Law Office of Ralph Pollard (with Gary Looney communicating for that Law Office with counsel for Plaintiff-Debtors), knew that the SF Void Judgment was improperly impairing Plaintiff-Debtors’ ability to purchase a home. Defendant’s quick about face and getting the SF Void Judgment vacated within days demonstrates that any delay and promises were not in good faith.
Fortunately for Defendant the damages for the violation of the discharge injunction are the same damages as those for the continuing violation of the automatic stay. As for punitive damages, the court believes that the $15,000.00 of punitive damages are sufficient to address both the violation of the automatic stay and the violation of the discharge injunction.
JUDGMENT TO BE GRANTED PLAINTIFF-DEBTORS
Judgment is granted for Robert and Stephanie Achterberg, the Plaintiff-Debtors, in the amount of $36,561.29 (in the amount specified above) against Creditors Trade Association, the Defendant. The court also grants judgment determining that the SF Void Judgment was a void judgment, having been issued in violation of the automatic stay.
This Memorandum Opinion and Decision constitutes the court’s findings of fact and conclusions of law. Fed. R. Civ. P. 52 and Fed. R. Bankr. P. 7052.
. Bankr. E.D. Cal. 08-925439 ("Bankruptcy Case.")
. Complaint, Dckt. 1.
. Answer, Dckt. 12.
. Defendant also failed to participate in the mandatory Pre-Trial Conference. Civil Minutes, Dckt. 24, and Trial Setting Order, Dckt, 25.
. Defendant admits knowing of the bankruptcy in December 2008 or January 2009, assert*825ing that learning of the bankruptcy caused Defendant to "close its file” and "send it to storage,” using that as the explanation as to why in February 2009 it did not have a "file” to link the SF Void Judgment to when obtaining it from the SF Superior Court in February 2009.
. 11 U.S.C. § 362(a).
. Bankruptcy Case Dckt. 22; 11 U.S.C. § 524(a).
. As discussed infra. Congress has expressly provided in 11 U.S.C. § 362(k) that the actual damages for an individual debtor, such as Plaintiff-Debtors, include the attorneys’ fees and costs relating to that violation. This is an exception to the general rule that attorneys’ fees and costs for the litigation before the court are part of the post-judgment award and not "actual damages.” See Fed. R. Civ. P. 54(d), Fed. R. Bankr. P. 7054.
.Defendant offered no evidence when the motion for entry of default judgment was filed, but made a general reference to the delay in obtaining default judgment from the California Superior Court. While unsupported by evidence, the court gives Defendant the benefit of the doubt with respect to the filing of the SF Superior Court Action and motion for entry of default judgment.
. Merely because a consumer files a bankruptcy case is not the end of the "bankruptcy story,” only the beginning. Filing a bankruptcy case does not guaranty that such case will be completed. Even if a debtor files all of the required documents that does not mean the debtor will obtain a discharge. Even if a discharge is entered, the creditor who has commenced debt collection litigation against a consumer debtor who has filed bankruptcy must address the bankruptcy filing and discharge in that debt collection litigation.
. Exhibit 15, copy of Extension of Time Addendum citing to Purchase Agreement.
. Exhibit 4, pg. 1; email from loan broker representative Patsy Silva to counsel for Plaintiff-Debtors.
. Id., p. 1; July 22, 2015 email Patsy Silva to counsel for Plaintiff-Debtors.
. Id., pp. 2-4.
, The court makes the reference to "in-house counsel” in quotes because the evidence presented that such attorneys were not "in-house employees" of Defendant but third-party law firms that had Defendant and other collection agencies as their respective clients, in addition to other clients for the law firm. As in this Adversary Proceeding, the purported "in-house counsel,” Ralph Pollard expressly represents on his pleadings that he is "Ralph L. Pollard, Esq.” of the “Law Offices of Ralph L. Pollard,” and not the "in-house legal department of Creditors Trade Association.”
. Mr. Kappos is reported by the California State Bar as having continuously in practice as an attorney in California from July 7, 1989, through the. issuance of this Decision, http:// members.calbar.ca.gov/fal/Member/Detail/ 141371.
. Mr. Pollard is reported by the California State Bar as having continuously in practice as an attorney in California from December 16, 1980, through the issuance of this Decision, http://members.calbar.ca.gov/fal/ Member/Detail/95975.
.Dckt. 20.
. http://members.calbar.ca.gov/fal/Member Search/QuickSearch?FreeText=gary+ looney&SoundsLike=false&x=0&y=0.
. 11 U.S.C. § 362(a)(1).
. 11 U.S.C. § 362(a)(6).
. The evidence includes a copy of the Discharge and Certificate of Service listing the discharge order having been served on Defendant. Exhibit 19, Discharge and Certificate of Service; Exhibit 24, Response to Interrogatory Question 1; and Testimony of Gary Looney of the address of Defendant.
. Collier on Bankruptcy, Sixteenth Edition, ¶ 362.02; Carter v. Buskirk (In re Carter), 691 F.2d 390 (8th Cir. 1982); Hillis Motors v. Hawaii Automobile Dealers' Association (In re Hillis Motors), 997 F.2d 581, 586 (9th Cir. 1993) ("Where through an action an individual or entity would exercise control over property of the estate, that party must obtain advance relief from the automatic stay from the bankruptcy court. Carroll v. Tri-Growth Centre City Ltd. (In re Carroll), 903 F.2d 1266, 1270-71 (9th Cir. 1990).”)
. State of Cal. Emp’t Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151-52 (9th Cir. 1996).
. Franchise Tax Bd. v. Roberts (In re Roberts), 175 B.R. 339, 343 (9th Cir. BAP 1994).
. Sternberg v. Johnston, 595 F.3d 937, 944 (9th Cir. 2010); Eskanos & Adler, P.C. v. Lee-tien, 309 F.3d 1210, 1215 (9th Cir. 2002) (addressing the obligation to discontinue post-petition collection proceedings).
. Eskanos & Adler, 309 F.3d at 1215.
. In re Risner, 317 B.R. 830, 835 (Bankr. D. Idaho 2004); see also Eskanos and Adler, P.C. v. Leetien, 309 F.3d 1210, 1215 (9th Cir. 2002); Thompson v. GMAC, LLC, 566 F.3d 699, 702-3 (7th Cir. 2009); Emp’t. Dev. Dept. v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151 (9th Cir. 1996) (holding that the knowing retention of estate property violates the automatic stay).
. Goichman v. Bloom (In re Bloom), 875 F.2d 224, 227 (9th Cir. 1989) (citing INSLAW, Inc. v. United States (In re INSLAW, Inc.), 83 B.R. 89, 165 (Bankr. D.D.C. 1988)).
. Botell v. United States, No. 2: 11-cv-01545-GEB-GGH, 2012 U.S. Dist. LEXIS 41172 (E.D. Cal. March 26, 2012); Joe Hand Promotions, Inc. v. Estradda, No. 1: 10-cv-02165-OWW-SKO, 2011 U.S. Dist. LEXIS 61010 (E.D. Cal. June 8, 2011).
. In re Cordle, 187 B.R. 1, 4 (N.D. Cal. 1995).
. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191-92 (9th Cir. 2003).
. Taxel, 98 F.3d at 1151.
. Johnson v. Parker (In re Johnson), 321 B.R. 262, 283 (D. Ariz. 2005) (citation omitted).
. Far Out Productions, Inc. v. Oskar et al., 247 F.3d 986, 995 (9th Cir. 2001). See also United States of America (In re Schwartz), 954 *832F.2d 569, 571 (9th Cir. 1992), [emphasis in original] holding:
Our decision today clarifies this area of the law by making clear that violations of the automatic stay are void, not voidable. See In re Williams, 124 B.R. 311, 316-18 (Bankr. C.D. Cal. 1991) (recognizing that the Ninth Circuit adheres to the rule that violations of the automatic stay are void and criticizing the BAP decision in this case)..,
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his [or her] creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.
H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97 (emphasis added).
. In re Schwartz, 954 F.2d at 572.
. Dyer v. Lindblade (In re Dyer), 322 F.3d 1178, 1190-91 (9th Cir. 2003).
. Id.
. In re Kaufman, 315 B.R. 858, 866 (N.D. Cal. 2004).
. Dawson v. Wash, Mut. Bank (In re Dawson), 390 F.3d 1139, 1148 (9th Cir. 2004).
. Id. at 1149.
. Id., citing Varela v. Ocasio (In re Ocasio), 272 B.R. 815, 821-22 (1st Cir. BAP 2002) (holding that testimony of debtor’s wife was sufficient to support an award of medical damages without medical testimony).
. Dawson, 390 F.3d at 1149 (citing Wagner v. Ivory (In re Wagner), 74 B.R. 898, 905 (Bankr. E.D. Pa. 1987)).
. Id. (citing United States v. Flynn (In re Flynn), 185 B.R. 89, 93 (S.D. Ga. 1995) ($5,000.00 award of emotional distress damages because ‘it is clear that the appellee suffered emotional damages’ when she was forced to cancel her son's birthday party because- her checking account was frozen)); see also Sternberg, 595 F.3d at 943.
. America’s Servicing Company v. Sckwartz-Tallard (In re Sckwartz-Tallard), 803 F.3d 1095, 1101 (9th Cir. 2015). This even includes the right to attorneys' fees for having to defend an award of damages pursuant to 11 U.S.C. § 362(k) on appeal. Id.
. Bloom, 875 F.2d at 228.
. Id.
. See Cooper Indus. v. Leatherman Tool Group, 532 U.S. 424, 432, 121 S.Ct. 1678, 149 L.Ed.2d 674 (2001); BMW of N. Am. v. Gore, 517 U.S. 559, 568, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996).
. Henry v. Assocs. Home Equity Servs. (In re. Henry), 266 B.R. 457, 481-83 (Bankr. C.D. Cal. 2001).
. id.
. See Walls v. Wells Fargo Bank (In re Walls), 262 B.R. 519, 529 (Bankr. E.D. Cal. 2001).
. Bauer v. NE Neb. Fed. Credit Union (In re Bauer) No. EC-09-1281, 2010 WL 6452899, 2010 Bankr. LEXIS 5096, (9th Cir. BAP 2010).
. H. Rept. No. 95-595 to accompany H.R. 8200, 95th Cong., 1st Sess. (1977) pp. 340-344:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collect tion efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor’s property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor’s assets prevents that.
. Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1162-63 (9th Cir. 1987).
. Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1024-25 (9th Cir. 1985).
. Cooper Industries v. Leatherman Tool Group, 532 U.S. at 425, 121 S.Ct. 1678.
. 517 U.S. at 582, 116 S.Ct. 1589.
. Though afforded the opportunity to present evidence to the court of the attempts made by Defendant, nothing was presented but the testimony of Gary Looney (called as a hostile witness by Plaintiff-Debtors and offered as a rebuttal witness). It appears that part of the explanation is that Defendant cannot get the file back from storage because it is reported as lost. However, that contention rings hollow in the 21st Century when businesses maintain electronic data bases and records, including electronic logs of the actions taken in the course of operating the business. Striking in its absence is the failure of Defendant to present the court with evidence and documents of all its "good works” in June and July 2015 to promptly address its continuing violation of the automatic stay and vacate the SF Void Judgment, There was not any presented that Defendant's 2015 and thereafter "files” (physical and electronic) relating to the SF Void Judgment and actions taken to correct the violation of the automatic stay when requested, and then demanded, in 2015 are "lost.”
. Exhibits 3 and 5.
. Dckts. 48 and 50,
. Direct Testimony Statement and Testimony at Trial of Robert Achterberg.
. It was argued that Plaintiff-Debtors also lost a portion of an escrow credit due to the delay in closing caused by the SF Void Judgment not being vacated and remaining in the public record. However, the possible evidence for that was to be provided by Patsy Silva, the loan officer. Ms. Silva was not presented as a witness at trial as required by L.B.R. 9017-1 and no basis was presented to the court to accept written testimony in lieu of the required live testimony.
.Old Republic Credit Services credit report, listing the State Court Judgment as one obtained by Defendant for a judgment in the amount of $6,467.00 against Plaintiff-Debtors.
. Civil Minutes, Dckt, 54, and Order, Dckt, 56.
. In the Opposition to Plaintiff-Debtors' Motion for Attorneys' Fees:
Creditors Trade Association, Inc. does not object to the hourly rates asserted by plaintiffs' counsel nor does CTA question the actual time spent.
Opposition, Dckt. 50.
. In this Adversary Proceeding Defendant has been represented by two different law firms. First, the law firm of Provencher & Flatt, LLP appeared with Douglas Provencher of that firm filing the answer for Defendant. Dckt. 12. On March 21, 2016, a Substitution of Attorney was filed by which Mr. Provencher and his firm were substituted out, and Ralph Pollard and the Law Offices of Ralph L. Pollard were substituted in as counsel of record for Defendant in this Adversary Proceeding. Dckt. 20.
Then, on November 30, 2016, Mr. Pro-vencher and his firm filed an Opposition to Motion for Attorneys’ Fees, listing Mr. Pro-vencher and his firm as co-counsel with Mr. Pollard and his firm for Defendant in this Adversary Proceeding. Dckt. 50, An association of counsel was filed on December 12, 2016. Dckt. 54.
. Exhibit "A” to the Complaint,
. The phrase that "the game is not worth the candle” is a phrase meaning that the cost of the endeavor is not worth the possible benefit. Cambridge Advanced Learner's Dictionary & Thesaurus, Cambridge University Press. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500911/ | Order Denying Trustee’s Motion for Turnover and Directing Clerk to Re-Close Case
Janice Miller Karlin, United States Chief Bankruptcy Judge
This matter is before the Court on Chapter 13 Trustee Jan Hamilton’s Motion for Turnover; he seeks turnover of settlement proceeds that Debtor Kelly Sue Purcell 1 is entitled to receive as a result of a class action lawsuit filed in December 2013.2 While the Court frequently sees turnover motions, this one is unique because it was filed more than five years after Debtor received her discharge and her case was closed, and the settlement in question is based on a cause of action that Debtor was unaware she had until well *861after her case was closed. However, the medical procedure giving rise to the ultimate cause of action occurred while the bankruptcy case was still (barely) open, thereby requiring the Court to determine, in the first instance, whether Debtor’s cause of action (resulting in the settlement proceeds) is even property of the estate under 11 U.S.C. § 541.3
Because the Court finds that the cause of action did not arise until she discovered the potential injury caused by the device, and that discovery occurred after her bankruptcy ease was closed, the settlement proceeds are not property of the estate.
I, Findings of Fact
A, Factual history.
The parties have stipulated to the following facts.4 Debtor filed her Chapter 13 petition for bankruptcy relief in March 2008. The pourt confirmed Debtor’s plan with a 36-month applicable commitment period, she successfully completed her required plan payments in April 2011, and an order of discharge was entered on September 23, 2011. The Trustee filed his Final Report in October 2011, and Debtor’s case was then closed on the same date the final decree was entered—November 30, 2011.
Five days after her discharge, on September 28, 2011, Debtor underwent a medical procedure in which a transvaginal mesh device (“pelvic mesh device”) was implanted. In the ensuing months, Debtor had several follow-up visits with physicians. No problems with the pelvic mesh device were discovered or disclosed to Debtor during these visits. A portion of the pelvic mesh was removed on April 18, 2012, but Debtor’s doctor again reported no defect in the medical device itself.
But in January 2013, Debtor apparently began to experience problems, so Debtor’s physician referred her to a specialist. In February 2013, Debtor consulted with that specialist, who discovered through the use of a cystoscope that there was some mesh exposure. This was the first indication of any problem with the device itself. The specialist apparently recommended to Debtor to have surgery to remove the device, and the surgery to do so occurred on April 8, 2013. Significantly, the parties stipulate that on that date “[f]or the first time, a failed transvaginal mesh sling was discovered and diagnosed. (495 days after the bankruptcy case was closed.)”5
Soon after this third surgery, Debtor saw a television commercial regarding pelvic mesh device failure. She contacted counsel eleven days after this third surgery and retained a firm to represent her in a claim against the manufacturer of the pelvic mesh device in a multi-district class action litigation. While Debtor has reached a settlement agreement with the manufacturer of the device, the parties’ stipulation does not reveal the net amount or the timeline for disbursement.
B. Procedural history.
The United States Trustee filed a motion to reopen Debtor’s case upon learning of the pending personal injury settlement.6 The Court granted the motion with the proviso that a party in interest file a pleading addressing the settlement funds within 60 days.7 The Chapter 13 Trustee *862then filed this Motion for Turnover.8 The parties have stipulated that the only issue for the Court’s consideration is: “Whether the product liability cause of action for personal injuries to debtor and resulting settlement between the debtor and the manufacturer of a medical device that is the subject of the Trustee’s Motion for Turnover of Settlement Proceeds is property of the Debtor’s bankruptcy estate.”9
Because this issue exists in several other newly reopened cases pending before this-Court—although those cases are still in the fact-finding stage—the Court invited the parties in those cases to submit ami-cus briefs on this limited legal issue.10 The Court appreciates, and has fully reviewed, the amicus briefs filed by the debtors in two other cases.11
II. Analysis
The Court has jurisdiction to decide this matter, and it is a core proceeding.12
A. Burden of proof.
In a motion for turnover, the burden falls upon the Trustee, as the moving party, to establish a prima facie case that the property sought is property of the estate.13 If the Trustee establishes a prima facie case, the burden of proving an exception shifts to the debtor.14 The Trustee must carry his burden by a preponderance of the evidence.15
B. Whether the class-action settlement proceeds are property of the estate.
The filing of a bankruptcy petition creates an estate; property that is included in the estate is broadly defined in § 541(a)(1) *863to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” Section 1306(a)(1) expands the property included in Chapter 13 cases to include property “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”
Even without the expansion of property of the estate created by § 1306 for Chapter 13 cases, contingent interests that exist upon filing, but that do not fully materialize until after filing, have long been held to be property of the estate.16 In Segal v. Rochelle,17 the United States Supreme Court held that a debtor’s tax refund that was received postpetition was property of the estate, because the refund was for business losses suffered prepetition and was “sufficiently rooted in the pre-bank-ruptcy past” to be included as property of the bankruptcy estate.18 Segal concerned the 1898 Bankruptcy Act, but in enacting § 541, Congress - intended to incorporate Segal’s holding.19
However, although § 541(a)(1) defines property of the estate as including “all legal or equitable interests of the debt-. or in property as of the commencement of the case,”20 neither § 101 (which contains definitions used in the Code) nor § 541 define “property.” The Supreme Court confronted that omission head-on in Butner v. United States.21 It recognized the constitutional authority of Congress to specifically enact a statute that would provide such a definition, but found that in the absence of such statutory authority, state law regarding property interests would control.22
So for example, while Congress elected to affirmatively include a debtor’s interest in rental income in the definition of property of the estate, it has not similarly optéd to expressly include a debtor’s postpetition legal claim as property of the estate.23 As a result, and because property interests for Kansas debtors are created by Kansas law, Kansas law governing when a cause of action accrues controls.24
The accrual of Debtor’s interest in the product liability claim for personal injuries is controlled by K.S.A. § 60-513. This statute establishes a two-year statute of limitations for most torts.25 Importantly, this statute of limitations is tolled in cases in which the fact of injury is not immediately ascertainable. In such cases, the cause of action does not accrue
“until the act giving rise to the cause of action first causes substantial injury, or, if the fact of injury is not reasonably ascertainable until some time after the *864initial act, then the period of limitation shall not commence until the fact of injury becomes reasonably ascertainable to the injured party.”26
This is commonly referred to as the discovery rule, or theory,27 in contrast with the conduct theory, in which the date of the action giving rise to the injury defines the accrual of the cause of action, irrespective of actual discovery.28
The distinction between a claim of the estate and a claim against the estate is important, however, because while Congress has not opted to preempt state law in defining property interests of the estate, it has defined “claims” against the estate.29 In re Smith, a case with Substantially similar facts and cited by both parties, discussed this distinction.30 There, debtor had taken a (later banned) weight-loss medication, Fen-Phen, before she filed her Chapter 7 bankruptcy case, but commenced litigation and reached a settlement agreement with the manufacturer after she received her discharge and her case was closed.31 The Trustee moved for an order directing the debtor to turn over the proceeds.32
The Smith decision noted the scope of the definition of “claim” in § 101(5) as pertaining to a bankruptcy claim, i.e., a claim against the,estate, and recognized that an interest could be a bankruptcy claim under the Code even if not recognized as such under state law.33 On the other hand, a debtor’s interest in a potential claim was determined and defined by state law and could not become property of the estate if it did not exist as of the commencement of the case.34 Relying on K.S.A. § 60-513, Smith found that the debtor’s cause of action had not accrued until she discovered her injury, which was well after discharge. As a result, the court held that the settlement proceeds were not property of the estate and denied turnover.35
The Trustee relies on In re Parker, where the Tenth Circuit broadly stated that the conduct theory controls the date of accrual of a claim.36 But the facts of that case are clearly distinguishable. Parker, a lawyer, failed to include a former client as a creditor in his no-asset Chapter 7. The client then brought a legal malpractice claim against him for his actions and/or omissions before he filed bankruptcy. The bankruptcy court allowed him to reopen his case to amend his schedules to include the client as a creditor, and ultimately declared that her claim against him was a prepetition claim because it revolved around his failure to respond to a show cause order resulting in the dismissal of her federal court case six months before he filed bankruptcy.
*865At no point in its decision did the Tenth Circuit discuss, let alone differentiate, between cases. involving claims against a bankruptcy estate as opposed to claims a debtor or his estate might have that would bring assets into the estate.37 And this Court has found no Tenth Circuit case deciding that precise issue. As a result, the Court finds that Parker1 s analysis is inap-posite to the facts of this case and elects not to adopt the “conduct theory5’ under these facts.
The Trustee also cites an unreported decision from the Kansas District Court, Shields v. U.S. Bank Nat'l Ass’n ND,38 which in turn cited to Parker to support its conclusion that the plaintiff/former debtor did not have standing to assert a claim it ultimately concluded belonged to the plaintiff/former debtor’s bankruptcy estate.39 However, a closer look at Shields is warranted, as that Court did not expressly adopt the conduct theory in dismissing the claims.
The plaintiff in Shields had filed a Chapter 7 bankruptcy petition in 2002, at which time he did not list any claims, contingent or otherwise, against U.S. Bank. In 2005, he brought an action against the bank, claiming it had violated various statutes in its treatment of, and reporting about, his HELOC account with the bank. The bank moved for summary judgment, alleging that Shields lacked standing to bring the claims, as they were prepetition claims that belonged solely to his bankruptcy estate.40
The Court granted the motion, holding that under the “unique circumstances of this case,” all the claims touched the pertinent checking account and Reserve Line, making them “sufficiently rooted” in the bank’s initial (prepetition) acts, such that they belonged to the bankruptcy estate.41 It is significant that in using that language, it relied on Segal (not Parker).42
Turning to the case law upon which Debtor and the amicus parties rely, all cite to two recent decisions in In re Ross (one from the bankruptcy court and one from the district court hearing the matter on appeal).43 This is one of the only reported cases involving a debtor’s post-discharge receipt of settlement funds in a pelvic mesh medical device suit. There, the Bankruptcy Court for the Eastern District of New York applied New York law and found that the debtor’s cause of action did not exist at the commencement of her Chapter 7 case—because the debtor had not discovered the potential damage—and thus was not property of her bankruptcy éstate.44
On appeal, the district court reached the same result, but only after rejecting the bankruptcy court’s reasoning.45 The district court did not engage in any analysis of Butner or applicable New York law, and instead held the bankruptcy court should have looked only to the Supreme Court’s analysis in Segal to determine whether the *866debtor’s claim was “sufficiently rooted in the pre-bankruptcy past.”46 Regardless of the analysis, the district court ultimately affirmed the bankruptcy court’s decision to deny the Chapter 7 trustee’s motion to reopen the case to administer the asset, finding that the debtor’s claim arose post-petition, was not sufficiently rooted in debtor’s pre-bankruptcy past, and thus was not property of the estate.47
In Ross, the District Court did not disagree with the bankruptcy court’s analysis of whether the claim had arisen under state law, but said that the bankruptcy court’s analysis was incomplete because it failed to take into account whether the underlying facts giving rise to the claim were sufficiently rooted in the pre-bank-ruptcy past.48 Indeed, the findings of some courts seem to suggest that Segal’s “rooted in the bankruptcy past” analysis is the sole determining factor.49
In the Tenth Circuit, the Segal analysis has arisen almost exclusively in a Chapter 7 context.50 This makes sense; in a Chapter 7, the line of demarcation between pre and post-bankruptcy has greater significance than in a Chapter 13 case. This is because a Chapter 7 case does not have the expanding effect of § 1306 to bring postpetition property into the estate.
Under either Chapter 7 or 13, however, in order for property to belong to the bankruptcy estate, it must first be property of the debtor. The Tenth Circuit has consistently cited Butner and turned to state law to determine whether something is property.51 Butner and Segal do not conflict. Instead, they answer different questions—Butner answers what is property under state law, while Segal determines whether that interest existed before the debtor filed his bankruptcy petition.
In Parks v. Dittmar,52 the Tenth Circuit applied both the Butner and Segal analy-ses to determine whether those Chapter 7 debtors’ employee stock appreciation rights (SARs) were property of the estate. The Circuit held that the proper test was: (1) whether the debtors had a property interest under Kansas law; (2) whether that interest existed before the filing of the bankruptcy petitions; and (3) whether those interests were property of the bankruptcy estate under § 541.53 The court found that the SARs were property of the estate because the debtors’ legal interest existed pre-bankruptcy, despite the fact *867that the SARs’ maturation was contingent on postpetition events.54
Applying the Parks v. Dittmar test, the Court finds it really only has to answer the first part of that test -here— whether Debtor had a property interest before her Chapter 13 case was closed in a cause of action against the manufacturer of the device. The answer to that question depends on when Debtor’s cause of action arose, which in turn is defined by state law. In Kansas, a cause of action does not arise until the discovery of the injury. In a Chapter 13 case, if the cause of action accrues after commencement, but before the case is closed, dismissed, or converted,55 then it' is property of the estate. Here, the Trustee has not demonstrated that Debtor had any factual basis on which to bring a cause of action against the manufacturer of the device before her bankruptcy case was closed. And a cause of action based on an injury that is not discovered until after the bankruptcy case is closed is thus not property of the estate, even if the act giving rise to the cause of action occurred during the pendency of the case.
C. Application in this case.
This Debtor’s pelvic mesh device was implanted on September 28, 2011— five days after she received her discharge, but 63 days before the final decree was entered and the case closed. Although Debtor had several routine follow-up appointments, it was more than a year after closing before her physician referred her to- a specialist in January 2013. The exact date the injury was first discoverable or reasonably ascertainable could be debated—a portion of the mesh device was removed in April 2012 (still post-closing), but based on the parties’ stipulation, Debtor’s first indication of any problems with the device itself did not occur until either January or March 2013. Because both dates were well after Debtor’s case was closed, this Court need not decide the exact discovery date. Under Kansas law, Debtor’s cause of action did not accrue until after her bankruptcy was closed, and thus the settlement proceeds are not property of her bankruptcy estate.
The Court would note, as an aside, that even if it went through the exercise of analyzing the other two parts of the Parks v. Dittmar test (essentially the Segal test used by the district courts in Ross and Shields—i.e., whether the interest at stake in a cause of action is sufficiently rooted in Debtor’s pre-bankruptcy past so as to require it be deemed property of the estate), the outcome would be identical. First, there is no nexus, let alone a strong one, between the product liability claim and pre-bankruptcy events. In fact, the medical device here was not even implanted until over three years after Debtor filed her case. Instead, it was implanted after Debt- or had completed her plan and received her discharge, but before administrative details necessary for case closing had been completed. And like in Ross, the undisputed evidence is that Debtor only became aware that the device was likely defective well over a year after her bankruptcy was closed. Thus, as the District Court held in Ross, the single pre-closing event—placement of the device—“would be rendered meaningless insofar as plaintiffs ability to obtain settlement proceeds is concerned.” 56
The Segal test requires a claim be “sufficiently” rooted in the debtor’s pre-bank-ruptcy past.57 In order for a claim to be *868rooted, the claim must first exist. Like m Ross, because the most critical element creating her interest—the discovery that there was a defect with the medical device—did not occur until well after her case was closed, and over five years after the petition date in this previous Chapter 13 proceeding, the Trustee has not sustained his burden to show the claim to be “sufficiently” rooted” in pre-closing (let alone prepetition) events.
III. Conclusion
This Court must apply Kansas law to determine when Debtor’s cause of action accrued in order to determine whether, as of the closing date of her case, she had an actionable property interest in that cause of action. Kansas law is clear on this point. Under K.S.A. § 60-513(b), the discovery rule governs her cause of action. The trustee has failed to meet his burden of proving that Debtor could reasonably have ascertained that she was injured as a result of the medical product before her case was closed.
Instead, the stipulated facts demonstrate that Debtor did not discover the potential problem with the pelvic mesh device until well after she received her discharge and her case was closed, irrespective of the date the device was implanted. For that reason, Debtor’s cause of action did not accrue until after her Chapter 13 case was closed, is not property of the estate, and the settlement proceeds from such cause of action need not be turned over to the long-closed bankruptcy estate.
The Trustee’s Motion for Turnover58 is denied. The Court further directs the Clerk to re-close this case after the appeal time runs on this order if no appeal is timely filed.
It is so ordered.
. Doc. 118. Since filing, Debtor has changed her last name to Busby.
. id.
. Unless otherwise stated, all future citations are to Title 11 of the United States Code (the Bankruptcy Code, 11 U.S.C. 101, et. seq.).
. Doc. 134.
. Doc. 134.
. Docs. 105.
.Doc. 109 (“A party in interest must file a motion or other pleading to justify keeping the case open, within 60 days, or the Clerk is ordered to re-close the case based on the assumption the estate has declined to pursue settlement funds”).
. Doc. 118.
. Doc. 139. The parties agreed to reserve other issues, including whether Debtor might have other defenses to turnover and whether her counsel should be entitled to fees as an administrative expense, in the event the Court were to decide the threshold issue in Trustee's favor. See Doc. 139.
. Doc. 137
. Docs. 140 (amicus brief of interested parties Brian Allen Murphy and Felecia Lyn Murphy, In re Murphy, No. 07-40859), 141 (amicus brief of interested party Myrna Lynn Castle, In re Castle, No. 01-23359).
. 28 U.S.C. § 157(b)(1) (jurisdiction to hear core proceedings); § 157(b)(2)(E) (orders for turnover of property of the estate are core proceedings); 28 U.S.C. § 1334.
. In re Studstill, No. 11-40582, 2011 WL 6208919, at *2 (Bankr. D. Kan. 2011) (in a motion for turnover, Trustee has burden to prove that the property sought is property, of the bankruptcy estate and debtor was in possession when case was filed); In re Spencer, 362 B.R. 489, 490 (Bankr. D. Kan 2006) (in a motion for turnover the “trustee has the burden to prove that the property sought is in fact property of the bankruptcy estate"); In re McDonald, 353 B.R. 287, 290 (Bankr. D. Kan. 2006) (“The Trustee, as the moving party, bears the burden of proof in this turnover action and must at least establish a prima facie case. After that, the burden of explaining, or going forward, shifts to Debtors, but the ultimate burden or risk of persuasion is upon the' Trustee.”) (citations omitted).
. McDonald, 353 B.R. at 290.
. In re Lee, 415 B.R. 518, 523 (Bankr. D. Kan. 2009) (burden is on trustee, as moving party, to show property belongs to the bankruptcy estate; and finding that under Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), preponderance of evidence standard is applicable to most, if not all, disputes in bankruptcy cases); United States v. Krause (In re Krause), No. 05-17429, 2009 WL 243398, at *10-11 (Bankr. D. Kan. 2009) (after noting inconsistent decisions regarding burden and standard of proof in turnover actions, court held that the trustee has burden of proving, by a preponderance of evidence, that property is of the bankruptcy estate); McDonald, 353 B.R. at 290.
. Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966).
. Id.
. Id.
. See Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1518 (10th Cir. 1991) (discussing Congress’s affirmative adoption of Segal in § 541).
. (emphasis added).
. 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
. Id. at 55, 99 S.Ct. 914; see also In re Bryant Manor, LLC, 422 B.R. 278, 288 (Bankr. D. Kan. 2010) (recognizing Congress's post-Butner amendment of § 541(a)(6) to specifically include in property of the bankruptcy estate interests in rents and profits earned by property).
. § 541(a)(6); Bryant Manor, 422 B.R. at 288.
. Butner, 440 U.S. at 54-55, 99 S.Ct. 914; In re Smith, 293 B.R. 786, 789 (Bankr. D. Kan. 2003).
. K.S.A. § 60-513(a) (actions limited to two years).
. K.S.A. § 60-513(b). This is subject to an absolute limit of 10 years from the date of the conduct, regardless of when the fact of injury was discovered. Id.
. Smith, 293 B.R. at 789.
. Watson v. Parker (In re Parker), 313 F.3d 1267, 1269 (10th Cir. 2002) (defining conduct theory and holding that the Tenth Circuit uses the conduct theory in determining when a claim against the estate has accrued).
. § 101(5); Smith, 293 B.R. at 789 (citing Swift v. Seidler (In re Swift), 198 B.R. 927, 936 (Bankr. W.D. Tex. 1996)).
. 293 B.R. at 788.
. Id.
. Id. at 787.
. Id. at 789 (citing In re Swift, 198 B.R. at 936).
. Id.
. Id. at 789-90.
. Doc. 118; In re Parker, 313 F.3d at 1269.
. 313 F.3d at 1270.
. No. 05-2073, 2006 WL 3791320 (D. Kan. 2006).
. Id. at *5 n.4.
. Id., at *1.
. Id. at *6.
. Id. (citing Segal, 382 U.S. at 380, 86 S.Ct. 511).
. 548 B.R. 632, 638-40 (Bankr. E.D.N.Y. 2016); Mendelsohn v. Ross, No. 16-CV-2071, 251 F.Supp.3d 518, 2017 WL 1900288 (E.D.N.Y. May 9, 2017); Docs. 133, 140, 141.
. Ross, 548 B.R. at 638-40.
. Ross, 251 F.Supp.3d at 523-25, 2017 WL 1900288, at *4-5.
. Id. at 525-26, at *6.
. Id.
. Id.
. Shields, 2006 WL 3791320, at *5 (citing In re Richards, 249 B.R. 859, 861-62 (Bankr. E.D. Mich. 2000), in which claim for asbestos injuries was found to be property of the estate because exposure occurred prepetition, even though ability to sue did not arise until post-petition); In re Sommer, 2008 WL 704401, at *3 (Bankr. N.D. Ohio 2008) (same).
. See, e.g., Parks v. Dittmar (In re Dittmar), 618 F.3d 1199 (10th Cir. 2010); In re Barowsky, 946 F.2d at 1518-19; but see Schneider v. Nazar (In re Schneider), 864 F.2d 683, 685-86 (10th Cir. 1988) (Chapter 7 debtor’s interest in payments-in-kind for not planting crops prepetition arose in contract; government agent had not signed contract until postpetition and therefore agreement was not so rooted in the bankruptcy past as to make it property of the estate).
. See, e.g., Expert S. Tulsa, LLC v. First Am. Title Ins. Co., (In re Expert S. Tulsa, LLC), 619 Fed.Appx. 779, 781 (10th Cir. 2015); Tracy Broad. Corp. v. Spectrum Scan, LLC (In re Tracy Broad. Corp.), 696 F.3d 1051, 1060 (10th Cir. 2012); In re Dittmar, 618 F.3d at 1204; Ford v. Ford Motor Credit Corp. (In re Ford), 574 F.3d 1279, 1283 (10th Cir. 2009); Wagers v. Lentz & Clark, P.A. (In re Wagers), 514 F.3d 1021, 1028 n.29 (10th Cir. 2007).
. 618 F.3d 1199, 1204-07 (10th Cir. 2010).
. Id. at 1204.
. Id. at 1208.
. § 1306.
. 251 F.Supp.3d at 525-26, 2017 WL 1900288, at *6.
. 382 U.S. at 379, 86 S.Ct. 511.
. Doc.118. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500913/ | Memorandum Opinion and Order Granting Debtors’ Motions for Partial Summary Judgment and Denying Creditor’s Motions for Partial Summary Judgment and Dismissal ROBERT D. BERGER, U.S. BANKRUPTCY JUDGE The question of whether an entity is eligible to be a “debtor” under the Bankruptcy Code seems, at first blush, to be elementary. Either the entity is or it is not, and let us all move on to the substance of the matter. But that question has consumed the debtors in this case and one of their principal creditors through briefing on a preliminary motion to dismiss, months of discovery, multiple cross-motions for summary judgment related to that motion to dismiss, and in attacks to nearly every substantive decision of this Court. With a full record now before it, the Court is prepared to rule in the affirmative: both the “revocable trust” and the “special purpose debtors”—each term defined more fully below—are eligible to be debtors under the Bankruptcy Code. Regarding the bankruptcy filing of the revocable trust, Creditor JD Holdings, L.L.C. (hereinafter “J.D. Holdings”) argues that the trust is merely an “ordinary trust” and not a “business trust,” and that, therefore, the trust does not qualify as a corporation—an entity specifically defined in the Code so that it is included in the “persons” eligible to file for Chapter 11 bankruptcy relief. Regarding the bankruptcy filings of the special purpose debtors, J.D. Holdings argues that a “status quo order” from the state court where the parties were litigating a breach of contract dispute altered who had the authority to make the bankruptcy filings, and that because the special purpose debtors did not comply with this status quo order, the Court lacks subject matter jurisdiction over them. The specific matters before this Court are: (1) J.D. Holdings’ Motion to Dismiss Debtors’ Chapter 11 Petitions, Abstain from these Chapter 11 Cases, or Alternatively, to Lift or Modify the Automatic Stay (Doc. 257), and related briefing thereto (Docs. 336, 401, 406);1 (2) Debtors’ Motion for Partial Summary Judgment Denying JD Holdings’ Motion to Dismiss Special Purpose Debtor Cases (Doc. 767), and related briefing thereto (Docs. 768, 888-1, 915); (3) J.D. Holdings’ Cross-Motion for Summary Judgment Granting J.D. Holdings’ Motion to Dismiss Case Filed by the Revocable Trust of John Q. Hammons (Doc. 887), and related briefing thereto (Docs. 887-1, 927, 966); (4) Debtors’ Motion for Partial Summary Judgment Denying J.D. Holdings’ Motion to Dismiss Case Filed for Revocable Trust (Doc. 769), and related briefing thereto (Docs. 770, 887-1, 914); and (5) J.D. Holdings’ Cross-Motion' for Summary Judgment Granting J.D. Holdings’ Motion to Dismiss the Special. Purpose Debtors’ Chapter 11 Petitions (Doc. 888), and related briefing thereto (Docs. 888-1, 926, 969). Final briefing on all motions closed on March 24, 2017, and on the request of the parties, oral argument was heard on June 5,2017. The Court first finds, and the parties agree, that there are no. genuine disputes as to any material fact. Because the Court then concludes that the undisputed facts show that the trust at issue does qualify as a business trust under the Code, and that the status quo order did not alter who had the authority to authorize a bankruptcy petition for the special purpose debtors, it rules against J.D. Holdings on all motions. The Court therefore grants the motions for partial summary judgment filed by Debtors,2 denies the motions for partial summary judgment filed by J.D. Holdings,3 and denies J.D. Holdings’ motion to dismiss based on these issues.4 1. Findings of Fact5 John Q. Hammons began developing hotels in 1958. In 1989, when he was 70 years old, Mr. Hammons created a trust, now titled the Revocable Trust of John Q. Hammons dated December 28, 1989, as Amended and Restated (the “Hammons Trust”). The Hammons Trust was amended- multiple times and restated in 2000, when he was over 80 years old, on the same day Mr. Hammons signed his will. Mr. Hammons’ will incorporated by reference the Hammons Trust’s terms, and called for any assets that remained in his estate when he died to be contributed to the Hammons’ Trust. During Mr. Ham-mons’ life, nearly, all of his assets were held by the Hammons Trust, and he was the sole contributor of assets to the Ham-mons Trust. The Hammons Trust does not have shareholders or a similar class of persons who own an interest in the trust, nor a board of directors or similar body elected on behalf of its beneficiaries. Per its terms, property was transferred by Mr. Hammons personally and individually to the Hammons Trust, and Mr. Ham-mons then held the trust property as sole trustee. The governing “dispositive provisions” of the trust indicated that during Mr. Hammons’ life, the net income of the trust would be paid to him, but upon his resignation as trustee, or if he became “incompetent, physically incapacitated,” or “unable to act in his own behalf or manage his own business affairs,” then successor trustees would “take possession and control” of the trust estate for the duration of his incapacity, paying for the care and support of Mr. Hammons and his wife, Juanita Hammons. Upon Mr. Hammons’ death, the Hammons’ Trust would then become irrevocable, and the trust estate would be used to pay all of Mr. Hammons’ final expenses, all debts owed by Mr. Hammons, and certain specific bequests to several local colleges, hospitals, etc.6 The remaining trust estate would be divided into two portions: a Marital Trust and a Charitable Trust. The Marital Trust specifically stated its intent to qualify for the marital deduction for federal estate tax purposes. The Charitable Trust was to continue indefinitely, with its annual income to be distributed to specific charities as directed therein, and again, complying with all federal tax code requirements. The Charitable Trust was authorized to form-a corporation if it would be more convenient or efficient to do so. The Hammons Trust granted broad powers to the trustee. It gave the trustee the power to “hold, possess, manage, and control” the trust estate and gave “full power to sell, transfer, convey and dispose” of the trust property on the terms and prices that the trustee deemed proper. The trustee was also given “full power” to invest or reinvest all or any of the trust estate upon the terms the trustee deemed in the best interest of the trust estate, with the statement that it was: intended hereby to vest in the Trustee full power and complete authority to hold, possess, manage, control, sell, convey, encumber or lease the real estate for any term although extending beyond the term of the trusts, and to invest and reinvest the whole and every part of the Trust Estate according to the Trustee’s sole judgment and discretion without any other limitation upon the Trustee’s power so to do. The discretionary actions taken by the trustee were declared conclusive and binding, and the trustee was not “liable for any mistake in judgment in the making or retaining of investments ... so long as any decision is made in good faith.” The trustee was also granted the power to borrow money in the trustee’s “absolute discretion,” and “whether or not that borrowing is for trust purposes,” and the power “to pledge, mortgage, assign or grant a security interest or lien in any trust assets to secure any indebtedness,” again, “whether or not the granting of the security interest or lien is for a trust purpose, or is for the purpose of the protection, preservation or improvement of the Trust Estate.” And finally, the trustee was given “the power to carry out agreements made by [Mr. Ham-mons] and to continue, operate, and control any businesses which are held in the Trust Estate.” Likewise, successor trustees were authorized to “hold securities, real estate and other investments” and “sell or otherwise dispose of any investments if, in their sole discretion to do so would be in the best interest of j&e trusts.” The successor trustees were released from personal liability: Being aware of the fact that, in operating any business, risks must be taken, [Mr. Hammons] hereby releases the Successor Trustees from any personal liability for any shrinkage of income or loss of capital value that may be incurred in the authorized operation of the businesses, except loss that may result from ... willful misconduct or action in other than good faith; and in any measurement of the degree of care, diligence and prudence exercised ..., [Mr. Ham-mons] directs that their actions be considered in relation to the inherent risks involved in the continued operation of businesses of the character represented, and that it be borne in mind that the Successor Trustees have been engaged in a business enterprise for the reasons and purposes hereinbefore stated pursuant to [Mr. Hammons’s] request and desire. The successor trustees were “expressly authorized” “to operate any business” in which Mr. Hammons was “engaged at the time of his resignation, death, or incapacity ... in order to accomplish an orderly disposition of that business over the period of the trust in the best interest of the beneficiaries thereof, and to do all things necessary in connection with the operation and conduct of that business or businesses so long as the Successor Trustees shall consider it advisable to continue the operation and conduct thereof.” The successor trustees have never drawn, a salary or payment in their capacity as successor trustees. From the establishment of the Ham-mons Trust in 1989 through September 28, 2010, the sole trustee of the Hammons Trust was Mr. Hammons. On September 16, 2005, Mr. Hammons and the Hammons Trust entered into a right of first refusal agreement (the “ROFR”) with J.D. Holdings and others.7 The ROFR applied to “JQH Subject Hotels,” and defined that phrase as specific properties included on an attached list “and any Hotel Properties or any direct or indirect interests in Hotel Properties now or hereafter acquired by [Mr. Hammons] or any [of Mr. Hammons’ entities].8 The ROFR set forth an affirmative obligation for Debtors to begin to sell for cash all of the ROFR assets upon the death of Mr. Hammons.9 In 2012, J.D. Holdings filed suit in Delaware state court for breach of contract, specifically, to redress breaches of the ROFR that was entered between J.D. Holdings, Mr. Ham-mons, and the Hammons Trust in 2005. The litigation has been ongoing since that date. Mr. Hammons died on May 26, 2013.10 From September 28, 2010, Jacqueline Dowdy and others have served as successor trustees, and from September 4, 2013 through the Hammons’ Trust’s bankruptcy petition date, the successor trustees have been Ms. Dowdy and Greggory Groves. Neither Ms. Dowdy nor Mr. Groves were present at the Hammons Trust’s creation, or ever had a discussion with Mr. Ham-mons about why the Hammons Trust was created. Rather, their understanding of its purpose comes from the four corners of the Hammons Trust documents. At all times since its inception, Missouri has been the situs of the Hammons Trust and the Hammons Trust has received income from business activities. The Hammons Trust has not registered as a business trust, however, or otherwise attempted to comply with state laws pertaining to qualification as a business trust tinder state law. The Hammons Trust has filed income tax returns each year since 2013. The Hammons Trust has elected to be treated as part of Mr. Hammons’ estate under the Internal Revenue Code, and the successor trustees indicated this was done for convenience and cost savings. In 2014, the Hammons Trust made payments totaling $6,982,718.72, per the special bequests stated therein for the Charitable Trust.11 (Note that the Charitable Trust did not make these transfers, as discussed below.) Additional “ongoing special bequest payments” to certain charitable organizations have- been made, totaling almost $8.3 million. None of the recipients of any of these payments made any capital contribution to the Hammons Trust. None of the assets of the Hammons Trust were ever delivered to the Marital Trust after Mr. Hammons’ death, and, likewise, no assets have ever been transferred to the Charitable Trust. Rather, funds held by the Hammons Trust were disbursed to cover the expenses of Ms. Hammons after Mr. Hammons’ death until her death on April 29, 2014. And the special bequests stated in the Hammons Trust related to the Charitable Trust have all been made directly by the Hammons Trust. Assets were not transferred to the Marital Trust or the Charitable Trust after Mr. Ham-mons’ death because the successor trustees decided that those transfers should not be made in light of financial uncertainty caused by the litigation commenced by J.D. Holdings. In that state court litigation, J.D. Holdings filed an amended complaint and ultimately sought specific performance of the ROFR in the form of a compelled transfer of the “JQH Subject Hotels” to J.D. Holdings. Also, in October 2015, J.D. Holdings filed a motion in the state court litigation over the ROFR seeking a status quo order. The motion stated: JD Holdings seeks a status quo order to protect its rights with respect to the JQH Subject Hotels. In particular, JD Holdings respectfully requests that the Court enter an Order preventing Defendants from taking actions that would impede JD Holdings’ ability to specifically enforce the ROFR Agreement, including by developing, encumbering, or otherwise altering, the JQH Subject Hotels in any way. Nothing in the motion seeking the status quo order expressly mentioned bankruptcy or any attempt to restrict the right of any Debtor to commence a bankruptcy case. The Delaware state court found, in a preliminary ruling on October 28, 2015, that Debtors had “made zero efforts to attempt to comply” with the sale provisions of the ROFR agreement. The transcript of the hearing on the status quo motion gives the state court’s oral decision on the motion. It states that it was reasonably probable that J.D. Holdings would be able to show at trial that Debtors were in breach of the ROFR, and the ROFR provided for specific performance in the event of a breach. The state court judge then listed the factors it would consider in assessing J.D. Holding’s motion (that the court characterized as seeking injunctive relief): equity, harm, and balancing. Regarding equity, the state court judge stated: In terms of the equities, equitable ownership lies with the plaintiffs. This is like an ordinary real estate transaction where Laster [sic] enters into a contract with seller to buy a house. Seller is supposed to close on date X but doesn’t. The equity of ownership lies with the buyer. Real estate is unique. The specific performance right is in effect. Equity treats the buyer as having the superior title in this instance, not the breaching sellers. The state court then indicated it would enter an order prohibiting Debtors from taking any action outside the ordinary course of business.12 The ultimate order entered by the Delaware state court on the status quo motion was three paragraphs in total. The status quo order stated, in its entirety: 1. Pending further order of this Court or final disposition of this action, Defendants shall not take action outside of the ordinary course of business as to any of the properties or assets that are subject to the Sponsor Entity Right of First Refusal Agreement, dated September 15, 2005 (the ‘JQH Subject Hotels’), including those JQH Subject Hotels identified on Annex A of the Supplemental Complaint filed in this action by JD Holdings, L.L.C. on October 19, 2015. 2. Defendants shall provide at least five (5) business days’ notice to Plaintiffs before taking any action outside of the ordinary course of business as to any JQH Subject Hotel. 3. The restrictions imposed by this Order may be waived on a case-by-case basis by written waiver signed by JD Holdings. J.D. Holdings sought no change in management of any of the JQH Subject Hotels after entry of the status quo order.13 No judgment was ever entered granting to J.D. Holdings any title (equitable or otherwise) in any property of any Debtor. On the other hand, Debtors never consulted with J.D. Holdings or the Delaware state court to clarify the meaning or scope of the status quo order, either. In April, 2016, J.D. Holdings filed a motion for contempt for a violation of the status quo order stemming from a loan default on one of the JQH Subject Hotels. That same month, the Delaware state court entered an order on the contempt motion, and stated that because trial in the case was already scheduled for July 2016, the court would hear evidence on the contempt issue and rule simultaneously. The Delaware state court also permitted a representative of J.D. Holdings to participate in every call and be present at every meeting between Debtors and a lender whose loan was secured by six ROFR assets. On June 26, 2016, essentially on the eve of trial on the state court litigation, the Hammons Trust and 71 of its directly or indirectly wholly owned subsidiaries and affiliates, including the “JQH Subject Hotels” that Debtors and J.D. Holdings refer to as the “Special Purpose Debtors,” filed Chapter 11 bankruptcy petitions.14 The petitions were jointly administered, as reflected in the caption above. The petition of- the Hammons Trust was marked as a “trust,” not a “corporation.” No trustee of the Hammons Trust had ever filed for bankruptcy on behalf of the Special Purpose Debtors until the present filings, and no Special Purpose Debtor had ever filed for bankruptcy before. Prior notice of the commencement of the bankruptcy cases was not given to J.D. Holdings or the Delaware state court. The Hammons Trust had seven employees on its petition date. The assets held by the Hammons Trust on that date consisted of three hotels, a storage facility, parking lots and garages, unimproved land, a baseball stadium, a building that houses a sports hall of fame operation, and ownership of all the equity issued by entities that in turn owned the equity issued by subsidiary entities owning hotels, casinos, office buildings, trade centers, a federal courthouse, etc.15 All assets held by the Ham-mons Trust were operated for profit, and profits were generated by the Hammons Trust in most, if not all, years. The three hotels directly owned by the Hammons Trust have been held for many years. Since the inception of the Ham-mons Trust, however, the Hammons Trust has controlled a single, global, consolidated cash management system ' for the businesses it operates directly and through its subsidiary entities. The Ham-mons Trust has personal liability for the promissory notes secured by the assets that it directly owns, and the cumulative debt owed on those loans was approximately $62.7 million on the Hammons Trust petition date. In addition, the Ham-mons Trust has executed unlimited guaranties of debts incurred by its subsidiary entities that cumulatively exceed $1 billion. A consolidated financial statement issued March 31, 2016 reported that the Hammons Trust held approximately $108 million of cash or cash equivalents and marketable securities of less than $8 million. Per that financial statement, which was not based on audited information or generally accepted accounting principles but was simply a compilation of financial statements, remaining assets (composed of business properties, investments in operating entities, and Mr. Hammoqs’ former personal residence) exceeded $2.2 billion with over $1.3 billion in debt. The Hammons Trust has not issued written instruments reflecting a beneficial interest or ownership interest, such as stock certificates. Rather, certain beneficiaries are designated in the Hammons Trust and the authority is granted within the Hammons Trust to the successor trustees to name additional beneficiaries, II. Analysis A proceeding to determine eligibility for relief under the Bankruptcy Code is a core proceeding under 28 U.S.C. § 157(b)(2)(A), over which this Court may exercise subject matter jurisdiction.16 A. Legal Standard for Assessing Cross Motions for Summary Judgment Federal Rule of Civil Procedure 56 requires a court to grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”17 An issue is ‘genuine’ if “there is sufficient evidence on each side so that a rational trier of fact could, resolve the issue either way.”18 ‘Material facts’ are those that are “essential to the proper disposition of [a] claim” under applicable law.19 The party moving for summary judgment bears the initial burden of demonstrating—by reference to pleadings, depositions, answers to interrogatories, admissions, or affidavits—the absence of genuine issues of material fact.20 When analyzing summary judgment, the Court draws all reasonable inferences in favor of the non-moving party.21 In a scenario with cross-motions for summary judgment, the Court is “entitled to assume that no evidence needs to be considered other than that filed by the parties, but summary judgment is nevertheless inappropriate if disputes remain as to material facts.”22 In addition, the court “must view each motion separately, in the light most favorable to the non-moving party, and draw all reasonable inferences in that party’s favor.”23 “Cross motions for summary judgment are to be treated separately; the denial of one does not require the grant of another.”24 B. Whether the Hammons Trust is a “Person” Eligible to be a “Debt- or” Under the Code “Interpretation of the Bankruptcy Code starts where all such inquiries must begin: with the language of the statute itself.”25 The problem, however, is that the Bankruptcy Code is not always crystal clear, and the following scenario is no exception. Under 11 U.S.C. § 301(a),26 only an “entity that may be a debtor” can file a voluntary petition for relief. Those terms are then specifically defined. An “entity” is a “person, estate, trust, governmental unit, and United States trustee.”27 A “debtor” is a “person or municipality concerning which a case, under this title has been commenced.”28 But then there are further manipulations of the English language— the word “person” is also defined by the Code, and its definition includes an “individual, partnership, and corporation.”29 And we’re not done, the term “corporation” is itself defined; that definition of corporation is the cause of the current quagmire: The term “corporation”— (A) includes— (I) association having a power or privilege that a private corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association; (in) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.30 After all that, this conclusion is clear and the parties and the Court agree: only a business trust may be a debtor under the Code—an ordinary trust is an entity not eligible for bankruptcy treatment.31 J.D. Holdings generally argues that the Ham-mons Trust is not a “business trust” under the Code because it does not have traditional attributes of a corporation (such as transferable interests or pooled capital), and therefore is not a “person” eligible to be a “debtor.”32 The Code does not further define “business trust,” however. Luckily, prior cases have had occasion to interpret the phrase; not so luckily, the case law is not from this Circuit and it is divergent, at best.33 There are two circuit courts to address the issue. The first, Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust),34 is a 2002 case from the Sixth Circuit. In Kenneth Allen Knight Trust, the court first notes the varying case law on the matter,35 and then gives some history: prior to 1978, the Code as it existed then “did not include the term ‘business trust,’ but instead provided that a ‘corporation’ could be ‘any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument.’ ”36 Courts construed this definition of “corporation” to require that shares of “beneficiaries be transferable and that they be evidenced by a certificate or writing.”37 But Congress changed the definition of corporation in 1978, and included the phrase “business trust” in “corporation.” Since then, two lines of cases have developed. Some courts “continued to require transferable certificates of ownership, relying on Morrissey [v. Comm’r of Internal Revenue ], 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 [ (1935) ], in which the Supreme Court set out the test for when trusts may be treated as corporations under the Internal Revenue Code—a test requiring, inter aha, transferable certificates of ownership.” 38 The Sixth Circuit chose not to follow this line of cases, because “the Mor-rissey criteria were meant for the Internal Revenue Code, and they contradict the 1978 liberalization of the Bankruptcy Code’s treatment of business trusts.”39 The second line of cases “concluded that Congress intended to dispense with the transferable-certificate-of-ownership requirement when it changed the statute in 1978” and instead looked to a variety of different characteristics based on a fact-specific analysis of the particular trust.40 Ultimately, the Sixth Circuit concluded the appropriate standard for that circuit was as follows: first, trusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the trust res for beneficiaries generally are not business trusts; and second, the determination is fact-specific, and it is imperative that bankruptcy courts make thorough and specific findings of fact to support their conclusions—findings, that is, regarding what was the intention of the parties, and how the trust operated,41 The underlying trust in Kenneth Allen Knight Trust-, (1) was created by an individual using solely that’s individual’s funds, (2) designated only the settlor and his daughters as beneficiaries, (3) gave “virtual total control” of the trust and management of trust assets to the settlor, (4) held both personal and business property (namely, the trust itself owned the settlor’s personal residence and 100% of the stock of a holding company, and the holding company then owned four subsidiary corporations that owned multiple business entities), and (5) most or all of the subsidiary corporation’s financial activities were conducted through the trust and the trust’s bank accounts.42 Because the bankruptcy court was correct to find that the “primary purpose” of the trust in that case “was to transact business or carry on commercial activity for the benefit of .,. the investor, and not merely to preserve the Trust’s res for the beneficiaries,” the Sixth Circuit upheld the bankruptcy court’s business trust designation.43 The only other circuit court to address this issue is the Second Circuit in Shawmut Bank Connecticut v. First Fidelity Bank (In re Secured Equipment Trust of Eastern Air Lines, Inc.).44 This opinion from the Second Circuit, nearly ten years prior to the Sixth Circuit’s opinion, affirmed the bankruptcy court’s conclusion that the trust at issue was not a business trust. The Second- Circuit stated “two general points” upon which the case law was in agreement: 1) “business trusts are created for the purpose of carrying on some kind of business, whereas the purpose of a non-business trust is to protect and preserve the res,” and 2) “while a trust must engage in business-like activities to qualify as a business trust, such activity, without more, does not necessarily demonstrate that a trust is a business trust.”45 Beyond that, the Second Circuit declared that “a very fact-specific analysis, of the trust at issue” was required.46 In the trust at issue in In re Secured Equipment Trust of Eastern Air Lines, Inc., the Second Circuit focused on two facts particular to the trust at issue in that case: namely, that the trust “was not established to generate a profit,” and that the trust was not “established to ‘transact business’ as that phrase is commonly interpreted.” 47 Rather, the trust was “merely created to serve as a vehicle to facilitate a secured financing” transaction.48 The Second Circuit, therefore, concluded the trust at issue did not qualify as a business trust under the Code.49 The parties cite numerous additional cases, and they each have specific factors within that the particular court found important to whether the trust at issue qualified as a business trust.50 Newer cases seem to favor a global, totality of the eir-cumstances approach, however, and the older cases seem focused on specific factors that the court felt “should” be shown by typical business trusts. This court finds the Sixth Circuit’s approach articulated in Kenneth Allen Knight Trust, and newer cases that have developed as the use of trusts has developed over the last 20 years, to be more persuasive for the task at hand. It would be illogical to do as J.D. Holdings suggests, and impose a formalistic, rigid test to define a business trust that requires transferable interests or pooled capital, because the very nature of a business trust—just like any business entity—is that it is suited to whatever particular task is at hand. The Code imposes no such rigid rule or express requirements on business trusts, and the Court will not read the requirement into the Code without a direction to do so.51 As the Sixth Circuit directed, this Court will instead conduct a fact-specific analysis of the particular trust in front of it. The Hammons Trust, as detailed above, was created in 1989, and existed for over twenty years with Mr. Hammons at the helm.52 During that time, Mr. Hammons continued his business enterprise through the Hammons Trust and the Hammons Trust held nearly all of his assets. As trustee, as permitted by the Hammons Trust’s terms, Mr. Hammons bought and sold hotel and other commercial properties. Mr. Hammons built the trust, and thus his business empire, throughout those more than twenty years, such that on its petition date, the Hammons Trust had assets of over $2 billion. And while that $2 billion number is significant, it is not just the fact that the Hammons Trust had and has significant assets; rather, the Hammons Trust has multiple other characteristics making this Court easily able to determine that it is a business trust. The Hammons Trust itself had seven employees on its petition date, but its combined entities employ thousands of people. Since its inception, it has been operated for profit, and has generated a profit in most, if not all, years of its existence. The Hammons Trust itself owns multiple properties (three hotels, a storage facility, parking lots and garages, unimproved land, a baseball stadium, and a building that houses a sports hall of fame), and then also owns all of the equity issued by subsidiary entities owning hotels, casinos, office buildings, trade centers, a federal courthouse, etc. Yes, the Hammons Trust also owns Mr. Hammons’ former personal residence, but owning one piece of residential property does not change the fact that the primary purpose of the Ham-mons Trust was to buy, sell, hold, and develop commercial real estate. The Ham-mons Trust could borrow money, enter into contracts, purchase property, sell property, invest, etc., and it, in fact, did do all of those things. The trust document even guarded the trustee and successor trustees against any personal liability for risks taken by these business decisions. In addition, the Hammons Trust, since its inception, has had a central cash management system for the business it owns directly and though all its subsidiaries, and it has issued guarantees of those subsidiaries’ debts. This Court cannot overlook that even the relationship between J.D. Holdings and Debtors springs from a complex business transaction valued in the hundreds of millions of dollars.53 There is no doubt that the purpose of the Hammons Trust was to engage in business, not to preserve the res of the trust. Did Mr. Hammons give some thought to estate planning when he created the Ham-mons Trust? It seems so.54 There are provisions for tax planning, there are provisions relating to the care of his and his wife’s final expenses, and there are detailed instructions as to payments to beneficiaries after Mr. Hammons’s death. But again, this does not change the fact that the overwhelming body of the Hammons Trust’s work was to operate a massive business enterprise.55 In addition, the Hammons Trust does not have shareholders or a board of directors, but these corporate formalities are also not shared by other categories of entities included in the definition of “corporation,” so the Court does not find that significant. Like the underlying trust in the Sixth Circuit’s Kenneth Allen Knight Trust opinion, the Hammons Trust: (1) was created by an individual (Mr. Hammons) using solely that’s individual’s funds, (2) designated only Mr. Hammons as the beneficiary during his lifetime, and only a limited number of beneficiaries after his death, (3) gave not just “virtual total control,” but exclusive control of the trust and management of trust assets to Mr. Hammons' during his lifetime, (4) had both personal and business property (but in this case, only one personal residence, and the overwhelming majority of the property was commercial real estate or subsidiary business entities), and (5) all of the subsidiary entities cash management activities were conducted through the Hammons Trust.56 This Court finds, just as the Sixth Circuit found, that the primary purpose of Hammons Trust is to “transact business or carry on commercial activity for the benefit of ... the investor, and not merely to preserve the Trust’s res for the beneficiaries,”57 and concludes that the Hammons Trust is appropriately designated as a business trust.58 For these reasons, the Court rules against J.D. Holdings, and for Debtors, on the issue of whether the Hammons Trust qualifies as a business trust. C. The Status Quo Order and the Special Purpose Debtors The U.S. Constitution grants the federal government the power to establish uniform bankruptcy laws.59 As a result, “bankruptcy law is paramount” to state law and “is essentially exclusive,”60 and federal courts “maintain exclusive jurisdiction of deciding who can and cannot be a bankrupt.”61 On the other hand, it is also well established that “[a] bankruptcy case filed on behalf of an entity without authority under state law to act for that entity is improper and must be dismissed.”62 The parties do not really dispute these basic fundamentals of bankruptcy law. Instead, they dispute the legal impact of the status quo order entered by the Delaware state court. The status quo order is itself brief. It contains only three paragraphs, and only two of those are at issue. The pertinent language is that Debtors 1) “shall not take action outside of the ordinary course of business as to any of the properties or assets that are subject to [the ROFR]” and 2) Debtors “shall provide at least five (5) business days’ notice to [J.D. Holdings] before taking any action outside of the ordinary coursé of business as to any JQH Subject Hotel.” J.D. Holdings argues that this brief language actually altered who had the authority to authorize a bankruptcy petition for the Special Purpose Debtors. But the facts just do not support this contention. If the Delaware state court was going to impose such a drastic change—actually altering the governing structure of each of the corporations, limited partnerships, and limited liability companies at issue—would not it have expressly said so? It seems more likely that the status quo order was exactly that: a way to maintain the standard day-to-day business operations (i.e., the “ordinary course of business”) of the Special Purpose Debtors, while prohibiting actions that would limit J.D. Holdings potential recovery of specific performance of the ROFR. Lets look at the spectrum: obviously, the Special Purpose Debtors were not prohibited from entering into daily supplies contracts as that would be an action in the ordinary course of business. But on the other end of the spectrum, the Special Purpose Debtors would have been prohibited from pledging as collateral the hotels subject to the ROFR upon which J.D. Holdings sought its remedy using non-market terms. In addition, the status quo order must be read in context of the litigation at hand.63 The amended complaint in the state court action sought specific performance of the ROFR in the form of a compelled transfer of the subject hotels— essentially a breach of contract action seeking specific performance as a remedy. The motion filed by J.D. Holdings sought: a status quo order to protect its rights with respect to the JQH Subject Hotels. In particular, JD Holdings respectfully requests that the Court enter an Order preventing Defendants from taking actions that would impede JD Holdings’ ability to specifically enforce the ROFR Agreement, including by developing, encumbering, or otherwise altering, the JQH Subject Hotels in any way. Nothing in the motion expressly mentioned bankruptcy or any attempt to restrict the right of any Debtor to commence a bankruptcy case, or a change in the governance of any of the entities. Rather, the motion referred to “development or alteration” of the properties at issue as an example. The order entered, again, did not mention anything at all related to governance or bankruptcy, and cannot fairly be read as J.D. Holdings proposes. J.D. Holdings repeatedly emphasizes that in the state court’s preliminary ruling on the motion for a status quo order, the state court judge stated that “equitable ownership lies with [J.D. Holdings].” But J.D. Holdings conveniently fails to report the context of that statement, which was stating 'the factors for injunctive relief and assessing the equities of the situation, not actually transferring equitable ownership of the property. -Such a transfer was what the upcoming trial—and related remedy of specific performance—was for. The argument that one comment in a preliminary ruling could actually transfer title to property, equitable or otherwise, to change the governance of an entity is frivolous.64 Even if the order were susceptible to different interpretations, “it is the duty of the court to adopt the one which renders it more reasonable, effective and conclusive in the light of the facts and the law of the case.”65 And because the reading J.D. Holdings proposes would be contrary to “overwhelming authority” holding otherwise,66 this court adopts the more permissible reading of the status quo order that does not read into it a forced change of the Special Purpose Debtors’ governance structure.67 For these reasons, the Court rules against J.D. Holdings, and for Debtors, on the issue of whether the Special Purpose Debtors were authorized to file their bankruptcy petitions. III. Conclusion The Court wishes to draw this portion of Debtors’ Chapter 11 case to a close, and continue to deal with the merits of Debtors’ petitions as it has preferred all along. For the reasons set forth above, the Court concludes that the Hammons Trust qualifies as a business trust and that the Delaware state court litigation did not alter the Special Purpose Debtors’ authority to file for bankruptcy relief. It is, therefore, by the Court ordered that Debtors’ motions for partial summary judgment68 are granted, J.D. Holdings’ motions for partial summary judgment69 are denied, and the portions of J.D. Holdings’ motion to dismiss based on the issues discussed above70 are also denied. IT IS SO ORDERED. . The Court will only address dismissal in this Opinion, and will address stay relief separately. J.D. Holdings withdrew its request for abstention and for dismissal of all cases based on Debtors' alleged lack of good faith in filing. Four additional creditors in Debtors' jointly administered cases joined in Debtors’ objection to J.D, Holding’s requested relief. See Doc. 350 (Creditor City of La Vista, Nebraska’s joinder in opposition to J.D. Holding’s requested relief); Doc. 351 (same from Creditor UMB Bank, N.A.); Doc, 354 (same from Creditor Hawthorn Bank); Doc. 360 (same from Creditor Great Southern Bank). . Docs. 767 and 769. . Docs. 887 and 888. . Doc.257. . The Court’s Findings of Fact are established by the Court’s record and the parties' statements of undisputed material facts. . The Court does not mean to minimize the specific bequests, as they were substantial by any measure. The Hammons Trust beneficiaries have no ability, however, to exercise any control over the successor trustees, whether as a result of their beneficial interests, or otherwise. The Hammons Trust also contained a spendthrift provision, which restrained all beneficiaries from selling, transferring, assigning, pledging, mortgaging, or alienating "their respective beneficial or legal or equitable right, title,, or interest, claim or estate in and to either the income or the principal of the Trust Estate, or any part thereof, during the entire period of the trust for their benefit.” Quarterly financial compilations of the Hammons Trust’s financial condition were never shared with any beneficiaries. . The ROFR was broadly applicable to the Hammons Trust, Mr. Hammons, and Mr. Hammons’s businesses, and bound Mr. Ham-mons and "any other entity directly or indirectly controlled” by Mr. Hammons "which owns a Hotel Property (hereinafter defined) now or at any time in the future, each of which will be added as parties to this Agreement." . The phrase "Hotel Properties” is itself defined, and includes "interests in real property and personal property, tangible or intangible. .., used in the operation of a hotel facility, or any interests in any related convention or entertainment facility, retail facility, parking facility or gaming facility, including, without limitation, fee interests, leasehold interests, interests in ground leases, easements and rights of way, air rights, surface rights, subsurface rights, debt or equity interests in corporations, limited liability companies, joint ventures, partnerships or other entities holding title to, or a leasehold interest in, any of the forgoing, contractual management interests, and debt instruments.... ” .The timing of those sales is a heavily litigated issue elsewhere, but not relevant to the specific issues herein. . The Court is aware that Mr. Hammons was previously incapacitated, although this fact is not established in the parties’ briefing. . Of that sum, just over $2 million was paid to individuals who were employees of the Hammons Trust or its subsidiaries (none of these individuals were related to either of the Hammonses). The remainder of the total sum was paid to institutions. . Regarding the phrase "ordinaiy course of business," the state court judge asked counsel to flesh that out, but also gave the example of refinancing on market terms. . The JQH Subject Hotels include one corporation, one limited partnership, and multiple limited liability companies. It is undisputed that for each of these entities, the appropriate board of directors, general partner, members, directors, or managers authorized the bankruptcy filing of that particular entity, and that J.D. Holdings was not ever appointed as a director, general partner, member, or manager of those entities. . Four additional closely related companies filed bankruptcy petitions on July 5, 2016, and those cases were also ordered to be jointly administered with the above caption. . The entities listed above employ "more than 4,000 people throughout the United States,” with employee payroll for a single pay period exceeding several million dollars. Doc. 10 ¶ 5, ¶ 12 (Debtors’ motion seeking court authority to, among other things, pay prepetition employee obligations); Doc. 45 (Order). . 28 U.S.C. § 157(b)(1) and § 1334(b). . Fed. R. Civ. P. 56(a), Rule 56 is incorporated and applied in bankruptcy courts via Federal Rule of Bankruptcy Procedure 7056. In its response to a few of Debtors’ statements of fact, J.D, Holdings argues that it lacks knowledge or information sufficient tó form a belief as to the truth of Debtors’ purported facts. But under Rule 56(c), if a party wishes to dispute a fact, the proper way to do so is to cite to portions of the record supporting that assertion or show that the materials cited do not support the fact. Fed. R. Civ. P. 56(c). The time for claims that the party lacks sufficient knowledge of the facts has long passed. As a result, the Court considered those facts undisputed. Fed. R. Civ. P. 56(e)(2) (stating that if a party “fails to properly address another party’s assertion of fact as required by Rule 56(c),” the Court may "consider the fact undisputed for purposes of the motion”); see also D. Kan. LBR 7056.1(a) (stating that under the District of Kansas Local Bankruptcy Rules regarding summary judgment, ”[t]he court will deem admitted ... all material facts contained in the statement of the movant unless the statement of the opposing party specifically controverts those facts”). . Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). . Id. . Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Debtors attempted, in footnotes, to challenge both of the affidavits supporting J.D. Holdings' motions for partial summary judgment, alleging that they do not establish personal knowledge of the allegations therein. But both affidavits are from attorney members of the law firms representing J.D. Holdings, and while they are not perfect examples of what an affidavit should be, the Court finds they adequately support their respective motions for partial summary judgment under Rule 56(c)(4). . Taylor v. Roswell Indep. Sch. Dist., 713 F.3d 25, 34 (10th Cir. 2013). . A. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000) (internal quotations omitted). . United States v. S. Ct. of New Mexico, 839 F.3d 888, 907 (10th Cir. 2016) (internal quotations omitted). . Christian Heritage Acad. v. Okla. Secondary Sch. Activities Ass'n, 483 F.3d 1025, 1030 (10th Cir. 2007) (internal quotations omitted). . First Nat’l Bank of Durango v. Woods (In re Woods), 743 F.3d 689, 694 (10th Cir. 2014). . See also 11 U.S.C. § 109(a) (“only a person ... may be a debtor”). All future statutory references are to the Bankruptcy Code, title 11, unless otherwise stated. . § 101(15). . § 101(13). . § 101(41). . Because the definition of "corporation” uses the word "includes,” the Court notes that the definition is not limited to the items listed, perhaps signaling Congress's intent that "corporation” be broadly construed. See § 102(3) (stating that the use of the word "includes” in the Code is "not limiting”). . Because, therefore, both a trust (as a business trust) and a corporation are entitled to seek Chapter 11 relief, it is immaterial that the Hammons Trust checked the box for trust rather than corporation in the "type of debt- or” section of its petition. . Who has the burden of proof in this scenario? Neither party addresses the issue and it is not clear: While typically the party seeking dismissal bears the burden of proof, debtors also bear the burden of establishing that they are eligible for relief under § 109. The case law on point is not particularly instructive. At least one court [addressing the question of business trusts] has opined that the burden is on the moving party seeking dismissal, while others, including the Second Circuit, have placed the burden of proof on the debtor. Still a third court created a shifting burden of proof in requiring the creditor to make a prima facie showing that the trust was not a business trust, but imposing the ultimate burden of persuasion on the debt- or. David S. Jennis & Kathleen L. DiSanto, Trust or Debtor: You Decide, 32 Am. Bankr. Inst. J. 34, 80-81 (December 2013) (internal citations omitted) Because the Court finds, below, that the Hammons Trust is clearly a business trust regardless of who has the burden of proof, this procedural question is not important to the holding. .The parties agree that federal law, not state law, should be used to determine the scope of the phrase “business trust,” and the Court so finds. See, e.g., Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 678-79 (6th Cir. 2002) (con-eluding that “the definition of ‘business trust’ properly belongs to federal, rather than state, law”); In re Sung Soo Rim Irrevocable Intervivos Trust, 177 B.R. 673, 676 (Bankr. C.D. Ca. 1995) (calling the "availability of access to the federal bankruptcy courts and the availability of bankruptcy relief itself” a question of "federal, not state, law”). . 303 F.3d 671 (6th Cir. 2002). . Id. at 679 (stating that "there are a number of court-made definitions [of business trust], and indeed perhaps the only thing that all the cases have in common is the recognition that they all differ.” and citing cases with same view). . Id. (citing 1976 version of § 101(8)). . Id. . Id. (citing cases). . Id. . Id. at 679-80. See also 8A C J.S. Bankruptcy § 24 (2017) for further discussion of tests that have developed from the varying case law interpreting the phrase business trust. . Kenneth Allen Knight Trust, 303 F.3d at 680 (internal quotations omitted). . Id. at 674-75. . Id. . 38 F.3d 86 (2d Cir. 1994). . Id. at 89, . Id. . Id. at 90. .Id. . A dissenting judge in In re Secured Equipment Trust of Eastern Air Lines, Inc., disagreed with the majority’s conclusions that the trust was formed only to preserve assets and that excess profits were paid out in set amounts per contractually limited terms, and instead focused on the facts that the trust had beneficial owners whose interests were reflected by investment certificates and was created to enter into transactions that would generate income to create certificateholders’ profits. Id. at 92-93. Because the dissent concluded that the legislative history showed that the term business trust "was intended to include an entity that conducts business through a trustee and issues certificates or other written instruments to evidence beneficial interest or ownership in the entity,” id. at 92, the dissent concluded the trust at issue was a business trust. But both the majority and dissent ultimately conducted a fact-based review of the terms of the trust at issue, and the fact that they relied on different factors to reach their conclusions merely emphasizes for this Court that the a global, totality view is important. . See, e.g., In re Gaetano Trust, No. 16-00719, 2016 WL 4150257, at *1 (Bankr. D. Haw. Aug. 3, 2016) (using three factors to determine whether a trust is a business trust—“the trust must (1) be actively engaged in and doing business, (2) have some of the significant attributes of a corporation, primarily the transferability of interest in the trust, and (3) have been formed primarily for a business purpose”—and concluding there was no business trust because the trust instrument showed the trust was "an ordinary estate planning trust,” one - asset was the personal residence of the settlor, the trust was not doing business on the petition date, and there was no indication that the beneficial and other interests of the trust were transferable); In re Rubin Family Irrevocable Stock Trust, No. 13-72193, 2013 WL 6155606, at *8-9 (Bankr. E.D.N.Y. Nov. 21, 2013) (focusing on the pri-maiy purpose and actions of the trust to determine if it is a business trust; concluding that having “employees, an independent board, shareholders, alienable ownership interests, and other ‘corporate’ attributes” were not necessary; finding that if a trust is established with a profit motive, that is a significant factor in favor of finding a business trust); In re Jin Suk Kim Trust, 464 B.R. 697, 704 (Bankr. D. Md. 2011) (stating that the "determination of whether a trust is a busir ness trust is fact-specific and focuses on the purpose and operations of the trust;” finding a business trust where trust was managed as a business and "not consistent with a fiduciary’s obligation to prudently protect and preserve the res of a trust” and beneficiary paid no income, but profit was all reinvested); In re Sung Soo Rim Irrevocable Intervivos Trust, 177 B.R. 673 (Bankr. C.D. Ca. 1995) (rejecting the business trust designation because the trust at issue was not created for a business purpose and did not constitute a business trust under state law); In re Woodsville Realty Trust, 120 B.R. 2, 4-6 (Bankr. D.N.H. 1990) (requiring that a business trust "must have at least some of the attributes of a corporation” and stating that transferability is relevant to finding a business trust); In re Arehart, 52 B.R. 308, 310 (Bankr. M.D. Fla. 1985) (finding a business trust where the trustee had the power to dispose of trust property, the trust was "formed for the express purpose” of developing and selling trust property for the economic benefit of the beneficiaries, and the trustee had "substantial management power” and was subject to little control from the beneficiaries); In re Armstead & Margaret Wayson Trust, 29 B.R. 58, 59 (Bankr. D. Md. 1982) (rejecting the business trust designation where there was no "voluntary pooling of capital by a number of people who are the holders of freely transferrable certificates evidencing beneficial interests in the trust estate”). . See, e.g., First Nat'l Bank of Durango v. Woods (In re Woods), 743 F.3d 689, 694 (10th Cir. 2014) (instructing bankruptcy courts to enforce the plain language of the statute, and begin the analysis by "examining the subsection’s structure”). Rather, the Court interprets the Code broadly in order to favor one of its chief objectives: the equal distribution of a debtor's assets amongst its creditors. See Howard Delivery Serv. v. Zurich Am. Ins. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006) (“the Bankruptcy Code aims, in the main, to secure equal distribution among creditors”). Other Code provisions are similarly interpreted broadly, for example, property of the estate under § 541. See, e.g., Parks v. FIA Card Servs., N.A. (In re Marshall), 550 F.3d 1251, 1255 (10th Cir. 2008) (stating that the scope of § 541 "is broad and should be generously construed”). . Mr. Hammons was seventy years old at the time he created the Hammons Trust and over eighty when he restated it, and J.D. Holdings points to this fact as evidence that the Ham-mons Trust must have been an estate-planning device. But Mr. Hammons was apparently still actively managing his business at the time, and continued to do so for a lengthy time thereafter, so the Court does not impute end-of life concerns solely by the fact of Mr. Hammons’ age. . See JD Holdings, LLC v. Dowdy, No. 7480-VCL, 2014 WL 4980669, at *3-4 (Del. Ch. Oct. 1, 2014). . In re Rubin Family Irrevocable Stock Trust, No. 13-72193-dts, 2013 WL 6155606, at *8 (Bankr. E.D.N.Y. Nov. 21, 2013) ("Any given trust may have multiple purposes, but ultimately the trust's primary purpose is the decisive factor in the analysis."). . See In re Blanche Zwerdling Revocable Lining Trust, 531 B.R. 537, 545 (Bankr. D.N.J. 2015) (stating that the focus for determining whether a trust is a business trust is “both the purpose of the trust and the actual operations of the trust” and "A trust that contains provisions regarding the distribution of the trust corpus upon the death of a trustor, does not preclude a finding that the trust is a ‘business trust’ so long as its primary purpose is to do business. On the other hand, just because a trust engages in business like activities, without more, it does not necessarily follow that the trust is a business trust.”); Robert J. D’Agostino, The Business Trust and Bankruptcy Remoteness, 2011 Norton Ann. Surv. of Bankr. Law 4, 35 (“In examining the person seeking relief the focus is not on what the debtor is called but on what the debtor is actually doing and the purpose for which it was created, that is, the intent of the settlers or creators of the trust and its actual primary purpose as developed by the evidence is controlling.”). . See Kenneth Allen Knight, 303 F.3d at 674-75. . Id. at 680. . Even if using the older guidance from the Second Circuit’s decision in In re Secured Equipment Trust of Eastern Air Lines, Inc., this Court would reach the same conclusion. In the trust at issue there, the Second Circuit focused on two factors when it found that the trust was not a business trust: namely, that the trust "was not established to generate a profit,” and that the trust was not "established to ‘transact business’ as that phrase is commonly interpreted.” 38 F.3d at 90. But the Hammons Trust was established for the purpose of generating profit and has generated that profit ever since. In addition, the Hammons Trust was established to transact business, and again, has done so since its inception. Regardless of whether this Court uses the tests articulated by the Sixth or Second Circuits, the Court concludes that the Hammons Trust is a business trust. . U.S. Const. art. I, § 8. . In re Watts, 190 U.S. 1, 27, 23 S.Ct. 718, 47 L.Ed. 933 (1903). . Lawson v. Kreisers, Inc. (In re Kreisers, Inc.), 112 B.R. 996, 999 (Bankr. D.S.D. 1990) (“Preemption mandates Congress and the federal court system maintain exclusive jurisdiction of deciding who can and cannot be a bankrupt.”). . DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), No. CO-10-046, 2010 WL 4925811, at *2 (10th Cir. BAP 2010). J.D. Holdings cites and discusses several cases standing for the proposition that state law governs whether a person is authorized to file a bankruptcy petition on behalf of an entity. See, e.g., Keenihan v. Heritage Press, Inc., 19 F.3d 1255, 1259 (8th Cir. 1994); Sino Clean Energy Inc. v. Seiden, 565 B.R. 677 (D. Nev. 2017); In re S & R Grandview, LLC, No. 13-03098-8-RDD, 2013 WL 5525729 (Bankr. E.D.N.C. Oct. 4, 2013), But Debtors do not dispute that legal point; as discussed above, they dispute the interpretation of the status quo order and its effect. As a result, the Court will not discuss these cases herein. . Union Pac. R.R. Co. v. Mason City & Fort Dodge R.R. Co., 222 U.S. 237, 247, 32 S.Ct. 86, 56 L.Ed. 180 (1911) (stating that when the parties’ dispute the meaning of a court’s order, the order “must be determined by what preceded it and what it was intended to execute”). . The facts at hand are also wholly distinguishable from .those in DB Capital Holdings, LLC, 2010 WL 4925811, a Tenth Circuit BAP case relied on by J.D. Holdings. In DB Capital Holdings, LLC, the debtor’s own LLC governing documents dictated who of its members had authority to commence bankruptcy on its behalf, required the LLC to be operated "as presently conducted,” and prohibited acts “that would make it impossible to carry on the ordinary business” of the LLC. Id. at *2-3, 5. The Tenth Circuit BAP unremarkably found that placing the debtor into bankruptcy ran afoul of all these contract provisions, but this is in no way similar to the facts in this case. . Maertin v. Armstrong World Indus., Inc., 241 F.Supp.2d 434, 447 (D.N.J. 2002). An entirely separate question is how a state court even could have the authority to order a change to an entity’s internal governance as a remedy for a breach of contract allegation. . Larson v. Kreisers, Inc. (In re Kreisers, Inc.), 112 B.R. 996, 1000-01 (Bankr. D.S.D. 1990) (stating that "[a] state court’s receivership appointment for the express purpose of restraining an entity, which otherwise would be allowed to seek the refuge of the bankruptcy court, from filing bankruptcy is an intolerable abuse” and referencing "[overwhelming authority” that "holds that, generally, corporate officers and directors may enact a resolution authorizing bankruptcy despite a receiver being appointed. Neither a state court injunction nor the pendency of a state receivership can bar the filing of an otherwise permitted bankruptcy due to the grant of the exclusive bankruptcy jurisdiction to the federal courts and the constitutional principle of supremacy” (internal citations omitted)). .For example, in a case where a state court order attempted to change the corporate governance of an entity and specifically enjoined that entity from filing bankruptcy—facts even more express than those stated here—the bankruptcy court concluded that the state court order could not "bar debtors from resorting to the exclusive bankruptcy court jurisdiction.” In re Corp. & Leisure Event Prods., Inc., 351 B.R. 724, 729 (Bankr. D. Ariz. 2006). As the Corporate & Leisure case indicates, it is not that state law has no place at all. Rather, "bankruptcy case law generally refers to state law to determine who has eligibility to file the petition,” id. at 732 ("While bankruptcy case law generally refers to state law to determine who has eligibility to file the petition, it unanimously refuses to do so (in the absence of an intracorporate dispute) when state law has provided a creditor’s remedy to vest that authority in a receiver.”). But J.D. Holdings does not dispute that each entity at issue here properly exercised its authority to file its petition. . Docs. 767 and 769. . Docs. 887 and 888. . Doc.257. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500915/ | MEMORANDUM OF LAW
Hon. Peter G. Cary, United States Bankruptcy Judge
This bankruptcy case is another chapter in the decade long struggle between the Internal Revenue Service (“IRS”) and Mr. Bailey over taxes. Much of that story is set forth elsewhere and is not relevant to the decision here. Now, the United States of America, on behalf the IRS, seeks to enforce its federal tax liens on debtor F. Lee Bailey’s pension accounts and right to Social Security benefits. Mr. Bailey objected to that relief and a hearing was held on September 13, 2017. Following the hearing, the Court took the matter under advisement to determine whether the issue could be determined as a matter of law, as IRS asserts, or whether an evidentiary hearing is necessary, as Mr. Bailey maintains. After consideration of the arguments of counsel, the Court concludes that for the reasons set forth below, IRS’s motion can be addressed without the need of testimony and it will be granted.
I. JURISDICTION AND VENUE.
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334, and the general order of reference entered in this District pursuant to 28 U.S.C. § 157(a). D. Me. Local R. 83.6(a). Venue here is proper pursuant to 28 U.S.C. § 1408. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(G).
II. BURDEN OF PROOF.
Mr. Bailey carries the burden of proof on all issues in connection with this motion for relief from stay except on the issue of the amount of equity in his pension accounts and Social Security benefits. On that issue, the United States has the burden of proof. 11 U.S.C. § 362(g).1
III.BACKGROUND.
In 2007, the IRS issued two statutory notices of deficiency pursuant to 26 U.S.C. § 6212 regarding Mr. Bailey’s federal income tax liabilities for years 1993 through 2001. The United States Tax Court sustained the notices in large part in 2012. Bailey v. C.I.R., 103 T.C.M. (CCH) 1499, 2012 (RIA) TC Memo 2012-096, 2012 WL 1082928, at *1 (T.C. 2012), aff'd sub nom. Bailey v. I.R.S., 2014-1 USTC P 50212, 2014 WL 1422580 (1st Cir. Mar. 14, 2014). Mr. Bailey filed a voluntary Chapter 7 bankruptcy petition in 2016 and his bankruptcy schedules disclosed that he had interests in three pensions: the Screen Actors Guild ($702 per month), the American Federation of Radio & Television Artists ($225 per month), and United Airlines ($476 per month); and that he received a Social Security benefit ($1,786 per month). In October of 2016, Mr. Bailey he received a discharge in his Chapter 7 case which eliminated his personal obligation to repay the IRS for its claims for tax years 1993 through 2001. The liens on Mr. Bailey’s personal property securing the IRS claim of more than $5 million survived the Chapter 7 bankruptcy case.
Approximately seven months later, in June of 2017, Mr. Bailey, now 84 years old, filed a Second bankruptcy case seeking relief under Chapter 13 of the Code from the in rem claims of the IRS and others. As in his Chapter 7 case, Mr. Bailey scheduled his three pensions and his Social Security benefits as assets. In August of *172017, the IRS filed this motion through which it seeks modification of the automatic stay to. enforce its federal tax liens on Mr. Bailey’s pension accounts and Social Security benefits so it can, among other things, apply the monthly pension payments of $1,488 and the monthly Social Security benefit payments of $1,786 to Mr. Bailey’s past tax obligations.
IY. DISCUSSION.
The IRS argues that it is entitled to a modification of the automatic stay on two grounds: (a) cause exists for the modification of the stay under § 362(d)(1) because the IRS’s interests in Mr. Bailey’s pension and Social Security benefits are not being adequately protected, and (b) Mr. Bailey has no equity in either of those benefits due to the magnitude of the IRS tax liens and the benefits are not necessary to an effective reorganization thereby permitting stay relief under § 362(d)(2). Mr. Bailey disagrees. He maintains that the IRS is adequately protected by his proposed treatment of its claims—a bankruptcy court assessment of the cash value of the IRS’s security interests in his pension and Social Security benefits and his payment of that amount through a third-party loan. He further asserts that the IRS cannot prevail on its § 362(d)(2) argument because he has equity in the pension and Social Security benefits and he needs them to effectively reorganize his obligations.
The IRS has the more persuasive position.
There is no dispute that the IRS, as a creditor of Mr. Bailey with a “color-able” tax claim against Mr. Bailey’s property, has standing to seek relief from stay. 2 Norton Bankr. L. & Prac. 3d § 43:44 (2017); In re Farr, 2016 WL 658743, at *2 (Bankr. D. Me. Feb. 17, 2016). And it, as a secured creditor, has certain rights under § 362(d)(1) which provides that the court shall grant a party in interest’s request for. relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property of such party in interest ...” Though the Code does not define “adequate protection”, § 361 gives us some examples which include the making of cash payments or providing of liens to the extent that the stay causes a decrease in the value of the creditor’s interest in the debtor’s property, or the granting of other relief which will “result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property”. § 361.2 The form that the protection takes depends in part upon the risk to the secured party, what the property is being used for and the protection the debtor offers. Professor John D. Ayer et. al., “What Every Secured Creditor (and Its Lawyer) Should Know About Chapter 11”, Am. Bankr. Inst. J. 22 (2003).
To make that determination here, we must first examine the nature of the property for which the IRS seeks relief from the stay and then determine its interest in it. Prior to either bankruptcy filing, the IRS obtained tax liens, pursuant to 26 U.S.C. § 6321, on all of Mr. Bailey’s property and interests in property, including his pensions and Social Security benefits.
The statutory language “all property and rights to property,” appearing in § 6321 (and, as well, in §§ 6331(a) and, essentially, in 6332(a), see nn. 1 and 2, supra), is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. See 4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶ 111.5.4, p. 111-100 (1981) (Bittker). “Stronger lan*18guage could hardly have been selected to reveal a purpose to assure the collection of taxes.” Glass City Bank v. United States, 326 U.S. 265, 267, 66 S.Ct. 108, 110, 90 L.Ed. 56 (1945).
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 719-20, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985).
“All property and rights to property" includes Mr. Baileys rights to receive future payments from his pension and Social Security benefits. Wessel v. United States of America (In re Wessel), 161 B.R. 155 (Bankr. D.S.C. 1993); In re Cook, 150 B.R. 439, 441 (Bankr. E.D. Ark. 1993); Rev. Rul. 55-210 (1955)(“[I]t is the position of the Internal Revenue Service that where a taxpayer has an unqualified fixed right, under a trust or a contract, or through a chose in action, to receive periodic payments or distributions of property, a Federal lien for unpaid tax attaches to the taxpayer’s entire right, and a notice of levy based on such lien is effective to reach, in addition to payments or distributions then due, any subsequent payments or distributions that will become due thereunder, at the time such payments or distributions become due.”). And, the liens imposed by 26 U.S.C. § 6321 remain in effect until the taxes are paid or become unenforceable due to the passage of time. 26 U.S.C. § 6322.
Although Mr. Bailey and the IRS do not dispute the amount of the tax liens, they differ on their effect. Mr. Bailey asserts that the IRS’s liens on his pension and Social Security benefits reach something far less than $5.2 million of that property. On one level, he is correct because for the liens to capture that amount from the pension and Social Security benefits, the IRS would need to seize the full monthly payments from both of those income streams for a period much longer than Mr. Baileys lifetime, over 136 years at the currently monthly amounts. Rather, Mr. Bailey argues that the “value” of the IRS’s in rem claim is the value of the collateral which can be reduced to a fixed amount by determining the present value of those streams of income. Mr. Bailey may be correct3 but his argument is not enough to fend off the IRS’s relief from stay request. First, he has not stated what the value is of the IRS’s collateral and he has not provided the IRS with a specific plan to adequately protect it. All that he has proposed to date is that the collateral will be valued and he will borrow enough money to pay it off. That proposal may indeed work at some time in the future but the current state of affairs—Mr. Bailey receives the monthly payments from his pension and social security benefits and he uses them for his expenses and to fund his plan—erodes the IRS’s collateral.
What Mr. Bailey seeks is a full adjudication of his challenge to the amount of the IRS secured claim; in other words, his opposition to the motion for relief from stay is essentially a claims adjudication under § 506. While he is entitled to mount such a challenge, the context of this motion for relief from stay is neither the time nor place. Relief from stay motions, such as IRS’s here, are expedited proceedings designed in part to ensure that secured creditors do not lose the value of their security *19interests because of the operation of the stay and Mr. Bailey’s proposal does not provide the IRS with the protection that § 362(d)(1) affords. As observed in In re Farr, the granting of this motion is not a decision in favor of IRS on the seope of its claim against Mr. Bailey. “Relief from stay hearings are merely summary proceedings to ascertain whether the party seeking relief has a colorable claim to estate property, they are not meant to determine the merits of the underlying substantive claims, defenses, or counterclaims.” In re Farr, 2015 WL 658743, at *2 (Bankr. D. Me. Feb. 17, 2015) (citations omitted). Mr. Bailey retains all of his arguments and objections concerning IRS’s claim and can assert them as he sees fit.
Y. CONCLUSION.
The IRS’s motion for relief from stay ' pursuant to § 362(d)(1) is granted.4 A separate order shall enter.
. All references to the "Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, 11 U.S.C. § 101, et seq.
. At least the Code is clear on what "adequate protection” is not: it does not include the granting of an administrative expense under § 503(b)(1). § 361(3).
. See, In re Wesche, 193 B.R. 76, 79 (Bankr. M.D. Fla. 1996) ("The Court will follow the reasoning in the previously cited cases, and hold that the IRS lien does attach to Mr. Wesche’s post-petition pension payments. The IRS claim is valued as the present value of the future payments over Debtor’s lifetime.”); Robinson v. United States (In re Robinson), 39 B.R. 47 (Bankr.E.D.Va. 1984) (Value of IRS lien on debtor’s military pension was equal to the present actuarial value of the pension payments Debtor would expect to receive over his lifetime.).
. Given the Court’s determination that the IRS is entitled to relief from the automatic stay pursuant to § 362(d)(1), there is no need to address IRS’s § 362(d)(2) arguments. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500916/ | MEMORANDUM OF DECISION
Judge Peter G. Cary, United States Bankruptcy Court
Debtor Kenneth M. Foster alleges that his ex-wife, Diane E. Burns (f/k/a Diane Foster), willfully violated 11 U.S.C. § 362(a)1 by seeking to enforce and modify a divorce judgment without first obtaining relief from the automatic stay. An evi-dentiary hearing took place on March 1, 2017, during which Mr. Foster was the sole witness and four exhibits were admitted without objection. At that hearing, counsel for Ms. Burns moved for dismissal, which motion I took under advisement. Mr. Foster and Ms. Bums filed post-trial briefs, and Mr. Foster subsequently submitted a reply brief. Upon review of the papers filed by the parties, and consideration of the evidence and testimony offered at trial, and for the reasons set forth below, judgment will enter against Ms. Burns and in favor of Mr. Foster on the stay violation, and Ms. Burns’s oral motion to dismiss will be denied.
I. Jurisdiction and Venue.
This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a) and 1334 and the United States District Court for the District of Maine Local Rule 83.6(a). The parties consented to this Court entering final judgment in this adversary. Venue here is appropriate pursuant to 28 U.S.C. §§ 1408 and 1409.
*22II. Background.
Mr. Foster and Ms. Burns were divorced pursuant to a divorce judgment (the “Divorce Judgment”) entered on July 1. 2014 by the Maine District Court, Portland Division (the “State Court”).2 The Divorce Judgment set aside to Ms. Burns her ownership interest in non-marital real estate located at 50th Street, Unit # 11 Ocean City, Maryland.3 Cáse No. 14-20991, Proof of Claim 5-1, Divorce Judgment at ¶ 2. The Real Property is subject to a mortgage which secures a note in the original principal amount of $276,000 signed by both Mr. Foster and Ms. Bums (the “Note”).4 Id at ¶ 7. With respect to. the Note, the State-Court ordered “that this Note is marital debt and the Note and its remaining balance of $258,129.62 as of May 30, 2014 is set aside to Husband and Wife, equally.” Id In addition, the State Court found that during eleven of the nineteen years Mr. Foster and Ms. Burns were married, Ms. Burns accrued benefits under a vested pension held in her name (the “Pension”). Id. at ¶ 5. The State Court ordered Ms. Burns to transfer to Mr. Foster by qualified domestic relations order half of the Pension benefits accrued by her during that period.
Over five months later, Mr. Foster commenced the underlying chapter 13 case by filing a.voluntary petition for relief and various schedules. On Schedule E, he listed a domestic support obligation to Ms. Burns of $3,164, of which $600 was entitled to priority treatment. On the same day, he filed a proposed chapter 13 plan (Case No. 14-20991, Docket Entry (“D.E.”) 2) (the “Chapter 13 Plan”), listing one domestic support obligation to Ms. Burns in the amount of $600.00. The Chapter 13 Plan further proposed to discharge as a general unsecured claim, “certain non-spousal support debts, stemming from division of marital assets, including an obligation to pay the mortgage on a condominium owner [sic] by her family members.” See Chapter 13 Plan, D.E. 2 at ¶ 10(F).
Ms. Burns filed the Proof of Claim on March 13, 2015, alleging a general, unsecured claim in the amount of $154,838.94 and a $600.00 domestic support obligation entitled to priority treatment. Shortly thereafter, she objected to confirmation of the Chapter 13 Plan on the grounds that, inter alia, it was filed in bad faith. Following an evidentiary hearing on October 27, 2015, a follow-up hearing on November 4, 2015 and briefing by the parties, the Chapter 13 Plan was ultimately confirmed over Ms. Burns’s objection.
Eleven months later, Ms. Burns’s divorce counsel filed three motions in the State Court.5 The first (the “Motion to Enforce”) sought an order enforcing the Divorce Judgment and directing Mr. Foster to pay that portion of the Note allocated to him by the Divorce Judgment. The second (the “Motion for Omitted Proper*23ty”) requested that the State Court reimpose an obligation on Mr. Foster to share the marital debt owed on the Note which the Chapter 13 Plan proposes to, in her view, inequitably discharge.6 Finally, Ms. Burns asked the State Court to modify the Divorce Judgment (the “Motion to Modify”) to accomplish the same result she seeks in the Motion for Omitted Property. Additionally, in light of the effects of Mr. Foster’s confirmed Chapter 13 Plan, she requested that her spousal support be increased and that she no longer be required to pay over to Mr. Foster a portion of her Pension.7
Two days after Ms. Burns filed the Motion to Enforce, the Motion for Omitted Property and the Motion to Modify (collectively, the “State Court Motions”), Mr. Foster commenced this adversary proceeding. In his complaint seeking actual and punitive damages, Mr. Foster alleged that the State Court Motions constituted a willful violation of the automatic stay because they were designed to skirt the protections afforded to Mr. Foster by the Code and the confirmed Chapter 13 Plan. Mr. Foster also took action in the State Court where, through his divorce counsel Mr. J. Kimball Hobbs, Esq., he filed an objection to the State Court Motions asserting that, in addition to certain infirmities under applicable non-bankruptcy law, the motions violated the automatic stay. Exh. 3-2.
On or about November 7, 2016, Ms. Burns withdrew the Motion to Enforce *24and filed an Amended Motion to Modify Divorce Judgment Dated July 1, 2014 Regarding Spousal Support and Property (the “Amended Motion to Modify”), which is substantively similar to the original Motion to Modify. Exh. 3-2 and 3-3. The prayer for relief in the Amended Motion to Modify seeks to modify the spousal support and deny Mr. Foster any share in Ms. Burns’s Pension. Exh. 3-3. As was the case in the original Motion to Modify, the relief sought in the Amended Motion to Modify is premised on the argument that the modifications are necessary to address “any resulting burden shift in paying marital debt” arising from the proceedings Id.
At trial, Mr. Foster testified that “several motions” had been dismissed but that the Amended Motion to Modify, or some variation thereof, was in the discovery phase. He further testified that Ms. Burns is seeking to extend his alimony obligations to 20 years at $1,000 per month and that this proposed modification, if adopted by the State Court, would result in a spousal support award equal to the Note obligations apportioned to Mr. Foster in the Divorce Judgment.8
Both after Mr. Foster submitted his case and again at the conclusion of the hearing, counsel for Ms. Burns orally moved to dismiss the Adversary Proceeding on the grounds that withdrawal of certain of the motions filed in State Court mooted the automatic stay violation action. The oral motion was taken under advisement pending submission of the post-trial briefs.
III. Legal Standard.
The automatic stay is one of the most fundamental and important protections afforded by the Bankruptcy Code. See, In re Nelson, 335 B.R. 740, 748 (Bankr. D. Kan. 2004) (“... the automatic stay is the lynchpin of the Bankruptcy Code”). See also, In re Harris, 310 B.R. 395, 397-398 (Bankr. E.D. Wis. 2004). “The automatic stay .., should be broadly construed in favor of the Debtor and exceptions thereto should be applied narrowly.” Gazzo v. Ruff (In re Gazzo), 505 B.R. 28, 35 (Bankr. D. Col. 2014). The list of acts stayed by the commencement of a bankruptcy case include:
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
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(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the cases under this title;
(7) the setoff of any debt owing to the debtor that arose before the com- ■ mencement of the case under this title against any claim against the debtor ..,
§ 362(a)(2), (6) and (7).
A creditor willfully violating the automatic stay is liable for actual damages *25and, in appropriate circumstances, punitive damages. § 362(k). “A debtor seeking damages under [§ 362(k)] bears the burden of proving by a preponderance of the evidence the following three elements: (1) that a violation of the automatic stay occurred; (2) that the violation was willfully committed; and (3) that the debtor suffered damages as a result of the violation.” Slabicki v. Gleason (In re Slabicki), 466 B.R. 572, 578 (1st Cir. BAP 2012) (citing In re Panek, 402 B.R. 71, 76 (Bankr. D. Mass. 2009). See also, Witkowski v. Knight (In re Witkowski), 523 B.R. 291, 297 (1st Cir. BAP 2014). Willfulness requires only that a creditor with knowledge of the stay acted intentionally in violation of the stay. Fleet Mortg. Grp., Inc. v. Kaneb, 196 F.3d 265 (1st Cir. 1999). A mistaken understanding of the law is not a defense to willfulness.
... A good faith belief in a right to the property is not relevant to a determination whether the violation was willful. A willful violation does not require a specific intent to violate the automatic stay. The standard for a willful violation of the automatic stay under § 362(h) is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation. In eases where the creditor received actual notice of the automatic stay, courts must presume that the violation was deliberate. The debtor has the burden of providing the creditor with actual notice. Once the creditor receives actual notice, the burden shifts to the creditor to prevent violations of the automatic stay.
Fleet Mortg. Grp., 196 F.3d at 268-269 [internal citations omitted],
IV. Analysis
Addressing the initial question of whether Ms. Burns had actual knowledge of Mr. Foster’s bankruptcy is easy. In light of her filing of a proof of claim in the underlying case and her vigorous opposition to the confirmation of the Chapter 13 Plan (including her testimony at the October 27, 2015 evidentiary hearing on confirmation), there can be no question that she was well aware of the pending bankruptcy case prior to filing the State Court Motions. Further, there is no doubt that Ms. Burns intended to seek a State Court order enforcing the Divorce Judgment, eliminating her Pension obligation to Mr. Foster and modifying spousal support. The only remaining questions are whether the filing of the State Court Motions constituted violations of the automatic stay, and, if so, the extent to which actual and punitive damages should be awarded.
A. Whether Ms. Bums Violated the Automatic Stay by Filing the State Court Motions
While it is not clear which matters remain pending before the State Court, it is undisputed that Ms. Burns caused the State Court Motions to be filed and that, after withdrawing at least the Motion to Enforce and maybe others, she continues to seek an increase in spousal support without obtaining relief from the automatic stay. The State Court Motions seek three forms of relief explicitly designed to counteract the combined effect of the confirmed Chapter 13 Plan and the Debtor’s eventual discharge. For the reasons set forth below, I find that all three State Court Motions and the Motion to Modify violated the automatic stay.
i. The Motion to Enforce
The Motion to Enforce expressly violated § 362(a)(2) by seeking an order compelling Mr. Foster to. make payments on the Note in accordance with the Divorce Judgment. In filing the motion, Ms. Burns erroneously relied upon the Maine Supreme Judicial Court’s ruling in Collins *26v. Collins, 136 A.3d 708 (Me. 2016) that § 523(a)(15), which specifically exempts from a chapter 7 discharge certain non-domestic support obligations to a former spouse imposed in connection with a divorce judgment. Id. at 712-714. Ms. Burns eventually withdrew the Motion to Enforce after Mr. Foster filed the complaint commencing this adversary proceeding and an objection to the State Court Motions; both of which addressed the inapplicability of the Collins decision in the context of this chapter 13 case.
Ms. Burns argues that withdrawal of the Motion to Enforce mooted Mr. Foster’s stay violation claim. That argument, however, ignores the distinction between liability and damages. The mere act of filing the Motion to Enforce violates § 362(a)(2) and (6). Prompt withdrawal may eliminate or reduce any resulting damage, but it does not undo or otherwise recharacterize the act such that a violation never occurred. While the withdrawal of the Motion to Enforce may be pertinent to the issue of damages, it is irrelevant to the discussion of whether a violation occurred in the first place.
ii. The Motion for Omitted Property
Mr. Foster’s testimony and the statements made by counsel for both parties during oral argument and in the post-trial briefs indicate that the Motion to Modify—or some version of it—may be the only matter still pending before the State Court.9 According to the text of the (i) Motion to Withdraw Motion to Enforce Judgment and Motion to Amend Motion to Modify and (ii) the Defendant’s Reply to Plaintiffs Opposition to Motion to Enforce, Motion for Omitted Property, and Motion to Modify only the Motion to Enforce was withdrawn, so the record may be incomplete as to the current procedural posture of the Motion for Omitted Property. Regardless, the parties do not dispute that this motion was, in fact, filed. For the reasons discussed above, whether or not the Motion for Omitted Property was withdrawn is immaterial to the determination of whether Ms. Burns violated the automatic stay.
The question of whether the Motion for Omitted Property violates the automatic stay turns, instead, on the nature of the relief sought by Ms. Burns in that motion. Through it, Ms. Burns seeks a state court order re-establishing Mr. Foster’s obligation under the Divorce Judgment to repay an equal portion of the Note; an obligation which would be discharged by the successful completion of the Chapter 13 Plan. Ms. Burns argues that the relief is necessary in order to restore equity among the parties “taking into consideration the slap from the Bankruptcy Court empowering Mr. Foster to thumb his nose at the State’s order to share in marital debt.” In this respect, the Motion for Omitted Property is substantively no different than the Motion to Enforce because its express purpose is to compel Mr. Foster to partially repay the Note. Accordingly, the filing of that motion violated § 362(a)(6) by seeking to collect a debt (that portion of the Note obligation allocated to Mr. Foster under the Divorce Judgment) which arose prior *27to the commencement of Mr. Foster’s bankruptcy case.
iii. The Motions to Modify
Finally, in both the Motion to Modify and the Amended Motion to Modify, Ms. Burns again requests that the State Court require Mr. Foster to repay an equal portion of the Note to correct the unfairness resulting from Mr. Foster’s bankruptcy case. To the extent that Ms. Burns renews her request for the relief sought in the Motion for Omitted Property, the motions to modify violate the automatic stay for the reasons set forth above. With respect to the Pension, Ms. Burns seeks, in violation of § 362(a)(7), to set off against Mr. Foster’s interest in the Pension, his dischargeable obligation under the Note. The Divorce Judgment explicitly directed Ms. Burns to transfer to the Plaintiff by a qualified domestic relations order half of the pension benefit accrued during the marriage. While it is not clear whether Ms. Burns has yet taken the steps necessary to effectuate that transfer, entry of the Divorce Judgment alone was sufficient to create an obligation due to Mr. Foster from Ms. Burns. By explicitly asking the State Court to eliminate her obligation to Mr. Foster in light of the discharged property settlement, Ms. Burns is seeking to set that liability off against her discharged claim in violation of § 362(a)(7).10 The motions to modify, therefore, violate the automatic stay simply by virtue of seeking these two forms of relief.
The motions to modify seek yet another form of relief, however, and that is an increase in spousal support awarded to Ms. Burns. Whether or not the motions to modify also violate the automatic stay by virtue of this final form of relief is a closer question. As counsel for Ms. Burns correctly states, the automatic stay does not extend to the commencement or continuation of a proceeding against the debtor for the establishment or modification of an order for domestic support obligations. § 362(b)(2)(A)(ii). Mr. Foster asserts that where the modification of domestic support obligations is a thinly veiled attempt to recover a discharged property division, an ex-spouse is not shielded by the exception in § 362(b)(2)(A)(ii).
Few courts have considered whether, notwithstanding the exception in § 362(b)(2)(A)(ii), a creditor must first seek relief from the automatic stay before seeking modification of a domestic support obligation premised solely upon nonpayment on a dischargeable debt arising out of a property settlement. While doing so may be prudent, especially in the highly-charged atmosphere of domestic relations litigation, it may, in some circumstances, not be necessary. At least one court, however, has held that a motion seeking adjustment of a domestic support obligation as a result of a debtor’s failure to pay in accordance with property division provisions in a divorce judgment constitutes a setoff in violation of § 362(a)(7). In re Harris, 310 B.R. at 399 (“Construing the exception of § 362(b)(2)(B)(ii) [sic] narrowly, and given Chet’s motivation to recover equity he lost in a property division, without seeking relief from the automatic stay or a determination that the Debtor’s obligation should not be discharged under § 523(a)(15) of the Bankruptcy Code), Chet’s Motion to reduce the maintenance he owed the Debtor violated the automatic stay.”).
*28The reasoning in Harris is compelling. Creditors should not be permitted to use the spousal support modification exception for the sole purpose of recharacterizing an otherwise dischargeable property division as a nondischargeable domestic support obligation. While an ex-spouse’s bankruptcy filing may be a proper and relevant factor in adjusting a spousal support award, a dollar-for-dollar modification premised solely upon the discharge of a marital debt allocated to the debtor under a divorce judgment would more closely resemble an impermissible setoff than a modification falling within the spirit § 362(b)(2)(A)(ii). See, e.g. In re Marriage of Trickey, 589 N.W.2d 753, 757 (Iowa Ct. App. 1998) (finding, in the -context of a discharge injunction violation, that “[i]f the modification is essentially a reinstatement of the property settlement under the guise of alimony, the modification violates section 524 and is not permitted”).
In this case, the Court was not presented with sufficient .evidence to determine that Ms. Burns’s request for a modification of the spousal support fell outside the scope of the § 362(b)(2)(A)(ii) exception. Certainly, both the timing of the Motion to Modify—on the heels of an unsuccessful objection to confirmation—and the language contained in all three State Court Motions and the Amended Motion to Modify are troubling. However, neither the original Motion to Modify, nor the Amended Motion to Modify, state a specific demand for support. Moreover, as noted above in footnote 9, statements by counsel for both parties, and the testimony by Mr. Foster, painted a confusing picture as to the' current procedural posture of the State Court proceedings. The record does, not clearly indicate what motions are currently before the State Court, the grounds, if any, Ms. Burns has offered to that court in support of her alleged request for a modification of spousal support, or the amount of spousal support she seeks. In other words, Mr. Foster did not plainly establish the nexus between the Note obligation the Chapter 13 Plan proposes to discharge and Ms. Burns’s request for a modification of support. On this evidentia-ry record, therefore, I cannot determine either that the initial request for a modification, or the proceedings currently pending before the State Court, exceed the scope of the spousal support modification exception to the automatic stay.
However, as noted above, the motions to modify seek other relief, a setoff against Mr. Foster’s interest in the Pension for example, which infringes on Mr. Foster’s rights under § 362(a). Thus, through all three of the State Court Motions as well as the Amended Motion to Modify, Ms. Burns, in one fashion or another, overstepped and willfully violated the automatic stay.
B, Whether Mr. Foster is Entitled to an Award of Damages
Having determined that Ms. Burns willfully violated’ the automatic stay by filing the State Court Motions and the Amended Motion to Modify, I must now turn to the issue of damages. The Code provides that, “... an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k). “Courts within the First Circuit have concluded that the words ‘shall recover’ indicate that ‘Congress intended that the award of actual damages, costs and attorney’s fees be-mandatory upon a finding of willful violation of the stay.’” Vázquez Laboy v. Doral Mortgage Corp. (In re Vázquez Laboy), 416 B.R. 325, 332 (1st Cir. BAP 2009) (quoting In re Heghmann v. Indorf (In re Heghmann), 316 *29B.R. 395, 405 n. 9 (1st Cir. BAP 2004) (emphasis in original), rev’d in part and vacated in part, 647 F.3d 367 (1st Cir. 2011).
Notwithstanding this mandate, a debtor bears the burden of establishing by a preponderance of the evidence that he or she suffered actual damages. Duby v. United States (In re Duby), 451 B.R. 664, 670 (1st Cir. BAP 2011).
... For § 362(h) purposes, actual damages should be awarded only if there is concrete evidence supporting the award of a definite amount. See In re Sumpter, 171 B.R. 835, 844 (Bankr. N.D. Ill. 1994). Once a party has proven that he has been damaged, he needs to. show the amount of damages with reasonable certainty. Id. (citing Doe v. United States, 976 F.2d 1071 (7th Cir. 1992), cert. denied, 510 U.S. 812, 114 S.Ct. 58, 126 L.Ed.2d 28 (1993)). A damages award cannot be based on mere speculation, guess or conjecture. Id. (citing Adams Apple Distrib. Co. v. Papeleras Reunidas, S.A., 773 F.2d 925, 930 (7th Cir. 1985)).
Heghmann, 316 B.R. at 405.
Mr. Foster seeks an award of actual damages compensating him for medical costs relating to emotional distress as well as attorney fees and costs incurred both in defending against the State Court actions and in prosecuting this adversary proceeding. However, at trial he presented scant credible evidence of damages he incurred as a result of the Ms. Burns’s offending actions.11 He did not offer billing statements, time compilations, invoices, spreadsheets, time sheets or the like.12 He did not call as witnesses either his state court or bankruptcy counsel. For the most part, his recollection was vague or general as to the amount of fees or expenses he incurred in connection with the violative aspects of the State Court Motions.13 However, in one area on direct examination, Mr. Foster testified:
*30Mr. Logan: And can you tell me whether you have incurred any costs or liabilities as a result of Ms. Burns’s state court filings?
Mr. Foster: Absolutely.
Mr. Logan: What types of costs and liabilities?
Mr. Foster: I now have two attorneys that are working on this case, one obviously here today in front of us and Mr. Hobbs, I had to rehire him for that to handle the motions in court and stuff for me.
Mr. Logan: And do you know approximately how much Mr. Hobbs has incurred?
Mr. Foster: It’s well over $8,000 already and that, and actually when I say that was just to defend the first three motions that were dismissed there was still ongoing, we’re in the middle of discovery right now and I mean the clock is running so I really expect this to exceed $10,000 easily.
Unofficial transcription from audio file of March 1, 2017 trial. DE 22 11:33—12:28.
This testimony was uncontroverted; Ms. Burns did not challenge it on cross examination. Though Mr. Foster’s damages might be higher (“so I really expect this to exceed $10,000 easily”), reaching that conclusion would require speculation, guesswork or conjecture. No guesswork is necessary to determine that Mr. Foster suffered at least $3,000 in actual in connection with Mr. Hobbs’s defense of the State Court Motions. I can Teach that decision with reasonable certainty based on the evidence adduced at trial.14
That is not so for the damage claims' relating to Mr. Foster’s bankruptcy fees and costs or for his medical expenses. Though the record is clear that Mr. Foster engaged bankruptcy counsel to represent him in connection with this adversary proceeding, it is devoid of any admissible evidence as to the hourly rate of Mr. Foster’s bankruptcy counsel or the specific number of hours spent by him in connection with the State Court Motions. Lacking any concrete evidence upon which to calculate the amount of fees and costs billed by Mr. Foster’s bankruptcy counsel, I am incapable of awarding damages in connection with these proceedings.
Also, although Mr. Foster testified that Ms. Burns’s actions in connection with the State Court Motions exacerbated the anxiety and depression from which he suffers, *31resulting in increased medical bills, he likewise did not itemize or otherwise specifically identify any increased costs resulting from Ms. Burns’s actions. The closest Mr. Foster came to quantifying the medical cost associated with medical visits was his statement that medical bills totaled “a couple hundred dollars,” after insurance. This vague estimation was not supported by definitive testimony or documentation and, therefore, no actual damages may be awarded with respect to his medical costs.
Finally, Mr. Foster also seeks punitive damages. Individuals injured by a willful violation of the automatic stay may be able to recover punitive damages, in appropriate circumstances. 11 U.S.C. § 362(k). The Code does not define the term “appropriate circumstances” but courts usually require something more than mere willfulness. Heghmann, 316 B.R. at 405. Punitive damages are intended to cause change in a creditor who is found to have acted in “arrogant defiance” of the Code. In re Panek, 402 B.R. at 77 (quoting In re Curtis, 322 B.R. 470, 486 (Bankr. D. Mass. 2005). “Relevant factors are: (1) the nature of the creditor’s conduct; (2) the creditor’s ability to pay damages; (3) the motive of the creditor; and (4) any provocation by the debtor.” Id. (citing In re Sumpter, 171 B.R. at 845). See also, Varela v. Ocasio (In re Ocasio), 272 B.R. 815, 825 (1st Cir. BAP 2002) (quoting, In re Shade, 261 B.R. 213, 216 (Bankr. C.D. Ill. 2001) (listing as additional potential facts, ‘“the nature of the creditor’s conduct, the nature and extent of harm to the debtor, the creditor’s ability to pay damages, the level of sophistication of the creditor, the creditor’s motives, and any provocation by the debtor’ ”).
In this case, I do not find that the filing of the State Court Motions or the Amended Motion to Modify rise to the level of “arrogant defiance.” The State Court Motions were premised, at least in part, upon a misapplication of the Collins decision. As soon as the adversary complaint was filed with this Court, and the objection to the State Court Motions was filed in State Court, Ms. Bums withdrew the Motion to Enforce and amended the Motion to Modify. While a mistaken understanding of the law may not be a defense to liability under section 362(k), it is a mitigating factor with respect to punitive damages. Had Mr. Foster established that Ms. Burns and her counsel were aware of the inapplicability of the Collins decision prior to filing the State Court Motions, punitive damages may have been appropriate. Likewise, punitive damages may have been appropriate if Mr. Foster had established that Ms. Burns continues to seek enforcement of the Divorce Judgment, re-division of the marital debt on the Note or elimination of the Pension obligation. However, it appears, based on the sparse record presented to this Court, that Ms. Burns’s current efforts in State Court are limited to seeking an adjustment of spousal support. In light of the § 362(b)(2)(A)(ii) exception, and the insufficient information regarding the nature of Ms. Burns’s demand for increased spousal support, Mr. Foster did not meet his burden of establishing that Ms. Burns flagrantly disregarded the automatic stay.
Ms. Burns’s continued efforts to obtain a modification of the domestic support awarded to her by the Divorce Judgment may well fall within the exception set forth in § 362(b)(2)(A)(ii). By this opinion, however, Ms. Bums is on ' notice that this Court can conceive of a circumstance in which a request for modification of spousal support may exceed the scope of that exception. In the event that Ms. Burns proceeds with State Court proceedings and does not seek relief from the automatic stay, and this Court later determines those *32proceedings violated the stay, Mr, Foster may be entitled to punitive damages. What could previously have been considered a mistaken application of the § 362(b)(2)(A)(ii) exception by Ms. Burns could very well, by virtue of this opinion, rise to the level of “arrogant defiance,” warranting punitive damages.
V. Conclusion
Ms. Burns violated the automatic stay. Judgment will enter in favor of Mr. Foster and against Ms. Burns in the amount of $3,000.00, and Ms. Burns’s oral motion to dismiss will be denied.
Separate orders shall enter.
. All references to the "Code” or to specific statutory sections are to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23, 11 U.S.C. § 101, etseq.
. Neither party offered the Divorce Judgment into evidence or attached it to papers filed in this adversary proceeding. Ms. Burns did, however, attach a copy of it to Proof of Claim No. 5-1 (the "Proof of Claim") in the underlying bankruptcy case, Case No. 14-20991. Judicial notice is hereby taken of the Proof of Claim, as well as other documents filed in Case No. 14-20991, as noted herein and pursuant to F.R.E. 201(b) and (c).
. Mr. Foster did not have an ownership interest in the property and Ms. Burns owns it jointly with her sisters. For ease of reference, Ms. Burns’s interest in that property will be referred to in this decision, as the "Real Property”.
. Mr. Foster and' Ms. Burns borrowed these funds in connection with a fledgling restaurant venture.
. Copies of these motions were contained in Exhibit 3-1.
. The Motion for Omitted Property stated in part, as follows:
10. Because of the bankruptcy, the final divorce decree failed to set apart or divide the marital property, the debt on the Maryland home, over which the court had jurisdiction.
11. Justice requires that the Court set aside or divide the constructively omitted property between the parties because the Judgment is only being circumvented and creating an unforeseen outcome—if ordered payments to [Ms. Burns] are not already marital payments required by all applicable laws.
12. In the alternative, the Court should redivide the marital property to be equitable taking into consideration the slap from the Bankruptcy Court empowering [Mr. Foster] to thumb his nose at the State's order to share in marital debt. WHEREFORE, in the alternative, [Ms. Bums] requests that this Court enter a judgment to set aside or divide the omitted property, the debt on the Maryland home, under 19-A M.R.S. § 953 in the Divorce Judgment dated July 1, 2014 and because [Mr. Foster] feels he is empowered to ignore the final divorce decree to set apart or divide martial [sic] property over which the court had jurisdiction.
Exh. 3-1 at pp. 3-4,
. The Motion to Modify provided in relevant part:
14. If the debt on the Maryland home is not effectively set aside to [Mr. Foster] under 19-A M.R.S. § 953, then the Divorce Judgment is necessarily unfair.
15. Because the Divorce Judgment in this context would be unfair, the Court must modify the Divorce Judgment to set aside or divide the omitted or constructively [sic] property between the parties as justice may require.
16. In addition, the Court should reset spousal support to accurately and fairly take into account the circumstances either created by the Bankruptcy Court or by [Mr. Foster] himself, see 19-A MRS § 952.
17. Because of any resulting burden shift in paying marital debt, the Court should rightly void any set aside of [Ms. Burns’s] pension or retirement to [Mr. Foster]; all in the interest of fairness and equity. WHEREFORE, if this unpaid debt on the Maryland property is deemed to have been omitted or constructive omitted, [Ms. Bums] requests that this Court Modify this judgment to recalculate the division of assets and set aside or divide the non-constructively omitted property, modify spousal support upward, and eliminate [Mr. Foster’s] share of [Ms. Burns’s] pension between the parties with respect to the Divorce Judgment dated July 1, 2014.
Exh. 3-1 at pp. 4-5.
. At $1,000 per month for 20 years, the proposed modified spousal support would equal $240,000. Ms. Burns was not called to testify and her counsel did not challenge Mr. Foster's testimony regarding the amount and nature of the spousal support sought by Ms, Burns. Since neither party offered evidence showing the current balance outstanding on Mr. Foster's obligations under the Note, a dollar-for-dollar correlation between the proposed modification and the Note balance has not been clearly established. In the Chapter 13 Plan, Mr. Foster stated that the outstanding balance on the Note as of that date, was $254,277.00. Ms. Burns’s Proof of Claim asserted a claim against Mr. Foster’s estate in the amount of $155,438,94, which figure apparently included the obligations under the Note and the $600,00 domestic support obligation.
. Mr. Foster’s testimony at the March 1, 2017 hearing, coupled with statements by counsel for both parties in their papers, suggested that all three State Court Motions may have been withdrawn and that a fourth motion may have been filed. Regardless of the confusion as to how many motions are presently pending in State Court, it seems that Ms. Bums is primarily seeking an adjustment of the spousal support. It is not readily apparent whether Ms. Burns also seeks to void that portion of the Divorce Judgment awarding Mr. Foster a portion of her Pension.
. Viewed another way, the motions to modify also violate § 362(a)(2) by seeking to enforce the Note obligations allocated to Mr. Foster under the Divorce Judgment against Mr. Foster’s interest in the Pension.
.During the trial, counsel for Mr. Foster asserted for the first time that in accordance with an allegedly "long standing practice" in this jurisdiction, the March 1, 2017 evidentia-ry hearing should be limited to the question of liability and that a subsequent hearing on damages would convene only if he successfully established that Ms. Burns violated the automatic stay. This Court disagrees. His view of the trial structure directly conflicts with the December 21, 2016 hearing on the Order to Appear and Show Cause against Plaintiff For Failure to file a Pre-Trial Scheduling Order (audio at DE 9), the Joint Pretrial State-menl/Pretrial Order dated December 22, 2016 (DE 10), the Order Setting Date for Trial and Related Deadlines dated January 6, 2017 (DE 13), the Plaintiff's Motion to Reconsider the Court's February 16, 2017 Order excluding witnesses and exhibits, ¶¶ 4, 8 (DE 15), and the parties' witness and exhibit lists (DEs 16, 18 and 19). Those pretrial hearings, orders and pleadings made it apparent that the trial was set for March 1, 2017 at 1:30 pm and that there was no request for a bifurcated hearing. Further, following the January 6, 2017 Order Setting Date for Trial and Related Deadlines which established the March 1st trial date, Mr. Foster filed two witness and exhibit lists and both indicated that Mr. Foster would "testify as to Communications with defendant, filings made by Defendant, state court proceedings, legal fees incurred, damages suffered ...” (emphasis added). DE 16 and 19.
. Although counsel for Mr, Foster attempted to introduce into evidence an affidavit allegedly prepared by Mr. Hobbs with respect to the fees he billed in connection with the State Court Motions, the affidavit (which referred to an exhibit containing billing details but which exhibit was not attached to the affidavit) was excluded from evidence on hearsay grounds.
. This latter point is significant because Mr. Foster testified that Mr. Hobbs has represented Mr. Foster in State Court during the underlying bankruptcy case with respect to two matters; the State Court Motions and Mr, Foster’s lawsuit against his former landlord.
. Other testimony by Mr. Foster appeared to initially support State Court attorneys’ fee damages of higher amounts. For example:
Mr. Logan: Do you know what Mr. Hobbs’ hourly rate is?
Mr. Foster: $325,1 believe it is?
Mr. Logan: Okay and do you have any ... based on your interactions with him, based on your review of this affidavit, do you have any approximate idea of how many hours he put into defending these motions?
Mr. Foster: Umm, definitely like, over 10, 15 hours
Mr. Hatem: Move to strike, your Honor. The question calls for a "yes” or "no”.
Judge Cary: I’m going to ... I’m going to grant ... I'm going to grant the motion to strike. Your answer is “yes”.
Mr. Logan: Approximately how many hours do you believe he has put into defending this?
Mr. Foster: Twelve.
Unofficial transcription from audio file of March 1, 2017 trial. DE 22 37:27—38:14. I did not find the testimony that Mr. Hobbs spent twelve hours credible. From my vantage point as the trier of fact, Mr. Foster’s testimony that Mr. Hobbs spent twelve hours of time defending the State Court motions to be an approximation designed to blunt the effect of the motion to strike by Ms. Bums’s counsel. While I find Mr. Foster’s estimated range of ten to fifteen hours of Mr. Hobbs' time to be more credible, that testimony was stricken. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500918/ | ORDER CONCERNING DEBTORS’ STANDING TO OBJECT TO NOTEHOLDER CLAIMS AND TRIAL EVIDENTIARY ISSUES
Alan S. Trust, United States Bankruptcy Judge
The Court enters this Order in accordance with Federal Rules of Civil Procedure 1, 16, 43, and 44, as incorporated by Rules 1001, 7016, 9014, and 9017 of the Federal Rules of Bankruptcy Procedure, as well as the Federal Rules of Evidence. This Order addresses the standing of Debtors to object to the proofs of claim filed by a secured creditor, as well as certain evidentiary issues raised at and after trial.
Pending before the Court are the following:
MLMT 2005-MCP1 Washington Office Properties, LLC’s (“MLMT” or “Note-holder”), Motion for Relief from the Automatic Stay under Bankruptcy Code Sections 362(d)(1), 362(d)(2), and 362(d)(4). [dkt item 94]
MLMT’s Motion for Dismissal or Conversion of the above-captioned Bankruptcy Cases under Bankruptcy Code Section 1112(b). [dkt item 95]
Olympia Office LLC’s (“Debtors”), Opposition to the Relief from Stay Motion and Motion to Dismiss, [dkt item 107]
MLMT’s Reply in Support of the Relief from Stay Motion and Motion to Dismiss. [dkt item 110]
Debtors’ Motion to Object to Proof of Claim # 4-1, filed by MLMT. [dkt item 127]
MLMT’s Memorandum of Law in Opposition to the POC # 4-1 Objection, [dkt item 152]
MLMT’s Motion to Strike (“Motion to Strike”) and Evidentiary Objection to Debtors’ Reply, [dkt item 229]
MLMT and Debtors’ Joint Letter Regarding Admission, of Evidence, [dkt item 245]
Debtors’ Request for admission of Accountant Report, [dkt item 246]
Debtors’ Request to submit David Born-heimer Deposition Transcript and Designations. [dkt items 247,248]
BACKGROUND AND PROCEDURAL HISTORY1
Pre-Petition History
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 *41Lynch 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 of 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.
Under the CDC Plan, Midland Loan Services, Inc., a division of PNC Bank, N.A. (“Midland”), acted as special servicer with respect to the Loans secured by the Original Collateral. While the CDC Plan placed various payment and reserve obligations on the reorganized debtor, the cash generated by operation of CDC’s properties was actually collected through a lock box and disburséd through accounts controlled by Midland.
CDC defaulted under its Plan obligations. On March 11, 2016, Lenders commenced non-judicial 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 allegedly exceeded $33 million.
On or about October 18, 2016, the Note-holder succeeded to Lenders’ rights under the Loans and the Deeds of Trust.
These Debtors’ Bankruptcies, Parties’ Motions, Evidentiary Hearing, and Post-Hearing Submissions
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”).
On November 16, 2016, Noteholder filed a motion with this Court pursuant to 11 U.S.C. § 362(d) seeking entry of an order *42determining that the automatic stay does not apply, [dkt item 19]
On November 28, 2016, the remaining Acquirers (Seahawk 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.
On December 1, 2016, the Court entered an Order that determined, inter alia, the Properties were property of Debtors’ estates and the automatic stay applied to the Properties, [dkt item 33]
On January 27, 2017, Noteholder filed a Motion for relief from the automatic stay pursuant to §§ 362(d)(1), 362(d)(2), and 362(d)(4) of the Bankruptcy Code (the “Relief from Stay Motion”), [dkt item 94]
On January 27, 2017, Noteholder filed a Motion for dismissal or conversion of the above-captioned Bankruptcy Cases pursuant to § 1112(b) (the “Motion to Dismiss”), [dkt item 95]
On January 31, 2017, Noteholder filed a proof of claim asserting that its claim is secured and it is owed at least $41,613,780.82, including interest, fees, and expenses, pursuant to the Loans (the “Noteholder POC”). [POC # 4-1]
On February 15, 2017, Debtors filed an Opposition to the Relief from Stay Motion and Motion to Dismiss (the “Opposition”), [dkt item 107]
On February 18, 2017, Noteholder filed a reply to the Opposition (the “Reply”), [dkt item 110]
On February 22, 2017, the Court held a preliminary hearing on the Relief from Stay Motion and Motion to Dismiss.
On March 1, 2017, the Court issued a contested matter scheduling Order (the “Scheduling Order”), scheduling an eviden-tiary hearing on the Relief from Stay Motion and Motion to Dismiss, [dkt item 121]
On March 8, 2017, Debtors filed an objection to the Noteholder POC (the “POC Objection”), [dkt item 127]
Given that the Relief from Stay Motion, the Motion to Dismiss, and the POC Objection (together, the “Parties’ Motions”) ultimately effected Debtors’ ability to confirm a chapter 11 plan of reorganization and should be heard concurrently, on March 20, 2017, the Court issued an amended contested matter scheduling Order (the “First Amended Scheduling Order”), which provided, inter alia, that affidavits of party controlled witnesses including experts, as well as deposition excerpts, shall be filed with the Court no later than May 1, 2017, that any objection to any portion of a witness affidavit, including evidentiary objections, shall be filed no later than May 8, 2017 at 4:00 pm, that the parties shall exchange all exhibits by no later than May 1, 2017, and that an evidentia-ry hearing on the Parties’ Motions would be held on May 11, 2017. [dkt item 141]
On April 11, 2017, Noteholder filed a memorandum of law in opposition to the POC Objection (the “Noteholder’s POC Opposition”), [dkt item 152]
On April 26, 2017, Debtors filed a Motion to modify the First Amended Scheduling Order (the “Motion to Modify”), [dkt item 159] In support, Debtors assert, inter alia, that a deposition of David Bornheimer (“Bornheimer”) was held on April 12, 2017 and needed to be continued, but could not be completed before the deadline of May 1, 2017 to submit affidavits and deposition excerpts to the Court. Additionally, Debtors assert Centrum Financial Services, Inc. (“Centrum”), an interested party in both the Debtors’ bankruptcy case and the CDC Bankruptcy Case, had turned over documents to Debtors on April *4320, 2017 that were purportedly related to the amount due under the Loans; thus Debtors needed extra time to investigate the documents in the context of the POC Objection and First Amended Scheduling Order.
On April 27, 2017, the Court entered an Order scheduling an emergency telephonic hearing on the Motion to Modify for May 1,2017. [dkt item 161]
On April 28, 2017, the Noteholder filed an objection to the Motion to Modify (the “Objection to Modify”), asserting that Debtors do not have standing to challenge the Noteholder POC or modify the Note-holder’s rights under the Loans because Debtors were not parties to the CDC Plan or the underlying loan documents incorporated therein, and have no contractual privity with the Noteholder, [dkt item 163]
On May 1, 2017, the Court held the emergency hearing on the Motion to Modify and tentatively adjourned the evidentia-ry hearing pending the parties’ attempts to resolve various discovery disputes. The Court extended the parties’ time to file affidavits with the Court and exchange exhibits to May 4, 2017. The Court adjourned the emergency hearing on the Motion to Modify to May 8, 2017.
On May 4, 2017, the parties filed a stipulated letter requesting the Court extend the time for the parties to submit exhibits from May 4, 2017 to May 5, 2017.2 [dkt item 164]
On May 5, 2017, Debtors filed an Application to Employ Demasco, Sena & Jahel-ka LLP as Accountants to Debtors (the “Application to Employ Accountant”), [dkt item 166]
On May 6, 2017, the parties filed certain exhibits • including witness affidavits with the Court pursuant to the May 1 hearing and May 4 stipulated letter.
On May 8, 2017, the Court held an adjourned emergency hearing on the Motion to Modify at which the Court adjourned the evidentiary hearing to May 24, 2017.
On May 9, 2017, the Court entered an Order granting the Application to Employ Accountant, [dkt item 178]
On May 9, 2017, Debtors filed a limited response to the Noteholder’s POC Opposition (the “POC Limited Response”), asserting, inter alia, that Debtors have standing to challenge the Noteholder’s claim, [dkt item 174]
On May 10, 2017, the Court entered a second amended contested matter scheduling Order (the “Second Amended Scheduling Order”), which scheduled an evidentia-ry hearing on the Parties’ Motions for May 24, 2017 and directed the parties to file direct testimony affidavits of witnesses from whom an affidavit could not be obtained prior to May 5, 2017 by supplemental Affidavit signed by the witness(es), as well as any deposition transcripts by no later than 4:00 pm EDT May 15,' 2017. [dkt item 181]
On May 19, 2017, Debtors filed a reply to the Noteholder’s POC Opposition (the “POC Reply”) [dkt item 226], and attached as an exhibit what they referred to as a preliminary analysis of various bank statements obtained by Debtors in discovery from third party Centrum, which analysis was purportedly prepared by Debtors’ accountant and relates to the amount due under the Loans (the “Accountant Report”). [dkt item 226-1]
On May 22, 2017, Debtors filed an emergency Motion to compel Bornheimer to appear for a continued deposition at Debtors’ Counsel’s office and to extend Debt*44ors’ deadline to submit designations of the transcript of the deposition of Bornheimer (the “Motion to Compel”), [dkt item 227] Debtors assert that the parties had scheduled the completion of Bornheimer’s deposition testimony for May 11, 2017, in Kansas City, but that due to a health-related incident, Debtors’ Counsel was unable to travel from New York to Kansas City for the deposition. As a result, the parties apparently agreed to conduct the examination of Bornheimer on May 23, 2017, the day before the scheduled evidentiary hearing.
On May 22, 2017, the Noteholder filed a Motion to strike the Debtors’ POC Reply (the “Motion to Strike”), asserting, inter alia, that Debtors’ POC Reply improperly raises new arguments and submits new evidence for the first time, which were neither raised nor submitted in Debtor’s POC Objection, [dkt item 229]
On May 22, 2017, the Noteholder filed a response to the Motion to Compel, [dkt item 230]
On May 22, 2017, the Court entered an Order that allowed the parties to file designations of the transcript of the continued deposition of Bornheimer by no later than June 1, 2017 at 5 p.m. (the “Order on Motion to Compel”), [dkt item 231]
On May 24, 2017, the Court held the evidentiary hearing on the Parties’ Motions (the “Hearing”), at which the Court ruled on a number of evidentiary issues and directed the parties by June 1, 2017, to file a joint letter regarding whether the parties had any objections to the filed exhibits that the parties did not move into evidence at the Hearing. Additionally, the Court directed Debtors to file a letter regarding the Accountant Report and Born-heimer deposition excerpts by June 1, 2017, with any responses to be filed by June 8, 2017.
On June 1, 2017, the parties filed a joint letter regarding the admission of evidence (the “Joint Letter”), [dkt item 245]
On June 1, 2017, Debtors filed a letter regarding the Accountant Report, [dkt item 246]'
On June 1, 2017, Debtors filed a letter regarding the Bornheimer depositions and designations of deposition transcripts, [dkt items 247, 248]
On June 2, 2017, the Noteholder filed a letter regarding the Bornheimer depositions. [dkt item 249]
On June 8, 2017, the Noteholder filed an objection to admission of the April Born-heimer deposition excerpts and submitted counter-designations and also filed a letter in opposition to admission of the Accountant Report, [dkt items 260,261]
In the aggregate, the Court has been presented with over 6,000 pages of proposed trial exhibits, including testimonial affidavits, appraisal reports, and deposition excerpts. The evidentiary issues addressed in this Order relate only to issues not resolved at the Hearing. Closing arguments on the Parties’ Motions has been scheduled for July 12,2017.
DISCUSSION
Debtors’ Standing to Challenge the Note-holder’s Claim and Modify the Noteholder’s Rights
Noteholder asserts that Debtors may neither challenge its claim nor modify its rights because Debtors were not parties to the CDC Plan or the underlying loan documents incorporated therein, and have no contractual privity with the Noteholder. Debtors assert they have standing to object to the claim and modify the treatment of Noteholder’s rights. However, the parties do not separate their arguments regarding Debtors’ standing to object to *45Noteholder’s proofs of claim from Debtors’ standing to modify Noteholder’s rights through a chapter 11 plan, but the Court will address each issue in turn.
Claim Objection
If a note holder or owner, or mortgagee, or servicer acting on behalf thereof, files a proof of claim under which it asserts a lien against property of the estate, a party in interest may object to the claim and seek a determination that the claimant is not entitled to enforce the note or mortgage at issue, or that the note or mortgage are not enforceable against the debtor or the estate; a bankruptcy court may make such a determination after notice and a hearing. See 11 U.S.C. § 502(b)(1); In re Escobar, 457 B.R. 229, 236 (Bankr. E.D.N.Y. 2011); see generally In re Tender Loving Care Health Svs., Inc., 562 F.3d 158 (2d Cir. 2009). “An objecting party ‘bears the initial burden of production and must provide evidence showing the claim is legally insufficient’ under 11 U.S.C. § 502.” In re Lehman Bros. Holdings Inc., 519 B.R. 47, 53 (Bankr. S.D.N.Y. 2014) (quoting In re Arcapita Bank B.S.C.(c), 508 B.R. 814, 817 (S.D.N.Y. 2014)); In re Richmond, 534 B.R. 479, 483 (Bankr. E.D.N.Y. 2015), aff'd sub nom., Richmond v. Select Portfolio Servicing Inc., No. 14-41678-CEC, 2016 WL 743397 (E.D.N.Y. Feb. 22, 2016).
Section 502(a) of the Bankruptcy Code provides “A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including ... objects.” Under § 502(b), if a party in interest objects to a claim, the court “shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount ...” Under § 101(5)(A), a “claim” is 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.” See Midland Funding, LLC v. Johnson, — U.S. -, 137 S.Ct. 1407, 1412, 197 L.Ed.2d 790 (2017). Under Section 102(2), a “claim against the debtor” includes a claim against property of the debtor. The parties here do not dispute that Noteholder has a claim against Debtors’ estates; 3 rather, the issue is whether Debtors have standing to challenge the amount of the claim.
This Court’s analysis necessarily begins by looking to the language of the statute itself to determine if the statute is plain or ambiguous. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012); Lamie v. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); United States v. Ron Pair Enters., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989); In re Addams, 564 B.R. 458, 462-63 (Bankr. E.D.N.Y. 2017). “[I]n determining plainness or ambiguity, courts are directed to look ‘to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.’” In re Phillips, 485 B.R. 53, 56 (Bankr. E.D.N.Y. 2012) (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997)); Addams, 564 B.R. at 463. “Courts are required to apply the plain meaning of a statute, unless the statute is ambiguous or applying the unambiguous plain meaning would yield an absurd result,” Id. If the statutory language is clear, a court’s analy*46sis must end there. Hartford Underwriters Ins. Co. v. Union Planters Bank, Nat’l Ass’n, 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (“[W]hen the statute’s language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.”); Addams, 564 B.R. at 463. Statutory terms are often “clarified by the remainder of the statutory scheme—because the same terminology is used elsewhere in a context that makes [their] meaning clear, or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” United Savings Assn. of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988); Rake v. Wade, 508 U.S. 464, 474, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993); Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 60, 125 S.Ct. 460, 160 (L.Ed.2d 389 2004); In re Coughlin, 568 B.R. 461, 469-70 (Bankr. E.D.N.Y. 2017).
As noted above, under § 502(b), a party in interest may object to a claim. Neither Sections 101, 502, 1109 nor any other Section in the Bankruptcy Code defines the term “party in interest.” However, a debtor is specifically referenced as a “party in interest” in various sections of the Bankruptcy Code, such as in Section 1109(b), which states that “[a] party in interest, including the debtor ... may raise and may appear and be heard on any issue in a case under this chapter.” See In re Ionosphere Clubs, Inc., 101 B.R. 844, 849 (Bankr. S.D.N.Y. 1989) (noting the meaning of “party in interest” must be construed in light of the Bankruptcy Code and is determined on an ad hoc basis.)4 Because § 502(b) provides that a party in interest may object to a claim, and because Section 1109(b) expressly allows a debtor to be heard on any issue in a case, it logically follows that, on the face of the statute, a debtor is a party in interest for purposes of Section 502(b)
Additionally, the Bankruptcy Code contemplates that a debtor acting as trustee has standing to object to a claim. Under § 1101(1), a “debtor in possession” means debtor. Under § 1107, a debtor in possession is a fiduciary installed as trustee to manage the estate in the interest of the creditors. See Czyzewski v. Jevic Holding Corp., — U.S. -, 137 S.Ct. 973, 978, 197 L.Ed.2d 398 (2017). Under § 1106(a)(1), a trustee has an obligation to perform certain duties specified in § 704(a). Section 704(a)(5) provides that if a purpose would be served, the trustee is obligated to “examine proofs of claims and object to the allowance of any claim that is improper;...”
The fact that Debtors here are not parties to the original Loans or the CDC Plan does not mean they are not parties in interest for purposes of filing a claim objection. Debtors are debtors in possession acting as fiduciaries of the bankruptcy estates and thus have a duty to object to an improper claim if it serves a purpose. The property of Debtors’ estates includes the Properties at issue here, which are encumbered by the Loans. Noteholder filed a proof of claim against Debtors’ estates relating to property of the estates. Debtors have a direct legal and pecuniary interest in objecting to the Noteholder’s claim and such an objection serves a purpose to the estates. Thus, Debtors have standing to challenge Noteholders claims.5
*47
A Plan Modifying Noteholder’s Rights
The Court next addresses Note-holder’s assertion that Debtors may not modify its rights through a chapter 11 plan of reorganization. A court shall confirm a plan under § 1129(a)(1), if the plan, among other things, complies with all applicable provisions of the Bankruptcy Code. Section 1128(a) provides for the mandatory requirements of a plan. Section 1123(b) provides for the permissive contents of a plan, subject to subsection (a), and states, among other things, that a plan may
(5) 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; and ...
See In re Pomilio, 425 B.R. 11, 18 (Bankr. E.D.N.Y. 2010).
As discussed above, the Court’s analysis necessarily begins by looking to the language of the statute itself to determine if the statute is plain or ambiguous. See e.g. Addams, 564 B.R. at 466 (holding that the similarly worded § 1322(b)(2) anti-modification clause is clear and unambiguous.) As noted, Noteholder is clearly a creditor who holds a claim under §§ 101(5)(A), 101(10)(A) and § 102(2). Noteholder’s claim is not secured only by a security interest in real property that is Debtors’ principal residence. Thus, from the clear and unambiguous language of § 1123(b), Debtors have standing to propose a chapter 11 plan of reorganization that modifies Noteholder’s rights. The Bankruptcy Code should not be read to allow the anomalous result which would ensue if a creditor holding a claim had standing to exercise its rights6 while at the same time a debtor would be precluded from having standing to exercise its statutory rights in regard to that claim.
The Court briefly addresses Noteholder’s cited cases in support of its assertion that Debtors do not have standing to modify its rights because Debtors have no contractual privity with the Noteholder. See Pescrillo v. HSBC Bank USA, N.A., 2015 WL 417659, 2015 U.S. Dist. LEXIS 11223 (W.D.N.Y. Jan. 30, 2015) (“a debtor has no right to restructure mortgages in bankruptcy when the debtor is not in privity with the mortgagee.”)(citing In re Parks, 227 B.R. 20, 21 (Bankr. W.D.N.Y. 1998)); In re Bracha Kizelnik, 190 B.R. 171 (Bankr. S.D.N.Y. 1995). The Pescrillo and Kizelnik courts’ decisions appear to arise out of those courts’ concerns that a lender *48should not be forced through a chapter 13 plan to essentially extend credit to a debt- or that has received property without the lender’s consent, is not a party to the loan contract, and against whom the lender does not have an in personam claim.
This Court notes that the Pescrillo and Kizelnik courts’ concerns are partially dealt with under chapter 11 of the Bankruptcy Code. Chapter 11 of the Bankruptcy Code provides protections for secured creditors who do not have recourse against the debtor, which apparently is not available under chapter 13. Section 1111(b) provides that nonrecourse secured creditors who are undersecured must be treated in chapter 11 as if they had recourse. Bank of Am. Nat. Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 439, n.6, 119 S.Ct. 1411, 1415, 143 L.Ed.2d 607 (1999); In re Coltex Loop Cent. Three Partners, L.P., 138 F.3d 39, 46 (2d Cir. 1998). Alternatively, the creditor may elect “to have the claim bifurcated into secured and unsecured portions.” In re 680 Fifth Ave. Assoc., 29 F.3d 95, 96 (2d Cir. 1994) (holding absence of contractual privity between the lienholder and the debtor does not deprive the'lienholder of the benefits and protections of § 1111(b)). The cases cited to by Noteholder, whose analysis is rooted in the context of a chapter 13 plan, are not wholly applicable to the chapter 11 case before the Court, and these decisions could be called into question by the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78, 80, 111 S.Ct. 2150, 2152, 115 L.Ed.2d 66 (1991), which mandates that a court permit a Chapter 13 debtor who is the owner of real property to cure a pre-petition default under a mortgage, even if that debtor lacks privity with the mortgagee. See also In re Rutledge, 208 B.R. 624, 628 (Bankr. E.D.N.Y. 1997); In re Allston, 206 B.R. 297 (Bankr. E.D.N.Y. 1997). Thus, because Noteholder has a secured claim against Debtors’ estates, Debtors have standing to propose a chapter 11 plan of reorganization that modifies Noteholder’s rights pursuant to § 1123(b)(5) of the Bankruptcy Code.
Specifíc Evidentiary Issues
Bondholder Reports
Debtors seeks to admit certain bondholder reports dated April 29, 2016, Debtors’ Exhibit MMMM, and August 31, 2016, Debtors’ Exhibit NNNN as establishing the amount of Noteholders’ claim, either in whole or in part (together the “Bondholder Reports”); neither party has moved for the admission of the bondholder report dated January 30, 2015, Debtors’ Exhibit LLLL and it is therefore not admitted. The Bondholder Reports at issue state an amount outstanding under portions of Noteholder’s debt instruments at certain times. Noteholder objects and asserts Debtors have not established a foundation to introduce the reports under FRE 602, and assert the Bondholder Reports are not relevant to Debtors’ claims or defenses under FRE 401, as they do not provide any evidence regarding the amounts owed by Debtors to Noteholder. Finally, Noteholder asserts Debtors do not have standing to rely on the Bondholder Reports, which were prepared in connection with a pooling and service agreement between Noteholder and the Servicer, because borrowers are not parties to a pooling and service agreement and lack standing to assert non-compliance therewith. Anh Nguyet Tran v. Bank of New York, No 13-cv-580 (RPP), 2014 WL 1225575, at *4 (S.D.N.Y. Mar. 24, 2014) (collecting cases); see also BNP Paribas Mortg. Corp. v. Bank of Am., N.A., 949 F.Supp.2d 486, 510 (S.D.N.Y. 2013). Debtors contend neither case stands for the proposition that a party may not use documents produced pursuant to a pooling and service agree*49ment as evidence, and that the Bondholder Reports are filed and publicly available pursuant to Securities and Exchange Commission regulations.
The Court agrees that Anh Nguyet Tran does not preclude Debtors from relying on the Bondholder Reports, even if they were prepared in connection with the Pooling and Service Agreement. Unlike the plaintiffs in Anh Nguyet Tran, who did not have standing to assert a breach of the pooling and service agreement, Debtors here are not alleging a breach of such agreement but seek to use the reports as evidence of the outstanding debt.
“Trial courts have broad discretion to determine when evidence is relevant to a given proceeding and to refuse to admit evidence it believes to be irrelevant or whose probative value is outweighed by the risk of undue delay or waste of time.” In re Millennium Glob. Emerging Credit Master Fund Ltd., 474 B.R. 88, 95 (S.D.N.Y. 2012). The Court finds the Bondholder Reports are relevant under FRE 401 because Debtors assert that the amount of Noteholder’s claim can be fixed, in whole or in part, through the Bondholder Reports, and that Debtors used the Bondholder Reports in evaluating whether to purchase the Properties, which is an asserted defense to Noteholder’s claims that Debtors have acted in bad faith. The probative value of the Bondholder Reports is neither outweighed by delay nor prejudice.
Federal Rule of Evidence 406 provides that “[ejvidence of a person’s habit or an organization’s routine practice may be admitted to prove that on a particular occasion the person or organization acted in accordance with the habit or routine practice.” Character may be thought of as “a generalized description of one’s disposition,” while habit “is more specific”: “[i]t describes one’s regular response to a repeated specific situation.” Crawford v. Tribeca Lending Corp., 815 F.3d 121, 125 (2d Cir. 2016)(quoting Fed. R. Evid. 406 advisory committee’s note to 1972 proposed rule). Here, the Bondholder Reports are admissible under FRE 406 to show that Wells Fargo regularly prepared and filed the reports. Wells Fargo habitually filed the Bondholder Reports as a regular response to the reporting requirements of the pooling and service agreement and requirements imposed by the Securities and Exchange Commission. Finally, there is adequate evidence in the record from testimony and other admitted exhibits to establish the foundation for these reports, and the elements of Rule 807(a) have otherwise been satisfied to admit these reports. See FRE 602, 807(a).7
Bornheimer April 12 Deposition
Noteholder objects to admission of the April 12, 2017 deposition of Born-heimer, Debtors’ Exhibit RRRR (the “April 12 Deposition”) and asserts that Debtors had the April 12 Deposition in their possession as of May 15, 2017, but failed to file the April 12 Deposition pursu*50ant to the Second Amended Scheduling Order.
The First Amended Scheduling Order provides
The parties shall submit any direct testimony from themselves and any witness under their control (including experts and appraisers) by Affidavit signed by the witness(es). Affidavits shall be filed with the Court no later than May 1, 2017.
The Second Amended Schedulihg Order provides
The parties shall submit any direct testimony from themselves and any witness under their control (including experts and appraisers) from whom an affidavit could not be obtained prior to May 5, 2017 by supplemental Affidavit signed by the witness(es), as well as any deposition transcripts by no later than 4:00 pm EDT May 15, 2017.
Debtors filed portions of the deposition on April 26, 2017 as an exhibit to their Motion to Modify, as opposed to specifically for use at the Hearing, [dkt item 159]
Both scheduling Orders provide . Failure to strictly comply with any of the provisions of the Order may result in the automatic entry of a dismissal, sanctions, a default, or other relief as the circumstances warrant, in accordance with Federal Rule of Civil Procedure 16, as incorporated by Federal Rules of Bankruptcy Procedure 7016 and 9014.
The Order on Motion to Compel provides
the Debtors and MLMT may file designations of the transcript of the continued deposition of Mr. Bornheimer by no later than June 1, 2017 at 5 p.m.
In accordance with Rule 1001, directing the Bankruptcy Rules be “construed to secure the just, speedy and inexpensive determinations of every case and proceeding,” this Court will admit the portions of the April 12 Deposition filed on April 26, 2017 as an exhibit to their Motion to Modify, but not the balance of that deposition; Debtors failed to comply with the Second Amended Scheduling Order when they did not file the remainder of the April 12 Deposition with the Court by May 15, 2017.8 In accordance with Rule 1001, Note-holder’s objections and counter-designations of the April 12 Deposition filed on June 8, 2017, pursuant to the Court’s directions at the evidentiary hearing are admitted. Noteholder’s specific objections to the portions designated by Debtors will be subsequently addressed by the Court.
Bornheimer May 23 Deposition
Debtors request portions of the May 23, 2017 Bornheimer deposition (the “May 23 Deposition”) be admitted into evidence. Noteholder has not objected to admission of the May 23 Deposition, but has submitted counter-designations and objections to Debtors’ designated portions. Debtors sent the May 23 Deposition transcript to chambers with a copy to Noteholder, but have not publically filed the May 23 Deposition transcript through the Court’s CM/ECF system.
The Court finds that Debtors have complied with the Order on Motion to Compel and the Court’s directions at the evidentia-ry hearing and that Debtors’ deposition designations from the May 23 Deposition should be admitted, subject to any of Noteholder’s specific objections to be subsequently addressed by the Court. Additionally, Noteholder’s counter-designations of the May 23 Deposition are also. admitted.
*51
Accountant Report
Debtors request that the Accountant Report be admitted and that Midland be directed to fully cooperate with Debtors’ request for information related to the bank statements purported to be analyzed. Noteholder opposes Debtors’ requests and assert they are an attempt to effectively reopen discovery and the evidentiary hearing.
Debtors first brought the existence of the bank statements to the Court’s attention on April 26, 2017, when they filed the Motion to Modify and attached certain documents obtained from Centrum on April 20, 2017. Approximately two weeks thereafter, Debtors filed the Application to Employ Accountant. Debtors assert that Noteholder did not produce the Central Account bank statements until May 18, 2017. Debtors did not submit the proposed Accountant Report as a separate exhibit pursuant to any of the Court’s Scheduling Orders neither did Debtors submit the Accountant Report with their letter dated June 1, 2017. However, as with the challenged portions of the first Bornheimer deposition, consistent with Rule 1001, the Court will not deny admission of the Accountant Report due to failure to submit it as a designated exhibit.
However, the Court will not admit the Accountant Report into evidence because the Court cannot ascertain its authenticity under FRE 901, cannot determine whether the summaries are in fact accurate to prove the content of the writings which they purport to summarize under FRE 1006, nor has the accountant who purportedly prepared the report been qualified as an expert pursuant to FRE 702. See generally Needham v. White Laboratories, 639 F.2d 394, 403 (7th Cir. 1981)(proponent of purported summaries must lay a proper foundation for admissibility of summarized materials and accuracy of summary); In re Fanaras, 263 B.R. 665 (Bankr. D. Mass 2001)(same).
In spite of this ruling, Debtors have not waived their right to assert that mismanagement by Midland of the funds available to CDC and its failure to comply with the waterfall provisions of the CDC Plan caused a default under the Loans and thereby created the opportunity for Note-holder to charge default interest (a very significant issue in these cases). Debtors have provided documents that they have obtained through third-parties to support this assertion and Debtors timely brought that evidence to the Court’s attention. Noteholder’s Motion to Strike Debtors’ POC Response is otherwise denied.
Exhibit 143
Debtors object to the admission of Note-holder’s exhibit 143, which purports to be an email from CMC-CMI Corporation (“CMC”) to Noteholder’s Counsel regarding CMC’s unfamiliarity with Debtors and this bankruptcy case. Exhibit 143 is not admitted because it has not been authenticated pursuant to FRE 901 and its relevance has not been demonstrated under FRE 401.
Exhibits 156-162
Debtors object to admission of Note-holder’s exhibits 156-162. Each of these exhibits purport to be records concerning how funds may have been disbursed or fees or other expenses charged against the Loans after confirmation of the CDC Plan. As these have not been authenticated under FRE 901, and as their relevance has not been demonstrated under FRE 401, exhibits 156-162 will not be admitted. Accordingly it is hereby
ORDERED, that Debtors have standing to proceed on their claim objection; and it is further
ORDERED, that Debtors have standing to propose a plan of reorganization that *52modifies Noteholder’s rights as a holder of a secured claim; and it is further
ORDERED, that the Bondholder Reports are admitted into evidence; and it is further
ORDERED, that the excerpts of the April 12 Bornheimer Deposition attached to the Motion to Modify are admitted but the remainder is not admitted and Note-holder’s April-12 counter-designations are admitted; and it is further
ORDERED, that Debtors’ May 23, 2017 Bornheimer Deposition designations are admitted and Noteholder’s May 23 deposition counter-designations are admitted; and it is further
ORDERED, that Debtors are directed to file the May 23 Deposition through the Court’s. CM/E CF filing system by no later than July 7, 2017; and it is further
ORDERED, that the Accountant Report is not admitted; and it is further
ORDERED, that Exhibit 143 is not admitted; and it is further
ORDERED, that Exhibits 156-162 are not admitted; and it is further
ORDERED, that Noteholder’s and Debtors’ deadline to each file a list of the admitted exhibits it intends to refer to at the closing arguments scheduled for July 12, 2017 under this Court’s Amended Order Scheduling Closing Argument [dkt item 259] is hereby extended to July 7, 2017 at 4:00 pm EDT.
. The Court assumes familiarity with the facts and procedural history, which are referenced only as necessary to explain the Court’s Order. See dkt items 33 and 82.
. The Court "So Ordered” the request on May 9, 2017. [dkt item 179]
. See e.g. In re Wilcox, 209 B.R. 181, 182 (Bankr. E.D.N.Y. 1996)(‘‘this Court concludes that Wendover holds a 'claim’ against the Debtor’s estate, even though, no privity of contract ever existed between it and the Debt- or.”)
. Additionally § 1121(c) provides that “any party in interest, including the debtor.. .may file apian..."
. Noteholder does not assert that Debtors lack prudential standing to object to its claim. This Court notes that the Second Circuit Court of Appeals has on several occasions *47addressed the requirement that a debtor have a pecuniary interest in the matter at issue in order to have standing to participate in bankruptcy matters. See, e.g., In re Friedberg, 634 Fed.Appx. 333 (2d Cir. 2016) (summary order) ("[W]e conclude that the bankruptcy court correctly held that Friedberg lacked standing to oppose the approval of the settlement agreement because he had no pecuniary interest directly and adversely affected by the bankruptcy court’s order adopting the settlement.”); In re Barnet, 737 F.3d 238, 242 (2d Cir. 2013) (“[T]o have standing to appeal from a bankruptcy court ruling, an appellant must be a person aggrieved—a person directly and adversely affected pecuniarily by the challenged order of the bankruptcy court.”) (internal quotations omitted); In re 60 E. 80th St. Equities, Inc., 218 F.3d 109, 115 (2d Cir. 2000) (“[A] Chapter 7 debtor is a ‘party in interest’ and has standing to object to a sale of the assets, or otherwise participate in litigation surrounding the assets of the estate, only if there could be a surplus after all creditors’ claims are paid.”); In re Roberts, 20 B.R. 914, 917 (Bankr. E.D.N.Y. 1982). This Court need not decide prudential standing here as it has not been asserted by Noteholder, but does note, however, that if Debtor’s pending claims objections were fully sustained, a legitimate prospect of a surplus estate does exist.
. See § 1126 ("The holder of a claim or interest allowed under section 502 of this title may accept or reject a plan.”)
. See Rule 807(a) In General. Under the following circumstances, a hearsay statement is not excluded by the rule against hearsay even if the statement is not specifically covered by a hearsay exception in Rule 803 or 804:
(1) the statement has equivalent circumstantial guarantees of trustworthiness;
(2) it is offered as evidence of a material fact;
(3) it is more probative on the point for which it is offered than any other evidence that the proponent can obtain through reasonable efforts; and
(4) admitting it will best serve the purposes of these rules and the interests of justice. FRE 807(a). See generally In re Teltronics Services, Inc., 29 B.R. 139, 165 (Bankr. E.D.N.Y. 1983)(addressing former Rule 803(24)).
. The Court notes that the Debtors' Counsel's health issues did not preclude Debtors from filing the April 12 Deposition by the deadline as those issues arose after the deadline. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500920/ | ORDER ALLOWING OBJECTION TO CLAIM
Stephani W. Humrickhouse, United States Bankruptcy Judge
The matter before the court is the objection to claim filed by debtor O. William Faison with respect to SummitBridge National Investments III, LLC’s proof of claim in the amount of $302,596.19. A hearing took place in Raleigh, North Carolina on March 1, 2017, at the conclusion of which the court took the matter under advisement. For the reasons that follow, the court will allow the objection.
BACKGROUND AND PROCEDURAL POSTURE
The debtor, O. William Faison (“Fai-son”), filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on January 3, 2014. The debtor is a trial attorney and remains in possession of certain assets, including sizeable real property holdings in Orange, Wake, and Vance counties. SummitBridge held prepetition claims against the debtor in the total amount of $1,627,239.82, secured by real property in Orange County. On November 10, 2016, SummitBridge filed a proof of claim (“Claim 16”) in the amount of $302,596,19, seeking allowance of a non-priority unsecured claim for attorneys’ fees *65equal to 15% of the outstanding indebtedness. Specifically:
Pursuant to the terms of its promissory notes and N.C.G.S. § 6-21.2, Summit-Bridge is entitled to payment by the Debtor of attorneys^ fees] equal to fifteen percent (15%) of the outstanding balance of its debt(s). Fifteen percent (15%) of the outstanding indebtedness amount of $2,017,307.93 is $302,596.19. SummitBridge asserts a general unsecured claim against the Debtor/bankruptcy estate in such amount.
To the extent that the Court determines that SummitBridge is not entitled to attorneys’ fees in the amount of fifteen percent (15%) of its outstanding indebtedness, and that, instead, SummitBridge is only entitled to a general unsecured claim for its actual attorneys’ fees and costs, SummitBridge asserts a general unsecured claim in the total amount of $101,020.16 [for attorneys’ fees, costs and expert witness fees incurred subsequent to the filing of the bankruptcy case].
Addendum to Proof of Claim of Summit-Bridge, Claim 16-1 Part 2.
The debtor’s Fifth Amended Chapter 11 plan (“the Plan”) was confirmed on November 15, 2016, and became effective on December 1, 2016. SummitBridge does not dispute the debtor’s accounting of the procedural posture of the matter, which is as follows:
5.The Plan provided that Class 4 shall consist of the claims held by [Summit-Bridge] as set forth in (I) Claim No. 6, secured by Patterson Lots 16 & 17 and Walker Lots 1 & 2, (ii) Claim No. 5, secured by a first lien on Bellechene Lots 9 & 15, and the barn and acreage referred to as the “Barn -Tract,” and (iii) Claim No. 7, secured by a second lien on Bellechene Lots 9 & 15, and ... the “Barn Tract.” ... As of the Petition Date, the loans which form the bases for the filed claims were not in default.
6. The Plan treated the Class 4 claims as an Allowed Secured Claim in the aggregate amount of $1,715,000 inclusive of principal, prepetition interest, postpe-tition interest, appraisal fees, late fees, and attorneys’ fees incurred, as determined under Section 506 of the Bankruptcy Code. The Plan provided that the Debtor shall convey the SummitBridge Collateral to the holder of the Class 4 Claim or its designee, subject only to (i) ad valorem taxes for the calendar year 2016 and for the calendar year 2017, if applicable, and (ii) the existing deed of trust securing such indebtedness, in full satisfaction of such claim pursuant to Section 1129(b)(2)(A)(iii); provided however, such treatment shall not impair the right of the holder of the Class 4 Claim from filing or requesting allowance of an unsecured claim for attorneys’ fees and expenses in addition to the Class 4 Allowed Secured Claim, nor the right of the. Debtor or any party in interest to object to or oppose allowance of such an unsecured claim.
7. On December 1, 2016, Summit-Bridge provided written notice to the Debtor, pursuant to N.C.G.S. § 6-21.2, that SummitBridge intended to enforce the provisions in the loan documents which provide for recovery of its attorneys’ fees and costs, and that the Debtor may avoid any obligation to pay such fees and costs by paying the entire outstanding balance due within 5 days of the date of the letter....
8. On December 1, 2016, the Debtor tendered to SummitBridge a deed, duly executed and acknowledged, sufficient to convey the SummitBridge Collateral to the designee of SummitBridge in satisfaction of the Class 4 Allowed Secured Claim....
*66Debtor’s Objection to Claim No. 16 Filed by SummitBridge (D.E. # 544) (“Debtor’s Objection”) at 2-3. At the time the petition was filed, the debtor was not in default.
The debtor contends that to the extent SummitBridge may be entitled under North Carolina law to recover its post-petition attorneys’ fees and legal expenses, the mandatory written notice component of that recovery was satisfied by the debtor’s delivery to SummitBridge of the duly executed and acknowledged deed to the Sum-mitBridge collateral. Because delivery of the deed “constituted payment-in-kind in the full amount of the indebtedness,” the debtor argues, SummitBridge cannot recover attorneys’ fees or costs under state law. Alternatively, the debtor maintains that if tender of the deed did not constitute payment of the outstanding indebtedness “so as to bar recovery of any attorneys’ fees or costs,” then SummitBridge still is not entitled to recover those fees under applicable federal law: “Summit-Bridge has already received what was permitted under Section 506(b) pursuant to the Plan, and the Bankruptcy Code does not provide for allowance of an unsecured claim for post-petition attorneys’ fees or costs.” Debtor’s Objection at 4.
Responding, SummitBridge points out that it “initially brought the attorneys’ fee issue to the fore in an Amended Motion to Lift Stay filed on April 22, 2016.” Reply by SummitBridge National Investments III, LLC To Objection (D.E. # 549) (“Summit-Bridge Reply”) at 2. In the April 2016 motion to lift stay, which was heard in connection with the debtor’s initial plan confirmation hearing, SummitBridge asked the court to lift or modify the stay to allow SummitBridge to serve the attorneys’ fee notice required by N.C.G.S. § 6-21.2(5). By order entered on September 2, 2016, the court denied both confirmation and the motion to lift stay, without prejudice. (D.E. #501) SummitBridge filed an additional motion for relief from stay on October 3, 2016. That motion was denied as moot in connection with the eventual confirmation of the debtor’s Plan, which lifted the stay as a matter of law on the plan’s effective date of December 1, 2016. This, Summit-Bridge argues, is relevant to the instant matter for the following reasons:
[T]he Debtor takes the position that the deliver of the deed to SummitBridge constitutes “payment-in-kind” of the full amount of the SummitBridge indebtedness (within the statutory 5 day time period), and that SummitBridge is therefore not entitled to recover any attorneys’ fees under applicable North Carolina law. Had the Court lifted the automatic stay back when Summit-Bridge originally requested such relief (in the spring of 2016), and at a time when the surrender of SummitBridge’s collateral was not contemplated, then the debtor would not have been able to (arguably) “pay” SummitBridge’s debt via the delivery of a deed. By denying such relief, at the time that Summit-Bridge requested the same, this Court has effectively prejudiced Summit-Bridge’s right to collect attorneys’ fees. There is no discernable reason why the automatic stay should not have been lifted to allow SummitBridge to issue the attorneys’ fee notice back in the spring of 2016. In fact, as stated above, this Court provided no such reasoning in its September 2, 2016 Order. By denying SummitBridge such relief, this Court has effectively created the timing “loophole” that the Debtor now seeks to take advantage of—tendering the deed in supposed full satisfaction of Summit-Bridge’s debt on the same date that SummitBridge issued the attorneys’ fees notice to the debtor....
SummitBridge Reply at 3^4. Summit-Bridge also contends that on these facts, *67the interaction between 11 U.S.C. §§ 506 and 502 is such that SummitBridge has an unsecured claim for attorneys’ fees which is allowable under § 502(a).
At the hearing, it became evident that there are three main issues before the court, each of which presents a purely legal question: 1) whether the debtor’s delivery of the deed satisfied North Carolina’s statutory five-day notice period such that compliance relieves the estate of the obligation to pay attorneys’ fees; 2) whether the Bankruptcy Code permits SummitBridge to pursue this unsecured claim for post-petition attorney fees; 3) and, if so, whether such fees would be allowed at the 15% rate or in a “reasonable” or actual amount. At the conclusion of the hearing, the court informed the parties that this matter probably would be decided on the second issue, which is whether the recovery of post-petition attorneys’ fees sought here as an unsecured claim is permitted under 11 U.S.C. §§ 506(b) and 502(a) and (b). For the reasons that follow, the court concludes that it is not.
DISCUSSION
Section 506(b) of the Bankruptcy Code provides to oversecured creditors like SummitBridge the right to seek reimbursement for “reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” Whether the attorneys’ fees are recoverable under § 506(b) is based on an interpretation of applicable state law. 11 U.S.C. § 506(b); see In re Ormond, 2015 WL 1000218 at *4-6 (Bankr. E.D.N.C. Mar. 3, 2015); In re Winslow, 2011 WL 5902619 at *2 (Bankr. E.D.N.C. Jun. 22, 2011), citing Independence Nat’l Bank v. Dye Master Realty, Inc. (In re Dye Master Realty, Inc.), 15 B.R. 932 (Bankr. W.D.N.C. 1981). Under North Carolina state law, reasonable attorneys’ fees incurred in connection with the collection of a debt may be recovered when the note provides for such' recovery. North Carolina General Statute § 6-21.2 provides in part:
Obligations to pay attorneys’ fees upon any note, conditional sale contract or other evidence of indebtedness, in addition to the legal rate of interest or finance charges specified therein, shall be valid and enforceable, and collectible as part of such debt, if such note, contract or other evidence of indebtedness is to be collected by or through an attorney at law after maturity, subject to the following provisions:
(1) If such note, conditional sale contract or other evidence of indebtedness provides for attorneys’ fees in some specific percentage of the “outstanding balance” as herein defined, such provision and obligation shall be valid and enforceable up to but not in excess of fifteen percent (15%) of said “outstanding balance” owing on said note, contract or other evidence of indebtedness.
(2) If such note, conditional sale contract or. other evidence of indebtedness provides for the payment of reasonable attorneys’ fees by the debtor, without specifying any specific percentage, such provision shall be construed to mean fifteen percent (15%) of the “outstanding balance” owing on said note, contract or other evidence of indebtedness.
N.C. Gen. Stat. § 6-21.2.
The debtor and SummitBridge have differing interpretations of precisely which bankruptcy statutes apply here, as well as how federal bankruptcy law intersects with the North Carolina statute. Leaving aside for the moment the question of the extent to which the debtor’s delivery of the deed could constitute payment within the meaning of N.C.G.S. § 6-21.2(5), the court turns first to the applicability of *68§§ 506 and 502. The debtor contends that SummitBridge already has “received what was permitted under Section 506(b) pursuant to the Plan, and the Bankruptcy Code does not provide for allowance of an unsecured claim for post-petition attorneys’ fees or costs.” Debtor’s Objection at 4. SummitBridge argues that the Bankruptcy Code says “nothing whatsoever” about the allowance or disallowance of attorneys’ fees on unsecured or undersecured claims, and that “the conclusion that unsecured (and undersecured”) creditors are entitled to allowed claims for postpetition attorneys’ fees is inescapable.” SummitBridge Reply at 13.
Citing precedent from within this district, the debtor argues that this court “previously has considered, and denied, a secured creditor’s request for post-petition attorney’s fees where there was no excess collateral value available under Section 506(b).” Debtor’s Objection at 4, citing In re Croatan Surf Club, LLC, 2012 WL 1906386 (Bankr. E.D.N.C. May 25, 2012) and In re Construction Supervision Servs., 2015 WL 4873062 (Bankr. E.D.N.C. Aug. 13, 2015), aff'd, 2016 WL 2764328 (E.D.N.C. 2016). In Construction Supervision Services, this court held that § 506 (b) is “the only means within the Bankruptcy Code in-which a secured creditor is entitled to postpetition attorney’s fees.” 2015 WL 4873062 at *4, The post-petition interest and/or attorneys’ fees cannot exceed the value of the collateral. “This section allows the holder of a secured claim to add post-petition interest and reasonable post-petition attorneys’ fees to the secured claim to the extent of the value of the collateral,” Id., quoting Croatan, 2012 WL 1906386 at *6.
For a creditor to “show entitlement to the requested post-petition amounts,” the creditor must demonstrate that “(1) it is oversecured; (2) the underlying agreement provides for such fees and costs; and (3) the requested fees and costs are reasonable.” In re Parker, 2015 WL 5095948 at *2 (Bankr. E.D.N.C. 2015), citing In re Gwyn, 150 B.R. 150, 154 (Bankr. M.D.N.C. 1993). More recently, in In re Davis, Judge Warren of this district noted that § 506(b) is “the only section of the Code that expressly authorizes a creditor to be reimbursed for post-petition attorneys’ fees as part of its secured claim.” In re Davis, 570 B.R. 522, 525 (Bankr. E.D.N.C. 2017) (citing Construction Supervision ). Moreover, § 506(b) “ ‘is an exception to the general rule contained within § 502 that claims are determined as of the date of the petition and ‘permits a party to bring a claim for fees, costs, or charges incurred postpetition, provided that the party bringing the claim is an oversecured creditor.’” Id., quoting Ins. Co. of N. Am. v. Sullivan, 333 B.R. 55, 61 (D. Md. 2005) (emphasis in original).
The debtor urges the court to focus on the “plain language of Sections 502(b), 506(a) and 506(b) which, taken together, lead to the conclusion that post-petition interest, fees, costs and charges become part of an allowed claim only as a result of being allowed in favor of an oversecured creditor under Section 506(b).” Debtor’s Objection at 5; See Anderson v. Hancock, 820 F.3d 670, 674 (4th Cir. 2016) (court must interpret the provisions of the Bankruptcy Code “as a whole, giving effect to each word and making every effort not to interpret a. provision in a manner that renders other provisions inconsistent, meaningless or superfluous”). Under the debtor’s analysis, the step-by-step process applicable here requires the court to determine the amount of any “claim” as of the date the petition was filed under § 502(b), then use the amount of that allowed claim in § 506(a) “to determine (i) the amount which is secured and (ii) the amount which *69is unsecured, where the value of the collateral is less than the amount of the allowed claim.” Debtor’s Objection at 5. Only if the value of the collateral exceeds the amount of that allowed claim does § 506(b) permit an oversecured creditor to recover its post-petition fees and expenses and to receive the “special treatment” provided under the statute for claims secured by liens on property of the estate. Id,
These fees aren’t “allowed” so much as they are “added” within the meaning of United States v. Ron Pair Enterprises, Inc., the debtor argues: “The natural reading of the phrase entitles the holder of an oversecured claim to post-petition interest and, in addition, gives one having a secured claim created pursuant to an agreement the right to reasonable fees, costs, and charges provided for in that agreement.... Therefore, in the absence of an agreement,' post-petition interest is the only added recovery available.” Id. at 6, quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (emphasis in Debtor’s Objection). In sum, the debtor concludes, post-petition fees are “added” by § 506(b) rather than “allowed” by § 502(b), and thus are not permitted in favor of undersecured or unsecured creditors. Id.
SummitBridge frames the question differently, arguing that § 506(b) does not apply, and that § 502 does. It reasons that
[t]he topic of Section 506 of the Bankruptcy Code is the allowance of secured claims. Section 502, on the other hand, deals with the allowance and disallowance of claims generally. Section 506 is wholly silent as to what happens if a claim is not allowed as a secured claim. Section 502(b) disallows claims for post-petition interest, but says nothing about postpetition attorneys’ fees. By negative implication, unsecured claims for attorneys’ fees are allowable under Section 502(a). “There is universal agreement that whereas section 506 furnishes a series of useful rules for determining whether and to what extent a claim is secured (and, therefore, entitled to priority), it does not answer the materially different question of whether the claim itself should be allowed or disallowed .... Rather, the general rules that govern the allowance or disallowance of claims are set out in section 502.” Gencarelli v. UPS Capital Bus. Credit, 501 F.3d 1, 5 (1st Cir. 2007).
SummitBridge Reply at 9-10 (italics by the court). SummitBridge thus asserts an unsecured claim for postpetition attorneys’ fees based on its contractual (ie. pre-petition) entitlement to such a claim, notwithstanding the fact that the debtor was not in default at the time the petition was filed, and no such fees had been incurred.
SummitBridge, like the debtor, also cites supporting precedent from within this district, including In re F & G Leonard, LLC, 2011 WL 5909463 (Bankr. E.D.N.C. 2011). In that case, oversecured creditor Textron filed a claim for actual, reasonable, and necessary attorneys’ fees and expenses under 11 U.S.C. § 506(b) and N.C.G.S. § 6-21.2, and the debtor objected to the amount of fees sought. In F & G, Judge Leonard wrote that § 506(b) “is not a dis-allowance statute,” and “merely allows an oversecured creditor to include reasonable attorneys’ fees as part of its secured claim.” 2011 WL 5909463 at *2. If the fees sought are “allowable under state law, but found to be unreasonable under § 506(b), the fees may be recovered as an unsecured claim.” Id., citing Welzel v. Advocate Realty Investments, LLC, 275 F.3d 1308, 1318-19 (11th Cir. 2001).
And, in In re Holden, the court overruled a debtor’s objection to the attorneys’ fees sought by wholly unsecured creditor *70SSB on grounds that the purpose of § 502 is to allow or disallow claims, and no provision of § 502 expressly disallowed unsecured claims for attorneys’ fees. In re Holden, 491 B.R. 728, 739 (Bankr. E.D.N.C. 2013). The' Holden court noted, however, that cases like Croaban and F & G Leonard were “not analogous to the present facts as they involve secured claims, which automatically necessitate an analysis pursuant to § 506(b), whereas SSB’s claims are wholly unsecured and do not trigger the implications of § 506(b).” In re Holden, 491 B.R. 728, 738 (Bankr. E.D.N.C. 2013) (emphasis by the court).
SummitBridge asks the court to adopt the expansive interpretation set out in Holden and to take it another big step further, arguing that the distinction cited above
is a distinction without a difference. Yes, partially secured claims do require an analysis under Section 506(a) and (b). But once the value of the collateral is devoured (by principal, interest and fees), the balance of the claim is a generic Section 502(a) general unsecured claim. Section 502(a) governs the allowance of wholly unsecured claims as well as the unsecured component of partially secured claims. The fact that Sections 506(a) and (b) are employed to assess what portion of a claim is secured has no bearing on the remaining unsecured portion. Under the statutory scheme envisioned by Judge Doub, wholly unsecured creditors would be permitted to reap the full benefit of their contractual bargains through the medium of Section 502, while undersecured creditors would be uniquely singled out for unfavorable treatment by the operation of Section 506(b). There is no conceivable explanation as to why Congress might have wanted undersecured creditors to be treated in so draconian a fashion. Creating that sort of uneven playing field would be antithetic to the general policy of the Bankruptcy Code, which tends to favor secured creditors in the first place. Accord Gencarelli v. UPS Capital Business Credit, 501 F.3d 1, 5 (1st Cir. 2007).
SummitBridge Reply at 12.
• It is true that a number of courts adopt some version of the position advanced by SummitBridge, and hold generally that post-petition attorneys’s fees are allowable as an unsecured claim, irrespective of whether the creditor is oversecured. See In re 804 Congress, L.L.C., 756 F.3d 368 (5th Cir. 2014), on remand, 529 B.R. 213 (Bankr. W.D. Tex. 2015); In re SNTL Corp., 571 F.3d 826, 842 (9th Cir. 2009); In re Welzel, 275 F.3d 1308 (11th Cir. 2001) (adopting a bifurcation framework for 506(b) whereby, after a reasonableness analysis, fees deemed reasonable constitute a secured claim and the balance is treated as an unsecured claipi). Other jurisdictions adhere to the view held by this court, that § 506(b) provides “the only means within the Bankruptcy Code in which a secured creditor is entitled to post-petition attorneys’ fees.” Construction Supervision Servs., 2015 WL 4873062 at *4, citing United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assoc’s, Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). “If attorneys’ fees were allowable on the unsecured portion of a debt, there would be no need for [§ 506(b) ]. If Congress had intended for the holders of both secured claims and unsecured claims to recover attorneys’ fees, it could have easily said so. But it did not.” In re Saunders, 130 B.R. 208, 210 (Bankr. W.D. Va. 1991), quoted in In re Miller, 344 B.R. 769 (Bankr. W.D. Va. 2006) (adopting same position that undersecured or unsecured creditors cannot be allowed an unsecured claim for post-petition contractual attorneys’ fees); see also, e.g., In re Electric Machinery Enterprises, Inc., 371 B.R. 549, *71550-51 (Bankr. M.D. Fla. 2007) (summarizing competing views, citing cases, and setting out primary reasons why most courts conclude that “post-petition attorneys’ fees should not be allowed as part of an unsecured claim”).
The court acknowledges that there are conflicting views expressed by decisions within this district, and divergent views expressed by courts elsewhere. And, while the position taken herein is consistent with what appears to still be the majority consensus among courts to address the question, this court acknowledges further that SummitBridge’s interpretation is a viable one, given the recent circuit court opinions cited above. A thoughtful and thorough discussion of the current split is set out in In re Auge, wherein the court canvassed the main points advanced by both sides before concluding, like this court, that § 506(b) “allows only oversecured creditors to add ‘reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.’ ” In re Auge, 559 B.R. 223, 229 (Bankr. D.N. M. 2016) (internal quotation omitted). The Fourth Circuit has not specifically addressed the question.
Ultimately, this court is not persuaded that it should deviate from its prior holdings on this issue, and concludes that Sum-mitBridge’s position fails to fully credit the plain language of § 506(b), which unquestionably applies to it. There is no viable reading of § 506(b) that could render that statute “inapplicable” here, nor is there a plausible basis upon which to consider it redundant, which is what SummitBridge’s interpretation would do. SummitBridge hopes to take an alternative path1 by pursuing an unsecured claim for post-petition attorneys’ fees on the premise that these fees are independent of and separate from its secured claim, but that effort would run afoul of both the plain language of the statute and the policy behind it.
A key component of that policy is judicial review of the fees sought. Section 506(b) establishes a nondiscretionary process by which such fees, if otherwise appropriate, shall be allowed. In connection with that, § 506(b) incorporates the bankruptcy courts’ oversight in determining the reasonableness of those fees.2 In so doing, the statute goes beyond facilitating overse-cured creditors’ recovery of the post-petition fees to which they’re entitled; it also protects the interests of the bankruptcy estate and unsecured creditors by precluding the recovery of fees that are outside the bounds of reasonableness and/or a percentage cap as stipulated by statute. Oversight of these competing interests is within the province of the bankruptcy courts, and application of § 506 in this manner balances of the rights of oversecured creditors to collect fees with the estate’s need *72to protect assets for distribution to other creditors.
CONCLUSION
For the reasons set forth above, the debtor’s objection to SummitBridge’s unsecured- claim for post-petition attorneys’ fees is ALLOWED. Having disposed of the issue on the basis of § 506, it is not necessary for the court to evaluate whether return of the collateral satisfies the state statutory notice requirements. Sum-mitBridge may recover its post-petition attorneys’ fees as provided for in the Plan and to the extent of the value of the collateral.
SO ORDERED.
. In essence, SummitBridge claims a ‘‘springing right” to attorneys' fees since there was no default (and thus no right to attorneys’ fees) as of the petition date.
. A bankruptcy court “retains broad discretion in determining the amount of fees and expenses to be allowed under § 506(b).” Parker, 2015 WL 5095948 at *2; see also In re 804 Congress, 756 F.3d at 376 (noting that bankruptcy court “has the power to arrive at a reasonable attorneys’ fee even if the contractual attorneys’ fee provision is valid under state law” (internal quotation omitted)). As this court explained in Parker, "[t]he reasonableness limitation found in § 506(b) serves to prevent the squandering of estate assets by oversecured creditors that ‘fail to exercise restraint in the attorneys’ fees and expenses they incur, perhaps exhibiting excessive caution, overzealous advocacy and hyperactive legal efforts,” and a "key determinant” in a court’s assessment is whether the creditor undertook actions that a similarly situated creditor might reasonably believe to be necessary. Id. at *4, quoting Gwyn, 150 B.R. at 155. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500921/ | ORDER ALLOWING PLAINTIFF’S MOTION FOR LEAVE TO AMEND COMPLAINT
Joseph N. Callaway, United States Bankruptcy Judge
The matter before the court is the Motion for Leave to File Second Amended Complaint filed by plaintiffs Federal Insurance Company, Great Northern Insurance Company, and Pacific Indemnity Company (collectively, “Federal”) on May 24, 2017 (Dkt. 33; the “Motion”). Defendant Dennis P. Sorge (“Mr. Sorge”) filed a Memorandum in Opposition on May 31, 2017 (Dkt. 34; the “Objection”). A hearing took place on July 13, 2017 in Greenville, North Carolina, at the conclusion of which the matter was taken under advisement. The Motion is approved with conditions as set forth below.
BACKGROUND
This adversary proceeding seeks entry of an order declaring that all debts owed by Mr. Sorge to Federal be excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(2) and (4). The facts and much of the background pertinent to the case were discussed in detail in the Order Regarding Defendant’s Motion to Dismiss Adversary Proceeding entered February 6,2017 (Dkt. 23; the “Dismissal Order”) in the case, which is adopted herein and will only be repeated where necessary. The Dismissal Order denied Mr. Sorge’s Motion to Dismiss the adversary proceeding under Federal Rule of Civil Procedure 12(b)(6)1 for failure to state a cause of action to except the claims from discharge based on 11 U.S.C. § 523(a)(2), and allowed the Motion to Dismiss with respect to claims for exception from discharge asserted under 11 U.S.C. § 523(a)(4) for breach of fiduciary duty. As a result, all of Count II from the Amended Complaint and a portion of Count I were dismissed. The purpose of the Motion is to add a discharge exception claim under Section 523(a)(4) for embezzlement, and to revive the previously dismissed Section 523(a)(4) claim based on breach of fiduciary duty. Mr. Sorge maintains that the proposed Second Amended Complaint still does not allege sufficient facts to state a valid cause of action under 11 U.S.C. § 523(a)(4) (whether for breach of fiduciary duty or embezzlement), and that as a consequence the Motion should be denied as inherently futile,
DISCUSSION
A. The Standard for Amendment Pursuant to Rule 15(a)(2).
Aside from certain specific exceptions not applicable here, pursuant to Federal Rule of Civil Procedure 15(a)(2),2 a *74party may amend its pleading with written consent of the opposing party or by leave of court. Leave to amend should be freely given when justice so requires, but may be denied if undue prejudice would result or if the - amendment is futile. Kozohorsky v. Harmon, 332 F.3d 1141, 1144 (8th Cir. 2003). At the hearing, the court announced from the bench that given the timing of the Motion, the availability of adequate time for Mr. Sorge to conduct discovery, the lack of surprise, and the consistency with positions taken in years of litigation between the parties, allowing the Motion would not unduly prejudice or adversely affect Mr. Sorge’s ability to defend the proposed additional claim.
The remaining question, therefore, is whether the amendment raises new claims that are inherently futile for failure to state a valid claim such that they would be subject to dismissal pursuant to Rule 12(b) if the amendment were allowed. Mr. Sorge contends that the Section 523(a)(4) claims as stated in the proposed Second Amended Complaint do not satisfy the pleading sufficiency requirements required under Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). If so, the Second Amended Complaint would not survive a subsequent motion to dismiss and allowing the amendment would be a waste of time and resources. See Travelers Indem. Co. v. Dammann & Co., Inc., 592 F.Supp.2d 752, 763 (D.N.J. 2008).
The Twombly and Iqbal cases hold that a complaint must include “enough facts to state a claim to relief that is plausible on its face”- rather than only containing “labels and conclusions or a formulaic recitation of the elements of a cause of action.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. at 1965). If sufficient factual allegations are contained in the pleading, the court may next consider “whether they plausibly give rise to an entitlement to relief.” Id. The court is entitled “to draw on its judicial experience and common sense” to determine if “a plausible claim” is stated. Id. at 679, 129 S.Ct. at 1950. As a result, the court will examine whether the embezzlement claim as revised, unlike the earlier Section 523(a)(4) breach of fiduciary duty claim, survives Rule 12(b)(6) scrutiny under the allegations of the proposed amended complaint.
B. The Elements for a Discharge Exception Claim Based on Embezzlement
Mr. Sorge maintains that a claim for “embezzlement” under Section 523(a)(4) requires a showing of the following three elements: (1) appropriation of funds for the debtor’s own benefit by fraudulent intent or deceit, (2) the deposit of the resulting funds in an account accessible only to the debtor, and (3) the disbursal or use of those funds without explanation of reason or purpose. In re Bryant, 147 B.R. 507 (Bankr. W.D. Mo. 1992); see also In re Whyte, 487 B.R. 578, 587 (Bankr. N.D. Ga. 2013) and In re Chambers, 226 B.R. 915, 920 (Bankr. N.D. Okla. 1998). Mr. Sorge also takes the position that Federal’s proposed Second Amended Complaint does not sufficiently plead either of the first two cited elements—that Mr. Sorge received any benefit from (or profited by) the alleged appropriation of funds by fraud or deceit, or that he deposited the money into “an account accessible only to the debtor.”
Federal contends that the test from the Bryant case relied upon by Mr. Sorge (and followed in Whyte and Chambers) misconstrues and misstates the elements of embezzlement applicable in Bankruptcy Code Section 523(a)(4) cases, and that neither direct “receipt of a benefit” nor deposit *75into a debtor’s controlled account must be shown to satisfy an exception to discharge claim based on embezzlement.
In determining the correct test, the court need look no further than its opinion previously rendered in this same case, which listed the elements necessary to prove embezzlement under Section 523(a)(4), to wit: “(i) the creditor entrusted money or property to the debtor; (ii) the debtor appropriated the money or property for a use other than that for which it was entrusted; and (in) the circumstances indicate a fraudulent intent.” In re Sorge, 566 B.R. 369, 381 (Bankr. E.D.N.C. 2017) (citing Peavey Electronics Corp. v. Sinchak, 109 B.R. 273, 276 (Bankr. N.D. Ohio 1990)); see also In re York, 205 B.R. 759, 764 (Bankr. E.D.N.C. 1997) (embezzlement is “the fraudulent, or knowing and willful, misapplication or conversion of property which belongs to another, by a person to whom such property has been entrusted or onto whose hands it has lawfully come”).
The test applied in Bryant appears to be based on a misreading of an older bankruptcy court case in Missouri, In re Beasley, 62 B.R. 653 (Bankr. W.D. Mo. 1986). The definition of embezzlement for Section 523(a)(2) purposes from Beasley is strikingly similar to that promulgated in this district in the York case, stating the term embezzlement is a “fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.” Id. at 655. The Beasley court then found that the facts in the case showed that the debtor (1) sold the creditor’s secured grain stored in his possession; (2) deposited the sale proceeds into his bank account; and (3) subsequently used the funds for his own benefit. Id. Based upon those facts, the Beasley court ruled pursuant to Section 523(a)(4) that the debt owed by the debtor to the grain owner arose from embezzlement and was thus excepted from discharge.
It therefore appears that the Bryant court misconstrued factual findings from the older Beasley case as establishing the elements of embezzlement under Section 523(a)(4), rather than noting the factual findings in the case, thereby unintentionally adding an additional element not necessary in every embezzlement dischargeability case. Because the Bryant test is not accurate, the court’s prior recitation of the elements for embezzlement contained in the Dismissal Order is correct and will be followed here.
1. Entrustment or Profit
Regardless of which standard applies, in considering Mr. Sorge’s first point, he ignores several critical pleadings contained in the proposed Second Amended Complaint. First, Federal relies upon and sets forth specific findings against Mr. Sorge made by a federal jury after a multiple-week trial in a lawsuit filed by Federal against Mr. Sorge (and other defendants) in the United States District Court for the Southern District of New York, Federal Insurance Co., et al. v. Paul H. Mertz, Jr., et al., 12-cv-1597-NSR (the “New York Action”). The complaint in the New York Action and the verdict sheet rendered by the jury are attached as Exhibits A and B to the original Complaint (Dkt. 1) and the Amended Complaint (Dkt. 3),3 are referenced in the proposed Second Amended Complaint (Dkt. 33, Ex. A), and are cited in paragraph 3 of each complaint. The proposed Second Amended Complaint alleges that the New York Ac*76tion jury returned a verdict finding Mr. Sorge liable with his co-defendant Mertz (along with affiliated corporations) for diversion of over $4.3 million from Federal on unnecessary and improper casualty insurance repair payments on six identified projects.4 (Dkt. 33 at 12, ¶ 27.) It further alleges that the jury charges from the New York Action included findings that Sorge (1) “adjusted insurance claims ... in a dishonest manner,” (2) “made material false and fraudulent statements to and concealed material facts from [Federal] and (3) “authorized, recommended or facilitated claim payments on the basis of fraudulent estimates knowing that the estimates were fraudulent....” Id. at ¶ 26. The jury verdict attachment bears out those allegations, at least for pleading purposes. Additional facts are alleged concerning unexplained and apparently excessive deposits into Mr. Sorge’s bank and retirement accounts during the time of the diversions.5 Id. at ¶¶ 30-32.
The allegations in the cited paragraphs of the proposed Second- Amended Complaint, along with the facts taken from and buttressed by the jury verdict, are assumed to be true for purposes of review under Rule 12(b)(6). Those allegations, as amended from the first version of the complaint, demonstrate in sufficient detail how, after being entrusted by Federal with the proper distribution of millions of dollars over the course of his employment, Mr. Sorge enabled millions of dollars to be taken from Federal as part of a fraudulent conspiracy and scheme with Mertz, and that Mr. Sorge received significant money back from or through Mertz as a direct result. The proposed Second Amended Complaint further alleges that Mr. Sorge received money and was able to deposit a far greater percentage of his income than would otherwise be “plausibly” available into retirement accounts. Mr. Sorge contends that the excess contributions were the result of frugal living, but that would be a defense to be shown at trial rather than a plausible conclusion apparent from common sense.
It is difficult to fathom under the alleged scheme how Federal could have more clearly and succinctly pled that Mr. Sorge received a “benefit from the appropriation of funds by fraud or deceit,” thereby satisfying the pleading requirement as to the first element. The first element of an embezzlement cause of action, whether taken from the correct Peavey Electronics elements list (“entrustment”), or under the improperly expansive list from Bryant (“debtor benefit”), is met. Mr. Sorge’s objection to the Motion will not be sustained on this basis.
2. Appropriation or Deposit
Mr. Sorge next contends that Bryant requires a direct deposit to a debtor’s account. Federal’s pleadings do not attempt to establish that the entrusted funds were deposited directly into a bank account controlled solely by Mr. Sorge because that did not happen in this case. Rather, as determined in the New York Action, the funds at issue travelled first from Federal to Mertz (or an account controlled by Mertz), but only upon a false insurance repair claim approved by Mr. Sorge with *77knowledge of the falsity of the claim. The proposed Second Amended Complaint does allege that a significant sum from the wrongfully diverted proceeds then continued its journey to Mr. Sorge in the form of bribes paid or kickbacks provided by Mertz. The two transfers were part and parcel of the same scheme or conspiracy, it is alleged. When the allegedly misappropriated funds rebounded to Mr. Sorge, he later made a deposit into his personal bank or retirement accounts.
In his objection, Mr. Sorge would have the court find that an “embezzlement” under Section 523(a)(4) could not have occurred since all of the money apparently went to Mertz first before part of the funds wound up in his bank and retirement accounts. Effectively, strict adherence to the Bryant test as urged by Mr. Sorge would enable a wrongdoer to escape liability by first “laundering” the money through a third party. If a direct deposit into an account of the embezzler is an element, the intentional step of using a third party intermediary likely would not obviate proof of this requirement under principles of estoppel and in pari delicto. However, because the direct deposit component is not a component of proving embezzlement dis-chargeability, the court need not consider the detour of the funds through Mertz here. Instead, the court will determine whether the pleadings state the second element of Peavey Electronics, “appropriation ... [of] money or property for a use other than that for which it was entrusted” adequate to support the first and second causes of action in the Second Amended Complaint.
“Appropriation” is “the exercise of control over property, especially] without permission.” Black’s Law Dictionary 123 (10th ed. 2014). In addition to the bribery and kickback allegations discussed in the preceding section, Federal has also pled that Mr. Sorge was employed by it from March 2005 to August 2011 as a property claims investigator and adjuster on high-end homes damaged by fire, wind, flood or other casualty, (Dkt. 33 at 8, ¶ 16.) Federal contends that while so employed, Mr. Sorge made recommendations to his superiors resulting in the payments of millions of dollars on insurance claims assigned to him. Federal maintains that it entrusted these financial decisions on these claims to Mr. Sorge as a trusted employee (alleged to be a “fiduciary”) with a corresponding duty of loyalty. Id. at ¶¶ 15-16. Federal further contends that “[b]etween 2005 and 2011, [Mr.] Sorge routinely authorized and/or recommended claim payments on the basis of fraudulent repair estimates prepared by Paul H. Mertz and The Mertz Company ... who were then consultants assisting Federal in the adjustment of those claims,” Id. at ¶ 18, all the while concealing from Federal “that Mertz and The Mertz Company were acting both as Federal’s building consultant and the insured’s repair contractor.” Id. at ¶ 22.
Based upon these and other detailed allegations buttressed by Exhibits A and B, the proposed Second Amended Complaint states with sufficiency facts that, if proven, would show an entrustment of authority to direct appropriation of money to pay claims, and that subsequently at least a material portion of those funds were received by Mr. Sorge in the form of bribes or kickbacks on false or inflated claims, and retained for personal use or to enrich himself.6 The second and third parts of the embezzlement dischargeability test from Peavey Electronics has been met for *78pleading purposes and the second point of the Sorge objection is denied.
CONCLUSION
Based on the foregoing:
1. The Motion for Leave to Amend is ALLOWED and the Objection is DENIED; however, allowance of the Motion does not affect the Dismissal Order, which remains in full force and effect with respect to the dismissed exception to discharge claim based on breach of fiduciary duty under 11 U.S.C. § 523(a)(4). As a result, the claim for an exception to discharge under 11 U.S.C. § 523(a)(4) in Count I and Count II of the Second Amended Complaint may only be asserted on the basis of embezzlement alleged under Section 523(a)(4).
2. Within seven (7) days of the date of this Order, the plaintiff Federal shall electronically file its Second Amended Complaint (aiong with any exhibits) on the docket of this case.
3. Mr. Sorge shall have twenty-one (21) days from the docketing of the Second Amended Complaint to file its amended answer or other responsive pleading, which time -may be extended up to another twenty-one (21) days by stipulation of the parties without necessity of prior approval by the court.
4. Within fourteen (14) days of the filing of the amended answer or other responsive pleading, the parties shall file a joint scheduling report and advise the court whether or not additional time is needed to conduct discovery in the case and the effect on existing case deadlines. The court will then determine if an updated scheduling order is warranted.
SO ORDERED.
. Rule 12(b)(6) of the Federal Rules of Bankruptcy Procedure is made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b).
. Federal Rule of Civil Procedure 15 is made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7015.
. The First Amended Complaint was filed as a matter of right one day after the original Complaint to correct a scrivener’s error.
. The jury verdict was rendered on July 8, 2016, and post-trial motions remain pending in the New York Action. A ruling by the district court in the New York Action on pending post-trial motions may clarify, elaborate upon or even deviate from Federal’s interpretation of the jury’s findings, which could affect the result in this adversary proceeding.
. See also the summary of allegations from pages 9 and 10 of the Amended Complaint, which are repeated in the proposed Second Amended Complaint,
. This order addresses only the sufficiency of pleadings, and expresses no opinion whether or not the Plaintiff can establish the facts as alleged at trial; if proven, whether those facts lead to an exception to discharge; and if so, the proper amount of damages excepted from discharge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500923/ | MEMORANDUM OPINION REGARDING SUBSTANTIVE CONSOLIDATION
Stacey G.C. Jernigan, United States Bankruptcy Judge
On September 26-27, 2017, this court held a hearing to consider confirmation of the above-referenced Chapter 11 Debtors’ Third Amended Joint Plan of Reorganization, as modified by certain Plan Supplements and modifications in the record (the “Plan”). After hearing numerous witnesses and considering hundreds of documents submitted into evidence, the court decided to confirm the Plan. Separate Findings of Fact, Conclusions of Law, and an Order Confirming Plan are being issued separately by the court. This Memorandum Opinion pertains solely to the substantive consolidation proposed in the Plan, to which an objection was lodged and overruled. This Memorandum Opinion is issued pursuant to Fed. Rs. Bankr. Proc. 7052 and 9014 in support of the court’s ruling that the substantive consolidation proposed in the Debtors’ Plan was legally proper.
I. Introduction.
The above-referenced Debtors (the “Debtors” or “Adeptus”—as the Debtors are collectively known), together with cer*89tain non-debtor affiliates, constitute the oldest and largest network of freestanding emergency rooms (“FSERs”) in the United States. The Debtors are headquartered in Lewisville, Texas. Since the Debtors’ founding in the year 2002, the Debtors have described themselves as being a patient-centered healthcare organization dedicated to providing quality emergency care through its FSERs, which are open to the public 24 hours a day, seven days a week. As of April 19, 2017 (the “Petition Date”), the Debtors’ business operations consisted of five fully-operational hospitals and 99 FSERs, that are either wholly-owned by the Debtors or by the Debtors’ joint ventures with leading healthcare systems in Arizona, Colorado, and Texas. There are 140 Debtors in this jointly-administered case. In the year 2017 to date, approximately 400,000 patients have visited facilities within the Adeptus network. Approximately 3,800 physicians, nurses, radiology technicians, laboratory professionals, and other administrative staff are either employed by or are independent contractors with the Adeptus organization. At the top of the Adeptus organizational structure is a public company called Adeptus Health Inc. (“PubCo”), which was incorporated in the year 2014 and conducted an initial public offering and subsequent offerings. Next in the organizational structure is Adeptus Health LLC (the holding company for the organization before PubCo was created to take the enterprise public). Next in the organizational structure is First Choice ER, LLC—the original company created when the first FSER was opened. Then, lower in the organizational structure are the various companies that own, manage, or perform other functions with regard to the various health care locations.
As far as the Debtors’ capital structure, the Debtors’ creditors in these cases consisted of the holders of secured debt (the “Deerfield Parties”) on a Prepetition' Credit Agreement (herein so called), on which more than $228 million was due and owing as of the Petition Date, and with regard to which 80 of the 140 Debtors were obligated. Postpetition, the Deerfield Parties extended secured debtor-in-possession financing of more than $70 million, and all 140 Debtors were obligated on it. The Debtors also have collectively perhaps $20-$50 million in unsecured trade debt— although the exact number is not yet known and could be higher. The Debtors also have medical malpractice claims (which there should be insurance to fully cover) and subordinated debt—most of which is held by insiders, but some of which is asserted by former shareholders of PubCo in certain contested securities litigation that is not very far along (the “Section 510(b) Claims”). The Debtors also have preferred shareholders (many of whom are defendants in litigation). And finally, the Debtor PubCo has a large number of public shareholders.
The Debtors’ Plan proposes that the Deerfield Parties will exchange their secured debt- for all of the equity of the reorganized Debtors. The Debtors’ business enterprise was valued by the financial advisory firm Houlihan Lokey at between $115 million and $137 million (no party contested this valuation). The Deerfield Parties’ unsecured deficiency claim was valued at $191.8 million (uncontested) and this unsecured deficiency claim and all other claims of the 140 Debtors will be pooled and shared in a Litigation Trust (herein so called), that will receive initial funding of $3 million cash and will likely receive another $3 million dollars of debt financing. The Litigation Trust will receive all of the Debtors-estates’ causes of action (of which there are many)—especially against former insiders—as well as certain “contin*90gent value rights” (i.e., cash flow in the future if the reorganized Debtors perform at certain levels in the future).
As noted, the Plan contemplates substantive consolidation of all 140 Debtors for P1an treatment and voting purposes. The following classes exist under the Plan:
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A large but disputed unsecured creditor (“PST”), with an alleged claim of about $5 million, has objected to the substantive consolidation. PST formerly collected the Debtors’ medical accounts receivable (for about a two-year period). The Debtors have argued that PST did a poor job and the Debtors have terminated PST’s contract. The- Debtors have indicated that they have their own claims against PST and they intend to bring litigation against PST.
II. The Substantive Consolidation Provisions of the Plan.
Both Article 3.2 and 5.1 of the Plan contain a “Substantive Consolidation” provision. Specifically, these provisions provide that:
Except as otherwise provided in this Plan, each Debtor shall continue to maintain its separate corporate existence after the Effective Date for all purposes other than the treatment of Claims under this Plan. Except as expressly provided in this Plan (or as otherwise ordered by the Bankruptcy Court), on the Effective Date: (a) all assets (and all proceeds thereof) and liabilities of the Debtors shall be deemed merged or treated as though they were merged into and with the assets and liabilities of each other, (b) no distributions shall be made under this Plan on account of Intercompany Claims among the Debtors and all such Claims shall be eliminated and extinguished, (c) all guaranties of the Debtors of the obligations of any other Debtor shall be deemed eliminated and extinguished so that any Claim against any Debtor, and any guarantee thereof executed by any Debtor and any joint or several liability of any of the Debtors shall be deemed to be one obligation of the consolidated Debtors, (d) each and every Claim filed or to be filed in any of the Chapter 11 Cases shall be treated filed against the consolidated Debtors and shall be treated one *91Claim against and obligation of the consolidated Debtors, and (e) for purposes of determining the availability of the right of set off under section 553 of the Bankruptcy Code, the Debtors shall be treated as one entity so that, subject to the other provisions of section 553 of the Bankruptcy Code, debts due to any of the Debtors may be set off against- the debts of any of the other Debtors. Such substantive consolidation shall not (other than for purposes relating to this Plan) affect the legal and corporate structures of the Reorganized Debtors. Moreover, such substantive consolidation shall not affect any subordination provisions set forth in any agreement relating to any Claim or Interest or the ability of the Reorganized Debtors or the Litigation Trust Trustee, as applicable, to seek to have any Claim or Interest subordinated in accordance with any contractual rights or equitable principles. Notwithstanding anything in this section to the contrary, all post-Effective Date fees payable to the United States Trustee pursuant to 28 U.S.C. § 1930, if any, shall be calculated on a separate legal entity basis for each Reorganized Debt- or.
The Debtors and others in the case have described this substantive consolidation as “deemed” substantive consolidation or substantive consolidation “light.” Why? Because it is substantive consolidation that is being implemented for plan-purposes only (i.e., voting and treatment purposes). Post-reorganization, the reorganized Debtors may or may not keep their existing structure of 140 separate legal entities.
III. The Law of Substantive Consolidation.
As a general matter, substantive consolidation in a bankruptcy case results in the combination of two or more debtors into a single pool from which the claims of creditors are paid ratably.2 A bankruptcy court’s ability to order substantive consolidation has its roots in the Supreme Court decision of Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 85 L.Ed. 1293 (1941), where the Supreme Court recognized that the consolidation of different but related estates was a vital tool in fulfilling a fundamental purpose of bankruptcy proceedings. Various courts of appeal eventually expounded upon this remedy of substantive consolidation over the next few decades.3
*92A. From What Statute Does a Bankruptcy Court’s Authority to Order Substantive Consolidation Derive?
While there is no specific Bankruptcy Code provision that uses the term “substantive consolidation,” there are two statutes upon which courts have primarily relied (since enactment of the current Bankruptcy Code) when ordering substantive consolidation: section 1123(a)(5)(C) and section 105 of the Bankruptcy Code.
First, section 1123(a)(5)(C) permits a consolidation or merger in a plan context.4 Specifically, section 1123(a)(5)(C) of the Bankruptcy Code provides that a chapter 11 plan shall provide adequate means for the plan’s implementation, such as “merger or consolidation of the debtor with one or more persons.” Section 101(41) of the Bankruptcy Code states that “person” includes “individual, partnership, and corporation.” When courts have exercised their authority to order, substantive consolidation pursuant to section 1123(a)(5)(C) of the Bankruptcy Code, most have tended to look to some of the many equitable or balancing factors described in more detail below (many of which were applied outside of the context of a chapter 11 plan) to determine whether or not substantive consolidation is appropriate.5 However, argu*93ably, to the extent the court is determining whether substantive consolidation in a plan is appropriate, pursuant to section 1123(a)(5)(C), the only “real requirement” for exercising such authority should be that section 1129 of the Bankruptcy Code is complied with in that: (1) classes of impaired creditors have accepted the plan’s proposed consolidation, or (2) the “best interest test” and “absolute priority rule” protection granted to dissenting creditors has been met by the plan proponent.6
Outside of a plan context, the authority of the court to order substantive consolidation has been said to derive entirely from the equitable powers of the bankruptcy court under section 105 of the Bankruptcy Code.7
B. Standards that Courts Typically Apply When Determining If Substantive Consolidation is Appropriate?
There seems to be no universally accepted legal standard for when substantive consolidation is appropriate (or not). It has been said to be a highly fact-specific analysis made on a case-by-case basis. Because it is a judicial creation, the contours of substantive consolidation are *94indefinite; it “usually results in, inter alia, pooling the assets of, and claims against, [multiple] entities; satisfying liabilities from the resultant common fund; eliminating inter-company claims; and combining the creditors of the [multiple] companies for purposes of voting on reorganization plans.”8 It has been noted that the increase in mega-bankruptcy cases in recent decades, involving numerous interrelated corporate structures and, in particular, subsidiary corporations operating under a parent entity, seems to have created a more “liberal” view that allows for consolidation more easily.9 The Fifth Circuit has not adopted its own criteria for determining when substantive consolidation is appropriate.10 However, the Fifth Circuit has acknowledged that bankruptcy courts do have authority to order substantive consolidation, while noting in dicta that substantive consolidation is “an extreme and unusual remedy” and should be used “sparingly.”11
That being said, there appear to be two standards that have developed over the years in case law—(1) a more traditional, multi-factor test (which ultimately gets distilled down to two critical factors); and (2) a balancing of harm test.
i. The Traditional Multi-Factor Test (Which Gets Distilled Down to Two Critical Factors).
Under the traditional multi-factor test, courts look to a long list of factors in determining whether substantive consolidation is appropriate.12 These factors include:
• the presence or absence of consolidated financial statements;
• the unity of interests and ownership between the various corporate entities;
*95• the existence of parent and intercorpo-rate guaranties on loans;
• the degree of difficulty in segregating and ascertaining individual assets and liabilities;
• the transfer of assets without formal observance of corporate formalities;
• the commingling of assets and business functions;
• the profitability of consolidation at a single physical location;
• the parent corporation owns all or a majority of the capital stock of the subsidiary;
• the parent and subsidiary have common officers and directors;
• the parent finances the subsidiary;
• the parent is responsible for incorporation of the subsidiary;
• the subsidiary has grossly inadequate capital;
• the parent pays salaries, expenses, or losses of the subsidiary;
• the subsidiary has substantially no business except with the parent;
• the subsidiary has essentially no assets except for those conveyed by the parent;
• the parent refers to the subsidiary as a department or division of the parent;
• the directors or officers of the subsidiary do not act in interests of the subsidiary, but take directions from the parent;
• the formal legal requirements of the subsidiary as a separate and independent corporation are not observed; and
• the transfer of assets without formal observance of corporate formalities.13
No single element or group of elements is determinative in the court’s inquiry, and the weight accorded to any given factor is unclear.14 Often it appears some courts pick and choose elements out of this laundry list of factors, focusing on which factors they believe to be most important.15
The case cited most often for this multi-factor standard for applying substantive consolidation is In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515 (2d Cir. 1988). The Second Circuit in the Augie/Restivo case ultimately distilled the many factors into two critical factors: (1) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit ...; or (2) whether the affairs of the debtors are so entangled that consolidation would benefit all creditors.”16 *96The presence of either factor is sufficient to order substantive consolidation.17
By way of background, Augie/Restivo dealt with a bankruptcy court’s decision to consolidate two bakery companies. Augie’s Baking Co. (“Augie’s”) and Restivo Brothers Bakers, Inc. (“Restivo”) were originally two separate bakeries. Restivo was a debtor to Manufacturers Hanover Trust Company (“MHTC”) and Augie’s was a debtor to Union Savings Bank (“Union”). About a year before bankruptcy, Restivo and Augie’s entered into a deal in which Restivo purchased Augie’s for half of Res-tivo’s stock. At the time of its purchase, Augie’s had $2.4 million in secured debts that it owed to Union. After the sale, Au-gie’s operations were combined with Resti-vo’s operations, but no move was made to dissolve Augie’s. Restivo then adopted the name Augie/Restivo Baking Co. (“Au-gie/Restivo”) and took over all of the bookkeeping for both companies. Prior to Au-gie/Restivo’s bankruptcy, MHTC extended another $2.7 million to Augie/Restivo, some of it secured by a subordinated mortgage on land owned by Augie’s. Once in bankruptcy, both Augie/Restivo and Au-gie’s were substantively consolidated by the bankruptcy court in contemplation of a future sale of the debtors’ assets to yet another bakery and a plan of reorganization. Although Union was opposed to the consolidation, the court found that the consolidation and sale were “in the interests of the creditors of both companies.” However, the sale never occurred düe to problems in obtaining financing. Union thereafter appealed the decision to substantively consolidate the estates. At the time, Au-gie’s debt to Union was undersecured by $300,000. As a result of substantive consolidation, the sale of Augie’s assets was poised to result in payouts to Augie/Resti-vo’s creditors, whose debt had priority, rather than to Union for its general unsecured debt. After the Eastern District of New York affirmed the bankruptcy court’s consolidation decision, the case was appealed to the Second Circuit.18
In analyzing whether the substantive consolidation order should be preserved, the Second Circuit first noted that “[t]he sole purpose of substantive consolidation is to ensure the equitable treatment of all creditors.” The court then reviewed and distilled the previous substantive cases down to what the Second Circuit perceived as “mere[] variants on two critical factors: (i) whether creditors dealt with the entities as a single economic unit and ‘did not rely on their separate identity in extending credit,’... or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors.” The Second Circuit held that the first factor is “applied from the creditor’s perspective” and the inquiry “is whether creditors treated the debtors as a single entity, not whether the managers of the debtors themselves, or consumers viewed the [debtors] as one enterprise.”19
*97In analyzing whether the estates of Au-gie/Restivo and Augie’s should be consolidated under the first factor, the Second Circuit focused on the fact that Augie’s creditor, Union, had obviously extended credit relying on Augie’s being its own separate entity. It also noted that MHTC had dealt with the pre-sale Restivo in much the same way. Given this information, the court found that Union should have a superior claim to that of MHTC regarding Augie’s assets. The Second Circuit held that no cause existed for upholding substantive consolidation under thé first factor.20 Under the second factor, the Second Circuit noted that “substantive consolidation should be used only after it has been determined that all creditors will benefit because untangling is either impossible or so costly as to consume the assets.” 21 Finding that the assets of Augie’s were traceable even though the business functions had been consolidated, the Second Circuit determined that substantive consolidation was not justified under the second factor.22 As substantive consolidation was not justified under either factor, and the court recognized that Union’s claims against Augie’s assets were superi- or to those of MHTC, the Second Circuit reversed the order of substantive consolidation.
A newer case from the Third Circuit dealing with substantive consolidation is the Owens Coming case. While this court puts it in the same category as the Au-gie/Restivo line of cases, it actually seems to take a slightly stricter view than did the Second Circuit in Augie/Restivo, in emphasizing that substantive consolidation is rarely appropriate. In this case, Owens Corning owned multiple subsidiaries that operated individually and independently. In 1997, Owens Corning pursued financing to purchase Fibreboard Corporation. Due to growing potential legal troubles and a bad credit rating, obtaining the necessary funds to purchase Fibreboard Corporation was difficult. However, Owens Corning was able to obtain $2 billion in requisite financing from a group of banks (the “Banks”) by obtaining guarantees from its subsidiaries. The financing agreement also expressly required Owens Corning and its subsidiaries to limit their relationships in ways that would protect their separateness in governance, financial accounting, and record keeping. The agreement also limited Owens Corning from conducting transactions with its subsidiaries that might “result in losses to that subsidiary,”23
In the year 2000, Owens Corning, along with seventeen subsidiaries, filed for bankruptcy. About two years later, substantive consolidation was proposed by the debtors and several creditor groups. This substantive consolidation was proposed to include all of the debtors, including Owens Corning, its subsidiaries which had filed for bankruptcy at the same time, and three subsidiaries which had not filed for bankruptcy. Additionally, unlike other past substantive consolidations, proponents of the plan sought substantive consolidation merely for the purposes of paying off creditors and confirming the plan. After the plan was confirmed, the “consolidated” entities were to resume operations as inde*98pendent entities. Despite objections from the Banks, the motion for consolidation pursuant to the plan was granted.24 Specifically, the district court (after withdrawing the reference) found that there existed “substantial identity” among the debtors and its subsidiaries, that “there [was] simply no basis for a finding that, in extending credit, the Banks relied upon the separate credit of any of the subsidiary guarantors,” that it was clear that substantive consolidation would greatly simplify and expedite the successful completion of the bankruptcy, and that it would be exceedingly difficult to untangle the financial affairs of certain entities and, thus, ultimately found that substantive consolidation was appropriate.25 The Third Circuit reversed the district court and stated the test for substantive consolidation as follows:
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.26
It is interesting to note that the Third Circuit distills the traditional list of substantive consolidation factors down to two critical either-or factors (as did the Second Circuit) but phrases them slightly differently. The Second Circuit suggests it all boils down to: (i) whether creditors dealt with the entities as a single economic unit and ‘did not rely on their separate identity in extending credit,’... or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors.” The Third Circuit phrased it as whether: (i) prepetition the debtors disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) whether post-petition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors. Thus, the tests seem essentially the same—only the Third Circuit seems slightly more stringent in its wording. In any event, the Third Circuit in Owens Coming further indicated that substantive consolidation proponents “have the burden of showing one or the other rationale for consolidation.” 27 As to the first rationale, the Third Circuit noted that a “prima facie case for it typically exists when, based on the parties’ prepetition dealings, a proponent proves corporate disregard creating contractual expectations of creditors that they were dealing with debtors as one indistinguishable entity.”28 Moreover, creditor opponents of consolidation can nonetheless defeat a prima facie showing under the first rationale if they can prove they are adversely affected and actually relied on debtors’ separate existence.29 The Third Circuit noted that the second rationale did not need an explanation, but provided in a footnote that
This rationale is at bottom one of practicality when the entities’ assets and liabilities have been “hopelessly commingled.” In re Gulfco Inv. Corp., 593 F.2d at 929; In re Vecco Constr. Indus., 4 B.R. at 410. Without substantive consolidation all creditors will be worse off (as *99Humpty Dumpty cannot be reassembled or, even if so, the effort will threaten to reprise Jarndyce and Jarndyce, the fictional suit in Dickens’ Bleak House where only the professionals profited). With substantive consolidation the lot of all creditors will be improved, as consolidation “advancefs] one of the primary goals of bankruptcy—enhancing the value of the assets available to creditors ...—often in a very material respect.” Kors, supra, at 417 (citation omitted).30
In applying its view of substantive consolidation, the Third Circuit found that the Owens Corning consolidation failed right from the start. The Third Circuit found that no corporate disregard had existed prior to the consolidation. It found that no “substantial identity” existed between the entities, and, therefore, the consolidation under the first option was unjustified. Furthermore, the court found that substantive consolidation under the second option was completely unjustified as consolidation would not result in every creditor receiving more than they would have without consolidation. In finding that substantive consolidation was wholly inappropriate, the court concluded that substantive consolidation is about equity and therefore should only be used to accomplish an equitable result.31
It is worth noting that the Fifth Circuit, albeit in dicta and in a non-plan context, cited to both Owens Corning and Augie/Restivo in In re Amco Ins., 444 F.3d 690 (5th Cir. 2006) and emphasized that this “rough justice” remedy should be rare. However, it is also noteworthy that the Amco case did not involve a chapter 11 plan, but rather a chapter 7 trustee seeking to consolidate a corporate debtor with an individual non-debtor on a nunc pro tunc basis, dating back to the petition date of the corporate debtor.32 The substantive *100consolidation was ruled to be improper as, among other things, it would have significantly prejudiced a particular large creditor who had been pursuing collection against the non-debtor for months.
ii) The Harm-Balancing Test
Other courts have applied somewhat more of’a true harm-balancing test, which tends to identify certain elements from the traditional multi-factor test, but ultimately balances the harms or prejudice along with considering how many of the traditional factors exist. One example is In re Snider Bros., Inc., 18 B.R. 230, 234 (Bankr. D. Mass. 1982), where the court held that substantive consolidation analysis boils down to weighing the economic prejudice of separateness versus economic prejudice of consolidation.33 In Snider Bros., the creditors’ committees for six corporate debtors sought the consolidation of all of the assets and liabilities of the six debtors, as well as the elimination of all intercorpo-rate debts, which they argued would benefit creditors generally. The Commerce Bank & Trust Co., a large secured creditor, objected to consolidation on the grounds that its secured position would be impaired thereby. The bankruptcy court ultimately held that consolidation of the debtors’ estates was not warranted under circumstances which, though there had been frequency of intercorporate transactions, loans, direct sales and guarantees, each debtor had kept separate records, and the creditors’ committee only generally alleged that they would be harmed by continued separation of estates. Moreover, the court noted that use of a single bookkeeping staff was not shown to have prejudiced creditors, the debtors had ceased doing business, and the possibility of consolidated sale of all of debtors’ assets was remote. Accordingly, the bankruptcy court held that the parties seeking consolidation had failed to show sufficient cause to order substantive consolidation.34
Another example is Eastgroup Props. v. S. Motel Ass’n, Ltd., 935 F.2d 245 (11th Cir. 1991). In that case the court balanced “whether consolidation is necessary to avoid some harm or realize some benefit.” In Eastgroup, a chapter 7 trustee for two debtors (SMA and GPH) had moved to substantively consolidate the two bankruptcy estates. SMA was a limited partnership that was formed for the purpose of acquiring and holding fee simple title to, and leasehold interests in, motel properties. GPH was a corporation whose sole business was the operation of the motel businesses owned or leased by SMA. The *101bankruptcy court ultimately granted the requested consolidation by the chapter 7 trustee. OCertain objecting creditors appealed the ruling and the Eleventh Circuit ultimately affirmed the bankruptcy court. Specifically, the Eleventh Circuit first held that the proponent of substantive consolidation must show that (1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit.35 When this showing is made, a presumption arises “that creditors have not relied solely on the credit of one of the entities involved.” Once the proponent has made this prima facie case for consolidation, the burden shifts to an objecting creditor to show that (1) it had relied on the separate credit of one of the entities to be consolidated; and (2) it would be prejudiced by substantive consolidation. Finally, if an objecting creditor has made this showing, “the court may order consolidation only if it determines that the demonstrated benefits of consolidation ‘heavily' outweigh the harm.” With this standard in mind, the Eleventh Circuit held that: (1) the chapter 7 trustee presented sufficient evidence on common identity of debtor entities and on harm to be avoided or benefit to be realized from consolidation to establish a prima facie case for consolidation, and (2) the objecting creditors failed to prove that they relied on the separate credit of one debtor entity in deciding to deal with it so as to constitute a defense to consolidation. Because the objecting creditors failed to prove that they relied on the separate credit of SMA in deciding to deal with it, they had failed to carry their burden of proof and their appeal failed.36
This balancing test approach has been adopted by numerous courts either explicitly or implicitly.37
C. Determining Whether Substantive Consolidation is Appropriate for the Adeptus Debtors.
In determining whether substantive consolidation is appropriate for the Adeptus Debtors, the court starts with two hugely significant observations.
First, the case at bar involves 140 Debtors. Augie/Restivo involved a mere two debtors. Owens 'Coming involved 18 debtors (a parent and 17 subsidiaries) plus three non-debtor subsidiaries that would *102be subject to the proposed substantive consolidation. Eastgroup Props, involved just two debtors. While there is no magic number that should necessarily change the legal analysis, surely all reasonable minds must recognize that having 140 related debtors in bankruptcy together is rare and creates unique challenges in order to both: (a) protect stakeholders’ legal rights, but at the same time (b) preserve limited resources and not unnecessarily drive up administrative expenses.
The second hugely significant observation is that no party challenged that the Adeptus Debtors’ assets (not including litigation claims and causes of action) are worth between $113 million and $137 million. All 140 Debtors are liable on the Deerfield Parties’ $70 million debtor-in-possession loan. And 80 of the Debtors are liable on the $228 million secured indebtedness owed to the Deerfield Parties. What about the remaining 60 Debtors that are not liable on the $228 million prepetition secured facility? Do some of them have value beyond the $70 million debtor-in-possession loan? Are any of them “cash cows” that might benefit creditors of those specific entities? The answer is no, according to the credible evidence. The credible evidence indicated that 49 of those 60 Debtors were inactive or had no assets. The remaining eleven were not shown to have any material value.
What was the other evidence? The Debtors (supported by their secured lenders the Deerfield Parties, the Official Committee of Unsecured Creditors, and the Official Committee of Equity Security Holders) made the following arguments and provided credible evidence in support of substantive consolidation as set forth below:
• The Debtors’ nerve center at which all policy and management decisions are made on behalf of all Debtors is in Lewisville, Texas at the corporate enterprise’s headquarters—not at the five hospitals and 99 FSERs that are spread out over three states.
• All payroll for the more than 3,000 employees of the Debtor-enterprise is effectuated out of Lewisville, Texas.
• All cash for the corporate enterprise is swept and managed out of three central accounts: a concentration account and two other accounts (one for wires and one for checks).
• As noted above, pursuant to the Pre-petition Credit Agreement (under which approximately $228 million is still due and owing), 80 of the 140 Debtors were jointly and severally liable and substantially all of the assets of most of these Debtors were encumbered by liens of the vastly underse-cured Deerfield Parties.
• As noted above, pursuant to the DIP Facility Loan Agreement (under which approximately $70 million more was lent by the Deerfield Parties) all of the Debtors (in other words, the remaining 60 Debtors that were not liable in connection with the Prepetition Credit Agreement) are jointly liable for the $70 million.
• The Debtors maintain consolidated books and records and a centralized cash management system, pursuant to which all debts of the Adeptus Enterprise are paid, thereby resulting in substantial intercompany claims between the Debtors. (In fact, many of the Debtors (including PubCo) did not have bank accounts in their own names and required their obligations to be paid from the accounts of other affiliates.)
• There was very credible testimony that, it is difficult for the Debtors to segregate and ascertain individual assets and liabilities (particularly pay-*103ables) on an entity-by-entity basis.38 There was credible evidence that the Debtors’ accounts payable are kept on a consolidated basis and accruals were all at a consolidated level. There was credible evidence that preparing separate Schedules and SOFAs was very difficult for the Debtors’ financial ad-visors. One financial advisor from FTI Consulting used the words “tangled mess” to describe trying to sort through intercompany receivables and payables. There was credible testimony that preparing a list of executory contracts, on a debtor-by-debtor basis, was extremely difficult for the Debtors’ financial advisors,
• The Debtors file tax returns on a consolidated basis. As a public company, the Debtors do their financial reporting as a single entity.
• In addition to the secured lenders, there was credible evidence that significant creditors of the Debtors view the Debtors as a single economic unit and did not rely on their separate identity in extending credit. There was evidence that numerous creditors have filed duplicative claims against multiple Debtors and did not know which Debtors were liable to them. Even two representatives of the creditor-objector PST testified as such in pre-hear-ing depositions—notably and understandably, the objecting creditor PST did not put his client representatives on the witness stand at the confirmation trial.
• All of the Debtors are controlled by common directors and officers. Specifically, the directors and officers of Pub-Co control, directly or indirectly, the affairs of all of the Debtors, and the individuals who are insiders of each of the subsidiary Debtors are also insiders of PubCo.
• Certain “D & 0 Claims” (ie., claims that have been asserted to exist against the Debtors’ officers and directors for fraud and mismanagement and the like) have been determined by credible professionals, including counsel for the Official Unsecured Creditors Committee, to be jointly owned by all of the Debtors. The Debtors have director and officer insurance liability policies (“D & 0 Policies”) that have $50.0 million in total limits and any recovery on account of the D & 0 Claims will be a significant asset of the Litigation Trust, which will be jointly owned by all of the Debtors’ estates.
• The Debtors have further noted that, the fact that distributions for general unsecured creditors and equity interest holders will be based on recoveries from litigation claims is a significant reason why the Debtors decided to request that these estates be substantively consolidated. Specifically, as a result of the postpetition analysis and investigation of potential causes of action that the Debtors and Creditors’ Committee conducted, the Debtors determined that a number of significant causes of action (a) were jointly owned by all of the Debtors, or (b) would be difficult to allocate between estates.
Because of the foregoing factors, the court believes that substantive consolidation will achieve a fair and equitable result for all creditors and equity interest holders of the Debtors and will enable the assets of the Debtors to be administered in an efficient *104manner. If the estates are not substantively consolidated, the time and expense to allocate assets and liabilities between estates will be enormous.
Whether applying a traditional multi-factor test or the harm balancing test, the Debtors have demonstrated that substantive consolidation is appropriate. The- preponderance of the evidence reflected that creditors tended to deal with the Debtors as a single economic unit and did not rely on their separate identity in extending credit. The preponderance of the evidence reflected that the liabilities and contracts of the Debtors were a “tangled mess” to try to unsort. Rephrased, the preponderance of the evidence reflected that creditors usually treated the Debtors as one legal entity. The preponderance of the evidence reflected that separating the Debtors would be prohibitive and hurt all creditors. The court is left to conclude that consolidation will benefit all creditors. There was no evidence of prejudice to any particular creditor. None whatsoever.
Finally, does it matter at all that the Plan only contemplates substantive consolidation of all 140 Debtors for Plan treatment and voting purposes and not for all purposes post-confirmation (ie, it proposes “deemed” consolidation or consolidation “light,” as some have referred to it)? This court thinks not. No reported cases have singled this out as a special circumstance that would impact either negatively or positively the substantive consolidation analysis. Thus, in summary, as a result of the Debtors’ integrated and interdependent operations, substantial intercompany obligations and guaranties, common officers and directors, common control and decision making, reliance on a consolidated cash management system, and dissemination of principally consolidated financial information to third parties, the Debtors operated, and creditors dealt with the Debtors, as a single, integrated economic unit. In view of the foregoing—and particularly since the causes of action that will produce most of the recovery to stakeholders have been determined to be owned by all Debtor estates—the court approves substantive consolidation. Substantive consolidation under the Plan will best utilize the Debtors’ assets and potential of all of the Debtors to pay to the creditors of each entity the distributions to which they are entitled.
D. Notwithstanding Substantive Consolidation, How Should Votes Be Counted, Per Plan or Per Debtor?
If substantive consolidation is ordered, then it appears appropriate for a bankruptcy court to combine the debtors for purposes of voting.39 Interestingly, even in cases where substantive consolidation has not been implemented (rather joint administration of many debtors has been involved) there is certain authority that supports a notion that section 1129(a)(10) of the Bankruptcy Code is to be applied on a “per plan” basis rather than a “per debtor” basis.
The earliest case supportive of the “per plan” interpretation of § 1129(a)(10) is In re SGPA, Inc., Case No. 1-01-026092, 2001 WL 34750646, 2001 Bankr. LEXIS 2291 (Bankr. M.D. Pa. September 28, 2001), in which the bankruptcy court overruled the objection of complaining creditors and confirmed a joint plan, holding that it was unnecessary “to have an impaired class of creditors of each Debtor to vote to accept the Plan.” In SPGA, the debtors had a multi-million dollar syndicated secured credit facility with a certain “Bank Group” *105and senior unsecured debt held by a group of bondholders referred to as the “Subordinated Bondholders.” The debtors negotiated a workout with the Bank Group, but not the Subordinated Bondholders. The debtors proposed a joint plan based on the workout with Bank Group that contained fifty-seven classes of creditors. The Subordinated Bondholders objected, arguing that the debtors failed to establish an impaired accepting class as to each debtor. The Subordinated Bondholders also argued that the only way the debtors could have satisfied section 1129(a)(10) of the Bankruptcy Code was if the court had ordered substantive consolidation. The SPGA court, after explaining that it did not truly understand the corporate structure prepetition and post-confirmation, held that, in order to confirm the plan, the multi-debtor plan only needed one impaired accepting class to satisfy section 1129(a)(10) of the Bankruptcy Code. The SPGA court appears to have been swayed somewhat by the equities of the case. Specifically, the court noted that under a per-debtor reading, “ten of the 11 debtors cannot satisfy § 1129(a)(10)” because the impaired classes were to receive no distribution, each of those classes were deemed to reject the plan, and the deemed rejections eliminated the possibility of a consenting class for the ten debtors on a stand-alone basis. Furthermore, the court noted that whether the debtors “were substantively consolidated or jointly administered would have no adverse affect [sic] on the Subordinated Bondholders.”40
Next, the bankruptcy court in In re Enron, Case No. 01-16034, 2004 Bankr. LEXIS 2549 (Bankr. S.D.N.Y. July 16, 2004), in an opinion marked “Not For Publication,” also considered the section 1129(a)(10) issue and decided that both the plain statutory meaning and “the substantive consolidation component of the global compromise” allowed confirmation of a 177-debtor joint plan when at least one class of impaired claims voted to accept the plan. The Enron court relied, in part, on SGPA, However, in Enron, it is worth noting that there was, as part of a global compromise and settlement embodied in the plan, some form of substantive consolidation utilized, so it is not entirely clear whether that impacted the court’s decision to allow “per plan” voting rather than “per debtor” voting. Moreover, the bankruptcy court in Enron noted that
It is quite common for debtors with a complex corporate structure to file a joint chapter 11 plan pursuant to which the corporate form is preserved, or in which a “deemed consolidation” is proposed and approved. In such circumstances, all debtors are treated as a single legal entity for voting and distribution purposes. See, e.g., In re Genesis Health Ventures, Inc., 266 B.R. 591, 619 (Bankr. D. Del. 2001).41
Finally, in JPMorgan Chase Bank, N.A. v. Charter Commc’ns. Operating, LLC (In re Charter Commc’ns), 419 B.R. 221 (Bankr. S.D.N.Y. 2009), the bankruptcy court overruled an objection that certain classes of creditors were “artificially” impaired to meet the section 1129(a)(10) requirement. Moreover, the bankruptcy court, in what is either an alternative ruling or dicta, went on to state that section 1129(a)(10) of the Bankruptcy Code is to be applied per plan, not per debtor, citing in support Enron and SGPA. The court observed that the debtors were managed *106on an integrated basis making it reasonable and administratively convenient to propose a joint plan and that the joint plan has been accepted by numerous other impaired accepting classes, thereby satisfying the requirement of section 1129(a)(10).42
Other courts, however, have rejected this “per plan” interpretation of section 1129(a)(10) of the Bankruptcy Code, holding that it applies on a “per debtor” basis where the plan did not provide for substantive consolidation of the debtor.43 For example, the bankruptcy court in In re Tribune, was tasked with evaluating how to tabulate voting in two competing plans that were proposed by 111 jointly administered debtors. The bankruptcy court first reasoned that the statutory language of section 1129(a)(10) was not dispositive because the Bankruptcy Code rules of construction state that “the singular includes the plural.”44 Second, the bankruptcy court relied on the doctrine of corporate separateness to conclude that section *1071129(a)(10) applies on a per-debtor basis.45
This court, having approved the substantive consolidation proposed by the Debtors, concludes that it was appropriate for the Debtors to have tabulated ballots on a consolidated basis. The court makes no comment on whether it would have been proper in the absence of substantive consolidation.
. See Power Int’l, Inc. v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.), 250 F.3d 955, 959 ns. 5 & 6 (5th Cir. 2001) (noting in dicta that "it usually results in, inter alia, pooling the assets of, and claims against, the two entities; satisfying liabilities from the resultant common fund; eliminating intercom-pany claims; and combining the creditors of the two companies for purposes of voting on reorganization plans” and because it "affects the substantive rights of the parties ... is subject to heightened judicial scrutiny”). Note that the Babcock case did not involve substantive consolidation pursuant to a chapter 11 plan. Rather, it involved an argument that certain debtor-in-possession financing resulted in an improper de facto substantive consolidation, and the Fifth Circuit ultimately held that no such de facto substantive consolidation occurred by virtue of the postpetition financing.
. Listed in the approximate sequence in which the "substantive consolidation” Circuit-level authority developed: Stone v. Eacho (In re Tip Top Tailors, Inc.), 127 F.2d 284 (4th Cir. 1942), cert. denied, 317 U.S. 635, 63 S.Ct. 54, 87 L.Ed. 512 (1942); Soviero v. Nat’l Bank of Long Island, 328 F.2d 446 (2d Cir. 1964); Chemical Bank N.Y. Trust Co. v. Kheel, 369 F.2d 845 (2d Cir. 1966); Flora Mir Candy Corp. v. R.S. Dickson & Co. (In re Flora Mir Candy Corp.), 432 F.2d 1060 (2d Cir. 1970); James Talcott, Inc. v. Wharton (In re Cont’l Vending Machine Corp.), 517 F.2d 997 (2d Cir.1975); FDIC v. Hogan (In re Gulfco Inv. Corp.), 593 F.2d 921, 927-28 (10th Cir. 1979); Pension Benefit Guar. Corp. v. Ouimet Corp., 711 F.2d 1085, 1092-93 (1st Cir. 1983), cert. *92denied, 464 U.S. 961, 104 S.Ct. 393, 78 L.Ed.2d 337 (1983); Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp.), 810 F.2d 270, 276 (D.C. Cir. 1987); In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515 (2d Cir. 1988); Eastgroup Props. v. S. Motel Ass’n, 935 F.2d 245, 248 (11th Cir. 1991); First Nat’l Bank of El Dorado v. Giller (In re Giller ), 962 F.2d 796, 797-98 (8th Cir. 1992); First Nat’l Bank of Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), 974 F.2d 712, 720 (6th Cir. 1992); Reider v. FDIC (In re Reider ), 31 F.3d 1102, 1105-07 (11th Cir. 1994); Alexander v. Compton (In re Bonham ), 229 F.3d 750, 771 (9th Cir. 2000); Power Int'l, Inc. v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.), 250 F.3d 955 (5th Cir. 2001); In re Owens Corning, 419 F.3d 195, 200-201 (3d Cir.2005); Wells Fargo Bank of Tex. N.A. v. Sommers (In re Amco Ins.), 444 F.3d 690, 692-93, 97, n. 5 (5th Cir. 2006).
. Yaquinto v. Ward (In re Ward), 558 B.R. 771, n. 24 (Bankr. N.D. Tex. 2016) (while not applicable to the case, the bankruptcy court noted that the Bankruptcy Code clearly permits consolidation within a plan context). See also In re Stone & Webster, 286 B.R. 532, 546 (Bankr. D. Del. 2002) (in ruling on summary judgment motion requesting pre-confirmation determination that substantive consolidation provision in the creditors' committee’s plan was proper, court held that section 1123(a)(5)(C) of the Bankruptcy Code clearly authorizes a bankruptcy court to confirm a chapter 11 plan provision which provides for substantive consolidation).
. See, e.g., In re Republic Airways Holdings, Inc., 565 B.R. 710, 716 (Bankr. S.D.N.Y. 2017) (holding that debtors satisfied Au-gie/Restivo test with regards to substantive consolidation provision in chapter 11 plan); In re Affiliated Foods, Inc., 249 B.R. 770, 775-784 (Bankr. W.D. Mo. 2000) (chapter 11 estates of corporate debtor and its wholly owned subsidiaries would be substantively consolidated under unsecured creditors’ committee proposed plan applying the Eighth Circuit’s Giller standard); In re Cello Energy, Nos. 10-04877-MAM-11, 2012 WL 1192784, at *11 (Bankr. S.D. Ala. April 10, 2012) (applying Snider standard when evaluating substantive consolidation provision in joint chapter 11 plan); In re Introgen Therapeutics, Inc., 429 B.R. 570 (Bankr. W.D. Tex. 2010) (applying Augie/Restivo standard in evaluating substantive consolidation in debtors’ proposed chapter 11 plan); In re Source Enters., Inc., No. 06-11707, 2007 WL 2903954, at *5 (Bankr. S.D.N.Y. Oct. 1, 2007) (holding that debtors should be substantively consolidated under the plan in recognition of the economic reality that the debtors’ books and records were incapable of being "untangled” from one another, and creditors, as well as the debtors themselves, had dealt as though the debtors were a single entity. Moreover, the court held that there had been no showing that the rights or interests of any creditors would be unduly harmed or affected by such substantive consolidation); In re Lionel L.L.C., No. 04-17324, 2008 WL 905928, at *11 (Bankr. S.D.N.Y. March 31, 2008) (ordering partial substantive consolidation as a result of *93the debtors’ integrated and interdependent operations, substantial intercompany guaranties, common officers and directors, common control and decision making, reliance on a consolidated cash management system, and dissemination of principally consolidated financial information to third parties, and the debtors belief that they operated, and creditors dealt with the debtors, as a single, integrated economic unit. In view of the foregoing, creditors would not be prejudiced to any significant degree by the debtors’ partial substantive consolidation treatment, and partial substantive consolidation would best utilize the debtors’ assets and potential of all of the debtors to pay to the creditors of each entity the distributions provided for under the plan); In re Lear Corp., No. 09-14326, 2009 WL 6677955, at *15 (Bankr. S.D.N.Y. Nov. 5, 2009) (finding that substantive consolidation provision in chapter 11 plan was in the best interests of the debtors and necessary and appropriate in the chapter 11 cases and did not adversely affect any creditor); In re Worldcom, Inc., No. 02-13533, 2003 WL 23861928, at *6-*16 (Bankr. S.D.N.Y Oct. 31, 2003) (after thorough analysis of several facts and finding that substantive consolidation provided significant benefits to the creditor constituency as a whole, court ordered substantive consolidation of debtors in confirming chapter 11 plan); In re Ltd. Gaming of Am., Inc., 228 B.R. 275, 287-88 (Bankr. N.D. Okla. 1998) (based upon findings that there was a "substantial identity” between the two debtors, the type of which is often found where cases are substantively consolidated and that there would be no harm to creditors, court confirmed chapter 11 plan with substantive consolidation provision); In re Am. HomePatient, Inc., 298 B.R. 152 (Bankr. M.D. Tenn. 2003) (court confirmed joint chapter 11 plan finding that substantive consolidation was appropriate and applied the Rafoth standard); Bruce Energy Ctr. Ltd. v. Orfa Corp of Am. (In re Orfa Corp. of Phila.), 129 B.R. 404, 412-416 (Bankr. E.D. Pa. 1991) (applying In re F.A. Potts & Co., Inc., 23 B.R. 569 (Bankr. E.D. Pa. 1982) standard which requires that the applicants must demonstrate that there is a necessity for substantive consolidation or a harm to be avoided by the use of the equitable remedy of substantive consolidation, and the benefits of substantive consolidation must outweigh the harm to be caused to objecting creditors in approving substantive consolidation provision in chapter 11 plan). But see In re CRB Partners, LLC, 2013 WL 796566, *13-14 (Bankr. W.D. Tex. 2013) (plan cannot allow substantive consolidation of jointly administered estates where court has never ordered substantive consolidation of the estates in the first instance).
. J. Maxwell Tucker, Groupo Mexicano and the Death of Substantive Consolidation, 8 AM. BANKR. INST. L. REV. 427, 448-49 (2000) (an interesting and scholarly piece, but clearly there has been no death of substantive consolidation in the' bankruptcy courts after Groupo Mexicano).
. See In re Permian Producers Drilling, Inc., 263 B.R. 510, 517 (W.D. Tex. 2000).
. Babcock & Wilcox Co., 250 F.3d at 959 n. 5 (citing In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2d Cir.1988), which was, in turn, citing 5 Collier on Bankruptcy § 1100.06, at 1100-32 n. 1 (L. King ed., 15th ed. 1988)).
. In re AHF Development, 462 B.R. 186, 195 (Bankr. N.D. Tex. 2011) (citing to 1 Collier on Bankruptcy ¶ 105.09[1][c] (16th ed. 2010)). In AHF Development, the United States Trustee, joined by unsecured creditors committee and creditors, moved to dismiss a chapter 11 case of a debtor-limited partnership. The unsecured creditors committee in an affiliated case of the debtor’s general partner, along with the debtor-general partner, investor/creditors, and Chapter 11 trustee in affiliated case, opposed dismissal and sought substantive consolidation of both cases. Following a trial, Judge Jones held that cause existed to dismiss the case, and did not find substantive consolidation to be appropriate under the facts and circumstances.
. Introgen Therapeutics, 429 B.R. at 582 (Bankr. W.D. Tex. 2010) (citing to In re Coleman, 417 B.R. 712, 726 (Bankr. S.D. Miss. 2009)).
. Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 249 (5th Cir. 2009) (citing In re Gandy, 299 F.3d 489, 499 (5th Cir.2002)) (while holding that plan of reorganization did not substantively consolidate debtor entities, the Fifth Circuit acknowledged the existence of substantive consolidation and did not question the authority of the bankruptcy court to order such remedy). See also Wells Fargo Bank v. Sommers (In re Amco Ins.), 444 F.3d 690, 696 n. 5 (5th Cir. 2006) (noting in a non-plan context that substantive consolidation "is an extreme and unusual remedy”); Permian Producers, 263 B.R. at 516 (citing S.I. Acquisition, Inc. v. Eastway Delivery Serv., Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142, 1145 n. 2 (5th Cir. 1987) ("The bankruptcy court has authority to order de facto disregard of the corporate form through [substantive] consolidation proceedings.") (noting that bankruptcy courts have authority to order substantive consolidation).
. In re E’Lite Eyewear Holding, Inc., No. 08-41374, 2009 WL 349832, at *3 (Bankr. E.D. Tex. Feb. 5, 2009).
. In re AHF Development, 462 B.R. 186, 195-96 (Bankr. N.D. Tex. 2011) (citing to 1 Collier on Bankruptcy ¶ 105,09[2][a] (16th ed. 2010)).
. AHF Development, 462 B.R. at 195-96.
. See, e.g., Chemical Bank N.Y. Trust Co. v. Kheel, 369 F.2d 845, 847 (2d Cir. 1966) (holding that where the interrelationships of the group are hopelessly obscured and the time and expense necessary even to attempt to unscramble them so substantial as to threaten the realization of any net assets for all the creditors, equity is not helpless to reach a rough approximation of justice to some rather than deny any at all); In re Vecco Constr. Indus., Inc., 4 B.R. 407, 410 (Bankr. E.D. Va. 1980) (ordered consolidation in part because of the absence of opposition and because consolidation would promote reorganization rather than liquidation where the debtors had a single operating account and consolidated financial statements, had made no attempt to segregate receivables, disbursements or income, had inaccurately allocated affiliate expenses through inter-company accounts, and had filed bankruptcy schedules on a consolidated basis).
. Union Sav. Bank v. Augie/Restivo Baking Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860 F.2d 515, 519 (2d Cir.1988) (emphasis added). Note that some commentators have characterized the Augie/Restivo test as a “balancing test” since the Second Circuit in Au-*96gie/Restivo stated that “the sole purpose of substantive consolidation is to ensure the equitable treatment of all creditors” (emphasis added). However, because it specifically looks at factors under the traditional test without requiring actual "balancing” of said factors, some authorities have categorized it not to be a balancing test, See In re Introgen Therapeutics, Inc., 429 B.R. 570, 583, n. 5 (Bankr. W.D. Tex. 2010) (Judge Gargotta did not view it as a balancing test). But see 2 Collier on Bankruptcy ¶ 105.09[2][a] (Alan N, Resnick & Henry J. Sommer eds., 16th ed. 2017) & In re Permian Producers Drilling, Inc., 263 B.R. 510, 518 (W.D. Tex. 2000) (describing Augie/Restivo test as a "simplified balancing test”).
. Augie/Restivo Baking Co., 860 F.2d at 519.
. Id. at 515-17.
. In re 599 Consumer Elecs., Inc., 195 B.R. 244, 249 (S.D.N.Y. 1996).
. Augie/Restivo Baking Co., 860 F.2d at 518-19.
. Id. at 519. See also Introgen Therapeutics, Inc., 429 B.R. at 582 (citing to Permian Producers, 263 B.R. at 517) (holding the plan proponents had satisfied both factors of the Augie/Restivo test); In re Bonham, 229 F.3d 750, 766 (9th Cir. 2000) (adopting the Augie/Restivo test).
. Augie/Restivo Baking Co., 860 F.2d at 519.
. In re Owens Corning, 419 F.3d 195, 200-201 (3d Cir. 2005).
. Id. at 202-207.
. Id. at 202-203.
. Id. at 211.
. Id. at 212.
. Id.
. Id.
. Id. at n. 20.
. Id. at 212-216.
. In Amco, an individual named Peerbhai controlled two entities that were involved in the insurance business, AIG and AIA. Peer-bhai and AIG obtained financing from Wells Fargo in 2000. By 2001, the parties breached the loan agreement with Wells Fargo and were sued in state court. Shortly thereafter, AIG and AIA filed bankruptcy, but Peerbhai did not. Wells Fargo was able to continue its collection efforts against Peerbhai individually since he had not filed. An agreed lift stay order was entered in the bankruptcy cases (apparently with the agreement of the trustee) so that Wells Fargo could continue the state court litigation—and for practical purposes, negotiate a settlement agreement with all three entities. This settlement agreement was ultimately reached in April 2002, leaving Peerbhai indebted to Wells Fargo for $3,398,956.16. In July of that year, the trustee for AIA filed a motion for substantive consolidation, seeking to consolidate AIA and Peer-bhai (a nondebtor) as a single debtor in bankruptcy on a nunc pro tunc basis—seeking to make it effective several months back. After two days of evidence, the bankruptcy court was convinced Peerbhai concealed assets from his creditors, commingled funds, that there was a substantial identity between the entities, creditors relied on them as a single unit, and they did not observe corporate formalities. The bankruptcy court ordered consolidation on a nunc pro tunc basis. That is, the entities (the non-debtor individual and the debtor) were to be considered consolidated from the date of the AIA petition "because at all relevant times, Peerbhai and AIA operated as one financial entity.” The Fifth Circuit reviewed the bankruptcy court’s order granting the trustee's motion for substantive consolidation and ultimately vacated the order as an abuse of discretion. The Fifth Circuit was concerned that the bankruptcy court gave a "green light” to Wells Fargo when it lifted the stay. Wells Fargo "expended its time and money to pursue the state court litigation” in reliance on this supposed nod from the bankruptcy court. It was unfair that Wells Fargo had negotiated a settlement only to have it undone by the bankruptcy court. The court noted that though the bankruptcy court is a court of equity, its equitable powers are not *100limitless and that it went too far by leading Wells Fargo down a path it later effectively revoked. Since the. court held the bankruptcy court erred by allowing substantive consolidation nunc pro tunc, it declined to address Wells Fargo's argument regarding the bankruptcy court’s power under section 105 to grant substantive consolidation and, if such power exists, the proper standard to use in applying substantive consolidation. See Wells Fargo Bank of Tex. N.A. v. Sommers (In re Amco Ins.), 444 F.3d 690, 692-93, 97, n. 5 (5th Cir. 2006).
. See also Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp.), 810 F.2d 270, 276-77 (D.C. Cir. 1987) (“adopting the .balancing test articulated in Snider but requiring a showing that the benefits of consolidation heavily outweigh the harms”); In First Nat’l Bank of El Dorado v. Giller (In re Giller), 962 F.2d 796 (8th Cir. 1992) (the court held that the factors to consider when deciding whether substantive consolidation is appropriate include 1) the necessity of consolidation due to the interrelationship among the debtors; 2) whether the benefits of consolidation outweigh the harm to creditors; and 3) prejudice resulting from not consolidating the debtors.” Furthermore, the court specifically encouraged a weighing of the benefits of consolidation versus the prejudice of not consolidating the debtors).
. In re Snider Bros., Inc., 18 B.R. 230, 238-239 (Bankr. D. Mass. 1982).
. In Eastgroup, the Eleventh Circuit noted that the proponent of consolidation may want to frame its argument using the seven factors outlined in In re Vecco Construction, which included: (1) the presence or absence of consolidated financial statements; (2) the unity of interests and ownership between various corporate entities; (3) the existence of parent and intercorporate guarantees oh loans; (4) the degree of difficulty in segregating and ascertaining individual assets and liabilities; (5) the existence of transfers of assets without formal observance of corporate formalities; (6) the commingling of assets and business functions; and (7) the profitability of consolidation at a single physical location. Additional factors that could be further presented in some cases by the proponent include (1) the parent owning the majority of the subsidiary’s stock; (2) the entities having common officers or directors; (3) the subsidiary being grossly undercapitalized; (4) the subsidiary transacting business solely with the parent; and (5) both entities disregarding the legal requirements of the subsidiary as a separate organization. However, the Eleventh Circuit in East-group stressed that these were only examples of information that may be useful to courts charged with deciding whether there is a substantial identity between the entities to be consolidated and whether consolidation is necessary to avoid some harm or to realize some benefit. Eastgroup Props. v. S. Motel Ass’n, Ltd., 935 F.2d 245, 249-50 (11th Cir. 1991).
. Id. at 248-52,
, See, e.g., 2 Collier on Bankruptcy ¶ 105.09[2][a], ns. 59 & 60 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017).
. Each of the Debtors were required to file separate Schedules and Statements of Financial Affairs; however, the Debtors noted therein that, because the books and records were maintained on a consolidated basis, it was difficult to allocate assets and liabilities on an entity-by-entity basis.
. See, e.g., In re Stone & Webster, 286 B.R. 532, 545 (Bankr. D. Del. 2002).
. In re SGPA, Inc., Case No. 1-01-026092, 2001 Bankr. LEXIS 2291, at *12-22 (Bankr. M.D. Pa. September 28, 2001).
. In re Enron, Case No. 01-16034, 2004 Bankr. LEXIS 2549, at *234-236 (Bankr. S.D.N.Y. July 15, 2004).
. JPMorgan Chase Bank, N.A. v. Charter Commc’ns Operating, LLC (In re Charter Commc’ns), 419 B.R. 221, 266 (Bankr. S.D.N.Y. 2009). See also In re Transwest Props., Inc., 554 B.R. 894 (D. Az. 2016). Tran-swest involved two luxury resorts (the Westin La Paloma in Tucson, Arizona and the Westin Hilton Head Resort and Spa in Hilton Head, South Carolina), purchased by the debtors in 2008 with mortgage and mezzanine financing. To facilitate the financing of the resorts, the debtors' owners formed several special-purpose entities, including two entities that owned the resorts (the “operating debtors”) and two entities that owned the operating debtors (the "mezz debtors”). Yet another debtor, the holding company debtor, was the sole owner of the mezz debtors. The mortgage loan was secured by a first-priority security interest in the resorts, while the mezzanine loan was secured by the mezz debtors’ ownership interests in the operating debtors. Ultimately, the debtors each filed separate petitions for chapter 11 relief in the U.S. Bankruptcy Court for the District of Arizona, and their cases were jointly administered. After finding a new equity investor, the debtors filed a joint chapter 11 reorganization plan for all five of the debtors, even though the debtors did not seek—nor did the bankruptcy court authorize—substantive consolidation of the debtors’ separate bankruptcy estates. The plan proposed transferring ownership of the operating debtors to the new investor in exchange for a multi-million-dollar investment in the operating debtors to finance extensive renovations to the resorts and fund distributions under the plan. The plan further proposed restructuring and extending the term of the mortgage loan, provided no distributions on account of the mezzanine loan, and extinguished the mezz debtors' existing ownership interests in the operating debtors. At the confirmation hearing, the lender, which held the mortgage loan and had, after the original chapter 11 plan was proposed, acquired the mezzanine loan claims, voted to reject the plan and argued that the plan could not be confirmed because, among other things, the mezz debtors lacked an accepting, impaired class as required for confirmation under section 1129(a)(10) of the Bankruptcy Code. The debtors argued that the plan satisfied section 1129(a)(10) because several classes of impaired claims against the operating debtors accepted the joint plan. The bankruptcy court confirmed the plan over the lender’s objections, finding that the plain language of section 1129(a)(10) required only that "a plan” have one accepting, impaired class of creditors, even if the plan covered multiple debtors. On appeal, the district court affirmed the bankruptcy court’s rulings, finding that the plain language of section 1129(a)(10) only required one áccepting, impaired class of creditors per plan. Transwest Props., Inc., 554 B.R. at 899-901. Note, this case is currently set for oral argument before the Ninth Circuit in October 2017.
. In re Tribune Co., 464 B.R. 126, 180-183 (Bankr. D. Del. 2011). See also In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293, 302-03 (Bankr. D. Del. 2011) (in ruling on a motion to dismiss, the court held in dicta that the debtors did not have a reasonable likelihood of reorganization because they could not confirm a joint plan where one of the debtors only had one, non-accepting class, citing to Tribune for support).
. See 11 U.S.C. § 102(7).
. Tribune Co., 464 B.R. at 180-83. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500924/ | OPINION REGARDING DEBTOR’S POST-PETITION FINANCING MOTION Thomas J. Tucker, United States Bankruptcy Judge I. Introduction This Chapter 11 case is before the Court on the Debtor’s motion under 11 U.S.C. §§ 364(c)(1) and 364(d) for approval of post-petition financing, filed September 5, 2017, entitled “First Day Emergency Motion of the Debtor for Entry of Interim and Final Orders (I) Authorizing Debtor to Obtain Post-Petition Financing, (II) Scheduling a Final Hearing, and (III) Granting Certain Related Relief’ (Docket # 13, the “Motion”). The Court held a preliminary hearing on the Motion on September 13, 2017. Several creditors filed objections to the Motion before the hearing, including several creditors claiming to have construction liens on the Debtor’s real property. Those objections were all styled as “limited” objections.1 The primary filed objection to the Motion is not limited in nature, but rather objects to the Motion on numerous grounds, including a lack of adequate protection. That is the objection filed by the Debtor’s pre-petition secured lender, CAN IV Packard Square LLC (“Canyon”).2 The Court held an evidentiary hearing on the Motion, limited to the issue of adequate protection as described below, on September 19 and 20, 2017, then took the matter under advisement. The Court has considered all of the evidence presented at the evidentiary hearing, and all of the arguments of the parties. This opinion states the Court’s findings of fact and conclusions of law regarding the Motion and the subject matter of the evidentiary hearing. For the reasons stated in this opinion, the Court will deny the Motion. II. Jurisdiction This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(D) and 157(b)(2)(0). This proceeding also is “core” because it falls within the definition of a proceeding “arising under title 11” and of a proceeding “arising in” a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding “arising under title 11” because it is “created or determined by á statutory provision of title 11,” see id., including Bankruptcy Code §§ 364 and 361. And this is a proceeding “arising in” a case under title 11, because it is a proceeding that “by [its] very nature, could arise only in bankruptcy cases.” See id. at 27. III. Background A. The Construction Loan Pre-petition, in October 2014, the Debt- or obtained a construction loan from Canyon in the maximum principal amount of $53,783,184,00 (the “Construction Loan”) to finance the construction of “a 360,000 square foot mixed-use development [project] on a six and a half acre site on Packard Street in Ann Arbor, Michigan,” including “249 residential units with high-end amenities, nearly 30,000 square feet of retail space and over 450 parking space[s] including an underground parking garage” (the “Project”).3 The Debtor signed a promissory note, and other loan documents, and granted Canyon a mortgage on the real property of the Project “together with the related easements, privileges and licenses, and the buildings, structures, improvements, fixtures and personal property located [on it]” to secure the Debtor’s indebtedness for the Construction Loan.4 The Debtor also executed an assignment of leases and rents in favor of Canyon.5 B. The appointment of a receiver in the state court suit On October 21, 2016, Canyon filed suit against the Debtor in Washtenaw County Circuit Court, in the case of CAN IV Packard Square LLC v. Packard Square, LLC, et al., Case No. 16-000990 CB (the “state court case”). In its verified complaint in the state court case, Canyon requested the appointment of a receiver over the property securing its debt, due to the Debtor’s alleged failure “to fulfill its obligations to complete construction of improvements for which funds were provided in accordance with the relevant loan agreements” and “to maintain the [property is a suitable condition,”6 Canyon also sought foreclosure of its mortgage in the state court complaint.7 On October 27,2016, the state court held a hearing in which it heard oral argument regarding the appointment of a receiver.8 Counsel for Canyon and counsel for the Debtor both appeared at the hearing and argued their respective positions at length, for and against the appointment of a receiver. During the hearing, Canyon alleged, in relevant part, that there had been multiple material defaults by the Debtor, in the form of missing critical construction milestone dates under the terms of the Construction Loan and the mortgage, despite Canyon having granted some extensions of those dates. Canyon alleged that, among other defaults, the Debtor had defaulted by missing the “substantial completion date which was October 25[, 2016],” and that the Debtor had defaulted on its obligation to enclose the building of the Project by July 1, 2016, which was “a critically important aspect of the [construction] schedule” to avoid damage to the building, from the inclement weather that had already occurred and that would be getting worse due to the approaching winter season.9’ Canyon alleged that although it had worked with the Debtor and extended the original contractually-agreed date of July 1, 2016 to August 26, 2017, the Debtor had also defaulted on its promise to enclose the building by the extended date.10 According to Canyon, that default still had not been cured, and the building was “still open, and exposed to the elements” at the time of the hearing.11 Canyon also alleged that Gaylor Electric Inc. d/b/a Gaylor, Inc. (“Gaylor”) and Jermor Plumbing & Heating, Inc. (“Jermor”), two subcontractors who had worked on the Project but had not been paid, had recorded construction liens against the property subject to its mortgage, and that more liens would soon be filed based on the Debtor’s firing of Quandel Construction Group, Inc. (“Quandel”), the former general contractor for the Project.12 Canyon informed the Court that due to the Debtor’s defaults, it had accelerated the promissory note and so the promissory note was due and owing in full. Canyon argued that “under either the [parties’] contract or the Construction Lien Act, the [c]ourt was authorized to appoint a receiver under the current existing circumstances” because the Project was only partially completed; the Debtor had defaulted on its obligations under its contract with Canyon; and the building was not enclosed and at risk of being damaged.13 The Debtor argued that although there had been “technical defaults” due to missed construction milestone dates, the Debtor was entitled to an extension of the construction milestone dates of “up to 150 days” due to the force majeure clause in the parties’ loan agreement.14 Debtor also argued that the “fundamental equities” of the case favored denying Canyon’s request for the appointment of a receiver.15 At the conclusion of the hearing, the state court gave a bench opinion in which it rejected the Debtor’s arguments and ruled that it would “appoint McKinley, Incorporated [“McKinley”] as receiver for the [P]roject arid that that [would] be done immediately.”16 On November 1, 2016, the state court entered an order appointing McKinley as the receiver (the “Receivership Order”).17 In the Receivership Order, the state court made the following findings, among others: C. [Debtor] has defaulted in the performance of its obligations under the Loan Documents identified and defined in the Complaint and [Canyon] has provided notice of such default. D. Further, [Debtor] has failed or refused to pay necessary and immediate expenses to preserve and protect the Property, all of which constitutes waste and which jeopardizes the security interest of [Canyon] and other parties having an interest in the Property. In this circumstance, MCL 600.2927 as well as the provisions of the Loan Documents authorize this Court to appoint a receiver. E. Additionally, the requirements under MCL 570.1122(1) are met in this case, namely: (i) The improvements and construction to the Property are incomplete; (ii) The Indebtedness due [Canyon] secured by the Mortgage is in default, and, therefore, the Mortgage is in default; and (iii) [Canyon], the mortgagee, is likely to sustain substantial loss, if the improvements to the Property are not completed.18 C. Terms of the Receivership Order, and the receivership loan At the time of the Receiver’s appointment, the Debtor estimates that the Project was about 65% complete. Canyon presented credible evidence, however, that at that time the Project was only about 50% completed, and needed reworking of some of the work that had been done.19 In any case, the Receivership Order gave the Receiver broad authority over the Debtor’s property and the Project, the purpose of which was “to protect the interests of all interested parties in the Property.”20 The Order gave the Receiver authority and direction not only to protect and preserve the Property, but also to complete construction of the Project: [T]he Receiver is authorized and directed to take immediate possession and full control of the Receivership Property and to take any and all necessary and appropriate action to effectuate his possession and sole control over same in order to prevent waste and to preserve, secure, safeguard, winterize and complete construction of the Receivership Property.21 To this end, the Receivership Order authorized the Receiver to “immediately enter into a loan agreement with [Canyon] to borrow funds to winterize, safeguard, and complete construction of the Receivership Property and to lease and potentially sell such property, in accord with the terms of MCL 570.1122, et seq.”22 The Order authorized the Receiver to borrow up to $19.7 million from Canyon “to, among other things, winterize, safeguard and complete construction of the Receivership Property.”23 Such loan was to be “subject to terms acceptable to [Canyon] and upon the approval of the Court,” and was to be secured by a “super priority” lien, “senior to all other liens,” on the Receivership Property.24 Shortly after its appointment, the Receiver and Canyon jointly sought the state court’s approval of proposed loan documents for the Receivership Loan. The Debtor objected, and the state court held a hearing on November 17, 2016, during which the court heard arguments and then granted the joint motion to approve the loan documents.25 Thereafter, the Receiver and Canyon entered into the Receivership Loan, in a loan agreement dated as of November 22, 2016 and related documents.26 D. Pre-petition activity under the state court receivership During the more than 10-month period after the state court appointed the Receiver and before the Debtor- filed this bankruptcy case, there was considerable activity on the Project by the Receiver and its chosen general contractor on the project, O’Brien Construction Company, Inc. And there was a great deal of litigation in the state court ease, between the Debtor and some of the construction lien holders on the one hand, and the Receiver and Canyon on the other hand. The state court case has been contentious. For example, almost immediately after appointment of the Receiver, the Debt- or appealed the Receivership appointment and sought a stay pending appeal. The Debtor also sought an order requiring the Receiver to use the Debtor’s preferred general contractor at the time, C.E. Glee-son Constructors, Inc., in place of the Receiver’s chosen contractor O’Brien,27 The state court heard these motions on November 17, 2016, and denied them.28 The Debt- or then filed a motion for reconsideration of the Receivership order on December 8, 2016, which the state court denied on December 19, 2016.29 The Debtor appealed the Receivership order to the Michigan Court of Appeals, where the appeal remains pending.30 The Debtor thereafter filed various oppositions and/or objections against the Receiver in the state court. The state court litigation has also included various motions and objections filed by some of the creditors claiming construction liens -predating the receivership. This includes motions by Gaylor Electric, Inc. (“Gaylor”) and Quandel seeking relief from, and amendment of, the Receivership Order, a motion by Gaylor for leave to file a complaint against the Receiver for claimed breaches of fiduciary duty, and objections by Gaylor and Quandel to reports of the Receiver.31 These matters were heard by the state court on June 22, 2017, and the Gaylor and Quandel motions were denied and their objections were overruled.32 Most recently in the state court case, on August 31, 2017, the Receiver and Canyon filed a joint motion seeking to increase the total amount of the Receivership Loan that the Receiver is authorized to borrow, in order to complete the Project. In round numbers, the motion sought to increase the maximum borrowing amount from the original maximum of $19.7 million (approved in November 2016) to $37.5 million, an increase of $17.8 million.33 The motion alleged, among other things, that: (1) “[s]ince entry of the Receivership Order, the Receiver has dutifully executed his obligations and has taken all necessary steps to complete the Project,” and to date, had incurred costs of $8.9 million; (2) the remaining undrawn amount of the original $19.7 million Receivership Loan was insufficient to complete construction of the Project; (3) the original $19.7 million loan authorization had been based on the Debtor’s budget, which had proven inadequate and unrealistic; and (4) the costs to complete the Project were significantly higher because of deficient work done by the Debtor and other specified problems caused by the Debtor. The joint motion was noticed for a hearing that was to have occurred in the state court on September 7, 2017.34 The hearing did not occur, however, because the Debt- or filed this bankruptcy case two days before the hearing. E. The Debtor’s bankruptcy case The Debtor filed a voluntary petition for relief under Chapter 11 commencing this case on September 5, 2017, As noted above, this was more than 10 months after the state court appointed the Receiver. In Part I of this opinion, above, the Court described the hearings it held on the Motion. In addition, the Court held a lengthy hearing on September 13, 2017, on two other, competing motions: (1) the Debtor’s motion entitled “First Day Emergency Motion for Order Directing Receiver to Turn Over All Property to Chapter 11 Debtor-in-Possession and Related Relief’ (Docket # 8); and (2) the motion filed by Canyon entitled “CAN IV Packard Square LLC’s Emergency Cross-Motion To: (1) Excuse Receiver from Turnover Provisions; and (2) Suspend the Bankruptcy Case” (Docket # 28). The Court is addressing those motions in a separate opinion and order being filed today. F. The Debtor’s financing motion In the Motion, the Debtor seeks an order under 11 U.S.C. § 364 to borrow up to $22,006,132 from Ardent Financial Fund, II, L.P. (“Ardent” or the “DIP Lender”), and of that loan amount, the Debtor seeks an interim order authorizing it to immediately borrow up to $1.5 million from Ardent, before entry of a final order. The purpose of the proposed $22 million loan is to enable the Debtor to complete construction of the Project. The Debtor’s budget for the use of the $22 million loan proceeds includes money for this purpose, and it also includes money to finance certain expenses the Debtor expects to incur for its Chapter 11 bankruptcy case—namely, $980,000 for the Debtor’s projected legal fees and payment of the Chief Restructuring Officer that the Debtor proposes to employ. The Debtor’s loan budget also in-eludes $4,690,282 in “Loan Costs.”35 It is undisputed that without post-petition financing, the Debtor has no money with which to fund its Chapter 11 bankruptcy case or perform any work on the Project. To secure repayment of the proposed DIP loan, the Motion seeks an order granting Ardent a lien that will “prime” all other liens on the Debtor’s property—that is, a lien that will have priority over all other liens, under 11 U.S.C. § 364(d)(1). The Motion also seeks an order granting Ardent a super-priority administrative expense to secure full repayment of the proposed DIP loan, under 11 U.S.C. § 364(c)(1). The Debtor says that it is unable to obtain post-petition financing without such a priming lien and super-priority administrative expense being granted to the lender. Thus, if approved, the lien securing the Debtor’s $22 million DIP loan would have priority over the existing liens that Canyon has to secure repayment of its Receivership Loan and its Construction Loan, and priority over all construction liens that are held against the Project by contractors and subcontractors. In order to obtain the proposed priming lien, of course, the Debtor must prove that “there is adequate protection of the interest[s] of the holderfs] of’ the liens to be primed. 11 U.S.C. §§ 364(d)(1)(B), 364(d)(2). The Debtor contends that such adequate protection exists in this case because there is a substantial “equity cushion”—ie., that the value of the Debtor’s property (the Project real estate) is substantially greater than the total of all debts secured by any liens- on the property, and that an equity cushion would still exist if the -priming lien for the $22 million DIP loan were added. Canyon disputes this, and argues that the Debtor has failed to meet its burden to prove adequate protection. The dispute about adequate protection was the subject of the evidentiary hearing. IV. Discussion A. The adequate protection dispute 1. Debtor’s position The Debtor contends that the real property that is the subject of the Project now has, and will in the future have, a value substantially greater that the total debts secured by all liens against the property, including the priming lien to be granted to Ardent as the lender on the proposed DIP loan. The Debtor supports its claims about the value of the property with the opinions of its appraisal expert, David Abraham of Colliers International, who testified during the evidentiary hearing and whose written appraisal report was admitted into evidence.36 In his report and in his testimony, Mr. Abraham opined that the real property has and will have the following present and future market values: • an “As-Is” market value, as of August 1, 2017, of $73,800,000 (the “As Is Value”); • a future value, upon completion of the Project (which completion date Mr. Abraham assumes will be May 1, 2018) of $85,700,000 (the “Future Completion Value”); and • a future value, upon “stabilization” (ie., after the Project is both completed and fully rented) (which Abraham assumes will occur on August 1, 2018) of $89,400,000 (the “Future Stabilization Value”). To each of these three values Mr. Abraham adds $4,080,000, which he says is the present value of a certain tax increment financing agreement for which the Debtor has completed all requirements.37 Adding that to the three values just stated, the values become: • $77,880,000 (As-Is Value on August 1, 2017); • $89,780,000 (Future Completion Value on May 1,2018); and • $93,480,000 (Future Stabilization Value on August 1,2018).38 With respect to the value of liens on the property, the Debtor argues that these range from a total of $33,624,368.94 (Debt- or’s contention) to a maximum of $55,289,851.38 (the “worst case scenario” from the Debtor’s perspective, according to the Debtor’s Craig Schubiner).39 The Debtor presents these two different lien totals as part of its adequate protection case, in large part because the Debtor disputes the amount that Canyon claims it is owed on its loans and the amounts Canyon and some of the lien claimants say is owing on construction liens. When the proposed priming lien for the $22,000,000 DIP loan is added to the above lien amounts, the total liens would'be in the range of $55,624,368.94 to $77,289,851.38. Even the higher of these two amounts, according to the Debtor, is below the market value of the property, no matter which of the three values opined by Mr. Abraham is used ($77,880,000 “As-Is” value as of August 1, 2017; $89,780,000 Future Completion Value on May 1, 2018; or $93,480,000 Future Stabilization Value on August 1, 2018). And, the Debtor emphasizes, the $22 million DIP loan would only be advanced over time, as progress toward completion of the Project occurred. Because of this, the Debtor argues, the value of the Project would be increasing toward the $89,780,000 Future Completion Value as the DIP loan advances move upward toward the full $22 million priming lien amount. 2. Canyon’s position Canyon disputes Debtor’s contentions, both as to the value of the property and as to the amount of debt secured by existing liens against the property. In support of its contentions about value, Canyon relies largely upon the testimony and written report of its appraisal expert, Timothy A. Eisenbraun, discussed below.40 Canyon and its expert Mr. Eisen-braun contend that the Abraham Report and Mr. Abraham’s opinions about the value of the property are not properly supported, are based on faulty assumptions, are unreliable, and overstate the value of the property. With respect to the amount of debt secured by existing liens, Canyon contends that the debt owing to it totals $50,710,493.64 as of August 31, 2017 (consisting of $41,041,777.07 owing on the Construction Loan and $9,668,716.56 owing on the Receivership Loan), with interest accruing on this debt at the rate of $640,273.48 per month.41 And Canyon contends that construction liens against the property total $8,914,852.85—consisting of a lien in favor of the Project’s former general contractor, Quandel, of $5,968,282.49 plus a lien in favor of the current general contractor, O’Brien Construction Company, Inc., of $2,946,570.36.42 Thus, according to Canyon, for purposes of the adequate protection analysis, the existing liens total at least $59,625,346.49 as of August 31, 2017, and that lien total is increasing by the amount of interest accruing after August 31, 2017, at the rate of at least $640,273.48 per month. The $59,625,346.49 sum, plus the $22,000,000 amount of the proposed priming lien under the DIP loan the Debtor seeks, totals $81,625,346.49. And, Canyon argues, the Debtor has not met its burden of proving that the value of the property exceeds, let alone substantially exceeds, this lien total amount. B. The Court’s findings and conclusions about lien amounts, value, and adequate protection 1. Applicable law Section 364(d) of the Bankruptcy Code states: (d)(1) The court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a hen only if— (A) the trustee is unable to obtain such credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. (2) In any hearing under this'subsection, the trustee has the burden of proof on the issue of adequate protection. 11 U.S.C. § 364(d). The issue before the Court is whether, as required by § 364(d)(1)(B), there is adequate protection of the interests of Canyon and the other lien creditors whose liens will be primed by the lien of the DIP Lender, if the Motion is granted. The Debtor has the burden of proving such adequate protection, by a preponderance of the evidence. See 11 U.S.C. § 364(d)(2); see generally Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In determining whether the Debtor has satisfied this burden, the Court is mindful of the fact that “granting post-petition financing on- a priming basis is extraordinary and is allowed only as a last resort.” In re YL West 87th Holdings I LLC, 423 B.R. 421, 441 (Bankr. S.D.N.Y. 2010) (citations omitted); see also Bland v. Farmworker Creditors, 308 B.R. 109, 115 (S.D. Ga. 2003) (internal quotation marks and citation omitted) (“[T]he § 364(d) process is considered rare and extraordinary ....”); In re Seth Co., Inc., 281 B.R. 150, 153 (Bankr. D. Conn. 2002) (citations omitted) (“The ability to prime an existing lien is extraordinary, and in addition to the requirement that the [debtor-in-possession] be unable to otherwise obtain the credit, the [debtor-in-possession] must provide adequate protection for the interest of the holder of the existing lien[.]”); In re Qualitech Steel Corp., 276 F.3d 245, 248 (7th Cir. 2001) (citation omitted) (“Section 364(d) is supposed to be a last resort. The statutory text itself conveys that message[.]”). In a similar vein, courts have held that the bankruptcy court must exercise particular caution in determining adequate protection in the face of a proposed priming lien: The determination of adequate protection is a fact-specific inquiry. “Its application is left to the vagaries of each case ... but its focus is protection of the secured creditor from diminution in the value of its collateral during the reorganization process.” In re Beker Industries Corp., 58 B.R. 725, 736 (Bankr. S.D.N.Y. 1986). “Given the fact that super priority financing displaces liens on which creditors have relied in extending credit, a court that is asked to authorize such financing must be particularly cautious when assessing whether the creditors so displaced are adequately protected.” In re First South Savings Association, 820 F.2d 700, 710 (5th Cir.1987). [[Image here]] A finding of adequate protection should be premised on facts, or on projections grounded on a firm evidentiary basis. In re Mosello, 195 B.R. 277, 289, 292 (Bankr. S.D.N.Y. 1996) (emphasis added). The authorization to prime an existing lien should not be read as authorization to increase substantially the risk of the existing lender in order to provide security for a new, post-petition lender. When the effect of the new borrowing with a senior lien is merely to pass the risk of loss to the holder of the existing lien, the request for authorization should be denied. In re Windsor Hotel, L.L.C., 295 B.R. 307, 314 (Bankr. C.D. Ill. 2003). Section 361 of the Bankruptcy Code, entitled “Adequate protection,” lists ways a debtor can provide adequate protection. It states: When adequate protection is required under section ,.. 364 of this title of an interest of an entity in property, such adequate protection may be provided by— ■ (1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale, or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity’s interest in such property; (2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or (3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property. 11 U.S.C. § 361 (emphasis added). Sections 361(1) and 361(2) do not apply, because the Debtor is not offering cash payments or replacement liens as adequate protection. Rather, § 361(3) applies, so the Debtor must provide, as adequate protection, the “indubitable equivalent” of the secured creditors’ interest in the property securing their claims. “Indubitable equivalence requires such relief as will result in the realization of value [by the secured creditor].” In re Vander Vegt. 499 B.R. 631, 637 (Bankr. N.D. Iowa 2013) (internal quotation marks and citation omitted), aff'd sub nom. First Sec. Bank & Tr. Co. v. Vegt, 511 B.R. 567 (N.D. Iowa 2014). To be the “indubitable equivalent” of a secured creditor’s interest in property, the proposed adequate protection must both compensate the secured creditor for the present value of that interest, and insure the safety of that interest. In re Pac. Lifestyle Homes, Inc., No. 08-45328, 2009 WL 688908, at *9 (Bankr. W.D. Wash. Mar. 16, 2009) (relying on in In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir.1935), and In re Am. Mariner Indus., Inc., 734 F.2d 426, 431 (9th Cir. 1984)), effectively overruled on other grounds by United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988)). In this case, the Debtor argues, in effect, that the secured creditors will realize the value of their interests in the collateral from the future increase in the value of the collateral which will result when the Project is completed and the residential units and retail spaces are leased. “In general, courts have denied financing that included a priming lien where adequate protection relied on increased value in highly speculative circumstances, where time periods for value increase were tight, or where a debtor faced red tape or other hurdles.” Vander Vegt, 499 B.R. at 638. Numerous reported cases confirm the need for courts to use great caution in granting a priming lien, where adequate protection is based on predictions of future value. For example: • In re YL West 87th Holdings I LLC, 423 B.R. 421, 423, 443 (Bankr. S.D.N.Y. 2010) (debtor moved for authority to obtain debtor-in-possession financing secured by a senior lien that would prime the liens of two secured creditors, in order to construct and improve a multi-use development; the court denied the motion due to the “highly speculative” nature of the project, and stated that “there [were] numerous contingencies in this case with respect to whether the [d]ebtor could successfully complete construction of the [project] and its ultimate value, if completed”); • Suntrust Bank v. Den-Mark Constr., Inc. (In re Den-Mark Constr., Inc.), 406 B.R. 683, 702 (E.D.N.C. 2009) (citation omitted) (holding that a secured creditor “[had] not been sufficiently assured of the indubitable equivalence of its existing security,” where the debtor, a real estate developer, sought authority to obtain post-petition financing on a priming basis to develop and construct residences on real properties on which the creditor had liens; debtor argued that “improvements to the subject properties [would] increase their value, thereby compensating [the secured creditor] for the loss of its priority to [the lender];” but the court explained that “ ‘Congress did not contemplate that a secured creditor could find its position eroded and, as compensation for the erosion, be offered an opportunity to recoup dependent upon the success of a business with inherently risky prospects’ ”); • In re Strug-Division LLC, 380 B.R. 505, 512, 515 (Bankr. N.D. Ill. 2008) (debtors argued that the renovation of an apartment complex on which secured creditor had an existing lien would “result in [an increase in] value [of the apartment complex far] exceeding debt, and that this ‘equity cushion’ [would] protect [the secured creditor] even if its 'loans [were] primed”; and “[t]he only adequate protection offered by the [d]ebtors for the proposed subordination of [the secured creditor’s] liens [was] the increase in property value resulting from the rehab work”; court held that the debtors could not obtain a loan with a priming lien under § 364(d)(1), reasoning that debtors could not provide the secured creditor -with the “indubitable equivalent” of its present interests and thus could not provide adequate protection, because “the ‘equity cushion’ would be small and therefore the risk of being primed would be entirely on [the secured creditor]”); • In re St. Petersburg Hotel Assocs., Ltd., 44 B.R. 944, 945-46 (Bankr. M.D. Fla. 1984) (debtor sought post-petition financing for improvements to a hotel which it needed to make to secure a “Holiday Inn” franchise; debtor argued that this would increase the value of the hotel; court denied debtor’s motion to obtain credit on a superpriority basis because the secured creditor whose lien would be primed was already un-dersecured by approximately $1 million and because “[a]n examination of the assumptions relied on by the [d]ebtor which form[ed].the basis for the proposition that the [secured creditor was] adequately protected reveal[ed] that the assumptions [were] mere expectations, many of which [were] highly speculative and unrealistic”). • Resolution Trust Corp. v. Swedeland Dev. Grp., Inc. (In re Swedeland Dev. Grp., Inc.), 16 F.3d 552, 566 (3rd Cir. 1994) (Third Circuit Court of Appeals held that in the case before it, “[t]he bankruptcy court was ... wrong in finding that [the secured creditor] derived adequate protection from the increased value of [a real-estate development] project through [the debtor’s] contemplated continuing construction,” because “the evidence [did] not establish that the property ha[d] increased in value to compensate [the secured creditor] for the loss of its priority to [the post-petition lender].” The Third Circuit reasoned that some of the debtor’s projections were “belied by [the debtor’s] historical performance; “the 5-month sales projections ... were below expectations;” and “the cash flow projections upon which the bankruptcy court relied were deficient as they did not provide for a reasonable developer’s profit nor discount the projected eight-year cash flow to present value.” Id. at 566. Given the “inherently risky circumstances of [the] Chapter 11 [case];” the debt- or’s reliance on projections rather than reliable objective quantifiable evidence; and the lack of any new consideration being offered by the debtor, the debtor had not satisfied its burden of showing that the interests of the secured creditor were adequately protected.) 2. The debt amounts currently secured by liens that would be primed Canyon presented substantial, credible evidence that there are construction liens against the Debtor’s property consisting of (1) $5,968,282.49, based on the lien filed by the Project’s former general contractor, Quandel, plus (2) a lien in favor of the current general contractor, O’Brien Construction Company, Inc. (“O’Brien”), of $2,946,570.36! These liens total $8,914,852.85.43 Quandel was the Debtor’s general contractor on the Project, until the Debtor terminated Quandel in October 2016, shortly before the Receiver was appointed by the state court. Quan-del’s filed lien of $5,968,282.49 includes amounts owed by Quandel to subcontractors, some of whom also filed lien notices against the Project. Because of this possible duplication in the filed lien amounts, the Court does not count the dollar value of liens filed by any of the subcontractors for purposes of deciding the adequate protection issue. During the evidentiary hearing, the Debtor attempted to prove that the valid amount of construction liens against the Project are less than asserted by Canyon. But' as part of its burden of proving adequate protection, the Debtor has the burden of proof regarding the amount of liens against the property. And the Debtor failed to meet its burden of proving, by a preponderance of the evidence, that the valid lien amounts against the property are less than the sum of $8,914,852.85 shown by Canyon’s evidence. Similarly, Canyon presented substantial, credible evidence that its liens for the Construction Loan and the Receivership Loan total $50,710,493.64 as of August 31, 2017, with interest continuing to increase that lien amount at the rate of $640,273.48 per month thereafter.44 The Debtor failed to meet its burden of proving, by preponderance of the evidence, that the debt amount owing to Canyon, secured by Canyon’s liens, is less than the amounts shown by Canyon’s evidence. For these reasons, the Court must assume, and finds and concludes, that for purposes of deciding the issue of adequate protection, the total amount of debt secured by liens against the Debtor’s property is at least $59,625,346.49 as of August 31, 2017, and is increasing by the amount of interest accruing after that date at the rate of at least $640,273.48 per month.45 The $59,625,346.49 sum, plus the $22,000,000 amount of the proposed priming lien under the DIP loan Debtor seeks, totals $81,625,346.49.46 3. The value of the property “In some cases, the [equity] cushion alone is adequate to guarantee a party will receive the ‘indubitable equivalent’ of its interest in the property as permitted by 11 U.S.C. § 361(3). The adequacy of a[n equity] cushion amount must be evaluated on a case-by-case basis.” In re Schaller, 27 B.R. 959, 962 (W.D. Wis. 1983) (citations omitted). To succeed in proving adequate protection in this case, the Debtor must prove that an adequate equity cushion exists and will exist, through the interim period covered by an interim order (with a DIP loan maximum amount of $1.5 million during the interim period), and into the future as the full $22,000,000 DIP loan is to be advanced to the Debtor. Turning now to the dispute between the Debtor and Canyon regarding the value of the Debtor’s real property, the Court first notes that all three of the valuation amounts opined by the Debtor’s appraisal expert, Mr. Abraham, are based on projections of the future vahe of the property after the Project is fully constructed (“completed”) and, thereafter, when the Project is fully rented (“stabilized”). This is obviously so for Mr. Abraham’s $85,700,000 Future Completion Value on May 1, 2018 and his $89,400,000 Future Stabilization Value on August 1, 2018. But it is also true with respect to Mr. Abraham’s opinion of the $73,800,000 As-Is Value on August 1, 2017. To arrive at the As-Is Value on August 1, 2017, Mr. Abraham began with the $89,400,000 Future Stabilization Value on August 1, 2018, and deducted certain adjustments from that value. The total of these deductions was $15,600,000. Mr. Abraham subtracted the $15,600,000 from the $89,400,000 Future Stabilization Value to arrive at the $73,800,000 As-Is Value on August 1,2017. The largest of these deductions was for $11,880,000' as the “total cost to complete” the development between now and the August 1, 2018 assumed date of stabilization. The logic of this approach—deducting the assumed future cost to complete the Project from the Future Stabilized Value to help arrive at a current As-Is Value—is that the current value of the property in its partially-completed, completely un-rented (and therefore non-income producing) state is what the property will be worth after the Project is completed and fully rented, less the cost it will take to move the project from its current state to the future completed and stabilized state. (Mr. Abraham’s other deduction adjustments were $2,357,371 in “Total Lease-Up” costs and $1,382,195 in “Total Other Income Loss.”)47 Thus, all ‘ of Mr. Abraham’s opinions about the value of the Debtor’s real property, at each of the three different times, are based on projections of what the value of the property will be in the future after construction of the Project is completed, and in the case of the As-Is Value and the Future Stabilization Value, after the apart-merits and retail space in the Project are fully rented and income-producing. But the Project is far from completed, and no part of the Project’s apartment space or retail space is occupied and rented, so the Project is not currently producing any income. And there is inherent uncertainty about the future—including how long it will take and how much it will cost in the future to complete the Project and to fully rent it, and how much rental income will be generated in the future. For these reasons alone, the Court finds each of the three valuation amounts ascribed to the Debtor’s real property by the Debtor’s appraisal expert to be inherently uncertain and speculative to some extent. In addition, the Court finds that there are several major flaws in the Debtor’s valuation evidence that make it unreliable. These are discussed later-in this opinion. But first, the Court will focus on what the adequate protection picture is, using Mr. Abraham’s projected values. Even using those, the Debtor has failed to prove adequate protection. The Court will begin by considering Mr. Abraham’s “As-Is Value” of the Debtor’s real property, on August 1, 2017, which is $73,800,000, plus the $4,080,000 present value of the tax increment financing agreement, for a total of $77,880,000. This current value is less than the sum of (1) the existing liens, which total at least $59,625,346.49 as of August 1, 2017, plus (2) the $22,000,000 amount of the proposed priming lien under the DIP loan the Debt- or seeks. This lien sum- equals $81,625,346.49. Thus, the total amount of the proposed priming lien plus the existing liens is greater than the current, As-Is Value by $3,745,346.49. This, of course, is an equity deficit, not an equity cushion. But the Debtor’s view is that this is not a fair comparison of value to lien amounts, because under the DIP loan the Debtor seeks, the loan would only be disbursed in periodic advances as construction of the Project progressed and moved toward completion. The Debtor argues that as the Debtor would draw upon the $22,000,000 DIP loan gradually over time, the value of the real property would be increasing correspondingly, and would be higher than the current As-Is Value of $77,880,000. Instead, the value would be moving toward Mr. Abraham’s projected $89,780,000 Future Completion Value and projected $93,480,000 Future Stabilization Value. There are at least two problems with the Debtor’s argument. First, the Debtor failed to prove with any evidence how much the value of the property would increase as DIP loan proceeds were gradually being spent on constructing the Project. The Debtor’s counsel argued, in effect, that the value of the Project would continually increase by at least as much as the amount of the DIP loan money being spent on the Project. But the Debtor did not prove this. Second, the Debtor’s argument overlooks the fact that as time passes, the amount of the existing liens will be increasing by at least the amount of interest accruing on Canyon’s loans—at least $640,273.48 per month. Thus, by the date on which Mr. Abraham projects a $89,780,000 Future Completion Value (May 1, 2018), the existing liens would have increased from the $59,625,346.49 amount as of August 31, 2017, by at least $5,122,187.80 ($640,273.48 per month times 8 months), to a total of at least $64,747,534.33. Adding the $22 million DIP loan priming lien to that equals a total of $86,747,534.33 in liens against the property as of May 1, 2018. This is only $3,032,465.67 less than Mr. Abraham’s projected Future Completion Value on May 1, 2018. This is a very slim equity cushion. It is only 5.43% of the above projected amount of Canyon’s liens as of May 1, 2018.48 and more importantly, it is only 4.68% of the projected amount of all the existing liens to be primed, as of May 1, 2018.49 It amounts to only 3.88% of Mr. Abraham’s projected value of the Debtor’s real property on May 1, 2018.50 The Court finds that this is not enough of an equity cushion to be adequate protection of the existing liens. Similarly, by the date on which Mr. Abraham projects a $93,480,000 Future Stabilization Value (August 1, 2018), the existing liens would have increased from the $59,625,346.49 amount as of August 31, 2017, by at least $7,043,008.28 ($640,273.48 of interest per month times 11 months), to a total of at least $66,668,354.77. Adding the $22 million DIP loan priming lien to that equals a total of $88,668,354.77 in liens against the property as of August 1, 2018. This is only $4,811,645.23 less than the projected Future Stabilization Value on August 1, 2018. This is a slightly higher equity cushion than the one projected for May 1, 2018, but this August 1, 2018 equity cushion too is a very slim equity cushion. It is only 8.33% of the projected amount of Canyon’s liens as of August 1, 2018,51 and more importantly, it is only 7.22% of the projected amount of all the existing liens to be primed, as of August 1, 2018.52 It amounts to only 5.15% of Mr. Abraham’s projected value of the Debtor’s real property on August 1, 2018.53 The Court finds that this is not enough of an equity cushion to be adequate protection of the existing liens. The Court finds these equity cushion percentages just calculated to be too small to be adequate protection of the existing liens, in large part because they are based on projections of value that are several months into the future, and that are inherently uncertain and speculative, as discussed above. This uncertainty and these small equity cushion percentages leave too great a margin of risk to the existing lien holders—too great a risk that the proposed priming DIP loan lien would impair the value of the existing liens. See generally In re Windsor Hotel, L.L.C., 295 B.R. at 314 (priming lien must be denied “[wjhen the effect of the new borrowing with a senior lien is merely to pass the risk of loss to the holder of the existing lien”). Other cases have found equity cushion percentages in this range insufficient to be adequate protection. See Kost v. First Interstate Bank of Greybull (In re Kost), 102 B.R. 829, 831-33 (D. Wyo. 1989) (quoting, with approval, In re McKillips, 81 B.R. 454, 458 (Bankr. N.D. Ill. 1987) (citations omitted): “[c]ase law has almost uniformly held that an equity cushion of 20% or more constitutes adequate protection;” and “[c]ase law has almost as uniformly held that an equity cushion under 11% is insufficient to constitute adequate protection;” and “[c]ase law is divided on whether a cushion of 12% to 20% constitutes adequate protection”); Drake v. Franklin Equip. Co. (In re Franklin Equip. Co.), 416 B.R. 483, 528-29 (Bankr. E.D. Va. 2009) (quoting above passage from Kost with approval, and citing numerous other cases; and finding an equity cushion of 4.87% to be insufficient). Thus, even using Mr. Abraham’s estimates of projected future values, the Court concludes that the Debtor failed to meets its burden of proving adequate protection by a preponderance of the evidence. But even if the slim equity cushion amounts described above could be deemed adequate, the Debtor has not met its burden of proving them. These equity cushions are based on projected values of the Debtor’s real property that have not been proven by reliable evidence. There are several significant flaws in the Debtor’s appraisal evidence. First, as he testified and described in more detail in his report, Mr. Abraham considered three general valuation approaches—the Income Capitalization Approach; the Sales Comparison Approach; and the Cost Approach. Of these three approaches, however, Mr. Abraham relied ultimately on only the Income Capitalization Approach. He stated in his report that “the [Income Capitalization Approach] warranted primary emphasis,”54 but he actually stated that the two other approaches—the Cost Approach and the Sales Comparison Approach—are not reliable in this case: The cost approach, while consistent with the other findings, is of limited reliability because of the difficulty of accurately measuring the various forms of depreciation .... The sales comparison approach was also consistent with the findings of the other approaches. It had to, however, rely on comparisons that were relatively dissimilar and thus required extensive adjustments. Its reliability is limited as a result.... As a result, the conclusion relies upon the findings of the income approach.55 Because the Debtor’s own expert conceded that his Cost Approach and his Sales Comparison Approach are not reliable in this case, the Court finds them to be unreliable and will give them no weight in determining value in this case. Second, and in any event, under all of the valuation approaches, all three of the values opined by Mr. Abraham are premised on significant, unproven assumptions. They are based on, among other things, the following assumptions: (1) that the total cost to complete the Project will be $11,880,000,56 and that the Project will be completed by May 1, 2018, which is less than seven months from now. These are assumptions that were crucial to Mr. Abraham’s appraisal values, and were provided to Mr. Abraham by- the Debtor’s Craig Schubiner. But the Debtor failed to prove these crucial assumptions by a preponderance of the evidence. Canyon presented substantial, credible evidence that it will cost roughly $19 million to complete the Project, and that the Project cannot be completed until the end of October 2018.57 The Debtor attempted to prove its much more optimistic assumptions, chiefly through the testimony of the Debtor’s Craig Schubiner. But the Court finds the Debtor’s evidence to be unpersuasive on these points, and finds the evidence presented by Canyon, including the testimony of the current general contractor O’Brien’s Paul Marcus, to be more credible and persuasive. The Debtor failed to meet its burden of proving the truth and validity of its above assumptions by a preponderance of the evidence. This renders Mr. Abraham’s appraisal values unreliably high. Third, the Court agrees with several of the other criticisms of Mr. Abraham’s appraisal opinions made by Canyon’s appraisal expert Mr. Eisenbraun in his report and testimony. These include the following points, which are some, but not all, of Mr. Eisenbraun’s criticisms. As Mr. Eisenbraun stated in his report, CXD, in rebutting Mr. Abraham’s appraisal report: • The lease-up time to stabilize the project is unrealistic. The appraisal states that there is a 3-month window to finish and lease-up the property to an occupancy rate of 96.5 percent. The report does not indicate any pre-leasing for any of the apartments or the retail space. In fact, the receiver is working fully on the apartment units and no significant work has commenced with the retail space. No letters of intent (LOIs) have been brought to our attention for the retail space. • The capitalization rate within the report is not supported. The appraisal utilizes a capitalization rate of 5.50 percent and states that the comparable sales are the best indication to support the rate. That stated, none of the comparable sales are located within Michigan. The comparable sales presented are located in the states of Colorado, New Jersey, Minnesota and Missouri. Despite the fact that local data is available, no local data to support the rate is presented. Within the report, it states, “A rate slightly higher than 5.50%, or around the average of the supplemental comparable sales, say 5.84% seems most reasonable, and the comparable sales data is concluded to provide a rate of 5.75% for the subject.” In the end, a rate of 5.50 percent was utilized. Within the report, it states, “Currently capitalization rates for stabilized assets range from 5.50% to 10.50%, with an average of 6.25%.” Based on the data presented within the report, a capitalization rate of 6.00 percent appears to be more inline within investor expectations within Michigan, Leaving all other assumptions aside, simply capitalizing the reported net operating income of $4,915,338 by 6.0 percent would result in a diminution of value of $7,500,000 ■ (81,900,000 less $89,400,000). • The appraisal does not provide adequate support for apartment rent estimates. Basically, the appraisal has simply utilized the owner’s asking rental rates and has utilized them to develop the Income Capitalization Approach. The average asking rental rate for apartment units is $2.32 per square foot. Market data presented within the report has an average apartment rent of $1.85 per square foot. Within the report, Apartment Rent Comparables 1, 2 and 6 are the only properties not in the downtown area of Ann Arbor. Apartment Rent Comparables 7, 8 and 9 are true student housing projects near the University of Michigan and do not reflect the economics at the subject property. As shown on Page 68 of the report, the apartment rents modeled are at 110.2 percent of market rent. • At 33,000 square feet, the size of the retail space is overstated. The architectural rendering provided by the client states that the actual square footage is 22,692 square feet. This additional 10,308 of square footage results in an overstatement of value. At the same time, the rental rates for the retail are overstated. The appraisal has built rental rates of $26.40 per square foot for the larger retail unit and $33.00 per square foot for smaller retail space within the subject. The appraisal report does not' demonstrate support for market rent. Rent Comparables 1, 3 and 5 are located in Downtown Ann Arbor near the University of Michigan. Rent Comparables 2 and 4 are located within traditional retail developments. Comparable 2 is a Mei-jer retail outlet while Comparable 4 is located in an intensive retail development near Interstate 94. At the same time, the subject property does not have a typical layout. The retail area is set slightly below the road and is part of the U-Shape configuration positioned at the front of the building. It is unlikely that the subject property could generate the same retail levels found at superior locations with retail space that has greater visibility and appeal. [[Image here]] • On Page 91, the growth rates modeled appear to be aggressive. The appraisal has rent spikes for Year 2, 3 and 4 of 4.0, 5.0 and 4.0 percent per year. At the same time, no spikes are anticipated for expenses. Most indications state that the Michigan market has reached a point of stabilization and any additional recovery or growth is limited. Based on current market conditions, market participants arc not modeling rent spikes at this time.58 For these additional reasons, the Court finds the Debtor’s appraisal evidence to be unpersuasive. For all of these reasons, the Court finds that the Debtor has failed to meet its burden of proving, by a preponderance of the evidence, adequate protection in the form of any equity cushion, let alone an adequate equity cushion, to protect the lien interests of the existing lien holders, including Canyon, if the proposed DIP loan and priming lien are approved. Y. Conclusion For the reasons stated in this opinion, the Court will enter an order denying the Motion. . Objections were filed by Quandel Construction Group, Inc. (Docket # 49)(claiming mechanic's lien); Gaylor Electric, Inc, (Docket # 52) (claiming construction lien); Zeeland Lumber and Supply Co, (Docket # 59) (claiming construction lien); and E.L. Painting Co. (Docket # 64), The written objection filed by E.L. Painting Co. was stricken as untimely, by an order entered on September 12, 2017 (Docket # 65). The United States Trustee did not file any written objection to the Motion. The United States Trustee appeared at the September 13, 2017 hearing, and its counsel stated that some of the terms of the Debtor's proposed debtor-in-possession ("DIP”) financing order need to be modified, but that otherwise the United States Trustee does not object to the Motion. . Canyon’s written objection is found at Docket # 53. . Affidavit of Craig Schubiner in Support of Chapter 11 Petition and First Day Pleadings ("Schubiner Aff.”) (Docket # 7) at ¶¶ 6-7; Plaintiffs Verified Complaint for Appointment of Receiver and Other Relief (the “state court complaint”) (Ex. A to Docket # 28) at ¶¶ 12, 15. . See state court complaint at ¶¶ 14-18; Order Appointing Receiver (Ex. C to Docket # 7) at 2 ¶ B. . See state court complaint at ¶ 14.c. . Id. at ¶ 2. . Id. at ¶¶ 75-82 (Count II Foreclosure of Mortgage). . See Tr. of Oct. 27, 2016 hearing in the state court case (Ex. B to Docket # 28). . Id. at 10-14, 28, 31. . Id. at 13. . Id. . Id. at 8-9, 28. . Id. at 13-14. . Id. at 6, 20-21, 34-35, 38, 40-41. . Id. at 36. . Id. at 57. . Receivership Order (Ex. C to Docket # 7). . Id. at 2-3. . Testimony of Paul Marcus. (All citations to “testimony” in this opinion are to testimony given during the evidentiary Hearing held on September 19 and 20, 2017.) . Receivership Order at 3. . Id. at 4 (emphasis added). . Id. at 4-5. . Id. at 5. . Id. at 5, 6. . Tr. of November 17, 2016 state court hearing (Docket # 103, Ex. 2) at 67-80. The state court entered its order approving the loan ■ documents on November 21, 2016. (See Docket # 103, Ex. 1 at 4 (state court docket entry of 11/21/2016)). . Copies of these loan documents were admitted into evidence during the evidentiary hearing as Creditor’s Exhibits S-3, S-4, and S-5, and as Debtor’s Exhibit 60. (In this opinion, the Court will cite the exhibits admitted into evidence during the evidentiary hearing as ‘'DX-_” for the Debtor’s exhibits and “CX-_” for Canyon's exhibits. With respect to the Debtor's exhibits, citation to a particular numbered exhibit is to the tab number in the Debtor’s exhibit books that were presented during the evidentiary hearing. Debtor's Exhibit 60, just referred to, for example, is cited as DX-60.) . Quandel Construction Group, Inc. had been the Debtor's general contractor on the Project, but disputes between the Debtor and Quandel led the Debtor to terminate Quandel, effective October 17, 2016. (See CX-N, CX-O). . Tr. of November 17, 2016 state court hearing (Docket # 103, Ex. 2) at 29-32, 54-58. The state court entered its order approving the loan documents on November 21, 2016. (See Docket # 103, Ex. 1- at 4 (orders at state court docket entries of 11/21/2016)). . See Docket # 103, Ex, 1 at 4,5 (state court docket entries of 12/8/2016 and 12/19/2016), . Schubiner Aff, (Docket # 7) at 8 n. 2. . The motions by Gaylor and Quandel were concurred in by two other construction lien claimants, Amthor Steel and Zeeland Lumber and Supply Co. (See Docket # 109, Exs. 4, 5). . Tr. of June 22, 2017 state court hearing (Docket # 103, Ex. 7) at 15, 27, 32, 47, 57. The state court entered its orders reflecting these rulings on June 23, 2017. (See Docket # 103, Ex. 1 at 15 (orders at state court docket entries of 6/23/2017); Docket # 109, Exs. 7-9 (copies of these state court orders)). . Joint Motion to Approve Amended Receivership Loan Documents and Budget (DX-28) at 4-5; Docket # 103 (Ex, 1) at 18 (state court docket entry of 8/31/2017). . See DX-28 (notice of hearing therein). . These numbers are taken from DX-37, which the Debtor's Craig Schubiner testified is the Debtor’s most recent DIP loan budget. . Mr. Abraham's written report is DX-1, and is referred to in this opinion as the “Abraham Report.” . The Debtor and Canyon have not disputed the $4,080,000 component of Mr. Abraham’s valuation, or that the $4,080,000 amount should be included in the value of the property for purposes of deciding the issue of adequate protection. . Abraham Report at 3; testimony of David Abraham. . These numbers are taken from a document entitled "Adequate Protection Summary" (DX-33) prepared by the Debtor’s Craig Schu-biner, who testified about it during the evi-dentiary hearing. The lower of these two numbers, according to Schubiner’s summary, consists of a balance owing to Canyon of $31,479,443.25 plus "mechanics liens” totaling $2,144,925.69. The higher of these two numbers (the "worst case scenario”) according to Schubiner’s summary, consists of a balance owing to Canyon of $51,000,000.00 plus "mechanics liens” totaling $4,289,851.38. .Mr. Eisenbraum wrote a report rebutting the Abraham Report. Eisenbraun’s report is CX-D, and was admitted into evidence during the evidentiary hearing, along with Mr. Eisen-braun’s testimony. (Mr. Eisenbraun’s report is referred to in this opinion as the "Eisenbraun Report.”) . E.g., CX-A; CX-U; CX-V; CX-W; testimony of Kevin Scholz. . E.g., CX-L; CX-P; testimony of Kevin Scholz; testimony of Matthew Mason; testimony of Paul Marcus. . See record citations in footnotes 41 and 42 of this opinion. . See record citations in footnote 42 of this opinion. . This $59,625,346.49 total is the sum of Quandel’s lien of $5,968,282.49, O’Brien’s lien of $2,946,570.36, and the secured debt owing to Canyon on the Construction Loan and the Receivership Loan totaling $50,710,493.64 as of August 31, 2017. . The Court notes that the priority of Canyon's liens, as against the construction liens, is a matter of some dispute between Canyon and the other lien holders. Canyon contends that its liens, both as to the Receivership Loan and the Construction Loan, have priority over the construction liens, But, as Canyon states, in the state court "the construction lien claimants have asserted that their liens are senior to the liens of Canyon,” and ”[t]he state court had not yet adjudicated the issue when the bankruptcy petition was filed,” (Canyon’s Objection to Mot. (Docket # 53) at 4 n,3). And in this Court, the construction lien claimants who filed timely "limited” objections to the Debtor’s Motion all asserted that their liens at least have priority over the lien securing Canyon’s Construction Loan. (See Docket # 49 at 1-2 (Quandel’s limited objection); Docket # 42 at 4 1111 (Gaylor Electric, Inc.’s limited objection); Docket # 59 at 111 (Zeeland Lumber and Supply Co.’s limited objection).) Canyon’s evidence shows that the debt owing on the Construction Loan is $41,041,777.07 of the total debt owing to Canyon, as of August 31, 2017. See discussion at record citations in Part IV,A,2 of this opinion. So if the construction lien claimants prevail in their priority arguments, Canyon’s lien securing roughly $41 million of the total debt owing to Canyon could be last in priority among the lien holders. This Court is not resolving any priority disputes between the existing lien claimants at this time. That is beyond the scope of the evidentiary hearing and the dispute over adequate protection, which both the Debtor and Canyon agree must be decided urgently in the very early days of this bankruptcy case. As a result, the Court must consider the value and amount of all of the existing liens in deciding whether the Debtor has proven an adequate protection equity cushion, not just the value and amount of the liens held by the objecting creditor Canyon. Neither the Debtor nor Canyon has argued otherwise; rather, the Debtor and Canyon each have presented their case regarding adequate protection on this basis. . See Abraham Report at 3, 101, 102. . Canyon’s liens would total at least $55,832,681.48 as of May 1, 2018 ($50,710,-493.64 as of August 31, 2017 plus 8 months’ interest thereafter totaling $5,122,187.84). The above projected equity cushion amount on May 1, 2018 of $3,032,465.67 divided by $55,832,681.48 equals .0543, or 5.43%. . As noted above, the existing liens {i.e., those other than the $22 million DIP loan lien) would total at least $64,747,534.33 as of May 1, 2018. The above projected equity cushion amount on May 1, 2018 of $3,032,465.67 divided by $64,747,534.33 equals .0468, or 4.68%. . $3,032,465.67 divided by $89,780,000 equals .0338, or 3.38%. . Canyon’s liens would total at least $57,753,501.92 as of August 1, 2018 ($50,-710,493.64 as of August 31, 2017 plus 11 months’ interest thereafter totaling $7,043,008.28). The above projected equity cushion amount on August 1, 2018 of $4,811,645.23 divided by $57,753,501.92 equals .0833, or 8.33%. . As noted above, the existing liens (i.e., those other than the $22 million DIP loan lien) would total at least $66,668,354.77 as of August 1, 2018. The above projected equity cushion amount on August 1, 2018 of $4,811,645.23 divided by $66,668,354.77 equals .0722, or 7.22%. . $4,811,645.23 divided by $93,480,000 equals .0515, or 5.15%. . Abraham Report at 135, . Id. . This includes $10,800,000 plus a 10% ($1,080,000) contingency. See Abraham Report at 102. . Testimony of Paul Marcus. . Eisenbraun Report at 3-4. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500925/ | MEMORANDUM
Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE
On February 20, 2015, John and Janet Maddox (“Defendants” or “Debtors”) filed a Chapter 7 bankruptcy. On June 8, 2015, they received a discharge. On June 7,2016, Creditor William Brothers (“Plaintiff’) commenced this action to revoke the Debtors’ discharge as to all creditors pursuant to 11 U.S.C. § 727(d)(1).
On March 14, 2017, Defendants filed a motion 'for summary judgment. Plaintiff responded with his own motion for summary judgment. The court heard argument on the motions on July 10, 2017. For the following reasons, the court will DENY Plaintiffs motion for summary judgment and will GRANT Defendants’ motion.
I. Jurisdiction
28 U.S.C. §§ 157 and 1334, as well as the general order of reference entered by the district court, provide this court with jurisdiction to hear and determine this adversary proceeding. Plaintiffs action regarding the revocation of the discharge is a core proceeding. See 28 U.S.C. § 157(b)(2)(J).
*129II. Statement of Material Facts
On a motion for summary judgment, the nonmoving party is entitled to have the facts viewed in the light most favorable to him. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In this case, both parties have filed motions for summary judgment. These are the facts as to which there is no genuine issue of fact.
Plaintiff and Mr. Maddox began doing business together in November, 2008. [Doc. No. 38, Defendant’s Statement of Material Facts as to Which No Genuine Issue Exists to be Tried in Support of Motion for Summary Judgment ¶ 11 (hereinafter “Defendant’s Statement of Facts”).] Plaintiff, doing business as L & W Motors, bought cars through Mr. Maddox, doing business as JM Wholesale. [Id.] Mr. Maddox would purchase vehicles at auction, then at the end of the week Plaintiff would pay Mr. Maddox for those purchases. [Id. at ¶ 13.] Sometimes, Mr. Maddox would sell vehicles for Plaintiff and then pay Plaintiff from the sale proceeds. [Id] During the weeks preceding the bankruptcy, Mr. Maddox wrote Plaintiff four checks for four cars he had ostensibly purchased at auction. The $78,000 in checks were returned to Plaintiff for insufficient funds prior to the bankruptcy filing. In addition, Defendant sold Plaintiffs vehicles without paying Plaintiff; granted security interests to a third party in vehicles that he had bought for Plaintiff and had already been paid for; and accepted payment from Plaintiff for vehicles that he did not purchase. [Doc. No. 53, Plaintiffs Statement of Material Facts as to Which No Genuine Issue Exists to be Tried in Support For Summary Judgment ¶¶ 1, 4, & 11 (hereinafter “Plaintiffs Statement of Facts”).] Through these methods Mr. Maddox came to owe Plaintiff $392,530. [Doc. No. 11, Response to Order for a More Definite Statement, Amended Complaint ¶ 19 (hereinafter “Amended Complaint”).]
On February 17, 2015, Plaintiff sent Mr. Maddox a letter demanding payment on the bad checks. [Plaintiffs Statement of Facts ¶ 4.]
Defendants filed for Chapter 7 bankruptcy on February 20, 2015. [Defendant’s Statement of Facts ¶ 1.] Plaintiff was listed as a creditor in that case. [Id. at ¶ 3.]
On February 24, 2015, Plaintiff filed an Alabama Uniform Incident/Offense Report with the Alabama Marshall County Sheriff related to the bad checks. [Id] Plaintiff received a letter from Mitchell Howie, attorney for Mr. Maddox, on February 24, 2015 which informed Plaintiff of the Defendants’ bankruptcy filing. [Defendant’s Statement of Facts ¶ 6.] The letter also stated that the bad checks were not written with the intent to defraud Plaintiff, that the funds which had been deposited to cover the checks had been seized by another creditor. [Id.] Plaintiff contends he relied on the letter as evidence that there was no intent to defraud him, and he did not realize he had been defrauded until he received word from the prosecutor’s office of Marshall County, Alabama that its investigator believed that fraud had been committed. Plaintiff contends that up until that time he believed that there were no assets available to him because everything had been seized by another creditor. The investigator for the Marshall County District Attorney’s office disclosed that some of his funds had been misused rather than seized. [Plaintiffs Statement of Facts ¶¶ 9-11.] Plaintiff saw the investigator’s supplement with these findings on June 24, 2015. [/&] This was approximately two weeks after the discharge had been entered.
Defendants made 237 alleged preferential payments for a total of $2.8 million in the 90 days prior to filing their bankruptcy. [Doc. No. 54-2, p. 19 (hereinafter “Ex*130hibit 10”).] Of those payments, 69 were to Plaintiffs business. [Id.] Those payments totaled $1.3 million. [Id.] Defendants do not dispute that those payments were made during that period. [Doc. No. 63 at 5.] On their bankruptcy schedules, Defendants stated that no payments of more than $600 were made to creditors on consumer debts and no payments of more than $6,255 were made on business debts during the 90 days prior to filing bankruptcy. [Defendant’s Statement of Facts at ¶ 12.]
Defendants received their discharge on June 8, 2015. [Id. at ¶ 8.] At no time prior to June 8, 2015 did Plaintiff file any objection to Defendants’ receiving their discharge or an objection to the discharge of the debts owed to him. He did not seek an extension of the time to do either.
On June 7, 2016, Plaintiff commenced this action to revoke the Debtors’ discharge as to all creditors pursuant to 11 U.S.C. § 727(d)(1). The action was timely filed pursuant to § 727(e)(1). Plaintiff alleges that Defendants committed fraud in obtaining their discharge by defrauding the Plaintiff and making false statements on their bankruptcy petition and schedules. [Amended Complaint ¶ 20-22.]
III. Analysis
A. Standard of Review
Summary judgment is appropriate 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(a). The burden is on the moving party to show conclusively that no genuine issue of material fact exists, and the court must view the facts and all inferences to be drawn therefrom in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Morris v. Crete Carrier Corp., 105 F.3d 279, 280-81 (6th Cir. 1997); 60 Ivy Street Corp. v. Alexander, 822 F.2d 1432, 1435 (6th Cir. 1987); Kava v. Peters, 450 Fed.Appx. 470, 473 (6th Cir. 2011).
Once the moving party presents evidence sufficient to support a motion under Fed. R. Civ. P. 56, the nonmoving party is not entitled to a trial merely on the basis of allegations. The nonmoving party is required to come forward with some significant probative evidence which makes it necessary to resolve the factual dispute at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); 60 Ivy Street, 822 F.2d at 1435. The moving party is entitled to summary judgment if the nonmoving party fails to make a sufficient showing on an essential element of the nonmoving party’s case with respect to which the nonmoving party has the burden of proof. Celotex, 477 U.S. at 323, 106 S.Ct. 2548; Collyer v. Darling, 98 F.3d 211, 220 (6th Cir. 1996).
B. Elements of Section 727(d)(1)
A proceeding to revoke a discharge must be initiated by filing an adversary complaint. Fed. R. Bankr. P. 7001(4). The party seeking revocation bears the burden of proof by a preponderance of the evidence. Buckeye Retirement Co v. Heil (In re Heil), 289 B.R. 897, 903 (Bankr. E.D. Tenn. 2003). “Revocation of a debtor’s discharge is an extraordinary remedy, so § 727(d) is liberally construed in favor of the debtor and strictly construed against the party seeking revocation.” Heil, 289 B.R. at 903.
Revocation requires a plaintiff to prove that defendants obtained their discharge by fraud and that plaintiff did not know of such fraud until after the discharge had been granted. Humphreys v. Stedham (In re Stedham), 327 B.R. 889, 897 (Bankr. W.D. Tenn. 2005). Section 727(d)(1) provides that “[o]n the request of *131the trustee, a creditor or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if—such discharge was obtained though the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge.” 11 U.S.C.§ 727(d)(1).
In order for the Plaintiffs motion to be granted, he must show that there is no genuine issue of fact for trial as to both elements: 1) there was fraud committed by the Debtors in obtaining their discharge and 2) he did not know of this fraud before the discharge-was. entered. In order for the Defendants’ motion to be granted, they must show that there is no genuine issue of fact for trial on either 1) that they did not commit fraud in connection with obtaining their discharge or 2) that, assuming they did commit fraud, the Plaintiff knew of the facts that would have provided him with a basis to object to the Defendants’ entire discharge before the discharge was entered.
While the Plaintiff must prove both elements are not genuinely disputed, the Defendant must only show that there is no dispute as to one element in their favor.
C. Existence of Issues Related to Whether Debtor Committed Fraud in Obtaining the Discharge.
Under § 727(d)(1), it is the debt- or’s fraud in obtaining the discharge that qualifies as grounds for revocation and not the debtor’s fraud vis-a-vis the creditor. Yoppolo v. Sayre (In re Sayre), 321 B.R. 424, 427 (Bankr. N.D. Ohio 2004) (“... [Section] 727(d)(1) contemplates the type of fraud that ... would have prevented the debtor from receiving a discharge in the first place.”); Lawrence Nat’l. Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991); First Nat’l Bank of Harrisburg v. Jones (In re Jones), 71 B.R. 682, 684 (S.D. Ill. 1987); Tighe v. Valencia (In re Guadarrama), 284 B.R. 463, 469 (Bankr. C.D. Cal. 2002); Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 925 (9th Cir. B.A.P. 1994). “‘As a general rule, to obtain relief under § 727(d)(1), it is insufficient that a debtor’s fraud rendered a particular debt nondis-chargeable; claimant must allege that the entire discharge would not have been granted but for debtor’s fraud.’ ” Buckeye Ret. Co., L.L.C. v. Heil (In re Heil), 289 B.R. 897, 903 (Bankr. E.D. Tenn. 2003) (quoting Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991)).
The types of fraud that would have prevented the Defendants from receiving a discharge in the first place are contained in section 727(a). The list of actions that will prevent a debtor from receiving a discharge include: transferring property within one year of the bankruptcy with the intent to hinder, delay, or defraud a creditor; concealing, destroying, or falsifying records of the debtor’s financial condition or business transactions; making a false oath; withholding recorded information; and failing to explain a loss of assets. 11 U.S.C. § 727(a)(2)-(5). These actions are different from the acts listed in section 523 which will result in the denial of the discharge of a particular debt. Most of the actions which Plaintiff describes in his complaint are acts of prepetition fraud, false pretenses, larceny or embezzlement. These are not the types of conduct that will result in the denial of the entire discharge.
Plaintiff does raise one ground which qualifies. He relies on two misstatements in the schedules as examples of the Defendants intentionally and knowingly making false oaths to obtain their discharge. The first misstatement he alleges is that the *132Defendants mischaracterized him as a “creditor” in their Schedule F. The second is that the Defendants lied in their Statement of Financial Affairs about making any transfers to business creditors within the 90 days prior to filing.
The court finds that the first statement is not a false oath as a matter of law. Plaintiff is a creditor and the amount listed reflects the significant amount of $400,000 owed to him. Plaintiff argues that listing him as a “creditor” and not by some other designation such as “fraud victim” was a false statement to the court about the nature of the debt, and one which misled the Plaintiff about his rights to recover his money. This is not a correct interpretation of his status as described by the schedules and this position is inconsistent with Plaintiffs action in filing this complaint. The term creditor is defined in the Bankruptcy Code as an entity that holds a claim against the debtor that arose at the time of or before the order for relief concerning the debtor. 11 U.S.C. § 101(10). A claim is defined 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. 11 U.S.C. § 101(5)(A). The plaintiff in a revocation action must be the trustee or a “creditor.” 11 U.S.C. § 727(d)(1). The gist of Plaintiffs statement of undisputed facts is that he has standing as a creditor to recover the money Mr. Maddox owes him for the cars Plaintiff financed or entrusted to Mr. Maddox for sale. There is no genuine issue of fact about whether listing Plaintiff as a creditor was a false oath. It is a true and accurate statement.
Plaintiff confuses being the holder of a claim with being the holder of a nondis-chargeable debt. If all of Plaintiffs allegations were proven, then Plaintiff would have pleaded facts sufficient to support a claim that Mr. Maddox defrauded him of $392,530. The Bankruptcy Code gave Plaintiff a right to file an adversary proceeding to have this court determine whether Mr. Maddox obtained funds from him by fraud, false pretenses, embezzlement or theft under 11 U.S.C. §§ 523(a)(2) or (4). The rules also required him to bring that action within a specific period of time. Fed. R. Bankr, P. 4007(c). However, Plaintiff did not bring such an action and the prepetition actions are not a sufficient basis to revoke a discharge. Buckeye Ret. Co., L.L.C. v. Heil (In re Heil), 289 B.R. 897, 903 (Bankr. E.D. Tenn. 2003).
The second misstatement on which Plaintiff relies to prove the existence of an intentional false oath involves the Defendants’ failure to disclose prepetition payments to creditors. The parties agree that the statement “none” in response to question no. 3 on the Statement of Financial Affairs is false. They agree that, in fact, there were hundreds of payments to creditors, many of which exceeded the $6,255 threshold for disclosure. The court has held that failure to disclose preferences is a material misstatement that may give rise to a denial of a discharge. Jahn v. Flemings (In re Flemings), 433 B.R. 230, 242 (Bankr. E.D. Tenn. 2010). The Plaintiff has shown that there is no genine issue of whether a false oath was made; however, Plaintiff must also show that there is no genuine issue about whether Defendants knowingly and with fraudulent intent made the false statement. The existence of intent is an issue that is not well suited for a motion for summary judgment because it requires the court to review circumstantial evidence and to evaluate the credibility of the evidence. FIA Card Servs. N.A. v. Wagner(In re Wagner), No. 10-36900, 2012 WL 6737830 at *5 (Bankr. N.D. Ohio 2012) (“where a debtor’s subjective intent is at issue, summary judgment is generally in*133appropriate unless all reasonable inferences defeat the claims of the opposing party”). Mr. Maddox denies he had such intent. He has filed an affidavit in support of his motion stating that the mistake was “inadvertent and without any fraudulent intent.” [Doc. no. 37, Affidavit of John Maddox ¶4.] As unlikely as inadvertence may be for the omission of 267 payments which totaled in excess of $2,860,000, Defendants are entitled to have the facts viewed in the light most favorable to them. Defendants’ counsel also argues that there was no benefit to Mr. Maddox in failing to disclose these transfers. The primary beneficiaries of such failures to disclose are usually the recipients of those payments who may face avoidance actions brought by a chapter 7 trustee. If they are family members or affiliates of the debtor, the court may infer a fraudulent intent that the debtor is hiding the transfers to protect those family members or to retain those funds in other entities in which the debtor has an interest. Payments to insiders is one of the badges of fraud. In re Courtney, 351 B.R. 491, 500 (Bankr. E.D. Tn. 2006). In this case, Plaintiff, who is not alleged to be a partner or relative of the Defendants, was the recipient of the largest number of payments made in the 90 day period. There is no other proof that the Defendants benefited by failing to disclose the transfers that would support the inference of fraud.
Mr. Maddox’s denial coupled with weak circumstantial evidence of intent leads the court to conclude that there is an issue of fact as to whether' Defendants had the requisite fraudulent intent to commit fraud in obtaining their discharge. Therefore the Plaintiffs motion for summary judgment will be denied.
Because the court has found that an issue of fact exists as to. Defendants’ intent, the court also finds that Defendants are not entitled to a summary judgment based on Plaintiffs failure to prove the first element of his claim. The stipulated fact that Defendants failed to list on their schedules $2.8 million in payments made to creditors in the 90 days before filing bank.ruptcy is sufficient to call into question the Defendant’s claim of inadvertance. As noted above this would be an issue of credibility for the court to determine at trial. Defendants’ motion for summary judgment will also be denied unless there is no issue of fact with respect to the Plaintiffs knowledge of the fraud before the discharge.
D. No Existence of Issues of Fact Regarding the Plaintiffs Knowledge of the Fraud before the Discharge Was Entered.
The second required element of a discharge revocation action is proof that Plaintiff did not have knowledge of the fraud. If Plaintiff was aware of the fraud prior to discharge,' he may not seek to revoke it. Id. In Stedham, Judge Boswell elaborated on § 727(d)(1):
In the case of Mid-Tech Consulting, Inc. v. Swendra (In re Swendra), the Eighth Circuit was faced with deciding the scope of the “did not know” requirement under § 727(d)(1). In that case, the debtors obtained a discharge on December 15, 1987. Sometime thereafter, one of their creditors in the chapter 7 case, Mid-Tech Consulting, filed a revocation complaint against the debtors under § 727(d)(1). In their complaint, Mid-Tech alleged that the debtors had fraudulently failed to list several assets on their bankruptcy schedules, most importantly a lake cabin. Mid-JTech admitted that they learned about the concealment during the pendency of the case, but did not obtain evidence of it until two days after the Swendras’ discharge was granted. After conducting a hearing, the bankruptcy court found that Mid-Tech *134did have knowledge of the alleged omission prior to the granting of the Swen-dras’ discharge and, based on that finding, dismissed Mid-Tech’s complaint. The district court affirmed the dismissal and Mid-Tech appealed.
On appeal, Mid-Tech alleged that a creditor must know all the facts that constitute the alleged fraud before dismissal under § 727(d)(1) is appropriate. The Swendras, on the other hand, alleged that dismissal under § 727(d)(1) is appropriate so long as the creditor knew facts that indicated a possible fraud pri- or to discharge. The 8th circuit agreed with the debtors and held “that dismissal of a § 727(d)(1) revocation action is proper where, before discharge, the creditor knows facts such that he or she is put on notice of a possible fraud.” Swendra, 938 F.2d 885, 888 (8th Cir. 1991). In support of its finding that “the burden is on the creditor to investigate diligently any possibly fraudulent conduct before discharge,” the Swendra court reasoned:
By placing this burden on the creditor, we ensure that situations such as the one before us will be avoided in the future. In this case, Mid-Tech knew of the cabin and its omission from the bankruptcy schedules, before discharge. Instead of thoroughly investigating the status of the lake cabin and the Swendras’ stock, and then promptly bringing any fraud to the bankruptcy court’s attention, Mid-Tech waited until after discharge. In seeking to revoke the discharge in a separate proceeding when the matter could have been handled before discharge in the original bankruptcy case, Mid-Tech has squandered the resources of the parties and the courts.
Id.
The majority of courts faced with deciding the “did not know” requirement of § 727(d)(1) have agreed with the Swendra court and found that “the party seeking revocation of the discharge must not have known sufficient facts regarding the Debtor’s actions and/or omissions ‘such that [it was] put on notice of a possible fraud.’ ” Heil, 289 B.R. at 903 (citing Swendra, 938 F.2d at 888); Anderson v. Vereen (In re Vereen), 219 B.R. 691, 696 (Bankr. D.S.C. 1997) (“... in a revocation action under § 727(d)(1), the plaintiff must show due diligence in investigating and responding to possible fraudulent conduct once he or she is aware of it or is in possession of facts such that a reasonable person in his or her position should have been aware of a possible fraud.”); Tighe v. Valencia (In re Guadarrama), 284 B.R. 463, 477-78 (C.D. Cal. 2002) (“Discovery of fraud for purposes of § 727(d) occurs when one ‘obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge.’ ” (citation omitted); State Bank of Indiana v. Kaliana (In re Kaliana), 202 B.R. 600, 604 (Bankr. N.D. Ill. 1996) (If the creditor could have known of the alleged fraud, it has an affirmative duty to so investigate before the discharge is granted or the court will dismiss the requested revocation.”); Wood v. Cochard (In re Cochard), 177 B.R. 639, 643 (Bankr. E.D. Mo. 1995); West Suburban Bank of Darien v. Arianoutsos (In re Arianoutsos), 116 B.R. 116, 118-19 (Bankr. N.D. Ill. 1990); Bear Stearns & Co. v. Stein (In re Stein), 102 B.R. 363, 367-68 (Bankr. S.D.N.Y. 1989); Citibank v. Emery (In re Emery), 201 B.R. 37, 41 (E.D.N.Y. 1996); Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 925 (9th Cir. BAP 1994).
Id. at 897-99.
In this case, the court has found the only false statement on which revocation could *135be based is the statement that there were no payments made to business creditors in excess of $6,255 in the 90 days prior to filing bankruptcy.
However, § 727(d)(1) requires that the creditor bringing the action have no knowledge of the fraud before the discharge was granted. Plaintiff attached to his motion for summary judgment an exhibit that details all of the alleged preferences which Defendants failed to disclose in their bankruptcy schedules. [Exhibit 10.] There are 237 alleged preferential payments made in the 90 days prior to filing for a total of $2.8 million. [Id.] While the Plaintiff may not have known about all 237, he knew about the 69 checks that were written to him. Those checks were for vehicles and totaled $1.3 million. [Id.] He would have known whether any of those checks exceeded the threshold amount for disclosure of $6,255. Since Plaintiff was the recipient of nearly half of the alleged preferences, the only way he can claim not to have known of the false statement in the bankruptcy filing is if he had been unaware of the bankruptcy. However, Plaintiff admits to being listed as a creditor (Amended Complaint at ¶ 19) and that he received a letter on February 24, 2015 which informed him of the bankruptcy (Plaintiffs Statement of Facts ¶ 6). He had filed a criminal complaint and the issue of the Defendant’s fraudulent intent was raised by Mr. Maddox’s attorney’s denial that his client had such intent.
Defendants filed their statement of financial affairs on February 20, 2015. It stated that no payments totaling more than $600 were made on consumer debts during the 90 days prior to filing. It also stated that no payments totaling more than $6,255 were made on business debts during the 90 days prior to filing.
At oral arguments on the motions, the parties agreed that Plaintiff received 69 payments in the form of checks during this period and that those payments totaled $1,300,000. There is no genuine issue that Plaintiff knew that there were significant transfers paid to creditors during the 90 days prior to filing that should have been disclosed.
Receipt of that many transfers in that magnitude provided Plaintiff notice that the statement was not accurate and should have led him to investigate further whether Defendants were not disclosing other prepetition payments. He knew from the first day the bankruptcy was filed that there were payments that had been made. He knew that he had received bad checks and that there were other vehicles which he never received and for which he was not paid within the first month of the case. He went to the criminal authorities on the day Mr. Maddox’s lawyer admitted that the Defendant had pledged the vehicles to another creditor and denied fraudulent intent.
The court does not find that there is any genuine issue of fact regarding the Plaintiffs actual knowledge of the facts which could have provided a basis for objection to the Defendants’ discharge. Creditors with far less knowledge than Plaintiff had have been denied relief under § 727(d)(1). See Stedham, 327 B.R. at 899. Because the Plaintiff cannot prove one of the required elements for revocation of a discharge, Defendants are entitled to have their motion for summary judgment granted and the adversary proceeding dismissed.
The court acknowledges that Plaintiff has lost a substantial sum, and the court does not intend by this opinion to sanction fraudulent conduct in any way or even make a finding of whether fraud was committed by Mr. Maddox prepetition that may be used in any criminal proceeding. That determination will be left to the state *136authorities in the exercise of their police powers. Plaintiff correctly argues that the fresh start provided by a discharge is intended for the “honest debtor.”
To that end, the Bankruptcy Code provides creditors with a window of opportunity to pursue objections to discharge and to object to the dischargeability of debts. When those claims involve fraud, embezzlement and larceny, the Code places the burden on the creditor to file an adversary proceeding to obtain a determination that its debt falls into such a nondischargeable category. 11 U.S.C. § 523(a)(2) or (4); Fed. R. Bankr. P. 4007(c). After that window of opportunity has closed, the Code places an additional burden on a party seeking to revoke a discharge to show that it had no knowledge of the acts which would have caused the debtor to lose his or her discharge. A creditor must pursue its claims of nondischargeability diligently; and if it needs more time to investigate, the creditor should alert the court of what facts it does know and seek an extension of time to do so. In the absence of an objection, the discharge is entered and the bankruptcy case moves to closing. The Code requires the showing that the creditor did not know of its objection to prompt creditors to come forward earlier in the case in order to prevent squandering the resources of the parties and the court. In this case, Plaintiffs failure to bring his knowledge of the false statements to the trustee’s attention by a timely filing may have resulted in substantial preference recoveries for the estate having been lost. Plaintiffs failure to investigate the Debt- or’s intent related to what he knew were the Defendants’ false statements or to ask the court to stay the entry of a discharge until the criminal process was completed within the window provided by the Code prevents him from now seeking revocation of the discharge after it has been entered.
IV. Conclusion
Because there is no issue of fact that William Brothers had knowledge of the existence of false statements on the schedules of John and Janet Maddox before they received their discharge, he is unable to satisfy 11 U.S.C. § 727(d)(1). Therefore, Mr, and Mrs. Maddox are entitled to summary judgment and the adversary proceeding will be dismissed.
A separate order shall enter. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500926/ | AMENDED MEMORANDUM OPINION1 DEBORAH L. THORNE, UNITED STATES BANKRUPTCY JUDGE This case requires the court to consider whether, in Illinois, the cancellation of a mistaken satisfaction of mortgage in the record system constitutes a transfer within the meaning of 11 U.S.C. § 101(54). As explained below, the cancellation did not constitute a “transfer,” and the court must dismiss the complaint for failure to state a claim.2 Background In 2006, Trinity 83, LLC (“Trinity”) granted a mortgage and assignment of rents on its commercial real property located at 19100 S. Crescent Drive in Moke-na, Illinois to secure a loan now in the approximate amount of $2.2 million made to it by First Midwest Bank. Later, First Midwest sold its rights to ColFin Funding Midwest, LLC (“ColFin”). In 2013, Col-Fin’s loan servicing agent mistakenly recorded a satisfaction of the mortgage with the Will County recorder’s office. In spite of the mistaken satisfaction, both parties continued to perform their obligations under the loan agreement, as Trinity continued to make all payments to ColFin in reliance on the loan agreement, and Col-Fin continued to receive the payments. In 2015, after discovering the mistake, ColFin recorded a cancellation of the satisfaction. That same year, ColFin instituted proceedings to foreclose the mortgage in state court. Thirteen months later, Trinity filed a voluntary' petition under Chapter 11, staying the state court foreclosure. Very shortly thereafter, it filed an adversary proceeding seeking to find that the cancellation of the prior satisfaction was invalid under Illinois law and/or that the underlying note was invalid.3 The court granted ColFin’s motion to dismiss, deciding in pertinent part that the mistaken recording of the satisfaction did not alter the rights of ColFin and Trinity, the actual parties to the mortgage. On May 15, 2017, Trinity filed a second adversary proceeding seeking to avoid, as a fraudulent transfer, the cancellation that ColFin had filed in 2015. ColFin filed a motion to dismiss for failure to state a claim on the basis that this action is foreclosed by res judicata principles. Based on the court’s review of the law, it will decide the matter on other grounds. Discussion A complaint may be dismissed if it fails to state a claim for relief. Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012(b). Detailed fact pleading is not required, but a mere recitation of elements will not do. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Rather, the plaintiff must provide enough factual content that would, if accepted as true, allow for an inference of the defendant’s liability. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Here, there must be enough substance, if true, to enable the court to draw the inference that a “transfer” occurred under the Bankruptcy Code (the “Code”) when the cancellation of the satisfaction was recorded. Granting a mortgage is a transfer; its perfection, by recording the mortgage document, is not a transfer between the parties to the mortgage being recorded. Similarly, the mistaken recording of a document purporting to reflect a satisfaction does not constitute a “transfer” between the parties because it only renders the interest vulnerable to later bona fide purchasers, and it is therefore only an act of recording relevant to third party notice, as is the later cancellation of that same document. Because plaintiff alleges, and can only allege, that this act of recording, namely the cancellation of the mistaken entry of satisfaction, constitutes the relevant transfer here, plaintiffs complaint will be dismissed. Section 548(a)(1) of the Code provides that the trustee4 may, under certain circumstances,5 avoid the transfer of the debtor’s interest in property if such a transfer is made within two years of the debtor’s bankruptcy filing. The definition of “transfer” includes the creation of a lien or the retention of title as a security interest in property. 11 U.S.C. § 101(54). While this definition is broad, it does require that the debtor must still relinquish some “property ... or ... interest in property.” Id.; cf. Pirie v. Chicago Title & Tr. Co., 182 U.S. 438, 444, 21 S.Ct. 906, 45 L.Ed. 1171 (1901) (construing similar broad provision under the 1898 Act). State law determines property interests. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Under Illinois law, it is clear that the granting of a mortgage is the “creation of a lien,” or the granting of a property interest, and therefore constitutes a transfer under the Code.6 Illinois Tr. Co. of Paris v. Bibo, 328 Ill. 252, 258, 159 N.E. 254, 257 (1927); F.R.S. Dev. Co. v. Am. Cmty. Bank & Tr., 2016 IL App (2d) 150157, ¶ 54, 405 Ill.Dec. 219, 58 N.E.3d 26, 37. It is also clear that, absent statutory language to the contrary,7 nothing more is “transferred” when the mortgagee records or otherwise perfects their interest in the property.8 Recording does nothing to alter the rights and obligations of the parties to the mortgage as between themselves. That is, as to the grantor and grantee, a mortgage in Illinois is effective, and remains effective, from the date of its proper grant. Union Cty., Ill. v. MERSCORP, Inc., 735 F.3d 730, 734 (7th Cir. 2013); Harms v. Sprague, 105 Ill.2d 215, 224, 85 Ill.Dec. 331, 473 N.E.2d 930, 934 (1984); Haas v. Sternbach, 156 Ill. 44, 57, 41 N.E. 51, 54 (1894) (“No one will contend that the recording of a mortgage is, in this state, necessary to its validity.”). The recording of a mortgage only serves to put later parties, without actual notice, on notice that they cannot take a superior legal position in the property vis-a-vis the mortgagee. Field v. Ridgely, 116 Ill. 424, 431, 6 N.E. 156, 159 (1886).9 Here, in 2006, Trinity granted a mortgage and assignment of rents to First Midwest Bank, securing its $2,025,000 loan. There was thus undoubtedly a “transfer” in 2006. Both of these security interests were also then properly recorded. This, of course, had no effect between First Midwest Bank and Trinity, the original parties to the mortgage. After Midwest sold the note and corresponding security interest to ColFin in 2011, ColFin’s loan servicing agent mistakenly recorded a satisfaction on the mortgage and assignment of rents. What was the effect of this? It rendered the security interests unperfect-ed; that is, subsequent grantees without notice otherwise would take their interests free of the liens. See Burgett v. Paxton, 99 Ill. 288, 311 (1881) (“[W]here there has been a mistaken entry of satisfaction of record of a mortgage, a purchaser without actual notice of the mistake will take a title clear of the mortgage.”). The mortgage and assignment of rents remained perfectly valid as between the parties.10 When the interest was re-perfected by filing the cancellation of satisfaction in 2015, again, nothing changed between the parties; no property rights changed hands. As such, the only relevant “transfer” was the granting of the mortgage, The re-perfection of that interest in the recording system did not “creat[e] ... a lien,”11 nor did the recording of the interest constitute a “mode”12 of parting with the debtor’s interest in property. The entirety of the mortgage had already been conveyed to the mortgagee, and no interest in property was left to be relinquished by the debtor-mortgagor that could have, been acquired by any act of perfection or re-perfection on the part of the mortgagee. Conclusion The plaintiffs complaint alleges that the cancellation of the mistakenly recorded satisfaction in the record system constituted an avoidable “transfer” under § 548. In order to state a claim for relief, this allegation, if true, must allow for an inference of the defendant’s liability. Owing to the fact that the recording of a mortgage13 in Illinois does riot, as a matter of law, constitute a “transfer” between the parties to the mortgage under § 101(54), a separate order will be issued dismissing the plaintiffs complaint with prejudice for failure to state a claim upon which relief can be granted. . This Amended Memorandum Opinion replaces, in total, the earlier filed Memorandum Opinion at Docket No. 13. . Jurisdiction over this matter is proper pursuant to 28 U.S.C. §§ 157, 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408(1), 1409(a). A fraudulent transfer claim is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H); see also In re Glick, 568 B.R. 634, 653 (Bankr. N.D. Ill. 2017). . See generally Pl’s Compl., 16ap00563, Docket # 1. . Here, this role is performed by Trinity as debtor-in-possession. See 11 U.S.C. § 1107(a). . If actually or constructively fraudulent. See id. § 548(a)(1)(B). . As would the "assignment of rents” here, which is also undoubtedly a lien or security interest in Illinois. See In re J.D. Monarch Dev. Co., 153 B.R, 829, 832 (Bankr. S.D. Ill. 1993); In re Woodstock Assocs. I, Inc., 120 B.R. 436, 446 (Bankr. N.D. Ill. 1990). The use of the word "mortgage” in this opinion includes the assignment of rents. . See, e.g., In re Unglaub, 332 B.R. 303, 317 (Bankr. N.D. Ill. 2005) (concluding that the recording of a mortgage constituted a transfer under the Colorado Uniform Fraudulent Transfer Act where the statute specifically provided that recordation of the interest constituted a transfer); see also Md. Code Ann., Real Prop. § 3-101(a) (specifically making recording a requirement to pass title in certain circumstances). . Fundamentally this is because, absent statutory language that ties the effectiveness of the grant itself to its recording, the recording of an instrument which grants an interest in property serves only to protect the grantee of that interest against subsequent purchasers for value with no other notice; that is, the recording acts only operate to put the world on notice of the recorded interest. See Bacon v. Nw. Mut. Life Ins. Co., 131 U.S. 258, 263, 9 S.Ct. 787, 33 L.Ed. 128 (1889); Tiffany on Real Property § 790, at 841 (1940). .While the Illinois Mortgage Foreclosure Law (IMFL) does speak of a mortgage being effective as a lien only from the time of its recording, see 735 ILCS 5/15-1301, it is assumed by courts in Illinois that this does not apply as to the original parties to the mortgage or as to anyone with actual notice of the interest. In discussing this statute alongside the Conveyances Act, 765 ILCS 5/30 (Illinois' general recording/notice statute), the Illinois Appellate Court remarked, "[i]t has, therefore, been recognized that at least with respect to third parties, a mortgage " 'becomes effective when it is recorded...' ” Barry v. Div. II, LLC, 2013 IL App (1st) 121944-U, ¶ 42 (quoting Firstmark Standard Life Ins. Co. v. Superior Bank FSB, 271 Ill.App.3d 435, 439, 208 Ill.Dec. 409, 649 N.E.2d 465, 468 (1995) (emphasis added)). The court then further noted that parties with actual or constructive notice of a mortgage take subject to that interest, which is plainly inconsistent with a literal reading of 735 ILCS 5/15-1301. Barry, at ¶ 43 (quoting Skidmore, Owings & Merrill v. Pathway Fin., 173 Ill.App.3d 512, 514, 123 Ill.Dec. 395, 527 N.E.2d 1033, 1034 (1988)). See also In re Turner, 558 B.R. 269, 278 (Bankr. N.D. Ill. 2016) (thoroughly discussing the above and predicting that the Illinois Supreme Court would hold that an unrecorded mortgage is effective against parties with notice); In re Arnold, 483 B.R. 515, 520 (Bankr. N.D. Ill. 2012) (noting, after citing and discussing the IMFL and Conveyances Act, that it has “no quarrel" with the idea that mortgages are effective against parties with actual notice), . See Bank of New York v. Langman, 2013 IL App (2d) 120609, ¶ 21, 369 Ill.Dec. 436, 986 N.E.2d 749, 753 (citing and discussing Vogel v. Troy, 232 Ill. 481, 83 N.E. 960 (1908); Lennartz v. Quilty, 191 Ill. 174, 60 N.E. 913 (1901); Ogle v. Turpin, 102 Ill. 148 (1881)). There does not seem to be a dispute here that ColFin's agent, acting by mistake, was not authorized to record the release. . 11 U.S.C. § 101(54). . Id. . The cancellation of the 2013 satisfaction in this case amounts only to a re-recording or re-perfection of the mortgagee’s interest because the 2013 satisfaction was recorded by mistake and was never acted nor relied upon by the parties, meaning the mistakenly recorded satisfaction’s effect was limited strictly to third party notice of the mortgagee's interest. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500929/ | MEMORANDUM OPINION PARTIALLY GRANTING MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Mare Barreca, U.S. Bankruptcy Court Judge
These matters came before me for hearing on April 20, 2017 on the Motion to Allow Claim In Part / For Partial Summary Judgment Regarding Breach of Fiduciary Duties (the “Motion Regarding Breach of Fiduciary Duties,” Dkt. No. 196) by Nancy L. James, Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of the Breast Cancer Prevention Fund (“BCPF”); and on June 8, 2017 on the Motion for Partial Summary Judgment Regarding Pledge Cards, Joint Cost Accounting, and Scripts (the “Motion Regarding Violation of the CSA and CPA,” Dkt. No. 227) by the State of Washington (the “State”).1
*201The Trustee was represented by Scott Henrie and Manish Borde and Williams, Kastner & Gibbs, PLLC. The State was represented by the Office of the Attorney General (the “AG”) and Tad Guy Robinson O’Neill. Legacy Telemarketing Corporation (“Legacy”) and James C. Patón (“Pa-ton”) were represented by Arie Bomsztyk and Barokas Martin i&Tomlinson. Clark Nuber, P.S. (“Clark Nuber”) was represented by Justin Bolser and Lori O’Tool and Preg O’Donnell & Gillett PLLC.
Following oral arguments, I took the matters under advisement. On July 26, 2017,1 granted the parties limited permission to supplement the summary judgment record. (See Dkt. No. 282). Given the significant overlap of parties, claims, defenses, and underlying facts, I considered the matters together.
Now, having fully considered the matters and being fully advised, I partially grant the Trustee’s Motion Regarding Breach of Fiduciary Duties and partially grant the AG’s Motion Regarding Violation of the CSA and CPA.
I. JURISDICTION
I have subject matter jurisdiction over the AG’s claim pursuant to 28 U.S.C. §§ 157(b)(2)(B) and 1334.2
H. RELEVANT FACTS
A. Legacy Telemarketing Corporation
Patón founded Legacy in 1992 as a telemarketing company serving both for profit companies and nonprofit charities. (Dkt. No. 198-1 at 46; Dkt No. 204 at 6).3 In 2005 Patón retired from the day-to-day management of Legacy. (Dkt. No. 204 at 6 n.4). Around 2006, Jeff Cunningham (“Cunningham”) became Legacy’s President. (Dkt. No. 236-1 at 5). However, from 2005-2012 Cunningham consistently reported to Patón such that Patón effectively continued to control Legacy. (Dkt. No. 228 at 38-39). Patón reviewed Legacy’s requests for proposals and assisted in drafting the scripts Legacy telemarketers used in providing telemarketing services. (Dkt. No. 228 at 40-41). Patón also reviewed and gave input on Legacy’s contracts. (Dkt. No. 228 at 42). Patón also at least occasionally reviewed Legacy employee evaluations. (Dkt. No. 228 at 44).
B. Breast Cancer Prevention Fund
Patón formed BCPF in 2004, (See Dkt. No. 152 at 1; Dkt No. 202 at 22). He asserts he was inspired to start BCPF after several experiences in which breast cancer indirectly touched his life. (See Dkt. No. 204 at 7-9). He also asserts he had become frustrated with the inefficacy of another breast cancer charity with which Legacy had worked-. (See Id.).
Patón asserts he founded BCPF with a tax exempt purpose to (1) remind women to regularly perform self-check exams and provide educational materials; (2) inform uninsured women that they could get a mammogram for free or little cost; (3) refer uninsured women to clinics that provide free or low cost mammograms, (4) offer and mail breast exam self-check *202shower cards at no charge; and (5) fun-draise. (Dkt. No. 152 at 1). The AG asserts that Patón formed BCPF to create a client for Legacy, and that Patón intended for a significant portion of donations raised on behalf of BCPF to flow back to himself, through Legacy. Patón denies this allegation. (Dkt. No. 204 at 7,10).
BCPF’s articles of incorporation provided in relevant part:
The purpose for which the corporation is formed is: promoting prevention and early detection of breast cancer, encouraging breast-self exams, providing funds to pay for mammograms for uninsured women, raise awareness and educate the general public about breast cancer, and providing funding for breast cancer research.
(Dkt. No. 198-1 at 87). BCPF’s bylaws provided in relevant part: “[t]he specific objectives and purposes of this corporation shall be: Public Benefit Corporation— (charitable purpose).” (Dkt. No. 198 1 at 15).
BCPF’s board of directors (the “Board”) was comprised of Patón and other individuals, including, but not limited to, Joyce Bottenberg (“Bottenberg”), Greg Sheffield (“Sheffield”), and James Shee-han (“Sheehan”). (See e.g., Dkt. Nos. 202 at 6-7, 14, 17, 19, 24; Dkt No. 152 at 1-2). BCPF’s stated mission in its Annual Reports for 2006-2009 was “to save women’s lives by promoting prevention and early detection of breast cancer through awareness and education, and providing funds to pay for mammograms for uninsured women.” (See Dkt. Nos. 202 at 12, 15, 18, 22).
C. BCPF-Legacy Relationship
BCPF’s Board decided to use telemarketing to accomplish its stated mission. (See Dkt. No. 152 at 4, Dkt. No. 204 at 2, 11). BCPF sent out a request for proposal to all registered professional fundraisers in Washington, including Legacy. (Dkt. No. 152 at 4-5; 152-6 at 86). Patón asserts that he disclosed to BCPF’s Board that he had an ownership interest in Legacy and then recused himself from any decision to hire Legacy. (Dkt. No. 152 at 5, Dkt. No. 204 at 2). For example, the minutes from that meeting state that:
RESOLVED, that Legacy was the only qualified firm that responded to the RFP. James C. Patón while an owner of Legacy is not directly involved in the day to day management and has previously stepped down as corporate President, excused himself from further discussion on this matter.
(Dkt. No. 152-6 at 86). BCPF hired Legacy in October 2005. (Dkt. No. 152 at .5, Dkt. No. 204 at 7; Dkt. No. 239-1 at 2-6). Patón asserts that the Board chose to hire Legacy in large part due to a “stop loss” provision so that BCPF would always be guaranteed funds for working capital. (Dkt. No. 152 at 5). The BCPF-Legacy contract (the “BCPF-Legacy Contract”) was approved by the BCPF Board, and it does not appear based on the evidence submitted that the rates charged under the BCPF-Legacy Contract were outside of market norms. (Dkt. No. 152 at 5, Dkt. No. 204 at 2).
The Trustee argues that Patón always enjoyed 100% of Legacy Telemarketing’s profits and was its sole shareholder. Patón asserts that at some point he entered into a stock option agreement with Cunningham, and believed this granted Cunningham an ownership interest in Legacy, leaving Patón with a 92% ownership interest. (Dkt. No. 204 at 6 n.4; 15 n.7). It does not appear from the record that Cunningham ever held any ownership interest in Legacy but, regardless, Patón owned all or substantially all of Legacy at all relevant times. (See 198-1 at 46).
*203Between 2006 and 2011, BCPF constituted 91% (2006), 96% (2007), 97% (2008), 99% (2009), 99% (2010), and 98% (2011) of Legacy’s revenues. (Dkt. No. 198-6 at 102-108).
D. Legacy’s Campaign on Behalf of BCPF
1. Solicitation Calls
Legacy telemarketers made solicitation calls to consumers on behalf of BCPF. Each call lasted an average of less than a minute. (See Dkt. No. 202 at 27-42). Legacy contacted consumers in Washington, California, Texas, Florida, Georgia, arid Pennsylvania. (Dkt. No. 152 at 2).
2. Scripts
Legacy telemarketers followed telephone scripts during their calls with consumers. Multiple versions of scripts were used over the years, and numerous samples appear in the record. (See e.g., Dkt. No. 228 at 7-83 (providing a demonstrative exhibit of scripts and donor cards used during BCPF’s operations). Also, at times, even the “approved” scripts were modified on the floor to test consumer’s responses to the script variations. (See e.g., Dkt. No. 201 at 12, 31-33). Although the scripts varied over the years, the scripts consistently (1) inquired as to whether women in the household were up-to-date on mammograms, (2) inquired as to whether those women had insurance covering mammograms, (3) inquired as to whether the consumer would like to receive a shower card on conducting breast self-exams, and (4) requested a donation.
For example, a 2007 script that was identified as having been approved by Pa-ton provided as follows:
This is (your first name) with Legacy calling on behalf of the Breast Cancer Prevention Fund?
Is this (First & last name)?
The reason for my call is that Breast Cancer Experts recommend that all women over 40 years old receive annual mammograms and understand how to perform self-breast exams ... I’m calling to ask if you have had a mammogram with the past year?
IF YES GO TO BREAST CARDS**
IF NO: Do you have insurance that covers this procedure?
IF NO: (DO NOT ASK THESE WOMEN FOR A DONATION, SKIP PART 3)
Mammography is the best way-to detect Breast Cancer in its earliest, most treatable stage—an average of 1 to 3 years before a woman can feel the lump. We encourage every woman over 40 years old to get a mammogram once a year. Can I refer you to the Washington State Breast and Cervical Health medical clinic in your county for a referral to a clinic so you can schedule an appointment for a mammogram?
** We also have an instruction card on Self Breast exams that I’d like to send out to you if you have any women in the household, or know of a woman that could use it. May I mail one out to you? OK let me verify your Name and Address ....
I will personally rush out the Breast Self Exam instructions from our office in (City), so it should arrive within the next few days. This is a waterproof card and you can hang it in your shower.4 Please use it at least monthly.
*204We also pay for mammograms for uninsured women. Mammograms cost about $90. Would you be able to help 2 women at $180?
(Dkt. No. 228 at 13-14). In another script the donation request was phrased as
First name, just so you know, ' "'Mammograms cost about $90 dollars each.
’“Currently our waiting list is so long, we are asking folks if they can help 2 women at $180 dollars. Can you help 2 women?”
(Dkt. No. 229 at 21). In another script the donation request was phrased as,
'“Mammograms cost about $90 dollars. "'This year the need is so great, we are asking folks if they can, to help 2 women at $180.,, can you help 2 women?
IF NO: Could you help 1 woman?
IF NO: Some of our supporters are sharing the cost at $45. Could you help with at least that much?
(Dkt. No. 228 at 7-8).
The telemarketer provided a “referral” for a consumer to follow-up about receiving a mammogram in only about 0.13 of one percent of the calls—which merely consisted of providing a phone number for another group(s) that provided mammograms. (See Dkt. No. 202 at 27-42).
The scripts consistently failed to disclose Legacy’s role as a professional fundraiser or the role of Legacy employees in making the phone calls. Some scripts instructed telemarketers to say that “This is (your name) with the Breast Cancer Prevention Fund”—omitting mention of Legacy altogether. (See e.g., Dkt. No. 228 at 8, 11, 25, 27). Other scripts referenced the caller being from “Legacy” but without any description of Legacy’s role. In addition, the scripts consistently used the first person plurals, “we” and “our”—effectively obscuring the identity between BCPF, the charity, and Legacy, the commercial fundraiser. (See generally, Dkt. No. 228 at 7-33).
Patón asserts that the scripts were drafted such that BCPF’s education and outreach mission took precedence, in order and emphasis, over fundraising. (Dkt. No. 237 at 2-3). However, Legacy floor manager Mary Heath acknowledged her primary responsibility was to increase profitability by increasing dollars returned per hour. (Dkt. No. 201 at 21).
Patón also provided a “rebuttal” script for Legacy’s telemarketers to use in the event that a consumer had questions or raised objections. The rebuttal script provided in relevant part,
Please study these objections and the corresponding rebuttals. It is very important that you learn and understand how to respond to each and every objection; your success depends on it. Over half of your pledges result from correctly addressing objections.
(Dkt. No. 228 at 69-73). If a consumer mentioned another charity, Legacy telemarketers were instructed to respond, “That’s great.. .they are a wonderful organization.. .We save lives right now.. .we help pay for mammograms for women without insurance. Can you help with a donation; can I mail you out an envelope?” (Dkt. No. 229 at 23).
Legacy’s training document on script delivery provided in relevant part that,
If you focus on each call, and you listen emphatically to the other person, not just what they say but how they say it, you will realize that you. can tell which people you should spend your time with (which will give). Remember, 85% of the people you talk to will not give. If you listen emphatically ... you can weed out these 85% quicker than you are now. This really is 85% of your job: deter*205mining who will not give and focusing on those who will.
(Dkt. No. 228 at 74-75) (internal emphases omitted).
Patón asserts that during its years of operation, BCPF contacted over 11,555,121 women to educate, refer to low cost mammography providers, and fundraise. (Dkt. No. 152 at 3). He asserts that after a conversation with a live telephone agent, approximately 1500 women per month without insurance learned about and were referred to a clinic that provided free mammograms. (Dkt. No. 152 at 3, Dkt, No. 204 at 3).
3. Donor Cards
Once a pledge was made orally on the phone, Legacy sent out a fulfillment pledge card to the donor (“donor cards”). Multiple versions of donor cards were used over the years, and numerous samples appear in the record. (See Dkt. No. 228 at 7-33 (demonstrative exhibit); see supra n. 4). Some were produced by Patón. (Dkt. No. 228 at 62-67). Some were attached to correspondence sent by Patón. (Dkt. No. 230 at 12). Some were produced by donors who had kept copies for their records. (Dkt. No. 161-6 at 5-6; Dkt. No. 161-12 at 5-9). Finally, a former telemarketer provided copies of the donor cards she had used in the course of her work. (Dkt. No. 229 at 15-17)
The donor cards were delivered to donors in envelopes proclaiming to be from the Breast Cancer Prevention Fund, with no mention of Legacy. (See Dkt. No. 229 at 19). The envelopes contained a large logo with the name, Breast Cancer Prevention Fund. (See Id.). The donor cards them-' selves also made no mention of Legacy. (See e.g., Dkt. No. 228 at 9, 16, 18, 23, 31). The donor cards were printed on BCPF letterhead, and provided BCPF’s website address and nonprofit tax ID number. (See Id.). They were usually signed by the individual Legacy telemarketer who had made the solicitation with the title “fundraising coordinator” or “outreach specialist”—but without disclosing that person’s role with Legacy or Legacy’s status as a paid fundraiser. (See e.g., Dkt. No. 228 at 15-16, 32-33). The detachable portion of the donor card that was to be torn off and returned with a donation, provided that donations should be returned to “Breast Cancer Prevention Fund,” and then provided an address. (See e.g., Dkt. No. 228 at 9, 16, 18, 23, 31).
On the detachable portion of the donor card some but not all of the donor cards stated “Fundraising provided by LTC.” (See e.g. Dkt. No. 228 at 9, 16, 31 (donor cards referencing LTC); Dkt. No. 228 at 18, 23 (donor cards fail to reference Legacy or even LTC). Legacy asserts the detachable portion of the donor card was a good place to disclose “LTC,” because this is where the donor actually had to write in information and therefore would be most likely to see it. However, the print was extremely small and the acronym “LTC” is vague.
Some of the donor cards gave a dollar figure followed by a parenthetical suggesting that the money donated would be used to pay for the named services, such as:
_$25.00 $45 Shared Mammogram,
.$50.00 _$90 (One Mammogram), or
-$90 _:_$180.00 (Two Mammograms).
(See e.g., Dkt. No. 228 at 9,16,18)' '
When potential donors did not timely return the donor cards with a donation, Legacy employees followed up with reminder cards that were substantively similar to the donor cards (the “reminder *206cards”). (See e.g. Dkt. No. 228 at 31, 65-67).
Legacy’s billing records establish that from July 2011 through BCPF’s July 2013 bankruptcy, BCPF distributed at least 202,470 initial pledge cards and 190,649 reminder cards. (Dkt. No. 228 at 48). Pa-ton asserts that BCPF raised only 25-30% of its funds from Washington donors; the other approximately 75% was from out of state. (Dkt. No. 152 at 2).
E. Clark Nuber and Form 990s
Clark Nuber prepared BCPF’s nonprofit entity IRS Form 990s from 2006 to 2012. (Dkt. No. 204-1 to 204-7). Clark Nuber also annually assisted BCPF with filing its Chai’itable Organization Registration with the Washington Secretary of State. (Dkt. No. 204 at 14; Dkt. No. 204-28 to 204-32),
At the bottom of the Form 990 is a place for the tax preparer to mark whether the charity is following SOP 98-2, a guideline established by the American Institute of Certified Public Accountants (AICPA) related to joint cost accounting. After reviewing the information provided to Clark Nuber by BCPF and Patón, Clark Nuber advised BCPF in 2006 and every year thereafter that BCPF was properly following SOP 98-2 and included that indication on BCPF’s Form 990s.
On BCPF’s Form 990s for years 2005-2010, the percentage BCPF allocated to “program services” had been hovering between 87% and 93%. (See Dkt. No 204-6 at 12 (2010), Dkt. No. 204-5 at 12 (2009), Dkt. No. 204-4 at 12 (2008), Dkt. No. 204-3 at 3 (2007), Dkt. No. 204-2 at 3 (2006), Dkt. No. 204-1 at 3 (2005)). On BCPF’s 2011 Form 990, Clark Nuber significantly decreased the amount allocated program services, to 52%. (See Dkt. No. 204-7 at 12 (2011). The AG asserts that Clark Nuber’s significant adjustment to the amount allocated to program services was made in response to considerations regarding BCPF’s practice of calling prior donors.5 (See Dkt. No. 228 at 105-08, 115-18). Although the record is clear that calls to prior donors may have impacted the significant downward adjustment, I cannot conclude on this record that this was the primary reason for the adjustment. (See Id.).
Notably, Judge Lasnik recently ruled that BCPF misused the joint cost accounting rule during the relevant time frame. He ruled that although the BCPF-Legacy Contract was drafted as a fee-per-service contract, because Legacy always received a percentage of the money, BCPF was not entitled to use joint cost accounting. (Dkt. No. 228 at 88-95).
The Form 990s prepared by Clark Nu-ber also disclosed that (i) Patón was the Director of BCPF; (ii) BCPF employed Legacy to fundraise; and (iii) Paton’s ownership of Legacy. (See Dkt. 204-1 to 204-7).
The Form 990s were posted on BCPF’s website. (See Dkt. 204 at 2).6
F. Secretary of State
The Charities Division of the Secretary of State (the “SOS”) is responsible for overseeing registrations and renewals for Washington charities. As to charitable solicitations, the SOS is generally not an enforcement agency. (See RCW 19.09.279; Dkt. No. 292-4 at 16). Instead, SOS staff *207refer complaints and compliance issues to the AG’s Office. (See Id.).
Tabatha Blacksmith (“Blacksmith”), a senior customer service representative at SOS, described her duties in 2007 as follows:
[Ejssentially we reviewed documents for compliance with the ROW, so the statute and rule, we assist customers on the phone, by e-mail, and in person, filing their documents. If they have questions about their requirements or how to review forms, and we review those. We enter them into a data base, and then we make that information available to the public so that donors can get that information when they’re asked to donate to organizations.
(Dkt. No. 292-1 at 7-8).
Rebecca Sherrell (“Sherrell”), currently the Charities Program Liaison between the AG’s Consumer Protection Division and the SOS, was the Charities Program Manager at the SOS in 2007. (Dkt. No. 292-4 at 5). She explained that in 2007, the SOS “wanted to make sure that accurate information was being provided, so whether it was joint cost allocations, or whether it was bad math, ... [the] financial section was being looked at to make sure [it did not contain] any glaring errors.” (Id. at 6, 13). At that time, customer service representatives had the authority to reject charities’ filings if they believed they were incomplete or inaccurate. (Id. at 15). If a filing was rejected, the charity had 30 days to fix the problem. (Id. at 16). If the problem was not remedied within 30 days, the SOS gave the charity an additional 15 days, and then referred the matter to the AG. (Id.).
In particular, in 2007, joint cost accounts ing was a topic of concern because it was becoming apparent that charities were “using this as a way of attributing costs in a manner that probably wasn’t true.” (Id. at 5-6, 13). The Charities Division began “flagfging] charities that had ... professional fundraising costs booked as program services at a high percentage.” (Id. at 10). Blacksmith took a particular interest in the misuse of joint cost accounting.7 (Dkt. No. 292-1 at 8). She consulted with charities programs and colleagues nationwide (Dkt. No. 292-4 at 11; Dkt. No. 292-1 at 9-10), and inquired with three Washington charities as to how they substantiated their program services allocations on their renewal forms. (Dkt. No. 292^1 at 8; Dkt. No. 292-1 at 8, 13). Her goal was to increase the accuracy of the financial reporting. (Dkt. No. 292-1 at 10).
Around mid-2007, Blacksmith inquired into BCPF’s joint cost allocation, seeking to understand BCPF’s methodology in allocating fundraising expenses to program services. (Id. at 10-13). On July 10, 2007, Patón forwarded a 2005 telemarketing script to Blacksmith, indicating that if she reviewed the script she would “understand what we are trying to accomplish.” (Dkt. No. 247-1 at 5). Through an exchange of emails, Blacksmith reiterated Washington’s statutory disclosure requirements for charities, and offered a number of suggestions on how to improve BCPF’s / Legacy’s script and disclosures. (See generally Dkt. No. 247-1). She requested that BCPF / Legacy amend its script. (Id. at 10).
On July 24, 2007, Blacksmith stated
After reviewing all the information that you provided, we have concluded that [BCPF] qualifies for joint cost allocation under SOP 98-2.... Our next step is to *208determine if the amount of funds that BCPF allocated to program services (as opposed to fundraising or other administrative costs) is appropriate. Despite repeated requests for copies of written materials, the only documentation that BCPF has provided to date to support their allocations is the telephone script. As a result, our determination is based solely on the telephone script and a review of BCPF’s 2006 IRS Form 990 federal tax return.
(Id. at 22). Blacksmith suggested that based on her methodology of counting words in the script, 27% should be allocated to fundraising/ administrative costs, and 73% to program services. (See Id.).
Also on July 24, 2007, Blacksmith noted that the script contained the statement: “We also pay for mammograms for uninsured women,” and suggested that while the statement may be true indirectly, it gave “the false impression that BCPF directly pays for mammograms.” (Id. at 10). She further noted that,
We have received a number of calls from potential donors who erroneously believe that BCPF directly pays for mammograms. To reduce donor confusion, we recommend that you consider amending your script to state that BCPF “subsidizes the funding of mammograms” or something to that effect.
(Id.).
Patón and Cunningham made revisions to the script. (Dkt. No. 247-1 at 14-15). On July 26, 2007, Blacksmith indicated, albeit equivocally, that she was satisfied with the responses she had received from Patón and Cunningham. (See Id. at 14). She stated that the script “seems to include the necessary disclosures,” and that her “questions regarding disclosure requirements appear to be resolved based on the information provided.” (Id.). On August 2, 2017, Blacksmith again followed up with Cunningham regarding the necessity that Legacy identify itself to each person they interacted with during a telephone call. (Id. at 18). She stated that “[repeating the first sentence of the script to the women of the household (if different than the person who answers the phone) would satisfy this requirement.” (Id.). She again requested a revision to the script. (Id.)
On August 2, 2007, Blacksmith. color-coded the script to explain her methodology, and noted that Cunningham had recently sent her a different version of the script. (See Id. at 25). Acknowledging the limitations of her word-counting methodology, Blacksmith queried whether “there might be a better method available to help determine a fair and more accurate joint cost allocation in the future,” and suggested a time methodology may be superior. (Id.). Patón responded with correspondence from Clark Nuber indicating that BCPF’s methodology was “somewhat aggressive, but not unreasonable,” and stated that he did not want to “incur the costs to amend a return if it is not absolutely necessary.” (Id. at 30).
In reply, Blacksmith stated:
I’m not an accountant, so my suggestions are those of a lay person. If your accountants advise you that tracking time is not an acceptable approach ..., then by all means please follow the advice of your accountants.... All I can suggest is that you discuss it with your accountant and the IRS to determine what path to take in the future.... I completely understand your hesitance to" incur the cost of an amended federal return, I would recommend discussing the matter with your accountants/advis-ors and the IRS. If it is determined that an amended 2006 Form 990 is not warranted, please be sure to include a cover letter with BOPF’s amended 2006 “Solicitation Report” stating that the 990 *209was not amended so I will know why the figures on the 990 and the Solicitation Report differ.
(Id.).
On August 7, 2007, Patón sought Blacksmith’s “feedback on changing some of the BCPF telephone script terminology to be more in line with your suggestions.” (Id. at 34-35). On August 8, 2007, Blacksmith responded that,
[Ojur office cannot give legal advice but I can tell you if the changes to BCPF’s telephone script meet our disclosure requirements and would be happy to provide feedback/comments. Your accountant will of course still need to be the one to address whether or not they meet AICPA/SOP 98-2 guidelines.
(Id. at 34).
On August 16, 2007, Patón thanked Blacksmith for her time on the telephone and attached an edited script. (Id. at 42). Blacksmith responded that, based on her calculations, the total allocable to program services was 65%. (Id. at 42). On August 24, 2007, in an email to Cunningham, Blacksmith indicated that, based on her calculations, the total allocable to program services was 83%. (Id, at 42).
On September 9, 2007, Patón advised Blacksmith that he was having difficulty completing the forms required by the SOS (Id. at 50). He proposed an alternate methodology to calculate the total allocable to program services, but ultimately suggested using the figures from the Form 990s. (Id.). On September 13, 2007, Blacksmith acknowledged that the “method of calculation I mentioned earlier seems rather complicated,” and then proposed a “less complicated” approach. (Id. at 60). Blacksmith indicated that, based on her new calculations, 86% was allocable to program services. (Id.).
Sherrell, Blacksmith’s supervisor in 2007, was surprised by the degree to which Blacksmith undertook her inquiries into BCPF’s joint cost accounting. (Dkt. No. 292-4 at 7). It was a “shock” to Sherrell that Blacksmith reviewed BCPF’s telemarketing script because Washington law does not request or require review of a charity’s scripts. (See Id. at 8).-Sherrell believed that, at times, Blacksmith offered opinions beyond the scope of her knowledge. (See Id. at 10).
Around late 2007, a new director, Pam Floyd, took over at the Charities Division, and clarified the SOS’ policy. (Id. at 6-7; 27). She explained that the SOS was “ministerial in nature,” and its role was not to verify information submitted by charities; “we don’t check to make sure anything’s correct or added correctly, we take what we get, and we make that available to the public.” (Dkt. No. 292-4 at 6).
The BCPF-Legacy Contract was filed with the SOS every year. (Dkt. 204 at 14; see also Dkt. No 204-28 to 204-32). Legacy’s annual filings with the SOS disclosed that BCPF was Legacy’s only client in Washington after 2006 and that Patón was Legacy’s highest paid employee. (Dkt. 204 at 14-15).
6. BCPF’s Representations Regarding Funds Spent on “Program Services”
BCPF raised $22,763,546 in charitable contributions from 2005 through 2012. (Dkt. No. 198-6 at 102). Of that amount, BCPF paid Legacy $18,613,926 for its telemarketing services. (Id.). Thus, BCPF paid Legacy over 80% of the total funds raised on behalf of BCPF. Of that amount, Patón himself took home $8,491,021—which amounts to 37% of the total funds raised on behalf of BCPF. (Id.). BCPF distributed only $3,820,921 in grants to organizations that provided something other than fundraising calls. (Id.). Thus, BCPF donat*210ed only about 16.8% of the money to charities that actually provided mammograms. Nevertheless, between 2006 and 2011, BCPF reported on its website, in its IRS filings, and in its other communications that the vast majority of money raised by BCPF went to “program services.” (See Dkt. No. 204-1 to Dkt. No. 204-7).
On its website, within yearly annual reports, BCPF divided the charity’s expenses into three categories—(1) program, (2) management and general, and (3) fund-raising. (Dkt. No. 202 at 12-25). Between 2006 and 2011, BCPF represented in these annual reports that 87%-93% of all funds it raised went to its “Program.” (Dkt. No. 202 at 13, 16, 19, 23). In reality, over 80% of all funds raised by BCPF were paid to Legacy and over a third of the funds that were paid to Legacy then flowed to Patón. (See Dkt. No. 198-6 at 102). BCPF’s website claimed that none of the Board of Directors, including Patón, was compensated for their time. (Dkt. No. 162-1 at 4).
On its website BCPF also displayed colorful pie charts suggesting that BCPF donated the vast majority of the money it raised. (Dkt. No. 202 at 14, 24). BCPF even posted a newspaper article comparing charities, touting that BCPF donated 90% of its money to its programs. See Dkt. No. 229 at 2, 6-13).
BCPF made similar representations during the course of its telemarketing campaign through Legacy. If a consumer asked how much money went to the “cause,” telemarketers were instructed to tell donors that for 2010 “88% of donations went to program services.” (Dkt. No. 228 at 71). Another version of a rebuttal script instructed telemarketers to respond that “[flor 2005 93% (2006 87%) of all funds went directly to program services. (The balance is for management & General [sic], and for fundraising.).” (Dkt. No. 229 at 24).
H. Investigation of BCPF and Bankruptcy
Sometime in 2010, Carl Hu contacted, among others, the Washington State AG, the SOS, the IRS, and KOMO News-initiating a “whistleblower campaign” against BCPF. (See Dkt. No. 152 at 6). In May 2011, the AG began investigating BCPF for possible violations of Washington’s Consumer Protection and Charitable Solicitation Acts. (Dkt. No. 229 at 1-2).
KOMO News aired an “expose” on BCPF, Patón, and Legacy featuring Legacy employees in November 2011. (Dkt. No. 152 at 7; Dkt. No. 207 at 5). Patón resigned from the Board of BCPF in October 2011. (Dkt. No. 152 at 6; Dkt. No. 204 at 3). BCPF continued to operate. (Dkt. No. 204 at 3). The AG ultimately investigated BCPF, and in March 2013 proposed a consent order of payment of $559,272. BCPF did not accept the offer and attempted to negotiate with the AG. (Dkt. No. 152 at 7).
BCPF filed its Chapter 7 bankruptcy petition on July 2, 2013. (Dkt. No. 1). On October 30, 2013, the AG filed a claim against the bankruptcy estate of BCPF in the amount of $20,280,512 (Claim 5-1), alleging that BCPF’s activities violated the Charitable Solicitations Act, RCW 19.09.020 et seq., and the Consumer Protection Act, RCW 19.86.020 et seq. Legacy ceased operations sometime around the third quarter of 2014. (Dkt. No. 198-1 at 52). The AG amended its proof of claim on February 18, 2015. (Claim 5-2).
III. ANALYSIS
The Trustee seeks an order allowing a portion of the AG’s claim in the amount of $7,616,389, on the basis that BCPF is liable for (a) BCPF’s breach of the fiduciary duty of loyalty and (b) Paton’s breach of the fiduciary duty of loyalty.
*211The AG seeks an order allowing a portion of its claim for restitution, in the amount of $18,942,625, based on violations of Washington’s Charitable Solicitation Act (CSA) and Consumer Protection Act (CPA). First, the AG asserts that BCPF’s pledge cards violated the CSA and CPA by-failing to comply with solicitation disclosure requirements, and seeks to establish at least 1,179,357 violations of the CSA and CPA.8 Second, the AG asserts that BCPF’s allocation of expenses between fundraising, administrative, and program services constituted an unfair or deceptive practice under the CPA. Third, the AG asserts that BCPF’s telephonic charitable solicitations—made pursuant to scripts in use from 2005 to August 2010 and from July 2011 to July 2013—deceptively represented BCPF’s charitable purpose. The AG seeks allowance of a portion of its claim for restitution and represents that under the doctrine of cy pres it will then distribute the restitution to legitimate charities for the purpose of providing mammograms in each state in which BCPF operated.
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is material if it “might affect the outcome of the suit under the governing law.” See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
When a properly supported motion for summary judgment has been presented, the adverse party “may not rest upon the mere allegations or denials of his pleading.” Id. Rather, the nonmoving party must set forth specific facts demonstrating the existence of a genuine issue for trial. Id. While all justifiable inferences are to be drawn in favor of the non-moving party, when the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party, summary judgment is warranted. Matsushita Elec. Indus Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citations omitted).
B. Standing and Remedies
1. AG’s standing to assert breach of fiduciary duty of loyalty claims and to seek restitution or disgorgement on behalf of the public
Patón, Legacy, and Clark Nuber assert that the AG does not have standing to seek a monetary remedy for BCPF’s asserted breach of its fiduciary duties. I disagree.
“Since the community is interested in the enforcement of charitable trusts, a suit to enforce a charitable trust can be maintained by the Attorney General of the State in which the charitable trust is to be administered.” Restat. 2d of Trusts § 391, Cmt. a (2012). “It is the attorney general that has the authority to represent the public interest in securing the enforcement of charitable trusts.” Lundberg v. Coleman, 115 Wash.App. 172, 179, 60 P.3d 595 (2002).
In Washington, under both statutory and case law authority, the AG is empowered to institute actions to protect the *212public interest. The Washington Supreme Court has held that “the Attorney General, as representative of the public and particularly of those individuals who may be specially benefited, has standing to maintain an action against the trustees of a charitable trust.” State v. Taylor, 58 Wash.2d 252, 261, 362 P.2d 247 (1961). Likewise, RCW 11.110.120 provides that the AG “may institute appropriate proceedings to secure compliance with [the Charitable Trusts Statute] and to secure the proper administration of any trust or other relationship to which [it] applies.”
Here, BCPF was domiciled in Washington, conducted business in Washington, and funds were solicited by Legacy through operations in Washington. Donations were deposited in and administered from Washington. The charitable trust (see infra) was located in Washington. Therefore, the Washington AG has standing to represent the public interest in securing the enforcement of this charitable trust.
Patón, Legacy, and Clark Nuber attempt to distinguish the AG’s request for a monetary remedy from an action “securing compliance,” “securing administration,” or “enforcing” a charitable trust. They in effect assert that because a monetary remedy is not expressly authorized, a monetary remedy is not recoverable. However, neither the applicable statute nor case law so limit the AG’s enforcement remedies. In addition, actions for “compliance,” administration,” or “enforcement” would often be rendered meaningless without the ability to seek some attendant monetary remedy.
Patón and Legacy assert that the Restatement (Second) of Trusts § 392 precludes a monetary remedy. It provides that “[t]he remedies for the failure of the trustees of a charitable trust to perform their duties under the trust are exclusively equitable.” Comment a then lists examples of equitable remedies that would not necessarily involve money. However, neither the text of the section nor the comment preclude monetary equitable remedies, such as restitution or disgorgement, where appropriate to “redress a breach of trust.” See cmt. a. Moreover, the Restatement (Third) of Trusts § 100 expressly indicates that remedies for breach of trust may result in a monetary award. It provides that,
A trustee who commits a breach of trust is chargeable with
(a) the amount required to restore the values of the trust estate and trust distributions to what they would have been if the portion of the trust affected by the breach had been properly administered; or
(b) the amount of any benefit to the trustee personally as a result of the breach.
Notably, subpart (b) essentially codifies the remedies of restitution and disgorgement. In addition, the comments to the section provide that the “goal of making the trust and beneficiaries whole is not always taken literally, however, either as a floor or as a ceiling.” See Cmt, a. In some cases even punitive damages aré permissible—“especially so if the trustee has acted maliciously, in bad faith, or in a fraudulent, particularly reckless, or self-serving manner.” See Cmts. a and d.
Based on the above, I conclude that the AG is entitled to assert its breach of fiduciary duty of loyalty claims and to seek restitution or disgorgement on behalf of the public.
2. AG’s standing to assert claims under the CSA and CPA and to seek restitution on behalf of the public
The AG asserts claims under RCW 19.09.340 (CSA), 19.86.080 (CPA), and 19.86.140 (CPA), and seeks restitution and statutory penalties.
*213RCW 19.09.340 provides in relevant part that,
(1) The legislature finds that the practices covered by this chapter are matters vitally affecting the public interest for the purpose of applying the [CPA]. A violation of this chapter is not reasonable in relation to the development and preservation of business and is an unfair or deceptive act in trade or commerce and an unfair method of competition for the purpose of applying the [CPA].
(2) The secretary may refer such evidence, as may be available, concerning violations of [the CSA] to the attorney general ... In addition to any other action they might commence, the attorney general ... may bring an action in the name of the state, with or without such reference, against any entity to restrain and prevent the doing of any act or practice prohibited by [the CSA]: PROVIDED, That [the CSA] shall be considered in conjunction with ... [the CPA], as now or hereafter amended, and the powers and duties of the attorney general ... as they may appear in the [the CPA], shall apply against all entities subject to [the CSA],
RCW 19.86.080 provides in relevant part that,
(1) The attorney general may bring an action in the name of the state, or as parens patriae on behalf of persons residing in the state, against any person to restrain and prevent the doing of any act herein prohibited or declared to be unlawful; and the prevailing party may, in the discretion of the court, recover the costs of said action including a reasonable attorney’s fee.
(2) The court may make such additional orders or judgments as may be necessary to restore to any person in interest any moneys or property, real or personal, which may have been acquired by means of any act herein prohibited or declared to be unlawful.
RCW 19.86.140 provides in relevant part that “[e]very person who violates RCW 19.86.020 shall forfeit and pay a civil penalty of not more than two thousand dollars for each violation.” A “person” includes corporations, trusts, unincorporated associations and partnerships. See RCW 19.86.010.
Patón and Legacy argue that under RCW 19.86.080 the AG does not have authority to seek restitution under the CPA because the AG did not file a predicate injunctive action. RCW 19.86.080(1) provides that the AG may bring an action “to restrain and prevent the doing of any act prohibited or declared to be unlawful” and the prevailing party may recover costs and attorneys’ fees. RCW 19.86.080(2) provides that the “court may make such additional orders or judgments as may be necessary to restore to any person in interest any moneys or property ...” Patón, Legacy, and Clark Nuber assert that the word “additional” is meant to require a predicate injunctive action. I disagree. The CPA provides the AG with enforcement authority. The mere inclusion of the word “additional” in the listing of equitable relief the AG may seek in enforcement of the CPA should not be interpreted as requiring a request for injunctive relief as a necessary prerequisite to asserting a claim in bankruptcy for other equitable remedies.
The Washington Supreme Court has indicated that the issuance of an injunction is not necessary for the AG to ultimately obtain restitution. See State v. Ralph Williams’ North West Chrysler Plymouth, Inc., 82 Wash.2d 265, 510 P.2d 233 (1973). In Ralph Williams, the AG brought a lawsuit under the CPA seeking injunctive relief, civil penalties and restitution. The injunctive action was effectively mooted when the car dealership closed. Neverthe*214less, the Supreme Court permitted the claim for penalties and restitution to proceed. See Id.
It would not effectuate the broad purposes of the CPA to limit relief to situations in which an injunctive action is filed. This is particularly true in situations in which an injunctive action would be futile—such as a closed business. In the bankruptcy context—where a closed company is put in the hands of a trustee, is not operating in any manner, and will not operate again—an injunctive action would serve no purpose. Moreover, any request for injunctive relief would be instituted in a lawsuit, not through a claims process. Although conceptually the AG could institute a lawsuit seeking injunctive relief even now, this would be a pointless exercise with a chapter 7 debtor corporation and is not necessitated by the statute.
3. Lack of limitation on AG authority to obtain monetary remedies based on conduct affecting nonresidents
Patón, Legacy, and Clark Nuber assert the AG’s authority to recover damages for breach of the fiduciary duty of loyalty is limited to damages suffered by Washington residents. Similarly, they assert that the AG’s ability to recover restitution for violation of the CSA and CPA is limited only to Washington residents. I disagree on both accounts.
a. Breach of the Fiduciary Duty of Loyalty
Neither the Charitable Trusts Statute nor case law limits the AG’s right to monetary remedies for breach of the duty of loyalty affecting non-residents.
If a trust is “administered in a particular state, that state has jurisdiction to determine through its courts not only the interests of the beneficiaries in the trust property but also the liabilities of the trastee to the beneficiaries, even though it does not have jurisdiction over the beneficiaries, or some of them.” See Restat. 2d of Conflict of Laws, § 267, Cmt. d (2nd 1988); see also Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 313, 70 S.Ct. 652, 94 L.Ed. 865 (1950) (noting that “the interest of each state in providing means to close trusts that exist by the grace of its laws and are administered under the supervision of its courts is so insistent and rooted in custom as to establish beyond doubt the right of its courts to determine the interests of all claimants, resident or non-resident”). Absent an express limitation, the AG should not be arbitrarily constrained in its ability to seek monetary remedies for breach of a charitable trust that is located in Washington.
b. The CSA and CPA
Likewise, neither statutes nor case law limits the AG’s ability to obtain monetary remedies for breach of the CSA or CPA to damages caused to Washington residents.
The CPA is a regulatory statute intended to protect consumers. It prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” See RCW 19.86.020. “Commerce” includes “any commerce directly or indirectly affecting the people of'the state of Washington.” RCW 19.86.010(2). “In order to give effect to the phrase ‘indirectly affecting,’ claims are not limited to those having only a direct affect” on the people of Washington. See Thornell v. Seattle Serv. Bureau, Inc., 184 Wash.2d 793, 800, 363 P.3d 587 (2015). The purpose of the statute is “not only to protect the public but also, and distinctly, to foster fair and honest competition.” Id. (internal quotes omitted). Washington’s citizens are both directly and indirectly affected when a Washington charity is held *215accountable for operating fairly and within the bounds of the law. “The commerce and trade that [an] abusive company brings into Washington ... affects the state economy and thus affects the Washington public at large.” Id. at 801, 363 P.3d 587 (internal marks omitted). The CPA is to be “liberally construed that its beneficial purposes may be served.” See RCW 19.86.920; see also Ralph Williams, 82 Wash.2d at 277-78, 510 P.2d 233 (endorsing a “liberal construction” of RCW 19.86.080 and “declining] to limit the traditional equity powers of the court”). '
Second, although the Washington Supreme Court has not yet specifically addressed whether the AG may invoke the CPA on behalf of non-Washington residents, it has repeatedly confirmed the CPA’s extraterritorial reach. The Washington Supreme Court “rejected an interpretation of [the CPA] that would have limited the applicability of the CPA to prohibit unfair and deceptive practices to Washington’s borders.” Thornell, 184 Wash.2d at 801, 363 P.3d 587 (referencing State v. Reader’s Digest Ass’n, 81 Wash.2d 259, 279-80, 501 P.2d 290 (1972)). In Thor-nell, the Supreme Court upheld an out-of-state plaintiffs use of the CPA to pursue a Washington corporation for allegedly deceptive acts. See 184 Wash.2d at 796, 363 P.3d 587. It also upheld an out-of-state plaintiffs use of the CPA to pursue an out-of-state defendant for the allegedly deceptive acts of its Washington agent. See Id. In other words, when, acts violating the CPA occur in the state of Washington, the reach of the CPA is not limited to damages caused to Washington residents. Patón and Legacy cite the language in 19.86.080(1) stating that the “attorney general may bring an action in the name of the state, or as parens patriae on behalf of persons residing in the state,” and then conclude that this precludes recovery on behalf of non-Washington residents. However, their interpretation ignores critical language in the second subpart of the statute. RCW 19.86.080(2) permits a court to “restore to any person in interest any moneys or property ... which may have been acquired by means of any act herein prohibited or declared to be unlawful.” Regardless of the type of predicate action brought by the AG, there is nothing in the statute preventing application of the broad language “any person” to encompass actions involving non-Washington residents.
C. Statutes of Limitations
1. Statute of limitations for AG’s breach of fiduciary duty of loyalty claims
Patón and Legacy assert that the AG’s breach of fiduciary duty claims are barred by a statute of limitations. However, at common law, a statute of limitation does not run against the State. See State v. LG Elecs., Inc., 186 Wash.2d 1, 12, 375 P.3d 636 (2016), This principle was codified in RCW 4.16.160, which provides that “there shall be no limitation to actions brought in the name of or for the benefit of state, and no claim of right predicated upon the lapse of time shall ever be asserted against the state.” Courts have interpreted this to exempt the State from the statute of limitations when the State acts for the public good. See LG Elecs., Inc., 186 Wash.2d at 14-15, 375 P.3d 636. Therefore, I conclude that there is no statute of limitations applicable to the AG pursuing breach of fiduciary claims on behalf of the public.
2. Statute of limitations for AG’s CPA penalties claims
A statute of limitations expressly applies to the AG in seeking penalties under the CPA. The AG must bring any “action upon a statute for a ... penalty to *216the state” within two years. See RCW 4.16.100. Here, the AG has asserted it will seek penalties for violations of the CSA and CPA occurring from July 2011 through March 2013. The AG selected the cut-off date of July 2011 because it is two years prior to the date of BCPF’s bankruptcy, which tolled the statute of limitations on claims against BCPF.
Legacy and Patón assert that the AG’s request for penalties was brought too late, in violation of RCW 4.16.100, because the “AG received notice as early as May 11, 2011, via the complaint from Carl Hu, regarding BCPF’s ‘defective’ pledge card.” Legacy and Paton’s argument is inapposite because the AG is not relying on the discovery rule9 to assert its statutory claims. Here the statutory violations were ongoing throughout the relevant period. The limitations period runs separately as to each violation. Therefore, I conclude that the AG has properly calculated the relevant statute of limitations for seeking penalties for violation of the CPA.
D. Charitable Trust Claims
1. Common law of charitable trusts
A trust “is a fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee.” Restat. 3d of Trusts, § 2 (2012) (emphasis added). Washington courts look to the Restatement of Trusts as persuasive authority. See e.g. In re Wash. Builders Benefit Tr., 173 Wash.App. 34, 71-72, 293 P.3d 1206 (2013).
A trust may be created by a transfer inter vivos by a property owner to another person as trustee for one or more persons. Restat. 3d of Trusts, § 10(b). “Except as required by a statute of frauds, a writing is not necessary to create an enforceable inter vivos trust, whether by declaration, by transfer to another trustee, or by contract.” Id. at § 20. Washington law expressly provides that trusts can be created orally. RCW 11.98.014. Alternatively, a trust may be created when an owner of property declares that he or she holds property for the benefit of others, Restat. 3d of Trusts § 10 (c). .
A corporation has the capacity to take and hold property in trust and act as trustee. See Restat. 3d of Trusts, § 33(1). “If property is transferred to a corporation in trust for a purpose germane to the purpose for which the corporation is created, it has capacity to administer the trust.” Id. at § 33 Cmt. b.
2. Washington’s Charitable Trusts Statute
Washington’s Charitable Trusts Statute, RCW 11.110 et seq., is intended to
facilitate public supervision over the administration of public charitable trusts and similar relationships and to clarify and implement the powers and duties of the attorney general and the secretary of state with relation thereto.
RCW 11.110.010. The statute does not de-fíne what constitutes a “charitable trust.” See RCW 11.110 et seq. However, the Washington Administrative Code defines a “charitable trust” to mean
any real or personal property right held by an entity or person that is intended to be used for a charitable purpose(s). The trust may be created by will, deed, *217articles of incorporation, or other governing instrument. It may be express or constructive.
WAC 434-120-025.
A “trustee” of a charitable trust means “any person holding property in trust for a public charitable purpose” and “a corporation formed for the administration of a charitable trust or holding assets subject to limitations permitting their use only for charitable ... purposes.” See RCW 11.110.020.10
The AG’s office “may institute appropriate proceedings to secure compliance with [the Charitable Trusts Statute] and to secure the proper administration of any trust or other relationship to which [it] applies.” See RCW 11.110.120.
3. Existence of a charitable trust
Under both statutory and case law, the corpus of donations solicited on behalf of BCPF constituted a charitable trust. When the individual donors transferred their property to BCPF, BCPF took the donations in a fiduciary capacity, in trust, for the beneficiaries. Notably, WAC 434-120-025 provides that a charitable trust may be created by articles of incorporation or other governing instruments.11 BCPF’s articles of incorporation provided in relevant part:
The purpose for which the corporation is formed is: promoting prevention and early detection of breast cancer, encouraging breast-self exams, providing funds to pay for mammograms for uninsured women, raise awareness and educate the general public about breast cancer, and providing funding for breast cancer research.
BCPF’s bylaws provided in relevant part: “[t]he specific objectives and purposes of this corporation shall be: Public Benefit Corporation—(charitable purpose).” BCPF also represented, on its website and in its public government filings, that it was holding and administering the donations for a public charitable purpose. These various statements of purpose by BCPF are consistent with the creation of a charitable trust for donations made to BCPF.
Clark Nuber asserts the existence of a charitable trust is disputed because BCPF’s articles of incorporation do not reference RCW 11.110 or include the words “public charitable purpose.” However, Washington law has no requirement to reference RCW 11.110 or to include any particular language, and WAC 434-120-025 provides that a charitable trust may be express or constructive. Similarly, the Restatement provides that “[n]o particular form of words or conduct is necessary for the manifestation of intention to create a charitable trust.” Restat. 2d of Trusts, § 351 Cmt. b. “A charitable trust may be created although the settlor does not use the word ‘trust’ or ‘trustee.’ ” Id.
Indeed, the scope of the charitable purpose for which the funds were donated is disputed. The Trustee and AG assert that donors intended for all or substantially all of the donated funds to pay for mammograms for uninsured women. Legacy, Pa-ton, and Clark Nuber assert that the intended charitable purpose was much broader, encompassing not only mammograms, but also outreach, education, and referrals. Regardless, the donated funds *218were held in trust for some public charitable purpose.
4, BCPF as trustee of the charitable trust comprised of donations made to BCPF
BCPF was the trustee of the charitable trust comprised of donations made to BCPF because it held the donations intended by donors to be used for a charitable purpose.
It is irrelevant that BCPF did not register as a trustee under RCW 11.110.020, as it did not meet the requirements of a trustee that needed to register. A trustee, as defined by RCW 11.110.020, must register with the SOS under certain conditions, none of which have been shown to apply to BCPF See RCW 11.110.051(1). Moreover, even if BCPF should have registered as a trustee, it would be illogical for a trustee to be able to avoid application of the entire statute merely by failing to register.
5. Inability to conclude Patón was a trustee of the charitable trust
The Trustee argued that Patón was a trustee of the charitable trust along with BCPF. The Trustee further argued that because they were co-trustees, BCPF would be co-liable for Paton’s breaches of the fiduciary duty of loyalty. However, the authority cited by the Trustee was inappo-site and did not demonstrate that Paton’s position as President and/or Director of BCPF also rendered him a co-trustee of the charitable trust.12 On this record, I cannot conclude whether Patón was a co-trustee of the charitable trust. Therefore, I do not reach the issue of asserted co-liability.
6.Fiduciary duty of loyalty
The existence of a legal duty is a question of law. See e.g., Alexander v. Sanford, 181 Wash.App. 135, 170, 325 P.3d 341 (2014). “[I]t appears to be generally recognized that the duties of the trustee of a charitable trust are substantially the same as those of the trustee of a private trust.” Taylor, 58 Wash.2d at 257, 362 P.2d 247 (citing cases).
Prior to 2011, Washington courts depended on the common law to define a trustee’s duty of loyalty. See Karen. E. Boxx and Katie S. Groblewski, Washington Trust Laws’ Extreme Makeover: Blending with the Uniform Trust Code and Taking Reform Further with Innovations in Notice, Situs, and Representation, 88 Wash. L. Rev. 813, 878 (Oct. 2013).
As stated above, Washington courts look to the Restatement of Trusts as persuasive authority. See e.g. In re Guardianship of Eisenberg, 43 Wash.App. 761, 766-68, 719 P.2d 187 (1986) (referencing the Restatement (Second) of Trusts to define a trustee’s duties); Wash. Builders Benefit Tr., 173 Wash.App. at 71-72, 293 P.3d 1206 (referencing the Restatement (Third) of Trusts to define a trustee’s duties). The Restatement (Third) of Trusts provides:
§ 78. Duty of Loyalty
(1) Except as otherwise provided in the terms of the trust, a trustee has a duty to administer the trust solely in the interest of the beneficiaries, or solely in furtherance of its charitable purpose.
(2)' Except in discrete circumstances, the trustee is strictly prohibited from engaging in transactions that involve self-dealing or that otherwise involve or create a *219conflict between the trustee’s fiduciary duties and personal interests.
(3) Whether acting in a fiduciary or personal capacity, a trustee has a duty in dealing with a beneficiary to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the matter.
As explained by Boxx and Groblewski,
[t]he duty of loyalty prohibits the trustee from self-dealing, which is transacting in her individual capacity with the trust, or entering into transactions where the trustee is not directly dealing with the trust, but nevertheless has a conflict of interest. If a trustee breaches her duty of loyalty by self-dealing, there is no further inquiry and the transaction is voidable by the beneficiaries regardless of the fairness of the transaction.
88 Wash. L. Rev. at 878. This is referred to as the “no further inquiry” rule. See Id. The standard is strict.
[U]nder this rule, a trustee who has violated the duty of loyalty is liable without further inquiry into whether the breach has resulted in any actual benefit to the trustee, whether the trustee has acted in good faith, whether the transaction was fair, or even, in some cases, whether the breach has caused any actual harm to either the trust or its beneficiaries.
Id. at 878-79 (citing 3 Austin Wakeman Scott et al., Scott and Ascher on Trusts § 17.2, at 1080 (4th ed. 2006)).
Commentators have further expressed that when a transaction does not rise to the level of a direct conflict of interest or self-dealing, it may nonetheless create a conflict or potential conflict that is problematic. Although articulated in different ways, it is clear that further inquiry is required into the transaction and relationships between the parties.
Further inquiry may be required to determine if the nature of the relationship(s) between the parties is close enough to adversely influence the trustee’s fiduciary decision-making judgment. As provided in the Restatement,
[A] trustee must refrain, whether in fiduciary or personal dealings with third parties, from transactions in which it is reasonably foreseeable that the trustee’s future fiduciary conduct might be influenced by considerations other than the best interests of the beneficiaries.
§ 78 Cmt. b. Except under certain circumstances,
[t]he duty of loyalty prohibits the trustee from engaging in transactions, as trustee, with persons with whom the trustee is closely related or associated....
[A] corporate trustee cannot properly engage in a purchase, sale, or other transaction with one of its officers or directors. Although not involving self-dealing ..., these transactions involve individuals closely associated with a corporate trustee in a manner comparable to family members of an individual trustee.
§ 78 Cmt. e.
In administering a trust the trustee has a duty to the beneficiaries not to be influenced by the interest of any third person or by motives other than the accomplishment of the purposes of the trust. Thus, it is improper for the trustee to ... engage an agent or advisor for the trust, either for the purpose of benefitting a third person (whether or not a party to the transaction) rather than the trust estate or for the purpose of advancing an objective other than the purposes of the trust.
§ 78 Cmt. f.
In other words, “[a]s the connection becomes less than a complete alter ego, the *220cases look to whether the common interest is sufficient to affect the trustee’s judgment.” Karen E. Boxx., Of Punctilios and Paybacks: The Duty of Loyalty Under the Uniform Trust Code, 67 Mo. L. Rev. 279, 287 (Spring 2002) (citing 2A Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 170.6 (4th ed. 1987); George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543(A), at 281-82 (2d ed. 1993)).
Alternatively, further inquiry may be required to determine the fairness of the transaction. See Boxx, 67 Mo. L. Rev. at 282 (“If the trustee’s conflict is not substantial, then the trustee may avoid liability by establishing the fairness of the transaction.”). “To be able to defend a transaction on the basis of fairness, under the common law a trustee would have to show that her own interests in the particular transaction were not sufficient to bring it into the zone of self-dealing.” Boxx and Groblewski, 88 Wash. L. Rev. at 879.
In 2011, Washington codified a trustee’s duties of loyalty in RCW 11.98.078. “In particular, it clarifies what transactions are subject to the no further inquiry rule, and what transactions can be defended by a trustee on the basis of fairness.” Id. at 823-824. RCW 11.98.078 provides in relevant part that,
(1) A trustee must administer the trust solely in the interests of the beneficiaries.
(2) ... a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee’s own personal account or which is otherwise affected by a conflict between the trustee’s fiduciary and personal interests is voidable by a beneficiary affected by the transaction unless:
(a) The transaction was authorized by the terms of the trust;
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(d) The beneficiary consented to the trustee’s conduct, ratified the transaction, or released the trustee in compliance with RCW 11.98.108; or
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(3)(a) A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be “otherwise affected” by a conflict between fiduciary and personal interests under this section if it is entered into by the trustee with:
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(iii) An agent or attorney of the trustee; or
(iv) A corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee’s best judgment.
(b) The presumption is rebutted if the trustee establishes that the conflict did not adversely affect the interests of the beneficiaries.
(4) A sale, encumbrance, ,or other transaction involving the investment or management of trust property entered into by the trustee for the trustee’s own personal account that is voidable under subsection (2) of this section may be voided by a beneficiary without further proof.
7. Trustee’s arguments regarding the duty of loyalty
First, the Trustee asserts that BCPF breached its fiduciary duty of loyalty by failing to administer the trust solely in the interest of the beneficiaries and solely in furtherance of its charitable purpose. In support, the Trustee argues that Patón always enjoyed 100% of Legacy Telemark*221eting’s profits and was its sole shareholder and that between 2006 and 2011, BCPF constituted 91% (2006), 96% (2007), 97% (2008), 99% (2009), 99% (2010), and 98% (2011) of Legacy’s revenues. In other words, “[t]he more money BCPF received in donations, the more money Patón made.”
Second, the Trustee asserts that BCPF breached its fiduciary duty of loyalty by engaging in the fundraising arrangement with Legacy because Legacy’s profits flowed solely to Patón, who was BCPF’s own President/ Executive Director/ Board Director. The Trustee argues that Patón had an incentive to maximize the amount of donations raised (even if the methodology would ultimately be harmful to donors and beneficiaries) given the existence of the Legacy-BCPF contract and that Pa-ton’s compensation through the Legacy was commensurate with the amount of donations.
Finally, the Trustee asserts that BCPF breached its fiduciary duty of loyalty by failing to communicate to its beneficiaries all material facts BCPF knew or should have known in connection with BCPF’s operations.13
-Although the Trustee articulated three separate bases for asserted breach of the fiduciary duty of loyalty, they all revolve around the extent to which Patón benefited or would have been able to benefit under the BCPF-Legacy Contract.
8. BCPF’s lack of a direct conflict
On this record, the Trustee has not" established that BCPF had a direct conflict of interest or engaged in direct self-dealing.
First, although Patón was the owner of Legacy and the President and Director of BCPF during much of the relevant time period, Legacy, Patón, and BCPF are technically separate and distinct entities. When entering into the BCPF-Legacy Contract, BCPF was contracting with Legacy. BCPF was not directly contracting with one of its directors.
Second, it has not been shown that BCPF itself stood to improperly benefit under the BCPF-Legacy Contract. The Trustee has not shown that the BCPF-Legacy Contract was not market rate or that BCPF would have had a substantially different financial arrangement with any other telemarketer. BCPF arguably would have paid the same amount for telemarketing services regardless of who was providing those services.
Third, the Trustee has not shown that BCPF had any particular knowledge of or control over what portion of Legacy’s revenue from the BCPF-Legacy Contract flowed to Patón. Paton’s sizable compensation generated from Legacy’s business with BCPF business is indeed troubling given Paton’s relationship with BCPF. However, it does not alone establish that BCPF breached its fiduciary duties as trustee of the charitable trust. Similarly, the Trustee has not shown that BCPF had any control over what proportion of Lega-*222ay’s business BCPF generated. Although the BCPF-Legacy Contract limited BCPF’s ability to engage other fundraisers, it did not limit Legacy’s ability to engage other clients.
9. BCPF’s possible indirect conflict
Notwithstanding the lack of a proven direct conflict of interest or direct self-dealing, BCPF may have violated its duty of loyalty by entering into and remaining in a relationship with Legacy. It is quite possible that the relationships between Patón, Legacy, BCPF, and BCPF’s other Board members may have prevented BCPF from administering the charitable trust solely in the interest of the beneficiaries or solely in furtherance of its charitable purpose. Unfortunately, to make that determination I must undertake a factually-intensive inquiry not possible solely on the record before me.
It is not sufficiently clear for purposes of summary judgment that the relationships between BCPF, Legacy, and Patón were close enough to potentially or actually taint, or adversely influence, BCPF’s fiduciary decision-making abilities. Analysis of the relationships between all of these players requires a factually-intensive inquiry that is better suited to an evidentiary hearing. For example, what were the details surrounding the selection of BCPF’s other directors? What was Paton’s ongoing relationship with the other directors? What did the other directors know about Patón and/or Legacy? What did they know about Paton’s compensation? Did Paton’s interlocking relationship with BCPF and Legacy influence the BCPF Board to make particular decisions? Although it is asserted that BCPF investigated hiring other telemarketers and that Patón re-cused himself from voting on the BCPF-Legacy Contract, these facts are not conclusive because Patón failed to disclose material information to BCPF’s other directors regarding the extent of his personal benefit under the BCPF-Legacy Contract.
In addition, it is unclear whether the BCPF-Legacy contractual relationship was fair—with “fairness” extending to matters including, but not limited to, the economics of the BCPF-Legacy Contract. For example, what were the details surrounding the selection of Legacy as BCPF’s exclusive telemarketer? Was it “fair” to the beneficiaries that BCPF decided to use a telemarketer to accomplish its charitable purpose at all? Could BCPF’s goals of outreach, education, and breast cancer prevention have been more effectively accomplished through over avenues? How were the beneficiaries affected by the BCPF-Legacy Contract?
Moreover, to the extent I consider the BCPF-Legacy relationship as it existed after Washington’s codification of the duty of loyalty, I can further consider fairness to the beneficiaries and/or the lack of an adverse effect on beneficiaries’ interests under the statutory scheme. See RCW 11.98.078(2)—(3).
In sum, disputed and unknown issues of fact preclude me from determining whether BCPF breached its fiduciary duty of loyalty on summary judgment.14
E. Consumer Solicitation Act and Consumer Protection Act Claims
1. CPA’s prohibition on unfair and deceptive acts or practices
The CPA forbids “unfair or deceptive acts or practices in the conduct of any *223trade or commerce.” RCW 19.86.020. The CPA is to be “liberally construed that its beneficial purposes may be served.” RCW 19.86.920. To prevail on a CPA claim, the AG must prove “(1) an unfair or deceptive act or practice (2) occurring in trade or commerce, and (3) public interest impact.” See State v. Kaiser, 161 Wash.App. 705, 719, 254 P.3d 850 (2001). Unlike private litigants, “the State is not required to prove causation or injury.” Id.
Here, there is no dispute that BCPF was acting in trade or commerce, as it was soliciting money. Nor is there a dispute that a public charity soliciting money for the benefit of the public “affects the public interest.” BCPF’s practices affected the public interest because the solicitations occurred in BCPF’s course of business as a part of generalized conduct, were repeated, and affected large numbers of people. See Stephens v. Omni Ins. Co, 138 Wash.App. 151, 177-78, 159 P.3d 10 (2007), aff'd sub nom., Panag v. Farmers Ins. Co. of Wash., 166 Wash.2d 27, 204 P.3d 885 (2009); Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wash.2d 778, 791, 719 P.2d 531 (1986). In addition, the legislature has declared that charitable solicitations are “matters vitally affect[ing] the public interest.” See RCW 19.09.340.
Whether conduct is unfair or deceptive is a legal question rather than a factual issue. See Panag, 166 Wash.2d at 47, 204 P.3d 885. There are two methods for the AG to meet its burden to show an unfair trade practice in this case. First, the AG can show that the conduct violated the CSA, which the Legislature has declared to be per se unfair trade practices. See RCW 19.09.340. Second, acts or practices are deceptive if they have “the capacity to deceive a substantial portion of the public.” Hangman Ridge 105 Wash.2d at 785, 719 P.2d 531 (emphasis in original). The AG does not have to prove either intent to deceive or actual deception. Panag, 166 Wash.2d at 63, 204 P.3d 885.
[A] communication may contain accurate information yet be deceptive. Deception exists if there is a representation, omission or practice that is likely to mislead a reasonable consumer. In evaluating the tendency of language to deceive, [one] should look not to the most sophisticated readers but rather to the least.
Id. at 50 (discussing the FTCA) (internal quotations and citations omitted). For the reasons set forth below, I conclude that Legacy’s and BCPF’s conduct was unfair and deceptive.
2. BCPF’s failure to include CSA-mandated disclosures as per se CPA violations
The CSA applies to “all entities soliciting contributions for charitable purposes.” RCW 19.09.100. Thus, both BCPF and Legacy were required to comply.
RCW 19.09.100 provides in relevant part that,
(1) Any entity that directly solicits contributions from the public in this state must make the following clear and conspicuous disclosures at the point of solicitation:
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(b) The identity of the charitable organization and the city of the principal place of business of the charitable organization;
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(2) A commercial fund-raiser must meet the required disclosures described in subsection (1) of this section clearly and conspicuously at the point of solicitation and must also disclose the name of the entity for which the fund-raiser is an agent or employee and the name and city of the charitable organization for which the solicitation is being conducted.
*224(3) Telephone solicitations must include the disclosures required under subsection (1) or (2) of this section prior to asking for a contribution. The required disclosures must also be provided in writing within five business days to anyone who makes a pledge by telephone to donate.
(4) In the case of a solicitation by advertisement or mass distribution, including postal, electronic, posters, leaflets, automatic dialing machines, publications, and audio or video broadcasts, it must be clearly and conspicuously disclosed in the body of the solicitation material that:
(a) The solicitation is conducted by a named commercial fund-raiser, if it is;
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(7) Any entity soliciting charitable contributions must not misrepresent orally or in writing:
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(c) That the person soliciting the charitable contribution is a member, staffer, helper, or employee of the charitable organization or words of similar meaning or effect that create the impression that the person soliciting is not a paid solicitor if the person soliciting is employed, contracted, or paid by a commercial fund-raiser.
RCW 19.09.100(1)—(3), (7)
In violation of RCW 19.09.100(l)(b), (2), and (3), Legacy’s telephone scripts failed to identify the city of BCPF’s principal place of business.
In violation of RCW 19.09.100(2) and (3), some of Legacy’s telephone scripts, and Legacy’s donor cards and reminder cards failed to “clearly and conspicuously” disclose Legacy’s name.
Similarly, in violation of RCW 19.09.100(7)(c), Legacy misrepresented orally and in writing: “[t]hat the person soliciting the charitable contribution [was] ■ a member, staffer, helper, or employee of the charitable organization or words of similar meaning or effect that create[d] the impression that the person soliciting [was] not a paid solicitor.” Several of the scripts did not mention Legacy at all, and actually instructed telemarketers to state that they were with the Breast Cancer Prevention-Fund. Other scripts instructed telemarketers to say they were with “Legacy calling on behalf of the Breast Cancer Prevention Fund.” However, by providing only the partial name “Legacy,” the disclosure still fell short of a “clear and conspicuous” statement revealing Legacy’s name or commercial fundraiser status. To the extent potential donors may have picked up on the potential significance of “Legacy,” the scripts immediately downplayed the distinction by conflating the two entities' through rhetoric. The scripts consistently referred to “we” and “our” in relation to BCPF, making it sound as though the Legacy telemarketer was affiliated with BCPF.
Likewise, the donor cards and reminder cards mailed to consumers to attempt to collect pledged donations did not “clearly and conspicuously” disclose Legacy’s name, and made it appear as though the cards were from BCPF rather than Legacy. Legacy employees mailed the cards in envelopes that displayed a large BCPF logo, without any reference to Legacy. Upon opening the mailing, consumers found cards printed on BCPF letterhead with a prominent BCPF logo, listing BCPF’s website and BCPF’s non-profit tax ID number. In addition, many of the cards were signed by Legacy employees with their personal names, identifying themselves as a “fundraising coordinator" or “outreach specialist”—without reference to Legacy at all. Signing the cards in this manner improperly made it appear *225as though those Legacy employees were affiliated with the Breast Cancer Prevention Fund rather than Legacy. This is particularly true given that the cards were received by consumers after Legacy telemarketers failed to properly identify Legacy during the prior solicitation calls.
Indeed, many of the cards made no reference to Legacy whatsoever, anywhere on the card. Some cards included very small print in the bottom right hand corner that stated “Fundraising provided by LTC,” However, the provision of the acronym “LTC” still falls far short of a “clear and conspicuous” disclosure of Legacy’s name. Moreover, provision of the acronym “LTC” does not ameliorate the plethora of details suggesting that the card was from a BCPF employee rather than Legacy.
a. RCW 19.09.100(7)(c) does not violate the First Amendment
Legacy and Patón assert that RCW 19.09.100(7)(c) is vaguely worded, over broad, and not narrowly drawn to serve the stated purpose of preventing deceptive and dishonest practices. They assert it should be considered void for vagueness and unnecessarily interfering with free speech and association. I disagree.
Fraudulent charitable solicitation is not protected speech. See Illinois ex rel. Madigan v. Telemarketing Assocs. Inc., 538 U.S. 600, 612, 123 S.Ct. 1829, 155 L.Ed.2d 793 (2003). As drafted, RCW 19.09.100(7)(c) clearly and narrowly prohibits a commercial fundraiser from making an express or implied misrepresentation that they are volunteer or employee of a charity. The statute “provided] a person of ordinary intelligence fair notice of what is prohibited.” See United States v. Williams, 553 U.S. 285, 304, 128 S.Ct. 1830, 170 L.Ed.2d 650 (2008). Courts consider “whether a statute is vague as applied to the particular facts at issue, for a plaintiff who engages in some conduct that is clearly proscribed cannot complain of the vagueness of the law as applied to the conduct of others.” Holder v. Humanitarian Law Project, 561 U.S. 1, 20, 130 S.Ct. 2705, 177 L.Ed.2d 355 (2010) (internal marks omitted).
Here, I conclude the application of RCW 19.09.100(7)(c) to the content of the donor cards is not vague in any respect. The donor cards not only create the misleading impression that they are being sent by BCPF, but also then fail to appropriately identify Legacy or its role as a commercial fundraiser. Under any sensible interpretation, Legacy’s donor cards did not satisfy the directive or purpose of the statute.
b. RCW 19.09,100(4)(a)
The AG asserted that the donor cards violated RCW 19.09.100(4)(a), by failing to include a clear and conspicuous disclosure “in the body of the solicitation material” that “[t]he solicitation [was being] conducted by a named commercial fundraiser.” However, I conclude that RCW 19.09.100(4) does not apply because the donor cards were not advertisements or mass distributions. Rather, the donor cards were targeted mailings sent to individuals who had already demonstrated a specific interest in donating money to BCPF.
3. Violations of the CSA and CPA from July 2011 through March 2013
The AG will ultimately seeks to collect penalties for violations of the CSA and CPA • occurring from July 2011 through March 2013. As set forth above, this is appropriate under the statute of limitations. See RCW 4.16.100. From July 2011 through March 2013, BCPF sent 202,470 pledge cards and 190,649 reminder cards, for a total of 393,119 mailings. It is unclear *226exactly which pledge card and reminder card version was sent during any particular time period. It is unclear on this record how many statutory violations were contained within those mailings. Therefore, calculation of the number of violations must await the evidentiary hearing.
4. Capacity to deceive regarding the allocation of money
The AG asserts that BCPF’s representation that 87% to 93% of money raised went to program services was deceptive and misleading for three reasons. First, the AG asserts that any allocation of money under the joint cost accounting rule was improper as determined by Judge Lasnik and BCPF’s use of the rule was misleading. Second, the AG asserts that even if the joint cost accounting rule did apply, BCPF concealed its practice of calling pri- or donors, resulting in an inflation of the number allocated away from fundraising. Third, the AG asserts that even if accurate and appropriate, the statements were misleading to members of the general public who are not expected to understand obscure accounting rules.
a. Judge Lasnik’s ruling
Judge Lasnik ruled that, for accounting purposes, BCPF was not entitled to use the joint cost accounting rule because its contract with Legacy was a percentage contract. The AG asserts that under the law of the case or collateral estoppel, Judge Lasnik’s ruling is dispositive for purposes of determining whether BCPF’s use of joint cost accounting was deceptive for purposes of the CPA.
Under the law of the case doctrine, a “court is precluded from reexamining an issue previously decided by the same court, or a higher appellate court, in the same case.” In re Watson, 192 B.R. 739, 750, (9th Cir. BAP 1996). Collateral estoppel, now more often referred to as issue preclusion, applies where the issue was identical, the issue was actually litigated, the issue was necessarily decided, the decision was final on the merits, and the party against whom it is asserted is the same. See In re Silva, 190 B.R. 889, 892 (9th Cir. BAP 1995).
I conclude that neither the law of the case nor issue preclusion applies. Both doctrines require that the same issue was previously decided by the prior court. Judge Lasnik made a ruling based on accounting conventions. He did not rule on whether BCPF’s definition of program services was deceptive or misleading. The issue before me is therefore different. Judge Lasnik’s ruling on the appropriateness of the joint cost accounting rule for accounting purposes is thus not determinative for my consideration of whether BCPF’s conduct had the capacity to deceive.
5. Alleged concealment of practice of calling prior donors
The AG asserts that BCPF “concealed its practice of calling prior donors, resulting in an inflation of the number allocated away from fundraising.” The AG further asserts that “[a]fter uncovering their error, BCPF never bothered to correct its public statements, left the inflated numbers up on its website, and continued to solicit money.”
On BCPF’s Form 990 for 2011, the amount allocated to “program services” for purposes of joint cost accounting was significantly decreased from prior years. On BCPF’s Form 990s for 2005-2010, the percentage allocated to “program services” was between 87% and 93%. On BCPF’s Form 990 for 2011 the percentage was 52%. The record suggests that Legacy’s practice of calling prior donors on BCPF’s behalf may have impacted Clark Nuber’s *227decision to decrease the 2011 allocation to “program services,” but it is unclear to what extent calls to prior donors were a factor.
The movants appear to argue that the downward adjustment to program services for year 2011 was a result of BCPF “concealing” its practice of calling prior donors. However, on this record, I cannot make that determination. The AG acknowledges in its own briefing that Patón asked Clark Nuber as early as 2006 whether fundrais-ing activities to prior donors should be categorized as fundraising. (Dkt. No. 227 at 12, n. 54). The movants further appear to argue that the downward adjustment to program services for year 2011 put BCPF on some type of notice that it had been improperly using joint cost accounting in prior years and that, as a result, BCPF should have altered its past and ongoing public representations regarding the amount allocated to program services. Although this is a somewhat logical argument, the record is unclear regarding why the downward adjustment was made for year 2011. The record is also unclear regarding the extent to which Legacy called prior donors in any given year, making it difficult to determine how that factor may have affected the appropriateness of joint cost allocations in any given year. Finally, the record is unclear regarding what BCPF was representing to the public on its website after October 2011. I therefore cannot conclude on this record that BCBP concealed its practice of calling prior donors or that related statements by BCBF on its website had the capacity to deceive.
6. BCPF’s statements that 87% to 93% of money raised went to program services
Even if BCPF had appropriately applied joint cost accounting, and even if BCPF’s Form 990s were entirely accurate and appropriate by accounting standards, BCPF’s plain language representations on its website had the capacity to deceive the public. Every potential donor received a donor card that provided BCPF’s website address. The website indicated in various locations that 87% to 93% of money raised went to the “program.” Money spent on the “program” was, in turn, then expressly distinguished from money spent on management, general, and fundraising expenses. Similarly, the BCPF rebuttal script used by Legacy telemarketers advised potential donors that 87%-93% of donations went to program services.
Based on these representations, an ordinary donor would not have understood that BCPF’s “program” included paying approximately 80% of all funds raised to Legacy, or paying nearly 40% of all funds raised to Patón personally. The extent .of funds flowing to Patón is particularly egregious given that BCPF was representing to the public that no member of BCPF’s Board was compensated. An ordinary donor viewing the BCPF website would not logically categorize fundraising calls as part of the “program,” particularly when “fundraising” was separately itemized within the same communication. It is irrelevant that a sophisticated and persistent donor might have been able to sift through the buried facts and accounting details to discover some or all of BCPF’s deception. Under the CPA, an entity engages in a deceptive practice even when it uses technically accurate terms if those terms have the capacity to deceive. Panag, 166 Wash.2d at 49-50, 204 P.3d 885. Therefore, as presented to the general public, BCPF’s statement that 87% to 93% of money raised went to their “program” was deceptive.
7. Capacity to deceive the public about the purpose of BCPF’s fundraising
In order to prove deception in CPA action, the State must only show that the *228act in question was intended to deceive, but only that it had “the capacity to deceive a substantial portion of the public.” Hangman Ridge, 105 Wash.2d at 785, 719 P.2d 531.
BCPF’s website, and Legacy’s BCPF scripts and donor cards used from 2005 to 2010 and from July 2011 forward, were unfair and deceptive. Although the website, scripts, and donor cards referenced education and outreach, they created a misleading impression that a significant portion of the funds raised by BCPF would go toward providing mammograms. For the vast majority of the relevant time period, the scripts’ requests for donations were couched in terms of the $90 cost of a mammogram and the number of women helped. Stating that a mammogram costs about $90, and then requesting $180 to help two women, or requesting a $45 donation to “share” the expense implies that the donation collected will be specifically used to pay for a $90 mammogram. The donation request was especially egregious in certain of the scripts which referenced a fictitious waitlist for mammograms. This misimpression was furthered by numerous of the donor cards which provided a dollar figure with a parenthetical correlating it to the number of mammograms it could provide, such as “$90 (one mammogram).” A reasonable consumer receiving these calls would conclude that they were donating to provide women with mammograms.
Patón and Legacy counter that BCPF never represented that money would be spent only for mammograms, and that there was value in the outreach Legacy provided. Indeed, Legacy provided some benefits to consumers in reminding them about the importance of mammograms, and providing certain women with a phone number and/or shower card. Yet, regardless of how these benefits could be quantified in dollars, no reasonable consumer listening to the scripts, receiving the donor cards, or viewing the website could have understood that Legacy received approximately 80% of all funds raised that Patón personally took home approximately 40% of all funds raised—and that only 16.8% was ever donated to charities actually providing mammograms. Patón and Legacy, rather than uninsured women who needed mammograms, were the primary beneficiaries of the money BCPF raised.
In order to prove deception in CPA action, the State must only show that the act in question was intended to deceive, but only that it had “the capacity to deceive a substantial portion of the public.” Hangman Ridge, 105 Wash.2d at 785, 719 P.2d 531. In sum, BCPF’s website and Legacy’s BCPF scripts and donor cards had the capacity to deceive the public into believing that a substantial portion of the money raised by BCPF was going to be used to fund the provision of mammograms.15
F. Equitable estoppel
To establish equitable estop-pel, one must prove
(1) an admission, statement or act inconsistent with a claim later asserted; (2) reasonable reliance on that admission, statement, or act by the other party; and (3) injury to the relying party if the court permits the first party to contradict or repudiate the admission, statement or act. Equitable estoppel against *229the government is not favored. Therefore, when the doctrine is asserted against the government, equitable estop-pel must be necessary to prevent a manifest injustice, and the exercise of government functions must not be impaired as a result of estoppel. Each element must be proved by clear, cogent, and convincing evidence.
Dep’t of Ecology v. Theodoratus, 135 Wash.2d 582, 599, 957 P.2d 1241 (1998) (internal quotations and citations omitted). However, “where the representations allegedly relied upon are matters of law, rather than fact, equitable estoppel will not be applied.” Id.; see also Laymon v. Dep’t of Nat. Res., 99 Wash.App. 518, 526, 994 P.2d 232 (2000).16
As set forth in greater detail above, in 2007 the SOS was concerned about the practice of charities improperly relying on joint cost accounting to inflate the percentage of donations attributable to “program services.” Blacksmith contacted BCPF to suggest that the amount it was reporting as attributable to program services appeared too high. She was seeking to understand how BCPF had calculated its allocation attributable to “program services” under joint cost accounting, to determine if BCPF’s disclosure was accurate. Blacksmith communicated back and forth with Patón and Cunningham, suggesting different possible methodologies for calculating “program services” and suggesting improvements to BCPF’s script. Patón and Legacy assert that through the course of these communications, Blacksmith ultimately approved BCPF’s compliance with RCW 19.09. et seq.
Legacy, Patón and Clark Nuber assert that the AG should be estopped from now claiming that Legacy’s scripts, donor cards, and/or website was deceptive and misleading because Blacksmith, acting in an authoritative capacity on behalf of the State, approved a version of BCPF’s script and approved the amount BCPF was representing as allocable to its “program services.” Similarly, they argue that equitable estoppel should prevent the state from asserting that BCPF and/or Patón violated their fiduciary duties of loyalty.
Here, I conclude that the defense of equitable estoppel.is inapplicable to the AG’s claims. Even if the 2007 communications from Blacksmith to Patón/ BPCF could be construed as approving compliance with RCW 19.09 et seq., .or more generally approving Patón and/or BCPF’s behavior, the representations regarded matters of law. Equitable estoppel does not apply to state employees’ erroneous legal advice or statements of the law. See e.g., Theodoratus, 135 Wash.2d at 599, 957 P.2d 1241.
I further conclude that the defense of equitable estoppel is inapplicable to the AG’s claims because Blacksmith was acting on behalf of the SOS in a governmental capacity in attempting to assure BCPF’s compliance with the State’s disclosure laws. There is no manifest injustice to Patón or Legacy in regulating charities or enforcing laws to protect the public. It appears Blacksmith’s inquiry into BCPF’s joint cost accounting may have been a bit overzealous—reaching beyond her expertise, and possibly beyond what her supervisor had intended. However, estoppel “will not be applied where its application would interfere with the discharge of governmental duties or where the officials on whose conduct estoppel is sought to be predicated acted beyond their power.” *230Mercer Island v. Steinmann, 9 Wash.App. 479, 481, 513 P.2d 80 (1973). Here, applying estoppel based on the conduct of Blacksmith, a diligent state employee attempting to do her job in a thorough manner, would impair the exercise of government function.
In addition, the comments made by Blacksmith are not necessarily inconsistent with claims now asserted by the AG. The scope of any asserted “approval” given by Blacksmith to BCPF’s conduct was limited. Although she analyzed and suggested changes to a version of BCPF’s script, Blacksmith did not approve the content of BCPF’s website, donor cards, rebuttal script, or other versions of its solicitation scripts.
Legacy, Patón and BCPF could not have reasonably relied on Blacksmith’s comments. At the time Blacksmith was analyzing BCPF’s conduct and disclosures, she was not privy to all of the relevant facts. Her comments were based only on limited information that was provided to her by Patón. She had only a script and BCPF’s 990s, and was unaware that BCPF and Legacy had a de facto percentage contract that made the application of joint cost accounting, as determined by Judge Las-nik, inappropriate. To the extent Blacksmith drew any meaningful conclusions regarding BCPF’s conduct or compliance, her conclusions were expressly conditional and equivocal.17 Notably, Blacksmith consistently advised Patón that she was not an accountant or a lawyer.18 Equivocal conclusions drawn from limited information cannot form the basis for reasonable reliance by Patón or Legacy, particularly in the face of repeated caveats.
Furthermore, during the course of analyzing BCPF’s script and joint cost accounting methodologies, Blacksmith concluded at various times that BCPF should allocate 65%, 73%, 83%, or 86% of donations received to program services.19 Pa-ton/BCPF apparently never relied on Blacksmith’s suggestions, because Pa-ton/BCPF never represented to the public that these percentages were attributable to program services. Rather, Paton/BCPF reported the figures from the Form 990s. Between 2006 and 2011, BCPF’s website represented that 87%-93% of all funds it raised went to its “Program.” In addition, regardless of whether the joint cost accounting methodologies were accurate or not, BCPF used the numbers to deceive donors into believing that the money donated went to mammograms and to con*231ceal the truth that nearly 40% of the money raised went to Paton’s bank account.
G. Laches
“Laches is an equitable defense based on the principles of equitable estoppel.” City of Cheney v. Bogle, 2008 WL 1904177, at *10, 2008 Wash.App. LEXIS 999, at *26 (May 1, 2008). Laches applies where there is (1) knowledge of or reasonable opportunity to discover a cause of action, (2) unreasonable delay in commencing that cause of action, and (3) damage to the defendant resulting from the unreasonable delay. See Valley View Indus. Park v. Redmond, 107 Wash.2d 621, 635, 733 P.2d 182 (1987); Hunter v. Hunter, 52 Wash.App. 265, 270, 758 P.2d 1019 (1988). It does not apply, absent very unusual circumstances, before the statute of limitations runs. Carrillo v. City of Ocean Shores, 122 Wash.App. 592, 610, 94 P.3d 961 (2004).
Laches will not be applied against the government “acting in a governmental capacity unless it is clearly necessary to prevent obvious” or manifest injustice. See Maynard v. King Cty., 2009 WL 2365707, at *4, 5, 2009 Wash. App. LEXIS 1949, at *11, 15-16 (Wash. Ct. App. Aug. 3, 2009) (“The policy against applying equitable es-toppel to the government, as stated in Steinmann, also applies to laches.”).
Patón and Legacy assert that laches applies to the AG’s request to calculate the number of violations (for purposes of later collecting penalties). They assert that from the time the State received Carl Hu’s May 11, 2011 complaint, it could have issued a cease and desist order regarding BCPF’s alleged violations. Instead, the AG commenced a two-year investigation and left BCPF to continue operating without knowledge that it was accruing approximately 300,000 alleged statutory violations per year. Patón and Legacy assert is a manifest injustice to permit the AG to go back and claim penalties for two years of that time, from July 2011 to July 2013.
Clark Nuber asserts laches applies to the AG’s assertions that BCPF’s disclosures to the public were deceptive or misleading under the CSA. Clark Nuber asserts that as of 2007 the State had all of the information in its possession necessary to evaluate BCPF’s disclosures including BCPF’s 2006 Form 990, the BCPF-Lega-cy Contract, and a copy of the BCPF script. Clark Nuber asserts that the State allowed BCPF to continue operating for almost six years after receiving this information and that it is unreasonable for the AG to have waited so long to bring its claim of deceptive or misleading disclosures.
As with the equitable estoppel defense, here, I conclude that laches is inapplicable as a defense to the AG’s claims. In regulating and investigating BCPF, the SOS and AG were acting in their governmental capacities. There is a compelling state need to regulate charities to protect the public, and the SOS and AG are the government agencies tasked with regulation and enforcement. Earlier decisive legal action by the AG may indeed have prevented Legacy, Patón, and Clark Nuber from accruing so many violations or making so many misrepresentations. However, it is not manifestly unjust to hold a charity accountable for violating the CSA or CPA— particularly since BCPF was long on notice that it was being investigated. See e.g., Maynard, 2009 WL 2365707, at *5, 2009Wash. App. LEXIS 1949, at *16 (“[T]he County cannot be precluded from enforcing its zoning regulations even though its officials remained inactive in the *232face of such violations.”).20
H. Damages
1. Breach of fiduciary duty of loyalty
For the claims premised on breaches of the fiduciary duty of loyalty, the Trustee asserts a portion of the AG’s claim should be allowed in the amount of $7,616,389, representing disgorgement of the amount by which Patón benefited from BCPF’s operations. This figure encompasses money earned while Patón was both the President of BCPF and the owner of Legacy. The AG asserts that it is entitled to not only these funds, but also the earnings Patón made after he resigned, and that the AG’s claim should be allowed in the amount of $8,491.021. The AG argues, in the alternative, that I have the power to order restitution, or that I should impose a constructive trust.
I conclude that on this record, I cannot assess damages or determine that, the AG’s breach of fiduciary duty claim should be allowed in any particular amount. I have genuine disputes of material fact surrounding the relationships between Patón, Legacy, BCPF, and BCPF’s other Board members, the extent of Paton’s personal benefit derived therefrom, and I am unable to determine on this record whether BCPF and/or Patón breached the fiduciary duty of loyalty regarding the trust composed of the funds contributed by BCPF donors.
2. CSA and CPA
As for the claims premised on the CSA and CPA, I conclude that on this record I cannot appropriately determine the number of violations or quantify the AG’s claim for restitution,
First, the AG requests that I find 786,-238 violations of the CSA and CPA (spanning from July 2011 through March 2013) to later calculate penalties. However, without greater clarity and detail, I cannot accurately count the number of CPA violations that will form the basis of the AG’s claim for penalties. Although a plethora of donor card and reminder card versions appear in the record, relevant to the period spanning the statute of limitations (July 2011 through March 2013), the AG has not clarified what version(s) of the donor cards and reminder cards were used. In addition, the AG asserts there were at least two violations of the CPA per donor card and reminder card, but does not specify what violation(s) each mailing contained. I have concluded that the donor cards and reminder cards in the record violated the CSA and CPA, and I have no doubt that there were thousands of violations during the relevant time period, but without more specificity, I cannot conclusively tabulate the number of actual violations.
The AG asserts that the amount lost by BCPF donors is the entire amount of money raised ($22,763,546), less the amount actually forwarded on to programs that provided mammograms ($3,820,921), for a net loss of $18,942,625. It also asserts that its claim for restitution should be allowed in that amount. Despite already concluding that Legacy’s and BCPF’s representations regarding the amount spent on program services and the provision of mammograms had the capacity to deceive the public, on this record I cannot accurately assess the amount of restitution to which the AG is entitled.
*233It is apparent that Legacy’s conduct included unfair and deceptive practices. However, it is difficult to quantify the “loss” attributable to those practices that were “capable of deceiving a substantial portion of the public.” In addition, there arguably was some value'to the public in the other services provided by Legacy/BCPF, including education and the provision of shower cards and referrals, even if de minimis. These equitable and fact-specific matters will be more appropriately resolved after conducting an evidentiary hearing. I also will be able to take into account damages awarded in connection with other claims, to avoid duplication or inconsistency.21
IV. CONCLUSION
Counsel for the parties should submit appropriate forms of order consistent with this memorandum opinion, partially granting the Trustee’s Motion Regarding Breach of Fiduciary Duties and partially granting the AG’s Motion Regarding Violation of the CSA and CPA.
, The AG filed a proof of claim in .BCPF’s bankruptcy in the amount of $20,280,512. (Claim Nos. 5-1 and 5-2). The Trustee brought a motion to allow the AG's claim, which was opposed by Patón, Legacy, and Clark Nuber. These summary judgment motions are brought in advance of the evidentia-ry hearing on the claim objection, currently set for November and December 2017.
It is notable that the Trustee filed a lawsuit against, inter alia, Patón, Legacy, and Clark Nuber, asserting various claims related to the downfall of BCPF. See James v. Paton, et al., 15-01164-MLB (Bankr. W. D. Wash, filed *201June 30, 2015). Subsequently, the reference was withdrawn, and the case is now pending before Judge Robert S. Lasnik ("Judge Las-nik”) in the District Court of the Western District of Washington, Civil Case No, Cl 5-1914RSL.
. Unless otherwise noted, all docket references herein are to Breast Cancer Prevention Fund, 13-16150-MLB (Bankr. W.D. Wash, filed July 2, 2013).
. Citations refer to the document and exhibit numbers in ECF, and pagination refers to the page numbers of the relevant PDF documents,
. A shower card had instructions and images to assist a woman in performing a breast self-exam. (See e.g., Dkt. No, 230 at 11, 14).
. Calls to prior donors are pure fundraising expenses that do not qualify for joint cost treatment.
. An AG investigator noted that despite visiting BCPF's website numerous times, in 2011 and 2013, BCPF's 2011 Form 990 was not posted on any of her visits to the website. (Dkt. No, 229 at 2).
. Blacksmith was a long-time employee of the Charities Division, since 1995. In 2007, Blacksmith was either a Level 2 or 3 customer service representative. (Dkt. No. 292-1 at 6).
. The AG is not seeking the actual penalties at this time; it only seeks to establish the predicate number of violations.
. Under the discovery rule “a cause of action accrues when the plaintiff knew, or through exercise of due diligence should have known the essential elements of the cause of action,” Allen v. State, 118 Wash.2d 753, 757-58, 826 P.2d 200 (1992).
. The definition of "person” explicitly applies to individuals, organizations, groups, associations, partnerships, corporations, or any combination of these. See RCW' 11.110.020.
. Although WACs are not themselves binding authority, the WAC definition of "charitable trust” is consistent with the RCW 11.110,020 definition of "trustee.”
. Comment b to the Restatement (Second) of Trusts, § 379 merely analogizes the role of the trustees or directors of a charitable corporation to the role of the trustees of a charitable trust. It does not state that individual directors of a corporate trustee are co-trustees with the corporate trustee.
. The Trustee has not demonstrated how the third prong of § 78 of the Restatement's articulation of the duty of loyalty would apply in this context. Breast cancer affects not only women diagnosed with cancer, but also their families and loved ones. Thus, the beneficiary of the charitable trust over which BCPF was trustee was the general public. Although it is logical in some contexts for a trustee to have a duty to communicate with trust beneficiaries, it is unclear what duty or practical ability BCPF had to communicate with all members of the general public. BCPF maintained a website and made certain disclosures to the IRS and SOS. Although the general public could have accessed this information, it is unclear that these impersonal disclosures are the kind of information intended to be encompassed by the terminology “all material facts the trustee knows or should know.”
. Clark Nuber argues that any potential liability for breach of fiduciary duties by BCPF caused by either Legacy or Patón were ultra vires actions and would not result in vicarious liability. As I have not yet determined whether BCPF breached fiduciary duties, this argument is premature.
. To the extent Legacy and Patón argue that any subsequent clarifying representations nullify the potential deception of earlier statements or communications, they are wrong. See Robinson v. Avis Rent A Car Sys., 106 Wash.App. 104, 116, 22 P.3d 818 (2001) (noting that "a practice is unfair or deceptive if it induces contact through deception, even if the consumer later becomes fully informed before entering into the contract”).
. See also e.g., State, Dep't of Ecology v. Campbell & Gwinn, L.L.C., 146 Wash.2d 1, 20-21, 43 P.3d 4 (2002); Williams Place, LLC v. State ex rel. Dep't of Transp., 187 Wash.App. 67, 103, 348 P.3d 797 (2015).
. For example, Blacksmith stated that: (a) “P?]he only documentation that BCPF has provided to date to support their allocations is the telephone script. As a result, our determination is based solely on the telephone script and a review of BCPF's 2006 IRS Form 990.” (Dkt. No. 247-1 at 22) (emphasis added), (b) The script “seems to include the necessary disclosures.” (Dkt. No. 247-1 at 14) (emphasis added), (c) "[Qjuestions regarding disclosure requirements appear to be resolved based on the information provided." (Dkt. No. 247-1 at 14) (emphasis added), (d) "If your accountants advise you that tracking time is not an acceptable approach ..., then by all means please follow the advice of your accountants." (DKt. No. 247-1 at 30) (emphasis added).
. For example, Blacksmith stated that: (a) "I’m not an accountant, so my suggestions are those of a lay person .... ” (Dkt. No. 247-1 at 30). (b) "I would recommend discussing the matter with your accountants/advisors and the IRS.” (Dkt. No. 247-1 at 30). (c) "All I can suggest is that you discuss it with your accountant and the IRS to determine what path to take in the future.” (Dkt. No. 247-1 at 30). (d) "Our office cannot give legal advice.” (Dkt. No. 247-1 at 34). (e) "Your accountant will need to be the one to address whether or not they meet AICPA/ SOP 98-2 guidelines.” (Dkt. No. 247-1 at 34).
. 65% (Dkt. No. 247-1 at 42), 73% (Dkt. No. 247-1 at 22), 83% (Dkt. No. 247-1 at 42), or 86% (DKt. No. 247-1 at 60)
. Moreover, the inapplicability of laches to the State in this context is bolstered by the plain language of RCW 4.16.160. It provides in relevant part that, "there shall be no limitation to actions brought in the name or for the benefit of the state, and no claim of right predicated upon the lapse of time shall ever be asserted against the state.”
. Clark Nuber asserts that any actions by Legacy that were violations of the CSA or CPA were ultra vires and did not create liability for BCPF, Given, inter alia, the overlap in management and the extensiveness of Legacy’s duties under the BCPF-Legacy Contract, it is hard to imagine that BCPF is not liable for misleading communications made to the public by Legacy. However, the parties áre free to present evidence at the evidentiary hearing on this issue, | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500930/ | ORDER INTERPRETING PLAN PROVISION
Elizabeth E. Brown, Bankruptcy Judge
THIS MATTER comes before the Court on the Debtor’s Motion for Determination of Effect of Confirmed Plan on Partition of Debtor’s Property. The parties have asked this Court to determine whether the plan’s language, which mirrors 11 U.S.C. § 1141(c)1 and vests property of the estate in the Debtor upon confirmation “free and clear” of claims and interests, extinguishes the partition rights of a co-owner of real property. Both the Debtor and Mr. Frank Wendland (‘Wendland”) hold an undivided one-half .interest in real property on which the Debtor conducts its non-profit business. For the reasons set forth below, the Court hereby FINDS and CONCLUDES that the “free and clear” language in the statute and the plan do not eliminate whatever state law partition rights Wendland may possess as a co-owner.
I. BACKGROUND
Debtor is a non-profit corporation that provides a sanctuary for wolves and hybrid wolf-dogs. Wendland and his now ex-wife, Patricia Lanteri (“Lanteri”), started to rescue these animals by providing a home for them in their backyard. Eventually, they formally incorporated the Debtor to carry on this mission. As Debtor rescued more animals, it became necessary to relocate to a larger property. In 1994 and 1995, Lanteri purchased four parcels of land for a total purchase price of $211,900 (collectively, the “Real Property”). Although the Real Property totals over 170 acres, the Debtor only uses about five acres, which is known as the “Fletcher Parcel.” Those five acres contain animal enclosures and a cabin. For many years, this cabin served as both the Debtor’s headquarters and as a home for Wendland and Lanteri.
The Real Property is in a remote mountainous area of Colorado, only accessible by a private dirt road that crosses neighboring parcels. In 1999, county officials advised Debtor that it needed a special use permit to operate an animal sanctuary. The permit it ultimately granted placed significant restrictions on Debtor’s operations, including a limit of thirty animals, a limitation of access to seven round trips per day, and a prohibition against use of the road by buses or vans. Later neighbors sued Lanteri over use of the dirt road. She settled the litigation by agreeing that the *235Debtor would be restricted to only five round trips per day.
In 2007, Wendland and Lanteri began discussing divorce. Lanteri wanted to protect the Real Property for Debtor’s continued use and to ensure that it would pass to Debtor after her death. To accomplish this goal, she transferred ownership to a revocable trust, giving the Debtor a remainder interest that would vest on the twenty-first anniversary of her death. While this may have been Lanteri’s original intent, it changed sometime before the end of the couple’s divorce. On October 27, 2008, Wendland and Lanteri signed a series of documents that essentially set aside the transfer to the Trust and extinguished Debtor’s remainder interest. Lanteri agreed to transfer a fifty-percent interest in the Real Property from her Trust to Wendland. On the same day, they also executed a purchase and sale agreement, selling both of their fifty-percent interests to Debtor. The total purchase price was $481,000, evidenced by two promissory notes—one to Wendland in the amount of $240,500 and one payable to Lanteri in the amount of $228,000. The Debtor secured both notes with a deed of trust. The sale documentation expressly reserved for Wendland a life estate in the Fletcher Parcel, allowing him to occupy the cabin during his lifetime.
At the time of entering into this sale and loan transaction, Wendland and Lanteri were the only directors of Debtor. As such, they signed the documents individually as the sellers and on Debtor’s behalf as the buyer. Five months later, after Debtor had elected outside directors, Wendland and Lanteri obtained a consent resolution from those directors, retroactively approving the transaction. Wendland, however, did not disclose several material aspects of the transaction to these outside directors.
On June 9, 2012, a major forest fire broke out in the area, requiring the Debtor to evacuate its facilities and to move the animals under its care. The Debtor relocated most of the animals to the home of one of its directors. After the fire abated, a disagreement arose between Wendland and Debtor’s board regarding the return of the animals. In the heat of the disagreement, Wendland tendered his resignation as president and as a director.
The fire, which came to be known as the High Park Fire, did substantial damage to the Real Property. It burned or scorched trees and vegetation, buildings and fencing, equipment, and items of personal property. Lacking vegetation, the Real Property flooded on a number of occasions in 2012 and 2013, resulting in substantial ash deposits, damage to ponds and an associated spillway, and damage to the dirt road. As a result, Debtor had to perform substantial repair and restoration work. The Debtor submitted claims against its insurance policy for reimbursement of its repair expenses and compensation for its damages.
Following Wendland’s July 2012 resignation, the relationship between Wendland and Debtor continued to deteriorate. Wendland presented Debtor’s board with a list of demands, the majority of which the board rejected. Wendland then attempted to exclude Debtor from the cabin and related facilities. This required Debtor to install new facilities on the Fletcher Parcel. Wendland responded with attempts to evict the Debtor, which led the Debtor to file bankruptcy on October 7, 2014.
Wendland filed two claims in the bankruptcy, one for an unsecured debt based on' undocumented loans and a second for a secured claim based on the Wendland note and deed of trust. As a secured creditor, he also claimed. entitlement to the fire insurance proceeds. Shortly after the *236petition date, Debtor filed an adversary-proceeding, objecting to his claims and alleging its own claims against Wendland, Lanteri, the insurance carrier, and a former employee of Debtor. Debtor subsequently settled its claims against all defendants except Wendland. As part of its settlement with Lanteri, she quit claimed her one-half interest in the Real Property to Debtor.
Debtor and Wendland proceeded to trial on their claims and on Debtor’s request for confirmation of its plan. The Court entered an order (the “Combined Order”), addressing all of the disputes between the parties. It found that the purchase and loan transaction was a conflicting interest transaction in breach of Wendland’s fiduciary duties to the corporation and in violation of Colo. Rev. Stat. § 7-128-501(3). The Court held that none of the safe harbors in that statute had been satisfied. Wendland had failed to disclose the material terms of the transaction when he sought ratification of it by the outside directors. Moreover, the transaction had not been fair to the Debt- or. Among other things, it obligated the Debtor to pay twice the value of the property and gave it far more land than it could ever use. The Debtor requested rescission of the transaction rather than damages and so that was the relief the Court imposed. The Court also ruled that the Debtor did not owe Wendland on any undocumented loans and, in fact, Wend-land owed the Debtor. It also declared the ownership of items of personal property of minimal value and ruled that the Debtor was the only party entitled to the insurance proceeds. Finally, the Court confirmed the Debtor’s plan of reorganization.
The Combined Order specified the nature of the rights of both Wendland and the Debtor to the Real Property. Rescission resulted in a return to the status quo just prior to the sale and loan transaction, with Wendland and Lanteri being co-owners. Since Lanteri had subsequently quit claimed her interest in the land to the Debtor, this left Wendland and the Debtor as co-owners, with each having the right to full use of the Real Property. The Combined Order noted that this “is a somewhat untenable situation ... when they are at odds with one another. Neither party, however, requested to partition the property or order its sale under § 363(h). Thus, regrettably, further litigation may be necessary.” Combined Order at 15.
Only a few months after plan confirmation, Wendland initiated litigation in state court to partition the land. The Debtor opposed it in part on the ground that the terms of the confirmed plan vested the property of the estate in the Debtor “free and clear of all claims and interests.” Debtor contends that this language eliminated any right Wendland had to seek partition under Colo. Rev. Stat. §§ 38-28-101 et seq. The parties then agreed to return to this Court for an order interpreting this language.
II. JURISDICTION
Although both parties agreed to seek this Court’s determination, Wend-land’s Response equivocates as to whether this dispute truly “arises under” the Plan for jurisdictional purposes. 28 U.S.C. § 157(a), (b)(1) (2012). He acknowledges that “[n]o one denies that under the Amended Plan this Court retains exclusive jurisdiction ‘to determine all controversies, suits and disputes that may arise in connection with or interpretation enforcement or consummation of the Plan ....’” Response at 5 (citing Amended Plan at §§ 8.36, 10)). However, Wendland hedges, asserting that, while this Court has jurisdiction to interpret and enforce its prior orders, it may do so only to the extent that “it deals with W.O.L.F.’s undivided one-*237half interest ...Id. Wendland’s fifty-percent interest, he argues, “is not the subject of W.O.L.F.’s bankruptcy Plan, nor is it appropriate for this Court to step in to deny Mr. Wendland rights ....” Id. at 5-6. His argument is based in part on the language of § 1141(a), which states that a confirmed plan is binding on “any entity acquiring property under the plan [or] any creditor,” and Wendland argues that he fits neither category. 11 U.S.C. § 1141(a). Despite these equivocations, “the Bankruptcy Court plainly had jurisdiction to interpret and enforce its own prior orders.” Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009). This includes an interpretation as to the scope of the “free and clear” language.
III. DISCUSSION
In the first year of law school, every lawyer leams the fundamental principles of real property law. One of these principles is the concept of the bundle of sticks. An owner of land does not possess only one right in the land, but many interests or rights, each of which represents a single stick in his bundle. These include, without limitation, the right of possession, the right of control, the right of exclusion, the right of enjoyment, the right to convey a security interest in the land, and the right of disposition. One of the lesser employed interests is the right to seek partition of the land. The need for partition usually only arises when two or more parties hold undivided joint interests in the land. Under certain conditions, a co-owner may ask a court to partition their interests or, if that is impracticable, then to order the sale of the jointly owned property. Wendland has asked the state court to allow him to exercise this right as a co-owner. The Debtor acknowledges that Wendland is a co-owner, but seeks a declaration from this Court that confirmation of its chapter 11 plan somehow extinguished or removed the partition stick from Wend-land’s bundle.
The Bankruptcy Code provides that one of the effects of confirmation of a chapter 11 plan is the extinguishment of certain interests in the Debtor’s property. In particular, § 1141(c) states:
Except as provided in subsections (d)(2) and (d)(3) of this section and except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor.
11 U.S.C. § 1141(c). The exceptions in § 1141(d) are not applicable to this case. Thus, the Court’s inquiry must begin with an assessment of whether the Real Property constitutes property “dealt with by the plan.” Neither party disputes that the plan in this case dealt with the Real Property as the Combined Order declared the nature of both Wendland’s and the Debt- or’s interest in it and provided that the Debtor would continue to operate its business on it while it repaid its creditors. Next the Court must address the scope of the “free and clear” language. Finally, if the “free and clear” language of § 1141(c) would otherwise extinguish an interest, then the Court must determine whether there was anything in the plan or the Combined Order that expressly provided for the retention of that interest.
The “free and clear” provision in § 1141(c) is not without limits. It eliminates only the claims and interests of three types of persons: (a) creditors; (b) equity security holders of the debtor; and (c) general partners in the debtor. 11 U.S.C. § 1141(c). The Debtor in this case is a nonprofit charitable organization. As such, it *238has neither equity security holders nor general partners. Thus, the only applicable portion of the statute is that pertaining to claims or interests held by creditors. Contrasting this statute with another Bankruptcy Code provision highlights the limits of § 1141(c). In § 363(f), the Code provides that a trustee may sell property of the estate “free and clear of any interest in such property of any entity other than the estate” if certain conditions are met. 11 U.S.C. § 363(f). This statute does not limit its reach to creditor claims.2 Thus, as it pertains to this case, § 1141(c) would only eliminate the claims and interests of the Debtor’s creditors in the Real Property.
The Bankruptcy Code defines a “creditor” as “an entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10). It defines a “claim” as “a right to payment” or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment,” regardless of whether the claim has matured, been reduced to judgment, 'is disputed, unliquidated or contingent. 11 U.S.C. § 101(5). Congress intended that courts interpret the term “claim” very broadly. Ohio v. Kovacs, 469 U.S. 274, 279, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985). Nevertheless, it must remain tethered to a right to payment—a debt or an obligation—owed by the debtor to another entity.
Admittedly, Wendland asserted creditor claims against both the Debtor and the Real Property throughout the bankruptcy case. It was not until the Court entered its Combined Order that he lost his creditor status. Since he asserted the rights of a creditor, the Debtor asks this Court to hold that § 1141(c) eliminated any interest he held in the Real Property at confirmation. To hold this, however, the Court would have to rule that § 1141(c) also has the power to extinguish ownership rights. The Debtor provided no supporting authority for this proposition and the scope of § 1141(c) does not extend this far.
Consider the implications of the Debt- or’s reasoning. Imagine a debtor filed for chapter 11 protection, listing as one of his assets an interest in real property. In reality, he held only a ten-percent undivided interest in it, with nine other co-owners holding the remaining ninety-percent interest. Since the debtor did not owe a debt to the other nine, he does not list them as creditors on his schedules. Consequently, they do not receive any notice of the bankruptcy filing. The debtor then confirms his plan, retaining his ownership interest in this real estate. Neither the plan nor the confirmation order make any mention of the interests held by the other nine. Would the debtor in this hypothetical then own 100% of the real estate “free and clear” of the interests of the other nine who had no idea that their interests were in jeopardy? If such logic prevailed, then bankruptcy would surely become a much sought-after tool for strategic investors.
Nor is a right of partition solely a creditor’s remedy. Section 38-28-101 of the Colorado Revised Statutes states that “[ajctions for the division and partition of real or personal property or interest therein may be maintained by any person hav*239ing an interest in such property.” Colo. Rev. Stat. § 23-208-101. Arguably, the statute’s language is broad enough to include the possibility of a creditor asserting a right to partition based on its lien rights against the property, but it is most commonly used by persons holding undivided ownership interests in the property. Nevertheless, if Wendland were asserting his right to partition based on a creditor interest, then § 1141(c) would prevent him from doing so. In this case, however, he is invoking a right to partition based solely on his co-ownership interest.
The final prong of the Court’s inquiry is to determine whether the plan or the Combined Order made express provisions for Wendland’s interest. However, § 1141(c) only requires the Court to examine the plan and its Order to see if it expressly retains an interest when § 1141(c) would otherwise eliminate it. Since the Court has held that § 1141(c) does not eliminate ownership interests, this final inquiry is unnecessary in this case.
Alternatively, the Debtor requests that this Court instruct the state court that any form of partition or sale may not impair the Debtor’s business or hinder its reorganization in any way. First, the Debtor’s reorganization appears to be complete. Its Amended Plan set forth the specific treatment each class of claims would receive. It stated that Wendland’s secured claim in Class 1 would remain unimpaired unless the Court disallowed his claims, which it did. His Class 2 unsecured claim, if allowed, would receive payment on the same terms as Class 5. Since the Court disallowed his Class 2 claim, the Debtor has no further obligation to repay it. For Class 3, it incorporated its settlement with Lanteri, which required the Debtor to pay her $15,000 for her one-half interest in the Real Property. Presumably, the Debtor has made this payment as it was required to do so long ago and she has not come forward to declare the plan in default. For Class 4, the Debtor committed to pay its small claims under $2,000, if any, in full within one year of the effective date of the plan. The effective date was sixty days from the January 29, 2016 confirmation date, or March 29, 2016. Thus, this payment to any small claims was due-no later than March 29, 2017. Finally, as to Class 5, which included all non-priority unsecured claims over $2,000, it provided that the Debtor would pay these claimants ten percent of their claims. Class 5 claims totaled less than $20,000. Even though the plan scheduled payments to Class 5 over the course of five years, the Debtor’s Chapter 11 Final Report and Motion for Final Decree indicated that it had already paid these creditors $4,000, which is in excess of the required plan payments over the five-year period.
With reorganization complete, a state court ruling on partition or sale rights will have no effect on the Debtor’s ability to fulfil its plan obligations. What the Debtor is actually requesting is that the bankruptcy court stop the state court from making a ruling that would impair its non-profit business in the future. The Bankruptcy Code does not promise this form of protection. A bankruptcy filing shields a debtor from creditor attacks based on pre-petition debts. It is not to be used by a debtor as either a shield or a sword to defeat the post-confirmation actions of courts, regulatory agencies, co-owners, and post-petition creditors.
IY. CONCLUSION
For the foregoing reasons, the Debtor’s request for plan interpretation is GRANTED but the Court holds that neither § 1141(c) nor the Debtor’s Amended Plan extinguished Wendland’s co-ownership interest in the Real Property. Nothing in the *240Plan, the Combined Order, or this statute prevents Wendland from seeking partition or sale in the state court.
. All references to “section” and "§” shall refer to Title 11, United States Code, unless expressly stated otherwise.
. Admittedly, § 363(h) specifically addresses a trustee’s ability to sell property that is co-owned and in which the debtor holds an undivided interest. It allows the trustee to partition or sell both the estate's interest and the co-owner’s interest under certain conditions. As the more specific statute targeting a particular issue, it would control over the more general provision in § 363(f). See Green v. Bock Laundry Mach. Co., 490 U.S. 504, 524-26, 109 S.Ct. 1981, 104 L.Ed.2d 557 (1989). However, the Court refers to § 363(f) only to emphasize the difference in the scope of its "free and clear” language. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500931/ | OPINION
Hon. David T. Thuma, United States Bankruptcy Judge
The Court held a trial on the merits of Plaintiffs nondischargeability and denial of discharge complaint. Having weighed the evidence and considered the relevant legal standards, the Court rules that Defendant’s discharge should be denied under §§ 727(a)(2)(B) and (a)(4).
I. FACTS
The Court finds the following facts:1
1. General. Defendant Bryan Lamey is a certified public accountant. He worked for Arthur Andersen from 1992-1995 and then started his own accounting firm (Chavar-ria, Dunne and Lamey), which specialized in litigation support. Before March, 2010, the owners of Chavarria, Dunne and La-mey sold the firm to a regional accounting firm (Clifton Gunderson), receiving millions of dollars in exchange. As of March 4, 2010, Defendant’s balance sheet reflected a net worth of more than $21 Million. His March 30, 2012, balance sheet showed a net worth of $15,440,000. Defendant is a relatively sophisticated businessman.
On December 30, 2014, Debtor filed this chapter 7 case. On his original bankruptcy schedules, Defendant reflected a negative *244net worth of $1,463,563, meaning that he had lost nearly $17 Million in less than three years. Defendant lost portions of his wealth day trading.
2.The United Entities. Defendant formed six limited liability companies in 2012 (the “United Entities”) for the purpose of owning and operating recreational vehicle dealerships in Las Cruces and Albuquerque, New México.2 The other owners were Robert Maese, Sr. and Robert Maese, Jr. Defendant owned 51% of the holding companies and was the managing member of all the United Entities.
Three of the United Entities3 borrowed $1,650,000 from Plaintiff to buy real estate in Las Cruces for the Las Cruces dealership. The loan was secured by a mortgage on the purchased land and by a security interest in personal property, including inventory and equipment.
The RV dealerships were unprofitable; the owners closed them in 2013. Their “floorplan” lender (GE Capital) repossessed its collateral of new and used recreational vehicles. The Albuquerque real estate was sold in August, 2013. The Las Cruces dealership sold its non-floor-planned inventory, its parts inventory, and the other dealership personal property in late 2013 or early 2014, netting about $20,-000-$30,000. It is not clear which United Entity owned this property.4
Tax returns for the United Entities were prepared timely for the 2012 tax year. Tax returns for the 2013 tax year were not completed until April 6, 2015. The United Entities’ accountant was Donald Miller of Peltier, Gustafson & Miller.
3. Rhonda Smith. On May 29, 2014, Defendant’s sister Rhonda Smith gave a $14,000 check to Defendant, which he deposited in one of his bank accounts. Defendant repaid his sister, with interest, on July 27, 2014. The payment amount was $14,268. Defendant did not list the $14,268 payment on his Statement of Financial Affairs (“SOFAs”) (question 3(c) requires disclosure of all insider payments made within a year pre-petition). Defendant has never amended his SOFAs. In response to a written request for production of documents evidencing transfers to brothers or sisters between September 1, 2012 and October 31, 2016, Defendant stated that there were no such transfers or responsive documents.5
4. 2013 Tax Refund. On October 14, 2014, Defendant filed his 2013 federal income tax return, asserting that he was due a $8,538 refund. Defendant did not disclose the refund on his bankruptcy schedule B. Defendant received the refund on May 26, 2015, but did not tell the trustee. Nearly two years later, Defendant amended his schedule B to disclose the existence and payment of the 2013 tax refund. The disclosure misleadingly attributes the 2013 tax refund to net operating losses generated by the United Entities (see the discussion below).
*2455. Dana Lamey’s Schwab Account. Defendant’s ex-wife, Dana Lamey, has a Schwab cash management account. In August, 2013, Ms. Lamey signed a power of attorney giving Defendant the right to transfer or withdraw funds from the account. In 2014, Defendant transferred the following amounts to himself from the Schwab account: $7,500 on January 16, 2014; $3,000 on February 11, 2014; $6,000 on March 12, 2014 (two transfers); $1,100 on May 5, 2014; and $22,500 on July 1, 2014 (two transfers). Defendant used the account as if it were his own.
Defendant did not disclose any information about Dana Lamey’s Schwab account, including the fact that on the petition date the account balance was $1,268. During his deposition taken by Plaintiffs counsel, Defendant testified that the transfers in 2014 were done by Dana Lamey, not by him. That testimony was false.
Ms. Lamey testified that the Schwab account was hérs, but the funds in the account were both hers and Defendant’s. Defendant testified he used the account to make money for both families.
Defendant signed answers to Plaintiffs interrogatories on December 16, 2015, under penalty of perjury. In response to Plaintiffs request to list all bank account to which he had signing authority, Defendant did not list Dana Lamey’s Schwab account.
6. United Entities’ NOLs and Defendant’s Amended Tax Returns. On December 29, 2014, the IRS notified Defendant that it was auditing his 2011 federal income tax return. Defendant hired CPA Don Miller to represent him in the audit.
Defendant and Miller realized that the United Entities had generated substantial net operating losses (“NOLs”) in 2013. Because the United Entities’ profits and losses passed through to its members, the NOLs would benefit Defendant and the Maeses. Further, the NOLs could be carried back to 2010. On or about April 6, 2015, Miller filed the 2013 federal and state income tax returns for United Entity holding companies, and also issued K-ls to the members.
Based on the K-ls, Defendant filed amended state and federal tax returns for 2010, 2011, and 2013, which generated the following refunds:
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All of the refunds were paid to Defendant and deposited in his bank accounts. He did not notify the trustee of the payments, nor turn the money over to the trustee. He apparently spent the tax refunds. Defendant’s original bankruptcy schedules do not reflect any potential tax refunds.7 Defendant amended his schedule B on February 13, 2015, but did not disclose any potential tax refunds. Defendant *246did not file a further amendment to Schedule B until March 14, 2017, at which time he disclosed three of the tax refunds, totaling $69,511. LANB exposed at least some of these omissions during a deposition taken before the March 14, 2017 amendments. Defendant’s schedules as amended never accurately described the tax refunds he received. By April 6, 2015, he knew the extent of the NOLs, and that he would use them to amend his prior tax returns and obtain large refunds.
7.Mustang GT. On the petition date Defendant owned a 2007 Ford Mustang GT “Foose.” He scheduled the car with a value of $10,225, and claimed all of that amount exempt. Defendant sold the car on March 30, 2015, for $14,500. He did not notify the trustee about the sale or turn over the excess above the claimed exemption. None of the schedule amendments disclosed the sale or the sales price. In particular, the March 14, 2017 amendment continued to value the car at $10,225. Defendant did not seek the Court’s or the trustee’s approval before selling the car.
8. Counterclaims. Defendant asserted counterclaims against Plaintiff in this adversary proceeding. The counterclaims were not disclosed until March 14, 2017, even though Defendant had asserted similar claims on behalf of the United Entities on April 19, 2016, and the transaction at issue closed in August, 2012. Subject to Court approval, the trustee and the Plaintiff have agreed to settle the counterclaims for $15,000.
9. Cash Value of Omitted or Removed Assets.
The following table lists the omitted or removed assets discussed above and their value:
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10.Records. Defendant had a substantial number personal banking and other financial records, but did not have all of the financial records Plaintiff wished to review. Plaintiff subpoenaed additional records from banks, brokerage companies, and the like, and spent time and money analyzing the records produced by Defendant and the third parties. Plaintiff was able to obtain a reasonably accurate accounting from the combination of records.
II.DISCUSSION
A. § 523(a)(6) (Willful and Malicious Injury to Property)
Plaintiffs first claim is that a portion of its debt is nondischargeable because one of the United Entities sold Plaintiffs collateral without permission and did not turn over the proceeds.
Section 523(a)(6) provides that a debt “for willful and malicious injury by a debtor to another entity or the property of another entity” is nondischargeable. Sell*247ing collateral without the permission of the secured creditor may, under certain circumstances, qualify as willful or malicious injury. See, e.g., In re Longley, 235 B.R. 651, 658 (10th Cir. BAP 1999).
This claim fails because there is not enough evidence that Plaintiff had a security interest in the subject property. The security agreement Plaintiff relies upon was signed by the United holdings companies and the Las Cruces real estate company, but not by the likely owner of the alleged collateral, i.e., the Las Cruces operating company.
Further, information about the sale is very skimpy. The Court cannot tell what was sold, when it was sold, for how much, or how the money was spent. Overall, Plaintiff did not carry its burden of proof on this claim.
B. General Standards for § 727 Denial of Discharge.
“Denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor. The provisions denying the discharge are construed liberally in favor of the debtor and strictly against the creditor.” In re Mosley, 501 B.R. 736, 742 (Bankr. D.N.M. 2013) (citation omitted). “Completely denying a debtor his discharge ... is an extreme step and should not be taken lightly.” Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993). However, the “fresh start” policy embodied in the Bankruptcy Code is limited to the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quotation omitted).
The standard of proof is a preponderance of the evidence. In re Stewart, 263 B.R. 608, 612 (10th Cir. BAP 2001). The plaintiff has the burden of proving each element of its claim. Id.
C. § 727(a)(2)(B) (Concealment of Property of the-Estate).
Section 727(a)(2)(B) allows Defendant a discharge unless he
with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed ... property of the estate, after the date of the filing of the petition.
“To deny a debtor’s discharge under § 727(a)(2)(B), the movant must establish by a preponderance of the evidence that the debtor transferred or concealed property of the estate after filing bankruptcy with the intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of the property.” In re Coppaken, 572 B.R. 284, 309 (Bankr. D. Kan. 2017), quoting Hepner v. Kleinhans (In re Kleinhans), 2010 WL 1050583, at *3 (10th Cir. BAP Mar. 23, 2010); In re Sowers, 229 B.R. 151, 156 (Bankr. N.D. Ohio 1998) (same).9
Concealment means withholding knowledge of an asset by failing or refusing to divulge owed information. In re Sowers, 229 B.R. at 156; 6 Collier on Bankruptcy ¶ 727.02[6][b] (16th ed.) (using the same language). A transfer is a disposition of an interest in property, and is construed as broadly as ' possible. *248§ 101(54); Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279 (9th Cir. 1996) (withdrawals from bank account constitute transfer under § 727(a)(2)(A)).
Omitting information in a debtor’s bankruptcy schedules may also constitute post-petition concealment for purposes of § 727(a)(2)(B). See In re Hadley, 70 B.R. 51, 53 (Bankr. D. Kan. 1987) (debtors’ failure to list assets on their bankruptcy schedules can be construed as concealment both before and after the filing of the bankruptcy petition), cited in In re Sowers, 229 B.R. at 157.
The fraudulent intent must be actual, not constructive. In re Standiferd, 2008 WL 5273690, at *8 (Bankr. D.N.M.); In re Sowers, 229 B.R. at 157, citing Bank of Pennsylvania v. Adlman, 541 F.2d 999, 1003 (2nd Cir. 1976). Actual intent may be established by circumstantial evidence or inferred from the debtor’s conduct. In re Standiferd, 2008 WL 5273690 at *8; Pavy v. Chastant (In re Chastant), 873 F.2d 89, 91 (5th Cir. 1989); American General Finance, Inc. v. Burnside, 209 B.R. 867, 871 (Bankr. N.D. Ohio 1997). “Just one wrongful act may be sufficient to show actual intent under § 727(a)(2), [but] a continuing pattern of wrongful behavior is a stronger indication of actual intent.” In re Sowers, 229 B.R. at 157.
Defendant’s conduct falls within § 727(a)(2)(B). He should have told the trustee and/or amended his schedules as soon as he applied, post-petition, for the tax refunds generated by the NOLs.10 When he received the tax refunds, Defendant should have turned them over to the trustee.11 The same is true for the 2013 federal tax refund Defendant applied for pre-petition and received in May, 2015. Defendant received post-petition and transferred (i.e. spent) or removed $130,000 in pre-petition tax refunds.
Similarly, when Defendant sold the Mustang GT, he should have told the trustee, amended his schedule B to reflect the actual value of the car, and turned over the $10,825 difference between the sales price and the claimed exemption.
Defendant’s failure to disclose certain assets also constitutes post-petition concealment. These assets .include his counterclaim against Plaintiff, the Rhonda Smith preference claim, Dana Lamey’s Schwab account, and the 2013 federal tax refund.
Taken together, Defendant’s actions show a pattern of intentional, fraudulent removal, transfer, or concealment of estate property, which runs afoul of § 727(a)(2)(B).
*249D. 727(a)(3) (Presevation records.)
Under § 727(a)(3), the court shall grant Defendant a discharge unless he
has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all circumstances.
“Records need not be so complete that they state in detail all or substantially all of the transactions taking place in the course of the business. It is enough if they sufficiently identify the transactions that intelligent inquiry can be made respecting them.” The Cadle Co. v. Stewart (In re Stewart), 263 B.R. 608, 615 (10th Cir. BAP 2001), aff'd, 35 Fed.Appx. 811 (10th Cir. 2002), quoting Hedges v. Bushnell, 106 F.2d 979, 982 (10th Cir. 1939). “Whether the records are sufficient lies within the Court’s discretion.” In re Splawn, 376 B.R. 747, 758 (Bankr. D.N.M. 2007).
A plaintiff has the burden of making a prima fade case that the debtor “failed to maintain and preserve adequate records and that the failure made it impossible to ascertain [her] financial condition and material business transactions.” Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1295 (10th Cir. 1997) (emphasis in original). The debtor then has the burden to justify his failure to maintain records. In re Stewart, 263 B.R. at 615. “[Creditors should not be required to speculate about the financial condition of the debtor or hunt for the debtor’s financial information.” In re Guenther, 333 B.R. 759, 765 (Bankr. N.D. Tex. 2005).
In general, a higher standard of recordkeeping will be required of debtors who are sophisticated business persons. In re Potts, 501 B.R. 711, 719 (Bankr. D. Colo. 2013); In re Luby, 438 B.R. 817, 832 (Bankr. E.D. Pa. 2010). The Court may consider the debtor’s occupation, financial structure, education, experience, and sophistication. Potts, 501 B.R. at 719; In re Strbac, 235 B.R. 880, 882 (6th Cir. BAP 1999).
Here, the evidence is unclear about the extent of Defendant’s records. Plaintiff subpoenaed records from Charles Schwab, TD Ameritrade, Vision Bank, and First National Bank of Omaha, after Defendant failed to turn over the requested documents. The subpoenaed records helped give Plaintiff a full picture of Defendant’s financial condition and business transactions, and allowed Plaintiff to find assets that were not disclosed on Defendant’s bankruptcy schedules. It is not clear, however, that Defendant’s records were inadequate for Plaintiff to “sufficiently identify the transactions that intelligent inquiry can be made respecting them.” Stewart, 263 B.R. at 615. Plaintiffs trial evidence focused almost entirely on § 727(a)(2)(B) and (a)(4).. In its opening Plaintiff mentioned § 727(a)(3), but little questioning of any witness concerned (a)(3). Weighing all of the evidence, the Court concludes that Plaintiff did not carry its burden of proof on the § 727(a)(3) claim.
E. § 727(a)(4).
Section 727(a)(4) provides that the Court shall grant the debtor a discharge unless he “knowingly and fraudulently, in or in connection with the case ... made a false oath or account.” Denial of discharge under § 727(a)(4) requires a material, false oath, made knowingly, with intent to defraud. In re Brown, 108 F.3d 1290, 1294 (10th Cir. 1997); In re Calder, 907 F.2d 953, 955 (10th Cir. 1990).
*250The materiality requirement is satisfied if the false oath “‘bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.’” United States Trustee v. Garland (In re Garland), 417 B.R. 805, 814 (10th Cir. BAP 2009), quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984). Debtors have a duty to fully disclose all of their assets, without deciding for themselves what is “important enough for parties in interest to know.” Freelife International, LLC v. Butler (In re Butler), 377 B.R. 895, 923 (Bankr. D. Utah. 2006); In re Garland, 417 B.R. at 815 (quoting Butler). The materiality requirement is not defeated by the fact that the undisclosed property has no value. Garland, 417 B.R. at 814. See also Calder, 907 F.2d at 955 (rejecting debtor’s argument that the undisclosed assets were worthless).
A false oath is made “knowingly” if the debtor “deliberately and consciously signs his or her bankruptcy schedules and statement of financial affairs “knowing that they were incomplete.” In re Retz, 606 F.3d 1189, 1198 (9th Cir. 2010).
A “reckless indifference to the truth” can satisfy the fraudulent intent requirement of § 727(a)(4). In re Garland, 417 B.R. at 815; In re Butler, 377 B.R. at 922; Boroff v. Tully (In re Tully), 818 F.2d 106, 112 (1st Cir. 1987). Failure to amend schedules in a timely fashion to correct errors may constitute reckless indifference to the truth. In re Guenther, 333 B.R. at 768.
Fraudulent intent may be inferred from the surrounding facts and circumstances, because a debtor is unlikely to admit an intention to defraud. Colder, 907 F.2d at 955-56. A debtor does not “wipe clean” his fraudulent intent by amending his schedules after a creditor discovers the false oath and confronts him. In re Sholdra, 249 F.3d 380, 383 (5th Cir. 2001) (fraudulent intent present when debtor amended schedules only after being confronted by creditor in deposition); cf. Brown, 108 F.3d at 1295 (fact that debtor comes forward on its own accord is strong evidence of lack of fraudulent intent).
False oaths can include statements made in depositions or Rule 2004 examinations taken in the bankruptcy case, or in written discovery responses. In re Butler, 377 B.R. at 922; In re Zhang, 463 B.R. 66, 86 (Bankr. S.D. Ohio 2012); In re Bushey, 568 B.R. 821, 829 (Bankr. D.N.M. 2017); In re Splawn, 376 B.R. 747, 760 (Bankr. D.N.M. 2007). A material omission may constitute a false oath. In re Splawn, 376 B.R. at 760.
Defendant’s discharge should be denied under this section. The facts outlined and discussed above show numerous, material false oaths, which Defendant made knowingly with intent to defraud. Defendant’s schedules and SOFAs were materially inaccurate when filed, and have never been adequately amended. The incomplete amendments were not timely, and in part came after LANB brought the false oaths to Defendant’s attention. Defendant’s deposition testimony about Dana Lamey’s Schwab account was false. Defendant’s response to a request for production of documents (no documents relating to transfers to his sister) was false. The schedule amendment filed in March, 2017 was false regarding the Mustang GT and the tax refunds. The sworn statements about the $130,000 or more of tax refunds have never been accurate.
From the numerous material omissions, all of which benefitted Defendant, the Court concludes that Defendant intended to defraud the trustee and other parties in interest, and/or acted with reckless indif*251ference to the truth. As a direct result of the false oaths, Defendant pocketed $149,453 that should have been paid to creditors.
F. 727(a)(5).
Under § 727(a)(5), Defendant’s discharge should be denied if he “has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.”
There is no Tenth Circuit standard for determining what constitutes a satisfactoiy explanation of loss of assets under § 727(a)(5). Other courts have held that such a finding is left to the sound discretion of the court. Martinez v. Sears (In re Sears), 565 B.R. 184 (10th Cir. BAP 2017), citing Blackwell Oil Co. v. Potts (In re Potts), 501 B.R. 711, 726 (Bankr. D. Colo. 2013). Some courts require corroboration of a debtor’s testimony about loss or disposition of assets. Id. See also First Tex. Sav. Ass’n v. Reed (In re Reed), 700 F.2d 986 (5th Cir. 1983) (the corroboration must be sufficient to eliminate any speculation as to what happened to the assets); Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 619 (11th Cir. 1984) (“Vague and indefinite explanations of losses that are based upon estimates uncorroborated by documentation are unsatisfactory.”).
The Court concludes that Plaintiff did not carry its burden of proof under § 727(a)(5). The trial evidence indicates that Plaintiff was able to reconstruct Defendant’s accounting records and determine how he lost all of his money between 2010 and the petition date. There is not enough evidence that Defendant cannot give a satisfactory explanation for his loss of assets.
G. LANB’s Claim.
Plaintiff seeks to establish the amount of its claim. Because Defendant’s discharge will be denied, Plaintiffs claim amount is not properly before the Court.
m. CONCLUSION
Plaintiffs §§ 523(a)(6), 727(a)(3), and 727(a)(5) claims fail, but Plaintiff carried its burden of proving that Defendant’s discharge should be denied under §§ 727(a)(2)(B) and (a)(4). The Court will enter a separate final judgment consistent with this opinion.
. The Court took judicial notice of the docket in the adversary case and in the main bankruptcy case. See St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir. 1979) (court may sua sponte take judicial notice of its docket); LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 8 (1st Cir. 1999) (same).
.The United Entities consisted of two holding companies (United Real Estate Holdings LLC and United RV Holdings LLC); two real es- ■ tate companies (United Real Estate Las Cruces LLC and United Real Estate Albuquerque LLC); and two operating companies (United RV Las Cruces LLC and United RV Albuquerque LLC). The real estate holding company owned the real estate companies, and the operating holding company owned the operating companies.
. The two holding companies and the Las Cruces real estate company,
. The likely owner was United RV Las Cruces LLC, the operating company for the Las Cruces dealership.
. The request for production and responses were in another adversary proceeding, brought by the Maeses, which also seeks, inter alia, denial of Defendant's discharge.
. There is a disclosure that the two United operating companies have "NOLs and other potential tax-related benefits.”
. Another formulation is that plaintiff must prove the debtor transferred, removed, etc. estate property, post-petition, intending to hinder, delay or defraud a creditor or estate officer. In re DiGesualdo, 463 B.R. 503, 519 (Bankr. D. Colo. 2011); In re Ritchie, 543 B.R. 311, 319 (Bankr. D.N.M. 2015).
, All tax refunds based on pre-petition income or loss are estate property, whenever paid. See Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516 (10th Cir. 1991), citing Kokoszka v. Belford, 417 U.S. 642, 648, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974); Holder v. Wilson (In re Wilson), 49 B.R. 19, 20 (Bankr. N.D. Tex. 1985) (tax refund based on pre-petition losses was property of the estate), citing Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966) (loss carry-back refund is property of the estate); see also Official Committee of Unsecured Creditors v. PSS Steamship Company, Inc. (In re Prudential Lines, Inc.), 928 F.2d 565, 573 (2d Cir. 1991) (right to carry forward net operating losses ("NOLs”) was property of the estate) and Gibson v. United States (In re Russell), 927 F.2d 413, 417-19 (8th Cir. 1991) (same); cf. 26 U.S.C. § 1398(g) (estate succeeds to tax attributes of debtor, including net operating loss carryovers). Here, all $130,090 in tax refunds were for pre-petition years and based on pre-petition losses. These tax refunds are property of the estate.
. A debtor has an affirmative duty to turn over property of the estate, without first requiring a demand or turnover motion by the trustee. Rupp v. Auld (In re Auld), 561 B.R. 512, 518 (10th Cir. BAP 2017). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500932/ | OPINION
Hon. David T. Thuma, United States Bankruptcy Judge
The Court tried this nondischargeability action on August 30, 2017, and took the matter under advisement. Having carefully reviewed the evidence and the law, the Court now holds that judgment should be entered against Plaintiff on his §§ 523(a)(4) and (a)(6)1 claims. The Defendant’s debt to Plaintiff is dischargeable.
I. FACTS
The Court makes the following findings of fact:
Defendant is an entrepreneur. In July 2011, he formed Tango, LLC, a New Mexico limited liability company (the “Company”). Defendant was the Company’s sole member. The Company’s proposed business was to own and operate a web-based “social media enterprise” designed to assist the- Company’s customers with sales and business development. The Company was capitalized initially by money from Defendant’s prior business. Defendant deposited those funds in a checking account opened in the Company’s name (the “Company Account”). Defendant was the sole signatory on the Company Account.
Defendant knew when he started the Company that its platform required substantial development, and that he would need to raise a significant amount of capital to launch the business successfully.
In the fall of 2011, Defendant was introduced to George Lovato, Jr., a corporate finance consultant and the principal of B.H. Capital Limited. The two met in October 2011 to discuss and review the Company’s business concept. On December 15, 2011, Defendant and B.H. Capital signed a Corporate Finance Consulting Agreement. Under the agreement, in consideration for a $20,000 consulting fee, B.H. Capital was to advise the Company in raising start-up capital.
After signing the agreement, Mr. Lovato gave Defendant a place to work, charging him $500 per month. From January through August of 2012, Mr. Lovato supervised Defendant’s progress in developing the Company. During this period, Defendant assembled “wire frames” (analogous to blueprints, the Court understands) for the Company’s online platform, worked on website design, and formulated revenue models. Mr. Lovato was pleased with .the Company’s development. He assumed an active role in the enterprise, becoming the treasurer and eventually the chairman of the board of directors.
As part of Mr. Lovato’s plan to raise capital, he recommended in early 2012 that Defendant convert the Company to a New Mexico corporation. The necessary conversion documents were signed in February 2012, but the conversion to Tango, Incorporated, a New Mexico corporation (the “Corporation”) did not occur until August 23, 2012.
At various times in 2012, Defendant approached friends and acquaintances about investing in the Corporation. Plaintiff was among the potential investors Defendant contacted. On August 6, 2012, Plaintiff *255gave Defendant a $15,000 cashier’s check, payable to the order of Defendant. Defendant deposited the $15,000 into the Company Account.2
On August 7, 2012, Plaintiff and the Corporation (which had not yet been incorporated) signed a Preincorporation Agreement. In this agreement the Corporation agreed to issue to Plaintiff 1.5% of its stock in return for the $15,000 investment.
The Corporation came into legal existence on August 23, 2012, when the New Mexico Public Regulation Commission issued a Certificate of Incorporation by Conversion. The certificate stated that the Company was converted to the Corporation on that date.
After conversion, the Corporation opened a bank account at Union Savings Bank (the “Corporation Account”). Defendant was not an authorized signer on the Corporation Account; if he wanted to pay a debt or an invoice of the Corporation with funds in the Corporation Account, he had to obtain approval (and a check) from Mr. Lovato, who had signing authority. The Company Account, into which Plaintiffs $15,000 investment had been deposited, remained open. No funds were transferred from the Company Account to the Corporation Account.
On October 17, 2012, Plaintiff delivered a $5,000 cashier’s check to Defendant. The cheek was payable to the Corporation. Defendant deposited the check into the Corporation Account.
From late 2012 through early 2014, Defendant continued working on the Corporation’s development and engaged a variety of engineers and consultants. Investors, including Plaintiff, were invited on occasion to attend live demonstrations of the Corporation’s online platform and to give their feedback.
On or about August 1, 2013, the Corporation issued 30,000 shares of common stock to Plaintiff.
No money was deposited into the Company Account after conversion, but Defendant retained authority to spend the funds in the account. Defendant used the money to pay Corporation expenses after the August 23, 2012 conversion. As time went on and Defendant’s other sources of income diminished, he also used the Company Account (the amount is not in evidence) for personal expenses such as utility bills and food.
Plaintiff confronted Defendant in June 2014, asserting that Defendant had misused Plaintiffs investment money. The Corporation, which had never “gotten off the ground,” ceased operations later that month.
On October 1, 2014, Defendant entered into a Repayment Agreement with three investors, including Plaintiff, to repay $50,000 in invested funds. In December 2014, the parties discussed amending the agreement to provide Defendant more flexibility in repaying the $50,000. The amendment was never finalized, and Defendant never repaid the entire $50,000. Of Plaintiffs $20,000 investment, Defendant repaid about $6,350.
Plaintiff sued Defendant in state court to recover the amount due. On August 24, 2016, the state court entered a money judgment against Defendant, in favor of Plaintiff, for $10,157. Post-judgment interest accrued at 8.75%.
*256II. DISCUSSION
A. Effect of Company’s Conversion to Corporation.
Under New Mexico law, “[a] limited liability company may be converted to a corporation, partnership or limited partnership.” N.M.S.A. 1978, § 53-19-60.1. When such conversion takes effect “all property owned by the converting entity is vested in the converted entity,” and “all debts, liabilities and other obligations of the converting entity continue as obligations of the converted entity .... ” N.M.S.A. § 53—19— 61.
Based on the above-cited New Mexico statute, the Company Account became property of the Corporation on August 23, 2012, and remained Corporation property thereafter. Defendant’s 2013 and/or 2014 personal expenses that Plaintiff complains about were paid with corporate assets, not with assets belonging to Plaintiff, Defendant, or the Company, This distinction is significant.
B. § 523(a)(4) (Fraud or Defalcation While Acting in a Fiduciary Capacity, Embezzlement, or Larceny).
1. Elements of § 523(a)(4) claim. Plaintiff alleges that his claim is nondischargeable under § 523(a)(4), i.e., a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
a. Fraud or defalcation while acting in a fiduciary capacity. To be non-dischargeable under this section, debts “for fraud or defalcation3 while acting in a fiduciary capacity” must have been incurred with intentional wrongful conduct, bad faith, moral turpitude, or other immoral conduct. Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-74, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013).
b. Embezzlement. A creditor may prove embezzlement by showing: (1) his property was entrusted to the debtor; (2) the debtor appropriated the property for a use other than the use for which it was entrusted; and (3) the circumstances indicate fraud. In re Morrow, 2017 WL 2062859, at *5 (Bankr. D.N.M. 2017), citing Bd. of Trustees v. Bucci (In re Bucci), 493 F.3d 635, 644 (6th Cir. 2007), and Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir. 1988) (embezzlement consists of “the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come”).
c. Larceny. 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.” Hernandez v. Musgrave (In re Musgrave), 2011 WL 312883, *5 (10th Cir. BAP 2011) (quoting 4 Collier on Bankruptcy ¶ 523.10[2], 523-77 (16th ed. 2009)). Embezzlement differs from larceny in that “[e]mbezzled property is originally obtained in a lawful manner, while in larceny the property is unlawfully obtained.” Musgrave, 2011 WL 312883, *5.
2. Ownership of the funds at issue. There is an initial problem with Plaintiff’s § 523(a)(4) claim, because the money allegedly misused was not Plaintiffs money. Rather, it was the Corporation’s money, and had been since August 7, 2012 (the initial $15,000 investment), or October 17, 2012 (the $5,000 investment). Defendant’s, initial handling of Plaintiffs investment *257funds was in accordance with Plaintiffs wishes. Much later, Defendant spent an unspecified amount of the Corporation’s money on Defendant’s personal expenses. Defendant never spent any of Plaintiffs money, either on Defendant’s personal expenses or on anything else.
3. Plaintiff lacks standing to complain about alleged misuse of corporate assets. Plaintiff, a stockholder of the Corporation, lacks standing to sue Defendant for misuse of corporate funds. See Marchman v. NCNB Texas Nat. Bank, 120 N.M. 74, 81, 898 P.2d 709 (S. Ct. 1995) (corporate shareholders do not have an individual right of action against a third person for damages resulting from an injury to the corporation). As stated in In re Patel, 536 B.R. 1, 16-17 (Bankr. D.N.M. 2015):
[W]hen the alleged injury is inflicted upon the corporation and the only injury to the shareholder is the indirect harm which consists in the diminution in value of his [or her] corporate shares[,] ... it has been consistently held that the primary wrong is to the corporate body [.] ” Id. (quoting Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 732 (3d Cir. 1970)). “Thus, although the stockholders of a corporation suffer when the corporation incurs a loss,” they “should look to the recovery of the directly injured party, not the wrongdoer for relief.” Id. (internal quotations omitted). See also Clark v. Sims, 147 N.M. 252, 254-55, 219 P.3d 20, 22-23 (Ct. App. 2009) (“Marchman applied the traditional rule and held that the shareholder in that case lacked individual standing to bring a direct action against third persons for damages resulting from an injury to the corporation, even though the shareholder was indirectly injured.”).
Further, shareholders do not gain standing if they also are creditors. See, e.g., Prudential-Bache Securities, Inc. v. Franz Mfg. Co., 531 A.2d 953, 955 (Super. Ct. Del. 1987) (creditor lacks standing to assert corporate claim against director for breach of duty); Nobles v. Marcus, 533 S.W.2d 923, 927 (Tex. 1976) (creditors do not have standing to assert legal rights belonging to the debtor corporation); Valley View State Bank v. Owen, 241 Kan. 343, 349, 737 P.2d 35 (S. Ct. 1987) (creditor of a corporation does not have standing to sue a custodian for alleged negligent loss of corporate assets).
4. Fiduciary capacity. Even if Plaintiff held sufficient legal standing, there is no evidence that Defendant acted in a “fiduciary capacity” toward Plaintiff as that term is used in § 523(a)(4). In the Tenth Circuit, to have § 523(a)(4) fiduciary duties, one must hold property of another pursuant to an express or technical trust. In re Morrow, 2017 WL 2062859, *5 (Bankr. D.N.M. 2017), citing In re Young, 91 F.3d 1367, 1371 (10th Cir. 1996). In New Mexico, shareholders in closely held corporations owe one another fiduciary duties similar to those owed among partners. Walta v. Gallegos Law Firm, 131 N.M. 544, 552-53, 40 P.3d 449 (Ct. App. 2002). Such duties, however, are not enough to trigger nondischargeable liability under § 523(a)(4). See, e.g., Edward J. Horejs v. Robert M. Steele (In re Robert M. Steele), 292 B.R. 422, 427 (Bankr. D. Colo. 2003) (the statutory duty of good faith owed by a corporate director to shareholders is too general to create a technical trust under § 523(a)(4)). Here, there is no evidence that Plaintiffs $20,000 investment in Tango was held in an express or technical trust by Defendant, the Company, or the Corporation.
5. No proof whose money was used to pay for Defendant’s personal expenses. Plaintiff has not shown that his $20,000 was spent on Defendant’s personal expenses. Rather, the evidence shows that *258Plaintiffs $5,000 was deposited into the Corporation Account, which was never used to pay Defendant’s personal expenses. Plaintiffs other $15,000 was deposited into the Company Account. Much later, Defendant apparently paid some of his personal expenses from this latter account. ■However, there is no evidence of what other funds were deposited into the Company Account, when they were deposited, or the amount and timing of any withdrawals. Without this information, the Court cannot determine if or when Plaintiffs $15,000, or some portion thereof, was spent.
6. No proof how much was spent on personal expenses. Finally, Plaintiff has not quantified the amount of the Corporation’s money Defendant spent on personal expenses. Defendant testified that his personal expenses paid for with Corporation money were “minimal,” but that general description was never quantified. Without that information, the Court could not determine a nondischargeable amount, even if the debt were otherwise nondischargeable.
For these reasons, the Court must rule against Plaintiff on his § 523(a)(4) claim.
C. § 523(a)(6) (Willful and Malicious Injury)
1. Elements of § 523(a)(6) claim. Plaintiff also alleges that Defendant’s debt is nondischargeable under 11 U.S.C. § 523(a)(6) because it arose from actions resulting in a “willful and malicious injury.” To satisfy his burden under § 523(a)(6), a plaintiff must prove: (1) either he or his property sustained an injury; (2) the injury was caused by the debt- or; (3) the debtor’s actions were “willful;” and (4) the debtor’s actions were “malicious.” In re Deerman, 482 B.R. 344, 369 (Bankr. D.N.M. 2012). Nondischargeability under § 523(a)(6) requires that the debt- or’s actions be both willful and malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004).
To be willful, a debtor must have intended both the act and the resulting harm. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (“The word *willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischarge-ability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”); see also Deerman, 482 B.R. at 369 (citing Geiger). For a debtor’s actions to be malicious, they must be intentional, wrongful, and done without justification or excuse. Deerman, 482 B.R. at 369 (citing Bombardier Capital, Inc. v. Tinkler, 311 B.R. 869, 880 (Bankr. D. Colo. 2004)). The Tenth Circuit follows a subjective standard in determining whether a defendant desired to cause injury or believed the injury was substantially certain to occur. Via Christi Reg’l Med. Ctr. v. Englehart (In re Englehart), 2000 WL 1275614, at *3 (10th Cir. 2000) (“[T]he ‘willful and malicious injury’ exception to dischargeability in § 523(a)(6) turns on the state of mind of the debtor, who must have wished to cause injury or at least believed it was substantially certain to occur.”); Saturn Sys., Inc. v. Militare (In re Militare), 2011 WL 4625024, at *3 (Bankr. D. Colo. 2011) (citing Tinkler, 311 B.R. at 878).
Knowing or intentional conduct is not enough to trigger § 523(a)(6) liability; the plaintiff must also show that the defendant intended to do harm. See, e.g., In re Osborne, 520 B.R. 861, 873 (Bankr. D.N.M. 2014) (denying plaintiffs § 523(a)(6) claim because, while defendant intentionally concealed property encumbrances, there was no evidence that defendant intended harm or acted with malice); Humility of Mary Health v. Garritano (In re Garritano), 427 *259B.R. 602, 613 (Bankr. N.D. Ohio 2009) (to the same effect).
2. Injury to person or property. Plaintiff does not allege that he suffered a personal injury, but his claim could be construed as an injury to his property (i.e., his $20,000 investment). Not every loss of money, however, comes within § 523(a)(6). As stated in In re Cagan, 2010 WL 3853316 (Bankr. D.N.M. 2010):
Conversion of a creditor’s property interest can support a non-dischargeability claim under 11 U.S.C. § 523(a)(6) (citations omitted). As explained by the Supreme Court in Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934), decided under subsection (6) of § 17(a) of the Bankruptcy Act of 1898, the precursor to 11 U.S.C. § 523(a)(6),
There is no doubt that an act of conversion, if willful and malicious, is an injury to property within the scope of this exception ... But a willful and malicious injury does not follow as a matter of course from every act of conversion, without reference to the circumstances. There may be a conversion which is innocent or technical, an unauthorized assumption of dominion without willfulness or malice.
293 U.S. at 332, 55 S.Ct. 151 (citations omitted).
2010 WL 3853316, at *3. See also In re Tinkler, 311 B.R. 869, 878 (Bankr. D. Colo. 2004).
2. Willfulness. To be willful, Defendant must have intended both the act and the resulting harm. There is no evidence that Defendant intended to harm Plaintiff when Defendant paid for some of his personal expenses with corporate money. Rather, the evidence shows that Defendant was trying to make Tango a success, was working hard on the business with very little income, and spent corporate money because he had no other source of funds.
3. Malice. Similarly, Plaintiff has not demonstrated that Defendant acted with malice. There is no evidence that Defendant desired to injure Plaintiff or believed that injury was substantially, certain to occur.
For these reasons, the Court finds against Plaintiff on his § 523(a)(6) count.
III. CONCLUSION
Plaintiff has a valid claim against the Defendant, and the Court. understands Plaintiff’s displeasure with the results of his investment. Further, Plaintiff, who proceeded in this matter pro se, did a creditable job at trial of this matter. Ultimately, however, the facts in evidence and the strict law on nondischargeability compel the result. Defendant’s obligation to Plaintiff is dischargeable. The Court will enter a separate judgment.
. Unless otherwise noted, all statutory refer-enees are to 11 U.S.C.
. As a side note, on August 7, 2012, Defendant signed a $15,000 promissory note in favor of Plaintiff. The parties testified that this note was a sort of back-up arrangement if Plaintiff's investment in Tango was lost for any reason.
. As discussed in Bullock, the definition of defalcation is unclear, and ranges from an innocent “failure to meet an obligation” to embezzlement. 569 U.S. at 272, 133 S.Ct. 1754. As Bullock makes clear, defalcation as used in § 523(a)(4) does not include the innocent variety. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500934/ | MEMORANDUM OPINION GRANTING PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT
K. Rodney May, United States Bankruptcy Judge
The court-appointed receiver (“Receiver”) for the entities involved in a Ponzi scheme seeks the imposition of an equitable lien and constructive trust on the Florida homestead of Vernon Lee (the “Debtor”) and his wife (“Sommers-Lee”).1 Between 2005 and 2008, the Debtor, then unmarried, received distributions from the Ponzi scheme totaling $2,942,264, which exceeded the amount of his investments by more than $1 million.2 The District Court has determined that these excess proceeds were fraudulent transfers, resulting in a judgment against Debtor for $935,631.57.3
FACTUAL BACKGROUND
The Debtor deposited all of his Ponzi scheme distributions into three brokerage accounts at Fidelity Investments; two of which are relevant to this dispute (“Account 2750” and “Account 2887,” collectively, the “Fidelity Accounts”).4 On February 25, 2008, the Debtor purchased a home with $227,126.78 drawn from- Account 2887.5 That account had been augmented about ten days earlier, on February 14, 2008, by the Debtor’s deposit of $100,000 from Account 2750. At that time, Account 2750 had a balance of $256,710, including $100,000 received directly from the Ponzi scheme and $156,710'from other sources. Immediately after the house purchase, $21,419.20 remained in Account 2887. Debtor and Sommers-Lee (together referred to as “Defendants”) married in 2010.6
Defendants allege that after the Debtor purchased the home, Debtor added $70,600 *290of untainted funds to Account 2887.7 Defendants contend that between March 28, 2008, and April 15, 2008, they made improvements to the home, which expenses were paid primarily from Account 2887.8
Debtor filed this Chapter 7 case in 2015,9 shortly after the Eleventh Circuit affirmed the District Court’s fraudulent transfer judgment.10 In the Chapter 7 case, the Debtor listed his home as exempt under Florida’s constitutional homestead exemption and as a tenancy-by-the-entireties with his wife.11
On April 10, 2015, the Receiver filed an ■objection to the claims of exemption, asserting that since the home had been purchased with fraudulent transfers from the Ponzi scheme before the Defendants were married, Debtor was not entitled to either exemption.12 The Defendants have not been accused of any wrongdoing associated with Nadel’s Ponzi scheme, only that they are the undeserving beneficiaries of the false profits derived therefrom.13
In turn, the Receiver filed a complaint against the Debtor (individually and in his capacity as the trustee of the Vernon M. Lee Trust) and his non-debtor wife. The Receiver then filed a motion for partial summary judgment on his claims for the imposition of an equitable lien and a constructive trust on Defendants’ homestead.14
ANALYSIS
A. Summary Judgment Standard
Summary judgment is appropriate “if the movant shows that no genuine issue of material fact exists, and that it is entitled to judgment as a matter of law.”15 “The moving party bears the initial burden of demonstrating that no genuine issue of material fact exists. If the moving party meets this initial burden, the non-movant must demonstrate the existence of a genuine issue of material fact.”16
B. Equitable Lien and Constructive Trust
The Receiver seeks the imposition of an equitable lien and a constructive' trust against the Defendants’ homestead, be*291cause substantially all of the funds used to purchase it originated from the fraudulent transfers. He relies on the affidavit of forensic accountant Maria M. Yip (“Ms. Yip”), who opined that $227,127 of such transfers can be identified as passing through the Debtor’s Fidelity Accounts into the home.17
The Defendants counter that no more than $127,126.78 can be traced to Ponzi scheme proceeds, because $100,000 of the purchase price came from commingled funds in Account 2750. Defendants also claim that they should receive a “credit,” of as much as $87,653.84, for their home improvements.18
The imposition of an equitable lien falls squarely within a recognized exception to Florida’s homestead exemption. Havoco of America, Ltd. v. Hill is the leading case, holding that a Florida homestead is protected from creditors’ claims even if money was put into a home with the owner’s specific intent to hinder, delay, or defraud creditors.19 The Florida Supreme Court noted in that opinion, however, that an equitable lien may be imposed “where funds obtained through fraud or egregious conduct were used to invest in, purchase, or improve the homestead.”20
The question presented here is whether that exception requires that the fraud or the egregious conduct be committed by the homeowner who is claiming the exemption. In this case, the Debtor passively received the fraudulent transfers and used them to buy the house. It is not alleged that he or his wife engaged in any fraud or egregious conduct.
In Palm Beach Savings & Loan Association, F.S.A. v. Fishbein,21 decided before Havoco, the Florida Supreme Court affirmed the imposition of an equitable lien on the homestead of Mrs. Fishbein, who was the unknowing beneficiary of a fraud committed by her husband.22 He had forged her signature to obtain a fourth mortgage;23 then, he used a portion of the loan proceeds to satisfy the three existing mortgages.24 Ultimately, Mrs. Fishbein became the sole owner of the property.25 When the lender attempted to foreclose, she asserted that it was precluded from doing so because she was innocent of her husband’s fraud and was, therefore, entitled to the full homestead exemption.26 The lender’s mortgage was invalid because of the forgery, but the trial court granted the lender an equitable lien on the homestead,27 which the Florida Supreme Court upheld.28 Otherwise, Mrs. Fishbein would have received a windfall from the satisfaction of the three pre-existing mortgages and the voiding of the foreclosing lender’s lien.29
*292In 2001, the bankruptcy court for the Southern District of Florida imposed an equitable lien and constructive trust against the Florida homestead of a Mrs. Levy, whose husband was involved, through his brokerage firm, in a Ponzi scheme operated by Financial Federated Title and Trust, Inc. (“FinFed”).30 The Levys had purchased their homestead with Ponzi scheme funds collected through Mr. Levy’s company. Mrs. Levy was not involved in FinFed’s fraud, but her “innocence” was considered irrelevant because the underlying funds used to purchase the home were obtained through fraud,31
The Eleventh Circuit affirmed, adopting the bankruptcy court’s reasoning in full:
“Roseann Levy asserts that her lack of knowledge or involvement in the Debt- or’s massive fraudulent activity exonerates her from liability and renders the holdings of Jones and Fishbein inapplicable to her. However, a lack of knowledge on the part of the person asserting the homestead exemption does not change this analysis, as it is the fraudulent nature of the funds which is of utmost importance.”32 .
Defendants seek to distinguish the foregoing decisions on the ground that neither Debtor, nor his wife, was engaged in the Ponzi scheme. But, the Florida Supreme Court has already rejected that argument. In Fishbein, the underlying decision was premised on the stated principle that “the only basis on which a court may impose an equitable lien is where there is fraud or egregious conduct by the party claiming the homestead exemption.”33 On appeal, the Supreme Court rejected that rule, basing its decision on preventing unjust enrichment:
“[T]he court below was not so concerned with the constitutional language as it was with its belief that an equitable lien could not be imposed because Mrs. Fish-bein was not a party to the fraud. Yet, there was no fraud involved in either La Mar or Sonneman. In those cases, the equitable liens were imposed to prevent unjust enrichment.”34
Likewise, the Fifth Circuit Court of Ap*293peals, in Crawford v. Silette,35 upheld the imposition of an equitable lien on a Florida homestead where false profits from a Pon-zi scheme were used to pay off the mortgage. The homeowner was unaware that the funds she had received as a gift from her boyfriend came from a Ponzi scheme.36 She asserted that the Florida homestead exemption barred an equitable lien because she was not complicit in the fraud.37 After reviewing Havoco, Fishbein, and FinFed, the Fifth Circuit concluded that a homeowner’s “innocence” was irrelevant because “the focus is on unjust enrichment, not fraud.”38 Otherwise, the home: owner will receive a windfall.39
Accordingly, this Court concludes that it is appropriate to impose an equitable lien on the Defendants’ homestead to prevent their unjust enrichment from the funds traced to the Ponzi scheme. The Debtor received $1,069,002.60 of fraudulent transfers from the Ponzi scheme.40 The Debtor maintains that all of those funds, including the funds used to buy the house, have been spent.41 The focus is not on the Defendants’ culpability, but on the necessity of preventing or mitigating their unjust enrichment by permitting fraudulent transfers to be sheltered in their homestead.
The Receiver also seeks the imposition of a constructive trust, as an additional remedy to allow him to take control of Defendants’ home and sell it. The remedy of a constructive trust is not limited, as Defendants argue, to remedy abuses in confidential or fiduciary relationships. In American National Bank v. Federal Deposit Insurance Corp.,42 the Eleventh Circuit, relying on the Florida Supreme Court case of Quinn v. Phipps,43 recognized that “actual fraud” or “abuse of confidence” are alternative bases for the imposition of a constructive trust:
“A constructive trust is one raised by equity in respect of property which has been acquired by fraud, or where, though acquired originally without fraud, it is against equity that it should be retained by him who holds it ... [EJquity will raise a constructive trust and compel restoration, where one through actual fraud, abuse of confidence reposed- or accepted, or through other questionable means gains something for himself which in equity and good conscience he should not be permitted to hold.”44
Imposing a constructive trust is an appropriate remedy for unjust enrichment.45 Courts have authorized this reme*294dy even in the absence of a - confidential relationship between the defendant and the claimant.46
Here, Defendants have been unjustly enriched by the receipt of the fraudulent transfers that they invested in their home. Under the constructive trust doctrine, the rightful owner of misappropriated trust property may trace whatever has been bought with the trust proceeds to the extent such property can be substantially identified as having been acquired with the misappropriated property or funds.47
There is a final judgment determining that Debtor received $985,631 of fraudulent transfers. Thus, Debtor did not have rightful ownership of those funds, which must be considered as being held in trust for the benefit of the receivership.48 A constructive trust will be imposed to the extent of the Ponzi scheme distributions are traceable into Defendants’ home.
C. Extent of the Equitable Lien and Constructive Trust
The parties disagree on whether $100,000 of the funds used for the home purchase price can be identified as being derived from the Ponzi.scheme. The Receiver’s ' forensic accountant, Maria Yip, traced distributions from one of the entities, Victory IRA Fund Ltd. (“Victory Fund”), to Debtor’s Fidelity Accounts before he purchased his home.49
Ms. Yip utilized several assumptions in her analysis: (1) the fraudulent transfers deposited into the Fidelity Accounts belong to the Receiver, but are considered to be held in trust by the Debtor; (2) payments by the Debtor to third parties are considered, first, to be from his untainted funds; (3) the funds received from the Ponzi scheme (trust funds) are limited to the “lowest intermediate balance” in each account after their being deposited; (4) deposits from any other source are assumed to be untainted funds; and (5) Pon-zi scheme funds moved by Debtor into another of his accounts are considered to retain their character as trust funds. Ms. Yip concluded that “it is clear that [Debt- or] purchased the [home] with funds in the amount of $227,126.78 that are traceable to *295the [ffelse [pfeofits from Nadel’s Ponzi scheme.”50
The “lowest intermediate balancé rule” is an acceptable method for treating trust proceeds that have been commingled with other funds:51 where trust funds are commingled in an account they are considered as undiminished so long as the total account balance is at least equal to the amount of the trust fund deposits.52 If the aggregate amount of trust deposits exceeds the lowest intermediate balance in the account, they are considered lost.53 Thus, “the lowest intermediate balance in a commingled account represents trust funds that have never been dissipated and which are reasonably identifiable.”54 This method has been approved by courts in cases requiring the tracing of money through accounts where assets have been commingled.55
Essentially, this method imposes several presumptions on the custodian of a trust res, where trust assets are commingled with other funds, for the • purpose of preserving the trust res. According to the Restatement (Second) of Trusts:
“Where the trustee deposits in a single account ... trust funds and his individual funds, and makes withdrawals from the deposit and dissipates the money so withdrawn, and subsequently makes additional deposits of his individual funds in the account, the beneficiary cannot ordinarily enforce an equitable lien upon the deposit for a sum greater than the lowest intermediate balance of the deposit. If the amount of deposit at all times after the deposit of the trust funds equaled or exceed the amount of trust funds deposited, the beneficiary is entitled to a lien upon the deposit for the full amount of the trust funds deposited in the account. If after the deposit of trust funds in the account the deposit was wholly exhausted by withdrawals before subsequent deposits of the trustee’s individual funds were made, the beneficiary’s lien upon the deposit is extinguished, and if he is unable to trace the money withdrawn, he is relegated to a mere personal claim against the trustee, and .is entitled to no priority over other creditors of the trustee.”56
Tracing does not require that each dollar be specifically accounted for at all points in time; it requires only that tainted funds be identified and followed from the *296point of origin (i.e. the fraudulent act).57 The commingling of funds does not preempt tracing.58 There need only be sufficient proof to permit the identification of the funds through the various transfers.59 A “dollar-for-dollar” accounting is not required.60
Defendants urge the Court to adopt a different accounting method—either the “first-in-first-out” method, or the “pro rata distribution” method.61 But, these methods would allow Defendants to keep a larger portion of their unjust enrichment. The Debtor has dissipated nearly $1 million of Ponzi scheme funds that were fraudulently transferred to him. There is nothing else for the Receiver, on behalf of other Ponzi scheme victims, to recover. The use of either the first-in-first-out or pro rata method would give the Defendants a windfall. Moreover, they have not provided any legal authority to justify these alternative methods.62
According to Ms. Yip’s declaration, the fraudulent transfers from the Ponzi scheme to Debtor can be summarized, as follows;
*2971. After June 30, 2006, substantially all the funds deposited into a third Fidelity account, Account 4198, came from nine Victory Fund distributions; subsequently, Debtor made two transfers from this account, totaling $272,728.61, to his Account 2887.
2. In September of 2007, Account 2750 had a balance of $153,303.14 (assumed by Ms. Yip to be untainted funds); thereafter, four distributions of Ponzi scheme proceeds, totaling $100,000, were received from the Victory Fund and deposited into Account 2750;63 on February 14, 2008, $100,000 was transferred to Account 2887; the remaining balance in Account 2750 thereafter was $156,710.12.
3. On October 31, 2007, Account 2887 had a balance of only $5,582; by December 31, 2007, the balance grew to $282,966.71, including the transfers of $272,728.61 from Account 4198.
4. After a series of payments to third parties, which Ms. Yip treated as deductions from untainted funds, there was $148,545.98 in Account 2887 on February 11, 2008, which Ms. Yip designated as tainted funds from the Ponzi scheme because it was less than the $272,728.61 that had been transferred from Account 4198, which itself held mostly Ponzi scheme deposits; on February 14, 2008, $100,000 was transferred from Account 2750 into Account 2887; then, transfers totaling $227,126.78 were made from Account 2887 to an attorney’s account for the purchase of the home; at all relevant points in time, the total amount in Account 2887 exceeded the amount of the transfers to the attorney’s account.
Defendants’ primary objection to Ms. Yip’s analysis is an alleged inconsistency in her application of the lowest intermediate balance rule. They contend:
“With sleight of hand, Yip applied a modified form of the standard lowest intermediate balance rule. She treated transfers from Mr. Lee’s Fidelity accounts to third parties as transfers of “untainted” funds until those amounts were exhausted. However, without explanation, Yip did not use this same treatment for transfers between Mr. Lee’s Fidelity accounts. This is an unjustified deviation from the standard application of the [lowest] intermediate balance rule. Essentially, this manipulation is little more.than a mechanism designed to produce the results desired by the Receiver.”64
The Defendants misconstrue the applicable principles employed by courts to preserve a trust res. When funds are withdrawn from an account holding commingled funds, ordinarily the presumption is that non-trust funds are withdrawn first, thereby preserving as much of the beneficiary’s trust funds for as long as possible.65 This presumption, however, is at the op*298tion of the trust beneficiary.66
There is also a fundamental difference between Debtor’s payments to third parties from commingled funds—treated as diminishing non-trust funds—and Debtor’s transfers to himself, from one of his accounts to another. The applicable principles of restitution require treating the latter in a manner that also preserves the trust res, where the funds retain then-tainted character as long as the original recipient is holding them. Otherwise, any recipient of a fraudulent trust res could change the character of the funds by moving the money from one account to another.
The Court has carefully considered Ms. Yip’s analysis and the tables attached to her Declaration. Ms. Yip’s findings are the only record evidence before the Court regarding the tracing of Ponzi scheme distributions. It was appropriate for Ms. Yip to apply established principles of restitution, including the treatment of the diminishing balances in Accounts 2750 and 2887 in accordance with the “lowest intermediate balance rule.”67 There is a clear path of $100,000 from the Ponzi scheme into Account 2750, with the subsequent'transfer of exactly that amount into Account 2887. That $100,000 retained its character as fraudulent transfers from the Ponzi scheme, from the time the Debtor first deposited them into Account 2750 until he purchased the home with funds drawn from Account 2887. Ms. Yip’s analysis is legally and factually sound.
After reviewing the documents and applying the principles stated above, it is a reasonable conclusion that the entirety of the funds used to purchase the home originated as excess distributions from the Ponzi scheme. Thus, the $227,126.78 drawn from Account 2887 to purchase is' the Receiver’s trust res, which warrants preservation by imposing an equitable lien and a constructive trust on the home.
The Court further concludes that Defendants should get no credit for any alleged home improvement expenses. They have not specified what these expenses were for, or how they added any value to the property. The appraiser’s report submitted by Defendants values the home at $300,000 as of October 3,2014; but, it does not attribute any increase in value above the $227,126.78 purchase price to any particular home improvements.68
*299The assumed $70,000 increase in value over six years is more plausibly the result of market appreciation since 2008. Accordingly, the Court declines to award the Defendants any “credit” against the $227,126.78 for home improvement expenditures.
Likewise, the Court will not augment the amount of the Receiver’s equitable lien to include the $21,419.20 of “tainted” funds remaining in Account 2887 after the home purchase. The Receiver has offered no evidence to show that any of the funds remaining in that account can be traced into the home after it was purchased.69
Finally, the Receiver is not entitled to the entire value of the home solely because it was acquired with Ponzi scheme funds.70 Nevertheless, an award of prejudgment interest is consistent, with the premise of the Receiver’s entitlement to recover the fraudulent transfers invested in the home.71 The calculation of prejudgment interest has not yet been done following the Eleventh Circuit’s remand of the issue.72 The Receiver’s proof of claim *300included prejudgment interest of $451,706.21 on the entire amount of the fraudulent transfer judgment.73 A pro-ration of that judgment amount ($227, 126.78/$935,631.51) would imply prejudgment interest on the $227,126.78 of $109,-652.76;74 but the parties will be given the opportunity to present further argument on that issue.
CONCLUSION
Summary judgment is due to be granted for the Receiver. There are no material facts in dispute to be tried. There are no issues of witness credibility. The Fidelity Accounts’ records demonstrate that the entirety of the funds Debtor used to purchase the home, $227,126.78, came from fraudulent transfers., from the Ponzi scheme. The Receiver is entitled to the remedies of an equitable lien and a constructive trust in the amount of $227,126.78, plus pre-judgment interest.
Accordingly, it is
ORDERED:
1. The Defendants’ home, with the address of 4018 Via Miranda, Sarasota, Florida, shall hereby be encumbered by an equitable lien for the Receiver in the amount of $227,126.78, plus pre-judgment interest, and a constructive trust in such amount.
2; The Receiver’s lien shall be superior to any claim of the Defendants, who shall not interfere with the Receiver’s foreclosure of such lien or sale of the property. The amount of the Receiver’s equitable lien (and any administrative expenses associated with the sale) shall be paid in full from sale prior to the Defendants receipt of any remaining proceeds.
3. That the parties shall have 14 days from entry of this order to submit supplemental memoranda setting forth their calculations of the amount of prejudgment interest that should be awarded, or to file a joint stipulation of such interest, after which the court will enter a separate final judgment in accordance with the findings and conclusions set forth herein following the further determination of appropriate interest.
ORDERED.
. See S.E.C. v. Nadel, et al., Case No. 8:09-cv-87-T-26TBM (M.D. Fla.). Burton W. Wiand was appointed to be the receiver for Valhalla Investment Partners, P.L., Viking Fund, LLC, Viking IRA Fund LLC, Victory Fund, LTD, Victory IRA Fund, LTD, Scoop Real Estate, L.P., and Traders Investment Club.
. Debtor invested about $1,873,262 in the Ponzi scheme. See Report and Recommendation, Case No. 8:10-CV-210-T-17MAP, at 17, filed in this adversary proceeding as Doc. No. 16-2 (“Report"), He received distributions from July 2005 to October 2008 totaling about $2,942,265. Id.- at 17-18. The Debtor received about $1,069,003 more than he invested. Id. at 18.
. Wiand v. Lee, 2013 WL 247361 (M.D. Fla. 2013). The District Court adopted and incorporated by reference the Report. The Receiver had previously recovered $133,371 from the Debtor's children, leaving approximately $935,631 as the judgment amount. Id. at *2. The Receiver filed a proof of claim in the Debtor’s bankruptcy case (Claim No. 1) in the amount of $1,391,269.41, which includes the judgment amount plus his calculation of pre- and post-judgment interest.
. Answer to Complaint Seeking Imposition of Equitable Lien on Florida Homestead and Objecting to Debtor's Discharge Pursuant to Bankruptcy Code Section 727 (Doc. No. 4), paragraph 33, These accounts were titled as "Vernon M Lee—Roth Individual Retirement Account— FMTG Custodian,” and "Vernon M Lee and Nancy E Lee—With Rights of Surviv-orship,” respectively.
. This was paid by three withdrawals from Account 2887: $5,000.00 on Februaiy 6, 2008, $20,000.00 on February 7, 2008, and $202,126.78 on February 25, 2008.
. Sommers-Lee was granted a life estate at the time the house was purchased. The Debt- or's trust, which took title to the house, held the remainder interest. Sommers-Lee and the trust conveyed their interests in the property to Debtor and Sommers-Lee as tenants by the entireties on November 5, 2010,
. Affidavit of Debtor, Doc. No. 22-1, ¶ 4. Debtor claims to have deposited Social Security benefits, Boeing retirement program payments, and other savings into Account 2887 after the home was purchased.
. Id. at ¶¶ 12-13. Most of these improvements were paid from Account 2887: $32,070.62 directly, and $29,664.14 used to pay charges on a Visa credit card. Defendants also allege that Sommers-Lee used $11,932.52 of her own money for home improvements. Id. at ¶ 15. Defendants do not state the source of the other $5,121.32 allegedly spent on home improvements.
. Debtor’s voluntary petition was filed on February 2, 2015.
. Wiand v. Lee, 753 F.3d 1194 (11th Cir. 2014).
. Fla. Const. Art. X, § 4(a)(1); Fla. Stat. Ann. §§ 222.01 and 222.02; 11 U.S.C. § 522(b)(3)(B).
. Creditor’s Objection to Claim of Exemptions, (Main Case Doc. No. 14). The Court’s consideration on the objection has been abated until the conclusion of the present adversary proceeding. See Main Case Doc. No. 32.
. See Report at 38. It is uncontested that Debtor believed his investments in the funds were legitimate and that he had no knowledge of the Ponzi scheme at the time he received distributions.
. Doc. No. 16.
. Fed. R. Civ. P. 56(a), made applicable to bankruptcy proceedings by Fed. R. Bankr. P. 7056.
. Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1116 (11th Cir. 1993).
. Doc. No. 16-5.
. Doc. No. 22, p. 13.
. 790 So.2d 1018, 1030 (Fla. 2001).
. Id. at 1028.
. 619 So.2d 267 (Fla. 1993).
. Id. at 268.
. Id.
. Id.
. Mat 269.
. Id.
. Id. The equitable lien was limited to $930,000, the amount of funds traced directly into the homestead through the payoff of the existing mortgages. Id. at 271.
. Id.
. Id.
. In re Fin. Fed. Title & Tr., Inc., 273 B.R, 706 (Bankr. S.D. Fla. 2001), subsequently aff'd sub nom. In re Fin. Fed. Title & Tr., Inc., 347 F.3d 880 (11th Cir. 2003).
. 273 B.R. at 716-17.
. In re Fin. Fed. Title & Tr., Inc., 347 F.3d 880, 890 (11th Cir. 2003). See also, In re Hecker, 264 Fed.Appx. at 789-91 (“Both this Court ... and the Florida Supreme Court .., have explained why an equitable lien may be imposed upon property benefited by fraudulent proceeds even where one co-owner spouse is innocent and ignorant of the fraud. The answer is straightforward: if an equitable lien is not placed on the property to the extent Hecker’s fraudulently obtained funds benefited the land, Gloria would be unjustly enriched.”); S.E.C. v. Aquacell Batteries, Inc., 2008 WL 2915064, *3 (M.D. Fla, 2008) (“Although counsel for the daughters stressed that the daughters were not involved in Aquacell's day-to-day operations and did not 'know' of any wrongdoing, that does not mean that it dld not occur and that the funds they admit to receiving were not the proceeds of fraud.”); Sweeteners Plus, Inc. v. Glob. Supply Source, Inc., 2013 WL 6890857, *8 (M.D. Fla. 2013) ("Although there is no evidence that [the spouse] participated in the fraud, she unjustly benefitted by receiving title to the property purchased with Sweeteners' funds; thus, there is no homestead protection inuring to interest of [the spouse] in the property,”).
. Fishbein v. Palm Beach Sav. & Loan Ass'n, F.S.A., 585 So.2d 1052, 1056 (Fla. 4th D.C.A. 1991) (emphasis added).
. Fishbein, 619 So.2d at 270 (citing La Mar v. Lechlider, 135 Fla. 703, 185 So. 833 (1939) and Sonneman v. Tuszynski, 139 Fla. 824, 191 So. 18 (1939)) ("Moreover, in both cases the homestead interest of the spouse of the party whose conduct led to the unjust enrichment was also subject to the equitable lien”).
. 608 F.3d 275 (5th Cir. 2010).
. Id. at 277.
. Id. at 278-79.
. Id. at 280-81.
. Id.
. See Report at 21.
. See Debtor's schedules (Main Case, Doc. No. 1), in which Debtor lists personal property of only $5,866, including funds of $2,301 in checking or investment accounts. The Receiver alleges that “[a]side from the [house at issue], the Debtor has no material assets because he admittedly gabled away hundreds of thousands of dollars [prior to this bankruptcy.]” Doc. No. 16, p. 3.
. 710 F.2d 1528 (11th Cir. 1983).
. 93 Fla. 805, 113 So. 419 (Fla. 1927).
. Am. Nat. Bank of Jacksonville, 710 F.2d at 1541 (emphasis in original).
. See Fin. Fed., 347 F.3d at 891 (‘‘The doctrine of constructive trusts is a recognized tool of equity designed in certain situations to right a wrong committed and to prevent un: just enrichment of one person at the expense of another either as a result of fraud, undue influence, abuse of confidence or mistake in the transaction.”); In re First Fid. Fin. Servs., *294Inc., 36 B.R. 508, 511 (Bankr. S.D. Fla. 1983) ("The reason for imposing a constructive trust is to avoid unjust enrichment to the recipient of the windfall, and to do equity for the party whose property has been misused.”)
. See Fin. Fed. 347 F.3d 880; Sweeteners Plus, Inc. v. Glob. Supply Source, 2013 WL 6890857 (M.D. Fla. Dec. 31, 2013); S.E.C. v. Aquacell Batteries, Inc., 2008 WL 2915064 (M.D. Fla. July 24, 2008); See also In re Estate of Tolin, 622 So.2d 988, 990-991 (Fla. 1993) ("A constructive trust is properly imposed when ... one party is unjustly enriched at the expense of another. Although this equitable remedy is usually limited to circumstances in which fraud or a breach of confidence has occurred, it is proper in cases in which one party has benefited by the mistake of another at the expense of a third party.”) (internal citations omitted) (emphasis added); Silver v. Digges, 2006 WL 2024935, at *4 (M.D. Fla. July 17, 2006) (citing Wadlington v. Edwards, 92 So.2d 629, 631 (Fla. 1957)) ("[A]lthough a number of Florida appellate courts have stated that a "confidential relationship” is a necessary element to a constructive trust, the Florida Supreme court considers the breach of a confidential relationship as but one of several circumstances in which the imposition of a constructive trust is equitable and just.").
. In re Hecker, 316 B.R. 375, 387 (Bankr. S.D. Fla. 2004) aff'd 264 Fed.Appx. 786 (11th Cir. 2008) (citing Republic of Haiti v. Crown Charters, Inc., 667 F.Supp. 839, 843 (S.D. Fla. 1987).
. Id.
. Declaration of Maria M. Yip, CPA, CFE, CIRA Regarding Vernon M. Lee’s use of Proceeds from the Nadel Ponzi Scheme to Acquire Real Property in Sarasota, Florida ("Yip Declaration”), Doc. No. 16, Exhibit 5, at 8-9.
. Yip Declaration at 11.
. Conn. Gen. Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 619 (1st Cir. 1988). See In re Columbia Gas Sys. Inc., 997 F.2d 1039, 1063 (3rd Cir. 1993); In re Dameron, 155 F.3d 718, 724 (4th Cir. 1998); First Fed. of Mich. v. Barrow, 878 F.2d 912, 916 (6th Cir. 1989).
. The lowest intermediate balance rule "attempts to divide tainted and untainted money by considering, where a set amount of proceeds is commingled with other funds, the account to be 'traceable proceeds’ to the extent of [the deposited proceeds] as long as the account balance never falls below that sum.” In re Rothstein, Rosenfeldt, Adler, P.A., 717 F.3d 1205, 1214 (11th Cir. 2013). This medi-od "is used to determine the rights of a trust beneficiary to a trustee’s bank account in which trust funds ant the trustee’s personal funds have been commingled.” U.S. v. Banco Cafetero Pan., 797 F.2d 1154, 1159 (2nd Cir. 1986). See also Conn. Gen., 838 F.2d at 619.
. Id.
. Columbia Gas, 997 F.2d at 1063.
. See In re Hecker, 316 B.R. 375 (Bankr. S.D. Fla. 2004) aff'd 264 Fed.Appx. 786, 788 (11th Cir. 2008); Matter of Felton’s Foodway, Inc., 49 B.R. 106 (Bankr. M.D. Fla. 1985).
. Restatement (Second) of Trusts § 202 (1959), cmt j.
. In re Hecker, 316 B.R, at 387 ("It is hardly fatal to a claim of constructive trust or equitable lien that the property, originally subject to the claim is money, which is fungible, or that the money is transferred through various accounts or converted into different forms.”)
. In re Mazon, 387 B.R. 641, 646 (M.D. Fla. 2008) (citing In re Seneca Oil Co., 906 F.2d 1445, 1452 (10th Cir. 1990)); Post-Confirmation Comm. for Small Loans, Inc. v. Martin, 2016 WL 3248369 at *13 (M.D. Ga. 2016) (citing Watts v. MTC Dev., LLC (In re Palisades at W. Paces Imaging Ctr., LLC), 501 B.R. 896, 917 (Bankr. N.D. Ga, 2013)); In re Dameron, 155 F.3d 718, 723-24 (4th Cir. 1998) ("., .courts have consistently rejected the notion that commingling of trust property, without more, is sufficient to defeat tracing”); See In re Int'l Admin. Servs., Inc., 408 F.3d 689 (11th Cir. 2005).
. See Int'l Admin. Servs., Inc., 408 F.3d at 709 (“It is undeniable that equity will follow a fund through any number of transmutations, and preserve it for the owner as long as it can be identified.”) (quoting In re Bridge, 90 B.R. 839, 848 (Bankr. E.D. Mich. 1988) and citing Farmers & Mechs. ’ Nat'l Bank v. King, 57 Pa. 202 (1868)). See also In re Hecker, 316 B.R. at 387.
. Int'l Admin. Servs., Inc., 408 F.3d at 708.
. The Debtor’s Account 2750 held $153,000 of funds (assumed by Ms. Yip to be untainted) before the four distributions totaling $100,000 were received from the Victory Fund. Since the funds remaining in Account 2750 after the transfer to Account 2887 totaled $156,710.12, the $100,000 would be deemed under the “first-in-first-out” method to have come from the earlier, untainted funds. The equitable lien and constructive trust would be limited to $127,127.
The pro rata approach would focus on the relative percentage of the tainted funds ($100,000) to the total ($256,710) in the account. Under this approach, only 39% of the transfer to Account 2887, or $39,000, would be considered tainted, because 39% of the funds held in Account 2750 were tainted at the time of the transfer. Accordingly, the equitable lien and constructive trust would preserve only $160,127 ($127,127 + $39,000). This accounting method, however, is to be employed when there are multiple and similarly situated beneficiaries. See In re Strategic Tech., Inc., 142 Fed.Appx. 562, 566-67 (3rd Cir. 2005); Goldberg v. N.J. Lawyers' Fund for Client Prot., 932 F.2d 273, 280 (3rd Cir. 1991) ("In general, courts favor a pro rata distribution of funds when such funds are claimed by creditors of like status.”)
.The Defendants cite two cases, but neither supports their argument. In re Foster, 275 F.3d 924 (10th Cir. 2001) stands for the proposition that the lowest intermediate balance rule should not be utilized where there are multiple equally-situated parties that have rights in the trust funds. In re Tax Group, LLC, 439 B.R. 78 (2010), also cited by the Defendants, stands for the proposition that the pro-rata approach should be utilized when there are multiple claimants to trust funds. Neither case is applicable here, because the Receiver is the only party with a claim of right to all of the trust funds.
. Debtor also made two deposits totaling $1,786.81 and had two "change[s] in investment value” totaling $1,620,17.
. Doc. No. 22, p. 12.
. In re Hecker, 316 B.R. at 387 ("When a person who is subject to a trust claim commingles the trust funds with funds of his own, and funds are subsequently dissipated, he is presumed to first dissipate his own funds rafter than funds held in trust, such that the funds remaining in an account are presumed to be those held in trust.”); Conn. Gen. Life Ins. Co. v. Universal Ins. Co., 838 F.2d 612, 619 (1st Cir. 1988) ("This is based on the fiction that the trustee would withdraw non-trust funds first, retaining as much as possible of the trust fund in the account”); In re Dameron, 155 F.3d 718, 724 (4th Cir. 1998).
.Restatement (Second) of Trusts § 202 (1959), comment i. "Where the trustee deposits in a single account in a bank trqst funds and his individual funds, and subsequently makes withdrawals from the bank account and dissipates the money so withdrawn, the beneficiary is entitled to an equitable lien upon the balance remaining in the bank for the amount of trust funds deposited in the account.. .The beneficiary’s lien is not restricted to any part of the deposit but extends to the whole deposit and can be enforced against any part of the funds remaining on deposit and against any funds which are withdrawn, so long as they can be traced. So also, there is no inference that the trustee withdraws his own funds first. If the funds withdrawn are preserved or can be traced, the beneficiary can enforce an equitable lien upon them or their product, even though the funds remaining on deposit are subsequently dissipated” (emphasis added).
. See Conn. Gen., 838 F.2d at 619 (citing 4 Collier on Bankr., supra, ¶ 541.13, at 541-77) ("The normal rule for construing trust proceeds commingled in a bank account is known as the "lowest intermediate balance test”); Dameron, 155 F.3d at 724 ("In cases where the trust property has been commingled, courts resolve the issue with reference to the so-called “lowest intermediate balance” rule”); Schuyler v. Littlefield, 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806 (1914); Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924)
. Doc. No. 22, Exhibit H. The appraisal is as of October 3, 2014, and is therefore stale.
. Payments for the repairs and renovations did not begin until at least April 3, 2008. See Lee Affidavit, Doc. Nos, 22-1 and 22-7 (Earliest date of payment for alleged repairs on list provided in affidavit is dated April 3, 2008. While Debtor allegedly made repairs in March of 2008, paid for by credit card, the balance regarding those expenses was not actually paid until on April 9, 2008). Absent new false profits being deposited into Account 2887 after February 25, 2008, the maximum amount of false profits remaining in Account 2887 that could have been utilized for the repairs and renovations is $10,808.64, which was the account balance on March 6, 2008, prior to the first account debit related to the repairs. See Doc. No. 22, Exhibit B. A full breakdown of Account 2887 during the relevant time period subsequent to February 25, 2008 has not been provided to the Court.
. See Fishbein, 619 So.2d 267, 271, notes 1 and 2 (Fla. 1993). See also In re Hecker, 264 Fed.Appx. 786, 791 (11th Cir. 2008) ("The amount of an equitable lien can be no more than the amount fraudulently obtained and used to benefit the home.”) (emphasis added.); Babbit Elecs., Inc. v. Dynascan Corp. 915 F.Supp. 335 (S.D. Fla. 1995) (Limiting equitable lien to amount of cash received from fraudulent transfers that was directly traced to the home by paying off the mortgage, and not including funds used to purchase stock); Flinn v. Doty, 214 So.3d 683 (4th DCA Fla. 2017) (holder of equitable lien was entitled to foreclose on the lien “to the extent that the lien secured monies paid to satisfy [holder]’s mortgage on the property,” and lien did not include other money unjustly obtained that was not directly invested into the home).
. See Donell v. Kowell, 533 F.3d 762, 772 (9th Cir. 2008) C"[P]rejudgment interest should not be thought of as a windfall in any event; it is simply an ingredient of full compensation that corrects judgments for the time value of money.”); Montage Grp., Ltd. v. Athle-Tech Comput. Sys., Inc., 889 So.2d 180, 199 (Fla. 2d D.C.A. 2004) (reversing trial court for failure to award prejudgment interest on unjust enrichment award); Burr v. Norris, 667 So.2d 424, 426 (Fla. 2d D.C.A. 1996) (reversing and remanding with instructions to trial court to award prejudgment interest on unjust enrichment award).
. In its order affirming, the Eleventh Circuit stated that "[t]he general rule is that prejudgment interest is an element of pecuniary damages, and Florida courts have awarded prejudgment interest on FUFTA claims and on unjust enrichment claims as a matter of course.” Wiand v. Lee, 753 F.3d 1194, 1205 (11th Cir. 2014). See Argonaut Ins. Co. v. May Plumbing Co., 474 So.2d 212, 215 (Fla. 1985) ("[W]hen a verdict liquidates damages on a plaintiff's out-of-pocket, pecuniary losses, plaintiff is entitled, as a matter of law, to prejudgment interest at the statutory rate from the date of that loss.”); See also Bosem v. Musa Holdings, Inc., 46 So.3d 42, 44-46 (Fla. 2010) (reaffirming Argonaut’s loss theory).
The Eleventh Circuit remanded the issue of pre-judgment interest calculation, which was not initially awarded, and instructed the magistrate judge to "cite specific equitable considerations recognized under Florida law,” in*300cluding the factors stated in Blasland, Bouck & Lee, Inc. v. City of N. Miami, 283 F.3d 1286, 1298 (11th Cir, 2002), if it would be inequitable to award prejudgment interest. As this issue has also not been decided on remand, the Defendants may present arguments against the award of prejudgment interest, to which the Receiver will be given the opportunity to respond.
. The proof of claim does not state what interest rate was used to calculate this amount, but the Court assumes it was the Florida prejudgment interest rate at the time.
. This proposed prejudgment interest, however, is offered as of the dates of the individual fraudulent transfers, not the purchase of the home. Interest should accrue from the date of home purchase. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500936/ | ORDER DENYING DEBTOR A DISCHARGE
Wendy L. Hagenau, U.S. Bankruptcy Court Judge
This matter came before the Court for trial on an Objection to Discharge under 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4), (a)(5) and (a)(6). Plaintiff proceeded pro se. The Debtor was represented by Evan Altman. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
FINDINGS OF FACT
The Debtor Shehnaz Ali Virani is married to Ramzan Ali Virani. The Viranis have two children, a boy and a girl, ages twenty and nineteen respectively at the time the petition was filed. Over the last ten or more years, the Viranis have been involved in various businesses. In March 2012, they incorporated S.H. Mart, Inc. (“SHM”) which operated an events facility. Plaintiff Girish Modi (“Mr. Modi” or “Plaintiff’) made two loans to Mr. and Mrs. Virani totaling $50,000.00. The Viran-is did not pay the sums due under the notes, and Mr. Modi commenced a lawsuit in 2013 in Gwinnett Superior Court. The parties ultimately participated in mediation and signed a mediation agreement on August 28, 2014. This mediation agreement was incorporated into an order of the Gwinnett Superior Court dated January 8, 2015. Both the agreement and the order required the Viranis to make payments of $300.00 per month to Mr. Modi. If any monthly payment was not made by the 6th of the month, the order and agreement provided that the Viranis would be in default and Mr. Modi could obtain a judgment for the total amount of $65,000.00 (minus any amounts paid) as well as a fifa.
The Viranis made payments under the agreement and order, but the April 2015 payment was received by Mr. Modi one day late. Mr. Modi filed an affidavit to obtain a fifa on April 8, 2015, to which the Viranis responded. The Gwinnett Superior Court ruled in favor of Mr. Modi and issued the fi fa. Mr. Modi sent an e-mail on June 17, 2015 to the Viranis’ counsel (copying Mr. and Mrs. Virani) stating in part that he would “send Sheriff to confiscate your personal property including cars” if the parties could not reach a resolution.
Mr. Virani filed a petition under Chapter 13 of the United States Bankruptcy Code at Case No. 15-61364 on June 19, 2015 at 2:51 p.m. Mr. Virani was represented in the filing of his case by Evan Altman. Mrs. Virani (the “Debtor”) filed her petition under Chapter 7 of the United States Bankruptcy Code on the same day at 4:15 p.m. The original petition showed her name as “Shehnaz Alivirani”. The original petition indicated that her debts were primarily consumer in nature. In answer to the question of whether the Debtor had filed previous bankruptcy petitions, she answered “no”. The question of whether her spouse had a pending bankruptcy case was *344also answered “no”. The petition was signed as a pro se debtor.
Mr. Modi immediately filed motions to dismiss in both cases. After the original motions to dismiss were filed, Evan Altman appeared as counsel for the Debtor. Mr. Altman filed the Debtor’s Schedules and Statement of Financial Affairs (“SOFA”) on July 20, 2015 [Docket No. 18]. The Debtor amended her petition to correct her name and to disclose a prior bankruptcy case on July 24, 2015 and July 27, 2015 respectively [Docket Nos. 23 and 24], She also amended her Schedules on August 12, 2016 [Docket No. 29] and February 26, 2016 [Docket Nos. 132 and 133] and then again on February 7, 2017 [Docket No. 192]. Mr. .Virani voluntarily dismissed his Chapter 13 case on September 13, 2015. Mr. Modi’s Motion to Dismiss, therefore, proceeded only as to the Debtor.
On September 21, 2015, the Court held an evidentiary hearing on the Motion to Dismiss (“September 2015 Hearing”). The Court subsequently entered an order on October 15, 2015 [Docket No. 53] denying the Motion to Dismiss (“Section 707 Order”). The Court ruled that the Motion to Dismiss under 11 U.S.C. § 707(b) was improper because the debts of Mrs. Virani were not primarily consumer debts and Section 707(b) only applied to such a debt- or. The Court also held that, even if the debts were primarily consumer debts, Mrs. Virani was a below median income debtor and only the judge or United States Trustee could bring such motion. The Court then analyzed the Motion to Dismiss under 11 U.S.C. § 707(a) and found that cause for dismissal had not been shown.
In the meantime, Mr. Modi filed a complaint against the Debtor on August 21, 2015 in the above-styled case, alleging her discharge should be barred under 11 U.S.C. § 727 and her debt to him should be deemed non-dischargeable under 11 U.S.C. § 523. The complaint was amended on October 22, 2015, October 26, 2015, November 12, 2015, and July 14, 2016. After several conferences and motions, the Court decided to proceed in this trial only on the Section 727 portions of the complaint, reserving a trial on the Section 523 allegations if necessary until after a determination of whether the Debtor was entitled to a discharge at all. At the trial, Plaintiff alleged (1) the Debtor made numerous false statements in her Schedules, SOFA and at trial; (2) concealed her interest in certain vehicles; (3) failed to maintain adequate records at SHM; (4) failed to satisfactorily explain the loss of assets; and (5) failed to comply with certain discovery orders.
Additional Findings of Fact are made below in connection with each of Plaintiffs allegations and are incorporated herein as additional Findings of Fact.
LEGAL CONCLUSIONS
Plaintiff contends the Debtor’s discharge should be denied under 11 U.S.C. § 727(a)(2), (a)(3), (a)(4), (a)(5) and (a)(6). Because one of the fundamental goals of the Bankruptcy Code is to provide a debtor with a fresh start, “[a] denial of a discharge is an extraordinary remedy and therefore, statutory exceptions to discharge must be construed liberally in favor of the debtor and strictly against the objecting party.” Eastern Diversified Distribs., Inc. v. Matus (In re Matus), 303 B.R. 660, 671 (Bankr. N.D. Ga. 2004) (cites omitted). “[T]he reasons for denying a discharge ... must be real and substantial, not merely technical and conjectural.” Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 304 (11th Cir. 1994) (cites omitted). The burden of proving the objection to discharge is generally on Plaintiff, Fed. R. Bankr. P. 4005, and the burden must be carried by a preponderance of the evi*345dence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct 654, 112 L.Ed.2d 755 (1991).
I. False Oaths—11 U.S.C. § 727(a)(4)
To deny a debtor a discharge under Section 727(a)(4)(A), a plaintiff must show “... the debtor knowingly and fraudulently, in or in connection with the case— (A) made a false oath or account; .,. 11 U.S.C. § 727(a)(4)(A). Under this section, a plaintiff must show there was a false oath, that it was material, and that it was made knowingly and fraudulently. A misrepresentation 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.” Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984) (cites omitted). Detriment to creditors need not be shown. Id. Furthermore, the debtor may not defend himself by claiming the assets omitted were worthless. Id. “Creditors are entitled to judge for themselves what will benefit, and what will prejudice, them.” Id. While the definition of materiality is broad, it is not without limits as the purpose of the requirement the debtor make disclosures is to allow the trustee or creditors to investigate the debtor’s affairs and recover any assets without “costly investigations”. Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999). So if the omission would not assist or impede the debtor or creditors in this endeavor, it is not material. Id.; see also Cadle Co. v. Pratt (In re Pratt), 411 F.3d 561, 568 (5th Cir. 2005) (failure of debtor to list his position as trustee of trust for his children was not material because the knowledge would not assist the debtor’s creditors); Spencer v. Blanchard (In re Blanchard), 201 B.R. 108, 130 (Bankr. E.D. Pa. 1996) (undervaluing assets that would have been exempt was not material); Manning v. Watkins (In re Watkins), 474 B.R. 625, 654-55 (Bankr. N.D. Ind. 2012), aff'd sub nom.; Manning v. Watkins, 2013 WL 3989412 (N.D. Ind. July 31, 2013) (failure to disclose interest in corporations not material to administration of the estate); Ivory v. Barbe (In re Barbe), 466 B.R. 737, 748 (Bankr. W.D. Pa. 2012) (failure to disclose dismantled stage immaterial because had no value).
Finally, a plaintiff must. show that the omission or misstatement was made knowingly and with intent to deceive. A plaintiff must demonstrate actual common, not constructive, fraud, Wines v. Wines (In re Wines), 997 F.2d 852, 856 (11th Cir. 1993), but actual intent may be inferred from circumstantial evidence. Ingersoll v. Kriseman (In re Ingersoll), 124 B.R. 116, 122-23 (M.D. Fla. 1991). Furthermore, “a reckless indifference to the truth is sufficient to constitute the requisite fraudulent intent for denying a dis charge under section 727.” Cadle Co. v. Taras (In re Taras), 2005 WL 6487202, at *4 (Bankr. N.D. Ga. Aug. 19, 2005) (cite omitted). A series or pattern of errors or omissions may have a cumulative effect giving rise to an inference of intent to deceive. Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992). The discharge may not be denied, however, when the untruth was the result of a mistake or inadvertence. Id. Further, while the omission of worthless assets may be material, the value of the asset omitted may be evidence of the debtor’s intent, or lack thereof, to deceive. See Garcia v. Coombs (In re Coombs), 193 B.R. 557, 565-66 (Bankr. S.D. Cal. 1996).
Plaintiff contends the Debtor made numerous false oaths in her Schedules and in her testimony, including the following:
(a) the ownership, operation of and payment for certain vehicles,
*346(b) the existence of the Debtor’s prior bankruptcy filing,
(c) the existence of the Debtor’s husband’s pending bankruptcy ease,
(d) the Debtor’s 2013 income,
'(e) all payments made within 90 days,
(f) payments to the Debtor’s attorney,
(g) the Debtor’s position and ownership in SHM,
(h) the Debtor’s relationship with Mills and Hoopes,
(i) Debtor’s husband’s income,
(j) Schedules I and J,
(k) the Debtor’s 2014 tax refund,
(l) the Debtor’s 2015 tax refund, and
(m) the nature of the Debtor’s debts as primarily consumer or business debt.
The Court will explore each of Plaintiffs allegations. The Court will first examine the falsity and materiality of each of the alleged false oaths, followed by a determination of the Debtor’s intent.
A. Cars
Much of the testimony at the trial focused on the Debtor’s disclosure or lack thereof about the cars driven by the Debt- or’s family. The Debtor and her husband consistently testified that the family had three cars at the time the petition was filed. All three were purchased within four months of the bankruptcy filing. The loans for all three cars were in the names of the Debtor’s children, which the Debtor and her husband stated was because the children’s credit was better. The initial car loans were made by Platinum Federal Credit Union (“PFCU”). The PFCU representative confirmed the children’s credit was better than the Debtor’s. She explained the credit union had special programs for young people for which one or both of the Debtor’s ■ children qualified. Plaintiff alleges, however, the Debtor’s testimony that the car loans were put in the names of her children because she could not get credit was false. Plaintiff points out that the Debtor obtained a $12,000.00 personal loan from PFCU on March 31, 2015, in the same time period when the car loans were obtained. Clearly, he argues, the Debtor did not have poor enough credit to keep her from obtaining a $12,000.00 unsecured personal loan. But the PFCU representative testified the Debtor’s loan was guaranteed by two unrelated guarantors, which suggests the Debtor’s credit alone was not sufficient to support the loan. Moreover, the fact the Debtor borrowed $12,000.00 does not mean that after obtaining that loan she could have obtained additional credit or that such additional credit would have been on as favorable terms as what her children were able to obtain as students. The Court cannot conclude the Debtor’s testimony regarding the reason for the children’s loan was untruthful.
1. 2009 Toyota Camry
A 2009 Toyota Camry was purchased by the Debtor’s son on February 27, 2015 for $10,900.00. PFCU financed the purchase of the vehicle by loaning him $10,237.75 on the same date. The repayment terms required a monthly payment of $209.60. The son’s loan from PFCU was refinanced with State Farm on November 4, 2015, and the payments were reduced to $208.95. The son is the primary driver. No evidence was produced that this car belongs to the Debt- or, that she is the primary driver, or that she makes the payments on the loan secured by the car.
2. 2012 Toyota Camry
A 2012 Toyota Camry was purchased by the Debtor’s daughter on March 15, 2015. The purchase of this vehicle was financed by PFCU in the amount of $14,630.00. The monthly payments required were $357.45. The Debtor authorized PFCU to withdraw *347these payments directly from her bank account and the payments were made every month from the Debtor’s bank account for the time period April 1, 2015 at least through September 2015. The loan on the 2012 Toyota Camry was refinanced with State Farm on November 3, 2015, and the monthly payment was reduced to $307.01. The 2012 Toyota Camry was driven primarily by the Debtor’s husband.
Plaintiff alleges that, in response to SOFA Question No. 3, the Debtor should have disclosed payments she made on the 2012 Camry within 90 days of the petition date. The Debtor answered “NONE” to Question No. 3. Question No. 3 is addressed differently to individual debtors with primarily consumer debts or business debts. Assuming the Debtor is a consumer debtor, she would list all payments on loans, installment purchases of goods or services, and other debts to any creditor made within 90 days immediately preceding the commencement of the ease, unless the aggregate value of all property that is affected by such transfer is less than $600.00. If the Debtor is not primarily a consumer debtor as this Court has found, the Debtor is only required to list payments or transfers to a creditor made within 90 days immediately preceding the commencement of the case if the aggregate value of all property affected by such transfer is more than $6,255.00.
The Debtor’s payments on the car loan in her daughter’s name are not responsive to Question No. 3. This question only asks for payments to creditors; a creditor is someone with a claim. Since the Debtor was not a signatory on the note to PFCU, PFCU had no claim against the Debtor; therefore the payments to PFCU were not payments to a creditor. Moreover, the total payments made by the Debtor to PFCU on account of her daughter’s car in the 90 days preceding the bankruptcy filing are $1,074.00. If the Debtor is a non-consumer debtor, as held by the Court in the Section 707 Order, the amount of these transfers would not aggregate enough to have been responsive to Question No. 3.
Plaintiff also alleges the Debtor should have responded to SOFA Question No. 14 by disclosing the 2012 Toyota Camry owned by her daughter as property owned by another person but that the Debtor holds or controls. The 2012 Toyota Camry is owned by the daughter and, while the Debtor drives the car occasionally, there was no evidence she held or controlled the vehicle. The Debtor used the vehicle as any parent might use the vehicle of their child but was neither the owner nor the primary driver of the car. Therefore, the Court finds this response to be accurate with respect to the 2012 Toyota Camry.
Last, Plaintiff contends the Debtor should have identified the 2012 Toyota Camry on Schedule B as property she owned because she made many of the car payments pre-petition. The title to the car was not in the Debtor’s name. For purposes of a false oath analysis, the Court cannot say that a debtor must assume that property is actually owned by the debtor when it is not in the debtor’s name, at least not under the facts here. The Debtor did not have title to the vehicle and was not the primary driver of the vehicle. The Court therefore concludes the Debtor’s failure to identify the 2012 Toyota Camry on Schedule B is not a false oath.
3. 2005 Honda Odyssey
The Debtor purchased a 2005 Honda Odyssey on April 16, 20151 for $11,338.00, which included fees and taxes. The purchase order for the vehicle, the title application for the vehicle and the title are all *348in the Debtor’s name, and the Debtor signed the purchase order and the title application. The insurance on the car when it was purchased was in the name of the Debtor and her husband. PFCU financed $8,000.00 for the purchase of the car, loaning the funds to the Debtor’s son. The source of the remaining $3,000.00 purchase price was never established. The monthly-payment required was $240.92, The Debt- or authorized payments for the vehicle to be made directly from her Wells Fargo bank account beginning in July 2015. At the September 2015 Hearing, the Debtor testified she made the $240.92 per month payment on this car. Nevertheless, the Debtor’s bank statements for July through September 2015 do not reflect an automatic draft of the payments from the Debtor’s bank account. Although the Debtor’s statement regarding paying $240.92 per month for the Odyssey cannot be supported by documents, the Court cannot find the statement false because the Debtor agreed for PFCU to withdraw the funds from her bank account and it is possible some of the cash withdrawals from her bank account were used to make payments. At the September 2015 Hearing, the Debtor testified she primarily drove the Honda Odyssey, At the trial of the Section 727 action, she stated her daughter was now primarily driving the car and making the car payments. The Court cannot conclude the Debtor’s statements are false. It is more likely the change in testimony reflects a change in usage.
The Debtor, in her testimony at the September 2015 Hearing, stated that she owned no cars but she acknowledged she drove the Honda Odyssey. She stated the Odyssey was owned by her son who had the loan on the car. The 2005 Honda Odyssey was not disclosed by the Debtor in her originally filed Schedule B. The Debtor’s Schedule B was amended on February 26, 2016 to disclose the Honda Odyssey, but this was after Plaintiff obtained a copy of the title and brought to the Debtor’s attention that her statements were false. The Debtor’s testimony and Schedule B regarding ownership of the Honda Odyssey is false.
Plaintiff alleges the Debtor should have responded to SOFA Question No. 14 by disclosing the Honda Odyssey as property owned by another person (her son) but that the Debtor holds or controls. The Court finds the Debtor’s response to SOFA Question No. 14 to be accurate. The Debtor is the owner of the Honda Odyssey so she was not holding and controlling the Odyssey while someone else owned it.
Lastly, Plaintiff alleges that, in response to SOFA Question No. 3, the Debtor should have disclosed payments she made on the 2005 Honda Odyssey within 90 days. The Debtor answered “NONE” to Question No. 3. The Court determines the Debtor’s response was correct. Question No, 3 asks for payments made to creditors. PFCU was not a creditor of the Debtor on the 2005 Honda Odyssey because she was not obligated to PFCU on the loan. Moreover, the payments she made on the Odyssey at most totaled $482.00, which is below the threshold for disclosure for both consumer and non-consumer debtors.
4. Insurance
The insurance on all three cars was paid by the household, meaning that the insurance payments were made from a combination of the Debtor’s and her husband’s income. The Court finds that the insurance payments were $369.00 per month as of the petition date, but increased post-petition to $468.00 per month. The Debtor’s Schedule J states that $369.00 per month is paid by the Debtor for insurance. The Debtor testified at the September 2015 Hearing that this $369.00 per month was the insurance cost as of the petition date *349for all three vehicles and that it was paid by her husband. The Debtor’s interrogatory responses confirmed that the monthly insurance payment was $369.00. Nevertheless, at the trial of this matter, the Debtor testified that the $369.00 amount entered in Schedule J as insurance payments was meant to be the payment on her daughter’s car (the 2012 Toyota Camry), even though that monthly car payment was $367.45. The $369.00 payment designated as insurance is a very specific number and the Court finds it highly unlikely that $369.00 was meant to be $357.45. In fact, the Court believes the $369.00 per month payment was the insurance on all vehicles and the Debtor’s statement at the trial that it was meant to reflect the car payment is false.
5. Prior Vehicles
The Virani family acquired three vehicles in February, March and April 2015, shortly before the filing of the Debtor’s petition. It appears that one or more cars were surrendered in that same time period. Plaintiff alleges the Debtor should have disclosed in response to SOFA Question Nos. 5 and 10 that a GMC van, a Jeep and a 2002 Odyssey were surrendered. The Court finds that a 2001 GMC van which was in the Debtor’s husband’s name was surrendered in 2012. The Court finds a 2001 Jeep in the name of the Debtor’s son was also surrendered, and a 2002 Honda Odyssey in the name of the Debtor’s husband was also surrendered. No evidence was presented that any of the three surrendered vehicles were ever in the Debt- or’s name, so the Court cannot find the Debtor’s answers were false.
Based on the foregoing, the Court concludes the following false oaths were made by the Debtor related to the cars: (1) the filing of the original Schedule B without disclosing the Debtor’s ownership of the 2005 Honda Odyssey, (2) the Debtor’s testimony at the September 2015 Hearing that she owned no car, (3) the Debtor’s trial testimony that the $369.00 entered on Schedule J as car insurance was not really an insurance payment but instead a payment on her daughter’s 2012 Toyota Camry. The Court concludes that each of the foregoing false oaths.is material because each is important to determining the scope of the Debtor’s assets and liabilities.
B. Income
Plaintiff argues the Debtor has greater income than what was identified on her Schedules because he contends her husband and children contribute regularly to the household. Schedule I asks a debtor to identify income regularly received or contributions to expenses regularly received. The Debtor’s Schedule I shows $1,800.00 per month regularly provided by Mr. Vira-ni to the household. Plaintiff believes Mr. Virani contributes more. He believes Mr. Virani’s business was more lucrative than disclosed. He notes Mr. Virani has paid other expenses, either directly or through his business, which indicate to Plaintiff that more income is available. Moreover, Plaintiff argues the Debtor’s two children contribute to the household income based in large part bn a review of the- Debtor’s bank account.
1. Mr. Virani’s Income
Mr. Virani’s income comes from the operation of SHM, an event hall. Mr. Virani operates the event hall on a cash basis, both for income and expenses. Consequently, there are no books to speak of to back up Mr. Virani’s assertions or to support Plaintiffs assertions. The evidence shows that the event hall held some very successful events over the years. In 2013, SHM’s corporate return showed gross income of $135,185.00. In 2014, its gross income was $176,078.00, and in 2015, the gross income of SHM was $189,780.00. Be*350cause of this large amount of gross income, Plaintiff believes Mr. Virani had access to more than $1,800.00 per month in income.
But, the gross income of SHM is not the same as its net income or cash available to the owner. The tax returns reflect expenses in the nature of rent, utilities, contract labor and the like which resulted in a reduction of the company’s gross income. In 2013, according to both the SHM corporate return and Mr. Virani’s individual return, he received $2,000.00 in wages as a W-2 employee and $7,058.00 of business income, for a total of $9,058.00.2 In 2014, the SHM corporate return and Mr. Vira-ni’s individual return show he received $4,000.00 as a W-2 employee, and the net business income of SHM was ($2,523.00). But Mr. Virani received other rental income of $9,450.00 for a total income to Mr. Virani of $10,927.00. Finally, the 2015 SHM corporate tax return and Mr. Vira-ni’s individual return reflect he received $4,000.00 as a W-2 employee and $6,387.00 in net business income for a total income of $10,387.00.
Mr. Virani testified the amount he withdrew from SHM each month varied based on his need and the availability of cash. This statement alone is not atypical for a sole proprietor in a small business. Mr. Virani testified the amounts he withdrew ranged from $1,000.00 to $2,500.00 per month, an average of $1,750.00 per month (less than the amount the Debtor identified on Schedule I). In the Court’s findings in its Section 707 Order, it noted that the 2013 tax return showed total income of $27,000.00, and the Court concluded there was no evidence in the record to indicate Mr. and Mrs. Virani have significant income that could be used to pay them creditors. The Court reiterates this finding. Finally, the Court notes that the $1,800.00 per month scheduled by the Debtor as Mr. Virani’s income is $19,200.00 per year. The income reported by Mr. Virani to the IRS is less than that in each of 2013, 2014 and 2015, again not giving the Court any reason to believe he actually received more than an average of $1,800.00 per month. If anything, the evidence suggests he made even less.
Plaintiff argues that a review of the Debtor’s bank account shows cash deposits that indicate additional income. Mr. Virani testified he did occasionally make deposits into his wife’s bank account if the funds were needed. A review of the evidence shows the following cash deposits in the Debtor’s bank account:
November 2014 $ 460.00
March 2015 $ 240.00
April 2015 $ 60.00
May 2015 $ 150.00
June 2015 $1,486.00
July 2015 $ -0-
August 2015 $ 380.50
September 2015 $ 780.003
*351The bank accounts do not reflect the source of the cash. The Court notes cash was withdrawn from the bank at various times. The cash deposited in the Debtor’s bank account, according to the testimony, could have been from Mr. Virani, could have been from either of the Debtor’s two children, or could have been a redeposit of cash that had previously been withdrawn. Other than the total deposits in June 2015 (immediately prior to the filing of the petition) the remaining prepetition deposits are minimal and do not indicate a substantial source of other income, a regular source of other income, or total other income in excess of the $1,800.00 per month identified in Schedule I. Furthermore, during this time period, PFCU was automatically drafting from the Debtor’s bank account the payment for the Debtor’s daughter’s car. Both the Debtor and Mr. Virani testified the Debtor’s daughter tried to deposit money in the Debtor’s bank account to cover some of those car payments.
Plaintiff argues that SHM was paying additional expenses of Mr. Virani which should count toward the calculation of income. In particular, Plaintiff points out the company was making payments to Plaintiff himself, Mr. Wread and Mr. Rupani. He also notes the company made payments of legal fees to Mills & Hoopes and to Debt- or’s counsel. Plaintiff therefore concludes that, because money is being paid on behalf of the Debtor and her husband, there must be greater income. In analyzing this argument, it is important to focus on the relevant timeframe. Schedule I, which is where the Debtor made her oath about Mr. Virani’s income, asks the Debtor to estimate her income as of the date the form is submitted. The Debtor filed her petition on June 19, 2015, and the Schedule I was filed on July 24, 2015. The Debtor also represented her husband’s income in Form 22A, also filed on July 24, 2015. This form asks for the debtor’s average monthly income for the prior six months. The six-month period preceding the filing of the bankruptcy case runs from December 1, 2014 to June 18, 2015. Neither Schedule I nor Form 22A asks for Mr. Virani’s income and contributions to the family for 2013, most of 2014, the second half of 2015, or any of 2016.
The payments to Plaintiff made on behalf of Mr. Virani began post-petition in 2016. Mr. Virani testified that at least some of the payments to Plaintiff came from the 2015 tax refund. Moreover, the Court has previously concluded the loan from Mr. Modi to the Debtor and Mr. Virani, although made personally, was for a business purpose, i.e., the operation of SHM. Consequently, if SHM made some of those payments to Mr. Modi in 2016, those payments would not necessarily reflect income to Mr. Virani. As to the payments to Mr. Wread and Mr. Rupani, no evidence was presented as to the exact amount or source or date of those payments. The testimony was that the Wread debt dates from 2005 and represents a failed prior business venture. The Rupani debt also relates to business ventures. Mr. Virani testified that SHM makes the payments on both Mr. Wread’s and Mr. Rupani’s debts and that SHM takes the interest deduction for those obligations. The evidence therefore does not demonstrate that SHM was making a payment on behalf of Mr. Virani on which it was not otherwise obligated or that it was not entitled to make. Moreover, the evidence is not sufficient to allow the Court to determine if the amount paid to Mr. Wread and Mr. Rupani in the six months prior to the filing of the bankruptcy petition was more than the difference between $1,800.00 per month (as reported on Schedule I and Form 22A) and Mr. *352Virani’s actual income.4
Plaintiff argues that SHM paid legal fees to Mills & Hoopes and those legal fees were really paid on behalf of Mr. Virani and should be included in his income. The litigation between Plaintiff on one hand and SHM and the Viranis on the other began in 2013. Mills & Hoopes represented SHM, and Mr. and Mrs. Virani, in those legal proceedings. As a result of their representation, Mills & Hoopes received payments of $11,307.00, with a little over $28,000.00 remaining due and owing to Mills & Hoopes. A review of the Mills & Hoopes statement shows that, during the six-month period prior to the filing of the bankruptcy petition, legal fees of $4,266.00 were received by Mills & Hoopes. The testimony was that these payments were made by SHM. SHM was a party to the litigation, and the payment by SHM of legal fees does not necessarily make those payments income to Mr. Virani.
Plaintiff showed that SHM made the payments to Mr. Altman on behalf of the Debtor for the filing of her bankruptcy petition. ■ All of the payments made by SHM to Mr. Altman were made post-petition, so even if those payments are considered income to Mr. or Mrs. Virani, they did not occur in the six-month period prior to the filing of the bankruptcy petition nor were they expected to be regular income to either of them. The total amount paid to Mr. Altman post-petition for the Debtor’s bankruptcy case was $3,265.00. Additionally, SHM paid $1,240.00 to Mr. Altman on behalf of Mr, Virani for the filing of his bankruptcy case. This payment could be attributed as additional income to the Vi-ranis. Nevertheless, the Court finds these payments are not “regular” payments to support the Debtor and do not in and of themselves demonstrate that the statements made by the Debtor in her Schedule I and Form 22A are false.
So, while the Court understands Plaintiffs suspicion that Mr. Virani contributed more than $1,800.00 per month on average to the family, and while it is certainly possible that at times in the six months prior to the filing of the bankruptcy petition he contributed more than $1,800.00 per month, Plaintiff has not carried his burden of proving by a preponderance of the evidence that the Debtor’s statement that Mr. Virani contributed approximately $1,800.00-per month in income was false. As the Court noted in its Section 707 Order, nothing in the Debtor’s or Mr. Vi-rani’s lifestyle suggests these debtors have more income than is disclosed. While the family presently has three vehicles, none of them are new, and none of them are luxury vehicles. They rent a home, and they have no other material assets and no lifestyle that suggests there is other income not being disclosed. Rather, the evidence shows that the Debtor and her husband and her two children are simply doing what they can to make ends meet.
2. Children’s Income
The trial included much debate over the income of the Debtor’s two children. The Debtor’s son was twenty years old when the bankruptcy petition was filed, and her daughter was nineteen years old. At the September 2015 Hearing, the Debtor testified that her daughter was an unemployed college student and that her son worked part-time. She stated the money he made covered his car expenses and spending money but that he did not contribute regularly to any household expenses.
*353The evidence at the Section 727 trial showed, that the daughter’s application for the car loan at PFCU dated March 3, 2015 reflected she was an event planner with SHM receiving $1,000,00 per month and had held that position since January 1, 2014. Her subsequent State Farm loan application dated November 2015 states she was a water meter inspector for three years making $30,000.00 a year. The evidence showed and the Court finds that these two loan applications were completed by Mr. Virani. The Court finds that the information in the two loan applications is incorrect. Since the Debtor’s daughter was only 18 years old at the time of the applications and had just graduated high school in 2014, it is highly unlikely she had a held a position with the water department for three years making $30,000.00 a year. It is possible she worked part-time for her father at SHM as an event planner, and it is also possible she received compensation when she assisted at various events. The Debtor testified her daughter did work part-time in one or more summers with the water department, but it-was,only a part-time job and she certainly did not make $30,000.00 a year.
Similarly, the Debtor’s son stated in his car loan application to PFCU in April 2015 that he had worked with Antique Jewelry Addiction since December 2013 receiving an income of $1,500,00 per month for 50 hours per month. This information could be correct since 50 hours per month is only a part-time job. However, his application with State Farm in November 2015 stated he had worked with Jarod Jewelry for three years at $30,000.00 a year. The evidence showed Mr. Virani filled out this application. This information is incorrect. The Court finds that both children at most had part-time jobs in the six months prior to the filing of the petition. The information provided on the loan applications is false.
The evidence presented at the trial did not show the Debtor’s children made consistent contributions to cover household expenses as of the petition date. As stated above, the operative timeframe for the information provided in both Schedule I and Form 22A is important. Schedule I is only an estimate of income as of the date the form is filed while Form 22A is meant to reflect the average monthly income for the six-month period prior to the filing of the bankruptcy petition. Schedule I, Form 22A and the definition of currently monthly income in 11 U.S.C. § 101(10A) all require the disclosure of income received from any source but on a regular basis and paid toward the household expenses identified in Schedule J. In this case, the children made money and paid many of their own expenses including their car payments. The children contributed only occasionally to the household pre-petition. As discussed above, review of the Debtor’s bank account does not reflect regular contributions by the children. In the time period identified in the bank statements submitted as exhibits, the amount of cash deposits in the Debtor’s bank account varies from $60.00 'in April 2015 to $1,486.00 in June 2015. The bank account showed at least one deposit from extra work provided by the Debtor to her employer and evidenced by a Form 1099. But, the Court finds the Debtor’s statements on Schedule I and Form 22A that do not reflect any regular income from her children are not false because any income made by the children was used to pay for their own expenses including their car payments and any that was contributed to the family was done only occasionally.
C. Attorney’s Fees
SOFA Question No. 9 asks the debtor to “list all payments made or property transferred by or on behalf of the Debtor to any *354persons, including attorneys, for consultation concerning debt consolidation, relief under the bankruptcy law or preparation of a petition in bankruptcy within one year immediately preceding the commencement of this case”. The question then has columns where the name and address of the payee is to be identified, the date of the payment is to be identified, the name of the payor if other than the debtor is to be identified, and the amount of money paid is to be identified. In response to this question, the Debtor responded that $1,750.00 was paid to Evan Altman in July 2015. The Debtor made no disclosure that the source of the payment was anyone other than herself. The evidence showed, however, that the Debtor made none of the payments to Mr. Altman and that Mr. Altman did not receive $1,750.00 at the time the SOFA was filed on July 20, 2015. In fact, Mr. Altman had only received $700.00 by that time, all of which was paid by Mr. Virani.
The Court concludes the Debtor’s response to Question No. 9 is a false oath. The Court also concludes this false oath is material because it relates to the Debtor’s use of money after the filing of the petition. The amount paid is relevant to determining the Debtor’s financial condition. The source of the payment is important to show not only the financial situation of the Debtor at the time the payment was made, but also so that the Court and creditors can ascertain whether other parties may be in a position to influence the Debtor and her counsel because of their payment.
D. Ownership of S.H. Mart
SOFA Question No. 18 asks an individual debtor to identify the “names, addresses, tax payer identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation ... within six years immediately preceding the commencement of this case, or in which the debtor owned five percent or more of the voting or equity securities within six years immediately preceding the commencement of this case”. In response to this question, the Debtor checked “NONE”. SOFA Question No. 10 asks the Debtor to list all property other than property transferred in the ordinary course of business which was transferred within two years immediately preceding the commencement of the case. Again, the Debtor checked “NONE” in response to this question.
Nevertheless, the Court finds the Debt- or was the CEO, CFO, registered agent and primary bank account holder for SHM at least in 2012. The Court also finds the Debtor was the 100% owner of SHM throughout 2013 as evidenced by SHM’s 2013 tax return. SHM’s 2014 tax return reflects Mr. Virani as the 100% owner. This confirms there was a transfer of the ownership of SHM from 2013 to 2014.
SHM, the relevant information about it, and the Debtor’s involvement with it should have been disclosed in response to Question No. 18. Moreover, because the 100% ownership in SHM was transferred at least in 2014, such ■ transfer occurred within two years prior to the filing of the bankruptcy petition and should have been disclosed in response to Question No. 10. Finally, in answer to the Chapter 7 Trustee’s inquiry at the 341 meeting, the Debt- or answered under oath that she was never a shareholder in SHM. This information is not true for the period of 2012-2013. The Court finds the omissions made by the Debtor in her SOFA and in her 341 meeting with respect to SHM are false and the information was material. Ownership in a business relates to the Debtor’s financial condition and the Trustee can only investí-*355gate the validity of any transfer of ownership interest in a business if she is aware that such transfer occurred.
E. Tax Refunds
The Debtor and her husband received a tax refund of $4,388.00 for tax year 2014. This refund was deposited into the Debtor’s bank account on July 22, 2015, post-petition and two days before her Schedules were filed. Question No. 18 on Schedule B specifically asks for the debtor to identify “other liquidated debts owed to debtor including tax refunds.” The case law is clear that tax refunds for the year prior to the filing of the bankruptcy petition are property of the estate. Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). The Debtor and her husband were due the refund at the time of the filing and the refund should have been identified on Schedule B in response to Question No. 18. The Court determines the Debtor’s failure to disclose the tax refund for 2014 was false and material.
Plaintiff argues the majority of the tax refund was the Debtor’s property, while the Debtor’s counsel argues a significant portion is attributed to her husband. The exact amount of the refund attributable to the Debtor need not be determined at this time. There is no doubt that a sizeable portion of the refund (at least one-half) is attributable to the Debtor and should have been disclosed on Schedule B. The Debtor has amended Schedule B to identify the entire refund as hers and also to claim the entire amount as exempt. While Plaintiff objects to this amendment and to the exemption, a determination of the Debtor’s entitlement to the exemption is a separate proceeding and will be determined at a later date.
Plaintiff also contends the Debtor’s 2015 tax refund should have been identified. The bankruptcy petition was filed in June 2015. At that point, tax returns were not due, as the yearly income of the Debtor and her husband, and any credits to which they were entitled, could not be calculated. A review of the Debtor’s 2014 and 2015 tax returns shows the Debtor had very little income tax withheld. The tax refunds are virtually all the result of tax credits which can only be calculated when a total year’s income is available and the IRS makes available the information on which the credit can be calculated. Therefore, the Court finds it was not necessary for the Debtor to identify in Schedule B a potential 2015 tax refund.
Last, Plaintiff argues the Debtor made false statements regarding the use of the tax refund. The Debtor testified her husband used the money. She answered in an interrogatory the money was used to pay $1,000.00 to Mills & Hoopes, $1,000.00 on her son’s behalf for books and supplies, $1,000.00 on her daughter’s behalf for books and supplies, $450.00 to an accountant, and the balance used by her daughter for a rideshare program. In reviewing the Mills & Hoopes accounts, the Court can only identify a $500.00 payment in July 2015. None of the other expenses listed by the Debtor can be verified. The facts show the entire refund was deposited in the Debtor’s bank account on July 22, 2015 and all but $38.00 was withdrawn the very next day in cash. The Court finds the Debtor really does not know how the tax refund money was spent. She testified on more than one occasion her husband was in charge of the finances and was the one who took the tax refund money and spent it. Based on those facts, the Court cannot find that the Debtor made a false statement with respect to how the tax refund was spent.
F. Petition Errors
Plaintiff alleges the Debtor made numerous errors in connection with filing her *356bankruptcy petition. First, the Debtor’s initial petition was filed with the last name “Alivirani”. The Debtor’s name should have been printed as “Ali Virani”. Second, where the petition asks the Debtor to identify. all prior bankruptcy cases filed within the last eight years, the Debtor stated none. In fact, the Debtor had a prior bankruptcy case, No. 10-92602, which was a petition filed under Chapter 13 of the United States Bankruptcy Code on November 1, 2010. The case was dismissed on December 28, 2010 for the Debtor’s failure to pay a filing fee. The Debtor’s bankruptcy petition also asked whether her spouse had any pending bankruptcy cases. Again, the Debtor stated “NONE” on the petition, despite the fact her husband Ramzan Ali Virani had filed a petition only an hour and a half earlier on the same day. Mr, Virani was represented in the filing of his case by Evan Altman, the same attorney who assisted this Debtor in her pro se bankruptcy filing. Lastly, Plaintiff contests the statement on the Debtor’s petition that her case is one of primarily consumer debts. This Court found in its Section 707 Order that the debts of this Debtor are not primarily consumer debts, but instead are primarily business-related debts. The Debtor subsequently filed an amended petition, this time noting the debts were business debts, in accordance with this Court’s Section 707 Order. Plaintiff contests this statement and continues to maintain that the debts are primarily consumer debts.
Most of the issues raised by Plaintiff regarding errors in the original petition were addressed by the Court in its Section 707 Order. There, the Court noted that the typing of her name as “Alivirani” without any spaces as opposed to “Ali Virani” could cause the petition to be indexed under a different alphabetical letter, but the Court did not find that the information was misleading. The Court noted that.the Debtor put her correct Social Security Number on the form. The evidence also showed the Debtor’s name of “Alivirani”, without a space, was used on her driver’s license and in some of her W-2 statements. The Court finds the presentation of the Debtor’s name was not a false oath.
With respect to the Debtor’s prior bankruptcy case, the Court noted in its Section 707 Order that the Debtor should have disclosed the prior Chapter 13 case. At trial, she stated she did not view that as a bankruptcy case because she did not complete the ease. She did not even pay the filing fee. The Debtor is incorrect, and the statement that no prior bankruptcy eases were filed is false and material. Next, the Debtor’s statement that her spouse did not have a pending bankruptcy case was false. The evidence was clear that her husband’s bankruptcy petition was filed an hour and a half or so prior to her own. So, the statement that there were no pending bankruptcy cases was false and is material because when spouses file separate bankruptcy cases as opposed to a joint case, it is necessary for the trustee to review the other spouse’s case to ensure consistency in the disclosure and verify that assets and liabilities are appropriately documented.
Finally, Plaintiffs dispute about whether the Debtor’s debts are primarily consumer or business debts has no bearing on this Section 727 action. The. Debtor (and Mr. Altman) stated their initial understanding that the debts were primarily consumer debts. The Court believes this was done without much consideration, probably because the vast majority of individuals who file bankruptcy have only consumer debts. The Court found to the contrary in its Section 707 Order. So when the Debtor amended her petition to state the debts were primarily business debts, she was amending the petition to make it consistent with the Court’s Order. Plaintiff dis*357putes whether the debts are primarily business debts, but his argument is irrelevant to a Section 727 action regarding whether there was a false oath and is irrelevant even in his Section 707 Motion to Dismiss. In the Section 707 Order, the Court found first that the debts were primarily business debts and that, even if they were primarily consumer debts, the Plaintiffs motion would fail due to the Debtor’s income level and lack of standing. Plaintiffs argument regarding whether the Debtor is primarily a consumer or business debtor has been dealt with and further argument is unnecessary.
G. SOFA Errors
Plaintiff argues there are numerous errors in the Debtor’s SOFA in addition to the SOFA errors already discussed. First, Question No. 1 asks the Debtor to state her 2013 income. The response says $-0-, This answer is incorrect as her W-2 and tax return show she made $21,505.81 in 2013. This information was available to the Debtor at the time she filed the SOFA. The answer of $-0- is false and the information is material for the Trustee and creditors to understand the Debtor’s history of income.5
Next, Plaintiff argues the Debtor answered Question No. 3 to the SOFA incorrectly. Plaintiff contends the Debtor should have identified in response to Question No. 3 payments to PFCU on the $12,000.00 personal loan which the Debtor obtained in 2015 and the transfers made by PFCU on account of the Debtor’s obligations from the $12,000.00 personal loan. On March 31, 2015, the Debtor borrowed $12,000.00 from PFCU as a personal loan. The monthly payment required was $268.29 beginning May 15, 2015. The two payments made by the Debtor in the 90 days preceding the filing of the bankruptcy petition were payments to a creditor, but because they did not aggregate the $600.00 minimum threshold for consumer debtors (much less the higher threshold for non-consumer debtors), the Debtor did not need to identify those payments in answer to Question No. 3.
When the $12,000.00 loan was made, PFCU used a portion of the proceeds of the loan to pay some of the Debtor’s old debts. This Court found in its Section 707 Order that $3,740.16 of this loan was used to pay off old consumer debts of the Debt- or such as credit card debt. Since this amount was paid within 90 days of the petition date, if the Debtor were considered a consumer debtor, such payments should have been identified in response to Question No. 3. However, for a debtor whose debts are'not primarily consumer debts, this transfer does not rise to the level that needed to be disclosed in response to Question No, 3.
Based on the foregoing, the Court concludes the Debtor’s response to Question No. 3 on the SOFA is not false. The Court has already concluded the Debtor was not a consumer debtor and therefore none of the transfers identified by Plaintiff reach the aggregate level of $6,255.00 needed for disclosure.6 Even if the Debtor were con*358sidered to be a consumer debtor, only the portion of the PFCU loan to the Debtor used to pay off old debts of the Debtor in excess of $600.00 would have been disclosed. While responses to Question No. 3 are material and do need to be provided to the Trustee, given the uncertainty regarding the nature of the Debtor’s debt and given that the transaction occurred as part of a loan transaction which was disclosed in the Debtor’s Schedule F, the Court concludes any failure to disclose the use of the PFCU loan proceeds to pay off old debt is not material.
H. Schedule Errors
Plaintiff next contends there are a number of errors in the Debtor’s Schedules other than those identified above. Plaintiff contends the original Schedule C is false because the 2005 Honda Odyssey and 2012 Toyota Camry are not identified and no exemption therein is taken. Even if both the 2005 Honda Odyssey and the 2012 Toyota Camry are property of the Debtor, a failure to identify property as exempt does not make the oath false. A debtor can always choose not to exempt property that she owns. Moreover, the Debtor has amended her Schedule C to claim an exemption in the 2005 Honda Odyssey which she owns. She does not own the 2012 Toyota Camry and therefore could not claim an exemption in it. This omission from Schedule C is not a false oath.
Next, Plaintiff argues Schedule D is incorrect because Mills & Hoopes is listed as a secured creditor. The Court notes that, although Mills & Hoopes is identified on Schedule D, there is no amount of claim stated and in fact the description of the debt says, “Assignee and notice for Mr. Modi”. The testimony at the trial was that Mr. Altman mistakenly understood Mills & Hoopes was the attorney for Plaintiff and believed Plaintiff had assigned his judgment to Mills & Hoopes. This understanding was entirely incorrect. Further, Mills & Hoopes should have been listed on Schedule F as an unsecured creditor due to their representation of the Debtor in litigation with Plaintiff. Nevertheless, the Court finds any misstatement here is immaterial because it is not about the Debt- or’s assets. Schedule D states no dollar amount for the liability, and it clearly designates the understanding at the time that Mills & Hoopes was representing Plaintiff.7 The fact that Mills & Hoopes was listed on Schedule D and not on Schedule F, while erroneous, is not material. They received notice of the bankruptcy case and had an opportunity to participate in it.
Plaintiff also argues Mills & Hoopes should have been identified on Schedule H as a creditor for whom there are co-debtors. Plaintiff appears to be correct in this regard. Mills & Hoopes represented the Debtor, Mr. Virani and SHM in litigation with Mr. Modi, so Mills & Hoopes could be a creditor of all of the parties for whom they provided representation. As such, the other parties would be co-debtors with the Debtor. The Court finds, however, that any misstatement here is not material in this context. The Debtor never made any payments to Mills & Hoopes, and it was clear from the testimony she was unaware of the financial arrangements with Mills & Hoopes. Both Mr. and Mrs. Virani viewed the obligation to pay the attorneys’ fees to *359be that of SHM. The Court finds therefore that, even if Schedule H is incorrect, the omission is immaterial.
Plaintiff argues the Statement of Intention filed by the Debtor is incorrect. He contends she should have stated her intention to keep both the Honda Odyssey and the Toyota Camry. As it turns out, the Debtor owns the Honda Odyssey. She is not, however, liable on the note for it. The Court can understand then why she would not have stated she was reaffirming a debt she did not owe. Similarly with respect to the Toyota Camry, the Debtor does not own the car nor was she obligated on the note. She would not have obligated herself to reaffirm the debt for which she was not responsible.
The Court has discussed above whether the income listed on Schedule I is correct. Plaintiff alleged the Debtor should have disclosed income from her children and that Mr. Virani contributed more than $1,800.00 per month to the Debtor’s household. But in addition to the discussion about total income, Plaintiff argues Schedule I is incorrect because the attached Business Expense Form should have been completed in full. Instead, only one line is completed—total income $1,800.00. The Court notes, however, the form only asks for information about the Debtor’s business, and income from the Debtor’s business. By the time the petition was filed, SHM was not the Debtor’s business, but was her husband’s. The Court therefore finds the failure to complete the details of the Business Expense Form is not a false oath.
The Debtor’s Schedule J is to be completed with the Debtor’s expenditures as of the date the petition was filed. The Debt- or’s original Schedule J was filed on July 20, 2015 and then amended on August 12, 2015 [Docket Nos. 18 and 29 respectively]. The Debtor’s Schedule J, both original and as amended, is confusing, particularly when compared to her husband’s Schedule J. His Schedule J was filed originally on July 15, 2015, and amended on August 12, 2015. Both Debtors testified at the September 2015 Hearing, and the Court found, that the two debtors did not ordinarily allocate expenses between themselves. Instead, they acted as a single household with both parties contributing and making payments as necessary. Nevertheless, it appears some attempt was made by Mr. Altman, the attorney for both of the Viranis, to allocate household expenses between the two debtors. This attempt by Mr. Altman appears arbitrary. Moreover, the expenses allocated to this Debtor do not dovetail with the expenses allocated to Mr. Virani in his bankruptcy case, either on the original Schedule J or the amended Schedule J. Thus, some expenses are double counted, and some are not counted at all. Finally, it is clear to the Court that Mr. Altman allocated the expenses between the two debtors in an effort to demonstrate that Mr. Virani could make a Chapter 13 payment of $400.00 per month and that the Debtor had insufficient net income to require her to file a Chapter 13 case. Because of this result-oriented approach, numerous inaccuracies are found in the Debtor’s Schedule J, both original and as amended. In particular, Plaintiff challenges the- Debtor’s statements that she spends $369.00 per month on vehicle insurance, that her husband spends $400.00 per month on a Chapter 13 plan payment, and that her husband allocates $100.00 per month for tax payments, and challenges the omission of the Debtor’s payments on the 2012 Camry.
The Debtor’s Schedule J, both original and as amended, were accurate as to Mr. Virani’s $400.00 per month Chapter 13 plan payment as of the petition date. His case was pending at the time the Debtor *360filed her petition and filed both of her Schedules J. His case was not dismissed until September 15, 2015. Thus, the $400.00 per month expense on Schedule J is not false.
Next, both the Debtor’s original and amended Schedule J show that Mr. Virani is allocating $100.00 per month for the payment of taxes. Even if a debtor has not historically set aside money for taxes, if a history of tax liability shows such payments are necessary, it is common for a Chapter 13 Trustee to require the allocation of monthly income for tax payments. In this case, however, Mr. Virani not only had no history of setting aside tax payments, he had no history of owing taxes. The 2013, 2014 and 2015 tax returns were examined by the Court and Mr. Virani had no tax withheld in any of the years. Instead, the Viranis received a combined tax refund consisting primarily of earned income and other credits. Given this history, the allocation of $100.00 per month for taxes for Mr. Virani was false. This allocation is also material because it leads to the mistaken belief that the Viranis have $100.00 less per month available for the payment of creditors.
Both of the Debtor’s Schedules J state she paid $369.00 per month in car insurance and the Court has found as a fact that insurance on all three cars cost $369.00 per month as of the petition date. While Mr. and Mrs. Virani also testified Mr. Virani paid the insurance expense, the Court finds the expense proper on the Debtor’s Schedule J because it is not included in Mr. Virani’s Schedule J.
At the trial, the Debtor changed her story to say the $369.00 per month designated as vehicle insurance was actually the payment on the daughter’s car. She should have acknowledged she did not include in Schedule J the monthly payment that was made on the daughter’s car. As discussed above, the daughter’s car is in the daughter’s name and the loan is also in the daughter’s name. The Debtor, however, signed an agreement with PFCU that the car payment for the 2012 Toyota Camry would be automatically withdrawn from her bank account. The amount of $357.45 was withdrawn regularly by PFCU from the Debtor’s bank account for the period of April 2015 through September 2015. Thus, this regular expense should have been indicated in the Debtor’s Schedule J. The Debtor’s failure to disclose this regular payment is false and is material, because it demonstrates the Debtor’s expenses and the amount available for payment.
I. Intent to Deceive
Once the Court has determined that a material omission or misstatement has been made, it must determine if it was made knowingly and with intent to deceive. Intent may be inferred from circumstantial evidence and “a reckless indifference to the truth is sufficient to constitute the requisite fraudulent intent for denying a discharge under section 727.” Taras, 2005 WL 6487202, at *4. “[A]though not every single item of assets need be schedule[d] and valued, ‘there comes a point when the aggregate errors and omissions cross the line past which a debtor’s discharge should be denied.’ ... The cumulative effect of a number of false oaths by the debtor with respect to a variety of matters establishes a pattern of reckless and cavalier disregard for the truth by the debtor.” Neary v. Stamat (In re Stamat), 395 B.R. 59, 74 (Bankr. N.D. Ill. 2008). (cites omitted), aff'd, Stamat v. Neary, 635 F.3d 974 (7th Cir. 2011); see also Dilbay v. Demir (In re Demir), 500 B.R. 913, 920 (Bankr. N.D. Ill. 2013). The debtor’s attention to detail is critical because “[receiving a discharge in bankruptcy is a privilege and not a right. Debtors *361have a responsibility to make certain the information they provide is accurate. They have a responsibility to respond truthfully and in a timely fashion to requests of the trustee or the Court. They also are responsible for the accuracy and truthfulness of all documents they sign and file under penalty of perjury.” Pergament v. Gonzalez (In re Gonzalez), 553 B.R. 467, 470 (Bankr. E.D.N.Y. 2016). Factors to consider in determining whether debtors exhibited a reckless disregard or indifference to the truth include “(a) the serious nature of the information sought and the necessary attention to detail and accuracy in answering; (b) a debtor’s lack of financial sophistication as evidenced by his or her professional background; and (c) whether a debtor repeatedly blamed recurrent errors on carelessness or failed to take advantage of an opportunity to clarify or correct inconsistencies.” Gonzalez, 553 B.R. at 474 (cites omitted); see also Kohut v. Wandrie (In re Wandrie), 563 B.R. 238 (Bankr. E.D. Mich. 2017); Cadle Co. v. Leffingwell (In re Leffingwell), 279 B.R. 328 (Bankr. M.D. Fla. 2002).
After a review of the evidence and the facts determined by the Court, the Court has found the following omissions and representations made by the Debtor to be false and material:8
1. The Debtor’s response to SOFÁ Question No. 1 stating that her 2013 income was $-0-;
2. The Debtor’s failure to identify the 2005 Honda Odyssey as an asset on Schedule B;
3. The Debtor’s failure to disclose the expected 2014 tax refund on Schedule B;
4. The Debtor’s inaccurate statement regarding the payment of attorney’s fees to Evan Altman in response to SOFA Question No. 9;
5. The Debtor’s failure to answer SOFA Question No. 18 truthfully by disclosing her ownership of SHM and her management position of SHM within six years prior to the filing of the bankruptcy case;
6. The Debtor’s failure to answer SOFA Question No. 10 truthfully by disclosing the transfer of the ownership of SHM from the Debtor to Mr. Virani;
7. The Debtor’s testimony at the 341 meeting that she never owned an interest in SHM;
8. The Debtor’s failure to include in Schedule J the monthly payments of $357.45 on her daughter’s car;
9. The Debtor’s inclusion of $100.00 per month for taxes on Schedule J;
10. The Debtor’s testimony that the $369.00 per month identified as vehicle insurance was in fact the payment on her daughter’s car;
11. The Debtor’s testimony at the September 2015 Hearing that she owned no cars and pays $240.92 per month on the Honda Odyssey;
12. The Debtor’s statement on her petition that she had no prior bankruptcy filing; and
13. The Debtor’s statement on her petition that her husband had no pending bankruptcy case.
In response, the Debtor states these omissions and misrepresentations were mistakes, or were the result of counsel action, or made in reliance on her husband. In some instances she amended the filings to correct the information, but not in all.
*362She also defends her actions based on challenges of language and background.
The Debtor’s standard response to every single misrepresentation and omission was that it was a “regrettable” mistake. It is the Debtor’s responsibility, however, to ensure the documents she signs are accurate. This requires the Debtor to do more than simply assume the information provided by her husband is correct. The Debtor must read the documents critically and use her own independent judgment. She stated at her 341 meeting and at trial that she had read the documents and they were accurate. The Court finds this to be untrue. For example, had the Debtor truly read the SOFA, she would have known immediately that she did not have zero income in 2013. She knew it immediately at trial. She knew she worked in 2013, and she knew she had income, so had she truly read the SOFA she would have known that answer was incorrect. She also knew Mills & Hoopes did not represent Plaintiff and she knew she had deposited her tax refund in her bank account two days before. She also knew the payment on her daughter’s car was being drafted from her bank account. Had she reviewed the Schedules and SOFA she would certainly have seen these errors. The Court also notes the Schedules and SOFA were filed the first time more than a month after the Debtor filed her initial pro se petition and after the Court granted an extension of time to do so. This is not a situation where the Schedules were prepared hurriedly; the Debtor had the time to gather the relevant information, review the draft schedules and make any changes that needed to be made.
The Debtor relies on her lawyer and her husband for many of the misrepresentations and omissions. The Debtor was not served well by her counsel in many respects (in particular the division of household expenses between the Debtor and her husband), but counsel cannot know the actual facts unless the Debtor tells him. Here, only the Debtor and her husband would have known the actual amount of income received, or the actual amount of payments made. Moreover, no evidence was presented that any of these specific omissions and misstatements were answered in a way directed by her counsel (except perhaps the attorney’s fee question).
' The Debtor and her husband both testified, and the Court finds, that Mr. Virani was in control of the family finances. Mr. Virani largely provided the information for the Debtor’s Schedules. The Debtor testified credibly that Mr. Virani made the financial decisions and provided the directions for most of the family’s financial transactions. The independent evidence supports this conclusion. It was Mr. Virani who had his children borrow money for the family to purchase the 2005 Honda Odyssey and 2012 Toyota Camry for family use. It was Mr. Virani who filled out the loan applications at PFCU and State Farm and had his children sign them. It was Mr. Virani who had the Debtor borrow $12,000.00 from PFCU, the vast majority of which was used to pay his business expenses. It was Mr. Virani who used the entire tax refund and provided the only, testimony as to its use. While the Court appreciates the difficult position a debtor may be in when it is the debtor’s spouse who is primarily in control of the finances, that does not eliminate the debtor’s duty and responsibility to make sure the Schedules are correct. A debtor cannot turn a blind eye to the spouse’s financial actions and expect not to pay some of the price for those actions.
The Debtor also argues in her closing that some of the omissions and misstatements are based on challenges of language and background. The Court does not be*363lieve language barriers or background contributed to most of the misstatements and omissions. The Debtor and her husband have resided in the United States for sixteen years. The Court notes the Debtor does not have a finance background and is not a sophisticated financial investor. Nonetheless, the Debtor has been gainfully employed at least for the last three years as a medical assistant which requires a post-high school education and being involved with patients and other people. She maintains her own bank account, and she, in the Court’s judgment, is fully capable of determining and understanding the actions of her husband. Mr. Virani has had his own business for a number of years. He has previously filed a bankruptcy case and received a discharge. The Debtor has previously filed a bankruptcy case. Her SOFA and testimony reflect several lawsuits to which she has been party. The Court cannot conclude the Debtor is unsophisticated to the point of being unable to understand her duties as a bankruptcy debtor and the questions asked on the SOFA and Schedules.
Finally, the Debtor argues the Schedules were amended to correct some of the errors. The Debtor amended her petition to correct the statement regarding her prior bankruptcy filing and the pending bankruptcy case of her husband. The Debtor amended her Schedule B to disclose her ownership of the 2005 Honda Odyssey, after Plaintiff obtained independent verification of the fact. The Debtor made one final amendment during the trial of the Section 727 action to identify the tax refund on Schedule B and to claim an exemption in it. All of the omissions and misstatements, however, have not been corrected. While correcting previously erroneous schedules can be some evidence of a lack of intent to defraud, “this inference is ‘slight where the debtor has ... amended his schedules after the trustee or creditors have already discovered what the debtor sought to hide’.” Gonzalez, 553 B.R. at 474 (cites omitted), “Coming clean about false oaths made with fraudulent intent well after the fact is better than not doing so, but it does not wipe away the fact that [d]ebtor made the original false oaths, for § 727(a)(4)(A) purposes.” Wandrie, 563 B.R. at 257.
In assessing the Debtor’s explanations for omissions and misstatements, the Court must assess the credibility of the Debtor and her husband. Unfortunately, the credibility of Mr. Virani, and to a lesser extent the Debtor, is suspect. Both exhibited a willingness to say or write down on an application the information they thought the Court, bank, or other relevant party wanted to hear, regardless of its truth. The evidence showed the loan applications submitted for the Debtor’s son and daughter both to PFCU and State Farm are incorrect. Both applications for both children were facilitated by Mr. Vira-ni. The information provided regarding the employment and income of both children was incorrect. Both State Farm applications showed each child had been employed for three years making $30,000.00 per year. Given that the Debtor’s daughter was only eighteen at the time, that simply is not true and the Debtor testified that was not true. Mr. Virani also testified the information was incorrect as to both children. Both the Debtor and her husband stated at separate times that these applications were showing the family income of $30,000.00 rather than the individual income of the applicant as requested by the applications. Their explanation was that, if they had not shown a $30,000.00 income, the children would not have received the *364loans.9 The Court was struck by this testimony—the statements were made without remorse or embarrassment, as if this is the way it is always done. It is not. Applicants for bank loans as well as debtors in bankruptcy cases are expected to be fully truthful. While these misstatements regarding the children’s income and employment history were made to the banks and not to the Court, they show the Court a willingness of both the Debtor and her husband to lie to achieve a desired result. Furthermore, the Debtor’s candor in describing this willingness to the Court demonstrates further a lack of care with regard to the truth. This approach to the truth was further confirmed by the Debtor’s testimony regarding car insurance on the final day of the trial. The Debtor’s Schedule J throughout the course of the case had shown she paid $369.00 per month for car insurance. The Debtor had testified to this fact in September 2015 and had responded to answers to interrogatories restating the same information. But by this last day, Plaintiff was pointing out to the Debtor that she had not identified in Schedule J the monthly payment she was making by automatic withdrawal on her daughter’s car. Suddenly the Debtor decided the $369.00 identified as insurance was actually the car payment even though the ear payment was only $357.00. This statement is simply not true and is further evidence of the Debtor’s desire to please the decision maker by saying what she thinks the decision maker wants to hear. With this background in credibility, the Court is skeptical about the explanations for the misstatements and omissions provided by the Debtor.
The Court recognizes the Debtor relied on her husband to a large extent, but this is the Debtor’s case only—it is not her husband’s case and it is not a joint case. The Debtor testified at her 341 meeting as well as at the trial that she reviewed the SOFA and the Schedules and that they were correct. It was her duty to have reviewed the SOFA and the Schedules and to make them correct. While any one of these misstatements or omissions alone is probably an insufficient basis for denial of a discharge,10 the Court cannot ignore the cumulative effect of the misstatements and omissions. When all of the omissions and misstatements are reviewed together with the Debtor’s and husband’s approach to stating whatever they think is necessary to obtain the result they desire, the Court concludes the Debtor exhibited a reckless indifference to the truth sufficient to constitute fraudulent intent and to support a denial of her discharge under Section 727.
II. Concealment—11 U.S.C. § 727(a)(2)
Plaintiff argues the Debtor concealed, the 2005 Honda Odyssey and the 2012 Toyota Camry and therefore her discharge should be denied under 11 U.S.C. § 727(a)(2). Section 727 of the Bankruptcy Code provides
(a) The court shall grant the debtor a discharge, unless (*)—
... (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
*365(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition.
11 U.S.C. § 727(a)(2). Thus, to deny a debtor a discharge under this section, Plaintiff must show the Debtor transferred or removed or concealed his property, within the requisite time period, and had the requisite intent to hinder, delay or defraud. “Section 727(a)(2) is intended to prevent the discharge of a debtor who attempts to avoid payment to creditors by concealing or otherwise disposing of assets.” 6 Collier on Bankruptcy ¶ 727.02[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. Supp. 2013).
Under the broad definition of transfer in 11 U.S.C. § 101(54), even a disposition of possession, custody or control could qualify as a transfer. Removal, on the other hand, is “an actual or physical change in the position or locality of property of the debt- or resulting in a depletion of the debtor’s estate.” Id., ¶ 727.02[6][a] (16th ed. Supp. 2010). Concealment includes physical hiding of the property, and “other conduct, such as placing assets beyond the reach of creditors or withholding knowledge of the assets by failure or refusal to divulge owed information.” Id. ¶ 727.02[6][b] (citing San Jose v. McWilliams, 284 F.3d 785 (7th Cir. 2002); Keeney v. Smith (In re Keeney), 227 F.3d 679, 682-83 (6th Cir. 2000)); see also Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1293 n.1 (10th Cir. 1997). The concealment of the interest must occur within the year prior to the bankruptcy filing. Transfers made more than one year prior to the petition date may fall within Section 727(a)(2) if the debtor retained a concealed interest in the asset. See R.I. Depositors Econ. Prot. Corp. v. Hayes (In re Hayes), 229 B.R. 253, 259-60 (1st Cir. BAP 1999); Rotella & Assoc., P.A. v. Bellassai (In re Bellassai), 451 B.R. 594, 602 (Bankr. S.D. Fla. 2011).
Finally, a creditor proceeding under Section 727(a)(2) must prove the debtor possessed an actual intent to hinder, delay or defraud creditors or the trustee when he transferred, concealed or removed his or the estate’s property. The Eleventh Circuit has made clear that a preferential transfer is not the type of transfer which will bar a discharge. Miller, 39 F.3d at 307; see also Hultman v. Tevis, 82 F.2d 940, 941 (9th Cir. 1936); Rutter v. Gen. Motors Acceptance Corp., 70 F.2d 479, 481-82 (10th Cir. 1934); Ins. Office of America, Inc. v. Wall (In re Wall), 2008 WL 8792259, at *4 (Bankr. S.D. Ga. Mar. 31, 2008). Constructive fraud is also insufficient. Miller, 39 F.3d at 306. Actual fraudu lent intent, however, may be inferred from the circumstances surrounding the transfer or concealment. Emmett Valley Assocs. v. Woodfield (In re Woodfield), 978 F.2d 516, 518 (9th Cir. 1992). The actions at issue should demonstrate “culpable intent”, such that the actions are “blameworthy in an equitable sense.” Belmont Wine Exch., LLC v. Nascarella (In re Nascarella), 492 B.R. 914, 916 (Bankr. M.D. Fla. 2013) (cites omitted).
Plaintiffs argument for concealment is really the same as his argument on false oaths. In particular, he points out the Debtor held tijle to the 2005 Honda Odyssey and did not schedule it. The Court has already addressed this issue above and found the Debtor’s failure to disclose the Honda Odyssey was a false oath. Concealment, though, as used in Section 727 is generally more than the failure to identify the property on the schedules. Usually, concealment under Section 727 involves transferring title to the debtor’s property in anticipation of the bankruptcy or financial difficulties while the debtor maintains all use and operation of it. The Honda *366Odyssey was always in the Debtor’s name and remained in the Debtor’s name, so the Court declines to find that the Debtor’s failure to schedule it in Schedule B is the equivalent of concealment under the facts of this case.
Plaintiff also argues the 2012 Toyota Camry is property of the Debtor that was concealed. The Court disagrees. The 2012 Toyota Camry was never in the Debtor’s name. Secondly, none of the vehicles the Virani family owned prior to the purchase of the Honda Odyssey, the 2012 Toyota Camry and the 2009 Toyota Camry were owned by this Debtor. The vehicles were previously owned by Mr. Virani, and one was owned by the Debtor’s son. So while the change in ownership of the vehicles from Mr. Virani to his wife and children may be evidence of concealment by Mr. Virani, it is not evidence of concealment by the Debtor. Therefore, the Court rules in favor of the Debtor with respect to Section 727(a)(2).
III. Books and Records—11 U.S.C. § 727(a)(3)
Plaintiff argues the Debtor’s discharge should be denied because she did not maintain adequate books and records. To deny the Debtor a discharge under Section 727(a)(3), the Court must conclude
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
11 U.S.C. § 727(a)(3).
“The purpose of § 727(a)(3) is to give creditors, the trustee and the bankruptcy court complete and accurate information concerning the debtor’s affairs and to ensure that dependable information is provided so that the debtor’s financial history may be traced.” Hylan Debt Fund, LLC—Portfolio Series 18 v. Nestor (In re Nestor), 546 B.R. 482, 486 (Bankr. N.D. Ga. 2016) (citing Harrington v. Simmons (In re Simmons), 525 B.R. 543, 547 (1st Cir. BAP 2015)); In re Juzwiak, 89 F.3d 424, 427-28 (7th Cir. 1996) (cite omitted). The debtor’s intent is not an element of a denial of discharge under Section 727(a)(3). Trauner v. Burrowes (In re Burrowes), 2011 WL 5035975, at *2 (Bankr. N.D. Ga. Oct. 13, 2011). But the requirement under Section 727(a)(3) that a debtor maintain recorded information from which debtor’s financial condition or business transactions might be ascertained is not absolute. A debtor may receive a discharge if the failure to keep records is “justified under all the circumstances.” Milam v. Wilson (In re Wilson), 33 B.R. 689, 692 (Bankr. M.D. Ga. 1983).
In particular, Plaintiff urges the Court to deny the Debtor a discharge because SHM did not maintain books and records sufficient to verify that Mr. Virani only received an average of $1,800.00 per month in income from SHM. But Section 727(a)(3) is aimed at a debtor’s actions. See Judgment Factors, L.L.C. v. Packer (In re Packer), 816 F.3d 87, 94 (5th Cir. 2016). No evidence was presented that the Debt- or had concealed, destroyed or failed to keep SHM records. By the petition date, the company was owned by Mr. Virani and by all accounts he was in control of the operations. While the Debtor had owned the company in 2013 and held a managerial position in 2013, no evidence demonstrated the Debtor was ever responsible for the operation of the business or for maintaining its books and records. Thus, the Court cannot conclude the Debtor has failed to keep adequate records of her assets or of SHM.
*367IY. Failure to Satisfactorily Explain Any Loss of Assets—11 U.S.C. § 727(a)(5)
Plaintiff pled Section 727(a)(5) as a basis for denying the Debtor a discharge, but little attention was paid to this particular section. The Court may deny the Debtor a discharge under Section 727(a)(5) if
the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities;
11 U.S.C. § 727(a)(5).
In an action under 11 U.S.C. § 727(a)(5), the objecting creditor has the initial burden of proof and must demonstrate: “(1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed or order of relief granted, the debtor no longer owned the assets; and (3) the bankruptcy pleadings or statement of affairs do not reflect an adequate explanation for the disposition of the assets.” Olympic Coast Inv., Inc. v. Wright (In re Wright), 364 B.R. 51, 79 (Bankr. D. Mont. 2007); Hawley v. Cement Ind., Inc. (In re Hawley), 51 F.3d 246, 249 (11th Cir. 1995). “A focus on the two years prior to the bankruptcy filing is common ... [but] [inquiries beyond the two-year period may be warranted.” Structured Asset Servs., L.L.C. v. Self (In re Self), 325 B.R. 224, 250 (Bankr. N.D. Ill. 2005) (cites omitted). Once the party objecting to the discharge establishes the basis for its objection, the burden then shifts to the debtor “to explain satisfactorily the loss.” Chalik, 748 F.2d at 619. But the “lost” assets must be estate assets.
“The question of whether a debtor satisfactorily explains' a loss of assets is a question of fact.” Id. (citing Shapiro & Ornish v. Holliday, 37 F.2d 407, 407 (5th Cir. 1930)). For an explanation to be unsatisfactory, the court does not have to find that a debtor is lying. In re D’Agnese, 86 F.3d 732, 734 (7th Cir. 1996). Under Section 727(a)(5), “[v]ague and indefinite explanations of losses that are based upon estimates uncorroborated by documentation are unsatisfactory.” Chalik, 748 F.2d at 619. “To be satisfactory, an explanation must convince the judge.” Id. (cite omitted); see e.g., First Texas Savings Ass’n, Inc. v. Reed (In re Reed), 700 F.2d 986, 993 (5th Cir. 1983) (cites omitted) (debtor’s explanation that $19,586.00 was consumed by business and household expenses and gambling debts was unsatisfactory). “Courts are not concerned with the wisdom of a debtor’s disposition of assets but, instead, focus on the truth, detail, and completeness of the debtor’s explanation of the loss.” Self, 325 B.R. at 250 (cites omitted). “Section 727(a)(5) requires that there be a satisfactory explanation of the loss of an asset, but does not require that the explanation be meritorious.... The court need only decide whether the explanation satisfactorily describes what happened to the assets, not whether what happened to the assets was proper”. Great American Ins. Co. v. Nye (In re Nye), 64 B.R. 759, 762 (Bankr. E.D. N.C. 1986); Bailey v. Whitehead (In re Whitehead) 483 B.R. 902, 910 (Bankr. E.D. Ark. 2012).
Plaintiff contends the Debtor disposed of cars and her portion of the 2014 tax refund without adequate explanation. Evidence was presented of the Debtor’s husband having previously owned cars and surrendered them, but this is the Debtor’s case' and not her husband’s case. As discussed previously, the Debtor and her husband stated that the 2014 tax refund was used to pay Mills & Hoopes, for school supplies for her children, and to pay,an accountant. While all of these expenses are not documented, the Court finds that the *368Debtor’s and her husband’s explanation as to her portion of the tax refund is satisfac-. tory.
V. Refusal to Comply with an Order— 11 U.S.C § 727(a)(6)
Finally, Plaintiff contends the Debtor’s discharge should be denied because she failed to fully comply with various orders of the Court related to the production of documents. Section 727(a)(6)(A) provides that the Debtor is not entitled to a discharge if she “has refused, in the case—(A) to obey any lawful order of the court, other than an order to respond to a material question or to testify.” Plaintiff must prove that there has been a violation of a lawful order of the court. In re Jordan, 521 F.3d 430, 433 (4th Cir. 2008). Once Plaintiff has demonstrated its case, the burden shifts to the debtor to prove that she has not committed the objectionable act or that there is some other defense. Connelly v. Michael, 424 F.2d 387, 389 (5th Cir. 1970). The term “refuse” is not defined in the Bankruptcy Code. Marcus v. Jeffries (In re Jeffries), 356 B.R. 661, 667 (Bankr. E.D. Va. 2006). However, the majority of courts have found that the term requires a showing of willful or intentional conduct, rather than simply mistake or inability to comply. See Jordan v. Smith, 356 B.R. 656, 659-60 (E.D. Va. 2006); aff'd in part, rev’d in part sub nom; In re Jordan, 521 F.3d 430 (4th Cir. 2008) (collecting cases). To satisfy his or her burden under Section 727(a)(6), the objecting party must demonstrate the debtor received the order in question and failed to comply with its terms. See Katz v. Araujo (In re Araujo), 292 B.R. 19, 24 (Bankr. D. Conn. 2003). Once done, the debtor is obligated to explain his or her failure to comply with the court order. Assocs. Commercial Corp. v. Reavis (In re Reavis), 92 B.R. 380, 383 (Bankr. W.D. Mo. 1988).
Courts have held that “[failure to timely produce discovery in an orderly, coherent fashion violates § 727(a)(6)(A) and may result in the denial of a debtor’s discharge”; however, “such failure to produce must be willful and not merely inadvertent.” Law Offices of Dominic J. Salfi, P.A. v. Prevatt (In re Prevatt), 261 B.R. 54, 60-61 (Bankr. M.D. Fla. 2000); see also In re Burrowes, 2011 WL 5035975, at *3 (mere failure to produce documents in response to order compelling production not equivalent to refusal under Section 727(a)(6)).
A denial of discharge should not be the primary remedy for discovery abuses. Instead, Fed. R. Bankr. P. 7037 provides for remedies in the event a party fails to participate in discovery or comply with a discovery order. The Court entered an order sanctioning the Debtor and her husband for failure to comply with certain discovery orders. Moreover, Section 727(a)(6) only applies when a debtor refuses to comply with the order, not simply fails to comply. Plaintiff is particularly irritated at the fact he had to subpoena documents from third parties rather than being provided documents by the Debtor. Many if not all of those documents were not in the Debtor’s possession, however. When a document is not in the debtor’s possession and can be as easily obtained by Plaintiff as by the defendant, the insistence on Plaintiff obtaining the documents independently does not equate to a refusal to comply with a court order. Plaintiffs complaint under Section 727(a)(6) fails.
VI. Plaintiffs Miscellaneous Arguments
In Plaintiffs written closing statement, he raises a number of other arguments the Court finds are not relevant to the Section 727 claim at issue. Plaintiff makes several arguments as to why the Defendant’s attorney, Evan Altman, should be sane-*369tioned. The Court notes Plaintiff has filed numerous motions to have Mr. Altman sanctioned and the Court has stated previously that all such motions -will be heard after the entry of this Order. Next, Plaintiff argues a trustee should pursue a number of preferences in this bankruptcy case. This is not a preference case, however, but Plaintiffs complaint to deny the Debtor a discharge. Whether preference actions are pursued is up to the judgment of the trustee. Plaintiff further argues the Debtor should not be entitled to certain exemptions, particularly of the tax refunds, because the refund was not identified initially nor was the exemption initially taken. The Court notes this action is not a hearing on any objection to exemptions. Plaintiffs objection to any exemptions of the Debtor will be dealt with separately following entry of this Order. Finally, this Court ruled in the Section 707 Order that Plaintiff had not established a basis for dismissal of the bankruptcy case under Section 707(a) or (b) of the Bankruptcy Code. Plaintiff continues to make many of the same arguments as to why the bankruptcy case should be dismissed. He argues the ease was a bad faith filing, that it was filed to avoid paying him, that different standards for dismissal should have been applied, and more. No need exists for further hearings on whether the bankruptcy case should be dismissed because, since the Debtor’s discharge is denied, dismissal of the bankruptcy case adds nothing.
CONCLUSION
Plaintiffs allegations that the Debtor’s discharge should be denied under Section 727(a)(2), (a)(3), (a)(5) and (a)(6) were not established by the evidence. It is undisputed, however, that the Debtor made numerous false statements and omissions in her Schedules and Statement of Financial Affairs. Given the number of mistakes, the obvious nature of many of the mistakes, and the Debtor’s and her husband’s history of making misrepresentations, the Court concludes the Debtor’s omissions and misstatements were made with a reckless indifference to the truth sufficient to constitute the requisite fraudulent intent for denying her a discharge under Section 727. Debtor’s discharge is denied under 11 U.S.C. § 727(a)(4).
As the Debtor’s discharge is denied in total, the portion of the complaint alleging Plaintiffs claim is non-dischargeable under Section 523 is moot, and is denied as such.
. One week after Plaintiff sought a fi fa in state court.
. As will be discussed later, the tax return actually shows the $7,058.00 in business income in 2013 as attributed to the Debtor as the 100% owner of SHM, rather than Mr. Virani.
. The Debtor's 2015 tax return includes a Form 1099 for $1,300.00 and the Debtor testified those payments show up as additional deposits in her bank account.
. The scheduled income from Mr. Virani is $1,800100 per month. The reported income to the IRS is $866.00 per month according to the 2015 tax returns. Thus, only if these "extra” payments exceed $1,000.00 per month (even if they were attributed as income to Mr, Virani) would they demonstrate that Mr. Vira-ni made more than $1,800.00 per month.
. According to the SHM 2013 corporate return, $7,058,00 of business income was attributable to the Debtor as well.
. Some courts view the "aggregate value” language listed in Question No, 3 as the aggregate of all payments made to all creditors, regardless of what is paid to any individual creditor, see Cadle Co. v. Leffingwell (In re Leffingwell), 279 B.R. 328, 347-48 (Bankr. M.D. Fla. 2002), whereas others look to aggregate payments made to each separate creditor during the relevant prepetition period, see Kaler v. Schrader (In re Schrader), 2006 WL 4392771, at *8 (Bankr. D.N.D. Aug. 11, 2006). It does not matter which approach the Court takes in the present case, as even if the funds paid to PFCU for the 2012 Toyota *358Camry were considered for the purposes of Question No. 3, the total amount paid to creditors would still be less than the $6,225 threshold required for non-consumer debtors.
. This statement, while not material in and of itself, is further evidence of the Debtor’s failure to read carefully tire Schedules before she signed them as it would have been obvious to her that Mills & Hoopes did not represent Mr. Modi.
. The Debtor's own written closing argument identified twelve "technical omissions or inaccuracies in Debtor's petition, Schedules and SOFA,"
. The Court regrets on the children's behalf that their father is using their credit to obtain property for the use of the family.
. The Court refused to dismiss the case on the grounds, inter alia, that she did not disclose her prior case or her husband's pending case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8500937/ | CONTESTED MATTER
ORDER ON SKUBIC DEFENSE TO DEBTOR’S MOTION FOR CONTEMPT AND SANCTIONS FOR VIOLATING THE AUTOMATIC STAY, DENYING SKUBIC’S MOTION FOR RELIEF FROM THE AUTOMATIC STAY, AND SCHEDULING STATUS CONFERENCE ON REMAINING ISSUES
Paul Baisier, U.S. Bankruptcy Court Judge
Before the Court is the Motion for Contempt and for Violation of the Automatic Stay, filed by the Debtor on November 25, 2015 (Docket No. 8), and amended by the Amended Motion for Contempt and for Violation of the Automatic Stay, filed on December 16, 2015 (Docket No. 19) (collectively, the “Sanctions Motion”), and the responsive pleadings thereto described in the next paragraph. Also before the Court is the Amended Motion for Relief from Stay filed by Matthew Skubic (“Skubic”) on January 4, 2016 (Docket No. 23) (the “Motion for Relief from Stay”).
Aisha Blanchard Collins (“Collins”), the Blanchard Collins Law Firm, LLC (the “Collins Law Firm”), and Elizabeth Anne (“Liz”) Shepherd (“Shepherd”), d/b/a Triple Threat Legal filed Respondent’s Memorandum of Law in Opposition- to Debtors’s[sic] Motion for Contempt and Sanctions for Violation of the Automatic Stay on December 12, 2015 (Docket No. 16)(the “Initial Response”). Skubic, Collins, the Collins Law Firm and Shephard (collectively, the “Respondents”) filed the Amended Response by Defendants Matthew Skubic, Aisha Blanchard Collins, Blanchard Collins Law Firm, LLC, and Elizabeth Ann Shepherd in Opposition to Debtor’s Motion for Contempt and Sanctions for Violation of the Automatic Stay on December 31, 2015 (Docket No. 22) (the “Amended Response”; the Initial Response and Amended Response, collectively, the “Response”).
In the Sanctions Motion, the Debtor seeks sanctions under 11 U.S.C. § 362(k) against the Respondents for the post-petition service on the Debtor of certain pleadings related to, among other things, the collection of a pre-petition award for attorneys’ fees. The Respondents argue that collection of the attorneys’ fees was excepted from the automatic stay and therefore sanctions are not warranted. Skubic also requests in the Motion for Relief From Stay that the Court confirm that no stay is in place vis a vis the collection for the prepetition attorneys’ fees or alternatively that the automatic stay be modified to permit such collection.
A number of hearings were scheduled on the Motion and Response. All of those hearings were ultimately continued at the request and with the consent of all the parties, and no substantive hearings on the Sanctions Motion or the Motion for Relief from Stay have ever been held. At a status conference set by the Court on January 10, *3722017, the parties requested that the Court rule on the pending pleadings and submissions on the issue of whether the relevant award of attorneys’ fees constitutes a “domestic support obligation” as defined in 11 U.S.C. § 101(14A). As part of that process, the Court directed the parties to file a stipulated set of facts regarding the award of the subject attorneys’ fees. In response, on April 14, 2017, the parties submitted a Joint Stipulation of Facts and Documents including all the documents and pleadings that were submitted to the Superior Court (defined below) in consideration and reconsideration of the relevant award of attorneys’ fees (Docket No. 83) (the “Joint Stipulation”).
For the reasons that follow, this Court finds that the Respondents actions did not qualify for the exception to the automatic stay that they assert applied. Further, there is not cause to modify the automatic stay.
BACKGROUND
Prior to the filing of this case, the Debt- or and Skubic, who have never been married, were parties to a legitimation and child custody action, commenced by Skubic as the father of the Debtor’s minor child, in the Superior Court of Fulton County, Georgia (the “Superior Court”). During the course of that action, the Superior Court entered several orders with regard to issues of paternity and parenting time. In the final order on paternity and parenting time (the “Parenting Order”)(attached as “Exhibit A” to the Amended Response), the Superior Court required the parties to submit supplemental pleadings to the extent they were requesting an award of attorneys’ fees (the “Fee Requests”). Both the Debtor and Skubic submitted letter briefs requesting same. See Exhibits “A” & “B” to the Joint Stipulation. Skubic sought attorneys’ fees under both O.C.G.A. §§ 19-9-31 and 9-15-142, while the Debt- *373or sought fees only under O.C.G.A. § 19-9-3. After evaluating their requests and submissions, the Superior Court awarded attorney’s fees in the amount of $36,000.00 to be paid by the Debtor to Skubic’s attorney (the “Fee Award”).3 See Order on Petitioner’s Motion for Attorney’s Fees (the “First Order”), attached as Exhibit “C” to the Joint Stipulation.4 In the First Order, the Superior Court stated, inter alia, the following with respect to its ruling on attorney’s fees:
Considering the submissions filed by each party, the financial conditions of the parties, the pleadings, the evidence at trial, the outcome of the trial, the settlement offers made and the billing statements submitted on this issue, the Court finds attorney’s fees to be appropriate, pursuant to O.C.G.A. Sec. 19-9-3.
First Order, at *1. Skubic subsequently filed a motion for contempt against the Debtor in the Superior Court on October 16, 2016, alleging that the Debtor had willfully failed to comply with the Superior Court’s orders with respect to selecting childcare providers, and by denying Skubic parenting time, refusing to communicate with him, and failing to pay attorney’s fees as awarded. See Petitioner’s Motion for Citation of Contempt against Respondent (the “Contempt Motion”), attached as Exhibit “D” to the Amended Response.
Prior to being served with the Contempt Motion, the Debtor filed this case on November 16, 2015 (the “Petition Date”). In the Sanctions Motion, the Debtor asserted that she filed notice of the filing of this case in the Superior Court and served it on Collins, who was Skubic’s attorney, on the Petition Date, and then also mentioned the filing to Skubic on November 17, 2015. Sanctions Motion at ¶ 6-8. The Debtor further asserted that she was contacted on November 24, 2015, by Shepherd, a process server, who was trying to coordinate a time and place to serve the Debtor with the Contempt Motion. Sanctions Motion at ¶ 9. The Debtor said that she told Shepherd that she had filed for bankruptcy and that service of the Contempt Motion was not permitted. Sanctions Motion at ¶9. Nonetheless, the Debtor alleges that:
Later in the day on November 24, 2015, the Debtor was approached by Respondent Shepherd as the Debtor was entering the Department of Motor Vehicles. When the Debtor attempted to continue into the building, Respondent Shepherd assaulted the Debtor, thrust the [Contempt Motion] at her, and informed her that she had been served. The Debtor then attempted to follow Respondent' Shepherd in order to take a picture of her and her vehicle. Respondent Shepherd got in her car and almost ran over the Debtor foot’s in an attempt to leave the scene and avoid pictures. ,.. During the assault, the Debtor heard her hip “pop” .... After her hip popped, the Debtor was in extensive pain and could not bear weight on her leg.
Sanctions Motion at ¶ 11-12. Finally, the Debtor alleged that Shepherd’s actions caused her pain and suffering, and that *374she had to seek medical treatment and therefore incurred medical and other expenses. Sanctions Motion at ¶ 12-13. Thus, the core of this dispute is whether the Respondents, including Skubic, willfully violated the automatic stay in connectión with Shepherd’s service of the Contempt Motion on the Debtor after the filing of this case.
The Respondents have admitted that the Contempt Motion was served on the Debt- or after this bankruptcy case was filed, and that they were aware of the filing at the time of service. The Debtor asserts this service was a violation of the automatic stay of 11 U.S.C. § 362(a). Respondents argue that the First Order explicitly states that the financial condition of the parties was a consideration in awarding fees, and therefore the Fee Award constitutes a “domestic support obligation” as defined in 11 U.S.C. § 101(14A) and service of the Contempt Motion was excepted from operation of the automatic stay pursuant to 11 U.S.C. § 362(b)(2)(B).5
The Debtor counters that, although the Superior Court refers to the “financial conditions of the parties” in the First Order, this Court cannot merely rely on such statement for two (2) reasons. First, the Debtor asserts that the Georgia statute cited by the Superior Court, O.C.G.A § 19-9-3, does not require consideration of the parties’ respective needs and ability to pay. See Viskup v. Viskup, 291 Ga. 103, 107, 727 S.E.2d 97 (2012). Without clear evidence of such a review, the Debtor asserts that it should not be presumed.
Second, the Debtor claims that, other than the Superior Court’s statement in the First Order, there is no indication in the Superior Court record, and none has been presented herein, that the Superior Court actually considered any evidence of the financial condition of the parties other than their financial affidavits. See Domestic Relations Financial Affidavits (each, a “DRFA”), Skubic’s DRFA on pp. 45-51 of the Joint Stipulation; Debtor’s DRFA on pp. 53-63 of the Joint Stipulation. The Debtor further states that, even if the Superior Court reviewed the DRFAs, they show Skubic enjoyed a better economic position than the Debtor, so he could not have been in a position of need for purposes of the Fee Award. Thus, the Debtor urges this Court to examine the parties’ respective financial means at the time of, the Fee Award (as it was presented to the Superior Court) in evaluating Respondents’ assertion, as a defense to the Sanctions Motion, that Skubic was collecting a “domestic support obligation.”
Similarly, given that O.C.G.A. § 19-9-3 does not require such an inquiry, the Debt- or contends any ambiguity in determining this issue due to the absence of support on the record should be construed against Respondents, as it is their burden to prove a viable defense to an allegation of violation of the automatic stay. See Jove Eng’g, Inc. v. I.R.S., 92 F.3d 1539, 1556 (11th Cir. 1996).
DISCUSSION6
Title 11 of the United States Code (the “Bankruptcy Code”) provides that the au*375tomatic stay is imposed upon the filing of a bankruptcy case. 11 U.S.C. § 362(a).7 Exceptions to the stay are set forth in 11 U.S.C. § 362(b), which provides, in pertinent part:
“(b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 6(a)(3) of the Securities Investor Protection Act of 1970[15 U.S.C. § 78eee(a)(3) ], does not operate as a stay-
(2) under subsection (a)—
(A) of the commencement or continuation of a civil action or proceeding—
(i) for the establishment of paternity;
(ii) for the establishment or modification of an order for domestic support obligations;
(iii) concerning child custody or visitation ...
(B) of the collection of a domestic support obligation from property that is not property of the estate
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11 U.S.C. § 362(b)(2)(A)(i)-(iii) & (B).
The Bankruptcy Code defines a domestic support obligation (a “DSO”) as:
“(14A) [A] debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is-
(A) owed to or recoverable by-
(i) a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or
(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent,' without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record;
(iii) a determination made in accordance with applicable nonbank-ruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s .parent, legal guardian, or responsible relative for the purpose of collecting the debt.”
11 U.S.C. § 101(14A).
The question before the Court is whether an exception to the automatic stay applies to the service of the Contempt Mo*376tion on the Debtor. Under the applicable law as set forth above, the question boils down to the following: if the Fee Award is a DSO, then the service of the Contempt Motion may have been excepted from the automatic stay of 11 U.S.C. § 362(a) pursuant to 11 U.S.C. § 362(b)(2)(B).8 Conversely, if the Fee Award is not a DSO, then the service of the Contempt Motion was not excepted from the stay. Because the question of whether the Fee Award is a DSO is obviously critical to the foregoing analysis, the parties have requested the Court to decide it at this time.
The Fee Award Is Not A DSO
In this case, it is undisputed that the Fee Award (i) is owed to the parent of a child of the Debtor; (ii) was established by a prepetition order from the Superior Court; and (iii) is not assigned to a nongovernmental entity. Thus, the only open question in determining whether the Fee Award is a DSO is whether the Fee Award is “in the nature of alimony, maintenance, or support” of Skubic or his child with the Debtor. The standard for whether attorneys’ fees are in the nature of alimony, maintenance, or support has been addressed by the Unitéd States Court' of Appeals for the Eleventh Circuit. See Strickland v. Strickland (In re Strickland), 90 F.3d 444 (11th Cir. 1996).9
Federal law, not state law, controls whether an award is “in the nature of alimony, maintenance, or support”, as used in the Bankruptcy Code. Strickland, 90 F.3d at 446. Therefore, even if, under state law, an award is couched as one that is in the nature of alimony, maintenance or support, that determination is subject to examination in a bankruptcy case under federal law. The Eleventh Circuit held that whether an award of attorneys’ fees constitutes support is a “simple inquiry” that “requires bankruptcy courts to determine nothing more than whether the support label accurately reflects that the obligation at issue is ‘actually in the nature of alimony, maintenance, or support.’ ” Id. (quoting Harrell v. Sharp (In re Harrell), 764 F.2d 902, 906 (11th Cir. 1986)). The Bankruptcy Code also explicitly provides that the label given to such an award in a court order is not determinative. 11 U.S.C. § 101(14A)(B) (“... without regard to whether such debt is expressly so designated”).
However, any attempt to expand the analysis into “an assessment of the ongoing financial circumstances ... would of necessity embroil federal courts in do*377mestic relations matters which should properly be reserved to the state courts.” Strickland, 90 F.3d at 447 (quoting Harrell, 754 F.2d at 907). Though the role envisioned for the bankruptcy court does permit some level of review, the Court should not embark upon its own investigation into the parties’ finances without proper justification. If the facts of a case make it clear that the related state court award is in the nature of alimony, maintenance or support, then a bankruptcy court should not conduct any further review. Conversely, if there is ambiguity in the state court order, or the facts of the case do not otherwise seem to support such a characterization, then a limited review is warranted.
In this case, the First Order lists multiple factors that were considered by the Superior Court in granting the Fee Award, only one of which was the relative financial needs of the parties, and the Superior Court did not specify the weight that it gave to the various factors. Further, the statute to which the Superior Court cited for support of the Fee Award, O.C.G.A. § 19-9-3, does not require an evaluation of the relative financial condition of the parties or base entitlement to the award on such an evaluation. Therefore, based on the ambiguity in the Fee Award, and the requirements of the statute supporting it, this Court will conduct a limited review to determine if the Fee Award is really in the nature of alimony, maintenance, or support.
As set forth in Strickland, this Court must conduct a “simple inquiry” into whether the attorneys’ fees award in this case is truly in the nature of alimony, support, or maintenance. In the Joint Stipulation, the parties submitted the pleadings and exhibits that were submitted to the Superior Court for its consideration of the Fee Award. Included in those submissions was a DRFA disclosing each party’s gross and net income and all assets owned in each party’s name. Neither the Debtor nor the Respondents have asserted that the information contained in any of the DRFAs is inaccurate or incomplete, or that any other financial information was submitted to the Superior Court.
According to Skubic’s DRFA, he had gross income of $6,500 per month, net monthly income of $4,420, and monthly expenses averaging $4,307. Additionally, Skubic had $240,000 in stocks and bonds, $13,800 in an IRA, and $11,000 in a checking account. He also owned real property with a fair market value of $230,000 and $77,000 in net equity, as well as a 2007 Toyota 4Runner with a fair market value of $14,000 and a 1985 BMW 535i with a fair market value of $2,000, as well as $6,000 worth of miscellaneous assets. Sku-bic’s overall net worth was $363,800. See Joint Stipulation, at *45-51. Through the Superior Court litigation, Skubic incurred $118,106.73 in attorneys’ fees and $28,178.15 in costs, including drug tests (all showing negative results) and supervision fees that the Debtor required, plus costs for the court-ordered custody evaluation, mediation, and late case evaluation. The fees and expenses incurred by Skubic totaled $146,284.88. See Joint Stipulation, at *72.
By comparison, according to the Debt- or’s DRFA, she had gross income of $6,044 per month, net monthly income of $4,678, and monthly expenses averaging $6,567. She had $15,000 in a 401 (k), $4,000 in an I.R.A., and $30,000 in checking and savings accounts. She also owned real property with a fair market value of $340,000 and $41,000 in net equity, as well as a 2005 Nissan Murano with a fair market value of $6,000. The Debtor’s overall net worth was $96,000. See Joint Stipulation, at *53-61. Through the Superior Court litigation, the *378Debtor incurred $114,027.34 in total attorneys’ fees and expenses. See Joint Stipulation, at *6.
Based on the above information, the Debtor and Skubic have very similar incomes. They both incurred similar amounts of attorneys’ fees. The Debtor pays about $2,000 more a month in expenses, and Skubic has approximately $267,800 more in net assets than the Debt- or. Although the Superior Court did recite that it considered the financial condition of the parties, it does not appear that ordering the Debtor, who has greater expenses and less assets than Skubic, to pay a portion of Skubic’s attorneys’ fees could possibly have been based on the financial needs of Skubic or the minor child.10 Rather, as is set forth in the First Order, the Court also considered other things, including the submissions by the parties, the pleadings, the evidence at trial, the "outcome of the trial, the settlement offers made and the billing statements submitted on this issue, and it appears that those matters, rather than any notion of support, resulted in the Fee Award.
In the Superior Court, Skubic was seeking attorneys’ fees under both O.C.G.A. § 19-9-3 and O.C.G.A. § 9-15-14. That latter statute provides attorneys’ fees where a party brings or defends an action lacking substantial justification, ie., as a sanction for frivolous or wrongful conduct. Although Skubic’s letter brief asserted that attorneys’ fees were proper under both O.C.G.A. §§ 19-9-3 and 9-15-14, only one (1) paragraph of his brief, including only a quote of O.C.G.A. § 19-9-3, addressed his request for attorneys’ fees under that section. By contrast, four (4) pages of his brief were devoted to setting forth the misconduct of the Debtor and the allegedly frivolous pleadings and positions taken by the Debtor11 that warranted attorneys’ fees pursuant to O.C.G.A. § 9-15-14.12
Based on the above, this Court finds that the First Order is unclear as to how *379much weight the Superior Court gave to consideration of the relative financial needs of the Debtor and Skubic, and whether that award was in any way intended as support. Although the Superior Court stated that it had taken into account the financial condition of the parties, financial condition was one of many factors that the Superior Court listed as consideration for the Fee Award. Unfortunately, the Superior Court did not provide further detail as to how much weight was given to any one factor. The ambiguity is heightened because the statute pursuant to which the Fee Award was expressly made does not itself require consideration of the financial condition of the parties in making an award, nor does it condition an award on the needs of the recipient.
Because the First Order is unclear as to how much consideration was given to the financial needs of the parties, and because the underlying statute did not even require the Superior Court to consider such, pursuant to Strickland and 11 U.S.C. § 101(14A), this Court makes its own determination as to whether the Fee Award is a DSO. Based on this Court’s own simple inquiry into what the Superior Court considered in making the Fee Award, it appears that the Superior Court must have given great weight to the other factors it mentioned, which would include the numerous instances of wrongful conduct by the Debtor asserted by Skubic, and therefore this Court finds that the Fee Award is primarily a sanction for the Debtor’s conduct, was not in the nature of alimony, maintenance, or support, and is thus not a DSO. Consequently, 11 U.S.C. § 362(b)(2)(B) did not apply to the service of the Contempt Motion to th,e extent it sought payment of the Fee Award by the Debtor.13
No Cause to Grant the Motion for Relief from Stay
In the Motion for Relief from Stay, Skubic is seeking, inter alia, an order confirming that prosecution of the Contempt Motion as related to collection of the Fee Award is excepted from the automatic stay for the same reasons asserted in the Response. Because this Court finds that the Fee Award does not constitute a DSO, no valid cause is set forth in the Motion for Relief from Stay to modify the automatic stay to allow Skubic to attempt to collect the Fee Award outside of this bankruptcy case.
Accordingly, for the reasons set forth above, it is
ORDERED that 11 U.S.C. § 362(b)(2)(B) did not apply to the service of the Contempt Motion to the extent it sought payment of the Fee Award by the Debtor. It is further
ORDERED that the Motion for Relief, to the extent not already granted pursuant to this Court’s Order of May 23, 2016 (Docket No. 68), is DENIED. It is further
ORDERED that the Court will hold a status conference with regard to the Motion for Sanctions and the Motion for Protective Order and to Quash Subpoena (Docket No. 51) on August 23, 2017 at 1:30 p.m. in Courtroom 1202 at the Richard B. *380Russell Federal Building and United States Courthouse, 75 Ted Turner Drive S.W., Atlanta Georgia 30S03.
The Clerk’s Office is directed to serve a copy of this Order upon the Debtor, counsel for the Debtor, Respondents, counsel for Respondents, the Chapter 7 Trustee, and the acting United States Trustee.
. This statute provides, in pertinent part:
Except as provided in Code Section 19-6-2 [regarding types of custody actions not applicable in this case], and in addition to the attorney’s fee provisions contained in Code Section 19-6-15 [child support], the judge may order reasonable attorney’s fees and expenses of litigation.. .and other costs of the child custody action and pretrial proceedings to be paid by the parties in proportions and at times determined by the judge. O.C.G.A. § 19-9-3(g).
. This statute provides, in pertinent part:
(a)In any civil action in any court of record of this state, reasonable and necessary attorney’s fees and expenses of litigation shall be awarded to any party against whom another party has asserted a claim, defense, or other position with respect to which there existed such a complete absence of any justiciable issue of law or fact that it could not be reasonably believed that a court would accept the asserted claim, defense, or other position, Attorney's fees and expenses so awarded shall be assessed against the party asserting such claim, defense, or other position, or against that party's attorney, or against both in such manner as is just.
(b) The court may assess reasonable and necessary attorney’s fees and expenses of litigation in any civil action in any court of record if, upon the motion of any party or the court itself, it finds that an attorney or party brought or defended an action, or any part thereof, that lacked substantial justification or that the action, or any part thereof, was interposed for delay or harassment, or if it finds that an attorney or party unnecessarily expanded the proceeding by other improper conduct, including, but not limited to, abuses of discovery procedures available under Chapter 11 of this title, the "Georgia Civil Practice Act.” As used in this Code section, "lacked substantial justification” means substantially frivolous, substantially groundless, or substantially vexatious,
(c) No attorney or party shall be assessed attorney’s fees as to any claim or defense which the court determines was asserted by said attorney or party in a good faith attempt to establish a new theory of law in Georgia if such new theory of law is based on some recognized precedential or persuasive authority.
*373O.C.G.A. § 9-15-14(a)-(c),
. The Superior Court also ordered that the Debtor reimburse Skubic for one half (1/2) of the costs associated with supervised parenting visits, mediation, late case evaluation, and for the custody evaluator, though no specific dollar amount was provided in the First Order. See First Order, passim.
. In response to a motion to reconsider and clarify, the Superior Court entered a second order on May 15, 2015, denying the Debtor’s request to reconsider the Fee Award and clarifying the First Order in certain respects not materiál to this matter. See Order on Respondent's Motion for Reconsideration of Award of Attorney's Fees (the “Second Order1’), attached as Exhibit "F" to the Joint Stipulation.
. As to the balance of the relief sought in the Contempt Motion, Respondents rely on the exception to the stay provided in Section 362(b)(2)(A)(iii) with respect to the continuation of an action “concerning child custody or visitation.” Partial relief from the automatic stay, allowing Skubic to continue prosecution of the Contempt Motion as it relates to custody, parenting and visitation (but not as it relates to the Fee Award) and noting the applicability of that exception to those parts of the Contempt Motion, was provided by Order of this Court on May 24, 2016 (Docket No. 68).
. This Court has jurisdiction over this matter under 28 U.S.C. § 1334. Venue is proper in *375this Court under 28 U.S.C. § 1409. This matter is a core proceeding under 28 U.S.C. § 157(b)(2).
. 11 U.S.C § 362(a) provides, in pertinent part:
"(a) [A] petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of-
il) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor ...;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title
. The Respondents asserted in their Response that 11 U.S.C. § 362(b)(2)(B) applied to their activities. In response, the Debtor has only asserted that Fee Award is not a DSO. No party in any pleading has addressed how Respondents' actions were an effort to collect only from property that is not property of the estate (presumably the Debtor’s post-filing wages and property abandoned by the Chapter 7 trustee), which is the second element of § 362(b)(2)(B). Had the Court determined that the Fee Award was a DSO, this failure of proof might nevertheless have proved fatal to Respondents' proposed defense, as the Respondents have the burden of proof as to their defense, Jove Eng'g, Inc., 92 F.3d at 1556, and have provided no proof on this issue.
. Although Strickland was decided under a prior version of 11 U.S.C. § 523(a)(5), the analysis of what is "in the nature of alimony, maintenance or support” for the purposes of the definition of a "domestic support obligation” under 11 U.S.C. § 101(14A) should be the same as the analysis that the 11th Circuit applied to those same words in Strickland and its other cases under the prior version of 11 U.S.C. § 523(a)(5). Although the prior version of 11 U.S.C. § 523(a)(5) contained the word "actually” before the applicable phrase, arid 11 U.S.C. § 101(14A)(B) does not, 11 U.S.C. § 101(14A)(B) finishes with the additional phrase "without regard to whether such debt is expressly so designated”, which has the same effect on the applicable phrase as "actually” had on it in the prior version of 11 U.S.C. § 523(a)(5).
. Because Skubic and the Debtor had never been married, and the Superior Court action was not a divorce but a legitimization action involving their child, the Debtor would not have had any legal obligation to support Sku-bic, making it extremely unlikely that the Fee Award constitutes support for Skubic. It is also extremely unlikely that the Fee Award was made in support of the child, since the Debtor has primary custody of the child under the Parenting Order, and thus taking money from her to give to Skubic, who was in a better financial position than the Debtor at the time of the award, could not in any obvious way benefit the child.
. Skubic asserted that the Debtor had required supervised visits despite no court order requiring same and a recommendation from the court-appointed doctor, Dr. Michelle Green, who evaluated custody, that Skubic be allowed unsupervised visits. Skubic further complained that Dr. Green had recommended that Skubic be allowed one 24-hour parenting period per week during the first three (3) months, and increasing to three 48-hour periods per month. Skubic had proposed such parenting plan to the Debtor on March 14, 2014. Then, on April 11, 2014, Skubic asserts that the Debtor unilaterally decided that Sku-bic was not entitled to any overnight parenting periods, forcing Skubic to file a motion for emergency hearing on temporary custody and parenting time. Pursuant to that motion, the Superior Court ordered the parties to attend "Late Case Evaluation.” Skubic finally complained that the parties agreed upon a co-parenting counselor, David Alexander, but when Mr. Alexander was contemplating allowing Skubic to take the child for 72 hours to attend a wedding, the Debtor stopped paying her portion of Mr. Alexander’s fees.
.The notion that the Fee Award was made as a sanction is further supported by the provision, in a footnote to the paragraph of the Parenting Order that permitted the parties to request attorneys’ fees, expressly shortening the period for requesting such fees under O.C.G.A. § 9-15-14. See Parenting Order, p. 12, fn. 8.
. Nothing in the foregoing constitutes a determination that the Debtor is entitled to an award of sanctions or damages in connection with such actions, an issue that the Court expressly reserves. Without ruling on any such issues, which are not presently before the Court, the possible good faith belief by the Respondents that several stay exceptions applied to the service of the Contempt Motion on the Debtor, together with causation issues arising from the Debtor’s own actions after having been served with the Contempt Motion (as described in the Sanctions Motion) are among the issues that would have to be overcome by the Debtor before the Court could consider any such award. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501217/ | RICHARD E. FEHLING, United States Bankruptcy Judge
AND NOW, this 25 day of January, 2018, for the reasons discussed and stated in the accompanying Memorandum Opinion entered of even date herewith, IT IS HEREBY ORDERED that JUDGMENT IS HEREBY ENTERED IN THE ADVERSARY PROCEEDING IN FAVOR OF PLAINTIFF IN PART AND IN FAVOR OF DEFENDANT IN PART.
IT IS FURTHER ORDERED that $31,500 of the $54,500 debt owed by Defendant to Plaintiff is HEREBY NONDISCHARGEABLE under Section 11 U.S.C. § 523(a)(5) because it is a DSO.
IT IS FURTHER ORDERED that the remainder of the debt owed by Defendant to Plaintiff ($23,000) is HEREBY FOUND TO BE DISCHARGEABLE because it is in the nature of a property settlement.
*324IT IS FURTHER ORDERED that Defendant's Claim Objection is HEREBY SUSTAINED and Plaintiff's claim is HEREBY DISALLOWED.
IT IS FURTHER ORDERED that Plaintiff's request for additional attorneys' fees in excess of the $4,500 determined by the state court judge is DENIED WITHOUT PREJUDICE. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501218/ | Stacey G. Jernigan, United States Bankruptcy Judge
CAME ON FOR TRIAL on August 23, 2017 and October 11, 2017 (the "Trial"), the above-referenced Adversary Proceeding (herein so called) filed by LaDainian and LaTorsha Tomlinson (collectively, the "Plaintiffs-Creditors" or the "Tomlinsons"), in which the Plaintiffs-Creditors objected to the dischargeability of a debt owed to them by the Defendant-Chapter 7 Debtor, Steven Andrew Clem (the "Defendant-Debtor"), pursuant to section 523(a)(2)(A) of the Bankruptcy Code. The court has determined that the Plaintiffs-Creditors have established a nondischargeable debt, pursuant to section 523(a)(2)(A) of the Bankruptcy Code, as further set forth herein. The court issues these Findings of Fact and Conclusions of Law in support of this decision, pursuant to *335Fed. R. Bankr. Pro. 7052. Any Finding of Fact that should more properly be characterized as a Conclusion of Law should be deemed as such, and vice versa .
I. INTRODUCTION.
The Adversary Proceeding is a nondischargeability action in which section 523(a)(2)(A) of the Bankruptcy Code is at issue. It involves a contract (the "Contract") entered into on April 30, 2015, between the Tomlinsons and Bella Vita Custom Homes, LLC ("Bella Vita"), for a $4,483,185.72 luxury, custom-built home (the "Home") in North Texas. The Defendant-Debtor was the "chief executive officer" of the homebuilder, Bella Vita, and was also the approximately 50% owner of Bella Vita (with his father and father-in-law collectively owning the remaining 50% of Bella Vita).1 The Tomlinsons' Home (at 18,000 square feet) would be the largest house that Bella Vita ever contracted to build.
Things went significantly awry with the early construction efforts on the Home. Among other things, Bella Vita admittedly undertook undisclosed/unapproved construction changes. Specifically, Bella Vita made the decision to utilize helical steel piers on the large Home-something atypical and that the Defendant-Debtor and Bella Vita had no experience using in the past-instead of the concrete piers that were specified in the Contract's original design plans. Bella Vita made this decision after encountering subsurface water when drilling holes for the contemplated concrete piers (something that should have been foreseeable because of available reports), and after further realizing that the concrete piers would have to be "cased" because of instability in the holes Bella Vita had drilled. The Contract provided that any change in the building plans required written approval of the Plaintiffs-Creditors. Not only did Bella Vita not obtain written approval from the Plaintiffs-Creditors for the switch to helical piers (or disclose initially that helical piers were being substituted) but, while drilling for installation of the helical piers, Bella Vita and/or its subcontractors failed to locate and punctured a water line-causing extensive flooding on the building pad and adjacent land. The Tomlinsons learned (rather belatedly) about the flooding from a neighbor. In addition to these construction issues, the Tomlinsons grew frustrated with Bella Vita for its alleged failure to account for usages of the Tomlinsons' 10% initial deposit and subsequent draw requests. On August 7, 2015, after the Plaintiffs-Creditors had paid $655,318.57 toward the purchase price of the Home, they terminated the Contract. From there, the disputes between the Plaintiffs-Creditors and Defendant-Debtor escalated and evolved into many stages.
Stage One: Prepetition Arbitration . On September 8, 2015, the Plaintiffs-Creditors filed a lawsuit against both Bella Vita and the Defendant-Debtor in the 153rd Judicial District Court of Tarrant County, Texas (the "State Court"). That court ordered the parties to participate in arbitration with the American Arbitration Association (the "Prepetition Arbitration"). The Plaintiffs-Creditors asserted numerous causes of action in the Prepetition Arbitration including at least the following: breach of contract/breach of warranty (Count A); negligence and malice/gross negligence *336(Count B); negligent misrepresentation (Count C); violations of numerous provisions of the Texas Deceptive Trade Practices Act ("DTPA")2 (Count D); fraud and fraud in the inducement or by nondisclosure (Count E); fraud in a real estate transaction (Count F); unconscionable, knowing, or intentional course of action (Count G); conversion (Count H); and various other doctrines or remedies were pleaded (estoppel, alter ego, and joint enterprise).3 Approximately a year later, on September 26, 2016, the Plaintiffs-Creditors were awarded damages by an arbitration panel (the "Arbitration Panel") against both the Defendant-Debtor and Bella Vita, jointly and severally, in the amount of $744,711-which was later adopted into a Final Judgment Confirming Arbitration Award entered by the State Court on September 30, 2016 (the "Arbitration Award").4
The Arbitration Award is somewhat confusing. It recited various instances in which Bella Vita and the Defendant-Debtor failed to comply with the Contract. More importantly (for purposes of this section 523(a)(2)(A) Adversary Proceeding), the Arbitration Award also recited various examples of false representations made by Defendant-Debtor (for example, the Defendant-Debtor falsely represented that he would put a full-time superintendent, full-time project manager, and full-time project liaison on the Plaintiffs-Creditors' job and he did not; and he represented that a builder's risk insurance policy had been purchased when, in fact, it had not ). The Arbitration Award stated that the evidence presented supported "both a breach of contract cause of action and a DTPA cause of action against Bella Vita ." Although the Plaintiffs-Creditors had cited in their "Statement of Claims" filed with the Arbitration Panel5 more than a half-dozen specific provisions of the DTPA that Bella Vita and Defendant-Debtor allegedly violated,6 the Arbitration Award did not state which specific provisions of the DTPA may have been violated. Then, the Arbitration Award went on to award "economic damages" for DTPA violations jointly and severally against both Bella Vita and the Defendant/Debtor in the amount of $677,053.50 (another $67,657.50 was added to this award for arbitration fees and expenses of the American Arbitration Association previously incurred by the Plaintiffs-Creditors, bringing the total of the award to $744,711). The Arbitration Award did not explain the basis for joint and several liability against both Bella Vita and the Defendant-Debtor. However, this court notes that, under the DTPA, a consumer may bring suit against any person whose false, misleading, or deceptive acts, or other practices enumerated in the Act are the producing cause of the consumer's harm.7 The DTPA broadly defines "person" as "an individual, partnership, corporation, association, or other group, however organized."
*3378 The DTPA is a consumer protection statute, and according to the Texas Legislature, is to be construed liberally to promote its central purpose.9 The Texas Supreme Court has stated that, if there is evidence that an agent of a separate legal entity personally made misrepresentations, then that agent can be held personally liable under the DTPA.10 In fact, the Texas Supreme Court has concluded that when corporate officers make affirmative misrepresentations in connection with the sale of a home, the agents are personally liable under the DTPA even though they were acting on behalf of the corporation.11 Liability attaches because the officers themselves made the misrepresentations . In any event, the Arbitration Award stated that the "actions of Clem and Bella Vita do not constitute a knowing violation of the DTPA."12 Further, the Arbitration Award went on to deny the Tomlinsons' claims for negligence and gross negligence as "barred by the economic loss rule." The Arbitration Award also stated that the Tomlinsons' claims for "misrepresentation, fraud , fraud in the sale of real estate, conversion, estoppel, alter ego, and joint enterprise were not sustained by a preponderance of the evidence and are, therefore, denied. "13
Stage Two: The Bankruptcy Case and Questions About the Preclusive Effect of the Tomlinsons' Arbitration Award. The Defendant-Debtor filed a Chapter 7 bankruptcy case on December 14, 2016. Soon thereafter, the Plaintiffs-Creditors filed the above-referenced Adversary Proceeding. On May 25, 2017, the Plaintiffs-Creditors filed an Amended Complaint in this Adversary Proceeding,14 arguing, *338among other things, that the debt owed to the Plaintiffs-Creditors pursuant to the Arbitration Award is not dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), as the Defendant-Debtor allegedly made numerous false representations to the Plaintiffs-Creditors in connection with the Contract, on which Plaintiffs-Creditors relied to their detriment. These allegedly false representations included such things as: representing that the Defendant-Debtor's company was qualified to perform the work under the Contract; representing that the work would be performed in a good and workmanlike manner and in accordance with first-class custom home building practices; representing that the work would be in compliance with design plans; representing that a builder's risk insurance policy was in place on Plaintiffs-Creditors' project, and charging the Plaintiffs-Creditors for the same; representing that the Plaintiffs-Creditors' upfront payment of ten percent (10%) of the total Contract price would go only towards the Plaintiffs-Creditors' project; representing that a full-time superintendent and full-time project manager would be on the project, as well as a personal liaison to coordinate design selections; representing that subcontractors working on the Plaintiffs-Creditors' project were being paid; and representing that the Plaintiffs-Creditors would receive lien releases for work performed by subcontractors. The Plaintiffs-Creditors sought to have the full $744,711 Arbitration Award declared nondischargeable.
The Defendant-Debtor soon thereafter filed a "Motion for Summary Judgment Based on Res Judicata Affirmative Defense,"15 arguing that the Plaintiffs'-Creditors' section 523(a)(2)(A) claims and issues were barred by "res judicata" because fraud was asserted in the Prepetition Arbitration by the Plaintiffs-Creditors and such claims were denied in the Arbitration Award . The Defendant-Debtor argued that res judicata precludes relitigation of claims fully adjudicated, or that arise out of the same subject matter and that could have been litigated in the prior action.16 Additionally, for purposes of res judicata, the Defendant-Debtor argued that a judgment or decree confirming an arbitration award operates as a final judgment.17
The Inapplicability of the Res Judicata Doctrine. Under res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating claims that were or could have been raised in that action.18 Res judicata, of course, requires proof of the following elements: (a) a prior final judgment on the merits by a court of competent jurisdiction; (b) identity of parties or those in privity with them; and (c) a second action based on the same claims as were raised or could have been raised in the first action.19 Preliminarily, this court agreed that, *339as a general matter, the res judicata doctrine is applicable to judgments or decrees confirming arbitration awards .20 However, it soon became clear that the Defendant-Debtor was arguing an inapplicable doctrine. The United States Supreme Court, in Brown v. Felsen, held that the doctrine of res judicata (i.e., claim preclusion) does not apply in bankruptcy dischargeability proceedings.21
In Brown v. Felsen , a guarantor of the debtor's debt had obtained an agreed judgment against the debtor in a prepetition state court collection suit that had been brought by a lender against both the debtor and guarantor. The agreed judgment did not specify the cause of action on which the agreed liability was based (contribution and indemnity? fraud? something else?). When the judgment debtor later filed bankruptcy, the guarantor sought to have the debt declared nondischargeable on the basis that the debtor had engaged in fraud, deceit, and malicious conversion in connection with underlying indebtedness that the guarantor had guaranteed. The bankruptcy court held that res judicata precluded the guarantor from relitigating the nature of the debt and from offering further evidence beyond that offered in the state court. The Supreme Court disagreed, holding that the bankruptcy court was not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of respondent's debt. The Supreme Court first noted the general proposition that res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding and, thus, encourages reliance on judicial decisions, bars vexatious litigation, and frees the courts to resolve other disputes. But here, the litigants were not in the typical situation in which res judicata is raised-where a litigant might go into a new court and assert a new ground for recovery, nor was this the case of a litigant attacking the validity of a prior judgment. Rather, the guarantor was, essentially, attempting to meet the new "defense" of bankruptcy-which the debtor had interposed between the guarantor and the sum earlier determined to be due him. In summary, Brown v. Felsen made clear that a creditor who obtains a prepetition judgment that is not based on fraud is not barred by res judicata from objecting to the dischargeability of his judgment, pursuant to section 523 (and, thus, from alleging fraud in the section 523 context). Significantly, the Supreme Court noted that the Brown v. Felsen case concerned res judicata only, and not the narrower principle of collateral estoppel.22 "Whereas res judicata forecloses all that which might have been litigated previously, *340collateral estoppel treats as final only those questions actually and necessarily decided in a prior suit .... If, in the course of adjudicating a state-law question, a state court should determine factual issues using standards identical to those of [predecessor to section 523 ], then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court."
The Tougher Question of Applicability of the Collateral Estoppel Doctrine. As with the doctrine of res judicata, case law holds that findings in an arbitration award can have collateral estoppel effects.23 The Fifth Circuit has stated, "if the first determination of an issue occurred in an arbitration which afforded litigants the 'basic elements of adjudicatory procedure,' a district court may find in a proper case that the arbitral award collaterally estops relitigation of the previously determined issues."24 Nevertheless, the application of collateral estoppel from arbitral findings is not required but is a matter within the broad discretion of the court.25
Twelve years after Brown v. Felsen , the Supreme Court elaborated upon what it had merely hinted at in Brown v. Felsen , regarding the possible applicability of collateral estoppel in nondischargeability proceedings, in the case of Grogan v. Garner.26 In Grogan , the Supreme Court primarily addressed the standard of proof in nondischargeability actions (i.e. , that it is preponderance of the evidence and not clear and convincing evidence). However, the Court also stated that, while it had "suggested" in Brown v. Felsen that principles of collateral estoppel (in contrast to res judicata) may apply in dischargeability actions, it was now officially clarifying that collateral estoppel (issue preclusion) can indeed prevent a bankruptcy court from determining dischargeability issues itself.27 Specifically, the Court noted that, if a creditor obtains a prepetition fraud judgment, its claim will be exempt from discharge under collateral estoppel principles if the elements of the fraud claim that resulted in the judgment are the same as those of the fraud discharge exception.
It should be noted, as a general principle, that, to determine whether a prior judicial fact finding from a state court or tribunal should be given collateral estoppel effect, a federal court must look to state law to determine the collateral estoppel effect (same as with res judicata).28 Under Texas law, a party seeking to invoke *341the doctrine of collateral estoppel must establish: (1) the facts sought to be litigated in the second action were fully and fairly litigated in the prior action, (2) those facts were essential to the judgment in the first action, and (3) the parties were cast as adversaries in the first action.29 This is similar to the Fifth Circuit's requirements for application of collateral estoppel, which are: (1) that the issue under consideration is identical to the issue previously litigated, (2) that the issue was fully and vigorously litigated in the primary proceeding, (3) that the previous determination of the issue was necessary for the judgment in that proceeding, and (4) that no special circumstances exist that would render preclusion inappropriate or unfair.30
The Fifth Circuit elaborated upon the applicability of the doctrine of collateral estoppel in dischargeability actions significantly in the case of Dennis v. Dennis .31 In Dennis , a plastic surgeon filed bankruptcy, and his ex-wife sought to have excepted from discharge a debt owing to her, alleging that it was in the nature of "alimony, maintenance, or support" (pursuant to section 523(a)(5) of the Bankruptcy Code, as it was worded at the time of the Dennis bankruptcy).32 The debt was an obligation of the husband-debtor to pay taxes on the ex-wife's share of retirement benefits awarded to her in their long-resolved divorce case. During the divorce case, the parties had agreed that the husband-debtor would pay the taxes-and apparently it was characterized therein as part of the division of community property and not any form of "spousal support, alimony, or child support." Later, the husband-debtor breached his agreement to pay the taxes and the IRS pursued the ex-wife for the taxes owed. Then the ex-wife filed a new state court lawsuit against the husband-debtor for breach of the divorce agreement, and she characterized this obligation of the husband-debtor to pay the taxes as part of a division of community property . The state court entered an agreed judgment holding that the husband-debtor was liable for the taxes and, in doing so, referred to the language in the divorce decree stating that the obligation was part of the community property division and not any form of "spousal support, alimony or child support."33 Days later, the husband-debtor filed bankruptcy. He contended that, because the divorce court and subsequent state court had found that the obligation to the ex-wife did not constitute alimony or spousal support, the doctrine of collateral estoppel precluded the bankruptcy court from finding to the contrary and excepting the obligation from discharge under section 523(a)(5) of the Bankruptcy Code. The bankruptcy court disagreed and so did the Fifth Circuit. The Fifth Circuit stated that the determination of whether a debt is dischargeable is a matter of federal bankruptcy law , not state law,34 adding that bankruptcy courts must look beyond the labels which state courts-and even parties themselves-give obligations which *342debtors seek to have discharged. The Fifth Circuit stated that the reason for this is that parties and state courts, as a general rule, do not label obligations with federal bankruptcy standards in mind and that, even if a state court reviews an issue which is similar to one created by the nondischargeability provision in the Bankruptcy Code, the state-law concept will likely differ from the specific federal bankruptcy doctrine in question.35 The court further stated:
Hence, in only limited circumstances may bankruptcy courts defer to the doctrine of collateral estoppel and thereby ignore Congress' mandate to provide plenary review of dischargeability issues. Collateral estoppel applies in bankruptcy courts only if, inter alia, the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question-that is, an issue which encompasses the same prima facie elements as the bankruptcy issue-and the facts supporting the court's findings are discernible from that court's record. In re Davis , 3 F.3d 113, 115 (5th Cir.1993) ; In re Shuler , 722 F.2d at 1256. See In re Comer , 723 F.2d 737 (9th Cir.1984) (ruling that bankruptcy courts should not rely solely on state court judgments when determining the true nature of a debt for dischargeability purposes if so doing would prevent the bankruptcy courts from exercising their exclusive jurisdiction to determine whether the debt is dischargeable); see also Browning v. Navarro , 887 F.2d 553, 561 (5th Cir.1989) (providing that although the doctrine of res judicata is generally applicable to bankruptcy courts, the contours of the doctrine are "different for bankruptcy courts ... because tasks which have been delegated to [bankruptcy courts] by Congress may not be interfered with by the decisions of other courts ....[B]ankruptcy courts have a job to do and sometimes they must ignore res judicata in order to carry out Congress' mandate").36
After applying this law, the Fifth Circuit held that the bankruptcy court was not precluded from going behind the state court and making its own finding, in the nondischargeability context, and that the bankruptcy court did not err in determining that the obligation of the debtor-husband to the ex-wife was in the nature of support (not a community property division) and was therefore nondischargeable under section 523(a)(5) of the Bankruptcy Code.
The Fifth Circuit has reiterated multiple times that issue preclusion will only prevent a bankruptcy court from determining dischargeability issues for itself if "the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question ... and the facts supporting the court's findings are discernible from that court's record ."37 The party asserting issue preclusion bears the burden of proof and has the burden of bringing forward an adequate state-court record."38
The Fifth Circuit case of King is further instructive on these issues. In King , the plaintiffs in a nondischargeability action had obtained a state court judgment and the issue before the Fifth Circuit was whether its terms precluded the plaintiffs' section 523(a)(2)(A) claim. The details were that a jury had first returned a verdict *343that the debtor breached a contract with the plaintiffs and also committed fraud against them. Initially the state court rendered a judgment consistent with the jury's verdict. Then, in response to a motion for new trial, the trial judge substituted a new judgment that limited the plaintiffs' award to only contract damages. The state court judgment did not indicate the reason why the trial judge eliminated the plaintiffs' fraud damages. When the debtor later filed bankruptcy and the plaintiffs brought a nondischargeability action alleging fraud, the bankruptcy court granted the debtor's motion to dismiss based on principles of preclusion. The bankruptcy court noted that the state court's decision to substitute a new judgment reflecting that the plaintiffs' claims only sounded in contract, rather than fraud, was made for reasons "only known to the state court judge" but preclusion nevertheless applied.39 The Fifth Circuit disagreed and overturned this decision. The Fifth Circuit quoted its earlier decision in Dennis as holding that "issue preclusion will prevent a bankruptcy court from determining dischargeability issues for itself only if 'the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question ... and the facts supporting the court's findings are discernible from the record.' "40 The Fifth Circuit stated that the state court record presented did not meet the requirements of Dennis . While noting that a full state-court record will not always be required for a bankruptcy court to apply issue preclusion, the record still must provide a sufficient basis for the bankruptcy court to determine that the issue to be decided was "actually litigated and necessarily decided" in the state court.41 The Fifth Circuit believed that the record presented to it from the state court reflected no " 'specific, subordinate, factual finding' that [debtor's] debt to the [plaintiffs] was not obtained by false pretenses, false representations, or actual fraud. Moreover, the record is devoid of facts to support such a finding, even if such a finding had been made."42 While the debtor had urged that it was implicit in the state court's action in issuing a substituted judgment that debtor did not obtain the debt by false pretenses, false representations, or actual fraud, the Fifth Circuit stated that the "bare fact that the state court awarded only contract rather than fraud damages does not preclude the bankruptcy court from inquiring into the true nature of that debt."43 The Fifth Circuit went on to state that there were any number of reasons that the state court may have altered the judgment award. It further stated that, "We have admonished bankruptcy courts to 'look beyond labels which state courts ... give obligations which debtors seek to have discharged.... The fact that a state court labels a judgment 'contract damages' rather than 'fraud damages' does not control the bankruptcy court if the state court's determination did not necessarily include a finding regarding the dischargeability issue (i.e., whether the debt was obtained by false pretenses, a false representation, or actual fraud).' "44 The Fifth Circuit reiterated in a footnote that the plaintiffs "need not have recovered a state-law fraud verdict in order to prevail on a claim that the debt owed them was obtained by fraudulent *344behavior and consequently should be discharged."45
In exercising this court's "broad discretion" as to whether to apply collateral estoppel to the arbitral findings in the case at bar,46 the court concluded that it should not and denied the Defendant-Debtor's motion for summary judgment. First, this court was ever-mindful of the admonishments of the Fifth Circuit that only in "limited circumstances may bankruptcy courts defer to the doctrine of collateral estoppel and thereby ignore Congress' mandate to provide plenary review of dischargeability issues."47 Moreover, this court did not have a discernible record from the Prepetition Arbitration proceedings to conclude that the Arbitration Panel "made specific, subordinate, factual findings on the identical dischargeability issue in question. "48 In fact, the record presented to the bankruptcy court was utterly devoid of any facts that may have been fully and fairly litigated so as to make the Arbitration Panel declare DTPA violations, but no common law fraud claims. While the Arbitration Award noted various false statements having been made by Defendant-Debtor,49 the Arbitration Award went on to state that the "claims of the [Plaintiffs-Creditors] for misrepresentation, fraud, fraud in the sale of real estate, conversion, estoppel, alter ego, and joint enterprise were not sustained by a preponderance of the evidence and are, therefore, denied." But then the Arbitration Award goes on to state that the evidence supports "a DTPA cause of action" and the economic damages awarded "are addressed as DTPA violations against both Bella Vita and Clem."50 The Arbitration Award never stated what provisions of the DTPA were determined to have been violated-something such as "breach of an express or implied warranty"51 or something more close to section 523(a)(2)(A) such as a "false, misleading, or deceptive act"?52 This court had no way of knowing what exact acts were determined to have given rise to a DTPA violation and what standards were applied by the Arbitration Panel. For collateral estoppel purposes, issues are not identical if a second lawsuit "involves application of a different legal standard, even though the factual setting *345of both suits be the same."53
One problem with arbitration proceedings generally is that they are not courts of record. This is perhaps why courts of appeal have opined that courts have broad discretion in determining whether to give arbitral findings collateral estoppel effect.54 But most troubling, what if creditors such as the Plaintiffs-Creditors here, choose not to put on full evidence of fraud when they see that they can easily make a case under the more consumer-friendly statute of DTPA? They might not really have the incentive to pursue the more difficult-to-prove fraud claims.55 A DTPA claim does not require that the consumer prove the employee acted knowingly or intentionally.56 A consumer is not required to prove intent to make a misrepresentation to recover under the DTPA.57 The DTPA was enacted to "protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty"58 and to provide consumers with a means to redress deceptive practices "without the burden of proof and numerous defenses encountered in a common law fraud or breach of warranty suit."59 Misrepresentations that may not be actionable under common law fraud may be actionable under the DTPA.60 Is it fair or appropriate-in a situation like this-to preclude creditors from pursuing section 523 allegations, in the new venue of bankruptcy court, simply because they may have only prevailed on DTPA (and breach of contract) claims in prepetition litigation/arbitration? This court thinks not.61 For collateral estoppel to be applied, an issue must have been "fully and fairly litigated " in the previous proceeding. While the Arbitration Award states that the "claims of the [Plaintiffs-Creditors] for misrepresentation, fraud, fraud in the sale of real estate, [etc.] ... were not sustained by a preponderance of the evidence and are, therefore, denied," we really have no evidence in the arbitration record that the Plaintiffs-Creditors fully and vigorously litigated common law fraud claims.62 After all, the Plaintiffs-Creditors *346were not facing a "defense" of bankruptcy at that time.63
In summary, this court denied both parties' motions for summary judgment64 and set the Adversary Proceeding for Trial.
Stage Three: The Big Reveal; Bella Vita Had Some Insurance Coverage. Soon after the motions for summary judgment were denied, the court set this Adversary Proceeding for an evidentiary Trial.65 Something troubling and unexpected happened midway through the first day of Trial. Specifically, on the first day of Trial during the Defendant-Debtor's counsel's examination of the Defendant-Debtor himself, counsel began questioning the Defendant-Debtor regarding the topic of insurance. The Defendant-Debtor's counsel asked the Defendant-Debtor whether Bella Vita had a commercial general liability insurance policy in place during the time of the construction of the Tomlinsons' Home, to which the Defendant-Debtor answered "yes."66 Soon thereafter, Defendant-Debtor's counsel pulled out a Def. Exh. 5, which was a 14-page document entitled "Summary of Insurance Bound," dated April 9, 2015, for Bella Vita Custom Homes, LLC, prepared by a Wortham Insurance Company (indicating at the bottom that it was a "Proposal" and "only a general description of coverages provided").67 The document appeared to be a proposal to provide general liability as well as an excess umbrella policy for Bella Vita, through Mid-Continent Casualty Company, for the year April 10, 2015-December 31, 2015 (the time frame that the Contract and the various mishaps thereunder occurred). The Defendant-Debtor also pulled out a Def. Exh. 4, which appeared to be a Declaration for Commercial Insurance for Bella Vita, through Mid-Continent Casualty Company, for December 31, 2015 through December 31, 2016. Plaintiffs-Creditors' counsel immediately objected to the introduction of these documents, informing the court that this was the first that he and his clients had ever heard about any insurance that Bella Vita may have had, despite inquiries in the past about insurance.
To put this into full context, one of the many assertions of "false representations" that the Tomlinsons have asserted against Bella Vita and the Defendant-Debtor in this Adversary Proceeding is that they knowingly and falsely represented that both builder's risk and general liability insurance policies "would be purchased for the construction of the [Tomlinsons'] home"; that Bella Vita "did not obtain any insurance policies"; and that, as a result, the Tomlinsons were "unable to collect their judgment from" Bella Vita or the Defendant-Debtor.68 The Tomlinsons had *347also more specifically complained that Bella Vita and the Defendant-Debtor had falsely represented or implied in written accounting reports supplied to the Tomlinsons that a builder's risk policy was in place69 (which, in fact, was never acquired) and the Tomlinsons had been charged $22,415.93 for the same.70 The Contract at paragraph 9.J provided as follows:
Builder shall provide and maintain at all times, Builder's Risk Insurance as protection against fire, storm, theft or vandalism during the course of construction of the Home in an amount equal to or greater than the Contract Sales Price. Builder shall include Owner as additional insured.71
This requirement of a Builder's Risk Insurance policy was reiterated at paragraph 19 of the Contract with slightly broader terms as to what needed to be covered-i.e., insurance to cover the cost of construction of the house in the event of "destruction of the improvements by fire, earthquake, explosion, hail, windstorm, or any other casualty prior to completion and Owner's occupancy.72 In addition, paragraph 9.J of the Contract stated:
Builder shall, at its own expense, during the entire period of Work, carry ... commercial general liability insurance (including contractual liability coverage) necessary for the full protection of Builder and Owner from injury to persons or property arising from the acts of the Builder or its subcontractors during the progress of the Work with limits of at least $1,000,000 per occurrence.73
Such paragraph went on to provide that "Certificates of insurance shall be delivered to Owner ... prior to the Initial Closing Date [not a defined term] and that each policy shall provide "for Owner to be named as an additional insured on the commercial general liability insurance policy."74
To be clear, both the Contract and the Plaintiffs-Creditors, in this Adversary Proceeding, made the topic of insurance a very significant issue. It was not just that it appeared that the Tomlinsons had been charged for a builder's risk policy that had never been purchased for their Home, but the Tomlinsons started Trial believing there was apparently no insurance of any kind to potentially cover their contractual and property damage claims (such as the significant water damage that ended up occurring). And the Plaintiffs-Creditors and their counsel had good reason to believe that there was no insurance. Why? The Plaintiffs-Creditors' counsel had served written discovery on Bella Vita and the Defendant-Debtor prepetition, inquiring about the topic of insurance.75 In an Objections and Responses to the Plaintiffs-Creditors' First Requests for Production, served on the Plaintiffs-Creditors on May 4, 2016, Bella Vita and the Defendant-Debtor answered as follows in connection with questions pertaining to insurance policies:
REQUEST FOR PRODUCTION NO. 3
To identify and produce a copy of any and all insurance policies, certificates of *348insurance, declaration pages and contracts that relate to insurance, worker's compensation insurance that relate to this lawsuit and any document or memorandum evidencing the existence of insurance in effect on the date of the occurrence made the basis of this lawsuit.
RESPONSE:
Respondent objects to this Request because it and the other 178 Requests propounded by Claimants are unduly burdensome, are not proportional to the needs of the case, and were served solely for the purpose of harassment. Respondent objects to this Request because it is overbroad, harassing, not reasonably limited in time or scope, and not reasonably calculated to lead to discoverable evidence. Respondent further objects to this Request because it seeks information and documents that are irrelevant to the claims and defenses to this lawsuit. Subject to and without waiving the foregoing objections, Respondent identified no responsive documents .76
REQUEST FOR PRODUCTION NO. 4
To identify and produce any and all excess or umbrella insurance policies or documents or memorandum evidencing the existence of insurance in effect on the date of the occurrence made the basis of this lawsuit.
RESPONSE:
Respondent objects to this Request because it and the other 178 Requests propounded by Claimants are unduly burdensome, are not proportional to the needs of the case, and were served solely for the purpose of harassment. Respondent objects to this Request as vague and confusing insofar as it seeks documents and information "in effect on the date of the occurrence [that] made the basis of this lawsuit" because there is not one occurrence that made the basis of this lawsuit and this Request fails to identify the information sought with reasonable particularity. Respondent further objects to this Request because it is overbroad, unduly burdensome, harassing, not reasonably limited in time or scope, and not reasonably calculated to lead to discoverable evidence. Respondent further objects to this Request because it seeks information and documents that are irrelevant to the claims and defenses to this lawsuit. Subject to and without waiving the foregoing objections, Respondent identified no responsive documents.77
In addition to Requests for Production 3 and 4 set forth above, there were four other Requests for Production aimed at obtaining information regarding insurance coverage.78 Bella Vita and the Defendant-Debtor responded in all cases that there were "no responsive documents."
When the Defendant-Debtor attempted to introduce evidence that Bella Vita had commercial liability and excess umbrella liability insurance policies, as required by the Contract, on the first day of Trial, the Plaintiffs-Creditors' counsel immediately pulled out these discovery responses and objected-crying foul that the Defendant-Debtor had never before disclosed them. The Defendant-Debtor and his counsel reacted with all sorts of plausible deniability. First, the Defendant-Debtor stated that he thought that insurance policies had, in fact, been produced in prior depositions handled by his prior lawyers at the law *349firm of Bell Nunnally.79 There was no evidence that this was true. The Defendant-Debtor's counsel further added that the written discovery responses cited above had been prepared by the Defendant-Debtor's previous lawyers at Bell Nunnally (who were not retained in this Adversary Proceeding). And the Defendant-Debtor's current counsel was quick to reiterate that he had only learned about the insurance in the last few days.80 Later in the day, the Defendant-Debtor's father, Mike Clem, who was an equity owner and Chief Financial Officer of Bella Vita, testified about the incorrect written discovery responses. He suggested that he was the one who likely dealt with Bella Vita's prior lawyers in responding to this written discovery concerning insurance, and he probably had "tunnel vision" and thought the questions were aimed at insurance specifically dealing with the Tomlinsons' Home, such as an individual builder's risk policy, which was, in fact, never purchased for the Tomlinsons' Home-allegedly since Bella Vita never bought builders' risk insurance policies until home projects went vertical.81 On balance, the combined statements of the Defendant-Debtor, his current lawyer, and Mike Clem were not very convincing.
Moreover, the court expressed that the Defendant-Debtor and his counsel could not skirt the issue by simply blaming the prepetition nondisclosure of insurance on the Defendant-Debtor's prior counsel-because the nondisclosure had persisted post petition. Rule 26(a) of the Federal Rules of Civil Procedure applies in this Adversary Proceeding. It states that:
(a) Required Disclosures .
(1) Initial Disclosure.
(A) In General . Except as exempted by Rule 26(a)(1)(B) [not applicable] or as otherwise stipulated or ordered by the court, a party must without awaiting a discovery request, provide to the other parties: ... (iv) for inspection and copying as under Rule 34, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment (emphasis added).82
It is clear from the record that the parties and counsel never stipulated (and this court never ordered) that this provision of Rule 26(a) would not apply. In this Adversary Proceeding (as with all adversary proceedings in this District), an "Order Regarding Adversary Proceedings Trial Setting and Alternative Scheduling Order" (hereinafter, the "Alternative Scheduling Order") was issued immediately following the filing of the Adversary Proceeding.83 It provided as follows: "Unless otherwise ordered by the Court, the disclosures required by Federal Bankruptcy Rule 7026(a) shall be made within fourteen (14) days of the entry of a scheduling order, including the Alternative Scheduling Order contained in Part III below (which shall become effective on the forty-sixth day following entry of this Order)."84 The Alternative Scheduling Order also provided that exhibits that might be used at trial, except for impeachment, were required to be exchanged with opposing counsel "fourteen *350(14) days prior to Docket Call" (along with a filed exhibit list).85 A few weeks later, the parties submitted a "Joint Discovery Plan."86 The Joint Discovery Plan stated that, among other things, "the parties agreed that initial disclosures would be exchanged on or before Wednesday May 24, 2017."87 The Joint Discovery Plan also stated that the "parties have consented to the terms of the Alternative Scheduling Order contained within ECF Doc 4 and agree that the same shall control all deadlines in this case, unless an agreement stating otherwise is entered into between the parties."88
So, in summary, Rule 26(a), the Alternative Scheduling Order and the Joint Discovery Plan collectively required that all insurance policies that might be applicable to the claims in this Adversary Proceeding had to be exchanged with the Tomlinsons by May 24, 2017. This did not happen. Moreover, exhibits that might be used at trial had to be exchanged 14 days prior to the August 2017 trial docket call. This did not happen. The Witness and Exhibit List timely filed by the Defendant-Debtor on July 31, 201789 disclosed no insurance policies on the list of exhibits that might be introduced at Trial. The court takes judicial notice that, in the Bella Vita bankruptcy case, the Schedules, at Question 73, which inquires as to whether the debtor has "Interests in insurance policies or annuities" the Debtor listed no information.90 The Bella Vita Schedules were amended once to add further information, but Question 73 was not changed.91
After this all came out the first day of Trial, the court pressed further for information on why the insurance policies that Bella Vita did have apparently had never been disclosed to the Tomlinsons or their counsel until now. Besides the explanations earlier mentioned, the Defendant-Debtor suggested that he did not think it really mattered-as far as he knew commercial general liability insurance would not cover any of the Tomlinsons' damages.92 When further pressed, the Defendant-Debtor's counsel stated that he had never really realized until recently that the Tomlinsons were complaining that not only builders risk insurance but also commercial liability insurance had not existed, and he asked his client and had literally received copies of the commercial liability policies the day before the Trial started.93
The court ultimately adjourned and continued the Trial two months to October 11, 2017, to allow the parties time to investigate the scope of the insurance policies. The court also later held a status conference with the Chapter 7 bankruptcy trustees of both the Defendant-Debtor and Bella Vita bankruptcy estates-to make sure they knew there was insurance that may or may not cover the Tomlinsons' and other creditors' claims. The court expressed that the false statements in the past concerning the insurance-and failure to comply with Rule 26(a) and orders of this court-might impact the damages in *351this Adversary Proceeding. Not only does the court's Alternative Scheduling Order provide that sanctions may be imposed for failure to comply with it (such as shifting of attorney's fees), but the court was concerned that this failure to disclose might suggest a troubling pattern or history of concealment on the part of the Defendant-Debtor that could not merely be passed off to attorneys.
Stage Four: The Second Day of Trial in the Section 523 Adversary Proceeding.
After a bankruptcy case status conference was held on September 29, 2017, to address with the bankruptcy trustees the insurance policies-and the prospect that such policies might provide coverage for some of the Tomlinsons' claims and the claims of others who had problems with their homes that Bella Vita had contracted to build-the court resumed the Trial in this matter on October 11, 2017. To be clear, the sole scope of this second day of Trial would be to hear evidence regarding Bella Vita's insurance policies that had never-in almost two years of litigation with the Tomlinsons-been disclosed to them. On October 11, 2017, the Defendant-Debtor continued with his theme of plausible deniability on the subject of the nondisclosure of the insurance. While his deniability at times seemed potentially plausible, the court was not convinced that the Defendant-Debtor was being wholly candid on the subject.
At the beginning of the second day of Trial, the court received evidence that reflected that, as early as January 2016, the Tomlinsons' legal counsel was asking Bella Vita's and the Defendant-Debtor's legal counsel (the Bell Nunnally law firm) for a list of Bella Vita's insurance policies, and Bell Nunnally was passing along this and other requests by email to the Defendant-Debtor and his father, Mike Clem.94 But no insurance information was ever passed along to the Tomlinsons' counsel, and the Defendant-Debtor continued to have no explanation for that-he said that, although he was copied on the emails from Bell Nunnally requesting a list of insurance policies, he did not remember paying attention to the emails and that he would have assumed that others in the company including his father would be handling that. The Defendant-Debtor also testified that, as to the May 2016 Requests for Production from the Tomlinsons,95 he did not "fill out" the answers to them wherein it was stated that Bella Vita had identified no insurance.96 He later said that he had not seen the Requests for Production.97 The Defendant-Debtor further stated that he really did not understand that insurance was something the Tomlinsons were trying to get-he did not think it seemed to be a "focal point" for them98 He said he did not believe their claims were an "insurable deal."99 The Tomlinsons' counsel reminded the Defendant-Debtor that there was massive damage to the Tomlinsons' foundation due to flooding after Bella Vita (or its subcontractors) punctured a water main and questioned why Defendant-Debtor would not wonder if insurance might pay for some of that (the court notes that some $235,000 of the Arbitration Award was for repairs needed to the Home's building pad after the flooding). The Defendant-Debtor did not have much of an answer on this question-other than *352to say he received a cease-and-desist letter shortly after the water-puncturing incident and was required to leave the property; thus, he really was not sure how bad the damage turned out to be. He further testified that his prior lawyers at Bell Nunnally-that were representing him during the Tomlinsons' requests to get information concerning insurance-withdrew from representing him for nonpayment of their legal bills in the "middle of the discovery process" and "didn't make it to the arbitration."100
The court also heard reports that the Tomlinsons' lawyer has now made a claim on Bella Vita's insurance but, as of the second day of Trial, had not heard back regarding whether coverage will be granted. The court conducted a follow up status conference on December 18, 2017. At that hearing, it was reported that the insurance company had subsequently responded with three reasons for denial of coverage on any of the Tomlinsons' claims, one of which was that the request for coverage was "untimely." The bankruptcy trustee and Tomlinsons are continuing to pursue this matter with the insurance company.
On balance, the court does not accept as credible the Defendant-Debtor's position that he really was never aware that the Tomlinsons' wanted to know about insurance or that insurance had any significance in this whole litigation. For one thing, the Defendant-Debtor's reactions on the subject changed slightly from the first day of Trial to the second day of Trial. On the first day of Trial, the Defendant-Debtor stated that the subject of insurance came up at a prepetition deposition and that the Tomlinsons' counsel was given copies of the insurance then (which was not corroborated and, in fact, was credibly denied by the Tomlinsons' counsel). Then on the second day of Trial, the Defendant-Debtor was quietly adamant that he never knew that the Tomlinsons' were inquiring about insurance and it never occurred to him that it was in any way relevant to their lawsuit. The court cannot believe that lawyers at Bell Nunnally completed and submitted answers to the Requests for Admission with no input or awareness from the Defendant-Debtor. The court cannot believe that the Defendant-Debtor never realized until a day or so before the first day of Trial in this Adversary Proceeding that the Tomlinsons had complained that the Defendant-Debtor and Bella Vita had fraudulently misrepresented that there would be insurance for their Home project-including general liability that covered contractual liability and an umbrella policy. The court has no way of knowing what the Defendant-Debtor's exact motivation might have been to conceal the insurance. Was he worried about claims being made on his insurance policies and the ramifications to him and his business if that happened? The court can only speculate. But the court believes, based on the totality of the evidence and the unconvincing answers provided by the Defendant-Debtor, that the late-revealed insurance in this Adversary Proceeding is just one more example of a pattern of concealment engaged in by this Defendant-Debtor vis-à-vis the Tomlinsons. The court believes the Defendant-Debtor kept silent about the insurance when it seemed convenient and advantageous to him to do so.
The court discussed with counsel and the parties after the second day of Trial that it felt compelled to consider sanctions-likely in the form of attorney's fee shifting-for the prolonged nondisclosure of insurance. This court believed that the Tomlinsons might have focused their efforts on insurance-collection issues ear *353lier and not pursued this section 523 Adversary Proceeding so aggressively, if they had known about the insurance policies. In fact, various other creditors filed section 523 actions and reached agreements to stay indefinitely their trials in those matters, while they and the bankruptcy trustees explore the potential coverage for their claims and to see what happens with the Tomlinsons. The court invited counsel for the Tomlinsons to submit an Affidavit regarding attorney's fees they have incurred during this matter. The Tomlinsons thereafter submitted a request for $65,368.75 in fees and $3,272.19 in expenses,101 to which the Defendant-Debtor has objected.102
This court has reviewed these fees. The court concludes that all of the fees and expenses incurred between May 25, 2017 (the date Plaintiffs first asserted their section 523 claim in this Adversary Proceeding) and August 23, 2017 (the date they learned about the insurance) should be reimbursed by Defendant-Debtor. Other fees and expenses submitted appeared to be related to the bankruptcy case more generally. The fees and expenses during this time frame totaled $29,440.51. However, it appears that one of the timekeepers (associate-attorney Beau Powell) was billed at a $450 per hour rate during that time frame when his actual billing rate was represented to be $275 per hour.103 When one recalculates Mr. Powell's fees at $275 per hour, the total fees and expenses during this time frame amount to $19,384.26. Thus, this is the amount that the court will award (irrespective of the ultimate section 523 nondischargeable debt) to the Plaintiffs against Defendant-Debtor as a sanction for failure to comply with Rule 26(a), failure to comply with the Alternative Scheduling Order, and failure to comply with the Joint Discovery Plan. Again, the court considers the Defendant-Debtor responsible for these nondisclosures-particularly when one considers that there was a failure to produce insurance even prepetition when Defendant-Debtor was represented by other attorneys.
Stage Five: Rule 15(b)(2) Motion for Leave to Amend Complaint.
Finally, at the end of the second day of Trial, the court observed that a couple of issues and theories had evolved over the course of Trial (and/or had developed in the evidence) that had not specifically been articulated in the Plaintiffs-Creditors' live complaint or other pre-trial pleadings. First, the issue with regard to the insurance. Specifically, the Plaintiffs-Creditors originally pleaded that the Defendant-Debtor and Bella Vita had misrepresented that they had insurance when they did not .104 Then, the Defendant-Debtor raised as a surprise defense at Trial that Bella Vita did , in fact, have general liability and umbrella liability insurance policies (producing copies of these policies, apparently for the first time). As noted earlier, these policies were not on the Defendant-Debtor's trial exhibit list. At that point (not surprisingly), things seemed to shift to an alternative argument by the Plaintiffs-Creditors-that they had been defrauded by the concealment of the insurance for many months pre- and postpetition (causing them damages, at least from the incurrence of attorney's fees-in that they pursued legal strategies that they may not *354have pursued if they had known about the insurance). A second evolving theory seemed to emerge with regard to the switch over to helical piers, the puncturing of the water main, and the usages of the Tomlinson's $448,318.57 initial deposit. While all of these subject areas were identified in the Plaintiffs-Creditors' live complaint105 and the joint pretrial order106 -and clearly the Tomlinsons were arguing misrepresentations had been made with regard to these topics-it seemed that, over the course of the Trial, a theory began to evolve that the Defendant-Debtor and Bella Vita had concealed material information with regard to the helical piers, water line puncturing, and usage of the $448,318.57 initial deposit-and that this concealment may have fraudulently induced the Tomlinsons to stay in their Contract longer than they otherwise would have. The Plaintiffs followed up the oral discussion about these evolving theories, at the end of the Trial, with a Motion for Leave to Amend Complaint,107 pursuant to Rule 15(b)(2). The Defendant-Debtor objected to the motion, primarily arguing that he did not consent to these new issues and his due process was violated.108
Rule 7015 of the Federal Rules of Bankruptcy Procedure adopts Rule 15 of the Federal Rules of Civil Procedure to adversary proceedings. Rule 15(b)(2) provides:
When an issue not raised by the pleadings is tried by the parties' express or implied consent, it must be treated in all respects as if raised in the pleadings. A party may move-at any time, even after judgment-to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the trial of that issue.
While this court acknowledges that implied consent is not to be lightly inferred,109 and a party should be given an opportunity to fully respond to new theories presented,110 here, with regard to the insurance, the Defendant-Debtor was the one who offered into evidence the insurance policies that had never been disclosed and caused the new, changed theory of the Plaintiffs-Creditors to emerge. It seemed disingenuous for the Defendant-Debtor to argue he did not consent to the new theory articulated by the Plaintiffs-Creditors, when his improper actions were what caused the theory to evolve at trial. With regard to the evolving theory pertaining to the helical piers, the punctured water main, and the alleged concealment of how the Tomlinsons' $448,318.57 initial deposit was spent, the Defendant-Debtor always knew that these were the most controversial subjects in the entire Adversary Proceeding. He knew that Plaintiffs-Creditors vociferously complained of the Defendant-Debtor's actions where these issues were concerned. It would appear to the court that no new or different evidence was injected that required an about-face response on the part of the Defendant-Debtor. The type or species of fraud alleged by the Plaintiffs, under section 523(a)(2), was simply refined as the evidence developed at trial. Moreover, the court gave the parties multiple opportunities to brief legal issues for the court. As the Fifth Circuit has noted in a similar context, "a party's *355pleadings need not specify in detail every possible theory of recovery but need only plead sufficiently to give the defendant fair notice of the claim and the facts upon which it rests."111
Additionally, even if Rule 15(b)(2) does not permit an amendment here, the court notes that, under Rule 15(b)(1), "If, at trial, a party objects that evidence is not within the issues raised in the pleadings, the court may permit the pleadings to be amended. The court should freely permit an amendment when doing so will aid in presenting the merits and the objecting party fails to satisfy the court that evidence would prejudice that party's action or defense on the merits." The Defendant-Debtor wholly failed to satisfy the court in his various arguments that any evolving theories or evidence presented at Trial by the Plaintiffs-Creditors prejudiced the Defendant-Debtor's defense on the merits. And the court believed that permitting the amended pleadings aided in the overall presentation of the merits in this Adversary Proceeding.
Based on the foregoing, the court permitted the post-Trial amendment of Plaintiffs-Creditors' complaint.
Having presented above the procedural background and various issues the court had to address before ruling on the merits, the court now renders its findings of fact and conclusions of law based on the evidence.
II. FINDINGS OF FACT.
A. The Two-Year Courtship of the Plaintiffs-Creditors by the Defendant-Debtor.
1. The Plaintiffs-Creditors112 owned two residential lots located at 2005 Navasota Cove and 2007 Navasota Cove, Westlake, Texas (the "Lots") on which they decided to construct a custom home (the "Home").
2. The Defendant-Debtor is a gentleman in his thirties and attended Baylor University. During college, he interned for Pulte Homes in Austin, Texas (focusing on homes ranging between $400,000 to $800,000) and later at a company called Jacobs Custom Homes in Georgetown, Texas (working 25% on custom homes and 75% on retirement "active adult homes"). The Defendant-Debtor eventually moved to Dallas, Texas and helped manage his father-in-law's concrete plant for a couple of years. Then, in 2011, the Defendant-Debtor formed Bella Vita. Bella Vita started with only the Defendant-Debtor, his father, father-in-law, and one other individual. The Defendant-Debtor was the CEO and his father was CFO. Bella Vita eventually grew in size and according to the Defendant-Debtor, built 150 custom homes over its history.113
3. Mr. Tomlinson is a well-known retired National Football League player and T.V. Network commentator. Mrs. Tomlinson, among other things, owns a business in California with 42 employees and is CEO of a charitable foundation. One of Bella Vita's sales associates, James Thokey, had a friend that was a friend of Mr. Tomlinson. James Thokey and the Defendant-Debtor discussed courting Mr. Tomlinson to let Bella Vita build a home for him, thinking it could be "a hallmark home for us" and "would be an expensive home," and Mr. Tomlinson was "a well-known person."
*356114
4. The Defendant-Debtor, during about a one-and-a-half year period, had continued follow up with the Tomlinsons, having meetings and dinners. He described Mr. Tomlinson as "an upstanding guy" and Mrs. Tomlinson as "a good person, too" although he would "disagree with a lot of her statements."115
5. During his interactions with the Tomlinsons, the Defendant-Debtor made numerous representations to the Plaintiffs-Creditors (collectively, the "Defendant Representations") including that:
a. Bella Vita would obtain general liability and builder's risk insurance policies for the construction of the Home;
b. Bella Vita was highly qualified and fully able to design and construct the Home;
c. All work performed by Bella Vita on the Home would be performed in accordance with first-class custom home building practices;
d. All work performed by Bella Vita on the Home would be in compliance with design plans;
e. Bella Vita would use the highest quality materials on the Home;
f. Bella Vita would appoint a full-time superintendent and full-time project manager to the project; and
g. Bella Vita would assign James Thokey to serve as the Plaintiffs-Creditors' personal liaison to coordinate design selections
6. Of particular importance to the Plaintiffs-Creditors was where the money that would be paid for their home construction project would be spent. With regard to this point, Mrs. Tomlinson credibly testified that she had some prior experience with custom home building, as she had built multi-million dollar homes in both California and Austin, Texas.116 Mrs. Tomlinson further testified that "I just wanted to make sure that, one, what we were asking to be built was going to be actually what we received. And that the monies that we were giving to the builder were going towards the things that they were supposed to be going towards."117 The Defendant-Debtor also credibly testified that he knew that the Plaintiffs-Creditors "had been burned" by another builder they used in the past. Therefore, a breakdown of how the Plaintiffs-Creditors' funds would be spent was important to the Plaintiffs-Creditors.
7. In September 2014, the Plaintiffs-Creditors, in anticipation of signing a written contract with Bella Vita, made a payment to Bella Vita in the amount of $448,318.57 (the "Initial Deposit"). Their Home would be an 18,000 square foot home.118 The Defendant-Debtor had never built a home of this magnitude, but the Defendant-Debtor testified that "we had a number of homes that were $2 million, $2.5 million that we had built around the same time frame" (it was unclear what that "number" actually was) and he thought Bella Vita was "well-suited" to build the Tomlinsons' Home.119
8. However, it was not until April 30, 2015 that the Plaintiffs-Creditors entered into a New Construction Build on Your Lot Agreement (the "Contract") with Bella Vita for the construction of the Home. The *357Contract was described by all witnesses at Trial as a "fixed-price contract" in the amount of $4,483,185.72 (although the words "fixed-price" are not used). The seven-month gap in time between the payment of the Initial Deposit and the actual signing of the Contract was largely due to the intense negotiations that went into forming the precise language of the Contract. In fact, the Plaintiffs-Creditors hired an attorney, Mr. Miller, to help advise them on the precise language that needed to be included in the Contract.
B. Key Terms of the Contract.
9. Unfortunately, while a great deal of time and effort was spent by the Plaintiffs-Creditors and the Defendant-Debtor in negotiating the Contract, the Contract itself is not a model of clarity-to put it kindly. In addition to awkward wording and cumbersome numbering in places, capitalized terms are frequently used (suggesting significance) without actually being defined terms. In any event, the entire set of documentation that constituted the Contract between the Plaintiffs-Creditors and Bella Vita consisted of: (a) a 10-page written document entitled "Bella Vita Custom Homes New Construction Build on your Lot Home Agreement," signed April 30, 2015 by the Defendant-Debtor as the designated representative of Bella Vita; (b) a one-page attachment thereto dated September 18, 2014, entitled "Bella Vita Custom Homes: Estimated Budget & Draw Schedule"; (c) an 11-page Exhibit A thereto consisting of certain specifications, cost allocations and allowances for the Home project; (d) a complete set of construction plans and drawings (the "Final Plans")120 that, according to the Contract, would be prepared by the Builder as part of the work covered by the Contract Sale Price; (e) a Builder's Limited Warranty; and (f) any Change Orders as described and approved in accordance with the Contract.121
10. The Contract does actually contain a few noteworthy defined terms in Paragraph 3. For example:
Change Order: Approved contractual document stating materials/items/allowances to be added to Home per Owner's request, which to be binding on Builder and Owner must be in writing and signed by Builder and Owner.
Allowances: Amounts set forth in Exhibit A covering materials for the Improvements that are specified as "Allowance" items.
Draw: Builder's ability to request dollars to be paid by Owner for work completed to date.
Selection Sheet: Builder's document stating all material that Owner selects and approves.
Work: All labor, materials, equipment and services necessary to construct the Improvements on the Property, including plans specified in the preceding subparagraph to be prepared by Builder subject to the final approval of the Owner.122
11. The "Contract Sales Price" is set forth in paragraph 5 of the Contract and is shown to be $4,483,185.72, as set forth in Exhibit A attached to the Contract, "and shall cover, regardless of the actual amounts incurred for the following, all of the expenses of Builder necessary, required, or actually incurred to complete the Work, including, without limitation, (i) the cost of all materials, supplies and equipment to be incorporated into the Work; (ii) payment by Builder to its subcontractors *358with respect to the Work; (iii) costs of all premiums for insurance required pursuant to this Agreement; (iv) taxes arising out of or related to the Work, including sales, use, employment, and income taxes; (v) all permits required to perform and complete the Work; (vi) overhead and other general expenses of Builder; (vii) all expenses related to the correction of damaged, defective or nonconforming Work; (viii) all architect and engineering fees required to perform the Work and complete the Project; (ix) the profit of and fee for Builder's performance of the Work; and (x) all submittals to, and processing and obtaining approvals of Vaquero and its Design Review Committee. Builder shall furnish Owner with copies of all bids received by Builder in connection with bidding this Project and completing Exhibit A attached to this Agreement; and with each draw request, Builder shall furnish Owner with copies of all invoices for items included in such draw request ."123
12. The Contract provided, in a paragraph entitled "Escrows,"124 that, prior to execution of the Contract, the Plaintiffs-Creditors "deposited with Builder the Initial Deposit of $448,318.57, being ten percent (10%) of the Contract Sales Price, and [Defendant-Debtor] commenced to proceed to Work." The Defendant-Debtor agreed "to retain the Initial Deposit as part of the Contract Sales Price and shall apply it against the first approved Draw Requests until such funds are exhausted (and [Plaintiffs-Creditors] shall pay any remaining amounts due for approved Draw Requests)."125
13. The Defendant-Debtor repeatedly referred in testimony to the Contract as a "fixed-price contract" and seemed to suggest that the requirement of providing Draw Requests or other evidence of funds spent was not very significant (particularly with regard to the Initial Deposit).126 However, the Contract language belies such a *359suggestion. First and foremost, draw requests with copies of invoices (among other documentation) were required by the Contract-plain and simple.127 Second, paragraph 6 dealing with the "escrow" of the Initial Deposit clearly contemplated that the Defendant-Debtor would retain it and "apply it against the first approved Draw Request."128 Finally, the second paragraph of paragraph 5 discusses how situations were to be handled in which actual costs of allowances set forth on Exhibit A to the Contract turned out to be either greater or less than the amounts on Exhibit A (with the Plaintiffs-Creditors, in some situations, being entitled to savings).129
14. The Contract at paragraph 7.A.3, last sentence, states that "Builder shall make no changes to the Improvements or alterations from the Construction Documents executed by Owner, unless agreed in writing by Owner, at Owner's sole and exclusive option ."130 Furthermore, the Contract at paragraph 7.A.5 (last paragraph) states that "If Builder discovers that changes or corrections are necessary for any of the foregoing reasons [one of such foregoing reasons being "unusual subsurface soil conditions, topography, or ground water"], Builder will promptly notify owner ."131
15. The Contract at paragraph 9.C. provides that the Defendant-Debtor agrees to build the Home "in accordance with first-class, custom home industry standard building practices ... and otherwise substantially in compliance with the Final Plans and the Construction Documents, including, without limitation, the customer selection sheet and customer change orders, if any. However, Owner agrees Builder may substitute materials of similar quality, but only with the prior written consent of Owner. "132 Paragraph 9.E. adds (last sentence) that "Builder reserves the right to make changes in the plans, specifications, materials, and components being used at the time of purchase, but only with prior written consent of Owner. "133 With regard to these various "consent" provisions in the Contract, Mrs. Tomlinson credibly testified that the Tomlinsons had experienced problems with prior builders they had used in the past, and they wanted "the builder to follow these plans, and if you're not following these plans, we want to know it and approve it."134
16. Furthermore, the Contract at paragraph 9.J. provides that "Builder shall provide *360and maintain at all times, Builder's Risk Insurance as protection against fire, storm, theft or vandalism during the course of construction of the Home in an amount equal to or greater than the Contract Sales Price. Builder shall include Owner as additional insured."135 In addition, "Builder shall, at its own expense, during the entire period of Work, carry ... commercial general liability insurance (including contractual liability coverage ) necessary for the full protection of Builder and Owner from injury to persons or property arising from the acts of the Builder or its subcontractors during the progress of the Work with limits of at least $1,000,000 per occurrence."136 Such paragraph goes on to provide that "Certificates of insurance shall be delivered to Owner ... prior to the Initial Closing Date [not a defined term]" and that each policy shall provide "for Owner to be named as an additional insured on the commercial general liability insurance policy."137
17. Additionally, paragraph 26 of the Contract contains what has been referred to as an "entireties" clause. Specifically, it provides that the Contract and its attachments:
constitutes the entire agreement between the parties and all prior negotiations, promises and/or representations, whether oral or written, not expressly set forth herein, are of no force and effect and do not constitute a part of this Contract. Owner represents to Builder that Owner has not relied and is not relying upon any warranties, promises, guaranties, or representations made by Builder ... except as contained in this Contract.138
18. Finally, on the last page of Exhibit A, which is attached to the Contract, under "Bella Vita Custom Homes Additional Expenses," there is a line item for "On-Site Project Manager, Vendor, Budget and Accounting Management throughout 2-year build," with an associated expense of $118,087.14.139 Mrs. Tomlinson credibly testified that it was important to have someone full-time on their project "because Bella Vita had already made it clear that the size of our house would be the first that they'd ever built that was that big, and because of that, to reassure us that it would be fine, even though it's bigger than most times they'd built, they were getting a full-time superintendent for the job."140
C. Construction Commenced on the Home and Problems Ensued
1. Failure to Provide Dedicated Personnel That Were Promised.
19. Once the Contract was finally signed and construction of the Home began, problems began to arise. First, the Plaintiffs-Creditors' full-time promised personal liaison, James Thokey (the individual who knew a friend of Mr. Tomlinson's and had initiated the original contacts with the Tomlinsons), relocated to Austin, shortly after the Contract was *361signed, as a result of being promoted to manage the sales team for Bella Vita in Austin. Thus, he was not fully available to the Plaintiffs-Creditors during the construction phase.141 Second, the project superintendent that was promised was not on the job full-time. The Defendant-Debtor acknowledged in testimony that Chase White was the full-time dedicated project superintendent for the project that was the "babysitter" on the job and was required to be there daily, but, as detailed below, there were certain instances where this proved to be false (and quite costly).
2. Draw Requests Made Without Actual Cost Information, Invoices, or Other Required Documentation.
20. More problematic to the Tomlinsons, within almost a month of signing the Contract, the Plaintiffs-Creditors began receiving draw requests from Bella Vita for more funds: (a) even after paying Bella Vita the Initial Deposit of $448,318.57; and (b) without being presented an adequate accounting of how funds had been spent on their Home project thus far. As earlier noted, the Contract required significant financial documentation to be submitted in connection with draw requests.142 Bella Vita wholly failed to comply with the Contract in this regard. The court finds that the Defendant-Debtor not only was personally involved with this omission143 of information, but he misrepresented to the court that he provided more information to the Tomlinsons than he did. The Defendant-Debtor specifically testified that he provided cost reconciliations to Mrs. Tomlinson for the Home project "between three and five times" through emails to her,144 but there was no supporting evidence and the court simply does not believe the Defendant-Debtor. The credible evidence shows that, on or around May 29, 2015, Mike Moss,145 the vice president of construction at Bella Vita, requested from the Tomlinsons the first $68,310 draw towards "Site Prep," "Lot Clearing," "Erosion Control," "Temp Fencing," and "Utilities."146 Mrs. Tomlinson then wrote a check for $68,310 on June 1, 2015 for the draw request, but also requested an accounting (as required by the terms of the Contract) as to where the Initial Deposit had been spent.147 It is important to note that this is the second time that Mrs. Tomlinson had requested an accounting for the Initial Deposit. Specifically, the evidence showed that, in response to a text from Mrs. Tomlinson on February 28, 2015, asking how much of the Initial Deposit had been spent, the Defendant-Debtor had stated that he "had already spent $135,000 of it in mobilization."148 In any event, on June 2, 2015, Mike Moss responded to Mrs. Tomlinson's request saying *362"Sure Thing ... I will get with the accounting folks today and see if I can get answers together on the cost to date."149 Then, on or about June 4, 2015, someone named "Carrie" sent Mrs. Tomlinson an excel accounting document showing $131,452 of the Initial Deposit had been spent for "Site Work."150 At that point, Mrs. Tomlinson logically assumed that she would only have around $7,000 left to pay on "Site Prep"-since the original budget on the draw request showed $207,000 going toward "Site Prep" ($131,452 plus the new $68,310 draw request = $199,762).151 Moreover, this excel accounting document also showed that $72,556 had been spent on "Permits/Fees," $104,360.79 had been spent on "Architectural/Engineering" (which included $22,415.93 for a "Builder's Risk Policy"), $8,995.51 had been spent on "BVCH Overhead," and $23,374.69 had been spent on "BVCH Profit."152
21. However, just three weeks later on June 23, 2015, Mike Moss sent the Plaintiffs-Creditors a second draw request for $138,690, to complete all the draw requests for the "Site Prep."153 This $138,690 was far more than the $7,000 that Mrs. Tomlinson thought remained for the "Site Prep" work. While Mrs. Tomlinson did end up writing the $138,690 check for the second draw request, she credibly testified that she was troubled by such request, since doing the simple math, Bella Vita appeared to be over budget on "Site Prep" by $131,452 (i.e. , $131,452 was represented in the document sent on June 4, 2015 to be the portion of the Initial Deposit spent on "Site Work" plus $68,310 plus $138,690 = $338,452). To be clear, the original budget for "Site Prep" was $207,000. Further, Mrs. Tomlinson credibly testified that this did not make sense to her because, when she went to look at the construction site, she did not see any of the items that the first $68,310 draw request was supposed to go toward (i.e. , erosion control or temporary fencing, and she was already paying utilities out of her own pocket), so she could not understand where the money had been spent.154 Despite her concerns, it appeared that some level of construction continued on the Home.
3. The Subsurface Water, Helical Piers, and Water Main Puncturing Fiasco.
22. Meanwhile, sometime in early to mid-July 2015, while drilling for the installation of concrete piers (as provided for in the Contract and in the preliminary foundation plans for the Home, as designed by the engineer hired by Bella Vita, Eric Davis),155 Bella Vita unexpectedly encountered *363subsurface water at the Lots.156 As a result of the water, the drilled holes were unstable, which prevented the installation of the stand-alone concrete piers that the Contract contemplated.157
23. Upon discovering this problem, the Defendant-Debtor, without either notice to or the written consent of the Plaintiffs-Creditors, as required under the terms of the Contract, made the decision to install steel helical piers in place of the concrete piers after consulting with Bella Vita's engineer on the project, Eric Davis.158 The Defendant-Debtor had never worked with helical piers. While the Defendant-Debtor testified that he informed the Plaintiffs-Creditors about the change in pier type almost immediately upon discovering the subsurface water, the court did not find such testimony credible. Rather, the evidence shows that, at least as early as July 20, 2015, Bella Vita was receiving bids for a change over to helical piers and, at the same time, sending emails to the Tomlinsons with no mention of the water problems and pier change.159 The credible testimony of Mrs. Tomlinson, as well as the other documentary evidence, seems to indicate that the Plaintiffs-Creditors did not know about the change to the pier type until shortly before August 3, 2015.160 In summary, there was a significant delay, and Mrs. Tomlinson credibly testified that "they had ample time to come to us and tell us about this issue while they were waiting on those piers to be presented on-site from Hargrave & Hargrave, but no one had said anything to us about it."161 And, of course, the Tomlinsons never consented in writing to a change in pier type.
*36424. To make matters worse, after making the unilateral decision to change the pier type, and while drilling for the new helical piers, a water line was punctured by the contractors installing the new helical piers, which caused flooding on the building pad and adjacent land on the Lots.162 A video showing the flooding was submitted into evidence that was taken by the subcontractor installing the helical piers-which the Tomlinsons obtained much later.163 The flooding was quite bad. The credible evidence showed that no one from Bella Vita informed the Plaintiffs-Creditors of the flooding on the day of the event and, in fact, Mrs. Tomlinson credibly testified that they did not learn of the flooding until several days later from a neighbor164 at a charity event.165
25. Upon learning of the flooding from their neighbor, the Plaintiffs-Creditors drove over to the Lots and they saw "things sticking out of the ground" (i.e. , the helical piers). The Plaintiffs-Creditors then had a meeting with Mike Moss (Bella Vita's vice president of construction) and Chase White (the Tomlinsons' dedicated full-time project superintendent) a few days later and it was at that point that they learned about the change in the pier type.166 Mrs. Tomlinson credibly testified that she was very concerned upon hearing that Bella Vita unilaterally determined to change the pier type without informing the Plaintiffs-Creditors, and that she wanted to do some further investigation regarding helical piers. She was very concerned that Bella Vita had no experience using helical piers. Specifically, Mrs. Tomlinson testified that she contacted the company that did the installation of the helical piers (i.e. , Hargrave & Hargrave) to learn more about what had been happening with the piers.167 Mrs. Tomlinson also testified that she learned that Chase White (again, the dedicated full-time project superintendent) was not on site when the water line was punctured.168 Mrs. Tomlinson also testified that she tried to get into contact with the engineer hired by Bella Vita, Eric Davis, but that Mr. Davis would not speak to her. Mrs. Tomlinson also credibly testified that, upon finally receiving the engineering report from Mr. Davis recommending the helical piers, she discovered a significant gap in time between such recommendation and the actual installation date of the new helical piers, and that she was concerned *365that no one at Bella Vita ever attempted to reach out to her or her husband.
26. Importantly though, Mrs. Tomlinson credibly testified that, had the Plaintiffs-Creditors been approached about the change in pier type, they would not have approved their installation.
27. Mrs. Tomlinson credibly testified that, upon cancelling their contract with Bella Vita, they hired their own engineers (Tom Witherspoon and Sunjong Engineering), and they did not recommend the use of helical piers for the Lots, but rather steel-cased concrete piers, and, in fact, that is the type of pier that was installed by the new builder that was hired to construct the Home after Bella Vita was terminated.169 She also credibly testified that three different companies that the Plaintiffs-Creditors hired to come out and look at the pier issue had all recommended that the helical piers come out and they should not be used because of the Home's wide footprint.170 Finally, Mrs. Tomlinson testified that "I also wouldn't have used helical piers and been a guinea pig with a builder that's using them for the first time. If I was going to use them, I would want a builder that is experienced in them, had been using them for years. I wouldn't want to be the guinea pig on my $4 million home for this builder."171
4. More Failures to Provide Adequate Cost Information.
28. Around the same time the pier issue and the site flooding arose, the Plaintiffs-Creditors also began to send additional emails to the Defendant-Debtor and Bella Vita requesting further accountings of where the money tendered by the Plaintiffs-Creditors was being spent. To be clear, during the period that Bella Vita was constructing the Home, the Plaintiffs-Creditors had tendered to Bella Vita $655,318.57 (collectively, the $448,318.57 Initial Deposit plus the two draw requests of $68,310 and $138,690).
29. First, on August 5, 2015, Mrs. Tomlinson sent the Defendant-Debtor a rather lengthy email asking, among other things, "where is my initial 10% deposit?"172 In response, the Defendant-Debtor sent an email on August 6, 2015 to the Plaintiffs-Creditors and attached the "latest cost download" to "help clear up much of the confusion" regarding where the money tendered to Bella Vita by the Plaintiffs-Creditors had been spent.173 The Defendant-Debtor also stated in this August 6, 2015 email that:
[r]emember the draw scheduled does not precisely coordinate with the costs of the home... it is impossible especially with a fixed price contract. After reviewing the attachments, I believe you will have a clearer understanding. I am happy to speak with your CPA and familiarize him as well. Per your statement in red, this is accurately complying. So you can see your deposit has been heavily utilized and until we receive the next draw, we are at complete depletion and will be underfunded on the geothermal, cables, and soon more concrete in the next few days.174
In closely examining the attached "reconciliation," however, there appears to have been a lack of full disclosure on, at least, where the Initial Deposit had been spent. Specifically, adding up amounts on this *366reconciliation spent on "Permits/Fees ($72,556)," "Architectural/Engineering ($107,235.79)," "Post Arc Design Development ($1,239.64)," "BVCH Overhead ($14,414.30),"175 and "BVCH Profit ($37,445.33),"-all of which could arguably fit into the category of "Soft Costs," that the Defendant-Debtor testified was the source of where the Initial Deposit was spent-this only totaled $232,901.06 . Thus, there was still a failure of Bella Vita and the Defendant-Debtor to account for roughly $215,418 of the Plaintiffs-Creditors' Initial Deposit ($448,318.57 minus $232,901.06).176 And, in fact, Mrs. Tomlinson recognized this omission when she sent yet another follow up email to the Defendant-Debtor early in the morning on August 7, 2015, requesting another breakdown since there remained a failure of Bella Vita and the Defendant-Debtor to account for where the Initial Deposit was spent.177 Thereafter, Mrs. Tomlinson received a purported final reconciliation, but it still did not explain where the Tomlinsons' Initial Deposit had all been spent.178
5. No Builder's Risk Insurance Policy.
30. As noted a couple of times herein, the Tomlinsons received certain documents during the course of dealing with Bella Vita indicating that a Builder's Risk Insurance Policy had been purchased with their Initial Deposit.179 That turned out to be false. No Builder's Risk Insurance Policy was ever purchased. The Defendant-Debtor had three basic explanations for this. First, he testified that he never, in his practice, purchased a Builder's Risk Insurance Policy until he erected lumber on a home, and the Tomlinsons' never got to this stage. Second, he testified that the cost reports that he had provided that seemed to indicate that $22,415.93 had been spent on a Builder's Risk Insurance Policy really meant to convey that this amount would be spent for such a policy. Third, the Defendant-Debtor offered a "what-difference-does-it-make" rebuttal-stating that a Builder's Risk Insurance Policy would not have covered anything *367like the water damage to the Tomlinsons' building pad (the Arbitration Panel awarded $235,000 for needed repair to the building pad).
31. The court was not presented with any expert evidence regarding when a Builder's Risk Insurance Policy is typically purchased by builders or whether it might cover damage from flooding caused by a contractor striking a water main. However, the court knows a misrepresentation when it sees one, and the court finds that the Plaintiffs-Creditors' Exhibit 5, Plaintiffs-Creditors' Exhibit 13-109, and the Defendant-Debtor's Exhibit 6 falsely implied that Bella Vita spent $22,415.93 of the Tomlinsons' Initial Deposit on a Builder's Risk Insurance Policy.
D. Termination of the Contract by the Plaintiffs-Creditors, the Prepetition Arbitration and Resulting Arbitration Award, and the Filing of the Adversary Proceeding.
32. On or around August 7, 2015, the Plaintiffs-Creditors sent a letter through their then attorney, Bill Miller, terminating the Contract with Bella Vita. Then, on September 8, 2015, the Plaintiffs-Creditors, through their new attorney, Van Shaw, sent two more letters to Bella Vita demanding $1,310,637.14 in compensation based upon Bella Vita's violations of the terms of the Contract, the DTPA, and Chapter 27 of the Texas Property Code.180
33. On September 8, 2015, the Tomlinsons filed their Original Petition and Jury Demand in the 153rd Judicial District Court against Steven Clem and Bella Vita in Tarrant County District Court (the "State Court Action").
34. On November 12, 2015, the 153rd Judicial District Court granted the Defendant-Debtor's Motion to Compel Arbitration and Dismiss. Thereafter, the Tomlinsons submitted their claims (as set forth in the Plaintiffs' Second Amended Statement of Claims) to arbitration with the American Arbitration Association (the "Prepetition Arbitration").
35. On September 26, 2016, the Plaintiffs-Creditors were awarded damages by the arbitration panel (the "Arbitration Panel") against both the Defendant-Debtor and Bella Vita, jointly and severally, in the amount of $744,711-which was later adopted into a Final Judgment Confirming Arbitration Award on September 30, 2016 (the "Arbitration Award").181
36. The Defendant-Debtor filed a chapter 7 bankruptcy on December 14, 2016. On that same date, Bella Vita also filed a chapter 7 bankruptcy.
37. On April 3, 2017, the Plaintiffs-Creditors filed the Adversary Proceeding against the Defendant-Debtor objecting to the Debtor's discharge pursuant to section 727(a)(4) of the Bankruptcy Code.
38. On May 25, 2017, the Plaintiffs-Creditors filed their First Amended Complaint, which in addition to the section 727(a)(4) claim, asserted that the Arbitration Award was nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code.
39. At trial docket call on August 14, 2017, the parties indicated that the Plaintiffs-Creditors would not be going forward on their section 727 claim, but would only be asserting their section 523(a)(2)(A) cause of action at trial.
*368III. CONCLUSIONS OF LAW.
1. Bankruptcy subject matter jurisdiction exists in this Adversary Proceeding pursuant to 28 U.S.C. § 1334. This is a statutory core proceeding, pursuant to 28 U.S.C. § 157(b)(2)(B) and (I) ; thus, the bankruptcy court has statutory authority to enter a final order. Moreover, the court has determined that it has Constitutional authority to enter a final order in this matter. Finally, venue is proper before this court, pursuant to 28 U.S.C. §§ 1408 and 1409.
2. The Plaintiffs-Creditors have brought a claim against the Defendant-Debtor under section 523(a)(2)(A) of the Bankruptcy Code. The standard of proof in any action under section 523(a) of the Bankruptcy Code is preponderance of the evidence.182
3. " Section 523(a)(2)(A) is not designed to protect debtors; rather it is designed to protect the victims of fraud."183 That being said, even in the section 523(a)(2)(A) context, "[e]xceptions to discharge are strictly construed against the creditor and liberally construed in favor of the debtor."184
4. Section 523(a)(2)(A) of the Bankruptcy Code provides that:
A discharge under section 727... of this title does not discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation , or actual fraud , other than a statement respecting the debtor's or an insider's financial condition.185
Here, the Plaintiffs-Creditors have argued that the Defendant-Debtor made numerous "false representations" to the Plaintiffs-Creditors both before and after the Contract was signed.
5. As a preliminary matter-before the court even gets to the issue of whether there is a nondischargeable debt in this case, pursuant to section 523(a)(2)(A) of the Bankruptcy Code -the court must address whether there is actually a "debt" of the Defendant-Debtor -in other words, a basis to impose personal liability upon the Defendant-Debtor, when it was Bella Vita, a Texas limited liability company ("LLC"), that actually contracted with the Plaintiffs-Creditors. To be clear, if there is no debt to begin with, as to the Defendant-Debtor , then there is no debt to discharge-much less a debt to except from discharge.186 This ultimately requires the court to first determine if it is necessary to pierce Bella Vita's entity veil, since *369Bella Vita is the entity with which the Plaintiffs-Creditors had the Contract.
A. Must the Plaintiffs-Creditors-as a Prerequisite to this Section 523(a) Nondischargeability Action-Establish Grounds to Pierce Bella Vita's Entity-Veil, Pursuant to Sections 21.223, 101.002 and 101.114 of the Texas Business Organizations Code ? Or is the Joint and Several Liability Set Forth in the Arbitration Award-Based Upon Unspecified DTPA Violations-Dispositive of There Being a "Debt" of the Defendant-Debtor, for Purposes of Section 523(a)(2)(A) of the Bankruptcy Code ?
6. Here, of course, the Defendant-Debtor was the manager and majority member of Bella Vita, an LLC. Again, it was Bella Vita that contracted with the Plaintiffs-Creditors, not the Defendant-Debtor personally. Pursuant to the Texas Business Organizations Code, managers and members of an LLC are generally not individually liable for the contractual debts of the LLC (nor those debts relating to contractual debts), unless there is a finding that the manager/member used the LLC to perpetrate an actual fraud on a creditor, primarily for the direct personal benefit of the member/manager.187 If there is, indeed, a finding of perpetration of an actual fraud on a creditor primarily for the direct personal benefit of the member/manager, then the LLC's veil can be pierced so as to hold the member/manager personally liable on the contractual debt (or debts relating to the contractual debt)188 owed to the defrauded creditor. Notably, this veil-piercing exercise is not necessary if a member/manager is "otherwise liable" to a particular creditor under an "other applicable statute."189
7. The knee-jerk answer to the above-posed questions may seem to be an obvious "yes" there is a "debt" as to the Defendant-Debtor, and there is no need to engage in a veil-piercing analysis-simply because of: (a) the terms of the Arbitration Award, and (b) its underlying basis (i.e., the DTPA-which is an "other applicable statute" as contemplated by *370Texas Business Organizations Code section 21.225(2) ). As far as the terms of the Arbitration Award, as noted earlier, it imposed damages "jointly and severally" against Bella Vita and the Defendant-Debtor in favor of the Plaintiffs-Creditors.190 As far as the basis of the Arbitration Award, as also noted earlier, it stated that the "evidence supports both a breach of contract cause of action and a DTPA cause of action against Bella Vita " and that the "economic damages are addressed as DTPA violations against both Bella Vita and Clem ."191 The Arbitration Award further stated that the "actions of Clem and Bella Vita, acting through Clem, violate the provisions of DTPA, and they are a producing cause of economic damage to the Tomlinsons."192
8. To understand why the Defendant-Debtor was imposed with personal liability under the Arbitration Award-and why this court believes there is a question here as to the pertinence of the veil-piercing provisions of the Texas Business Organizations Code-one must dissect a bit both the DTPA and the Arbitration Award. The relevant provisions of the DTPA are sections 17.46(b) (under the heading "Deceptive Trade Practices Unlawful") and section 17.50 (under the heading "Relief for Consumers"). First, under section 17.50(a) of the DTPA only a "consumer" has standing to maintain a private cause of action under these provisions of the DTPA. The Plaintiffs-Creditors were undeniably "consumers."193 Second, proving a violation of the DTPA requires a consumer to proceed down one of two different avenues. Avenue number one is to show that a defendant committed one or more of a laundry list of 33 "false, misleading, or deceptive acts or practices" enumerated under section 17.46(b) that were relied upon by the consumer to his detriment (hereinafter, the "False, Misleading, or Deceptive Acts").194 An alternative avenue to prove a violation of the DTPA is for the consumer to show that a defendant committed one of three violations enumerated under section 17.50(a)(2) ("breach of an express or implied warranty"), section 17.50(3) ("any unconscionable action"), or section 17.50(4) ("violation of Chapter 541, Insurance Code") (hereinafter, the "Alternative DTPA Acts").195 Under the DTPA, a consumer may bring suit against any "person" whose False, Misleading, or Deceptive Acts or Alternative DTPA Acts were the producing cause of the consumer's harm.196 The DTPA broadly defines "person" as "an individual, partnership, corporation, association, or other group, however organized."197 The Texas Supreme Court has concluded that officers or agents of an entity may be held personally liable under the DTPA, even though they were acting on behalf of the entity.198 Finally, a consumer who prevails in a type of private action described herein may obtain "economic damages" but-if the trier of fact finds the conduct was committed "knowingly"-the consumer may obtain "mental anguish" damages (up to three times the *371amount of "economic damages"); if the trier of fact finds that the conduct was committed "intentionally," the consumer may recover up to another three times the amount of economic and mental anguish damages.
9. As noted earlier in the discussion of collateral estoppel, the Arbitration Award is not a model of clarity (and very little in the way of a record from the Prepetition Arbitration was submitted into evidence). However, we know that the Plaintiffs-Creditors alleged, in their Second Amended Statement of Claims submitted to the Arbitration Panel, more than a half-dozen common law and statutory causes of action including at least the following: breach of contract/breach of warranty; negligence and malice/gross negligence; negligent misrepresentation; violations of approximately ten provisions of the DTPA-of which eight constituted False, Misleading, or Deceptive Acts and two constituted Alternative DTPA Acts; fraud and fraud in the inducement or by nondisclosure; fraud in a real estate transaction; unconscionable, knowing, or intentional course of action; conversion; and various other doctrines or remedies were pleaded (estoppel, alter ego, and joint enterprise). The Arbitration Award ultimately determined that there was evidence to sustain just a breach of contract cause of action and unspecified DTPA violations and the Arbitration Panel awarded economic damages jointly and severally against Bella Vita and the Defendant-Debtor for the DTPA violations. The Arbitration Award states that the actions of Bella Vita and the Defendant-Debtor did "not constitute a knowing199 violation of DTPA"-which seemed aimed at denying the Plaintiffs-Creditors any basis for receiving mental anguish/treble damages. Again, the Arbitration Award never states what provisions of the DTPA were violated-were there False, Misleading, or Deceptive Acts or merely Alternative DTPA Acts? The Arbitration Award implies that the following acts were determined to be violations of some unspecified provisions of the DTPA: (a) promises by the Defendant-Debtor that "he would put a full-time superintendent and a full-time project manager" on the Plaintiffs-Creditors' project as well as James Stokey as a "personal liaison" and "[t]hese representations proved to be false"; (b) installing helical rather than concrete piers called for by the Contract plans and specifications without written approval from the Plaintiffs-Creditors; and (c) the Defendant-Debtor "represented that a builder's risk policy for the Residence had been purchased when in fact the purchase had not been made." Again, there is no articulation of what provisions of the DTPA were found to be violated. The Arbitration Award does state that claims of common law negligence and gross negligence were denied in that they were barred by the economic loss rule. The Arbitration Award also states that the claims of the Plaintiffs-Creditors "for misrepresentation, fraud, fraud in the sale of real estate, conversion, estoppel, alter ego, and joint enterprise were not sustained by *372a preponderance of the evidence and are, therefore, denied." As noted earlier in this ruling, it is unclear whether these causes of action were pursued and denied, or simply abandoned by Plaintiffs.
10. In summary, all that is clear is that the Arbitration Panel believed that: (a) certain false statements and certain actions taken without the Plaintiffs-Creditors' written consent constituted unspecified DTPA violations-for which both Bella Vita and the Defendant-Debtor should be held jointly and severally liable; and (b) only economic damages should be awarded-not mental anguish damages-because the Arbitration Panel was not persuaded that "knowing" violations of the DTPA had occurred.
11. With this backdrop, the court struggles somewhat in determining whether the Plaintiffs-Creditors should be required to pierce the entity-veil of Bella Vita here, pursuant to Texas Business Organizations Code section 21.223, in order for this court to find a "debt" owing by the Defendant-Debtor to the Plaintiffs-Creditors that may, in turn, be nondischargeable. On the one hand, section 21.225 explicitly recognizes that, if there is a statutory basis to hold a member/manager liable for an LLC obligation to a creditor, then section 21.223 does not apply . The DTPA may just be that statutory basis here.200 On the other hand, this court earlier determined, in the collateral estoppel discussion herein, that the arbitral findings were not worth all that much weight in this Adversary Proceeding, since it was so unclear what had actually been "fully and vigorously litigated" and was likewise unclear whether the Arbitration Panel "made specific, subordinate, factual findings on the identical dischargeability issue in question. " Is it correct for this court not to apply collateral estoppel in one context (because of a dearth of explanation regarding what was really litigated and found by the Arbitration Panel and what was not), but apply collateral estoppel in another context (i.e., for purposes of personal liability imposed on the Defendant/Debtor under the DTPA)-when it is not clear what DTPA provisions were even violated? The court has been cited no authority on this point and has not been able to find any authority independently that presents a clear answer.
12. On balance, the court believes that the Arbitration Award, imposing personal liability on the Defendant-Debtor pursuant to some provision of the DTPA-albeit an unspecified provision-makes the situation at bar fall within the ambit of section 21.225 of the Texas Business Organizations Code and, thus, there is an "applicable statute" that makes the Defendant-Debtor liable on a "debt" of the LLC. Thus, the court simply needs to analyze: (1) whether some portion of the "debt" owed by the Defendant-Debtor (pursuant to the Arbitration Award) constitutes a debt for money obtained by false pretenses, a false representation, or actual fraud; and (2) whether such debt is, therefore, nondischargeable pursuant to section 523(a)(2)(A)'s legal standards.
B. What are the False Pretenses, False Representations, or Actual Fraud That Occurred?
1. The Plaintiffs-Creditors' Fraud Claim.
13. In their First Amended Complaint, the Plaintiffs-Creditors have *373asserted damages based upon certain misrepresentations made by the Defendant-Debtor in the form of a common law fraud claim. In order to assert a claim for fraud under Texas law, the Plaintiffs-Creditors must prove that: (1) a material misrepresentation was made that was false; (2) that was either known to be false when made or was asserted without knowledge of its truth; (3) that was intended to be acted upon; (4) that was relied on; and (5) that caused injury.201 It is important to note that many of the representations complained of by the Plaintiffs-Creditors are included as actual terms of the Contract with Bella Vita. While as a general rule, the failure to perform the terms of a contract would be a breach of contract action (not an action for the tort of fraud), a contractual promise can be actionable as fraud if the contractual promise is made with the intent at the time not to perform.202 Thus, a present intent not to perform is the essential ingredient to making a promise to perform in the future actionable, and intent not to perform may be measured from a party's subsequent acts after the promise is made.203 Intent is a fact question uniquely within the realm of the trier of fact because it largely depends upon the credibility of the witnesses and the weight to be given to their testimony.204 Moreover, since the intent to defraud is not susceptible to direct proof, it invariably must be proven by circumstantial evidence.205
14. Additionally, to the extent there is not an actual material misrepresentation at issue, but rather silence or concealment by a party, fraud may, nonetheless, still be present under a fraud by nondisclosure cause of action. Fraud by non-disclosure is a subcategory of fraud because, where a party has a duty to disclose, the non-disclosure may be as misleading as a positive misrepresentation of the facts.206
15. In order to prove fraud by nondisclosure, the Plaintiffs-Creditors must show that the Defendant-Debtor: (1) concealed or failed to disclose a material fact within his knowledge; (2) knew that the Plaintiffs-Creditors were ignorant of the fact and did not have an equal opportunity to discover the truth; (3) intended to induce the Plaintiffs-Creditors to take some action by concealing or failing to disclose the fact, and (4) the Plaintiffs-Creditors suffered injury as a result of acting without knowledge of the undisclosed fact.207 As a general rule, a failure to disclose information does not constitute fraud unless there is a duty to disclose the information .208 Thus, silence may be *374equivalent to a false representation only when the particular circumstances impose a duty on the party to speak and the party deliberately remains silent.209 Whether such a duty exists is a question of law.210 In applying Texas law, the Fifth Circuit has held that a duty to disclose may arise in four situations: (1) when there is a fiduciary relationship; (2) when one voluntarily discloses information, the whole truth must be disclosed; (3) when one makes a representation, new information must be disclosed when that new information makes the earlier representation misleading or untrue; and (4) when one makes a partial disclosure and conveys a false impression.211
16. The Plaintiffs-Creditors assert that the Defendant-Debtor made numerous material false representations with the intent of deceiving the Plaintiffs-Creditors. Specifically, the Plaintiffs-Creditors allege that the Defendant-Debtor's misrepresentations include, but are not limited to:
a. Misrepresenting that the Defendant-Debtor's company was qualified to perform the work under the contract with the Plaintiffs-Creditors;
b. Misrepresenting that the work would be performed in a good and workmanlike manner;
c. Misrepresenting that the work would be performed in accordance with first-class custom home building practices;
d. Misrepresenting that the work would be in compliance with design plans;
e. Misrepresenting the source of the design plans;
f. Misrepresenting that a Builder's Risk Policy was in place on the Plaintiffs-Creditors' project, and charging the Plaintiffs-Creditors for the same;
g. Misrepresenting that the Plaintiffs-Creditors' upfront payment of ten percent (10%) of the total contract price would go only towards the Plaintiffs-Creditors' project;
h. Misrepresenting the quality of materials that would be used on the Plaintiffs-Creditors' project;
*375i. Misrepresenting that a full-time superintendent and full-time project manager would be on the project;
j. Misrepresenting that the Plaintiffs-Creditors would have a personal liaison to coordinate design selections;
k. Misrepresenting that subcontractors working on the Plaintiffs-Creditors' project were being paid; and
l. Misrepresenting that the Plaintiffs-Creditors would receive lien releases for work performed by subcontractors.
17. Parsing through these misrepresentations individually, the court first believes that there was no evidence presented by the Plaintiffs-Creditors regarding misrepresentations (e), (k) and (l), so these representations are not actionable.212
18. Next, misrepresentations (a), (b), (c), and (h) are also not actionable here. Most of these alleged misrepresentations address the Defendant-Debtor's qualifications as a custom home builder and his obligation to perform the work in a good and workmanlike manner, in accordance with first class custom home building practices and using quality materials. Specifically, the court does not believe that the evidence shows that these representations were "false" or a promise of some future performance made with the intent not to perform , both of which are requirements to prove common law fraud.213 Here, the court believes that the evidence-specifically the testimony of the Defendant-Debtor-demonstrates that the alleged misrepresentations listed above were "mostly true" when made, but, if not, were intended to be performed by the Defendant-Debtor at the time they were made. Moreover, the court does not believe that the Plaintiffs-Creditors presented evidence that any of the materials utilized by Bella Vita were poor quality, but rather that they were not the material specifically approved by the Plaintiffs-Creditors. Because of this evidence, the court does not believe that these alleged misrepresentations would qualify as actual "misrepresentations" rising to the level of fraud under Texas law and, accordingly, are not actionable.
19. Next, the court finds that representation (j) (that the Plaintiffs-Creditors would have a personal liaison to coordinate design selections) is also not actionable due to the presence of the "entireties clause" in the Contract. First, to be clear, representation (j), while indeed promised by the Defendant-Debtor to the Plaintiffs-Creditors prior to the Contract being signed, never was actually incorporated into the Contract and related documents. Paragraph 26 of the Contract provides that
This Contract and the attached addenda, constitutes the entire agreement between the parties and all prior negotiations, promises and/or representations whether oral or written, not expressly set forth herein, are of no force and effect and do not constitute part of this Contract. Owner represents to Builder that Owner has not relied and is not *376relying upon any warranties, promises, guaranties, or representations made by Builder, any agent of Builder, or any third party or anyone else acting or claiming to act on behalf of Builder with respect to the purchase of the Property, except as contained in this Contract....
This was quite clearly an entireties clause. Under Texas law, the presence of an entireties clause can have the effect of disclaiming any reliance a contract party may have had on any representations made by a counter-party to the contract prior to the contract being signed, as long as the disclaimer in the contract language is "clear and unequivocal" in its expression of the parties' intent to disclaim reliance.214 By way of example, the Texas Supreme Court has held that there was an intent to disclaim reliance where the contract provided, "[N]one of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment ...."215 In Italian Cowboy Partners , the Texas Supreme Court noted that this form of disclaimer of reliance "was evident from the language of the contract itself."216
20. Here, the court finds that a plain reading of the language above from the Contract also shows a clear and unequivocal disclaimer of reliance.217 Why is this critical? To the extent that there was a representation made by the Defendant-Debtor prior to the Contract being signed that was not actually incorporated into the Contract, the Plaintiffs-Creditors effectively waived any reliance on such representation being performed. As previously stated, reliance of the Plaintiffs-Creditors on the representation made is a requirement to prove common law fraud under Texas law. Any reliance the Plaintiffs-Creditors would have had on such representation *377being performed by the Defendant-Debtor would have been disclaimed pursuant to paragraph 26 of the Contract. Accordingly, because there is no reliance of the Plaintiffs-Creditors that the representation would be performed, the Plaintiffs-Creditors' fraud claim as to alleged misrepresentation (j) fails.
21. In summation, the only alleged misrepresentations that now remain are that: (1) "the work would be in compliance with the design plans;" (2) "that Plaintiffs-Creditors' upfront payment of ten percent (10%) of the total contract price would go only towards Plaintiffs-Creditors' project;" (3) "that a full-time superintendent and full-time project manager would be on the project;" and (4) that "a Builder's Risk Policy was in place on the Plaintiffs-Creditors' property, and charging the Plaintiffs-Creditors for the same."
22. Turning now to the evidence before the court, and keeping in mind the required elements to prove fraud under Texas law outlined above, the court believes that three of the four alleged misrepresentations above form the basis for an ultimate finding of fraud or fraud by nondisclosure committed by the Defendant-Debtor.
a. Representation 1: "the work would be in compliance with the design plans."
23. First, as to the representation that "the work would be in compliance with the design plans," the evidence showed that the initial design plans submitted to the Plaintiffs-Creditors contemplated the installation of concrete piers and, in fact, that was the pier type that Bella Vita first attempted to install. However, upon discovering subsurface water, Bella Vita decided to change the pier type to steel helical piers, without timely disclosing this to the Plaintiffs-Creditors or obtaining their consent to the change, as required under the terms of the Contract. Clearly, this amounted to a breach of the Contract. Specifically, the Contract at paragraph 7.A.3, last sentence, stated that "Builder shall make no changes to the Improvements or alterations from the Construction Documents executed by Owner, unless agreed in writing by Owner, at Owner's sole and exclusive option ."218 Furthermore, the Contract at paragraph 7.A.5 (last paragraph) stated that "If Builder discovers that changes or corrections are necessary for any of the foregoing reasons [one of such foregoing reasons being "unusual subsurface soil conditions, topography, or ground water"], Builder will promptly notify owner ."219 Additionally, the Contract at paragraph 9.C. provided that the Builder agrees to build the Home "in accordance with first-class, custom home industry standard building practices ... and otherwise substantially in compliance with the Final Plans and the Construction Documents, including, without limitation, the customer selection sheet and customer change orders, if any. However, Owner agrees Builder may substitute materials of similar quality, but only with the prior written consent of Owner. "220 Finally, Paragraph 9.E. of the Contract added (last sentence) that, "Builder reserves the right to make changes in the plans, specifications, materials, and components being used at the time of purchase, but only with prior written consent of *378Owner. "221 Thus, the Contract clearly required Bella Vita to inform the Plaintiffs-Creditors of any changes to the pier type, and the Defendant-Debtor was well aware of this requirement since he was the one who actually signed the Contract. Moreover, this was a material term of the Contract, as Mrs. Tomlinson credibly testified that the Tomlinsons had problems with prior builders and they wanted "the builder to follow these plans, and if you're not following these plans, we want to know it and approve it."222
24. While the Defendant-Debtor has argued that his actions merely amounted to a breach of the Contract by Bella Vita (mainly breach of the requirement to obtain the approval of the Plaintiffs-Creditors of any changes to the Home design), the court concludes that the evidence presented demonstrates something more-specifically a fraud by nondisclosure during the performance of the Contract that induced the Tomlinsons to continue on with the Contract longer than they would have, had they known the truth. Specifically, there was a significant gap in time between: (a) when the subsurface water was discovered on the Lots, (b) followed by the unilateral decision to change the pier type, (c) followed by the puncturing of the water line with the unapproved piers, which seriously flooded the Tomlinsons' building pad, and (d) ultimately confirming to the Plaintiffs-Creditors all these events (after the Tomlinsons learned from a neighbor that something seemed amiss). There was no credible testimony offered by the Defendant-Debtor to adequately explain why he chose not to inform the Plaintiffs-Creditors about the discovery of subsurface water; the decision to change piers; and the puncturing of a water line causing massive damages.
25. Applying the specific requirements for a fraud by nondisclosure to the evidence above, the court finds that (1) the Defendant-Debtor concealed or failed to disclose the change in pier type to the Plaintiffs-Creditors (as well as the significant events preceding and following pier installation), which was a material fact within the Defendant-Debtor's knowledge; (2) the Defendant-Debtor knew that the Plaintiffs-Creditors were ignorant of the change in pier type (and surrounding events) and did not have an equal opportunity to discover the change; (3) by failing to disclose the change in pier type (and surrounding events), the Defendant-Debtor intended to induce the Plaintiffs-Creditors to stay in the Contract and continue paying for subsequent draw requests; and (4) the Plaintiffs-Creditors suffered injury as a result of the concealment of the change in pier type, mainly in having to remove and repair the damage from the unapproved helical piers (more on this below).
26. As stated above, fraud by nondisclosure also requires a duty to disclose. Here, the court finds that a duty to disclose arose from the fact that there had been previous representations by the Defendant-Debtor to the Plaintiffs-Creditors that a specific pier type (i.e. , concrete piers) would be used in the construction of the Home. Bella Vita proceeded to expend the Tomlinsons' Initial Deposit and requested additional funds from the Plaintiffs-Creditors in order to (among other things) purchase these concrete piers.223 Once the Defendant-Debtor knew that there was going to be a change to the pier *379type, the Defendant-Debtor was under a duty to inform the Plaintiffs-Creditors of this change. One needs to consider the overall circumstances. This was not just a simple change in generic building materials. The nondisclosure was a combination of: (a) Bella Vita and its subcontractors encountering subsurface water of which they had reason to be aware; (b) Bella Vita deliberating with engineers and vendors and deciding to make a major change-one that the Tomlinsons ultimately would not feel comfortable with and one which the Bella Vita engineer (Eric Davis) later refused to discuss with them; (c) Bella Vita changing to helical piers, then puncturing a water line while installing one; and (d) never disclosing any of this until Mrs. Tomlinson started asking questions. As noted above, Texas courts have held "when one makes a representation, new information must be disclosed when the new information makes the earlier representation misleading or untrue." In other words, there is a duty to speak that arises by operation of law. Here, once the Defendant-Debtor knew that there would be a change in the pier type after consulting with the engineer, Eric Davis, the Defendant-Debtor had a duty to disclose the new information to the Plaintiffs-Creditors.224
27. To be clear, the court is not finding that there was a fraudulent misrepresentation at the time the Contract was entered into-as to the contractual provisions that the "work would be in compliance with design plans" or as to the provisions that written consent would be obtained for changes. The court is not concluding that the Defendant-Debtor intended not to comply with these Contract representations when they were made. Rather, the court is concluding that the Defendant-Debtor, during the performance of the Contract, intentionally concealed material facts from the Tomlinsons, knowing they were unaware, with the intention of inducing the Tomlinsons to stay in the Contract. The Defendant-Debtor does not refute that he was personally involved (as CEO) in the entire pier switch and water puncturing fiasco. The court believes that the Defendant-Debtor cared mightily about not losing a $4.5 million contract with a famous NFL star on the biggest home that he had ever contracted to build. This project would be the biggest accomplishment of his young career.
28. As far as the damages for this fraud by nondisclosure, the court notes that the Plaintiffs-Creditors relied solely upon the damages set forth in the Arbitration Award as proof of their damages, and the Defendant-Debtor did not present any evidence to refute such amounts.225 The Arbitration Award awarded damages of $169,875 for the "charge for the helical piers" as well as $30,300 for the "removal of the helical piers" (which new engineers recommended to the Tomlinsons). The Arbitration Award also found that "as a result of the installation of the helical piers and as a result of the punctured water line, the building pad must be torn out and replaced ... [and a] reasonable and necessary cost to do this work is $235,000.00." Thus, the Plaintiffs-Creditors are also entitled *380to a total damage award of $435,175 ($169,875 plus $30,300 plus $235,000) for the nondisclosure of the change in the pier type.
b. Representation 2: "that Plaintiffs-Creditors' upfront payment of ten percent (10%) of the total contract price would go only towards the Plaintiffs-Creditors' project."
29. Second, as to the alleged representation made by the Defendant-Debtor "that the Plaintiffs-Creditors' upfront payment of ten percent (10%) of the total contract price would go only towards the Plaintiffs-Creditors' project," the court concludes that there was an utter failure to disclose how the upfront payment was spent. This was material, and within the Defendant-Debtor's knowledge. The Defendant-Debtor knew the Tomlinsons were unaware of and did not have an opportunity to otherwise discover it. And by failing to disclose, the Defendant-Debtor intended to induce the Tomlinsons to stay in the Contract. This caused harm to the Tomlinsons.
30. The Contract clearly stated that draw requests with copies of invoices (among other documentation) were required-plain and simple. Second, paragraph 6 dealing with the "escrow" of the initial 10% deposit clearly contemplated that Bella Vita would retain it and "apply it against the first approved Draw Request." However, after the Contract was signed, Bella Vita repeatedly failed to fully account for the Initial Deposit, even after repeated requests from Mrs. Tomlinson. Specifically, the court makes note of at least two or three cost-reconciliations that were sent to the Plaintiffs-Creditors, in which there was a failure to fully account for where the Initial Deposit was actually spent (despite previously representing to the Plaintiffs-Creditors in prior draw requests that the entire Initial Deposit had been expended on "soft costs").226
31. The argument made vociferously by the Defendant-Debtor is that the Contract was a "fixed price" contract-as though nothing he sent or did not send to the Plaintiffs-Creditors-as far as how their deposit and subsequent draw money was spent-really mattered. However, this defense does not adequately take into account the true nature of the Contract for at least two reasons. First, the Contract did have some mechanisms for cost adjustments-upward or conceivably downward. Second, while no "trust fund" mechanisms/protections were put in place, there were oversight and approval mechanisms that were clearly intended to ensure that the Plaintiffs-Creditors could monitor where their money was being spent and make sure it did not go toward any of the Defendant-Debtor's other projects. This would be a rational concern for any consumer building a house, and Mrs. Tomlinson credibly testified that bad experiences with prior house-building projects were what made her retain a lawyer (Mr. Miller) to negotiate special oversight mechanisms into the Contract. Moreover, the Defendant-Debtor also testified that the Plaintiffs-Creditors "had been burned" by other builders in the past and that he knew the Plaintiffs-Creditors "wanted transparency in the visibility of the cost."227
32. The failure to comply with the Contract's requirements to provide invoices and other documentation to the Plaintiffs-Creditors regarding expenditures on their Home project was not only a breach of contract but also, in this court's view, *381based on the totality of the credible evidence, slipped into the category of a fraudulent nondisclosure. Once again, to be clear, the court is not finding that there was a fraudulent intent at the time of entering into the Contract that Bella Vita would not disclose how the Tomlinsons' Initial Deposit and other funds would be spent. Rather, the court is concluding that, during the performance of the Contract, the Defendant-Debtor personally participated in concealing how the Tomlinsons' funds had been spent with the intention of inducing his famous clients to stay in the lucrative Contract. This court strongly suspects, from the continuous concealment and the Defendant-Debtor's obtuse answers at Trial, that some of the Tomlinsons' funds were used for purposes other than their Home-since no genuine "escrow" was ever actually established.
33. The Plaintiffs-Creditors must show, of course, that there was a duty to disclose in order for this to be an actionable fraud by nondisclosure against the Defendant-Debtor. As noted above, Texas courts have held that there is a duty to disclose "when one makes a partial disclosure and conveys a false impression." Here, such a duty clearly existed in light of the fact that the first two draw requests showed that the Initial Deposit had been completely utilized on "soft costs," creating a false impression that the Initial Deposit had actually been spent on the Plaintiffs-Creditors' home. Yet, in the subsequent reconciliations produced by the Defendant-Debtor, it became clear that the Defendant-Debtor was unable to account for a significant portion of the Initial Deposit. Thus, the Defendant-Debtor was clearly under a duty to disclose to the Plaintiffs-Creditors how he had or had not spent the Initial Deposit.
34. What would be the resulting actual damages owed to the Plaintiffs-Creditors for this nondisclosure? In looking at the various cost breakdowns that were submitted into evidence at the Trial, as well as the testimony of the Defendant-Debtor, Mrs. Tomlinson, and the Defendant-Debtor's father, the most logical amount this court can derive is $207,000. This represents the amount of the subsequent draw requests ($68,310 plus $138,690) that the Plaintiffs-Creditors paid, based on a belief that their Initial Deposit had all been expended. In fact, there was a failure to disclose how as much as $215,418 of the Initial Deposit was even spent.228 To this day, the Defendant-Debtor has failed to disclose how these funds were or were not spent. The mystery looms. Accordingly, the court believes that $207,000 represents the damages Plaintiffs-Creditors are entitled to against the Defendant-Debtor for failing to fully account for how the Initial Deposit was spent.
c. Representation 3: "that a full-time superintendent and full-time project manager would be on the project."
35. As to the third representation "that a full-time superintendent and full-time project manager would be on the project," the evidence showed that there was not a Bella Vita representative (i.e. , a manager or superintendent) on site full-time after the Contract was signed. Specifically, Mrs. Tomlinson credibly testified that on the day the water line was punctured at the Lots, Chase White, who was supposed to be the full-time superintendent on the project, was not at the Lots because he was at another home around *382the corner being built by Bella Vita when the water line was punctured.229 Additionally, Mrs. Tomlinson also credibly testified that it was important to them to have someone full-time on their project because this was the biggest home that Bella Vita had ever built.230 While this representation turned out to be unfulfilled and there was a breach of contract, the court concludes it did not rise to the level of a "fraudulent misrepresentation" or "fraud by nondisclosure."
d. Representation 4: "a Builder's Risk Policy was in place on the Plaintiffs-Creditors' property, and charging the Plaintiffs-Creditors for the same."
36. Finally with regard to the representation that "a Builder's Risk Policy was in place on the Plaintiffs-Creditors' property, and charging the Plaintiffs-Creditors' for the same," the court believes that a fraudulent misrepresentation occurred. Once again, the court is not concluding that the Defendant-Debtor misrepresented at the time of contracting that Bella Vita would purchase the Builder's Risk Policy, while secretly intending not to do it. Rather, the Defendant-Debtor personally supervised reports going out to the Tomlinsons during the performance of the Contract that created the false impression that $22,415.93 of the Tomlinsons' money had been used to acquire a Builder's Risk Policy.
37. The Defendant-Debtor testified that a builder's risk policy was a policy that would originate and be paid for once the "lumber dropped" on the home and, since the Plaintiffs-Creditors' construction project never got to that stage, the Defendant-Debtor testified that the builder's risk policy was never purchased. However, to be clear, there is documentary evidence in the record showing that the Defendant-Debtor did represent to the Plaintiffs-Creditors on multiple occasions that Bella Vita had, in fact, purchased the builder's risk insurance policy and paid for the builder's risk insurance policy . Specifically, the evidence showed that there were cost-reconciliations sent to Mrs. Tomlinson on June 4, 2015 and August 6, 2015, and that both cost-reconciliations represented that $22,415.93 had been spent on a builder's risk policy for the Home, when, in fact, one had not been purchased.231 All attempted explanations of the Defendant-Debtor and his father regarding why an unpurchased builder's risk policy was placed on cost reports sent to the Tomlinsons fell flat. Based on the Defendant-Debtor's testimony that this policy was, in fact, never purchased, the court finds that Bella Vita, through the Defendant-Debtor, committed fraud by misrepresenting that the builder's risk policy had, in fact, been purchased, and accordingly, the Plaintiffs-Creditors are entitled to damages in the amount of $22,415.93 (the line item amount for such policy in the various cost reconciliations provided to the Plaintiffs-Creditors).
38. In sum, the court finds that the Plaintiffs-Creditors are entitled to damages in the amount of $664,590.93 ($435,175 plus $207,000 plus $22,415.93) for the various fraudulent misrepresentations and nondisclosures made to the Plaintiffs-Creditors in this case and that the Defendant-Debtor *383(for the reasons articulated above) is personally liable to the Plaintiffs-Creditors for this debt, pursuant to the application of section 21.225 of the Texas Business Organizations Code (and the resulting application of the DTPA).
2. Is the Plaintiffs-Creditors' Debt as to the Defendant-Debtor Nondischargeable Pursuant to Section 523(a)(2)(A) of the Bankruptcy Code ?
39. In order to prove that a debt is nondischargeable, because it was obtained through "a false representation, " pursuant to section 523(a)(2)(A) of the Bankruptcy Code, a creditor must show that: (1) the debtor made representations other than a statement concerning his financial condition, (2) at the time the debtor made the representations, he knew they were false, (3) the debtor made the representations with the intention and purpose to deceive the creditor, (4) the creditor justifiably relied on such representations,232 and (5) the creditor sustained losses as a proximate result of the false representations.233 Moreover, "when one has a duty to speak, both concealment and silence can constitute fraudulent misrepresentation; an overt act is not required."234 Misrepresentations may also be made through conduct.235 However, "[d]ebts falling within the ambit of section 523(a)(2)(A) are those obtained by fraud 'involving moral turpitude or intentional wrong, and any misrepresentations must be knowingly and fraudulently made.' "236 An intent to deceive may be inferred from a "reckless disregard for the truth or falsity of the statement combined with sheer magnitude of the resultant misrepresentation."237 Nevertheless, an honest belief, even if unreasonable, that a representation is true and that the speaker has information to justify it does not amount to an intent to deceive.238
40. A debt may also be nondischargeable under section 523(a)(2)(A) on the basis of "false pretenses." Often times, courts use the terms "fraudulent representation" and "false pretenses" interchangeably. However, the Supreme Court in Husky clearly recognized a distinction between the various types of fraud set forth in section 523(a)(2)(A) (namely "false representations" and "actual fraud"), and several courts have clearly recognized a distinction between a "false representation" and "false pretenses." For purposes of interpreting *384section 523(a)(2)(A) of the Bankruptcy Code, courts have generally defined "false pretenses" as written or oral misrepresentations, or conduct which creates or fosters in the proposed lender or creditor a "false impression" and can include "conduct and material omissions."239 "False pretenses" can also 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."240
41. Turning now to the credible evidence, the court ultimately concludes that the Plaintiffs-Creditors' fraud claims against the Defendant-Debtor (in some cases actual misrepresentations and in some cases nondisclosures) clearly fall within the ambits of section 523(a)(2)(A) of the Bankruptcy Code and are nondischargeable. The court, in its analysis above, found multiple, material misrepresentations and nondisclosures by the Defendant-Debtor with the intent and purpose of deceiving the Plaintiffs-Creditors (on the most significant home project he had ever undertaken). The Plaintiffs-Creditors justifiably relied upon these material misrepresentations and nondisclosures. The Plaintiffs-Creditors sustained losses as a proximate result of the material misrepresentations and nondisclosures. Moreover, the court believes that the material misrepresentations and nondisclosures found above would also fall into the category of "false pretenses" under section 523(a)(2)(A) of the Bankruptcy Code, since when considered collectively, the Defendant-Debtor's actions created a contrived and misleading understanding that the Contract was being complied with-specifically with regards to what piers were being used (and the subsequent striking of the water pipe)-and that the Initial Deposit was being properly and fully spent on the Tomlinsons' Home. This all ultimately induced the Plaintiffs-Creditors to continue paying draw requests to the Defendant-Debtor. The court believes that the Defendant-Debtor's conduct and omissions created an overall false impression that induced the Tomlinsons to stay in the Contract longer-ultimately causing them harm.
42. Accordingly, the court finds and concludes that the $664,590.93 debt owed by the Defendant-Debtor is nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code.
IV. CONCLUSION.
Based on the foregoing, the court will issue a separate Judgment based on these Findings of Fact and Conclusions of Law. Plaintiffs-Creditors' counsel is directed to *385submit a form of Judgment. Such Judgment will be in the amount of $683,975.19-which represents the $664,590.93 found to be nondischargeable plus the $19,384.26 sanction award, for the untimely disclosure of insurance policies. All other relief requested by the parties not herein addressed is denied.
More specifically, Bella Vita's Amended Statement of Financial Affairs filed in its bankruptcy case (Case No. 16-34790-bjh-7), which this court may take judicial notice of, shows that Steven A. Clem owned 48.6% of Bella Vita, Michael Clem, Steven Clem's father, owned 34.7%, and Fred Treffinger, Steven Clem's father-in-law, owned 16.7%. See DE # 42 in In re Bella Vita Custom Homes, LLC (Case No. 16-34790-bjh-7).
Tex. Bus. & Com. Code Ann. §§ 17.41 et seq. (West 2017).
See Plaintiffs-Creditors' Second Amended Statement of Claims, pp. 7-23 [DE # 15 in the AP]. Note that references to "DE # ___ in the AP" throughout these Findings of Fact and Conclusions of Law refers to the docket entry number at which a pleading appears in the docket maintained by the Bankruptcy Clerk in this Adversary Proceeding.
See Plaintiffs-Creditors' Exhibit 12.
See Plaintiffs-Creditors' Second Amended Statement of Claims, pp. 13-17 [DE # 15 in the AP].
Tex. Bus. & Com. Code Ann. §§ 17.46(b)(2), (3), (5), (7), (12), (13), (23) & 17.50(a)(2) & (3) (West 2017).
Id. at § 17.50(a)(1).
Id. at § 17.45(3).
Id. at § 17.44(a). See Miller v. Keyser , 90 S.W.3d 712, 715 & 719 (Tex. 2002) (in suit of home buyers against home builder and various of its agents personally, court noted that the purpose of the DTPA is not only to deter the conduct the DTPA forbids but also to provide consumers with an efficient means to redress deceptive business practices, citing Tex. Bus. & Com. Code § 17.44(a), Amstadt v. U.S. Brass Corp. , 919 S.W.2d 644, 649 (Tex. 1996), Smith v. Baldwin , 611 S.W.2d 611, 616 (Tex. 1980), Pennington v. Singleton , 606 S.W.2d 682, 690 (Tex. 1980), Woods v. Littleton , 554 S.W.2d 662, 670 (Tex. 1977) ). See also Eckman v. Centennial Sav. Bank , 784 S.W.2d 672, 675 (Tex. 1990) ; Jim Walter Homes, Inc. v. Valencia , 690 S.W.2d 239, 242 (Tex. 1985) ; Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 540 (Tex. 1981) ; Joseph v. PPG Indus., Inc., 674 S.W.2d 862, 865 (Tex. App.-Austin 1984, writ ref'd n.r.e.).
Miller v. Keyser , 90 S.W.3d at 717-18 (an agent may be held personally liable for his own violations of the DTPA regardless of his position in the company).
Weitzel v. Barnes , 691 S.W.2d 598, 601 (Tex. 1985).
See Plaintiffs-Creditors' Exhibit 12, ¶ 17. "Knowing" violations of DTPA enable a plaintiff to obtain mental anguish damages. Tex. Bus. & Com. Code Ann. § 17.50(b)(1) (West 2017).
See Plaintiffs-Creditors' Exhibit 12, p. 4 (emphasis added).
The document was entitled "First Amended Objection to Discharge." See DE # 12 in the AP. The original complaint commencing this Adversary Proceeding was entitled "Objection to Discharge," filed April 3, 2017, and only alleged section 727 grounds for denial of the Debtor's overall discharge in his bankruptcy case. See DE # 1 in the AP. The First Amended Objection to Discharge alleged both grounds for denying the discharge of the Plaintiffs-Creditors' individual debt, pursuant to section 523(a)(2) of the Bankruptcy Code, as well as section 727 grounds for denial of overall discharge. The Plaintiffs-Creditors announced at the beginning of the Trial that they were no longer pursuing their section 727 objection to overall discharge. The court notes that the deadline for either section 523 or 727 objections in this case was June 19, 2017. Thus, there was no timeliness issue with regard to the newly added section 523 objections asserted in the First Amended Objection to Discharge.
See DE # 15 in the AP.
Amstadt , 919 S.W.2d at 652.
The Plaintiffs-Creditors also filed a motion for summary judgment arguing that they were also entitled to judgment on their section 523(a)(2)(A) claim as a matter of law-based on the record from the Prepetition Arbitration. See DE ## 17-19 in the AP. The court easily denied this motion-as the record certainly did not support an unrefuted finding of fraud. The Plaintiffs-Creditors' motion for summary judgment is not addressed herein. Rather, the much more vexing questions that were presented in the Defendant-Debtor's motion for summary judgment are addressed herein.
Cromwell v. County of Sac. , 94 U.S. 351, 352, 24 L.Ed. 195 (1876).
See Amstadt , 919 S.W.2d at 652. See also Ellis v. Amex Life Ins. Co. , 211 F.3d 935, 937 (5th Cir. 2000). Note that a federal court that is determining whether a judgment from a state court has res judicata effect should apply the law of the jurisdiction where the state court sits regarding the doctrine of res judicata. Del-Ray Battery Co. v. Douglas Battery Co. , 635 F.3d 725, 730 (5th Cir. 2011), cert. denied , 565 U.S. 1015, 132 S.Ct. 559, 181 L.Ed.2d 398 (2011).
See Milliken v. Grigson , 986 F.Supp. 426, 431 (S.D. Tex. 1997), aff'd , 158 F.3d 583 (5th Cir. 1998) ; J.J. Gregory Gourmet Servs., Inc. v. Antone's Import Co. , 927 S.W.2d 31, 33 (Tex. App.-Houston 1995, no writ) ; Anzilotti v. Gene D. Liggin, Inc., 899 S.W.2d 264, 266 (Tex. App.-Houston [14th Dist.] 1995, no writ) (citing Bailey & Williams v. Westfall , 727 S.W.2d 86, 90 (Tex.App.-Dallas [5th Dist.] 1987, writ refused) ).
See Brown v. Felsen, 442 U.S. 127, 133-39, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) ; Key v. Wise , 629 F.2d 1049, 1063-64 (5th Cir. 1980) (discussing Brown v. Felsen ).
Brown , 442 U.S. at 139, n. 10, 99 S.Ct. 2205.
See Universal Am. Barge Corp. v. J-Chem, Inc. , 946 F.2d 1131, 1136 (5th Cir. 1991) ("In an arbitral case not directly involving federal statutory or constitutional rights, courts should use a case-by-case approach to determining the collateral estoppel effects of arbitral findings."); Viking Dynamics Ltd. v. O'Neill (In re O'Neill), 260 B.R. 122, 126-28 (Bankr. E.D. Tex. 2001) (finding that an arbitration award met the state and federal standards for collateral estoppel); Pollock v. Marx (In re Marx) , 171 B.R. 218, 221-22 (Bankr. N.D. Tex. 1994) (same).
Universal Am. Barge , 946 F.2d at 1137.
Parklane Hosiery Co., Inc. v. Shore , 439 U.S. 322, 331, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) ; Universal Am. Barge, 946 F.2d at 1137.
Grogan v. Garner , 498 U.S. 279, 284 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Id.
Marrese v. Am. Academy of Orthopaedic Surgeons , 470 U.S. 373, 373-74, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) ; Migra v. Warren City School Dist. Bd. of Educ. , 465 U.S. 75, 87-88, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984) ; Ragupathi v. Bairrington (In re Bairrington) , 183 B.R. 754, 756-57 (Bankr. W.D. Tex. 1995) ; Kleindienst v. Horne (In re Horne) , Adv. No. 10-5063-C, 2011 WL 350473, at *4-6 (Bankr. W.D. Tex. Feb. 2, 2011).
Pancake v. Reliance Ins. Co. (In re Pancake) , 106 F.3d 1242, 1244 (5th Cir. 1997).
Universal Am. Barge Corp. , 946 F.2d at 1136.
Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th Cir. 1994), cert. denied , 513 U.S. 1081, 115 S.Ct. 732, 130 L.Ed.2d 636 (1995).
Now all "domestic support obligations" (whether or not in the nature of "alimony, maintenance, or support") are excepted from discharge pursuant to section 523(a)(5) of the Bankruptcy Code -and such term is broadly defined in section 101(14A) of the Bankruptcy Code.
Dennis , 25 F.3d at 277.
Id.
Id.
Id.
Fielder v. King (In re King), 103 F.3d 17, 19 (5th Cir. 1997) (emphasis added); Dennis , 25 F.3d at 278.
King, 103 F.3d at 19.
Id. at 20.
Id. at 19 (citing Dennis 25 F.3d at 278 ).
Id. at n. 1.
Id. at 19.
Id.
Id.
Id. at n. 3 (citing Brown ). But see RecoverEdge L.P. v. Pentecost , 44 F.3d 1284 (5th Cir. 1995), overruled on other grounds by Husky Intern., Elecs., Inc. v. Ritz, --- U.S. ----, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016) (RTC had filed federal district court lawsuit against a doctor-debtor and other borrowers, asserting breach of contract, conspiracy to defraud, common law fraud, and unjust enrichment; RTC abandoned the common law fraud and unjust enrichment counts, and a jury came back with a verdict of breach of contract against doctor-debtor and the other defendants, but only found conspiracy to defraud against all defendants except doctor-debtor; Fifth Circuit held that, in later dischargeability action, jury's verdict precluded a dischargeability determination by the court because the identical issue of "conspiracy to defraud" was what was "actually litigated" before the jury and was subsequently argued as the section 523(a) grounds).
Parklane Hosiery Co., Inc. v. Shore , 439 U.S. 322, 331, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) ; Universal Am. Barge, 946 F.2d at 1137.
Dennis , 25 F.3d at 277.
King, 103 F.3d at 19 (emphasis added). See also Dennis , 25 F.3d at 278.
See Plaintiffs-Creditors' Exhibit 12, ¶¶ 12 & 5.
Id. at ¶ 20.
Tex. Bus. & Com. Code Ann. § 17.50(a)(2) (West 2017).
Tex. Bus. & Com. Code Ann. § 17.46(a) -(b) (West 2017).
RecoverEdge , 44 F.3d at 1291 (and citations therein).
This court hastens to add that failure to introduce a trial record from earlier court proceedings does not absolutely bar the use of issue preclusion. Sheerin v. Davis (In re Davis) , 3 F.3d 113, 115 (5th Cir. 1993). However, the record supporting a state court judgment must be sufficiently detailed in order for a bankruptcy court to be able to give it collateral estoppel effect on an identical issue.
The DTPA simply requires that the consumer show that a misrepresentation was false and that the false misrepresentation was the producing cause of the consumer's damages. Tex. Bus. & Com. Code Ann. § 17.50(a) (West 2017). See also Helena Chem. Co. v. Wilkins , 47 S.W.3d 486, 502 (Tex. 2001).
Id. at 502. See also Eagle Props., Ltd. v. Scharbauer , 807 S.W.2d 714, 724 (Tex. 1990) ; Smith v. Baldwin , 611 S.W.2d 611, 616-17 (Tex. 1980).
Id. at 616-17.
Tex. Bus. & Com. Code Ann. § 17.44(a) (West 2017). See also Amstadt , 919 S.W.2d at 649.
Baldwin , 611 S.W.2d at 616. See also Pennington v. Singleton , 606 S.W.2d 682, 690 (Tex. 1980) ; Woods v. Littleton , 554 S.W.2d 662, 670 (Tex. 1977).
Eagle Props., Ltd. , 807 S.W.2d at 724 ; Baldwin , 611 S.W.2d at 616.
See Brown , 442 U.S. at 133-39, 99 S.Ct. 2205 (discussing the fact that a nondischargeability action is akin to a new "bankruptcy defense" that a state-law plaintiff/creditor was not yet facing).
For other examples of cases in which bankruptcy courts have struggled with application of collateral estoppel in section 523 litigation, where prior DTPA litigation was involved, see the following: Dang v. Gilbert (In re Dang) , 560 B.R. 287 (S.D. Tex. 2016) ; Ragupathi v. Bairrington (In re Bairrington) , 183 B.R. 754 (Bankr. W.D. Tex. 1995) ; Kleindienst v. Horne (In re Horne) , Adv. No. 10-5063-C, 2011 WL 350473, at *4 (Bankr. W.D. Tex. Feb. 2, 2011).
See Brown , 442 U.S. at 133-39, 99 S.Ct. 2205.
As mentioned earlier, the Plaintiffs-Creditors also filed a motion for summary judgment arguing that it was also entitled to judgment on its section 523(a)(2)(A) claim as a matter of law-based on the record from the Prepetition Arbitration. See DE ## 17-19 in the AP. The court easily denied this motion-as the record did not support an unrefuted finding of fraud.
The first day of Trial began August 23, 2017.
See Transcript, p. 70 (lines 9-11). References to the "Transcript, p. _" herein refer to the Transcript of the first day of the Trial held on August 23, 2017 and is located at DE # 59 in the AP.
See Defendant-Debtor's Exhibit 5.
See Joint Pre-Trial Order, p. 6 [DE # 40 in the AP], filed August 22, 2017.
See Tomlinson's First Amended Objection to Discharge and Dischargeability, p. 6 (¶ 13f) [DE # 12 in the AP], filed May 25, 2017.
See Plaintiffs-Creditors' Exhibit 5 (p. 0000050), provided June 4, 2017 to Mrs. Tomlinson; Defendant-Debtor's Exhibit 6; & Plaintiffs-Creditors' Exhibit. 13.109 (p. 000031).
See Plaintiffs-Creditors' Exhibit 1.
Id. (emphasis added).
Id. (emphasis added).
Id.
See Plaintiffs-Creditors' Exhibit. 11.
Id. (emphasis added).
Id. (emphasis added).
Id. (Request Nos. 6, 7, 8, and 9).
See Transcript, pp. 73-74.
See Transcript, pp. 75-84; 90-91.
See Transcript, pp. 242-49, 280-86.
Fed. R. Civ. P. 26.
See DE # 4 in the AP, dated April 4, 2017.
Id. at ¶ 1.
Id. at ¶ 3.
See DE # 11 in the AP, filed May 24, 2017.
Id. at Part II.
Id. at Part III.
See DE # 28 in the AP.
See DE # 16, Schedule B in In re Bella Vita Custom Homes, LLC (Case No. 16-34790-bjh-7).
See DE # 44, Schedule B in In re Bella Vita Custom Homes, LLC (Case No. 16-34790-bjh-7).
See Transcript, pp. 71-74.
Id. at p. 90.
See Defendant-Debtor's Exhibit 13.
See Plaintiffs-Creditors' Exhibit 11.
10/11/17 FTR audio at 10:01:45.
Id. at 10:20:07.
Id. at 10:09:34.
Id. at 10:09:43.
Id. at 10:14:08.
See DE # 55 in the AP.
See DE # 62 in the AP.
Plaintiffs-Creditors' counsel acknowledged this error.
See Joint Pretrial Order, DE # 40 in the AP, p. 4 (¶ C.a.(a) ) and p. 5 (¶ (a)(i) and (ii) ).
See DE # 12 in the AP, Amended Complaint, p. 6 (¶ 13(b), (c), (d), (f), & (g).
See Joint Pretrial Order, p. 5 (¶ (d)(i) ) and p. 6 (¶ e (i) and (ii) ).
See DE # 54 in the AP.
See DE # 60 in the AP.
Jimenez v. Tuna Vessel "Granada" , 652 F.2d 415, 422 (5th Cir. 1981).
Morgan & Culpepper, Inc. v. Occupational Safety & Health Review Comm'n , 676 F.2d 1065, 1068 (5th Cir. 1982).
Thrift v. Hubbard , 44 F.3d 348, 356 (5th Cir. 1995).
Individually, the court will refer to LaDainian Tomlinson as "Mr. Tomlinson" and his wife, LaTorsha Tomlinson, as "Mrs. Tomlinson."
See Transcript, pp. 13-16.
See Transcript, pp. 17-18.
See Transcript, pp. 19-20.
See Transcript, pp. 19 & 132.
See Transcript, pp. 136-37.
See Transcript, p. 99.
See Transcript, p. 108.
See Plaintiffs-Creditors' Exhibit 1, ¶ 3.f.
Id. at ¶ 4.
Id. at ¶ 3
Id. at ¶ 5 (emphasis added).
Id. at ¶ 6.
There is another sentence near the end of this paragraph 6 that states in all capital letters, "OWNER ACKNOWLEDGES AND AGREES THAT THE INDEPENDENT CONSIDERATION IS NONREFUNDABLE FOR ANY REASON." "Independent consideration" is not defined, and it is not entirely clear if this meant that the Initial Deposit was intended to be nonrefundable for any reason or not. If the intention of the parties was to make the $448,318.57 Initial Deposit a nonrefundable deposit, then it would appear that this would be an unenforceable forfeiture penalty. See, e.g. , Stewart v. Basey , 150 Tex. 666, 245 S.W.2d 484, 485-486 (1952) (setting forth two-part test in determining whether a stipulated damage provision of a contract should be enforced as liquidated damages or denied as a penalty provision-specifically a liquidated damages provision will not be enforceable unless it is a reasonable forecast of just compensation for harm caused by a breach and the harm caused by such breach is incapable of accurate estimation). But, more importantly, such an interpretation would seem to be wholly inconsistent with the requirement earlier in paragraph 6 that draw requests had to be provided to and approved by the Plaintiffs-Creditors before the funds in the "escrow" could be applied to the Defendant-Debtor's Work. Such an interpretation would also be inconsistent with paragraphs 18 and 19 of the Contract (each dealing with specific circumstances when Deposits can be retained).
It is noteworthy that the Plaintiffs-Creditors were paying all cash for the Home-no bank loan was involved. This court believes (based on the Defendant-Debtor's testimony and actions) that the Defendant-Debtor thought he could be more relaxed about the draw request process with the Plaintiffs-Creditors than he might otherwise be in a situation in which a bank lender is involved. But the Contract clearly required him to provide documentation in order to be entitled to "draw" money from the Plaintiffs-Creditors (even in the case of the Initial Deposit).
See Plaintiffs-Creditors' Exhibit 1, ¶¶ 3(h), 5 (last sentence), 6 (second sentence), and 8. More specifically, Paragraph 8 of the Contract actually stated that the Plaintiffs-Creditors' approval of a Draw Request was subject to receiving Draw Requests with copies of invoices covered by the Draw Request as well as various other items including a "comparison budget, showing overages/underages of actual versus original Contract Sales Price budget, for the items covered by the draw request and on an aggregate basis for the entire Project budget"; lien waivers; a "certification that the Work covered by the draw request has been completed according to Contract, executed by the chief executive officer or chief financial officer of the Builder"; and a builder certification "certifying that all suppliers and subcontractors covered by the draw request have been paid, or will be paid from disbursement of the proceeds of the draw request."
Id. at ¶ 6.
Id. at ¶ 5.
Id. at ¶ 7.A.3. (emphasis added).
Id. at ¶ 7.A.5 (emphasis added).
Id. at ¶ 9.C. (emphasis added).
Id. at ¶ 9.E. (emphasis added).
See Transcript, p. 137.
See Plaintiffs-Creditors' Exhibit 1, ¶ 9.J. This requirement of a Builder's Risk Insurance policy was reiterated at paragraph 19 of the Contract with slightly broader terms as to what needed to be covered-i.e., insurance to cover the cost of construction of the house in the event of "destruction of the improvements by fire, earthquake, explosion, hail, windstorm, or any other casualty prior to completion and Owner's occupancy." Id. at ¶ 19.
Id. at ¶ 9.J. (emphasis added).
Id.
Id. at ¶ 26.
Id. at Exhibit A, p. 11.
See Transcript, p. 172.
See Plaintiffs-Creditors' Exhibit 4.
See Plaintiffs-Creditors' Exhibit 1, ¶¶ 3(h), 5, 6 and 8.
See Transcript, pp. 59 (lines 16-24); 60 (lines 8-14); 61 (lines 8-9 & 19-25); and 62 (lines 6-18).
See Transcript, p. 62 (lines 11-15).
Mike Moss, the vice president of construction, appeared to be the other individual at Bella Vita (other than the Defendant-Debtor) who worked directly with the Plaintiffs-Creditors.
See Plaintiffs-Creditors' Exhibits 13-40 & 13-50.
Id.
See Plaintiffs-Creditors' Exhibit 13-101, p. 285. There was also reference to an Excel document that the Defendant-Debtor had sent further breaking down the $135,000 that had been spent and Mrs. Tomlinson had said "Everything looked good!" However, the Excel document was never provided to the court as part of the evidentiary record.
See Plaintiffs-Creditors Exhibit 13-50.
See Plaintiffs-Creditors Exhibit 5.
See Plaintiffs-Creditors' Exhibits 13-40 & 13-101.
See Plaintiffs-Creditors' Exhibit 5.
See Plaintiffs-Creditors' Exhibit 13-40.
See Plaintiffs-Creditors' Exhibit 13-101.
See Plaintiffs-Creditors Exhibit 1, Exhibit A. p. 3; Plaintiffs-Creditors Exhibit 3 (Henley Johnston Report dated June 17, 2014 with attached Foundation Plan with Original Drawing Date of October 6, 2014); Plaintiffs-Creditors' Exhibit 13.7 (Foundation Plan with Original Drawing Date of October 6, 2014); and Plaintiffs-Creditors' Exhibit 13.29 (April 17, 2015 bid proposal for the concrete piers from Pennington Construction). Exhibit A to the Contract provides for "Post Tension on Piers Foundation per Engineer Design and soils report." The June 17, 2014 Henley Johnston Report seemed to contemplate concrete piers if piers were used and the Foundation Plan contemplates concrete piers. While it is somewhat unclear when the Plaintiffs-Creditors actually received and reviewed copies of the Foundation Plan or the June 17, 2014 Henley Johnston Report, Mrs. Tomlinson credibly testified that "the concrete piers were spelled out in our contract," and, thus, the court believes that they must have been reviewed by the Plaintiffs-Creditors either prior to or around the same time that the Contract was signed. See Transcript, p. 153.
Subsurface water was not an unforeseen condition in that it was identified in the Henley Johnson Report (an engineering report) dated June 17, 2014. See Plaintiffs-Creditors' Exhibit 3, pp. 27-41. However, the Defendant-Debtor testified that the water levels encountered in July 2015 were much higher then what was initially addressed in the Henley Johnson Report. See Transcript, p. 42.
The record is unclear as to when exactly the subsurface water was encountered. It appears that it happened in early-to-mid July 2015. The court concludes it must have been prior to July 20, 2015, which is the date on a bid proposal for the new 304 helical piers-as further addressed below. See Plaintiffs-Creditors' Exhibit 13.74.
See Transcript, pp. 42-43, 102-104.
Specifically, the court notes that there was a bid proposal submitted to Bella Vita by a company called Hargrave & Hargrave dated July 20, 2015 for the 304 helical piers for $112,838.72 that was sent to both Mike Moss and Chase White on the morning of July 20, 2015 that said "attached is new revised pier layout. 304 piers." Yet in an email to the Plaintiffs-Creditors from Mike Moss (copying Chase White) with the subject "Delayed update" that very same day, there was no mention at all of the discovery of subsurface water nor the change to helical piers, but rather Mike Moss stated: "Last Week: started drilling piers, started drilling wells for geothermal, form board survey was approved. This Week: finish drilling piers, finish drilling wells for geothermal." See Plaintiffs-Creditors' Exhibit 13.74. This seems very suspect and provides further support to Mrs. Tomlinson's credible testimony that they were never informed about the intention to change the pier type.
See Plaintiffs-Creditors' Exhibit 13.98. Mrs. Tomlinson credibly testified that she was orally told about the change to helical piers at a meeting with Mike Moss sometime in late July 2015. See Transcript, pp. 161-62. This is consistent with an August 5, 2015 email from Mrs. Tomlinson that states "... I didn't receive so much as a call, text, or email regarding changing the whole foundation support structure of my home. Again, it seems like the guidelines and rules change on a whim. And this whole switching my foundation support without my knowledge is also costing me even more money ...." See Plaintiffs-Creditors' Exhibit 13.101.
See Transcript, p. 164.
Again, it is unclear from the evidence on what exact day this happened or whether Bella Vita was at fault for the puncture. Specifically, the court notes an email dated August 21, 2015 from Chase White referencing an invoice from the City of Westlake for the broken water line and noting that there is a disagreement on who was responsible and that "[w]e need to have a meeting with them and hash this out." See Plaintiffs-Creditors' Exhibit 13.110; Transcript, p. 225-26.
See Plaintiffs-Creditors' Exhibit 14.
The neighbor was identified as current Dallas Cowboys tight end, Jason Witten. See Transcript, pp. 153-155.
The court would especially note that, when being questioned directly by the court, the Defendant-Debtor actually testified that the discovery of the subsurface water and the striking of the water line all happened within the same day or two and he notified the Plaintiffs-Creditors the very day it happened. Not only did Mrs. Tomlinson credibly refute such testimony, but the court finds that the additional documentary evidence at the Trial supports the notion that the discovery of the subsurface water and the striking of the waterline by Hargrave and Hargrave when installing the helical piers were two separate and distinct events which occurred over a multiple week span of time. See Transcript, pp. 225-27.
See Transcript, pp. 105-106, 153-155.
See Transcript, pp. 164, 226-27.
See Transcript, p. 172.
See Transcript, pp. 166-67 & 173-74.
See Transcript, p. 166.
See Transcript, p. 164.
See Plaintiffs-Creditors' Exhibit 13.101.
See Defendant-Debtor's Exhibit 6.
Id.
Defendant-Debtor's Exhibit 6 showed overhead of approximately $14,000. At the Trial, the Defendant-Debtor's father testified that this number should have been closer to $57,000, but did not provide any further documentary evidence to support this calculation.
Id.
See Plaintiffs-Creditors' Exhibit 13.107.
At the Trial, there was a significant discussion about the Plaintiffs-Creditors' Exhibit 13.109 (a so-called "final reconciliation"). While it is unclear (based on the testimony of the Defendant-Debtor and Mrs. Tomlinson) when the Plaintiffs-Creditors actually received Exhibit 13.109, the Defendant-Debtor testified that the document represented the final reconciliation of where the aggregate $655,318.57 of funds provided by the Plaintiffs-Creditors to Bella Vita had been spent through August 18, 2015. Again, even though the final reconciliation purports to itemize where the Plaintiffs-Creditors' funds had been spent, there still appears to be a "gap" in the accounting. More specifically, the court is adding $72,556 for permits/fees, $110,016.92 for architectural/eng/ins/surveys (including $22,415.93 for a builder's risk policy, which according to the Defendant-Debtor's testimony was never purchased), $1,239.64 for interior decoration, $17,914.30 for BVCH overhead, and $46,549.33 for BVCH profit for a total of $248,276.19 in what the Defendant-Debtor has characterized as "soft cost" expenses. Subtracting that from the Initial Deposit, there is still a failure to account for $200,042.38 of the Initial Deposit. This is so despite the fact that the Defendant-Debtor had previously represented to the Plaintiffs-Creditors that the Initial Deposit had been fully spent on "soft costs" in both draw request # 1 dated May 25, 2015 and draw request # 2 dated June 23, 2015. See Plaintiffs-Creditors' Exhibit 13.40.
See Plaintiffs-Creditors' Exhibits 5 & 13-109 & Defendant-Debtor's Exhibit 6.
See Plaintiffs-Creditors' Exhibits 7 & 8.
See Plaintiffs-Creditors' Exhibit 12.
Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Tummel & Carroll v. Quinlivan (In re Quinlivan) , 434 F.3d 314, 319 (5th Cir. 2005).
FNFS, Ltd. v. Harwood (In re Harwood) , 637 F.3d 615, 619 (5th Cir. 2011) (citing Hudson v. Raggio & Raggio, Inc. (In re Hudson) , 107 F.3d 355, 356 (5th Cir. 1997) ).
11 U.S.C. § 523(a)(2)(A) (2017).
See generally Husky Int'l Elec., Inc. v. Ritz (In re Ritz) , 832 F.3d 560, 562 (5th Cir. 2016) (on remand from the United States Supreme Court, in which the United States Supreme Court held that no misrepresentation is necessary to establish an "actual fraud" under section 523(a)(2)(A) of the Bankruptcy Code, the Fifth Circuit noted that the next necessary step in the dischargeability litigation was for the bankruptcy court to determine whether there was a basis under state law to determine that the Debtor, Ritz, was personally liable on the debt that his corporation, Chrysalis, owed to the plaintiff/creditor, Husky, because "if Ritz is not liable to Husky under Texas law, then there is no debt to discharge and the question of the deniability of a discharge under § 523(a)(2)(A) is moot.").
See collectively Tex. Bus. Orgs. Code Ann. § 21.223 (West 2017) (landmark legislation limiting the liability of a shareholder or affiliate of a corporation for the contractual obligations of a corporation (and obligations relating to or arising from the contractual obligations) except where a shareholder or affiliate caused the corporation to perpetrate an actual fraud on the creditor primarily for the direct personal benefit of the shareholder or affiliate); Tex. Bus. Orgs. Code Ann. § 101.002 (West 2017) (providing that Tex. Bus. Orgs. Code § 21.223 is applicable to limited liability companies) & Tex. Bus. Orgs. Code Ann. § 101.114 (West 2017) (providing that the general rule of limited liability of members and managers afforded by Tex. Bus. Orgs. Code §§ 21.223 & 101.002 may be modified by specific provisions in a limited liability company's formation agreement). See also Spring Street Partners-IV, L.P. v. Lam, 730 F.3d 427, 442-444 (5th Cir. 2013); McCarthy v. Wani Venture, A.S. , 251 S.W.3d 573, 590 (Tex. App.-Houston [1st Dist.] 2007, pet. denied).
See generally discussion in Ward Family Found. v. Arnette (In re Arnette) , 454 B.R. 663, 693 (Bankr. N.D. Tex. 2011) (noting that some courts have found that Texas Business Organizations Code section 21.223 applies to both contractual claims and torts ancillary to the underlying contract). But see Kwasneski v. Williams (In re Williams) , Adv. No. 10-05077, 2011 WL 240466, at *1 (Bankr. W.D. Tex. Jan. 24, 2011) (noting that it is the general rule in Texas that corporate agents are individually liable for fraudulent or tortious acts committed while in the service of their corporation and it is not necessary to pierce the corporate veil in order to impose personal liability).
Tex. Bus. Orgs. Code Ann. § 21.225(2) (West 2017).
See Plaintiffs-Creditors' Exhibit 12, pp. 3 & 4 (¶ 18 and "Award" paragraph).
Id. at pp. 3-4 (¶ 20) (emphasis added).
Id. at p. 3 (¶ 16).
Tex. Bus. & Comm. Code Ann. § 17.45(4) (West 2017).
See, collectively , id. at §§ 17.46(b) and 17.50(a)(1).
Id.
Id. at § 17.50(a)(1).
Id. at § 17.45(3).
See Miller v. Keyser , 90 S.W.3d 712, 717-18 (Tex. 2002) ; Weitzel v. Barnes , 691 S.W.2d 598, 601 (Tex. 1985).
Although the Arbitration Award does not elaborate at all on the basis for this finding, Texas jurisprudence has articulated that "knowingly" means actual awareness, at the time of the act or practice complained of, of the falsity, deception, or unfairness of the act or practice giving rise to the consumer's claim ... but actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness." Tex. Bus. & Com. Code Ann. § 17.45(9) (West 2017). Actual awareness does not mean merely that a person knows what he is doing. St. Paul Surplus Lines Ins. Co., Inc. v. Dal-Worth Tank Co., Inc. , 974 S.W.2d 51, 53-54 (Tex. 1998). Rather, it means that a person knows what he is doing is false, deceptive, or unfair. Id. at 54. Moreover, "actual awareness is more than conscious indifference to another's rights of welfare." Id. See also Daugherty v. Jacobs, 187 S.W.3d 607, 618 (Tex. App.-Houston [14th Dist.] 2006).
See TecLogistics, Inc. v. Dresser-Rand Group, Inc. , 527 S.W.3d 589, 601 (Tex. App-Houston [14th Dist.] 2017, no pet.) (explaining in dicta that even if 21.223 bars liability that might otherwise be imposed under the common law, the statute provides no protection from liability imposed by another statute and citing to the DTPA as one of those statutes).
Amouri v. S.W. Toyota, Inc. , 20 S.W.3d 165, 168 (Tex. App.-Texarkana 2000, pet. denied) ; Formosa Plastics Corp. USA v. Presidio Eng'rs. & Contractors, Inc. , 960 S.W.2d 41, 47 (Tex. 1998).
New Process Steel Corp., Inc. v. Steel Corp. of Tex., Inc. , 703 S.W.2d 209, 214 (Tex. App.-Houston [1st Dist.] 1985, writ ref'd n.r.e.) ; Spoljaric v. Percival Tours, Inc. , 708 S.W.2d 432, 434 (Tex. 1986) ("A promise to do an act in the future is actionable fraud when made with the intention, design and purpose of deceiving, and with no intention of performing the act.").
Id.
Id.
Id. at 435.
Metz v. Bentley (In re Bentley) , 531 B.R. 671, 688 (Bankr. S.D. Tex. 2015).
Rawhide Mesa-Partners, Ltd. v. Brown McCarroll, L.L.P. , 344 S.W.3d 56, 60 (Tex. App.-Eastland 2011, no pet.) (citing to Bradford v. Vento , 48 S.W.3d 749, 755 (Tex. 2001) ).
Ins. Co. of N. Am. v. Morris , 981 S.W.2d 667, 674 (Tex. 1998).
SmithKline Beecham Corp. v. Doe , 903 S.W.2d 347, 353 (Tex. 1995) ; Smith v. Nat'l Resort Cmtys., Inc. , 585 S.W.2d 655, 658 (Tex. 1979).
Ralston Purina Co. v. McKendrick , 850 S.W.2d 629, 633 (Tex. App.-San Antonio 1993, writ denied).
Hamilton v. Segue Software, Inc. , 232 F.3d 473, 481 (5th Cir. 2000) (citing to Hoggett v. Brown , 971 S.W.2d 472, 487 (Tex. App.-Houston [14th Dist.] 1997, pet. denied) ). See also Dorsey v. Portfolio Equities, Inc. , 540 F.3d 333, 341 (5th Cir. 2008) (a duty to disclose may arise "where one makes a representation and fails to disclose new information that makes the earlier representation misleading or untrue ...."); Rimade v. Hubbard Enters. , 388 F.3d 138, 143 (5th Cir. 2004) (holding that a duty to disclose can arise by operation of law or by agreement of the parties, or by some special relationship between the parties, such as a fiduciary or confidential relationship; notwithstanding the above, the Fifth Circuit reiterated that there is always a duty to correct one's own prior false or misleading statements, such that a speaker making a partial disclosure assumes a duty to tell the whole truth even when the partial disclosure was not legally required; finally, the Fifth Circuit noted that there was also a duty to speak when one party voluntarily discloses some but less than all material facts, so that he must disclose the whole truth (i.e. , material facts, lest his partial disclosure convey a false impression) ); Lewis v. Bank of Am. NA , 347 F.3d 587, 588 (5th Cir. 2003), cert. denied , 343 F.3d 540 (2003) ("A duty to speak arises by operation of law when ... one party voluntarily discloses some but less than all material facts, so that he must disclose the whole truth, i.e. , all material facts, lest his partial disclosure convey a false impression.").
As to representations (k) and (l), while there were two exhibits admitted into evidence that alluded to the fact that there may have been unpaid subcontractors on the project, there was no testimony regarding these exhibits, and the court cannot discern by just examining the exhibits whether that was dispositive of the issue. See Plaintiffs-Creditors' Exhibit 6 (Text Messages between Mrs. Tomlinson & Paul Holland) & Plaintiffs-Creditors' Exhibit 13.110 (Email from Chase White to Josh Van, regarding invoice from the City of Westlake).
Eagle Props., Ltd. v. Scharbauer , 807 S.W.2d 714, 723 (Tex. 1990) (emphasis added).
See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am , 341 S.W.3d 323, 331, 336, 337 n.8 (Tex. 2011) (stating that there is a need "to protect parties from unintentionally waiving a claim for fraud," that clarity of the disclaimer is a "requirement" for its enforceability, and that only when a disclaimer is "clear and unequivocal" does analysis "then proceed" to the contract's circumstances); Schlumberger Tech. Corp. v. Swanson , 959 S.W.2d 171, 179 (Tex. 1997) (holding that disclaimer-of-reliance clause had "requisite clear and unequivocal expression of intent necessary to disclaim reliance").
Id. at 180. See also Forest Oil Corp. v. McAllen , 268 S.W.3d 51, 54 (Tex. 2008) (finding disclaimer of reliance where the contract stated that "in executing the releases contained in this Agreement, [the parties are not] relying upon any statement or representation of any agent of the parties being released hereby. [We are] relying on [our] own judgment").
Italian Cowboy , 341 S.W.3d at 335.
The Texas Supreme Court also noted in Forest Oil (which was decided prior to Italian Cowboy ) that courts should not only examine the contract itself, but also the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding. Those factors include: (1) whether the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) whether the complaining party was represented by counsel; (3) whether the parties dealt with each other in an arm's length transaction; (4) whether the parties were knowledgeable in business matters; and (5) whether the release language was clear. Forest Oil , 268 S.W.3d 51, 60 (Tex. 2008). Here, the court notes that the factors outlined above were also all present in this case. Specifically, the Contract was thoroughly negotiated by the parties, and the Plaintiffs-Creditors were represented by an attorney, Mr. Miller. Mrs. Tomlinson had some prior experience in building a custom home and seemed very knowledgeable and sophisticated regarding how the construction process generally worked, and the language in paragraph 26 of the Contract was clear regarding the Plaintiffs-Creditors' disclaimer of reliance.
See Plaintiffs-Creditors' Exhibit 1, ¶ 7.A.3. (emphasis added).
See Plaintiffs-Creditors' Exhibit 1, ¶ 7.A.5 (emphasis added).
See Plaintiffs-Creditors' Exhibit 1, ¶ 9.C. (emphasis added).
See Plaintiffs-Creditors' Exhibit 1, ¶ 9.E. (emphasis added).
See Transcript, p. 137.
See Plaintiffs-Creditors' Exhibit 40 & Defendant-Debtor's Exhibit 6.
The court also notes an email that was sent from Mike Moss to the Plaintiffs-Creditors on July 20, 2015 that referenced installation of the "piers", without referencing that the concrete piers originally required by the Contract's design plans were being changed to helical piers. The court believes that this also amounted to "a partial disclosure conveying a false impression" (see Lewis , 347 F.3d at 588 ) of what was really going on with the piers and this may have also triggered a duty to inform the Plaintiffs-Creditors about the change in the pier type.
See Plaintiffs-Creditors' Exhibit 12.
See Plaintiffs-Creditors' Exhibit 5, 13-109 & Defendant-Debtor's Exhibit 6.
See Transcript, pp. 62-63.
See Defendant-Debtor's Exhibit 6. While Plaintiffs-Creditors' Exhibit 13-109 fails to account for a lesser amount ($200,042), there was not enough credible evidence presented by the Defendant-Debtor to show that Mrs. Tomlinson actually received this "final" reconciliation.
See Transcript, p. 172.
Id.
See Plaintiffs-Creditors Exhibit 5 & Defendant-Debtor's Exhibit 6. The court also notes this same charge also appears on a subsequent cost-reconciliation provided by the Defendant-Debtor, however, the evidence is unclear whether or not Mrs. Tomlinson actually received this cost-reconciliation. See Plaintiffs-Creditors' Exhibit 13-109.
In evaluating a cause of action under section 523(a)(2)(A) of the Bankruptcy Code, the court must determine that the plaintiff justifiably relied upon the representations made by the defendant. Mullen v. Jones (In re Jones) , 445 B.R. 677, 721 (Bankr. N.D. Tex. 2011) (citing to Field v. Mans , 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ). Justifiable reliance does not require independent investigation of the facts as presented, but a plaintiff may not blindly rely upon a misrepresentation, the falsity of which would be obvious to the plaintiff had he used his sense to make a cursory examination. Jones , 445 B.R. at 721 (citing to Field , 516 U.S. at 69-71, 116 S.Ct. 437 ). Justifiable reliance is not a "reasonable man" standard, but is a lesser standard than reasonable reliance (which is a statutory element of section 523(a)(2)(B) of the Bankruptcy Code ). Jones , 445 B.R. at 721 (citing to Field , 516 U.S. at 77, 116 S.Ct. 437 ).
In re Acosta , 406 F.3d 367, 372 (5th Cir. 2005) ; RecoverEdge L.P. , 44 F.3d at 1293.
AT & T Universal Card Servs. v. Mercer (In re Mercer) , 246 F.3d 391, 404 (5th Cir. 2001).
Id.
Provident Bank v. Merrick (In re Merrick) , 347 B.R. 182, 186 (Bankr. M.D. La. 2006) (citing In re Martin , 963 F.2d 809, 813 (5th Cir. 1992) ).
Acosta , 406 F.3d at 372.
Id.
See, e.g. , Cordell v. Sturgeon (In re Sturgeon) , 496 B.R. 215, 222 (10th Cir. 2013) (citing to Marks v. Hentges (In re Hentges) , 373 B.R. 709, 725 (Bankr. N.D. Okla. 2007) ). See also Fowler Bros. v. Young (In re Young) , 91 F.3d 1367, 1374-75 (10th Cir.1996) (failure to disclose may constitute a false representation or false pretenses under Section 523(a)(2)(A) of the Bankruptcy Code ); Harmon v. Kobrin (In re Harmon) , 250 F.3d 1240, 1246 n. 4 (9th Cir. 2001) (noting that a debtor's failure to disclose material facts can constitute a fraudulent omission under Section 523(a)(2)(A) ); The William W. Barney, M.D. P.C. Ret. Fund v. Perkins (In re Perkins) , 298 B.R. 778, 788 (Bankr. D. Utah 2003) (stating that "[a] false pretense as used in § 523(a)(2)(A) includes material omissions, and means implied misrepresentations or conduct intended to create and foster a false impression"); Manheim Auto. Fin. Servs., Inc. v. Hurst (In re Hurst) , 337 B.R. 125, 132 (Bankr. N.D. Tex. 2005) (nondisclosure of a material fact when there is a duty to disclose has been held to constitute the type of fraud necessary to except a debt from discharge).
Sturgeon , 496 B.R. at 222 (citing Stevens v. Antonious (In re Antonious) , 358 B.R. 172, 182 (Bankr. E.D. Pa. 2006) ). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501219/ | Tracey N. Wise, Bankruptcy Judge
Parties who settled an adversary proceeding have asked the Court to restrict public access to settlement-related documents filed in the record because they agreed to keep their settlement terms confidential. In fact, they suggest that the settlement will "blow up" if the Court does not seal the documents. But the parties have failed to show that they are entitled to this extraordinary relief, and the Court rejects the proffered "no seal, no deal" position.
Debtor Brittany R. Thomas filed a class-action lawsuit in this Court (Adv. No. 17-2024) against AT & T Corp. and DirecTV, LLC (the "AP Defendants"). Debtor quickly settled her individual claims with the AP Defendants. Debtor then moved the Court in her chapter 13 bankruptcy case to approve the settlement under Federal Rule of Bankruptcy Procedure 90191 and provided a copy of the fully-executed Settlement Agreement to the Court for review. And, because the parties want to keep the terms of their settlement confidential, Debtor also filed two motions [ECF Nos. 32, 39) ] (the "Seal Motions") to seal the Settlement Agreement and a related explanatory memorandum in the record in this case.
As explained below, documents in a bankruptcy court's record are presumptively accessible to the public. 11 U.S.C. § 107(a). The parties have failed to establish a basis to seal the records at issue under § 107(b) ; therefore, the Seal Motions will be denied.
BACKGROUND
Co-Debtors Brittany Thomas and Andrew Thomas filed a chapter 13 bankruptcy petition on April 19, 2017. Just over seven months later, Debtor Brittany Thomas filed an adversary proceeding against the AP Defendants, alleging generally *387that they engaged in a repeated course of conduct that violated the automatic stay under § 362:
Defendants purposely disregard the Bankruptcy Code and illegally collect or attempt to collect amounts from debtors, which they are prohibited from collecting. Defendants' routine and persistent attempted collection and/or collection of prepetition obligations from debtors, are an abuse of process and are in violation of the automatic stay provided to Chapter 13 Debtors by Section 362(a) of the United States Bankruptcy Code ("Code").
[AP No. 17-2024, ECF No. 1 ¶ 2.] Not only did Debtor seek to proceed on her own behalf against the AP Defendants, she filed her Complaint as a proposed class action on behalf of "[a]ll persons who entered into contracts for telecommunication services or satellite television services, with [the AP Defendants] between April 19th 2012 and the present, who filed then filed [sic] a Chapter 13 bankruptcy petition in the Eastern District of Kentucky and who received documents which substantially conform to" documents sent to Debtor. [Id. ¶ 34.]
About seven weeks after Debtor filed her Complaint, however, the parties filed a Notice of Settlement in the adversary proceeding. In her chapter 13 bankruptcy case, Debtor filed her first Seal Motion [ECF No. 32] and filed the fully-executed Settlement Agreement in the record under a provisional seal for the Court's review; it reflects a settlement between the AP Defendants and Debtor individually respecting the claims in the adversary proceeding.2 Shortly thereafter, Debtor filed a Motion to Compromise Controversy Under Rule 9019 with AT & T Corp. and DirecTV, LLC [ECF No. 35] ("Motion to Compromise"). Stating that Debtor and the AP Defendants "have entered into the Settlement Agreement and Release which will be filed under seal with the Court," Debtor asked the Court "to approve the [Settlement] Agreement and retain jurisdiction to enforce its terms." [Id. ¶¶ 7, 9.]
In other words, Debtor halted her class action lawsuit in favor of a quick settlement of her own claims. Because she sought to settle post-petition claims that are property of her chapter 13 bankruptcy estate under § 1306(a)(1), Debtor moved the Court to approve the settlement. Thus, the Court must "determine if the settlement is fair and equitable based on the facts of the case." In re Equine Oxygen Therapy Res., Inc. , Case No. 14-51611, 2015 WL 1331540, at *2, 2015 Bankr. LEXIS 900 at *5 (Bankr. E.D. Ky. March 20, 2015) (citations omitted). The public has a right to know the basis for the Court's decision on that motion. "This policy of open inspection, established in the Bankruptcy Code itself, is fundamental to the operation of the bankruptcy system and is the best means of avoiding any suggestion of impropriety that might or could be raised." In re Bell & Beckwith , 44 B.R. 661, 664 (Bankr. N.D. Ohio 1984) ; see also Geltzer v. Andersen Worldwide, S.C. , Case No. 05 Civ. 3339 (GEL), 2007 WL 273526, at *4, 2007 U.S. Dist. LEXIS 6794, at *13 (S.D.N.Y. Jan. 30, 2007) (stating that the public is entitled to "monitor the appropriateness of the Court's decision" to approve a settlement).3
*388Debtor's first Seal Motion with respect to the Settlement Agreement quotes § 107(b) and Bankruptcy Rule 9018,4 but does not mention the primary right of public access codified in § 107(a). Debtor inaccurately avers that "a bankruptcy court may enter a seal order under the broad confidentiality protections in bankruptcy proceedings where necessary to protect confidential information." [ECF No. 32 ¶ 14, citing In re Global Crossing Ltd. , 295 B.R. 720, 725 (Bankr. S.D.N.Y 2003).5 ] Debtor claims that "[t]he Settlement Agreement contains settlement terms, the confidentiality of which form the basis of the settlement. Due to the confidential and sensitive nature of the Settlement Agreement, the Debtor respectfully submits that no alternative method would adequately protect the Settlement Agreement." [Id. ¶ 16.] Debtor also reports that she "has delivered copies of the Settlement Agreement to the Court for in camera review, and either have [sic] delivered, or will deliver the Settlement Agreement to the Chapter 13 Trustee on a confidential basis." [Id. ¶ 17.]
Importantly, Debtor's motion does not offer any evidence to show that the Settlement Agreement falls within a category of documents subject to protection from disclosure under § 107(b). Debtor's tendered order (1) does not contain any findings of fact or conclusions of law,6 and (2) would seal the entire Settlement Agreement in perpetuity pending a subsequent Court order. [ECF No. 32-1.]
Following an initial review of the two motions and the Settlement Agreement, the Court entered an Order scheduling a hearing, stating:
The proposed order tendered with the Seal Motion [ECF 32-1] provides that the Settlement Agreement will be sealed in perpetuity absent party consent to unseal or a subsequent Court order. The proposed order does not contain any findings and conclusions that justify nondisclosure to the public, even though the Sixth Circuit requires such findings and conclusions and has held "[t]he public has a strong interest in obtaining the *389information contained in the court record." Brown & Williamson Tobacco Corp. v. F.T.C. , 710 F.2d 1165, 1176, 1180 (6th Cir. 1983) ; see also Shane Group, Inc., et al. v. Blue Cross Blue Shield of Mich., et al. , 825 F.3d 299 (6th Cir. 2016) ; Rudd Equip. Co. v. John Deere Constr. & Forestry Co. , 834 F.3d 589 (6th Cir. 2016) ; c.f. In re Reynolds , No. 04-70259, ECF No. 111 (Bankr. E.D. Ky. May 19, 2017).
In addition, the Motion to Compromise does not discuss the terms of the Settlement Agreement-presumably because Debtor seeks to seal this document. The Court cannot discern from the Settlement Agreement, temporarily filed under seal in the record pending the outcome of the Seal Motion, pertinent terms of the settlement, including the total proposed compensation to Debtor. The Court further notes that the Complaint in the adversary proceeding to be compromised via the Settlement Agreement (No. 17-2024) requests class action certification, but the settlement does not purport to settle the claims in the Complaint on behalf of the proposed class.
[ECF No. 38.] The Court permitted "any party in interest" to "file further information or supplement the record" prior to the scheduled hearing. [Id. ]
After this Order's entry, Debtor filed the second Seal Motion [ECF No. 39] and filed under a provisional seal a Supplemental Memorandum in further support of the Motion to Compromise. Debtor explains her request to seal the Supplemental Memorandum as follows:
Debtor submits that the Supplemental Memorandum in Support of Motion to Compromise, which by this motion she seeks to file under seal, is filed in [sic] to provide a further factual basis for the Motion to Compromise, but for the same reasons which she sought to seal the settlement agreement which forms the basis for the Motion to Compromise, this Supplemental Memorandum in Support of Motion to Compromise must also be sealed."
[ECF No. 39 ¶ 7.] The legal argument in the second Seal Motion is virtually identical to that in the first Seal Motion. Debtor did not file any evidence with the second Seal Motion to establish that either the Settlement Agreement or Supplemental Memorandum may be sealed under § 107(b)(1). And, again, Debtor's proposed order (1) does not contain any findings of fact or conclusions of law, and (2) would seal the Supplemental Memorandum in perpetuity absent a subsequent Court order. [ECF No. 39-1.] The Supplemental Memorandum does supply information in response to the Court's questions about the proposed disposition of settlement funds and the fact that the settlement resolves Debtor's claims alone.
Shortly thereafter, the AP Defendants also filed a Supplement to the Seal Motions. [ECF No. 40.] Their Supplement states that "[t]he Defendants are unwilling to enter into the Settlement Agreement unless the terms thereof remain confidential" and "allowing the Settlement Agreement to be filed under seal would promote the efficient disposition of this dispute and further the public policy favoring settlement agreements." [Id. at 3.] The Supplement cites In re Hemple , 295 B.R. 200 (Bankr. D. Vt. 2003), regarding "non-exhaustive factors in determining whether a settlement agreement may be filed under seal under 11 U.S.C. § 107(b)." [Id. ] The Supplement further advises that "the Debtor is only requesting that the Sealed Documents be sealed for a period of five years, not indefinitely," which clearly contradicts the proposed orders tendered with Debtor's Seal Motions.7 [Id. at 4.] Like *390Debtor, the AP Defendants did not offer any evidence with their Supplement to establish a basis on which the Court could conclude that either the Settlement Agreement or Debtor's Supplemental Memorandum may be protected from disclosure under § 107(b).
The Court held a hearing on all of these motions on February 6, 2018, and gave the parties 14 days thereafter to supplement the record. The parties opted to stand on their papers.
ANALYSIS
The Seal Motions ask the Court to seal entire documents (i.e., the Settlement Agreement and the Supplemental Memorandum explaining the settlement) in the Court's record in perpetuity or until a subsequent order is entered unsealing the documents. Debtors offer no explanation in the Seal Motions why both documents must be sealed in their entireties, and why that seal never should expire. At the hearing, the parties' counsel both agreed that the only information that would need to be sealed is the settlement amount.
While the Sixth Circuit has not evaluated a motion to seal a court record in connection with § 107(b)(1), there can be little doubt that it would find Debtor's requests to seal records to be extraordinary. Indeed, the long-standing maxim in the Sixth Circuit is that "[t]he public has a strong interest in obtaining the information contained in the court record." Brown & Williamson Tobacco Corp. v. F.T.C., 710 F.2d 1165, 1180 (6th Cir. 1983). However, given that a specific section of the Bankruptcy Code governs restricting public access to documents in the record, it is the Code, and not the Sixth Circuit authority relating to non-bankruptcy motions to seal, that is the starting point for the Court's analysis of the Seal Motions.
I. Section 107 of the Bankruptcy Code Provides the Framework for Assessing Whether a Bankruptcy Court may Restrict Access to Public Records.
In bankruptcy matters, Congress has codified a strong presumption in favor of public access to all papers filed therein: "Except as provided in subsections (b) and (c) and subject to section 112, a paper filed in a case under this title and the dockets of a bankruptcy court are public records and open to examination by an entity at reasonable times without charge." 11 U.S.C. § 107(a). Section 107(b), however, identifies certain narrow categories of documents that, notwithstanding the presumption, may be entitled to protection:
On request of a party in interest, the bankruptcy court shall, and on the bankruptcy court's own motion, the bankruptcy court may-*391(1) protect an entity with respect to a trade secret or confidential research, development, or commercial information; or
(2) protect a person with respect to scandalous or defamatory matter contained in a paper filed in a case under this title.
11 U.S.C. § 107(b). Only § 107(b)(1) is at issue here; the parties contend that the Settlement Agreement and its terms constitute confidential "commercial information" under § 107(b)(1). [ECF No. 40 at 4 ("Bankruptcy Rule 9018 provides that on motion, with or without notice, the Court may make any order which justice requires to protect the estate or any entity in respect of confidential commercial information.").]
" 'Commercial information' has been defined as 'information which would cause an unfair advantage to competitors by providing them information as to the commercial operations of the debtor' " or another party. In re Frontier Group, L.L.C. , 256 B.R. 771, 773 (Bankr. E.D. Tenn. 2000) (quoting Video Software Dealers Ass'n v. Orion Pictures Corp. (In re Orion Pictures Corp.) , 21 F.3d 24, 27 (2d Cir. 1994) ). Stated differently "commercial information" is "information that is so critical to an entity's operations that disclosing the information will unfairly benefit that entity's competitors" such that its disclosure "must reasonably be expected to cause commercial injury." In re Waring , 406 B.R. 763, 768-769 (Bankr. N.D. Ohio 2009) (citations omitted).
II. The Parties Have Failed to Establish that the Settlement Agreement and Debtors' Supplemental Memorandum are Entitled to Protection under Section 107(b)(1).
The Seal Motions ask the Court to restrict public access to documents pertaining to the settlement of an adversary proceeding. The party seeking protection under § 107(b)"has the burden of proving that the information should be protected." Waring , 40 B.R. at 768 (citing In re Fibermark, Inc. , 330 B.R. 480, 496-97 (Bankr. D. Vt. 2005) ). Here, Debtor moved to seal documents (as the parties agreed in the Settlement Agreement), and the Court considers the AP Defendants' Supplement as akin to joining in the Seal Motions. The parties have not established that the Settlement Agreement and Debtor's Supplemental Memorandum constitute "commercial information" subject to protection. The parties' broad statements regarding their desire for confidentiality is not a basis to seal the records at issue from public view.
Neither the Seal Motions nor the Supplement are accompanied by any evidence-in the form of an affidavit or otherwise-to demonstrate that the documents at issue are protected as confidential "commercial information" under § 107(b). Thus, the Court has no evidentiary basis whatsoever upon which to conclude that the documents are entitled to protection. Compare In re Silicon Graphics, Inc. , Case No. 09-11701, 2009 Bankr. LEXIS 1350, at *2 (Bankr. S.D.N.Y. Apr. 24, 2009) (unpublished) ("The motion to seal the Excluded Schedules was unopposed and was supported by evidence showing that the schedules contain confidential commercial information regarding [the debtor]'s contract counter-parties and the non-public terms of their business arrangements. The Court found that the Excluded Schedules contained confidential commercial information and were entitled to protection under § 107(b)."); with Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.) , 561 B.R. 36, 43 (Bankr. S.D.N.Y. 2016) ("Evidence-not just argument-is required to support the extraordinary *392remedy of sealing."); In re Muma Servs. , 279 B.R. 478, 485 (Bankr. D. Del. 2002) (stating that the movant on a motion to seal had "not provided any evidence that filing under seal outweighs the presumption of public access to court records. In the absence of any such evidence, we cannot conclude that disclosure of the terms of the lease would cause harm."); In re Found. for New Era Philanthropy , Case No. 95-13729F, 1995 WL 478841, at *4, 1995 Bankr. LEXIS 2204, at *15-16 (Bankr. E.D. Pa. May 18, 1995) (denying motion to seal and noting that the debtor/movant failed to come forward with evidence to support its argument on a motion to seal that disclosure would cause harm).
In addition, the parties' arguments in support of sealing the documents at issue are inadequate. In short, Debtors and the AP Defendants want to keep the terms of their settlement confidential and, thus, included a confidentiality provision in their Settlement Agreement. In fact, Debtors and the AP Defendants essentially tell the Court that there will be no settlement in the adversary proceeding if the terms of settlement are not kept confidential. [ECF No. 32 ¶ 16; ECF No. 39 ¶ 13; ECF No. 40 at 3.] However, the parties' statements about the Settlement Agreement's confidentiality provision are not accurate. While the fully-executed Settlement Agreement does contain a paragraph on confidentiality, that provision does not state that the Settlement Agreement will be null and void if the Court does not seal it in the record. Indeed, the Settlement Agreement's terms implicitly confirm that the parties fully understood that the Court would independently determine whether to seal the Settlement Agreement. "If we were to permit [movant] to file documents under seal simply because it unilaterally agreed to keep matters confidential, then the Court would never have control over motion practice in this case and section 107 would be meaningless." Muma Servs. , 279 B.R. at 485 ; c.f. Togut v. Deutsche Bank AG (In re Anthracite Capital, Inc.) , 492 B.R. 162, 172 (Bankr. S.D.N.Y. 2013) ("The Movants['] argument that the 'no seal, no deal' condition is reason enough for sealing a document under § 107 is not only wrong under the law, it is also illogical. If that were the standard for sealing, every settlement in a bankruptcy case would be sealed whenever a party insisted that a document be sealed. Such a test would remove the need for analysis under § 107 and would directly conflict with the statute, the common law, and the legislative history of § 107.").
Further, neither the Seal Motions nor the Supplement provide a valid legal explanation to establish why the confidentiality provision in the parties' Settlement Agreement requires the Court to impose a seal pursuant to § 107(b)(1) and Bankruptcy Rule 9018. Debtors and the AP Defendants certainly offer case law supporting the uncontroversial proposition that settlements are favored within the Sixth Circuit, and that confidential settlements in litigation are not unusual. These truisms, however, do not supplant the fact that only limited kinds of confidential records are entitled to protection under § 107(b), such as confidential "commercial information" under § 107(b)(1).
In the bankruptcy context, courts across the country have held that settlement terms (including settlement amount) are not confidential "commercial information" that is subject to seal under § 107(b)(1). See , e.g. , Geltzer, 2007 WL 273526, at *4, 2007 U.S. Dist. LEXIS 6794, at *6-14 ("The parties' stipulation of settlement is the central document 'presented to the court to invoke its power[ ]' to approve the settlement, and the size of the settlement is the critical term in that document.
*393The sealing request here thus goes to the very core of the 'constitutionally-embedded presumption of openness in judicial proceedings.' Only the most 'compelling circumstances' could overcome the strong presumption in favor of public availability of such a document. The Trustee's submission falls far short of the showing necessary even to raise a serious question with respect to the sealing of the settlement amount." (citations omitted) ); In re Gibbs , Case No. 11-03070, 2017 WL 6506324, at *2, 2017 Bankr. LEXIS 4322, at *3-4 (Bankr. D. Haw. Dec. 19, 2017) ("The filings make clear that [a party settling with a trustee] is not really concerned about its competitors. Rather, it worries that, if the settlement amount in this case is disclosed, other parties claiming that [the settling party] engaged in wrongful foreclosure conduct will demand similar amounts. This does not amount to 'confidential commercial information' within the meaning of section 107."); Bornman v. Thompson Pump & Mfg. Co. (In re Bornman) , AP No. 6-00023-5-DMW, 2016 WL 4468069, at *2, 2016 Bankr. LEXIS 3110, at *4-6 (Bankr. E.D.N.C. Aug. 24, 2016) (rejecting the argument "that public disclosure would undercut the settling defendant's leverage in negotiating with other claimants" as "[s]ettlement agreements are not entitled to greater protection than other requests for relief from bankruptcy courts" and "there is no public interest in sealing the pending Settlement Agreement between the Plaintiff and the Defendant"); In re Laurel Canyon MK2, LLC , Case No. 1:15-bk-11763-MB, 2015 Bankr. LEXIS 3396, at *3 (Bankr. C.D. Cal. Oct. 6, 2015) ("[T]he Debtor seeks an order of this Court authorizing the filing under seal of the Settlement Agreement. The only cause articulated for this relief is that the parties agreed at the time of the settlement agreement to maintain its confidentiality. This is not cause to authorize the filing under seal of a settlement agreement."). To the extent the parties argue that their settlement is a private matter, § 107(b)"was not intended to save the debtor or its creditors from embarrassment, or to protect their privacy in light of countervailing statutory, constitutional and policy concerns." In re Found. for New Era Philanthropy , 1995 WL 478841, at *4, 1995 Bankr. LEXIS 2204, at *15-16.
As noted above, the AP Defendants cite In re Hemple , 295 B.R. 200 (Bankr. D. Vt. 2003), as authority for when a settlement agreement may be sealed. No court in the Sixth Circuit has cited Hemple . In addition, the bankruptcy court in Hemple actually denied a motion to seal the amount of a settlement (not the whole settlement agreement) because the movant had "not demonstrated that the filing of the settlement agreement falls with the articulated exceptions to the Bankruptcy Code's general rule that all documents in a bankruptcy case be available to the public." Id. at 202. Another court in the Second Circuit analyzed Hemple , noting that it was the only case that court found in which a seal of a settlement amount under § 107(b)"was even sought," and explained that the bankruptcy court in Hemple started from the premise that "absent compelling circumstances all documents filed in bankruptcy cases should be available to the public." Geltzer , 2007 WL 273526, at *3, 2007 U.S. Dist. LEXIS 6794, at *10-12 (quoting Hemple , 295 B.R. at 202 ). The court in Geltzer , in the context of its own case, rejected a movant's argument that public disclosure of a settlement amount would allow other similar claimants to know how much the movant was willing to pay in settlement. The court labeled this argument "a wan excuse for impinging on the public's right of access to judicial documents" because
*394[t]here is no discernable public interest, or interest of the bankruptcy estates, in preserving [the movant]'s 'leverage' as against other parties who have sued it. Nor has the movant indicated any authority to support its implicit proposition that protecting the bargaining position of the defendant in other, unrelated cases, is even a proper consideration of a court being asked to approve a settlement in a given case.
Id. at *4, 2007 U.S. Dist. LEXIS 6794, at *11-12. See also Anthracite Capital , 492 B.R. at 172 ("While it is unclear whether the Hemple factors are ever applicable given the plain meaning of § 107, it is clear that these factors should not be considered until after one of the exceptions to § 107 has been met."). Here, the documents do not fall within the confines of § 107(b).
III. Sixth Circuit Authority Confirms that Sealing Documents in the Public Record is Disfavored.
Finally, although the failure to establish that the documents at issue constitute confidential "commercial information" is enough to deny both of the Seal Motions, the Sixth Circuit's multiple pronouncements on sealing access to public records further support the Court's decision. See, e.g. , Shane Grp., Inc., et al. v. Blue Cross Blue Shield of Mich., et al. , 825 F.3d 299 (6th Cir. 2016) ; Rudd Equip. Co. v. John Deere Constr. & Forestry Co. , 834 F.3d 589 (6th Cir. 2016). The Sixth Circuit has stated:
The burden of overcoming that presumption [of public disclosure] is borne by the party that seeks to seal them. In re Cendant Corp. , 260 F.3d 183, 194 (3d Cir. 2001). The burden is a heavy one: "Only the most compelling reasons can justify the non-disclosure of judicial records." In re Knoxville News-Sentinel Co. , 723 F.2d 470, 476 (6th Cir. 1983).... And even where a party can show a compelling reason why certain documents or portions thereof should be sealed, the seal itself must be narrowly tailored to serve that reason. See , e.g. , Press-Enter. Co. v. Superior Court of California, Riverside Cnty. , 464 U.S. 501, 509-11, 104 S.Ct. 819, 78 L.Ed.2d 629 (1984).
Shane Grp. , 825 F.3d at 305-06.
Within this circuit, a court granting a motion to seal must make an independent finding as to "why the interests in support of non-disclosure are compelling, why the interests supporting access are less so, and why the seal itself is no broader than necessary." Id. at 306 (citations omitted). This burden applies even where "neither party objects to the motion to seal" as "[a] court's obligation to keep its records open for public inspection is not conditioned on an objection from anybody." Id. To that end, while no party has objected to the Seal Motions, this Court cannot abdicate its responsibility to ensure that public access to court records is restricted only in appropriate circumstances. The parties failed to establish that appropriate circumstances exist here.
CONCLUSION
While the settling parties may wish to keep their agreement confidential, they have not provided sufficient authority to demonstrate that the terms of settlement of their adversary proceeding constitutes confidential "commercial information" under § 107(b) and Bankruptcy Rule 9018. Debtor has moved this Court to approve the parties' settlement under Bankruptcy Rule 9019. To do so, the Court must rule on the reasonableness of that settlement, and the public has a right to know the basis for the Court's ultimate assessment.
*395Wherefore, the Court having considered the Seal Motions and the record, and being duly and sufficiently advised, it is ORDERED that
1. The Seal Motions are DENIED; and
2. Debtor shall file an unrestricted and unredacted copy of the Settlement Agreement in the record of this case within seven days of the entry of this Order. Upon submission of the Settlement Agreement in the record, the Court will rule on the Motion to Compromise.
Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101 -1532. References to the Federal Rules of Bankruptcy Procedure appear as "Bankruptcy Rule ____."
The Settlement Agreement requires Debtor to move the Court: (a) to approve the Settlement Agreement; and (b) to seal the Settlement Agreement. Debtor has done so.
See also In re Food Mgmt. Grp., LLC , 359 B.R. 543, 553 (Bankr. S.D.N.Y. 2007) (where a party is acting on behalf of another "[t]he public interest in openness of court proceedings is at its zenith."); Gitto v. Worcester Telegram & Gazette Corp. (In re Gitto Global Corp.) , 422 F.3d 1, 7 (1st Cir. 2005) ("This governmental interest is of special importance in the bankruptcy arena, as unrestricted access to judicial records fosters confidence among creditors regarding the fairness of the bankruptcy system.").
"On motion or on its own initiative, with or without notice, the court may make any order which justice requires (1) to protect the estate or any entity in respect of a trade secret or other confidential research, development, or commercial information ...." Fed. R. Bankr. P. 9018.
In In re Global Crossing , the debtors asked the bankruptcy court to "hear evidence relating to proceedings before the Committee of Foreign Investment in the United States ("CFIUS") in camera ," and to exclude the debtors' competitors from the hearing. 295 B.R. at 722. The evidence asked to be presented in camera was to include sensitive national security information and competitive information such that disclosure would cause commercial damage to the debtors; the debtors had "made a showing that [their competitors had] expressed an interest in acquiring the Debtors or their assets, and would have an interest in CFIUS denying approval of the now pending transaction" between the debtors and a purchaser. Id.
The Court questions Debtor's citation to Global Crossing with respect to when it is appropriate for a court to enter a seal "where necessary to protect confidential information" given the profound factual differences between Global Crossing and the instant matter. Citation to Global Crossing is particularly troublesome given that authority exists that is much more factually analogous to this matter, as discussed in detail below.
The Sixth Circuit requires such findings and conclusions in any order that seals records. See , e.g. , Shane Group, Inc., et al. v. Blue Cross Blue Shield of Mich., et al. , 825 F.3d 299, 306 (6th Cir. 2016) (citation omitted).
The AP Defendants filed a proposed order with their supplement that calls for the sealing of the pertinent documents in the Court's record for five years and provides that "any party in interest to this Bankruptcy Case" may ask AP Defendants' counsel for a copy of the sealed documents, which they may procure only after executing "an acceptable confidentiality agreement." [ECF No. 40-1.] While less restrictive than Debtors' proposed orders, the AP Defendants' order still would limit access to the sealed documents only to a "party in interest" in the bankruptcy case as opposed to the public at large, and would require any party seeking access to accede to terms on a confidentiality agreement presumably to be drafted by the AP Defendants' counsel. Moreover, the AP Defendants' proposed order states: "counsel for the Debtor shall contact the Clerk's Office regarding the return or disposition of the Settlement Agreement as soon as practicable following the closure of this case." [Id. ] In other words, notwithstanding the five-year seal contained elsewhere in the proposed order, the AP Defendants suggest that the Settlement Agreement itself would be pulled from the record of the case , such that it never would be unsealed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501221/ | Thomas J. Tucker, United States Bankruptcy Judge
I. Introduction
This case is before the Court on the motion filed by the Chapter 7 Trustee entitled "Trustee's Motion for Approval of Sale Procedures and for Order Transferring Liens and Other Interests to Sale Proceeds" (Docket # 336, the "Trustee Sale Motion"). The Debtor Glenn Underwood (the "Debtor"), timely filed an objection to the Trustee Sale Motion, on March 5, 2018 (Docket # 345, the "Objection"). No other party in interest has filed an objection to the Trustee Sale Motion, and the deadline for doing so was March 8, 2018.
For the following reasons, the Court concludes that a hearing on the Trustee Sale Motion and the Debtor's Objection is not necessary, and that the Debtor's Objection must be overruled. That leaves no objections to the Trustee Sale Motion, and the Court will grant that motion.
II. Jurisdiction
This Court has subject matter jurisdiction over this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
This proceeding also is "core" because it falls within the definition of a proceeding "arising in" a case under title 11, within the meaning of *44028 U.S.C. § 1334(b). Matters falling within this category in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc. ), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id. at 27.
III. Discussion
The Trustee's Sale Motion seeks approval to sell the bankruptcy estate's real property located at 6185 & 6085 White Lake Road, White Lake Township, Michigan (together, the "Real Property"), for $211,000.00 or for a higher amount, if any, that may be bid for the Real Property. The motion also seeks approval of procedures relating to the sale of the Real Property.
The Debtor's Objection falls into two categories: (1) an argument that the Real Property has a market value higher than the proposed $211,000.00 sale price, and arguments made to support that conclusion; and (2) various arguments unrelated to the value of the Real Property or the Trustee's proposed sale procedures.
As to the second of these objection categories, the Court must reject all the Debtor's arguments, because in making these arguments the Debtor is merely attempting to relitigate numerous issues that have already been conclusively decided by final orders that are no longer appealable. This the Debtor cannot do, under the doctrines of res judicata, collateral estoppel, the Rooker-Feldman doctrine, the law-of-the-case doctrine, and under the appellate mandate doctrine. This prohibition on relitigation has been explained several times, in the prior orders and opinions of this Court and of the United States District Court (in rejecting the Debtor's appeals).
As to the first of the above Debtor-objection categories, the Debtor asserts that the fair market value of the Real Property is $287,000.00. (Objection at 2). The Court construes this as an argument that the Trustee's proposed sale price of $211,000.00 (which is subject to possible higher bids), is unreasonably low, compared to the market value of the Real Property. The Court concludes that the Debtor lacks standing to make this objection, for the following reasons.
Even if the Trustee was proposing to sell the Real Property for a price equal to what the Debtor says is its market value-i.e. , $287,000.00-the Debtor would be no better off financially than if the Real Property sells for the $211,000.00 proposed amount. Thus, the Debtor has no financial stake in the outcome of his objection regarding the sale price of the property.
The Court has previously discussed the concept of debtor standing to make objections in a Chapter 7 case, most recently in the case of In re DiNoto , 576 B.R. 835 (Bankr. E.D. Mich. 2017). That case discussed the standing concept in the context of holding that a Chapter 7 debtor lacks standing to object to a creditor's proof of claim, unless the debtor shows that the case is likely to be a "surplus" case. The reasoning that leads to that conclusion applies equally to a debtor who tries to object to a Chapter 7 trustee's sale motion on the ground that the sale price is too low. In the DiNoto case, this Court explained the standing concept in this way:
The general rule is that a debtor in a Chapter 7 case does not have standing to object to a proof of claim. This is because, in the vast majority of Chapter 7 cases, it makes no financial difference to the debtor whether claims are paid by the Trustee or in what amount claims are paid.
Under 11 U.S.C. § 502(a), a proof of claim is deemed allowed unless a "party *441in interest" objects. See also Fed. R. Bankr. P. 3008. The Bankruptcy Code nowhere defines the term "party in interest." The vast majority of courts have held that only a Chapter 7 trustee may file objections to a proof of claim.
United States v. Jones , 260 B.R. 415, 418 (E.D. Mich. 2000) (collecting cases).
Generally, to have standing in a bankruptcy case, a person must have a pecuniary interest in the outcome of the bankruptcy proceedings. One rule that follows from this "pecuniary interest" standard is that an insolvent Chapter 7 debtor generally does not have standing to object to claims, because he is considered to have no interest in how his assets are distributed among his creditors and is held not to be a party in interest.
In re Moss , 320 B.R. 143, 149 (Bankr. E.D. Mich. 2005). "In fact, almost every court that has dealt with the issue of a Chapter 7 debtor's standing to object, has held that unless there is going to be a surplus, debtors do not have standing to object to a proof of claim." Jones , 260 B.R. at 418. This is so because only when there is a surplus in the bankruptcy estate-i.e. , the assets in the estate exceed in value the amount necessary to pay all allowed administrative expenses and all allowed creditor claims in full with interest-will the debtor be entitled to any distribution from the estate. See 11 U.S.C. § 726(a).
Further, in trying to demonstrate standing, "the [D]ebtor cannot simply claim that there is a theoretical chance of a surplus in the estate, but must show that such surplus is a reasonable possibility." Simon v. Amir (In re Amir ), 436 B.R. 1, 10 (6th Cir. BAP 2010) (internal citations and quotations omitted). The Debtor has the burden of demonstrating such a reasonable possibility of a surplus. See id. ; see also In re Lunan , 523 Fed.Appx. 339, 340 (6th Cir. 2013) (same).
576 B.R. at 838 (emphasis added) (footnote omitted).1
The Court reiterates its holdings and reasoning in DiNoto , and applies them to the Debtor's Objection to the Trustee Sale Motion in this case. See also 60 East 80th St. Equities, Inc. v. Sapir (In re 60 East 80th St. Equities, Inc. ), 218 F.3d 109, 115-16 (2d Cir.2000) (citations omitted) (holding that the debtor "clearly lacked standing to challenge the sale [of assets of the estate] ... or otherwise participate in litigation surrounding the assets of the estate" where there would be no "surplus after all creditors' claims [were] paid"); Cult Awareness Network, Inc. v. Martino (In re Cult Awareness Network, Inc. ), 151 F.3d 605, 607-09 (7th Cir. 1998) (holding that the debtor lacked standing "to object to the trustee's sale of its trade name ... because it ha[d] no pecuniary interest in the disposal of its estate"); Willemain v. Kivitz (In re Willemain ), 764 F.2d 1019, 1022-23 (4th Cir.1985) (holding that the Chapter 7 debtor had no "standing to challenge the proposed sale of his primary asset" because he "lack[ed] a pecuniary interest in this litigation").
*442The Debtor has not alleged or demonstrated that there is a reasonable possibility that there will be any surplus in this Chapter 7 case, even if the Trustee could sell the Real Property for a price equal to what the Debtor says is its market value ($287,000.00). Rather, the record shows that there is no possibility of a surplus.
If the Real Property were sold for $287,000.00, the proceeds of that sale first would be reduced by the required payment of approximately $22,000.00 in outstanding property taxes on the Real Property,2 and the normal costs of sale, including a standard 6% real estate commission.3 Of these costs of sale, the 6% real estate commission alone would equal $17,220.00. Deducting only the property taxes and the real estate commission (a total of $39,220.00) brings the net proceeds of sale down to $247,780.00.
From this amount, before the Debtor could receive any distribution, the Trustee would be required to make distributions that paid in full all of the creditors of the bankruptcy estate according to the priority rules of 11 U.S.C. § 726 -including first, full payment of allowed Chapter 7 administrative expenses (including a Trustee fee and allowed fees of the Trustee's counsel); second, full payment of all allowed Chapter 11 administrative expenses, if any; third, payment in full of all other allowed priority claims, if any; and fourth, full payment of all other allowed unsecured claims, plus interest on such claims. See 11 U.S.C. §§ 726(a)(1) - 726(a)(6).
In this case, the statutory fee for the Chapter 7 Trustee under the commission percentages provided in 11 U.S.C. §§ 326(a) and 330(a)(7), on distributions totaling $247,780.00, would be $15,639.00. The allowed amount of fees for the Chapter 7 Trustee's counsel remains to be determined. The amount of allowed Chapter 11 administrative expenses, if any, is not necessarily known yet. As for the other unsecured claims in this case, we know, at a minimum, that the allowed claim of the judgment creditors Patricia Selent, et al. is $200,823.00 plus interest,4 and the Chapter 11 Liquidating Agent, Gene Kohut, reasonably estimated as of April 20, 2017, that the unpaid balance on that allowed claim is $266,744.09.5 In addition, the Claims Register and the proofs of claim filed in this bankruptcy case show that the unsecured claims other than the claim of the judgment creditors Patricia Selent, et al., total at least $62,730.35.6
From these numbers, it appears that a total of more than $345,113.44 ($15,639.00 + $266,744.09 + $62,730.35 = $345,113.44) would have to be paid by the Trustee to creditors in this case before the Debtor would be entitled to receive any surplus distribution under 11 U.S.C. § 726(a)(6). But nothing close to this *443amount would be paid by the $247,780.00 in maximum net sale proceeds,7 calculated above, that the estate would realize from a sale of the Real Property by the Chapter 7 Trustee, if the Real Property were sold for the $287,000.00 market value alleged by the Debtor.
From these numbers, it is clear that the Debtor has no financial stake in the outcome of the Trustee's Sale Motion, or in the outcome of his objection that the Trustee's proposed sale price is too low. And the Debtor's Objection does not demonstrate, or even allege, otherwise. Thus, the Debtor lacks standing to object to the Trustee's proposed sale of the Real Property on the ground that the price is too low. That objection by the Debtor to the sale therefore must be overruled.
IV. Conclusion
For the reasons stated in this opinion, the Court will enter an order overruling the Debtor's Objection. Because no other objections have been filed, and because the Court finds that the Trustee Sale Motion is well taken and should be granted,8 the Court instructs the Trustee to submit a proposed order granting his motion. The Court waives presentment of such order.
In a footnote in the DiNoto case, the Court also stated the following:
An exception to this surplus rule, not applicable in this case, is that "when the debtor has a non-dischargeable debt, for which the debtor will remain personally liable after the bankruptcy," the debtor has standing to object to a claim if success on the objection will increase the bankruptcy estate's distribution on the non-dischargeable claim. See Moss , 320 B.R. at 149-50 and cases cited therein; see also Jones , 260 B.R. at 418 and cases cited therein.
576 B.R. at 838 n. 1.
See Trustee Sale Motion at ¶ 8.
See, e.g. , the February 9, 2018 Order in this case, approving the Trustee's employment of the real estate agent (Docket # 335) (approving compensation not to exceed 6% of the gross proceeds from the sale of the Real Property).
Such allowed claim is described and referred to in Paragraph 8 of the Court's Order entered on December 10, 2014 in Adv. Pro. No. 14-4966 (at Docket # 65).
See Status Report (Docket # 281) at 3.
This total is the sum of the claim amounts of the claims in the Claims Register numbered 2-1, 4-1, 11-1, 13-1, 21-1, 22-1, plus the allowed claim of Rockwood W. Bullard in the amount of $5,380.00, plus the allowed claim of C. Daniel Harry in the amount of $15,714.59. The allowed amounts of these last two claims were set by the July 24, 2007 order confirming Debtor's Chapter 11 plan (Docket # 114, at 2, 3).
This maximum amount of net sale proceeds is an overstated amount, since it does not factor in costs of sale, other than the real estate commission.
The Court finds that the sale, sale price, and sale procedures proposed in the Trustee Sale Motion are fair and reasonable, are in the best interests of the bankruptcy estate and all parties in interest, and are an appropriate exercise of the Trustee's judgment and discretion in performing his fiduciary duties. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501222/ | Non-party Christopher Bucceri filed a complaint to determine dischargeability and objection to discharge, together with a Petition and Order for Appointment of Next Friend (ECF No. 1-7, the "Next Friend Petition") on behalf of plaintiff D. C.-B. (the "Plaintiff") against debtor-defendant Anna Marie Brooks (the "Defendant"). The court reviewed the Next Friend Petition and set the matter for hearing, which took place on March 22, 2018 in Lansing, Michigan. Both Mr. Bucceri and the Defendant appeared without counsel.
Mr. Bucceri credibly testified that the Plaintiff is twelve years of age, and that Mr. Bucceri is the Plaintiff's father. Although the Plaintiff's mother and Mr. Bucceri live separately and share custody under the Opinion Regarding Custody and Parenting Time dated Aug. 23, 2011 (entered in Case No. 07-04-218-DC in the Circuit Court for Branch County, Michigan), the testimony established that the two parents, though not always in agreement, generally share in making the usual parental decisions, for example regarding education, health and welfare, sports and other activities. Based on the testimony, and the Branch County custody opinion, the court finds that Mr. Bucceri is the Plaintiff's father, and therefore a general guardian.
Under Fed. R. Civ. P. 17(c)(1)(A), applicable in this adversary proceeding by virtue of Fed. R. Bankr. P. 7017, a general guardian may sue on behalf of a minor. As Judge Enslen recognized twenty years ago, a parent is a guardian who may sue as a minor's representative. See Communities for Equity v. Michigan High Sch. Athletic Ass'n , 26 F.Supp.2d 1001, 1006 (W.D. Mich. 1998) ; see also Russick v. Hicks , 85 F.Supp. 281 ( (W.D. Mich. 1949) (no need to appoint next friend in action brought by father on behalf *445of minor children). Because Mr. Bucceri may sue on behalf of his minor daughter as her parent without resort to any appointment as next friend or guardian ad litem under Fed. R. Civ. P. 17(c)(2), the court will deny the Next Friend Petition as unnecessary.
Concluding that Mr. Bucceri is a proper representative, however, does not mean that he may represent the Plaintiff without counsel. As the Sixth Circuit has observed, "parents cannot appear pro se on behalf of their minor children because a minor's personal cause of action is her own and does not belong to her parent or representative." Shepherd v. Wellman , 313 F.3d 963, 970-71 (6th Cir. 2002) ; Lawson v. Edwardsburg Pub. Sch. , 751 F.Supp. 1257, 1258-59 (W.D. Mich. 1990) (litigant has the right to act as his or her own counsel under 28 U.S.C. § 1654 but may not represent the interests of his or her minor child without counsel); cf. Marquette Prison Warden v. Meadows , 114 Mich.App. 121, 318 N.W.2d 627 (1982) (same result under Michigan law).
Accordingly, as the court stated on the record, Mr. Bucceri must retain counsel if he wishes to continue prosecuting his daughter's claims against the Defendant. If he fails to retain counsel, the court will dismiss the complaint without prejudice.1 The unauthorized practice of law is forbidden as a matter of state and federal law, and the court will not hesitate to enforce the proscription.
At the hearing, the Defendant suggested that the Plaintiff's mother does not support Mr. Bucceri's pursuit of this adversary proceeding. Although she was allegedly aware of the adversary proceeding and yesterday's hearing, the mother did not appear. Nevertheless, in response to the Defendant's suggestion, the court asked Mr. Bucceri to provide the name and address of the Plaintiff's mother so that the Clerk may apprise her of today's decision. The court assumes that Mr. Bucceri will also keep the Plaintiff's mother informed.
NOW, THEREFORE, IT IS HEREBY ORDERED that the Next Friend Petition is DENIED as unnecessary.
IT IS FURTHER ORDERED that this adversary proceeding will be dismissed, without prejudice and without further notice, unless counsel for the Plaintiff files an appearance within 28 days after entry of this Order.
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 Christopher Bucceri, Anna Marie Brooks, and the United States Trustee, and shall send a courtesy copy of this order to the Plaintiff's mother at the following address, provided by Mr. Bucceri after the hearing:
Jennifer Callender-Wright
4189 E. Rolston
Linden, MI 48451
IT IS SO ORDERED.
Although the dismissal would be without prejudice, the deadline prescribed in Fed. R. Bankr. P. 4007(c) may independently bar relief. See also Fed. R. Bankr. P. 523(c). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501223/ | Hon. LaShonda A. Hunt, U. S. Bankruptcy Judge
This matter is before the court for ruling on an objection to confirmation by creditor Ford Motor Credit Company LLC ("Ford"). Ford asserts that the Chapter 13 plan proposed by debtor Felicia Williams ("Debtor") fails to provide for equal monthly payments on its allowed secured claim as required by *454section 1325(a)(5)(B) of the Bankruptcy Code ("Code"). 11 U.S.C. § 1325(a)(5)(B). The parties have briefed the issues and presented oral arguments. For the reasons that follow, Ford's objection is sustained.
BACKGROUND
Debtor filed for Chapter 13 bankruptcy protection on November 6, 2017, and listed in her petition and Schedule D, a secured debt owed to Ford for a 2016 Ford Fusion motor vehicle with 25,000 miles. (Dkt. # 1). Debtor also filed a Chapter 13 plan that same day, in which she proposed 60 monthly payments of $785 to the trustee (Dkt. # 2, Section D.1), and payment of Ford's secured claim totaling $23,185, at 7% interest and a fixed monthly amount of $459.09, (Dkt. # 2, Section E.3.1(a) ). In her initial plan, Debtor directed the trustee to disburse $459.09 each month to Ford as pre-confirmation adequate protection (Section G.1).1 (Id. ) She further estimated attorney's fees of $3,800 (Section E.4). (Id. ) Section F of this district's required model plan2 sets forth the order of priority for trustee disbursements-secured claims in Section E.3 are paid at a higher level than attorney's fees in Section E.4. (Id. ) However, Debtor sought to change that payment scheme by adding a special term in Section G.2, allowing the trustee to pay her attorney $246 per month, at the same priority level as Ford. (Id.)
Within days, Ford objected to confirmation, challenging the interest rate as insufficient and concurrent payment of attorney's fees with its secured claim as potentially depriving Ford of adequate protection and resulting in unequal monthly payments. (Dkt. # 15). In response, Debtor filed modified plans that deleted both provisions in Section G and reduced Ford's monthly amount, first to zero dollars at 7% interest (Dkt. # 20, January 4, 2018 Plan), and then to $300 dollars at 7.5% interest (Dkt. # 24, January 9, 2018 Plan). Debtor amended the plan again on January 19, 2018, this time reducing the monthly payment to zero dollars at 7.5% interest, and adding two new special terms in Section G-to pay Ford $275 each month beginning February 2018 and to step up those payments to $741 each month upon completion of administrative expenses, including attorney's fees. (Dkt. # 26). In essence, the Debtor's new proposal flipped the script from giving Ford a higher monthly amount ($459) and her attorney less ($246), to allocating a greater portion to counsel first, and paying more to Ford later in the plan term.
Consistent with her plan, Debtor responded to Ford's objection on January 19, contending that equal monthly payments to secured creditors need not begin immediately after confirmation and that accelerated payment of attorney's fees is allowed so long as Ford receives monthly adequate protection payments, which she calculated to be $275. (Dkt. # 27). The court ordered Ford to file a reply by February 7, and it did so, arguing that the plain language of § 1.325(a)(5)(B) is clear about equal periodic *455payments beginning at confirmation, not a later date. (Dkt. # 36). The City of Chicago ("City"), a non-creditor in this case, moved to file an amicus brief in support of Ford's objection, which the court denied, citing the absence of any statute or rule providing for these filings in pending bankruptcy cases.3 Ford then orally moved to adopt the City's arguments as its own, and that request was granted over Debtor's objection. (Dkt. # 35). Debtor subsequently filed a sur-reply, reiterating her reliance upon case law from this district and others supporting her interpretation of the statutory requirements. (Dkt. # 42). The court heard oral arguments on March 20, 2018 ("Hearing"). Having reviewed the written submissions and hearing transcript, the court is now prepared to rule on whether the proposed plan meets the requirements of §§ 1325 and 1326.
JURISDICTION
This court has jurisdiction pursuant to 28 U.S.C § 1334(b) and 28 U.S.C. § 151. Matters relating to confirmation of a plan are core proceedings under 28 U.S.C. § 157(b)(2)(L). Ford argues that the statute, as written, clearly requires that monthly periodic payments distributed post-confirmation must be equal throughout duration of the plan, at least until the claim is paid in full. In this case, Ford calculated that a set payment of $480 per month would adequately protect its interest and pay off the claim. (Hearing Tr. at 9:18-21, Dkt # 43). Debtor concedes that Ford is entitled to equal monthly payments, but maintains that the statute is silent as to when those must begin. As such, she urges the court to consider the impact of 11 U.S.C. § 1326(b)(1), requiring payment of priority administrative claims "[b]efore or at the time of each payment to creditors under the plan," and construe the two provisions together as allowing adequate protection payments to Ford that cover depreciation of the vehicle-$275 per month-and once the debt to counsel is paid in full, commencing equal payments on Ford's secured claim-$741 per month.4 Ultimately, the Debtor seeks to prioritize payments to her attorney and Ford objects that she cannot do so at the expense of a secured creditor. Resolution of this dispute depends upon who is entitled to be paid what and when under the applicable provisions of §§ 1325 and 1326.
DISCUSSION
At issue in this case is the meaning of language in 11 U.S.C. § 1325(a)(5)(B), which mandates the terms that a plan must provide if the holder of an allowed secured claim objects to its proposed treatment. Specifically, the parties dispute the effect of § 1325(a)(5)(B)(iii) which states that the court shall confirm a plan that provides as follows:
(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and
(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim *456adequate protection during the period of the plan;
Courts are divided on the question of statutory interpretation of § 1325(a)(5)(B), and, not surprisingly, the parties urge this court to follow the cases supporting their respective positions. Debtor points to In re Marks , 394 B.R. 198 (Bankr. N.D. Ill. 2008), a case from this district decided by my colleague Judge Jacqueline Cox, that adopted the slight majority viewpoint. Judge Cox concluded after reviewing the conflicting case law that:
Requiring [the lender] to receive its claim value payment beginning with the first payment and throughout the duration of the plan conflicts with the provision of the Code requiring priority treatment of administrative expenses. Further, the dangers of abuse that precipitated the amendments to § 1325 are not inherent under this interpretation of the statute. Since [the lender] is receiving adequate protection payments in the amount of depreciation while the administrative claims are covered, it will not be left holding the bag for any loss in value of the collateral if the plan should later fail or become converted to a chapter 7 case. [The lender] is not injured by the plan so long as it is receiving these monthly payments equal to the collateral's depreciation. Note that the Debtor is required to make equal monthly payments to the plan by § 1325(a)(5)(B)(iii), not to a particular creditor. Moreover, the trustee is not obligated to disburse equal monthly payments to the creditor because of the trustee's duty to pay priority claims.
Id. at 204-05. Marks relied heavily on a line of cases holding that "secured claims maybe deferred until later in the plan so long as the secured creditor is provided adequate protection payments in the interim." Id. at 203 ; accord In re DeSardi, 340 B.R. 790, 806 (Bankr. S.D. Tex. 2006) ; In re Erwin, 376 B.R. 897, 901 (Bankr. C.D. Ill. 2006) ; In re Hill, 397 B.R. 259, 269 (Bankr. M.D. N.C. 2007). Other courts since Marks have continued to find that reasoning persuasive. See In re Butler, 403 B.R. 5, 16 (Bankr. W.D. Ark. 2009) ("[t]he requirement to pay administrative fees-either in full before or concurrent with payments to creditors-when read in conjunction with the requirement to make adequate protection payments within 30 days of filing dictate that equal monthly payments may not necessarily occur until some time after confirmation"); In re Brennan, 455 B.R. 237, 240 (Bankr. M.D. Fla. 2009) ("[t]he bankruptcy code does not require payments on allowed secured claims begin at month one, or at confirmation, and it expressly requires the accelerated payment of attorneys' fees"). Marks indicated the appropriate method for calculating adequate protection payments in this district is "by looking at the N.A.D.A. Guide to compare the value of the collateral at the time of filing the petition with the value of the collateral in the month immediately after filing." 394 B.R. at 202. Debtor here concludes that figure is $275 each month. Ford does not necessarily dispute this method of computation for pre-confirmation adequate protection, but both sides agree $275 monthly would not be enough to complete payment of the claim over the life of the plan. (Hearing Tr. at 7:7-24; Dkt # 43).
In contrast, Ford points to In re Sanchez, 384 B.R. 574 (Bankr. D. Or. 2008), where that court acknowledged the majority view promoted a "salutary goal" of paying debtor's attorney fees in Chapter 13 cases on an expedited basis, but nonetheless rejected those holdings as "strained interpretations" of the statute. Id. at 577. Sanchez construed "during the period of the plan" in subsection II of § 1325(a)(5)(B)(iii) to mean that "equal *457monthly payments must commence with confirmation and last until the secured claim is paid in full." Id. at 578. Furthermore, in reliance on In re Denton, 370 B.R. 441, 445-46 (Bankr. S.D. Ga. 2007), Sanchez distinguished pre-confirmation adequate protection under § 1326(a)(1)(C) and equal monthly amounts under subsection I of § 1325(a)(5)(B)(iii), in holding that debtors could not simply extend adequate protection payments beyond confirmation "when the monthly amount is less than the amount of payment on the allowed secured claim under the plan." Sanchez, 384 B.R. at 579. See also In re Willis , 460 B.R. 784, 791 (Bankr. D. Kan. 2011) (characterizing the majority's "effort to differentiate post confirmation payments on secured claims and create tiered payment amounts" as an "elegant accommodation" not authorized by the Code).
After reviewing the plain language of the statute and the thoughtful reasoning of the courts that have already considered this issue, this court respectfully disagrees with the rationale of Marks and the majority. This court cannot harmonize the conclusions reached by those courts with the statutory provisions. First, with respect to priority treatment of administrative expenses, there is no basis in the statute for finding that § 1326(b)(1) trumps the right of an objecting secured creditor to equal payments under § 1325(a)(5)(B). All § 1326(b) establishes is that "priority claims such as attorney's fees may be paid concurrently with non-priority claims." In re Romero, 539 B.R. 557, 560 (Bankr. E.D. Wis. 2015). "Nothing in § 1326(b)(1) carves out an exception to the requirement mandated by § 1325(a)(5)(B)(iii)(I) that [secured claims] be paid in equal monthly amounts commencing at the effective date-confirmation-of the plan." In re Kirk , 465 B.R. 300 307 (Bankr. N.D. Ala. 2012). Therefore, in instances where both §§ 1325(a)(5)(B) and 1326(b)(1) apply, debtors "need to calculate plan payments sufficient to provide for these payments and for payment of attorney fees and other administrative expenses." In re Williams, 385 B.R. 468, 475 (Bankr. S.D. Ga. 2008). See also Kirk, 465 B.R. at 308 (a confirmable plan "should be structured so that payments to the attorney neither reduce nor delay the required equal monthly payments to secured claimholders").
Next, as to the adequate protection requirement, Debtor can certainly propose to pay the same monthly amount for pre-confirmation adequate protection and on the secured claim, as she did here with the original November 6, 2017 plan, but subsections I and II of § 1325(a)(5)(B)(iii) are joined by "and," which indicates both provisions must be satisfied. In other words, "the plan must provide for [objecting secured] creditors to receive equal monthly payments beginning with the first distribution post-confirmation and the payment amount must be sufficient to provide adequate protection during the period of the plan." Williams , 385 B.R. at 475. As such, the Debtor cannot merely continue pre-confirmation adequate protection under § 1326(a)(1)(C) as post-confirmation payments under § 1325(a)(5)(B)(iii), if doing so will lead to unequal payments on a secured claim.
Finally, this court can find no support for the holding in Marks, supra, and Erwin, 376 B.R. at 902-3, that the term "equal monthly amounts" in § 1325(a)(5)(B)(iii) references payments to the trustee, as opposed to a creditor. More persuasive is the rationale of the Sanchez court: "Subsection (I) is part of § 1325(a)(5), which expressly pertains to 'allowed secured claims provided for by the plan.' Thus, subsection (I) refers to distributions by the trustee to creditors under the plan, not the debtor's payments into *458the plan." Sanchez, 384 B.R. at 578 ; accord Romero, 539 B.R. at 559-60 ("[t]he payments required to be in equal monthly amounts are 'periodic payments' of 'property to be distributed pursuant to this subsection' ... [which] cannot be understood to mean the debtor's payments to the trustee." (citation omitted) ).
In sum, because the plan proposes to pay Ford a lesser amount until debtor's attorney's fees are paid in full and Ford has not accepted this treatment, the plan does not comply with § 1325(a)(5)(B)(iii). Accordingly, Ford's objection to confirmation is sustained.
CONCLUSION
Confirmation of the January 19, 2018 plan is denied. Debtor must file an amended plan within 21 days of this opinion.
11 U.S.C. § 1326(a)(1)(C) requires debtors to begin making payments in an amount "that provides adequate protection directly to a creditor holding an allowed claim secured by personal property" within 30 days of filing the plan. The general practice in this district is for the debtor to submit the necessary funds to the trustee, who then tenders pre-confirmation payments directly to secured creditors. See Bankr. N.D. Ill. Standing Order "Chapter 13 Pre-confirmation Adequate Protection Payments," dated Aug. 15, 2005.
At the time of filing, the local Chapter 13 Model Plan was the appropriate plan to be used by Debtor. Cases filed or converted to Chapter 13 on or after December 1, 2017, must use Official Form 113 (Chapter 13 National Plan).
Bankruptcy Rule 8017 allows amicus briefs to be filed before the district court or BAP in bankruptcy appeals.
Debtor has never stated exactly how many months Ford would have to wait for the step-up in payments. Based on very rough math, and assuming the Debtor has made all plan payments thus far, the court estimates approximately nine months. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501224/ | Deborah L. Thorne, United States Bankruptcy Judge
Introduction
Cleveland L. Carr ("Carr") and Antoinette L. Lindsey ("Lindsey") are both chapter 13 debtors who have proposed plans providing that their respective attorneys, Peter Frances Geraci Law, LLC ("Geraci") and The Semrad Firm, LLC ("Semrad"), be paid before their secured auto lenders. The chapter 13 trustee, Marilyn O. Marshall, has filed objections to each of their plans and to the applications to approve the compensation of each firm.
The court has heard argument, read the submissions of the parties, and conducted its own independent research. Although these are two separate chapter 13 cases, the issues and points of law are nearly equivalent, and because these issues relate to a great many chapter 13 plans and fee applications presented to this court, the court will issue one decision ruling on both cases.
The court finds that the proposed plans are confirmable but will deny the applications for compensation without prejudice as explained in this opinion.
Background
Cleveland L. Carr
Carr filed a chapter 13 petition in September 2017. He has asked the court to confirm a plan which will require the chapter 13 trustee to disburse payments first to the trustee and second to his auto lender, Exeter Financial ("Exeter"), and to his attorney at the same priority.1 In other *459words, Carr's attorneys' fees in the amount of $4,000.00, and Exeter's secured claim in the amount of $13,100.00, will be paid at $200.00 and $348.00 per month, respectively. To date, Exeter has not objected to the proposed $348.00 per month payment through the life of the plan.
In Carr's case, a fee application was filed a week after the petition seeking approval of $4,000.00 in fees. Along with the application, Carr's law firm, Geraci, filed a Court Approved Retention Agreement ("CARA") signed by Carr and one of Geraci's attorneys. The CARA was signed nearly two weeks before Carr's petition was filed. The CARA pertinently provided that the debtor would pay the filing fee of $310.00 and attorneys' fees of $4,000.00. It obligated the attorney to, among other things, "[p]ersonally explain ... how and when the attorneys' fees and the trustee's fees are determined and paid." It also obligated the attorney to "[p]ersonally review with the debtor ... the completed ... [chapter 13] plan."
During the briefing on this matter, a detailed affidavit signed by Carr was filed as an exhibit to one of the pleadings. The affidavit provided that before the filing of the petition, Carr was informed of the precise terms of Geraci's accelerated compensation under the plan as well as the detrimental effect it would have on the early plan payments to Exeter. Carr stated that before the filing of the petition, he was made fully aware by Geraci that an early dismissal in his case would result in it being much more difficult for him to keep his vehicle as a practical matter because he would be paying more to his attorneys at the beginning of the case and less to the auto lender until the attorneys' fees were paid in full.
Antoinette L. Lindsey
The facts are much the same in Lindsey's case. Lindsey filed a chapter 13 petition in August 2017 and proposed a plan making payments in the amount of $590.00 per month for 60 months. During the early months of the case, the plan provides that the chapter 13 trustee will make adequate protection payments to the car lender, Regional Acceptance ("Regional"), in the amount of $25.00 per month. Regional has not objected to this amount of adequate protection. Starting in August of 2018, the payments to Regional increase to $500.00 per month. During the period of adequate protection payments, Lindsey's law firm, Semrad, will be paid over $500.00 per month.
Just as with Carr's case, Lindsey and her Semrad attorney entered into the CARA, which set out the same basic obligations as in the Carr case. They first entered into the CARA on August 14, 2017 (a week before filing). They executed a new CARA on the date that Lindsey filed her petition, August 21, 2017.
During the briefing in Lindsey's case, a set of disclaimers initialed by Lindsey and dated August 14, 2017 (a week before filing) was filed as an exhibit. The disclaimers indicate that Lindsey understood that Semrad would be paid before any of her creditors. A separate disclaimer indicated, however, that Lindsey understood that Semrad would be paid "before all creditors unless otherwise agreed or ordered by the court." The disclaimers, however, do not show that Lindsey understood, for example, the practical difficulties an early dismissal would have on her ability to keep *460her vehicle given the accelerated payment of Semrad's fees under the plan.
The Trustee's Objections to the Plans and Applications for Compensation
In both cases, the trustee filed an objection to the attorneys' compensation and an objection to confirmation of the chapter 13 plan. The trustee objects to the following: (1) payments made to the secured creditors will not be in "equal monthly amounts," since they receive only adequate protection for a certain amount of time, and only later do they begin receiving increased payments on their allowed secured claim;2 (2) debtors' attorneys in these cases have not shown that they have benefitted the estate; (3) the attorneys have breached their fiduciary obligations to the debtors by not disclosing to the debtors that they would be paid ahead of the debtors' other creditors, particularly the auto lenders; and (4) both attorneys violated Local Rule 2016-1 because both attorneys had come to an "agreement" with their clients concerning their compensation, and those agreements were never then reduced to writing, signed by both parties, and filed with the court pursuant to the requirements of Local Rule 2016-1.
For the reasons discussed below, the chapter 13 plans in both cases will be confirmed. Compensation in both cases is denied without prejudice. Counsel may refile applications seeking approval of compensation in conformity with this Memorandum Opinion.
Discussion 3
I. Is the Accelerated Payment of Attorneys' Fees in Chapter 13 Plans Permissible under the Bankruptcy Code in these Cases?
The court must decide whether section 1325(a)(5)(B)(iii)(I) applies where a secured creditor is not objecting to its treatment under the plan. Because the court concludes that it does not, the court does not reach the question as to whether or not that provision is violated when a secured creditor receives post-confirmation payments under the plan that are different in amount. For this reason, the trustee's objection to confirmation of the plan in Lindsey's case is overruled.4
A. The Relevant Statutory Provisions
Section 1325(a)(5) provides in relevant part that:
with respect to each allowed secured claim provided for by the plan- (A) the holder of such claim has accepted the plan; (B) ... (iii) if- (I) the property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or (C) the debtor surrenders the property securing such claim to such holder ....
*46111 U.S.C. § 1325(a)(5). For the court to confirm a chapter 13 plan, it must satisfy itself that one of section 1325(a)(5)'s three conditions has been met, since section 1325(a)(5) must be satisfied in order for a plan to be confirmed. See United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 277, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (noting that all conditions in section 1325(a) are mandatory); Johnson v. Home State Bank , 501 U.S. 78, 87-88, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) ; In re Andrews , 49 F.3d 1404, 1409 (9th Cir. 1995) (noting the use of the disjunctive "or" in section 1325(a)(5) ) (quoting In re Szostek , 886 F.2d 1405, 1412 (3d Cir. 1989) ).
Section 1326(b)(1) provides in relevant part that:
Before or at the time of each payment to creditors under the plan, there shall be paid-(1) any unpaid claim of the kind specified in section 507(a)(2) of this title ....
11 U.S.C. § 1326(b)(1). Section 1326(b) sets up a scheme by which administrative expense payments must be made either before or concurrently with payments to creditors; in other words, initial payments to administrative expense claimants cannot commence on a date later than the date on which initial payments to creditors begin. See In re Maldonado , 483 B.R. 326, 337 (Bankr. N.D. Ill. 2012) ; but see In re Harris , 304 B.R. 751, 756-57 (Bankr. E.D. Mich. 2004) (stating that administrative claimants such as the debtor's attorney must be paid in full before payments to secured or unsecured creditors begin).
The precise workings of section 1326(b), as pertinent to this case, are as follows. First, the section references unpaid claims "of a kind specified in section 507(a)(2)," which in turn references the administrative expenses found in section 503(b), with those expenses including compensation and reimbursement awarded under section 330(a) of this title." 11 U.S.C. §§ 1326(b)(1), 507(a)(2), 503(b)(2). One type of compensation or reimbursement that may be awarded under section 330(a) is that for the services of a debtor's attorney in a case under chapter 13. 11 U.S.C. § 330(a)(4)(B).5 Thus, the approved compensation of a debtor's attorney in chapter 13 case may be paid under the chapter 13 plan out of the estate, see 11 U.S.C. § 1306, and that compensation must be paid under the plan in the manner provided by section 1326(b)(1).6
The question to be answered here is whether a chapter 13 plan may be confirmed where a secured creditor is to continue receiving adequate protection payments under the plan until the debtor's attorneys' fees are paid in full, after which time the payments to the secured creditor under the plan "step up" to an increased amount sufficient to pay off the creditor's claim in the time allotted under the plan. There is no doubt that, in isolation, section 1326(b)(1) allows for the payment of attorneys' fees prior to the payment of creditors. The difficulty arises where this type of arrangement causes the monthly payments made to the secured creditor under the plan to be unequal, potentially running afoul of section 1325(a)(5)(B)(iii)(I). A further wrinkle is added in these cases by the fact that no affected secured creditor has objected to the plan.
*462B. Should this Court Apply Section 1325(a)(5)(B) Where no Secured Creditor has Objected to Confirmation of the Plan?
A threshold question to be answered, however, is whether the failure of a secured creditor to object to confirmation of the plan renders section 1325(a)(5)(A) satisfied in these circumstances. If it does, then section 1325(a)(5)(B) would not have any application, see Andrews , 49 F.3d at 1409 (noting the disjunctive "or"), and the objection to the accelerated treatment of debtors' attorneys' fees under section 1326(b)(1) on the basis that such treatment causes the monthly payments to certain secured creditors to be unequal would have no merit.
A majority of courts consider section 1325(a)(5)(A) to be satisfied as to the debtor's secured creditors where secured creditors have had proper notice and no secured creditor is objecting. See, e.g., In re Jones , 530 F.3d 1284, 1291 (10th Cir. 2008) ; In re Lorenzo , No. BAP PR 15-011, 2015 WL 4537792, at *6 (1st Cir. BAP July 24, 2015) (citing In re Flynn , 402 B.R. 437, 443 (1st Cir. BAP 2009) ), aff'd , 637 Fed.Appx. 623 (1st Cir. 2016) ; In re Olszewski , 580 B.R. 189, 192 (Bankr. D.S.C. 2017). The court finds that the secured creditors, in these cases the auto lenders, have had adequate notice of the debtor's plan in both cases, and neither has objected to the current plans being proposed.7 Section 1325(a)(5)(A) is therefore satisfied. Because section 1325(a)(5)(A) is satisfied, section 1325(a)(5) is satisfied. See Andrews , 49 F.3d at 1409 (noting the disjunctive "or"). The cramdown requirements housed separately in section 1325(a)(5)(B), such as section 1325(a)(5)(B)(iii)(I), are thus simply not implicated. No other independent, freestanding confirmation requirement found in section 1325(a) is being transgressed by these plans, nor are these plans violating any other self-executing provision located in the Bankruptcy Code. See United Student Aid Funds, Inc. v. Espinosa , 559 U.S. at 276-77, 130 S.Ct. 1367.8
The trustee's objection to confirmation on the grounds that section 1325(a)(5)(B)(iii)(I) is being transgressed by this plan is therefore overruled, since no properly noticed secured creditor is objecting.
C. Good Faith.
The trustee also argues that these plans have not been proposed "in good faith and not by any means forbidden by law." See 11 U.S.C. § 1325(a)(3). The trustee's objection on this basis is also overruled.
The trustee argues that the plan in Lindsey's case is not being proposed in good faith because it proposes to pay attorneys' fees ahead of Lindsey's auto lender.9 This treatment, however, is perfectly permissible under section 1326(b)(1). See In re Maldonado , 483 B.R. at 337 ; see also In re Harris , 304 B.R. at 756-57. There is no per se rule that a plan proposing to pay attorneys' fees ahead of the debtor's creditors *463is a violation of section 1325(a)(3)'s good faith requirement. In re Crager , 691 F.3d 671, 675-76 (5th Cir. 2012). To the extent the trustee raises any breach of the attorneys' fiduciary duties with respect to her section 1325(a)(3) argument, the court notes that such breaches are more properly addressed by this court in ruling on the attorneys' applications for compensation. The court otherwise finds that there is no good faith deficiency with respect to the proposal of this chapter 13 plan. See In re Rimgale , 669 F.2d 426, 431-33 (7th Cir. 1982).
II. The Attorneys' Fiduciary Duties, Local Rule 2016-1, and the Objections to Compensation
In her objection to compensation, the trustee has argued that the debtors' attorneys' compensation should be denied for essentially three reasons. First, she argues that they cannot show that they provided a benefit to the estate. Second, she argues that the attorneys breached their fiduciary obligations that they owe to their clients, the debtors, because they have not shown that they have adequately explained the terms of their compensation and the implications of that compensation on the interests of their clients. Third, the trustee argues that Local Rule 2016-1 was violated in both cases because the attorneys had an understanding with their clients as to the way in which the attorneys' fees would be paid, and this type of understanding is an "agreement" in the broad sense of that term as it is used in the Local Rule. This agreement, she argues, also pertains to compensation, and therefore falls within the Rule requiring its being reduced to writing, signed by both parties, and filed with the court.
A. Chapter 13 Debtor's Attorney Compensation under the Code and in this District
The Code does not require that chapter 13 debtors' attorneys' fees benefit the estate. This was not always the case, as starting in the early nineteenth century and ending in 1978, a debtor's attorney was generally entitled to have his compensation paid out of the bankruptcy estate as an administrative expense only if he could demonstrate that his services had provided a "clear and substantial benefit to the bankruptcy estate." Michelle Arnopol Cecil, A Reappraisal of Attorneys' Fees in Bankruptcy , 98 KY. L.J. 67, 98 (2010) ; see also Matter of Lee , 3 B.R. 15, 17- 18 (Bankr. N.D. Ga. 1979) (deciding case under the Bankruptcy Act); Ex parte Hale , 11 F. Cas. 178, 179 (C.C.D.N.H. 1842) (No. 5,910).
This changed in 1978 with the enactment of the Bankruptcy Reform Act,10 but under the case law that developed, the services of the debtor's attorney were generally still not compensable out of the estate where the services had benefitted only the debtor and had not aided in the administration of the estate in some way. See, e.g., In re Chas. A. Stevens & Co. , 105 B.R. 866, 870 (Bankr. N.D. Ill. 1989) ; but see In re Deihl , 80 B.R. 1 (Bankr. D. Me. 1987) allowing a debtor's attorney to be compensated out of the estate for representing the debtor in a dischargeability adversary proceeding) (relying partially on Conrad, Rubin & Lesser v. Pender , 289 U.S. 472, 476, 53 S.Ct. 703, 77 L.Ed. 1327 (1933) ); see also In re Lifschultz Fast Freight, Inc. , 140 B.R. 482, 485-88 (Bankr. N.D. Ill. 1992) (discussing the issue).
In 1994, however, Congress again amended the bankruptcy laws. This time, *464it modified 11 U.S.C. § 330 to remove any reference to "the debtor's attorney." Lamie v. U.S. Tr. , 540 U.S. 526, 529-30, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). As a result, the general rule has become that a debtor's attorney in a chapter 7 case cannot be compensated out of the estate as an administrative priority claimant unless he/she is employed by the trustee. See In re Radulovic , No. BAP.WW-05-1142-SDK, 2006 WL 6810999, at *5 (9th Cir. BAP Aug. 18, 2006). Congress, however, added a special exception at the same time for debtors' attorneys in chapters 12 and 13 only. Lamie , 540 U.S. at 540-41, 124 S.Ct. 1023. That Code provision reads:
In a chapter 12 or chapter 13 case in which the debtor is an individual, the court may allow reasonable compensation to the debtor's attorney for representing the interests of the debtor in connection with the bankruptcy case based on a consideration of the benefit and necessity of such services to the debtor and the other factors set forth in this section.
11 U.S.C. § 330(a)(4)(B). It has, therefore, become clear that (1) debtors' attorneys may be compensated out of the estate in chapters 12 and 13, and that (2) reasonable compensation may be allowed by the court, based on a consideration of the relevant factors, regardless of any separate benefit to the estate or lack thereof. See, e.g., In re Tahah , 330 B.R. 777, 782-83 (10th Cir. BAP 2005) ; In re Walsh , 538 B.R. 466, 474-75 (Bankr. N.D. Ill. 2015).
If a debtor's attorneys' fees are allowed by the court, they are entitled to administrative expense status. See 11 U.S.C. § 503(b)(2) ; In re Maldonado , 483 B.R. 326, 337 (Bankr. N.D. Ill. 2012). With that status, those fees become entitled to payment out of the estate at second priority. 11 U.S.C. § 507(a)(2) ; Maldonado , 483 B.R. at 337. In chapter 13, that means that the plan must provide for the fees' payment in full over time, unless the attorney agrees otherwise. 11 U.S.C. § 1322(a)(2) ; Maldonado , 483 B.R. at 337. The payments for the fees must be made either before or concurrently with any payments to creditors, including secured creditors. 11 U.S.C. § 1326(b)(1) ; Maldonado , 483 B.R. at 337.
The bankruptcy court has an independent duty to review fees for reasonableness before allowing those fees to be paid out of the estate as an administrative expense. In re Eckert , 414 B.R. 404, 410 (Bankr. N.D. Ill. 2009). Ordinarily, the bankruptcy court must approve compensation to be paid out of the estate based on the factors set forth in section 330, with those factors mirroring those used in a traditional lodestar analysis. In re Sullivan , 674 F.3d 65, 69 (1st Cir. 2012). The court, however, is not required to perform a lodestar analysis, "and bankruptcy courts have increasingly adopted systems under which attorneys for chapter 13 debtors can be awarded a presumptively reasonable standard fee for each case." In re Brent , 458 B.R. 444, 450 (Bankr. N.D. Ill. 2011).
The court in Brent extensively detailed the shift to presumptively reasonable attorneys' fees in chapter 13 practice both nationally and locally. These presumptively reasonable fees are called "no look" fees because they are awarded without any sort of detailed fee application being submitted to the court. Id. The award of the fee usually depends on whether or not the attorney and debtor entered into a court approved agreement detailing the obligations of both the attorney and the debtor. Id. "As such, the flat fee represents a kind of agreement not only with the debtor but with the court: in exchange for the attorney's commitment to perform specified legal services for the debtor, the court *465awards a flat fee and dispenses with the usual application." Id. (emphasis added).
Given the large number of chapter 13 cases and their generally routine nature, the shift to the no-look fee "has proven immensely advantageous to both the courts and bar." Id. This regime helps attorneys because they no longer have to maintain extensive records and prepare detailed fee applications for every case. Id. The no-look fee also incentivizes the "efficient practice of law." Id. Further, it aids the court because it allows the court to avoid the administratively burdensome task of reviewing fee applications in every chapter 13 case, a task that might more accurately be described as "inconceivable" given the large volume of such cases. Id. (internal quotations omitted).
There are a number of local rules relevant to no look fee compensation in this district. Two local rules are considered in detail below in relation to the trustee's claim that one of these rules (Local Rule 2016-1) has necessarily been violated in these cases. Suffice it to say for now that this district still utilizes the same procedure described generally above by the court in Brent: if the attorney and debtor enter into the Court Approved Retention Agreement (and no other agreement), and if the attorney does not seek more than a $4,000.00 fee, then the attorney is presumptively entitled to the requested fee and does not have to submit a detailed fee application in order to be awarded the fee as an administrative expense to be paid out of the bankruptcy estate.
B. Fiduciary Duty Violations
The court begins first with the trustee's question as to whether or not the attorneys have violated any fiduciary obligations they owe to their clients in seeking payment of fees on an accelerated basis under their respective chapter 13 plans with the disclosures that were given in these cases. The court concludes that in these cases, since the cases are consumer chapter 13 cases where the attorney is to be paid at least partly over time pursuant to the chapter 13 plan, the attorneys had a minimum duty to disclose the negative ramifications of an early dismissal on the interests of the debtor prior to or simultaneously with entering into the retention agreement. Pertinently in these cases, this means that they had a duty to disclose that, because attorneys' fees would be paid ahead of or concurrently with the debtors' auto lenders, an early dismissal of the chapter 13 case might or would, depending on when exactly the dismissal happened, significantly impair each debtor's ability to keep his/her vehicle. Though this duty was imposed by Illinois law in these cases, its existence and breach is relevant only to this court's analysis of the attorneys' requests for compensation under Bankruptcy Code sections 329 and 330.11
As a threshold matter, the trustee is correct to look to Illinois law in raising this objection. See Sears, Roebuck & Co. v. O'Brien , 178 F.3d 962, 966-67 (8th Cir. 1999) ("[W]hile federal bankruptcy law is expansive, Congress has not exclusively regulated the relationship of private lawyers and clients .... On the contrary, that arena is particularly one of local concern ...."); see also Leis v. Flynt , 439 U.S. 438, 442, 99 S.Ct. 698, 58 L.Ed.2d 717 (1979) (per curiam); In re Liou , 503 B.R. 56, 67-68 (Bankr. N.D. Ill. 2013) (defining the fiduciary relationship by reference to Illinois law).
*466A violation of Illinois fiduciary law may render the compensation sought excessive and, therefore, unreasonable. This is because breaches of a fiduciary duty owed to the client "can diminish the value of services to a client ...." In re Martin , 197 B.R. 120, 127 (Bankr. D. Colo. 1996) ; see also 11 U.S.C. §§ 329(b), 330(a)(4)(B) (noting that court looks to "other factors" set forth in section 330 in allowing "reasonable compensation"), 330(a)(3).
Even where a presumptively reasonable no-look fee is sought, a "reasoned objection" from a party in interest shifts the burden of proof back onto the fee-claimant, who must establish the reasonableness of the fees sought under section 330. In re Crager , 691 F.3d 671, 677 (5th Cir. 2012). Since the trustee is a party in interest, see id. , and since the objection is reasoned, the court concludes that the burden is on both Semrad and Geraci to prove their entitlement to compensation in these cases. Further, the court has the inherent authority to sanction the attorneys who practice before it for serious breaches of the fiduciary duties that they owe to their clients, regardless of any diminution in the value of the services provided to the debtor. Matter of Arlan's Dep't Stores, Inc. , 615 F.2d 925, 943 (2d Cir. 1979) ; In re Vann , 136 B.R. 863, 869 (D. Colo. 1992), aff'd , 986 F.2d 1431 (10th Cir. 1993).
The trustee correctly points out that "the attorney-client relationship constitutes a fiduciary relationship as a matter of law." In re Winthrop , 219 Ill. 2d 526, 543, 302 Ill.Dec. 397, 848 N.E.2d 961, 972 (2006). "As fiduciaries, attorneys owe to their clients 'the basic obligations of agency: loyalty and obedience.' " Horwitz v. Holabird & Root , 212 Ill. 2d 1, 9, 287 Ill.Dec. 510, 816 N.E.2d 272, 277 (2004) (quoting RESTATEMENT (SECOND) OF AGENCY § 14N, cmt. a, at 80 (1958) ); accord Comm'r v. Banks , 543 U.S. 426, 436, 125 S.Ct. 826, 160 L.Ed.2d 859 (2005) (stating that the relationship between a client and an attorney "is a quintessential principal-agent relationship"). "When, in the course of his professional dealings with a client, an attorney places personal interests above the interests of the client, the attorney is in breach of his fiduciary duty by reason of the conflict," Doe v. Roe , 289 Ill. App. 3d 116, 122, 224 Ill.Dec. 325, 681 N.E.2d 640, 645 (1997), and this is because, in that scenario, the attorney, as an agent of the client, has violated his/her duty "to act solely for the benefit of the principal in all matters connected with his agency." RESTATEMENT (SECOND) OF AGENCY § 387 (1958) ; see also Kochorimbus v. Maggos , 323 Ill. 510, 518, 154 N.E. 235, 238 (1926) ("A party may voluntarily assume a confidential relation towards another, and, if he does so, he cannot thereafter do any act for his own gain at the expense of that relation.").
On the other hand, "most fiduciary relationships are established by contract and are not eleemosynary." Maksym v. Loesch , 937 F.2d 1237, 1242 (7th Cir. 1991) (applying Illinois law). That is to say, the fees to be paid to the attorney in consideration for the attorney's services on behalf of the client are "matters of contract," and "the broader scope of fiduciary duty ... does not apply with full force when the attorney's compensation is the issue." United States v. Weimert , 819 F.3d 351, 369 (7th Cir. 2016) (citing Maksym , 937 F.2d at 1242 ); A Sealed Case , 890 F.2d 15, 17 (7th Cir. 1989). As one court has noted in considering a related question in the context of chapter 13 attorney compensation, "the fact that counsel seeks to be paid for services rendered does not create a conflict of interest. If that [were] the case, no attorney could ever be paid for any work performed for a client." In re Younger , 360 B.R. 89, 94-95 (Bankr. W.D. Pa. 2006).
*467Thus, the court will treat the matter of the attorney's compensation in each case, at least as between the debtor and the attorney, as one of contract. Here it is hard to say that, in seeking compensation out of the estate as an administrative expense in a manner perfectly allowable by the Code, see 11 U.S.C. § 1326(b)(1), the attorneys breached the contract they had entered into with the debtors concerning their fees. An agreement for attorney compensation constitutes a contract that is interpreted much as any other contract. Bard v. Harvey , 74 Ill. App. 3d 16, 19, 29 Ill.Dec. 814, 392 N.E.2d 371, 374 (1979). "The primary goal of contract interpretation is to give effect to the intent of the parties." Salce v. Saracco , 409 Ill. App. 3d 977, 981, 350 Ill.Dec. 796, 949 N.E.2d 284, 288 (2011). "In determining the intent of the parties, a court must consider the document as a whole ...." Id.
The agreements submitted in these cases show that no (or very little) compensation had been paid up front, and an express provision provides that "the attorney ... may not receive fees directly from the debtor after the filing of the case." If the attorney received nothing (or almost nothing) up front, and could receive nothing directly from the debtor after filing, then how could the parties have expected the attorney to have been paid except out of the bankruptcy estate pursuant to the provisions of the chapter 13 plan, where those provisions were also permissible under the Bankruptcy Code? Other parts of the agreement confirm this as well:
If the case is dismissed after approval of the fees and expenses but before payment of all allowed fees and expenses, the order entered by the Bankruptcy Court allowing the fees and expenses is not a judgment against the debtor for the unpaid fees and expenses based on contract law or otherwise.
That is, the parties have agreed that the order to be entered by the Bankruptcy Court operates to allow the unpaid fees to be paid from the estate under the plan only, and does not serve as an independent basis for the attorney to collect unpaid fees outside of the particular bankruptcy case for which the compensation agreement had been entered into.
In light of express provisions such as these, it is not a leap to conclude that the parties intended the attorney to be paid under the plan pursuant to plan provisions that were also lawful under the Bankruptcy Code.12 After all, "[w]hen the subject matter of the contract between the parties lies in an area covered by federal law, they necessarily adopt, as a portion of their agreement, the applicable provisions of the particular Act of Congress." 11 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 30:20, at 280 (4th ed. 2012) ; see also Broenen v. Beaunit Corp. , 440 F.2d 1244, 1249 (7th Cir. 1970) ("It is an ancient principle of contract law that parties are presumed to have contracted with knowledge of and consistent with the law in effect at the time of execution of a contract."); Vokal v. United States , 177 F.2d 619, 625 (9th Cir. 1949) ("Both parties to a contract are presumed to know the law in respect to which the contract is made. There is no presumption of ignorance on one side and knowledge on *468the other.") (citing New York v. Phinney , 178 U.S. 327, 342, 20 S.Ct. 906, 44 L.Ed. 1088 (1900) ).
That is not to say that the law of fiduciary obligations has nothing to add here-far from it. Traditionally, and still as a general rule, a person does not owe a fiduciary duty to another person where they are settling on the terms of the compensation to be paid in exchange for the former agreeing to provide and so providing services in a fiduciary capacity to the latter. See Elmore v. Johnson , 143 Ill. 513, 525, 32 N.E. 413, 416 (1892). Where that general rule holds, the agent-to-be owes no fiduciary duty to act fairly, to completely disclose all the details of the compensation arrangement, nor to ensure that the principal-to-be completely understands those details. See Maksym , 937 F.2d at 1242. The two deal with one another at arms-length. Elmore , 143 Ill. at 525, 32 N.E. at 416.
The Illinois Supreme Court has made it clear, however, that pre-agency fiduciary relationships may be found in appropriate cases. Martin v. Heinold Commodities, Inc. , 163 Ill. 2d 33, 44-46, 205 Ill.Dec. 443, 643 N.E.2d 734, 740-41 (1994) ; Martin v. Heinold Commodities, Inc. , 117 Ill. 2d 67, 79, 109 Ill.Dec. 772, 510 N.E.2d 840, 845 (1987). It has done so by adopting part of the Restatement (Second) of Agency, id. , which states as follows:
A person is not ordinarily subject to a fiduciary duty in making terms as to compensation with a prospective principal. If, however, as in the case of attorney and client , the creation of the relation involves peculiar trust and confidence, with reliance by the principal upon fair dealing by the agent, it may be found that a fiduciary relation exists prior to the employment and, if so, the agent is under a duty to deal fairly with the principal in arranging the terms of the employment.
RESTATEMENT (SECOND) OF AGENCY § 390 cmt e. (1958) (emphasis added). Current Illinois law therefore allows for a pre-agency fiduciary relationship, and the concomitant disclosure duties imposed thereby, to be found in appropriate cases, such as those where an attorney-client relationship is being created.
In light of this present state of Illinois law, it is appropriate to look to the specific provisions of the Restatement (Third) of the Law Governing Lawyers that pertain to the informational disclosures that should be given by attorneys when entering into a fee contract, since it can fairly be concluded that the types of informational disclosures delineated in that Restatement are the types of disclosures that would reasonably affect a prospective client's judgment in entering into the agreement.13 See RESTATEMENT (SECOND) OF AGENCY § 390 (1958) ). That Restatement notes: "In entering a contract at the outset of a representation, the lawyer must explain ... the contract's implications for the client." RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 18 cmt. d (2000). In other words, if the attorney is to be compensated by way of the fee contract in consideration for acting as a fiduciary, the terms of that compensation cannot remain a mystery to the client; the attorney "must lay bare the truth, without ambiguity or reservation, in all its stark significance."
*469Cent. Ry. Signal Co. v. Longden , 194 F.2d 310, 318 (7th Cir. 1952) (quoting Wendt v. Fischer , 243 N.Y. 439, 154 N.E. 303, 304 (1926) (Cardozo, J.) ).
To be clear, the court is finding in these two cases that a fiduciary relationship existed between the attorneys and Carr and Lindsey before entering into their retention agreements such that the attorneys had a heightened duty to disclose the implications of their compensation. It is fair to conclude that the court will find the same duty in like future cases that come before it. It is not fair to conclude that the court is implying that Illinois law categorically imparts a preretention fiduciary duty in all relationships that later become attorney-client relationships. See Maksym , 937 F.2d at 1242 ("Fiduciary law does not send the dark cloud of presumptive impropriety over the contract that establishes the fiduciary relationship in the first place and fixes the terms of compensation for it.").
These findings are warranted in these cases for three reasons. First, these debtors are debtors with primarily consumer debts. See 11 U.S.C. §§ 101(8), 101(3). A pre-agency fiduciary duty is designed to protect "vulnerable and unknowledgeable" parties. See Meyer Grp., Ltd. v. United States , 115 Fed.Cl. 645, 652 (2014) (generalizing that a branch of the government is a sophisticated party and is therefore not the appropriate beneficiary of a pre-agency fiduciary duty). Congress has signaled that consumer debtors comprise one particular class of vulnerable and unknowledgeable persons by enacting, for example, provisions in the Code mandating that such persons be positively provided with information concerning, for example, the benefits and costs of proceeding under each chapter of the Code. See 11 U.S.C. §§ 101(3), 101(8), 342(b)(1)(A), 527(a)(1), (b) ; Milavetz, Gallop & Milavetz, P.A. v. United States , 559 U.S. 229, 235-239, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010) (concluding that attorneys are debt relief agencies and are subject to various statutory disclosure requirements when providing bankruptcy assistance to people with primarily consumer debts). The court therefore finds it appropriate to draw the conclusion that the debtors in these cases are less knowledgeable, more vulnerable, and therefore more likely to repose more trust and confidence in their attorney prior to entering into any fee arrangement, based on the types of debts owed in these cases.
Second, these agreements were signed on the eve of bankruptcy. Prospective bankruptcy debtors are often anxious and desperate to retain houses, tenancies or leases, and automobiles. That these debtors later filed for bankruptcy is more evidence of their vulnerability and more evidence that the creation of the attorney-client relationship, assuming that event did not happen prior to the signing of the retention agreement, involved the client's placing a peculiar trust and confidence in the attorney. The law has long recognized the particular risk of attorney overreaching in the run-up to a bankruptcy filing. See 11 U.S.C. § 329 ; In re Wood , 210 U.S. 246, 253, 28 S.Ct. 621, 52 L.Ed. 1046 (1908) ; In re Michaelson , 222 B.R. 595, 597 (Bankr. C.D. Ill. 1997).
Finally, even where a prospective principal is not vulnerable and unknowledgeable, there is a heightened reliance on fair dealing from a prospective agent in setting the terms of the compensation where the implications of the fee structure on the interests of the client can only be known based on information within the control of the prospective agent. Here, that heightened reliance on fair dealing is present because the implications of the attorneys' fees on the clients' interests could only be known by reference to the Bankruptcy Code's provisions for payment of attorneys' fees out of the estate and from the provisions of *470the chapter 13 plan. This type of knowledge belongs peculiarly to the attorney and not at all to the client, since one part of the attorney's job is generally to understand the workings of the law. See RESTATEMENT (SECOND) OF AGENCY § 390 cmt. e (1958) (noting the significance of the prospective principal's reliance on fair dealing from the prospective agent); see also Deborah A. DeMott, Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and Their Consequences , 48 ARIZ. L. REV. 925, 950 (2006) (noting the relevance of unique access to information). This type of reliance might not be present in a case where the attorney's fees are simply agreed to be paid as a lump sum up front before filing; there, the implications of the fee on the client's interests would appear to be quite clear.
The court is well aware that the CARA already contractually obligates the attorney to explain how attorney's fees are determined and paid. To the extent the attorney fulfills the fiduciary obligation to ensure that the client understands the implications of the payment of attorney's fees, the attorney will more than likely simultaneously fulfill that contractual obligation. To the extent the attorney does not fulfill the fiduciary obligation in entering into the CARA, but later explains how the fees are paid and ensures that the client fully understands the implications of how those fees are paid, the client might be taken to have waived any breach of the attorney's fiduciary obligation in entering into the CARA by continuing the representation.
In sum, the court concludes that imposing on the attorneys a fiduciary obligation to deal fairly and make a full disclosure as to compensation prior to entering into the retention agreement is appropriate in these cases. Semrad has not shown that the implications of its compensation structure, in that an early dismissal would result in Lindsey being unable to retain her vehicle as a practical matter, were appreciated in all of their stark significance by Lindsey. Geraci, by contrast, has, since its detailed affidavit shows Carr understood, at least prior to filing,14 that an early dismissal would result in a practical inability to keep his vehicle. The court therefore sustains the trustee's objection as to Semrad and overrules it as to Geraci. Because Semrad's breach occurred before any services were provided, however, the court cannot find that the value of services provided to the debtor was diminished by the breach. Moreover, in light of Semrad's good faith throughout this process and the fact that it did make some disclosures to the debtor, the court declines to exercise its inherent power to deny compensation for an attorney's breach of a fiduciary duty. Both applications for compensation will instead be denied for having violated Local Rule 2016-1 as discussed below.
C. Violation of Local Rule 2016-1
The trustee also argues that the attorneys violated Local Rule 2016-1 when they *471failed to sign and file with the court their understandings that they had with the debtor regarding the manner in which their payment would be made under the plan. The trustee is correct.
The rule reads:
Every agreement between a debtor and an attorney for the debtor that pertains, directly or indirectly , to the compensation paid or given, or to be paid or given, to or for the benefit of the attorney must be in the form of a written document signed by the debtor and the attorney. Agreements subject to this rule include, but are not limited to, the Court-Approved Retention Agreement, other fee or expense agreements, wage assignments, and security agreements of all kinds. Each such agreement [must be disclosed to the court].
Local Rule 2016-1 (emphasis added). The term "agreement" is not defined. The court interprets the meaning of a local rule in the same way in which it interprets the meaning of a statute. See Shamshoum v. Bombay Cafe , 257 F.Supp.2d 777, 780 (D.N.J. 2003) (applying the canons of construction to the court's local rules); see also Samsung Elecs. Co. v. Rambus, Inc. , 440 F.Supp.2d 495, 506 (E.D. Va. 2006) (applying the canons to the Federal Rules of Civil Procedure) (citing Business Guides, Inc. v. Chromatic Communications Enterprises, Inc. , 498 U.S. 533, 540, 111 S.Ct. 922, 112 L.Ed.2d 1140 (1991) ).
Where the meaning of a term is plain and unambiguous, judicial inquiry is at an end, and the plain meaning of the term must be enforced. Mosley v. City of Chicago , 252 F.R.D. 445, 449 (N.D. Ill. 2008) ; see also Connecticut Nat. Bank v. Germain , 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). To ascertain the plain meaning of a term, the court looks to references such as Black's Law Dictionary. See, e.g., United States v. Cook , 850 F.3d 328, 332 (7th Cir.), cert. denied , --- U.S. ----, 138 S.Ct. 135, 199 L.Ed.2d 81 (2017).
Black's Law Dictionary defines "agreement" pertinently as follows:
A mutual understanding between two or more persons about their relative rights and duties regarding past or future performance; a manifestation of mutual assent by two or more persons.
Agreement , BLACK'S LAW DICTIONARY 81 (10th ed. 2014).
Black's goes on to say:
The term 'agreement,' although frequently used as synonymous with the word 'contract,' is really an expression of greater breadth of meaning and less technicality. Every contract is an agreement; but not every agreement is a contract. In its colloquial sense, the term 'agreement' would include any arrangement between two or more persons intended to affect their relations (whether legal or otherwise) to each other. An accepted invitation to dinner, for example, would be an agreement in this sense; but it would not be a contract because it would neither be intended to create, nor would it in fact crate, any legal obligation between the parties to it. Further, even an agreement which is intended to affect the legal relations of the parties does not necessarily amount to a contract in the strict sense of the term. For instance, a conveyance of land or a gift of a chattel, though involving an agreement, is ... not a contract; because its primary legal operation is to effect a transfer of property, and not to create an obligation.
Id. (quoting 2 STEPHEN'S COMMENTARIES ON THE LAWS OF ENGLAND 5 (L. Crispin Warmington ed., 21st ed. 1950) ). Thus, agreement is broader than contract: it means any mutual arrangement or understanding between two people that is intended to *472alter or that has the effect of altering the relations between them, whether legal or otherwise, and whether or not the arrangement or understanding has the effect of creating binding legal obligations between them as a contract does.
The understandings that existed in these cases surely fall within this definition. In disclosing to the debtors that the attorneys would be paid under the plan ahead of the debtors' creditors, and in the debtors' acknowledgement of that fact and subsequent acquiescence, there was a mutual understanding between the parties at least of the attorneys' rights going forward to the money that the debtor would be paying into the plan, and, in Geraci's case, of the actual effect of the debtor's future performance under the plan on the status of the debtor's other obligations owed to creditors. These understandings, then, were agreements, and they clearly pertained to compensation.
Yet they were never signed by the attorney and the debtor in each case and filed with the court as required by the Local Rule. The attorneys' reason for not disclosing these agreements initially as required is roughly that, based on an interpretation of the Local Rules regarding nolook fees, the CARA is the only agreement required to be disclosed, and indeed that if they had filed any other agreement other than the CARA, they would have lost their ability to seek a nolook fee. They also reason in any event that these understandings were not separate agreements within the meaning of Local Rule 2016-1.
The attorneys are incorrect. Local Rule 2016-1 makes it clear by its terms that every agreement pertaining to compensation, including (but not limited to) the CARA, must be disclosed. These understandings are within the definition of agreement in Local Rule 2016-1.
Further, Local Rule 5082-2(C), which specifically governs the award of a no-look fee in chapter 13 cases, states as follows:
(1) If debtor's counsel and the debtor have entered into the Court-Approved Retention Agreement, counsel may apply for a Flat Fee not to exceed the amount authorized by the applicable General Order [$4,000.00]. If the Court-Approved Retention Agreement has been modified in any way, a Flat Fee will not be awarded, and all compensation may be denied.
Did these understandings modify the CARA? Surely not. "Modify" is defined as "[t]o make somewhat different." Modify , BLACK'S LAW DICTIONARY 1157 (10th ed. 2014). The understandings did not make the CARA different; the terms of the CARA remained the same as before. The mutual understandings in these cases regarded the attorney being able to seek payment on an accelerated basis out of the estate under the plan. These understandings did not change the parties' rights and obligations under the CARA, except insofar as the understanding may itself have come about by way of the attorney also fulfilling his/her explanatory duty under the CARA. In that sense, by explaining the terms of the compensation and coming to an understanding, the CARA was modified in that one of the duties it had imposed had been performed, but this did not work a change to its very terms. This is so even though an obligation created by those terms may have been satisfied.
Local Rule 5082-2(C) provides further:
(2) If debtor's counsel and the debtor have not entered into the Court-Approved Retention Agreement, the Form Fee Application must be accompanied by a completed Form Itemization.
*473This part has no application, since the attorney and the debtor did enter into the CARA in these cases.
The rule finally provides that:
(3) The Flat Fee will not be awarded and all compensation may be denied if, in addition to the Court-Approved Retention Agreement, the debtor and an attorney for the debtor have entered into any other agreement in connection with the representation of the debtor in preparation for, during, or involving a Chapter 13 case, and the agreement provides for the attorney to receive:
(a) any kind of compensation, reimbursement, or other payment; or
(b) any form of, or security for, compensation, reimbursement, or other payment that varies from the Court-Approved Retention Agreement.
It would be fair to conclude that the meaning of agreement in this Rule is the same as in Rule 2016-1. Therefore, the attorneys and debtors did enter into an agreement in connection with the representation of the debtor in these chapter 13 cases. That agreement was the understanding that they had regarding the manner in which the attorneys' compensation would be paid under the plan, specifically that it would or might be paid ahead of the debtor's creditors. In Geraci's case, the understanding also encompassed the specific implications of that fact.
Did this agreement also provide for the attorney to receive any kind of compensation, reimbursement, or other payment? No. In these cases, the only agreement that provided for the compensation of the attorney was the CARA. Since the CARA itself contractually allows the attorney to seek payment of the fees out of the bankruptcy estate pursuant to the Code-compliant provisions of the chapter 13 plan, any understanding between the attorney and the debtor regarding the mechanics of the compensation was just that: an understanding. Having that understanding might satisfy any fiduciary obligations that the attorney may owe in a given case when coming to an agreement on compensation, and/or it might satisfy certain contractual obligations under the CARA, but the understanding would in no way provide for what has already been established by the CARA itself.15
The end result of this analysis is that any understanding that the attorney and debtor have regarding the precise manner of the attorneys' compensation under the chapter 13 plan, whether that understanding comes about (1) as a result of the attorneys' compliance with any fiduciary obligations that he/she may owe, and/or (2) as a result of the attorneys' compliance with the contractual provisions contained in the CARA, is subject to the requirements of Local Rule 2016-1. Compliance with this Local Rule protects both the client and the attorney in forcing them to reduce to writing their understanding and helps to avoid any future surprises as to the precise way in which fees are paid.
*474Local Rule 2016-1 was not complied with in these cases. Though agreements existed, they were not disclosed. Because of this fact, the attorneys' certifications under Local Rule 5082-2(B)(2) were false and hence, under that rule, neither firm is entitled to have their compensation approved.
Conclusion
The plans proposed in both cases are confirmable. The fee applications filed in both cases will be denied without prejudice and may be refiled subject to disclosure of the agreements between the debtor and counsel as to the compensation. Each fee application filed before this court, whether the fees are to be paid before the claims of creditors or simultaneously with the claims of creditors, must have attached to it the agreements required by Local Rule 2016-1.
The last amended plan filed by Carr provided that his attorneys would be paid first while the auto lender received adequate protection payments. At a point in time after his attorneys had been paid the $4,000.00 fee in full, the payments to the auto lender would be paid at a significantly higher amount throughout the remaining life of the plan. Exeter did not object to the adequate protection. The latest amended plan was filed a few days before this Memorandum Opinion was issued; it eliminates the lower payments to Exeter and reduces the larger payments to Geraci. It will accordingly be confirmed following the running of the relevant notice period unless a new objection is filed by a party in interest.
This objection is now only pertinent to Lindsey's case, since the "equal monthly amounts" problem in Carr's case has been removed with the new plan filed on April 4.
This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (L). The court has constitutional authority to hear and decide this matter.
The objection in the Carr case has been mooted by a very recently filed plan that removes the "equal monthly amounts" problem. Since there are no relevant objections to Carr's plan currently pending, Carr's plan will be confirmed following the running of the relevant notice period unless a secured creditor such as Exeter objects to the new plan.
This section of the Code is discussed in more depth below with regard to the attorney compensation issue.
Compare Lamie v. U.S. Tr. , 540 U.S. 526, 538-39, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (holding that a debtor's attorney in a chapter 7 case cannot be paid out of the estate unless he/she is employed by the trustee under section 327).
Again, in Carr's case, this was true of the prior plan. This will only be true of the new plan once the relevant notice period has expired without any objections.
The trustee's cited case, Matter of Brown , 559 B.R. 704, is therefore inapposite because there the court sua sponte enforced the mandates of section 1322. Matter of Brown , 559 B.R. 704, 707 (Bankr. N.D. Ind. 2016) ("A plan that attempts to do what § 1322(b)(2) forbids does not satisfy [the requirement under section 1325(a)(1) ] that the plan compl[y] with the provisions of [chapter 13] and with the other applicable provisions of [title 11]."). Section 1322(b)(2) is not implicated in this case.
The plan in Carr's case has been amended so that the auto lender is not being jumped by Carr's attorneys' fees.
See Reappraisal , 98 Ky. L.J. at 98 (noting that Congress "sharply deviated" from this standard when it enacted the 1978 Bankruptcy Reform Act).
In no way does this court conclude, for example, that the attorneys' agreements for compensation are presumptively fraudulent under Illinois law under circumstances where the duty to disclose exists.
While the attorney may have had this right as a matter of contract based on the parties' presumed intent, it would seem that the client always retained the right, under agency law, to terminate the attorney-client relationship and/or to limit the attorney's actual authority to draft and submit a plan on the client's behalf that would pay the attorney's fees in a particular manner. See, e.g. , Restatement (Second) of Agency § 118 & cmt. b (1958). The affidavit submitted in the Geraci case tends to show that Carr was aware of the inherent control and power he maintained over the relationship.
That is, the precise scope of the duty of disclosure and fair dealing in this particular type of relationship is best defined by reference to the Restatement that deals specifically with that relationship. See generally SEC v. Chenery Corp. , 318 U.S. 80, 85-86, 63 S.Ct. 454, 87 L.Ed. 626 (1943) (noting that the scope of a fiduciary obligation in a particular setting must be precisely defined).
22 While the CARA was entered into on September 14, 2017, the petition was not filed until September 29, 2017. The affidavit submitted only states that the client understood the contract's implications prior to filing. If the understanding came before or concurrently with September 14, 2017, then, under the court's reasoning, the attorney fulfilled any pre-agency fiduciary disclosure obligation it may have had to the client. If the understanding came after September 14, 2017, then the attorney's pre-agency fiduciary obligation to disclose was breached, but the client ratified the attorney's conduct by acknowledging a full understanding of the information regarding the contract's implications, thus effectively curing the attorney's breach. See 1 Floyd R. Mechem, a Treatise on the Law of Agency § 1222, at 894 (2d ed. 1914) (noting that a breach of a fiduciary duty may be waived where the principal has full and complete information); see also Restatement (Second) of Agency §§ 390 cmt. h., 416 (1958).
It could be argued that, because compensation may be denied if the attorney does not show that a fiduciary obligation was complied with, the separate understanding regarding the implications of the attorney's compensation actually does "provide" for the attorney's compensation since it satisfies the attorney's fiduciary obligation, and therefore it could be argued that the separate understanding runs afoul of Local Rule 5082-2(C)(3). The Rule, however, is concerned with "other agreement[s]" providing for compensation. The separate understanding, even if it satisfies a fiduciary obligation, would not, on its own , provide for the attorney's compensation, since that understanding simply cannot exist except by specific reference to the attorney's contractual right to compensation under the CARA. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501225/ | Hon. Catherine J. Furay, U.S. Bankruptcy Judge
Victoria Sue Fishel ("Debtor") is a consumer debtor with a car loan, tax debt, credit card and charge account debt, and a small amount of medical bills. She also has student loans dating back almost seven years. She is an above-median debtor with disposable income.
To address her debts, she filed a Chapter 13 petition. Debtor's bankruptcy schedules list unsecured, nonpriority debts in the amount of $147,891.30, including student loan debt of $16,184.78. The schedules also list certain other student loans as owed in unknown amounts. Debtor's Plan proposes to devote all disposable income for five years toward payment of her creditors.
The Trustee objects to confirmation of the Plan based on an issue of eligibility. The Trustee points to scheduled student loan debt in the amount of $132,000. The servicer for the U.S. Department of Education ("DOE"), on the other hand, filed a claim for $341,136. Attached to the claim were itemizations of amounts and a statement that the servicer had no copies of any promissory notes because it did not receive them from "the originating lender or prior servicer." The Trustee points out in his objection that the Proof of Claim filed by the DOE contains insufficient information to determine whether some of its claim overlaps with the claims the Debtor scheduled.
*476DISCUSSION
1. Jurisdiction
The Trustee argues that, based on the DOE claim, the noncontingent, liquidated unsecured claims exceed the statutory amount of $394,725 set forth in 11 U.S.C. § 109(e). The Trustee thus asserts the Debtor is not eligible to be a debtor in a Chapter 13.
There is a split of authority among the courts that have considered this question. The minority view holds that Chapter 13 eligibility requirements under section 109(e) are jurisdictional. The majority view holds that eligibility is not jurisdictional. Instead, "the eligibility requirements of § 109(e) create a gateway into the bankruptcy process, not an ongoing limitation on the jurisdiction of the bankruptcy courts." Glance v. Carroll (In re Glance) , 487 F.3d 317, 321 (6th Cir. 2007).
The Seventh Circuit has not yet ruled on whether section 109(e) is jurisdictional or merely sets forth a debtor's eligibility. Courts in the Seventh Circuit have interpreted other subsections of 109 in a manner consistent with the majority view. The Northern District of Illinois considered eligibility under section 109(h) and ruled that "eligibility to be a debtor under a particular chapter of the Bankruptcy Code is not the equivalent of a jurisdictional question." In re Arkuszewski , 550 B.R. 374, 377-78 (N.D. Ill. 2015) (citing In re Lane , No. 12-10718-M, 2012 WL 1865448, at *5 (Bankr. N.D. Okla. May 22, 2012) ). Rather, the filing of a petition "sets in motion a series of events" and the "court may properly dismiss a petition at a later date if it is determined that the debtor is ineligible under § 109." Id. (emphasis supplied). Jurisdiction is determined by good-faith allegations rather than by what the evidence eventually might show. St. Paul Mercury Indemnity Co. v. Red Cab Co. , 303 U.S. 283, 288-90, 58 S.Ct. 586, 82 L.Ed. 845 (1938). The Court agrees with the majority view. This Court has jurisdiction.
2. Conversion or Dismissal
Having jurisdiction, the Court has authority to evaluate this case under section 1307(c). Section 1307(c) instructs the court "may convert ... or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including" a series of scenarios that are not relevant here. (Emphasis supplied).
Eligibility is not expressly listed as "cause" under the statute. The threshold question therefore is whether the list in section 1307(c) is exhaustive. If not, then the Court will need to determine whether lack of eligibility constitutes cause to dismiss or convert this case.
The Seventh Circuit has consistently ruled that the list in section 1307(c) is non-exhaustive. In In re Love , the Seventh Circuit dismissed a case under section 1307(c) for lack of good faith, which is not explicitly listed in the statute. 957 F.2d 1350, 1354 (7th Cir. 1992). See also In re Smith , 848 F.2d 813, 816 n.3 (7th Cir. 1988). The Southern District of New York has articulated it more directly: "This list is 'not exhaustive,' but exemplary." In re Jensen , 425 B.R. 105, 109 (Bankr. S.D.N.Y. 2010). Collier's has also weighed in on the matter: "The grounds enumerated in subsections 1307(c)(1) through (11) are not exhaustive." 8 Collier on Bankruptcy ¶ 1307.04 (16th ed.).
The Court must therefore determine whether, based on the facts here, the apparent lack of eligibility under section 109(e) constitutes "cause" for conversion or dismissal. Section 1307 gives the Court discretion to dismiss but does not compel the Court to dismiss under any scenario.
*477Although the Court "has the power," it is not necessarily compelled to exercise that authority.
Once again, there is no decision from the Seventh Circuit on whether lack of section 109(e) eligibility constitutes "cause" under section 1307 and whether dismissal is therefore mandated. Several lower courts have ruled lack of 109(e) eligibility constitutes cause. For example, after determining an unsecured claim was non-contingent and liquidated, the Northern District of Indiana ruled that "[d]ebtor's failure to fulfill the eligibility requirements of 11 U.S.C. § 109(e) constitutes cause, as required by 11 U.S.C. § 1307(c), to dismiss this case." In re McGovern , 122 B.R. 712, 717 (Bankr. N.D. Ind. 1989). In In re Day , the Bankruptcy Court dismissed a case for lack of eligibility under section 109(e). It did not reach section 1307. After parsing through the definition of "secured," the Seventh Circuit determined some debts to be unsecured, therefore putting the debtor over the 109(e) limits. The Court affirmed the dismissal. 747 F.2d 405, 407 (7th Cir. 1984).
The list in section 1307(c) contains causes such as unreasonable delay, failure to file a plan, and failure to make plan payments. Each of these establishes a volitional act-or failure to act-by the debtor. Even if the Court determines cause exists under 1307(c), it may still decline to convert or dismiss. Under section 1307, "the court is not required to dismiss or convert the case if it concludes that the debtor is appropriately entitled to Chapter 13 relief and has the ability to confirm and consummate a plan." W. Homer Drake, et al., Chapter 13 Practice & Procedure § 20:5 (2017). The Court's analysis on whether to convert or dismiss must hinge on what is in the best interests of creditors and the estate. Id.
In re Santana presented a motion to dismiss for ineligibility under section 109(g)(2). 110 B.R. 819 (Bankr. W.D. Mich. 1990). The court refused to dismiss despite what some may characterize as an unambiguous statute reasoning that such an application to the facts before the court "would produce, if not an absurd result, then certainly one which goes far beyond the scope of the abuse which it appears Congress was attempting to cure." Id. at 821. As the court reasoned in In re Manalad , "[n]owhere in Title 11 is there a provision setting forth the remedy for failure to comply" with sections 109(e) and (h). 360 B.R. 288, 295 (Bankr. C.D. Cal. 2007). Further, "the filing of a petition in bankruptcy court seeking assistance in the restructuring of debtor-creditor relations is at the core of federal bankruptcy power." Id. at 299 (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. , 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) ).
As noted by the court in In re Pratola , the debt limits in section 109(e) expanded chapter 13 eligibility to a larger group of individuals with regular income. In re Pratola , 578 B.R. 414, 419-20 (Bankr. N.D. Ill. 2017). The limits were intended to permit small business owners and other individuals "for whom a chapter 11 reorganization is too cumbersome a procedure to proceed under chapter 13 ...." H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977).
It is a recognized canon of statutory construction that "[j]udicial interpretation of a statute outside its literal terms is appropriate only when a literal application of the statute would lead to an absurd or unconstitutional result." In re Stuart , 297 B.R. 665, 668 (Bankr. S.D. Ga. 2003). This canon has been repeatedly applied by courts in deciding whether to exercise the discretion granted in determining whether to dismiss a case.
For instance, in Shovlin v. Klaas , the Western District of Pennsylvania affirmed *478a bankruptcy court's refusal to dismiss where the debtor had materially defaulted. There, debtor missed a payment, which caused her to be short at the end of her 60-month plan. The Trustee argued the shortage amounted to a material default under section 1307(c)(6). Even so, the court reasoned the material default did not significantly alter the distributions to creditors and declined to dismiss. On appeal, the Third Circuit affirmed that holding. 539 B.R. 465, 471 (W.D. Pa. 2015), aff'd sub nom. Shovlin v. Klaas (In re Klaas) , 858 F.3d 820 (3d Cir. 2017).
The Northern District of Illinois has followed a similar line of reasoning. In In re Grant , the court emphasized the discretionary nature of section 1307 and reasoned "[g]enerally, a court will find conversion or dismissal appropriate when efforts to cure a default are unsuccessful and the plan cannot be modified so as to make it feasible for completion." 428 B.R. 504, 507 (Bankr. N.D. Ill. 2010). While section 1307(c) contains explicit grounds for dismissal, the discretion of the court to excuse compliance with and grant an exception to those requirements has been repeatedly recognized. See In re McDonald , 118 F.3d 568, 569 (7th Cir. 1997). If discretion exists for the specifically stated grounds, then it must also exist for other grounds falling within the penumbra of the non-exhaustive list.
The decision to convert or to dismiss a Chapter 13 case is a matter of discretion for the bankruptcy court. In re Handy , 557 B.R. 625, 628 (Bankr. N.D. Ill. 2016). It should be made on a case-by-case basis considering the best interest of creditors and the bankruptcy estate. In re Cutillo , 181 B.R. 13, 14 (Bankr. N.D.N.Y. 1995).
Here, the Trustee objects to confirmation because Debtor may fail to meet eligibility requirements. It is undisputed the Debtor can make the proposed Plan payments. The only real roadblock to confirmation of Debtor's Plan is the alleged amount of her student loans which, in any case, will not be discharged in her bankruptcy. The Trustee also concedes inability to determine the amount of the student loans with absolute certainty. The claim filed on behalf of the DOE contains some itemization of amounts but does not include any of the purported notes or related documents and it is impossible to determine whether the claim overlaps or includes the obligations listed in Debtor's schedules. Moreover, Debtor's schedules disclose only $16,184.78 in student loans, in addition to several individual student loans in unknown amounts. It is unclear based on the record how the Trustee arrived at her estimation of $132,000 in scheduled student loans. It is equally unclear from the DOE claim the number of loans or how and over what period $80,163.68 in interest accrued on the loans.
If the Trustee's estimate of total amount is correct, the Debtor would be eligible under section 109. If only the principal amounts in the DOE claim are considered, the Debtor would satisfy the eligibility requirements.
The Debtor can make the proposed Plan payments. She scheduled $4,816 in monthly income against $4,296 in expenses. The Plan anticipates monthly payments between $520 and $550 and the Trustee does not dispute the Debtor can meet her obligations under the Plan. Setting aside the section 109 question, Debtor has proposed a feasible Plan and can complete it. There are no objections to the Plan other than the Chapter 13 Trustee's.
The policy considerations set forth in the Pratola opinion weigh on the side of permitting Debtor's case to proceed. 578 B.R. 414 (Bankr. N.D. Ill. 2017). Judge Baer's argument that tuition costs have increased so quickly that Congress has been unable *479to keep pace is particularly persuasive. Further, however, is the consideration of the exercise of discretion this Court has under 11 U.S.C. § 105 and 11 U.S.C. § 1307. This discretion authorizes the Court to enter any order necessary or appropriate to carry out the provisions of title 11 in a manner consistent with the commands of the Code.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") added a significant hurdle to relief under Chapter 7. If debts are primarily consumer, the debtor must qualify through a means test. After BAPCPA, a debtor who can pay creditors or whose Chapter 7 is deemed an abuse1 will not be entitled to a Chapter 7 discharge. In that sense, such a debtor would be forced into Chapter 13 if the debtor wanted bankruptcy relief. See United States Tr. v. Cortez (In re Cortez) , 457 F.3d 448 (5th Cir. 2006) ; In re Stampley , 437 B.R. 825 (Bankr. E.D. Mich. 2010) ; In re Johnson , 503 B.R. 447 (Bankr. N.D. Ind. 2013). The change reflects the intention that debtors who could afford to repay some portion of their debt should do so. If the debtor does not meet the means test, it is presumed an abuse. The debtor can try to rebut the presumption by showing "special circumstances" that would justify a modification of the means test formula of section 707(b).
Based on the facts, it is in the best interests of the Debtor, the estate, and the creditors that the Debtor be permitted to pursue confirmation of her Chapter 13 Plan. The Court finds section 109 does not exclude this debtor from relief on the set of facts here. To hold otherwise would effectively exclude this Debtor from relief, and the congressional intent behind limiting the availability of Chapter 13 through section 109(e) is not applicable here. This Debtor is a true consumer debtor and should therefore be afforded the benefit of Chapter 13. The Court does not seek to determine the preclusive effect of section 109 in all cases. Rather, the Court is exercising its discretion under sections 105 and 1307 to review issues arising under section 109 on a fact specific, case-by-case basis. The Court is also disinclined to dismiss Debtor's case where the amount of unsecured debt is not clearly established. It merely finds this type of consumer debtor, who cannot realistically obtain relief under any section of the Code, will not be dismissed simply because her unsecured debt burden may exceed the amount in section 109(e).
Literal interpretation of the statute would lead to an absurd result. This debtor has no option. She is above-median income with disposable income available to pay creditors. Based on the facts here, she will not be able to rebut the presumption of abuse. Thus, she faces Morton's Fork-either file a Chapter 7 that will be determined an abuse, thus leading to dismissal, or file a Chapter 13 to attempt repayment of some amounts only to have a trustee move to dismiss arguing that, as here, the debtor is ineligible for Chapter 13 relief.
If the Trustee is correct, the only other option would be the filing of a Chapter 11. Such a course would be absurd for this true consumer debtor. The Chapter 11 process is inordinately expensive and cumbersome for a consumer debtor. It would likely result in significant portions of the funds that would otherwise be available to creditors being paid in administrative expenses and U.S. Trustee quarterly fees. For example, the U.S. Trustee's quarterly fees alone would reduce the amount available *480to creditors by more than 20%. The additional formalities of a Chapter 11, including a disclosure statement and balloting, and other administrative expenses, including attorney's fees, would no doubt eat up substantial amounts that would otherwise be available to creditors. Such a result is contrary to the purposes of the Code because it is neither in the best interests of the Debtor nor of the creditors.
CONCLUSION
For these reasons, the motion of the Trustee to dismiss is denied. The Debtor will be permitted to remain in Chapter 13 and proceed to confirmation of a plan.
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
A separate order consistent with this decision will be entered.
Only consumer debtors are subject to the means test. Debtors whose debts are primarily business are not subject to this limitation. The presumption of abuse is set out in 11 U.S.C. § 707(b)(2)(A). The bar to rebutting the presumption is high and contains only narrow exceptions. See 11 U.S.C. § 707(b)(2)(B). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501226/ | SANBERG, Bankruptcy Judge.
The Appellant, United States of America, appeals the July 24, 2017, order of the Bankruptcy Court sustaining the Debtors' objection to a proof of claim filed by the Internal Revenue Service. We have jurisdiction over this appeal from the final order of the Bankruptcy Court. See 28 U.S.C. § 158(b).
For the reasons stated below, we reverse.
STANDARD OF REVIEW
The question of whether substantial evidence was presented in support of the objection as a matter of law sufficient to rebut the Internal Revenue Service's ("IRS") proof of claim is reviewed de novo . Fed. R. Bankr. P. 8013 ; Halverson v. Estate of Cameron (In re Mathiason) , 16 F.3d 234, 235 (8th Cir. 1994) ; Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation ), 318 B.R. 147, 150 (B.A.P. 8th Cir. 2004). We review the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Brown v. I.R.S. (In re Brown) , 82 F.3d 801, 805 (8th Cir. 1996), abrogated on other grounds by Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ; Keating v. C.I.R., 544 F.3d 900 (8th Cir. 2008), Blodgett v. C.I.R. , 394 F.3d 1030, 1035 (8th Cir. 2005) (finding in the context of proving tax loss, which is entitled to a presumption of correctness, that "we review de novo the legal question of whether a taxpayer produced sufficient evidence to shift the burden of proof").
BACKGROUND
The Debtors, Scott S. and Anna M. Austin ("Austins" or "Appellees"), filed a voluntary petition under Chapter 13 of the Bankruptcy Code with the Bankruptcy Court for the Eastern District of Missouri on December 8, 2014. In their schedules, the Austins listed two pending worker's compensation claims as contingent and unliquidated exempt property. These claims were valued at $0.00 or an "unknown value." The Austins listed the IRS as a secured creditor. The IRS filed proof of claim no. 5-1, asserting in part a secured claim as a result of a tax lien.
On January 9, 2015, the Austins filed an objection to claim no. 5-1 ("January Objection"). They objected to the amount of the IRS's priority claim and the amount of the *482claim listed as secured. They argued that no value should be attributable to their worker's compensation claims in determining the secured portion of the IRS's claim. They also argued, in the alternative, that since there were neither settlement offers nor a basis to determine the value of the worker's compensation claims, the present value of the worker's compensation claims should be $0.
On July 13, 2015, the Bankruptcy Court held a hearing on the January Objection. No evidence was presented at this hearing and the matter was taken under submission.
On September 18, 2015, the Bankruptcy Court overruled the Austins' January Objection and held that the Austins had failed to meet their burden to produce substantial evidence to rebut the IRS's claim. The Bankruptcy Court disagreed with the Austins' assertion that their worker's compensation claims had no value. In re Austin, 538 B.R. 543 (Bankr. E.D. Mo. 2015) (" Austin 1"). Rather, the Bankruptcy Court held that because the claims were being pursued at the time the petition was filed, they must have had some value. Id. at 546. Therefore, the Bankruptcy Court overruled the Austin's objection. Id. at 546-547.
In the meantime, on July 28, 2015 (while Austin 1 was under submission), the Austins negotiated a settlement of the worker's compensation claims for $21,448.80. After attorneys' fees, the Austins received a net settlement of $15,661.60.
The IRS learned of the settlement, and on October 13, 2015, filed an amended claim, No. 5-3, which included as part of its secured claim the amount of $15,661.60 for the value of the worker's compensation settlement.
The Austins again objected to the IRS's claim, specifically to the value of the IRS lien against the worker's compensation claims. In support of their objection, on July 26, 2016, the Austins filed an affidavit of Michael Smallwood1 ("Smallwood Affidavit"), the Austins' worker's compensation attorney, who opined that the worker's compensation claims had a "nuisance" value of $3,000.00 on the petition date.
In response, the IRS argued that the Smallwood Affidavit was not substantial evidence sufficient to overcome the prima facie validity of the IRS's claim. Further, the IRS argued that the value of the worker's compensation claims should be the amount that the claim settled for, though it was several months after the Austins' petition date.
After hearing oral arguments, on August 22, 2016, without taking evidence or hearing testimony, the Bankruptcy Court took the matter under submission.
On July 24, 2017, the Bankruptcy Court ruled that the Smallwood Affidavit was "substantial evidence" of the value of the worker's compensation claims, sufficient to rebut the prima facie validity of the IRS's claim. The Bankruptcy Court reasoned that the affidavit was from the attorney who litigated the matter himself. Further, the Bankruptcy Court stated that the "IRS has not provided additional evidence to prove why it believes the true value of the claim should be the actual settlement amount." The Bankruptcy Court therefore sustained the Austins' objection and valued the worker's compensation claims at *483$3,000, and reduced the IRS's secured claim by $12,661.00.
The IRS timely filed this appeal.
ISSUES ON APPEAL
On appeal, the IRS argues that the Bankruptcy Court erred in finding that the Austins presented substantial evidence in support of their objection. The IRS argues that the single affidavit of the worker's compensation counsel, the Smallwood Affidavit, filed in support of their objection did not constitute 'substantial evidence' in rebutting the IRS's claim. Rather, the Smallwood Affidavit contains uncorroborated and self-serving hearsay statements and the IRS did not have the opportunity for cross-examination.
The Austins argue in response that the IRS did not preserve for appeal, and therefore waived any argument, on the issue of the sufficiency of evidence of the Smallwood Affidavit. The Austins also argue that the Bankruptcy Code does not prescribe any particular method of valuation, but instead leaves valuation questions to judges on a case-by-case basis. According to the Austins, the Smallwood Affidavit is sufficient proof of the value of the claim because Mr. Smallwood handled the case and is an experienced worker's compensation attorney; he is in the best position to value the claims as of the petition date.
DISCUSSION
The IRS's Claim
We first note that there is no dispute about the amount of the IRS's claim or that the federal tax lien is a valid lien against the proceeds of the workers compensation claims. Therefore, we do not address those issues. Rather, the issue is the value of the lien on the worker's compensation claims pursuant to 11 U.S.C. § 506(a)(1).
Section 506(a)(1) states that a claim is a "... secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ...." 11 U.S.C. § 506(a)(1). The Austins argue that this amount is $3,000, the value asserted in the Smallwood Affidavit. The IRS disagrees and asserts that the Austins failed to present substantial evidence to overcome the presumptive validity of the IRS claim which valued the amount secured by the worker's compensation claims to be $15,661.60, the amount the Austins received in the settlement, after attorneys' fees were deducted.
Burden of Proof
A creditor of the debtors may file a proof of claim and it is deemed allowed, unless a party in interest objects. 11 U.S.C. § 502(a). A proof of claim that comports with the requirements of Bankruptcy Rule 3001(f) constitutes prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f) ; In re Dove-Nation , 318 B.R. at 152 ; Kimmons v. Innovative Software Designs, Inc. (In re Innovative Software Designs, Inc.) , 253 B.R. 40, 44 (8th Cir. BAP 2000). The filing of an objection does not deprive the proof of claim of a presumptive validity unless the objection is supported by substantial evidence. McDaniel v. Riverside Co. Dept. of Child Support & Serv. (In re McDaniel) , 264 B.R. 531, 533 (8th Cir. BAP 2001), (citing In re Brown , 82 F.3d 801, 805 (8th Cir. 1996) ).
Further, as part of its burden of producing substantial evidence to rebut the presumptive validity, the objecting party bears the burden of producing substantial evidence as to the value of the collateral securing any portion of the claim. 11 U.S.C. § 506 ; In re Heritage Highgate Inc., 679 F.3d 132, 140 (3rd Cir. 2012) (citing In re Robertson , 135 B.R. 350, 352 (Bankr. E.D. Ark. 1992). This is because the claim is secured only to the extent of the value of the collateral, pursuant to *484Section 506. Wright v. Standard Consumer USA Inc. (In re Wright ), 492 F.3d 829, 830 (7th Cir. 2007) ; Taffi v. U.S. , (In re Taffi ) 96 F.3d 1190, 1192 (9th Cir. 1996).
Here, the Bankruptcy Court determined that the value of the worker's compensation claim was $3,000 based on the Smallwood Affidavit provided by the Austins, and that the Smallwood Affidavit constituted substantial evidence rebutting the presumptive validity of the IRS's claim. The IRS disagreed.
While the Austins argue that the IRS did not preserve the issue of the sufficiency of the evidence for appeal and therefore waived the argument, we disagree. The IRS raised the issue of the sufficiency of the affidavit in its submissions several times at the hearing on August 22, 2016. The attorney for the IRS stated at one point: "I don't believe that the affidavit of Mr. Smallwood in this matter meets the debtors' burden of substantial evidence." Transcript of Objection to Claim 5 of Department of the Treasury For $171,606.34 by Debtors (54); Response By the Trustee (55); Response by Internal Revenue Service (56) at 4, In re Austin , No. 14-49516 (Bankr. E.D. Mo. Sept. 11, 2017) ECF No. 93. Thus, the argument was not waived.
Value of Austins' Worker's Compensation Claims
The Austins argue that they submitted substantial evidence in the form of the Smallwood Affidavit to support their valuation of the secured portion of the worker's compensation claims in rebuttal of the IRS's proof of claim. Substantial evidence means "more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Consolidated Edison C. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 83 L.Ed. 126 (1938) : Richardson v. Perales , 402 U.S. 389, 401, 91 S.Ct. 1420, 28 L.Ed.2d 842 (1971). Substantial evidence requires financial information and factual arguments. See Vomhof v. United States , 207 B.R. 191, 192 (D. Minn. 1997) ; In re Dove-Nation, 318 B.R. at 152. Here, the Smallwood Affidavit does not contain the financial or factual information necessary to support Mr. Smallwood's opinion of value.
First, the Smallwood Affidavit was Mr. Smallwood's personal opinion of value. He admits in the affidavit that at the time of the filing of the petition he did not know the full extent of Mr. Austin's injuries; Mr. Austin had not had any independent medical exams and needed further treatment and analysis.
Second, Mr. Smallwood opines that by continuing to pursue the workers compensation claims post-petition, his work increased the value of the claims from a "nuisance value" of $3,000.00 to the final settlement amount. There is nothing in the Smallwood Affidavit that shows what Mr. Smallwood did to increase the value of the worker's compensation claims. The claims are for losses due to the injuries Mr. Austin sustained at work. The evidence supporting the losses would be determined by the extent of the injury, worker's compensation schedules, etc. Mr. Smallwood's work had no impact on these factors.
As an analogy, assume a debtor has a damaged car and he wants to file a claim with the auto insurance company but at the time he makes the claim, the full extent of the damage is not known. An agent's work to establish the extent of the damage and pursue the insurance proceeds would have no effect on the value of the damage. Rather, the agent's work made the facts known so that the claim could be resolved. Similarly, here worker's compensation is a type of insurance; Missouri employers are required to either carry the insurance or be self-insured. R. S.
*485Mo. Stat. § 287.280. Mr. Smallwood's work helped establish the extent of Mr. Austin's injuries and helped to recover the benefits from the worker's compensation insurance. Mr. Smallwood's work had no impact on the value of the worker's compensation claims themselves as he did not increase the extent of Mr. Austin's injuries, his efforts simply made the facts known and aided in recovery.
Third, Mr. Smallwood states in the affidavit that at the time of the filing of the petition, no offers in settlement had been made. But he does not state what demands had been made on Mr. Austin's behalf nor did he provide any documentation to corroborate his statement that the claim was worth only $3,000.00 on the petition date, despite settling for more than $21,000.00 just seven months later. He did not present copies of the actual workers compensation claims filed, evidence of the Missouri state statutory scheme for valuing such worker's compensation claims, or evidence of past awards for similar claims.
Finally, the IRS had no opportunity to cross examine Mr. Smallwood as there was no evidentiary hearing, no testimony taken, and nothing admitted into evidence.
The Austins had the burden of producing substantial evidence to rebut the IRS' claim. They must have provided evidence that has a reasonable, objective basis for the valuation of a tort claim such as here. This could include such things as lost wages, medical bills or worker's compensation schedules. See In re Solly , 392 B.R. 692, 697 (Bankr. S.D. Tex. 2008) (a medical malpractice claim may not be scheduled as unknown, the scheduled value of medical malpractice claims must have reasonable basis); In re Cumba , 505 B.R. 110, 116 (Bankr. D. P.R. 2014) (the best guide for establishing the value of a particular legal claim is to find out the monetary awards that the state courts have awarded to similar legal claims in the past). Allowing a valuation of a tort claim without a reasonable factual basis encourages abuse. Debtors could avoid a secured creditor's interest in tort claims simply by failing to obtain the facts necessary to support those claims. See In re Solly, 392 B.R. at 697.
Based on our de novo review of the record, the Austins failed to present substantial evidence sufficient to overcome the presumption of the validity and amount of the IRS's proof of claim. Therefore, their objection to claim should have been overruled.
CONCLUSION
For the foregoing reasons, we REVERSE.
The Smallwood Affidavit was filed on July 26, 2016, and was amended the next day to correct the amount of the settlement. The Smallwood Affidavit addressed here is the corrected affidavit filed on July 27, 2016. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501229/ | William R. Sawyer, United States Bankruptcy Judge.
*529This Adversary Proceeding is before the Court on the Motion for Summary Judgment filed by Defendant Creditor Holmes Motors, Inc. (Doc. 41). The motion is fully briefed. The issue considered is whether Defendant is entitled to a judgment as a matter of law under Fed. R. Bankr. P. 7056. For the reasons set forth below, the motion is DENIED.
I. FACTS
Plaintiff Stacey H. Brodgen (Debtor) filed a petition in bankruptcy pursuant to Chapter 13 in this Court on March 31, 2017, and filed a Chapter 13 Plan the same day. (17-30955, Docs. 1, 2). The Plan treats the claim of Creditor as secured by a 2007 Chevrolet Tahoe.1 It provides for Holmes as the holder of a claim having a "specified monthly payment" of $502.00 to be paid over the life of the Plan and an "adequate protection payment" of $185.00 per month to be paid until confirmation of the Plan. The Chevrolet Tahoe is listed as an asset of the Debtor on Schedule B and the indebtedness owed to Creditor is listed as a secured indebtedness on Schedule D. (17-30955, Doc. 1). On April 6, 2017, the Court issued an "Income Withholding Order" that called for Brodgen's employer to take money out of her paycheck and pay it over to the Chapter 13 Trustee for the purpose of funding her Chapter 13 Plan, which includes the payment of Creditor's secured claim. (Case No. 17-30955, Doc. 13). Debtor amended her Chapter 13 Plan on April 19, 2017, (17-30955, Doc. 18) and again on June 16, 2017; however, the treatment of Creditor's claim was not changed (17-30955, Doc. 27). Creditor did not object to its treatment under Debtor's Chapter 13 Plan. The Court confirmed the Plan on June 23, 2017. (17-30955, Doc. 29).
Debtor testified in her deposition that she spoke on the telephone with representatives of Creditor a number of times.2 After the Debtor filed bankruptcy, an employee of Creditor named Chris told Debtor that she could not file bankruptcy. (Doc. 41, Ex. 5, Part 1, p. 27).
Q: This was back when you were first at the dealership or when you were talking to Chris on the phone?
A: On the phone. On the phone.
Q: After you had filed bankruptcy?
A: Right. He told me you can't do that. And I'm like what do you mean, I can't do that. That's why I was like what.
Q: Okay. And when you said that he said you can't do that, you understood that to be you can't file bankruptcy?
A: Right. And I told him I had done it.
* * *
Q: And did he tell you that you had to continue making your payments?
A: I don't know if he said that, but-well, he had to have because they kept calling me asking me for payments. I'm like it's already coming out of my check.
(Brodgen Dep. pp. 29-30). Creditor knew of Debtor's bankruptcy filing, knew of its treatment under the Plan, and knew that the Plan was being funded by an income withholding order. Notwithstanding this knowledge, on April 12, 2017, representatives of Creditor went to Debtor's place of employment and proceeded to repossess her Chevy Tahoe. She told the representatives *530that she was in bankruptcy and that she made her payments as they had been taken from her paycheck. Under the compulsion of a threat of repossession, she drove to Creditor's place of business, where she thought she could straighten things out. Instead, she was told that she could not take her vehicle unless she paid $703, which she did under protest. To further aggravate the situation, Debtor was threatened with arrest if she attempted to move her vehicle without paying the sum demanded. (Brodgen Dep. pp. 31-42).
Creditor offers a copy of a "Motor Vehicle Lease Agreement-Closed End," signed May 11, 2016, in support of its claim that Debtor leased the vehicle and that the lease terminated prior to the bankruptcy filing. (Doc. 41, Ex. 1). Whether the underlying contract between Brodgen is in fact a lease or a security agreement is, at a minimum, a fact that, as of April 12, 2017, was in dispute. It appears that this fact is no longer in dispute in light of this Court's Order of June 23, 2017, confirming the Brodgen's Chapter 13 Plan.3 (17-30955, Doc. 29).
Creditor contends that the lease terminated prior to the date of Brodgen's bankruptcy filing-March 31, 2017. Yet, Creditor offers no evidence in support of this fact. It is undisputed that Debtor possessed the vehicle at the time she filed her petition in bankruptcy. In fact, except for the events taking place on April 12, 2017, which disturbed but did not divest her of possession, Debtor possessed the vehicle at all times relevant to these proceedings. It is further undisputed that Creditor did not send or deliver Debtor a document telling her that her rights under the lease had terminated. Indeed, for all of the conversations between Debtor and representatives of Creditor, both on the telephone and in person, it does not appear that any representative of Creditor ever stated that the lease had terminated.
Debtor offered a copy of a document entitled "A/R Customer Research Payments," which appears to be a business record of Creditor's. (Doc. 46, Ex. 4). That document indicates that Creditor sent numerous past due reminders to Debtor as late as July of 2017, contradicting Creditor's assertion that the lease terminated in March of 2017. Furthermore, it is undisputed that Creditor permitted Debtor to leave its premises with the Chevy Tahoe on April 12, 2017, after she paid the aforementioned $703, all of which contradicts any argument that Debtor's rights under the lease (or security agreement) had somehow terminated. Drawing all reasonable inferences in favor of the Debtor, the only conclusion to be drawn is that her rights under the contract had not been terminated.
II. LAW
A. Jurisdiction
This Court has jurisdiction to hear this Adversary Proceeding pursuant to 28 U.S.C. § 1334(b). The question of whether the Creditor violated the automatic stay is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (G). The remainder of the issues raised in the complaint are noncore. This is not a final order.
B. Motion for Summary Judgment Standard
This Adversary Proceeding is before the Court on the Motion for Summary Judgment filed by Defendant Holmes Motors, Inc. (Doc. 41). Such motions are governed by Bankruptcy Rule 7056, which incorporates Rule 56, Fed. R. Civ. P. Motions for Summary Judgment may only be granted if there is no genuine issue as to any *531material fact and if the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. The evidence is viewed in the light most favorable to the non-moving party and all inferences must be drawn in the light most favorable to the non-moving party. Mize v. Jefferson City Board of Ed. , 93 F.3d 739, 743 (11th Cir. 1996). The initial burden of proving that there is no genuine issue as to any material fact is on the movant. Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
C. The Automatic Stay
1. General Considerations
Creditor makes two arguments in its brief. First, it contends that the Chevy Tahoe was not property of the estate because the vehicle lease terminated prior to date of the bankruptcy filing and, as a result, there was no violation of the automatic stay. (Doc. 41, pp. 5, 7-10). In the alternative, it argues that any violation of the automatic stay was not willful. (Doc. 41, pp. 10-11). The evidence submitted by the parties shows that, at a minimum, there are disputed material facts on both of these factual contentions.
On should first consider that the filing of a petition in bankruptcy:
(a) ... operates as a stay, applicable to all entities, of-
* * *
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
* * *
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.
* * *
(k) ... an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.
11 U.S.C. § 362. It is well established that a creditor who takes action to collect an indebtedness owed by a debtor may be held liable for damages. Lansaw v. Zokaites (In re Lansaw) , 853 F.3d 657, 667 (3rd Cir. 2017) ; Lodge v. Kondaur Capital Corp., 750 F.3d 1263, 1268 (11th Cir. 2014) ; Credit Nation Lending Services, LLC v. Nettles , 489 B.R. 239 (N.D. Ala. 2013) (aff'g Bankruptcy Court's imposition of damages, punitive damages and attorney's fees for post-petition repossession of automobile); In re White , 410 B.R. 322 (Bankr. M.D. Fla. 2009) (imposing damages, punitive damages, and attorney's fees for repeated telephone calls to the debtor and debtor's relatives to collect a debt); Smith v. Homes Today, Inc. (In re Smith) , 296 B.R. 46 (Bankr. M.D. Ala. 2003) (imposing damages, punitive damages, and attorney's fees for repossession of a mobile home in violation of the automatic stay).
2. Creditor's argument that the Chevy Tahoe is not property of the estate is not supported by the evidence
Creditor argues in its brief that the Chevy Tahoe is not property of the estate because Debtor's rights under her lease were terminated prior to the date of the filing of the petition in bankruptcy and hence, they contend, there can be no violation of the automatic stay. Creditor's argument is contrary to the evidence in the Court's record. Debtor filed a Chapter 13 Plan which treats Creditor's interest as a secured claim, which is dealt with under the Plan by paying its value, with interest, over the life of the Plan. (17-30955, Docs. 2, 18, 27); see 11 U.S.C. § 1325(a)(5). In other words, the Debtor's Plan takes the *532position that her interest had not terminated, and that her interest in the Chevy Tahoe was property of the estate. Creditor did not object to its treatment under the Plan.4 On June 23, 2017, this Court confirmed Debtor's Plan. (17-30955, Doc. 29). The Creditor failed to establish, as a matter of undisputed fact, that Debtor's leasehold interest in the Chevy Tahoe terminated; rather it is established, to the contrary, that Creditor has a secured claim which is provided for under the Plan. § 1327 (provisions of plan bind debtor and creditor). Hope v. Acorn Fin. Inc., 731 F.3d 1189, 1196 (11th Cir. 2013) ; Inre Zayed , 340 B.R. 108, 110-11 (Bankr. M.D. Fla. 2006) ; In re Mitchell , 281 B.R. 90, 93-94 (Bankr. S.D. Ala. 2001) ; Green Tree Fin. Corp. v. Garrett (In re Garrett) , 185 B.R. 620, 622 (Bankr. N.D. Ala. 1995). It is established, by way of a confirmed Chapter 13 Plan that the Chevy Tahoe is property of the estate, contrary to the argument made by Creditor.
Creditor's argument, that the lease terminated, is further rejected, because it offers no evidence that the lease was, in fact, terminated. By Creditor's own admission, Debtor was only $200 behind on her obligation to Holmes at the time her vehicle was repossessed.5 (Doc. 41, p. 3, n. 1). There is nothing in any of the evidentiary submissions that shows that Creditor had taken any action to terminate the lease. When they repossessed the vehicle, on April 12, 2017, they released it upon receiving payment of $703. Thus, the lease had not in fact been terminated on April 12, 2017-unless Creditor takes the position that they let Debtor drive off its property, with its car, out of the goodness of its heart! That is not plausible. Rather, the fact that Debtor drove off with her car, after paying $703, on April 12, 2017, it was well established that the lease-if one wants to call it that-was still in effect. To be sure, the document under which Debtor claims rights to the car is denominated a lease. (Doc. 41, Ex. 1). Whether it was actually a lease or a disguised security interest was an issue which was then in dispute. However, when this Court confirmed the Chapter 13 Plan, on June 23, 2017, that issue was resolved. (17-30955, Doc. 29). After June 23, 2017, Creditor holds a claim, secured by an interest in the 2007 Chevy Tahoe, that was property of the estate.
Creditor argues that neither its lease nor Alabama law require that it give Brodgen formal, written notice that it was terminating the lease. See , Ala. Code § 7-2A-502. Even if that were so, it does not excuse Creditor from carrying its burden, under Rule 56, Fed. R. Civ. P., that it must establish the facts in support of its motion. As it has taken the position that the lease terminated, it must offer evidence that establishes this fact. Fed. R. Civ. P. 56 ; Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). While notice may not be required under Alabama law, if Creditor had given Debtor notice that she was in default or that it was terminating her rights under the lease, then it would have some favorable facts supporting its position that the lease in question had terminated. Nevertheless, Creditor failed to offer evidence establishing undisputed facts that support its contention *533that it terminated Debtor's rights under the lease.
The parties filed a number of documentary exhibits in support of their respective positions on the pending Motion for Summary Judgment. Having examined the documentary record, the Court is unable to find any evidence suggesting that the lease had been terminated. Moreover, there is nothing in Debtor's deposition testimony which suggests that she was ever told the lease had been terminated. Creditor's records document several dozen demands for payment-all which suggest they considered the lease in effect, albeit in default. The fact that Debtor drove off Creditor's lot with the Chevy Tahoe after paying $703 establishes that both parties considered the lease, or the contract if one prefers that term, in effect. Creditor's argument, that the lease had terminated, is without merit because it is contrary to the Court's order of confirmation and because there is no evidence in the record showing that the lease had been terminated.
3. Creditor violated the automatic stay every time it demanded payment after the bankruptcy filing even if its actions did not affect property of the estate.
Even if Creditor is correct on its point about the lease being terminated prior to the Debtor filing bankruptcy, the facts here establish multiple violations of the automatic stay. Creditor violated 11 U.S.C. § 362(a)(6) as it committed any number of acts in an effort to collect on its prepetition claim against Debtor. For example, it made numerous telephone calls to Debtor demanding payment. (Doc. 46, Ex. 4). This fact alone is sufficient to establish a willful violation of the automatic stay and thereby defeat the pending motion. Moreover, Creditor repossessed the Chevy Tahoe, yet returned it to Debtor upon receipt of $703-establishing that the purpose of its repossession was to extract money from Brodgen, on its prepetition claim, and not to regain possession of the Chevy Tahoe. The plain language of § 362(a)(6) requires only an act to collect a claim, irrespective of whether the act has any effect on property of the estate. Creditor misperceives the breadth of the protection afforded a debtor by the automatic stay.
4. Creditor's alternative argument, that any violation of the automatic stay was inadvertent and not willful, fails because the facts concerning its intent are in dispute.
Creditor argues that even if it did violate the automatic stay, its violation was not willful and for that reason there is no claim against it. (Doc. 41, pp. 10-11). Creditor argues that "the evidence shows that HMI did not have actual knowledge that Brodgen filed bankruptcy and that the automatic stay had been entered." (Doc. 41, p. 10). This claim is disingenuous. Creditor took Debtor's deposition and offered it into evidence. As set forth above, Debtor testified that she told Creditor's employee, Chris, that she filed bankruptcy and he responded that she could not file bankruptcy. (Brodgen Dep. pp. 29-39). This testimony alone establishes facts supporting Debtor's claim that Creditor's violation of the automatic stay was willful. For a violation of the automatic stay to be willful, the defendant must know of the automatic stay and intend the act done in violation. Jove Engineering, Inc. v. Internal Revenue Service, 92 F.3d 1539, 1555 (11th Cir. 1996) ; Campbell v. Carruthers (In re Campbell) , 553 B.R. 448, 453 (Bankr. M.D. Ala. 2016). There is an abundance of evidence in the record showing that material facts are in dispute on the question of whether any violation of the automatic stay committed by Creditor was willful.
*534III. CONCLUSION
Holmes Motors violated the automatic stay when it made repeated demands for payment under its contract, when it repossessed Brodgen's Chevy Tahoe, and when it extracted $703 from Brodgen on its prepetition contract claim. Holmes' argument, that its lease with Brodgen terminated prior to the bankruptcy filing is contrary to all the evidence in the record. At a minimum, these are disputed facts precluding summary judgment in Holmes' favor. In addition, even if one assumes that Holmes is correct in its argument that the lease terminated, it willfully violated the automatic stay numerous times when it demanded payment from Brodgen on its prepetition claim. For these reasons, Holmes' motion will be denied by way of a separate order.
Done this 30th day of March, 2018.
Holmes Motors has not filed a Proof of Claim with the Court. The Debtor's Plan states that Holmes is owed $18,771.50, secured by a 2007 Chevrolet Tahoe.
Excerpts of Brodgen's deposition are attached at Exhibit 5 to Creditor's Motion for Summary Judgment. (Doc. 41).
Creditor did not object to its claim being treated as secured under Debtor's Plan.
Creditor argues in its brief that its lease with Debtor was a "true lease" and not a disguised security agreement. Had it timely objected, it may well have prevailed on that point, but it did not. Rather, it is now bound by the Debtor's confirmed Chapter 13 Plan-which treats the interest of Creditor as a secured claim and not a leasehold interest.
If Holmes was only $200 behind on her contract payment at the time of repossession, the record is unclear as to why she had to pay $703 to get her car back. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501230/ | II. LAW
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(G). This is a final order.
*537The Court divides its analysis of the issues here into four parts. In Part II(A), the Court analyzes the status of the competing garnishment proceedings as of the date of the petition in bankruptcy-Nov. 8, 2016. In Part II(B), the Court analyzes the effects Lively's bankruptcy filing has on the wages garnished from Miller's wages after the filing of the petition. In Part II(C), the Court considers both parties' arguments regarding the attachment of judgment liens to property. In Part II(D), the Court considers whether the Maitlands willfully violated the automatic stay.
A. The Status of Funds Held by the State Court as of the Date of the Petition in Bankruptcy-November 8, 2017
The Court first analyzes the effect of the bankruptcy filing, the automatic stay, and Lively's claim of exemption on Miller's garnished wages, as of the date Lively filed his petition in bankruptcy. When a petition in bankruptcy is filed, all of the Debtor's property becomes property of the estate, with an important exception discussed below. "The commencement of a case under section 301 ... creates an estate. Such estate is comprised of all of the following property, wherever located and by whomever held: (1) ... all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). The Lively judgment against Miller, and the garnishment proceeds held by the Clerk of the Court of Autauga County, became property of the estate upon the filing of a petition in bankruptcy. Bracewell v. Kelley (In re Bracewell) , 454 F.3d 1234, 1237 (11th Cir. 2006).
Next, we must consider the effect of the Maitlands' garnishment on Lively's interest in the proceeds garnished from Miller's wages. Alabama statute defines garnishment as follows:
A "garnishment," as employed in this article, is process to reach and subject money or effects of a defendant in attachment, in a judgment or in a pending action commenced in the ordinary form in the possession or under the control of a third person, or debts owing such defendant or liabilities to him on contracts for the delivery of personal property, on contracts for the payment of money which may be discharged by the delivery of personal property or on contracts payable in personal property; and such third person is called the garnishee.
ALA. CODE § 6-6-370 (2017).
When the Maitlands served their garnishment process on the Clerk of the Court in Autauga County, they created an obligation on the part of the Clerk to redirect the funds from Lively to the Maitlands. It appears that Alabama law allows such a redirection. "Money in hands of an attorney-at-law, sheriff, or other officer may be garnished; and, in the case of officers of the court, the money must be paid into the court to abide the result of the action, unless the court otherwise directs." ALA. CODE § 6-6-412 (2017).
As of the date of the petition in bankruptcy, November 8, 2016, Lively was garnishing Miller's wages in an effort to collect on the Lively judgment. The Maitlands in turn were attempting to redirect those payments to themselves to collect on the Maitlands' judgment against Lively. As of the date of the petition, the Clerk in Autauga County held $578.95, which was subject to both Lively's and the Maitlands' judgment liens. Deloney v. U.S. Fidelity & Guaranty Co., 272 Ala. 569, 133 So.2d 203 (1961) ; First Nat. Bank of Brantley v. Standard Chem. Co., 226 Ala. 509, 512, 147 So. 682 (1933).
B. The Effect of Lively's Bankruptcy Filing Upon the Two Garnishment Proceedings
The filing of a petition in bankruptcy gives rise to the automatic stay. "[A]
*538petition filed under section 301 ... operates as a stay, applicable to all entities, of-(1) the commencement or continuation, including the issuance of employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a) ; see also United States v. White , 466 F.3d 1241, 1244 (11th Cir. 2006). As the Maitlands' garnishment process, issued out of Jefferson County, is clearly judicial process, its effects were stayed as of the date of the petition in bankruptcy. Therefore, going forward from the date of the petition, the Maitlands' garnishment lien did not attach to any amount paid over to the Autauga County Circuit Court Clerk after the date of the petition. Bank of America, N.A. v. Johnson (In re Johnson) , 479 B.R. 159, 170 (Bankr. N.D. Ga. 2012) (Bonapfel, B.J.); Roche v. Pep Boys, Ind., (In re Roche) , 361 B.R. 615, 620-22 (Bankr. N.D. Ga. 2005) (Diehl, B.J.); see also , In re Briskey , 258 B.R. 473, 477 (Bankr. M.D. Ala. 2001) (creditor garnishing debtor's funds is under an affirmative duty to cease taking funds so as to avoid violating the automatic stay).
At the time Lively filed his petition in bankruptcy, his interest in the funds garnished from Miller's wages became property of the estate, subject to the Maitlands' garnishment lien. 11 U.S.C. § 541(a)(1) ; Bracewell v. Kelley (In re Bracewell) , 454 F.3d 1234, 1237 (11th Cir. 2006). Garnished funds becoming payable after the date of the petition are proceeds of the judgment and are property of the estate. 11 U.S.C. § 541(a)(6). Miller owed an indebtedness to Lively-the Lively judgment-and his interest in the indebtedness became property of the estate when Lively filed a petition in bankruptcy. At this point, one should distinguish between Miller's indebtedness to Lively, which is an intangible asset that is property of the bankruptcy estate, and the continuing proceeds garnished from Miller's wages on the Lively judgment, which become property of the estate as the wages are earned by Miller and then paid over to the Clerk in Autauga County. The Maitlands made no effort to garnish or attach the underlying indebtedness owed by Miller to Lively, rather they only sought to redirect the funds to be paid by Miller to Lively under the garnishment by the Clerk of the Autauga County Circuit Court.
Under Alabama law, garnishment process is served upon the garnishee. ALA. CODE § 6-6-393 (2017). As the only garnishee served under the Maitlands' garnishment process is the Clerk of the Autauga County Court, it follows that Miller is not a party to the Maitlands' garnishment process as she was never served. (Pl. Ex. 6). For that reason, the Maitlands' garnishment lien did not attach to the underlying judgment against Miller-the Lively judgment-but only attached to the order directing payment of the funds garnished from Miller's wages as they were earned. One should bear in mind that a money judgment is a judicial determination that an amount of money is owed. To attach the underlying indebtedness, one must garnish the party that owes the indebtedness-Miller in this case-and not merely the Court that entered the judgment. The Maitlands failed to do so; thus, the they did not cause their judgment lien to attach to the indebtedness owed by Miller on the Lively judgment.
That being said, a question does arise as to whether the Maitlands' judgment had attached, by way of the garnishment process, to any funds on hand with the Circuit *539Clerk of Autuaga County at the time Lively filed his petition in bankruptcy. When the Maitlands served the garnishment process on the Autauga County Circuit Clerk, their judgment against Lively attached to all funds held by the Clerk on behalf of Lively. On the date of the petition in bankruptcy, the Clerk held $578.95 garnished on the Lively judgment from Miller's wages. Thus, this $578.95 is subject to the Maitlands' lien as the garnishment process was served on the Clerk of the Court for Autauga County prior to the filing of Lively's petition in bankruptcy.
Nevertheless, Lively claims the funds held by the Clerk of the Autauga County Court as exempt pursuant to 11 U.S.C. § 522(b)(3) and ALA. CODE § 6-10-6 (2017). (Doc. 1, Sch. C). As Lively properly claimed an exemption, he is entitled to avoid the Maitlands' lien and preserve his exemption. 11 U.S.C. § 522(f)(1)(A) ; see also , In re Rowell , 281 B.R. 726 (Bankr. S.D. Ala. 2001) (holding that the debtor may avoid a garnishment lien and claim funds as exempt when permitted by applicable law). As there was only $578.95 held by the Court at the time Lively filed his petition in bankruptcy, and as Lively had more than that amount left in unused exemptions, he is entitled to avoid the Maitlands' lien in its entirety and obtain that money for himself.
The facts of this case are similar in many respects to those in a case recently handed down by the Northern District of Georgia Bankruptcy Court. In re Williams , 460 B.R. 915 (Bankr. N.D. Ga. 2011). In Williams , a debtor's wages were being garnished by a judgment creditor. At the time the debtor filed bankruptcy in Williams , $417.64 was being held in the registry of the court. The debtor claimed the money as exempt and moved to avoid the judgment lien of the creditor. The creditor objected contending that the funds were property of the estate and subject to a lien and, as a result, the debtor no longer held an interest in the funds. The Bankruptcy Court ruled to the contrary, holding the debtor still owned an interest in the funds and she has the right to claim the funds as exempt. The analysis of the Bankruptcy Court in Williams is applicable here. The only difference is that in Williams it was the debtor's wages that were garnished, where in the case at bar it is a third party's wages that were garnished by Lively, which were in turn garnished by the Maitlands.
The end result is that the Maitlands' judgment lien attached to the funds garnished prior to the date of the petition in bankruptcy but not to funds garnished after that date. However, as Lively claimed them as exempt in his bankruptcy schedules, he is entitled to avoid the Maintlands' lien and preserve his exemption. Therefore, the $578.95 on hand as of the date of the petition in bankruptcy is Lively's money. The Court will authorize and request the Clerk to release the funds to Lively. As the Maitlands did not attach the underlying indebtedness owed by Miller, the garnishment proceeds after the date of the petition are not subject to the Maitlands' garnishment lien.
As it is established that Lively is entitled to $578.95 on hand as of the date of the petition, the question becomes whether Lively or the Maitlands are entitled to the garnished funds received after the date of the petition. As the Miller judgment is property of the estate and because future garnishment funds are proceeds, which become property of the estate as they are received, it follows that funds received after the date of the petition also become property of the estate. Trustee's often make business decisions to further the best interest of the estate. Sometimes this requires the trustee to decide that *540certain property is not worth pursuing, or not worth waiting around to collect. 11 U.S.C. § 554. The process is referred to as abandonment.
In this case, the Trustee determined it was not worth holding the estate open to collect the $115 per week that Miller is paying on the Lively judgment. The Trustee in this case sent notice of her intent to abandon the estate's interest in the Lively judgment on March 7, 2017. (Doc. 31). Parties in interest, including the Maitlands, had thirty days to object. Fed. R. Bankr. P. 6007 ; LBR 9007-1. No objections were filed and the Court granted the Trustee's motion to abandon on May 9, 2017. (Doc. 47). Upon the Trustee's abandonment, the property became property of the debtor. Murray v. Nagy (In re Nagy) , 432 B.R. 564, 569 (Bankr. M.D. La. 2010) (holding that property abandoned from the estate reverts to the debtor).
As the Trustee abandoned the estate's interest in the Lively judgment and as the property reverts to Lively, the question becomes whether the funds garnished under the Lively judgment are subject to the Maitlands' garnishment against Lively. As discussed in Part II(A) above, the Maitlands' garnishment did attach to funds garnished prior to the filing of the petition in bankruptcy; however, it did not attach to garnished funds coming due after Lively filed his petition in bankruptcy. 11 U.S.C. § 362(a). Thus, the Maitlands' garnishment process did not attach to any funds coming due after November 8, 2016, the date Lively filed his petition in bankruptcy.
C. The Fact that the Maitlands Did Not Record a Certificate of Judgment had No Effect Upon the Efficacy of the Garnishment Process
There was considerable discussion at the June 5, 2017 evidentiary hearing as to whether the Maitlands were required to file a Certificate of Judgment with the Judge of Probate. See ALA. CODE § 6-9-211 (2017). Specifically, Lively argued that the Maitlands do not have a lien pursuant to the garnishment against him because they failed to file a Certificate of Judgment with the Judge of Probate.
To obtain garnishment process in Alabama, one must file an affidavit. ALA. CODE § 6-6-391 (2017). It is not necessary to file a Certificate of Judgment with the Judge of Probate to obtain a garnishment. See ALA. CODE § 6-9-210 -11 (2017) (providing that a judgment lien is obtained by filing a Certificate of Judgment with the Judge of Probate). In this case, the Maitlands filed the necessary affidavit and obtained a writ of garnishment from the Circuit Court of Jefferson County. (Cr. Ex. 6). Thus, the Maitlands followed the appropriate steps to obtain a garnishment under Alabama law.
The Maitlands' failure to file a Certificate of Judgment with the Judge of Probate is of no consequence here because the judgment lien that arises from Ala. Code § 6-9-211 attaches only to property that is subject to execution. Executions may be levied upon real and personal property, except things in action. ALA. CODE § 6-9-40 (2017). The funds paid over under the Lively judgment are "things in action." It then follows that a judgment lien arising pursuant to Alabama Code § 6-9-211 does not encumber an indebtedness owed to the Debtor. See , In re Vance , 538 B.R. 862 (Bankr. M.D. Ala. 2011) (a judgment lien did not attach to the debtor's bank account because it was a "thing in action").
The issue here is to what did the Maitlands' garnishment lien attach? As discussed in Part II(B) above, the Court concludes that Maitlands' garnishment process did not attach to the indebtedness underlying Lively's judgment against Miller because Miller was not served by garnishment process by the Maitlands. All of *541the discussion concerning whether the Maitlands should or need not have filed a certificate of judgment, in accordance with ALA. CODE § 6-9-211 (2017), has no bearing on the issue at hand because judgment liens do not attach to things in action.
D. The Maitlands Did Not Commit a Willful Violation of the Automatic Stay When They Responded to Lively's Suggestion of Bankruptcy
Lively contends that the Maitlands willfully violated the automatic stay when they opposed the Suggestion of Bankruptcy filed in Jefferson County. The factual setting here is, to say the least, unusual. While this Court ultimately rejected the Maitlands' claim that their garnishment lien attached to post-petition funds, the Court finds that any violation of the automatic stay was not willful. The Maitlands are represented by counsel who made a reasoned, good faith argument in support of their position. The Court heard evidence on these motions. The parties and their counsel have been antagonistic to one another throughout this case; nevertheless, the Court concludes that both advanced their positions in good faith, even if in a bellicose manner at times.
III. CONCLUSION
The garnishment lien of the Maitlands attached to the funds held by the Clerk of the Court in Autauga County, Alabama, as of the date of the petition. The automatic stay prevented the Maitlands' garnishment lien from attaching to any funds subsequently paid over to the Clerk. Moreover, Lively may avoid the attachment of the Maitlands' garnishment lien to the funds on hand pursuant to 11 U.S.C. § 522(f)(1)(A). The Maitlands' judgment did not attach to the underlying indebtedness owed by Miller to Lively because the Maitlands failed to serve garnishment process on Miller. To the extent that any of the actions taken by the Maitlands may have violated the automatic stay, the Court finds that any such violation was not willful. The Motion for Relief From the Automatic Stay filed by the Maitlands will be denied by a separate order. Lively's motion is granted insofar as the Maitlands' judgment lien on the garnishment proceeds from the Lively judgment is avoided. Lively's motion is denied to the extent that he seeks sanctions or damages for violation of the automatic stay. The Court will, by way of a separate order, request that the Clerk of the Court for Autauga County pay over a portion of the garnished funds to Clerk of the United States Bankruptcy Court for the Middle District of Alabama.
Done this 12th day of October, 2017. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501233/ | Lamoutte, U.S. Bankruptcy Appellate Panel Judge.
Janice Lorraine Stevenson ("Stevenson") appeals pro se from the bankruptcy court's August 3, 2017 order dismissing her chapter 13 case (the "Dismissal Order"). For the reasons discussed below, we AFFIRM .
BACKGROUND 1
Stevenson filed a petition for chapter 7 relief on September 8, 2016. At that time, there was a summary process action pending against her in state court in which her landlord, TND Homes I, LP ("TND"), alleged nonpayment of rent in connection with her lease of a residential apartment (the "Property"). TND filed a motion for relief from the automatic stay (the "motion for relief"), seeking authorization to continue the summary process action. Stevenson opposed the motion for relief, accusing TND of "erroneous billing practices." Following a hearing, the bankruptcy court denied TND's request for relief from the automatic stay, on the condition that Stevenson make certain rent payments to TND. In addition, the court directed TND to correct its electronic records to accurately reflect the amounts Stevenson owed.
TND subsequently moved to voluntarily dismiss the summary process action after *575receiving full payment of the rent amounts due from Stevenson. Stevenson received a discharge on January 6, 2017, and her bankruptcy case was closed on February 14, 2017.
After receiving her discharge, Stevenson again stopped paying rent. According to TND, Stevenson also "persisted in her refusal to complete recertification paperwork,"2 failed to permit inspection of her unit, and violated her lease by keeping a dog on the Property. TND issued a 30-day notice to quit on February 24, 2017, and on April 10, 2017, commenced a new summary process action against Stevenson alleging that her tenancy had been terminated for cause. Stevenson filed an answer and counterclaim in the summary process action, asserting that the Property lacked heat and hot water. The state court scheduled the matter for a bench trial on April 20, 2017.
On April 21, 2017, Stevenson filed a petition for chapter 13 relief, thereby commencing the bankruptcy case that is the subject of this appeal. By letter dated May 3, 2017, TND notified the state court of Stevenson's bankruptcy filing and requested a stay of the summary process action.3
On her Schedule A/B: Property, Stevenson reported $30,000.00 worth of assets, $20,000.00 of which represented the surrender value of an insurance policy. She listed no creditors on Schedule D: Creditors Who Have Claims Secured by Property. On her Amended Schedule E/F: Creditors Who have Unsecured Claims, Stevenson listed only two creditors: Educational Credit Management Corporation ("ECMC"), with a claim of $15,000.00; and Navient, with a claim of $5,000.00.4 On Schedule G: Executory Contracts and Unexpired Leases, Stevenson identified the residential lease with TND.
On April 24, 2017, the bankruptcy court issued a notice stating that Stevenson was "not entitled to a discharge in bankruptcy because of prior case filings." The bankruptcy court issued another notice on the same date, warning Stevenson that, as a "repeat filer," her rights might be affected by § 362(c)(3)5 and/or (4).6 Thereafter, *576Stevenson filed a motion to extend the automatic stay pursuant to § 362(c)(3)(B). The bankruptcy court ruled that the motion was moot because the automatic stay was still in effect, explaining: "Although [Stevenson] filed a prior case ... within the preceding [ ] year, that case was not dismissed and, therefore, [§] 362(c)(3) does not apply."
On June 2, 2017, TND filed a motion to dismiss Stevenson's chapter 13 case (the "Motion to Dismiss") pursuant to § 1307(c), asserting that "[a] chapter 13 case can be dismissed for cause when it is demonstrated that the case was not filed in good faith." TND contended that Stevenson had not filed her petition in good faith but, rather, for the sole purpose of "delay[ing] and frustrat[ing] TND," and preventing the prosecution of the summary process action. Arguing that Stevenson's bankruptcy case amounted to a two-party dispute, TND elaborated that she remained in violation of her lease, she had no debts to reorganize other than student loan debt, and her claims relating to the condition of the Property should be litigated in the state court summary process action.
Stevenson objected to the Motion to Dismiss, insisting that: (1) her chapter 13 case was filed in good faith; (2) she proposed to pay all rent arrearages over a 36-month period in her chapter 13 plan of reorganization; and (3) TND had committed "acts of intentional wrong doing" by, among other things, retaliating against her for asserting her right to habitable premises.
On July 20, 2017, Stevenson filed her fifth amended chapter 13 plan of reorganization (the "Plan"),7 indicating that: (1) she intended to "assume" the lease of the Property; (2) she would pay lease arrears in the amount of $6,853.00 to TND through the Plan; (3) she owed TND an additional $28,391.00, which she characterized as a nondischargeable unsecured claim for rent; (4) ECMC held a nondischargeable unsecured claim in the amount of $70,240.96; and (5) general unsecured creditors would receive a dividend of "0.70%" of their claims.
The Trustee filed an objection to confirmation, asserting that: (1) the Plan was not feasible; (2) Stevenson had overstated the amount of TND's claim and understated the amount of her student loan debt; (3) the Plan's liquidation analysis was incomplete; (4) Stevenson proposed to pay a dividend of .70% to the holders of unsecured claims totaling $105,484.96, which Stevenson calculated as $31,645.88, although *577the Trustee's calculation was $73,839.47;8 and (5) Stevenson had not filed her pre-petition state tax returns. ECMC also filed an objection to confirmation, arguing Stevenson had incorrectly listed her student loan debt as approximately $70,000.00, although it was actually about $147,000.00.
The bankruptcy court conducted a hearing on the Motion to Dismiss on August 3, 2017. At the outset, counsel for TND characterized Stevenson's bankruptcy case as a "two-party dispute" and an "effort to ... continue to hamstring" TND. He reiterated TND's contention that Stevenson's claims regarding the condition of the Property did not justify the filing of her chapter 13 petition, and added that Stevenson had filed six plans of reorganization, "none of which ha[d] come within striking distance of being confirmable." He concluded by arguing that Stevenson was merely a "month-to-month tenant," as her lease had terminated pre-petition due to the recertification issue. Stevenson, in turn, conceded that she was withholding rent because the Property lacked heat and represented that her goal was to "resume" her lease under § 365.
At the conclusion of the hearing, the bankruptcy court granted the Motion to Dismiss, explaining to Stevenson from the bench:
[Y]our lease is [ ] terminated. There's nothing that I could do to revive that lease. And you've been through a chapter 7.
....
You've gotten a discharge.
....
[Y]our problem isn't debt. Your problem [ ] is that you're in a continuing dispute with this landlord.
....
[A]nd the right place to [complain about uninhabitable conditions] is in state court.
....
[W]e've done everything we can do here. I'm going to dismiss the case under [§] 1307 as unreasonable ... delay.
Following the hearing, the bankruptcy court entered the Dismissal Order. On the same day, Stevenson commenced an adversary proceeding against TND with a complaint alleging that it had violated the Massachusetts "anti-SLAPP"9 statute ( Mass. Gen. Laws ch. 231, § 59H ) by retaliating against her "for complaining of [un]inhabitable conditions ...." The bankruptcy court dismissed the adversary proceeding for lack of subject matter jurisdiction in light of its dismissal of Stevenson's main bankruptcy case.
Stevenson appealed the Dismissal Order on August 11, 2017. She also filed a request for certification of the Dismissal Order for direct appeal to the U.S. Court of Appeals for the First Circuit, which the bankruptcy court denied. Several months later, Stevenson filed a request for injunctive relief pursuant to 28 U.S.C. § 2283 (the "Anti-Injunction Act") and § 105, asking the Panel to stay the state court summary process action. The Panel denied her request.
POSITIONS OF THE PARTIES
I. Stevenson
On appeal, Stevenson presents five issues, namely, whether: (1) her lease "was *578unexpired and assumable"; (2) "the automatic stay precludes a state court from undertaking ministerial acts after a bankruptcy filing"; (3) TND's summary process action was a "[SLAPP] suit and abuse of process"; (4) "racial bias influence[d]" the bankruptcy court's decision to dismiss her chapter 13 case; and (5) the bankruptcy court should have permitted her adversary proceeding to proceed. She asks the Panel for "retroactive relief ordering the state court to dismiss the summary process" action.
II. TND
TND counters that there is no basis for reversing the Dismissal Order. Moreover, in response to Stevenson's claim that her lease was "unexpired and assumable," TND contends the bankruptcy court correctly determined that TND had terminated Stevenson's lease prior to the filing of the chapter 13 case and that Stevenson had already received a recent discharge in her chapter 7 case. Thus, TND asserted, the bankruptcy court properly concluded "there was no lease to be assumed and nothing further to be accomplished in the [c]hapter 13 [c]ase." As in the proceedings below, TND maintains Stevenson filed her chapter 13 case to resolve a two-party dispute, "raising quintessentially non-bankruptcy issues which are [more properly] adjudicated in state court summary process actions ...." In support, TND cites Chertok v. Phelan (In re Phelan), No. 1:15-BK-04101 MDF, 2017 WL 713570, at *[6] (Bankr. M.D. Pa. Feb. 22, 2017) (dismissing chapter 13 case, reasoning, in part, that it was primarily a two-party dispute involving state law questions).
Turning to the remaining issues which Stevenson framed in her brief, TND argues: (1) the automatic stay issue is beyond the scope of this appeal and, in any event, TND promptly informed the state court of Stevenson's bankruptcy filing; (2) Stevenson should litigate anti-SLAPP claims in the summary process action; (3) Stevenson's assertion that the dismissal of her chapter 13 case was the product of the bankruptcy court's alleged racial bias is "baseless"; and (4) Stevenson did not appeal the dismissal of the adversary proceeding.
JURISDICTION
A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits, even if the litigants do not raise the issue. Sepulveda Soto v. Doral Bank (In re Sepulveda Soto), 491 B.R. 307, 311 (1st Cir. BAP 2013) (citing Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 724-25 (1st Cir. BAP 1998) ). "Pursuant to 28 U.S.C. §§ 158(a) and (b), the Panel may hear appeals from 'final judgments, orders, and decrees[.]' " Fleet Data Processing Corp. v. Branch (In re Bank of New Eng. Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998) (citing 28 U.S.C. § 158(a)(1) ); see also Bullard v. Blue Hills Bank, --- U.S. ----, 135 S.Ct. 1686, 1692, 1695, 191 L.Ed.2d 621 (2015) (discussing the Panel's jurisdiction to hear bankruptcy appeals under 28 U.S.C. § 158(a) ). An order dismissing a chapter 13 case is a final, appealable order. In re Sepulveda Soto, 491 B.R. at 311 (citation omitted); Pellegrino v. Boyajian (In re Pellegrino), 423 B.R. 586, 589 (1st Cir. BAP 2010) (citing Howard v. Lexington Invs., Inc., 284 F.3d 320 (1st Cir. 2002) ). Therefore, we have jurisdiction.
STANDARD OF REVIEW
"Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law."
*579Belser v. Nationstar Mortg., LLC (In re Belser), 534 B.R. 228, 233 (1st Cir. BAP 2015) (citing Lessard v. Wilton-Lyndeborough Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir. 2010) ). "[The Panel] review[s] a bankruptcy court's decision to dismiss a chapter 13 case for abuse of discretion." Witkowski v. Boyajian (In re Witkowski), 523 B.R. 300, 305 (1st Cir. BAP 2014) (citing Howard, 284 F.3d at 322 ); Zizza v. Pappalardo (In re Zizza), 500 B.R. 288, 292 (1st Cir. BAP 2013) (citations omitted). "An abuse of discretion occurs when the trial court ignores a material factor deserving significant weight, relies upon an improper factor, or assesses all proper and no improper factors, but makes a serious mistake in weighing them." In re Witkowski, 523 B.R. at 305 (citation omitted) (internal quotations omitted).
DISCUSSION
I. The Standard
A. Section 1307(c)
" 'Section 1307 governs dismissal of a chapter 13 case.' " Benoit v. Deutsche Bank Nat'l Trust Co. (In re Benoit), 564 B.R. 799, 805 (1st Cir. BAP 2017) (quoting In re Baril, No. 09-20112, 2015 WL 1636442, at *2 (Bankr. D. Me. Apr. 10, 2015) ). "Section 1307(c) provides that, 'on request of a party in interest or the United States trustee and after notice and a hearing,' the court, 'for cause,' may dismiss a case under chapter 13 or convert the case to chapter 7, 'whichever is in the best interests of creditors and the estate.' " In re Acevedo, No. 12-12393-JNF, 2014 WL 1664255, at *3 (Bankr. D. Mass. Apr. 24, 2014) (quoting 11 U.S.C. § 1307(c) ). "The three princip[al] requirements of dismissal under § 1307 are: (1) the request of a party in interest or the United States Trustee, (2) notice and a hearing, and (3) a showing of cause." Minkes v. LaBarge (In re Minkes), 237 B.R. 476, 478 (8th Cir. BAP 1999) (footnotes omitted). The moving party under § 1307(c) bears the burden of proof. In re Zizza, 500 B.R. at 292 (citation omitted). Dismissal under § 1307(c) is committed to the bankruptcy court's discretion. In re Benoit, 564 B.R. at 805 (citing Howard, 284 F.3d at 322-23 ).
Because the first two requirements for dismissal under § 1307(c) are not at issue here, our focus is on the third element: whether there was "cause" for dismissal. "Cause for dismissal is not specifically defined in [§] 1307, but subsection (c) sets forth [a] non-exclusive list of eleven examples of cause."10
*580In re Acevedo, 2014 WL 1664255, at *3 (citing 11 U.S.C. § 1307(c) (other citation omitted); see also Marrama v. Citizens Bank of Mass., 549 U.S. 365, 373, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (stating § 1307(c)"includes a nonexclusive list of [ ] causes justifying" dismissal or conversion of a chapter 13 proceeding).11
Although TND did not reference a specific subsection of § 1307(c) in the Motion to Dismiss, in its prayer for relief, TND asked the bankruptcy court to dismiss the case "on th[e] basis that it was not commenced in good faith as it only serve[d] to delay and frustrate a two-party dispute." (emphasis added). At the conclusion of the hearing on the Motion to Dismiss, the bankruptcy court stated it was dismissing the case "under [§] 1307 as unreasonable ... delay"-an implicit reference to subsection (c)(1).
B. Unreasonable Delay that is Prejudicial to Creditors
When "evaluating whether there has been unreasonable delay [by the debtor] which is prejudicial to creditors, the court must consider whether the debtor has engaged in some form of unreasonable delay, and whether the delay has been prejudicial." Zareas v. Bared Espinosa (In re Bared Espinosa), AP No. 04-0298, 2006 WL 3898379, at *4 (Bankr. D.P.R. Jan. 27, 2006) (discussing § 1112(b)(1) ) (citing Lawrence P. King, Collier on Bankruptcy& 1112.04[5][c] (15th ed. rev. 2005) );12 see also Penland v. Rakozy (In re Penland), BAP No. ID-05-1467-HKMa, 2006 WL 6811002, at *4 (9th Cir. BAP Aug. 17, 2006) ("To support cause for dismissal, § 1307(c)(1) requires the bankruptcy court to find that a debtor was a proponent of unreasonable delay that resulted in prejudice to creditors.") (citation omitted). The First Circuit has explained that dismissal under § 1307(c)(1) is appropriate where "a further delay [by the debtor] would only prejudice creditors and ma[k]e the feasibility of any plan unlikely." Howard, 284 F.3d at 323 (affirming dismissal where debtor failed to file her tax returns within the time allotted by the court) (citation omitted).
The types of delay which courts find "unreasonable" for § 1307(c)(1) purposes vary. "[T]he most obvious example of an unreasonable delay prejudicial to creditors is the unjustified failure to file a reasonable plan of reorganization in a timely fashion." In re Colón Martinez, 472 B.R. 137, 145 (1st Cir. BAP 2012) (citation omitted) (internal quotations omitted). In In re Bared Espinosa, 2006 WL 3898379, at *4, the court dismissed a chapter 11 case for unreasonable delay that was prejudicial to creditors, where the bankruptcy case was merely a "two-party dispute between *581the debtor and his ex-wife, stemming from their contentious divorce proceedings, and [ ] not properly a matter of financial reorganization under the Bankruptcy Code[.]"13 As another court stated, "[d]elay is unreasonable [ ] only when it occurs without justification." In re Oliver, 279 B.R. 69, 70 (Bankr. W.D.N.Y. 2002) (discussing analogous provision, § 707(a) ).
II. The Standard Applied
The record discloses that TND was Stevenson's only creditor besides ECMC and Navient. The record further establishes that Stevenson's relationship with TND was contentious. In 2016, TND commenced a summary process action against Stevenson. That action was followed by the commencement of Stevenson's chapter 7 case. In that case, TND filed a motion for relief from stay, which Stevenson opposed. Stevenson's relationship with TND remained antagonistic after she received her chapter 7 discharge. For example, she again withheld rent and still refused to participate in the recertification process. A second summary process action ensued, in which Stevenson raised a counterclaim against TND. On the day after trial was scheduled to begin in the summary process action, Stevenson filed the chapter 13 case which is at the heart of this appeal. During the pendency of the chapter 13 case, Stevenson commenced an adversary proceeding against TND asserting anti-SLAPP claims. Finally, in this appeal, Stevenson unsuccessfully sought to enjoin the state court summary process action under the Anti-Injunction Act.
Moreover, during the bankruptcy court hearing on the Motion to Dismiss, Stevenson identified no purpose for her chapter 13 filing beyond "resum[ing]" her lease. When the court stated, "[T]here's nothing for me to do[,]" she then attempted to justify her bankruptcy filing by responding: "[T]he only reason I came here [is] because there is case law where a party can bring their lease, they can bring other debt, they can pay it off in a chapter 13." However, the suggestion that Stevenson had "other debt" to pay off is belied by her recent chapter 7 discharge, and by her own bankruptcy schedules, in which she failed to disclose any other debt to reorganize beyond her student loan debt. Furthermore, Stevenson's intention of "resuming" her lease reflects a fundamental misapprehension, as the record indicates that her lease was previously terminated.
The foregoing chronology supports a conclusion that there has been "unreasonable delay" by Stevenson "that is prejudicial to creditors." 11 U.S.C. § 1307(c)(1). Absent from the record-and from Stevenson's arguments on appeal-is justification for Stevenson's delay. Instead, this record suggests that Stevenson's chapter 13 filing was motivated by or targeted at a single creditor-TND-and that her filing was part of a pattern of conduct aimed at thwarting TND's eviction efforts. See In re Bared Espinosa, 2006 WL 3898379, at *4 (dismissing chapter 11 case for unreasonable *582delay that was prejudicial to creditors where the filing was tantamount to a two-party dispute).14 Furthermore, when we consider Stevenson's stated purpose in filing her chapter 13 case (to "pay ... off" other debt), together with her filing of six chapter 13 plans and failure to confirm any of them over an approximate one-year period, there is more than ample support for the bankruptcy court's decision. See In re Colón Martinez, supra ; see also In re Addams, 564 B.R. 458, 466-67 (Bankr. E.D.N.Y. 2017) ("Because Debtor has been unable to file a plan that complies with §§ 1322 and 1325, this case should be dismissed for cause under § 1307(c)(1) for unreasonable delay by the debtor that is prejudicial to creditors.") (citations omitted); In re Blanco, 520 B.R. 476, 483-84 (Bankr. E.D. Pa. 2014) ("Cause exists for dismissal under [§] 1307(c)(1) when the chapter 13 debtor has been given a reasonable time to propose a viable plan and it is clear that the debtor will be unable to do so.") (citations omitted); In re Michaelesco, 312 B.R. 466, 474 (Bankr. D. Conn. 2004) (concluding conversion under § 1307(c)(1) was warranted due to debtor's inability to fund a chapter 13 plan).
Thus, the bankruptcy court did not abuse its discretion in dismissing Stevenson's chapter 13 case for unreasonable delay that is prejudicial to creditors within the meaning of § 1307(c)(1).15 Even if we were to consider the five issues Stevenson framed in her brief, the outcome of this appeal would not change. None of Stevenson's arguments challenge the bankruptcy court's essential conclusion that there was unreasonable delay that was prejudicial to creditors. Furthermore, as TND correctly observes, a number of Stevenson's arguments raise issues beyond the scope of this appeal, including: (1) whether "the automatic stay precludes a state court from undertaking ministerial acts"; (2) whether TND's summary process action was a "[SLAPP] suit" or an "abuse of process"; and (3) whether the bankruptcy court should have permitted her adversary proceeding to continue despite the dismissal of the main case. Finally, Stevenson's claim that racial bias influenced the bankruptcy court's decision is without support in the record.
CONCLUSION
For the foregoing reasons, we AFFIRM the Dismissal Order.
The factual background set forth in this opinion is gleaned from the record and the bankruptcy court's dockets. See TD Bank, N.A. v. LaPointe (In re LaPointe), 505 B.R. 589, 591 n.1 (1st Cir. BAP 2014) (stating "we may take judicial notice of the bankruptcy court's docket and imaged papers").
TND explains in its brief that tenants who, like Stevenson, "live in a [l]ow-[i]ncome [t]ax credit unit, are required to complete paperwork certifying their income annually ...." TND asserts that failure to do so constitutes grounds for termination of the tenancy. Case law corroborates that individuals who receive a rent supplement pursuant to Section 8 of the Housing Assistance Program of the United States Housing Act, 42 U.S.C. §§ 1437, et seq., are required to provide certain documentation regarding their finances to ensure that they receive rent subsidies according to their level of need. See, e.g., Wood Ridge Homes, Inc. v. DeRosa, 57 Mass.App.Ct. 914, 782 N.E.2d 1123 (2003) (discussing the annual recertification process).
The record indicates that the April 20, 2017 trial was initially continued and subsequently restored to the trial list. The state court's docket reflects that after a bench trial on April 4, 2018, judgment entered in favor of TND on April 13, 2018, and provides that execution shall not issue until July 1, 2018. See Porter v. Ollison, 620 F.3d 952, 954-55 (9th Cir. 2010) (noting that federal courts may take judicial notice of state courts' dockets); see also Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994) (stating courts may take judicial notice of matters of public record). Stevenson immediately appealed that judgment.
Only two entities filed proofs of claim in Stevenson's case: TND filed a proof of claim for $3,916.00, and ECMC filed one proof of claim for approximately $73,000.00 and another for approximately $74,500.00.
Unless expressly stated otherwise, all references to "Bankruptcy Code" or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. §§ 101, et seq.
Section 362(c)(3)(A) provides:
If a single or joint case is filed by ... a debtor who is an individual in a case under chapter ... 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed ...
(A) The stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case[.]
11 U.S.C. § 362(c)(3)(A).
Section 362(c)(4) provides, in relevant part:
[I]f a single or joint case is filed by or against a debtor who is an individual ..., and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, ... the stay under subsection (a) shall not go into effect upon the filing of the later case[.]
11 U.S.C. § 362(c)(4)(A)(i).
On April 21, 2017, Stevenson filed her first plan of reorganization, which she subsequently amended on May 4, 2017. When the chapter 13 trustee (the "Trustee") and TND objected to the confirmation of the first amended plan, Stevenson responded with the filing of a second amended plan on June 26, 2017. The Trustee objected to that plan, and Stevenson filed a third amended plan on June 29, 2017. Several days later, Stevenson filed her fourth amended plan. The Trustee then filed another objection to confirmation, which resulted in the filing of the Plan.
Both of these figures appear to be in error, as neither the Trustee's calculation nor the Debtor's amounts to a "0.70%" dividend.
The acronym, "SLAPP," stands for "strategic lawsuit against public participation."
Section 1307(c) 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-
(1) unreasonable delay by the debtor that is prejudicial to creditors;
(2) nonpayment of any fees and charges required under chapter 123 of title 28;
(3) failure to file a plan timely under section 1321 of this title;
(4) failure to commence making timely payments under section 1326 of this title;
(5) denial of confirmation of a plan under section 1325 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) material default by the debtor with respect to a term of a confirmed plan;
(7) revocation of the order of confirmation under section 1330 of this title, and denial of confirmation of a modified plan under section 1329 of this title;
(8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan;
(9) only on request of the United States trustee, failure of the debtor to file, within fifteen days, or such additional time as the court may allow, after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a);
(10) only on request of the United States trustee, failure to timely file the information required by paragraph (2) of section 521(a); or
(11) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
11 U.S.C. § 1307(c).
Courts may consider matters other than those enumerated in § 1307(c). In re Lilley, 91 F.3d 491, 494 (3d Cir. 1996). For example, it is well established that lack of good faith is grounds for dismissal. See Sullivan v. Solimini (In re Sullivan), 326 B.R. 204, 211-13 (1st Cir. BAP 2005) (discussing dismissal due to lack of good faith, generally); In re Bouchard, 560 B.R. 385, 394-95 (Bankr. D.R.I. 2016) (same).
The language in § 1307(c) parallels that in § 1112(b), which governs dismissal and conversion in chapter 11 cases. In re Hernandez Figueroa, No. 07-00964 (ESL), 2012 WL 1035903, at *3 (Bankr. D.P.R. Mar. 27, 2012).
Courts have also found unreasonable delay "where a debtor failed to timely file her state tax returns, failed to make payments under the plan, failed to disclose ownership of assets on schedules, and failed to make good faith payments to the [c]hapter 13 [t]rustee[,]" In re Burgos, 476 B.R. 107, 111 (Bankr. S.D.N.Y. 2012) (citations omitted) (internal quotations omitted), or failed to comply with court orders setting deadlines, Howard, 284 F.3d at 323-24. See also In re Lopez Llanos, 578 B.R. 700, 710 (Bankr. D.P.R. 2017) (finding cause to dismiss under § 1307(c)(1) where debtor failed to: submit evidence of filing of her tax returns; disclose ownership of assets; make good faith plan payments; amend her statement of current monthly income to disclose pre-petition income; comply with discovery; disclose litigation; and file a confirmable plan).
We are mindful that when considering whether to dismiss a chapter 13 case as a two-party dispute, some courts frame the analysis in terms of lack of good faith (i.e., "cause" under § 1307(c) ), rather than "unreasonable delay that is prejudicial to creditors" (i.e., § 1307(c)(1) ). See, e.g., Stathatos v. U.S. Trustee (In re Stathatos), 163 B.R. 83, 87-88 (N.D. Tex. 1993) ; In re Milstein, No. 13-17286 HRT, 2014 WL 3511526, at *3 (Bankr. D. Colo. July 15, 2014) ; In re Sherman, No. 4:09-bk-02833-JMM, 2009 WL 1607856, at *3 (Bankr. D. Ariz. June 9, 2009) ; In re Fonke, 310 B.R. 809, 817 (Bankr. S.D. Tex. 2004) ; In re Herndon, 218 B.R. 821, 825 (Bankr. E.D. Va. 1998) ; In re Klevorn, 181 B.R. 8, 11 (Bankr. N.D.N.Y. 1995). Indeed, TND argues that Stevenson lacked good faith in filing and the case was nothing more than a two-party dispute. However, as the record before us supports the bankruptcy court's decision to dismiss for unreasonable delay that was prejudicial to creditors under § 1307(c)(1), we need not address whether the record establishes that Stevenson lacked good faith when she filed her chapter 13 case.
Stevenson has not argued that conversion would have been more appropriate than dismissal. Thus, "we need go no further to plumb [the court's] reasoning with respect to its choice of one remedy over another." In re Colón Martinez, 472 B.R. at 146. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8501234/ | Joan N. Feeney, United States Bankruptcy Judge *585I. INTRODUCTION
The matter before the Court is the Motion filed by MSCI 2007-IQ16 Blue Hill Avenue, LLC ("Blue Hill") to Dismiss or, in the Alternative, for Relief from Stay (the "Motion to Dismiss or for Relief from Stay"). The Debtor filed an objection to the Motion, and the Court held a hearing on April 3, 2018, at which the Court directed the Debtor's attorney to file a supplemental brief on the judicial estoppel argument made by Blue Hill, which was filed on April 6, 2018. The Court then took the matter under advisement.
Preliminarily, A. Hirsch Realty, LLC (the "Debtor"), through its Expedited Motion for Use of Cash Collateral (the "Cash Collateral Motion"), and Blue Hill, in its Opposition to the Cash Collateral Motion, as well as in its Motion to Dismiss or for Relief from Stay, raise the issue of the enforceability of certain prepetition bankruptcy waivers, including a waiver of the protection of the automatic stay, a waiver of the right to oppose dismissal of the case, and a waiver of the use of cash collateral, which were contained in a modification agreement (the "Modification Agreement") that was approved, in form, prior to its execution, by the bankruptcy court in the Debtor's prior Chapter 11 case in conjunction with confirmation of the Debtor's First Amended Plan of Reorganization. The Debtor, on the one hand, takes the position that the provisions are unenforceable because they amount to a complete waiver of bankruptcy protection in violation of public policy. Blue Hill, on the other hand, maintains they are enforceable, thus warranting dismissal of the Debtor's case, or, alternatively, entry of an order granting it relief from the automatic stay.
The issue initially was raised on February 7, 2018 at a hearing on the Debtor's Expedited Motion for Use of Cash Collateral on an Interim Basis. At that time, the Court entered the following order:
For the reasons stated on the record, the Court authorized the Debtor's interim use of cash collateral through the continued hearing date of March 7, 2018 at 11:00 a.m. The Debtor shall file a reconciliation of actual income and expenses to projections by March 6, 2018 at 4:30 p.m. Counsel shall submit their briefs on the objection and on the legal issues identified at the hearing and any agreed statement of facts by February 19, 2018 at 4:30 p.m. In the event, the parties cannot agree on all facts needed for the Court to decide the legal issues, they shall file a joint statement of disputed facts by February 19, 2018 and the Court will schedule an evidentiary hearing.
The parties obtained an extension of time to file briefs. On March 12, 2018, Blue Hill filed its Motion to Dismiss or for Relief from Stay, the Debtor filed a Brief in Opposition to Blue Hill's Motion to Dismiss or for Relief from Stay in which it challenged the enforceability of certain provisions of the parties' prepetition Modification Agreement, and the parties filed a Stipulation of Undisputed and Disputed Facts in Connection with the Motion to Dismiss or for Relief from Stay and the Debtor's Opposition.
The material facts necessary to resolve the issue as to the enforceability of the prepetition waivers are not in dispute. For the reasons set forth below, the Court only shall consider Blue Hill's alternative request for relief from the automatic stay. The Court shall enter an order granting Blue Hill's alternative request to grant it relief from the automatic stay.
*586II. THE PARTIES' STIPULATION OF UNDISPUTED FACTS
The Court paraphrases the Stipulation and supplements the Undisputed Facts filed by the parties with reference to the contents of documents filed in the Debtor in its prior case.1
A. Background
Approximately six years ago, on March 14, 2012, the Debtor filed a Chapter 11 case captioned A. Hirsch Realty, LLC, Case No. 12-12092-WCH (Bankr. D. Mass.) (the "First Bankruptcy"). The Debtor filed the First Bankruptcy to prevent a foreclosure of the Property, as defined below.
On January 5, 2018, the Debtor commenced its present Chapter 11 case as a single asset real estate case, as defined in 11 U.S.C. § 101(51B), with the filing of a voluntary petition. Andrew H. Sherman executed the petition as Manager and authorized representative of the Debtor. In addition Andrew Sherman, as the Manager and 99% Member of the Debtor, executed the "Written Consent of Managers and Members," authorizing the commencement of the Chapter 11 case.
On January 19, 2018, the Debtor filed its Schedules and Statement of Financial Affairs. On Schedule A/B: Assets-Real and Personal Property, it listed real property located at 1613-1615 Blue Hill Avenue, Mattapan, Massachusetts (the "Property") with a value of $4 million. On Schedule D: Creditors Who Have Claims Secured by Property, the Debtor listed Blue Hill as the holder of a first mortgage in the amount of $2,584,359.31. On Schedule E/F: Creditors Who Have Unsecured Claims, the Debtor listed four claims, including the claims of the Massachusetts Development Finance Agency in the sum of $288,000; Marlene Sherman in the sum of $80,000,2 Skolnick CPA in the sum of $4,200, and Associated Elevator Companies in the sum of $1,800.3 It also listed eight unexpired commercial real estate leases with tenants for premises at the Property.
B. Undisputed Facts
The Debtor's sole business is owning and managing the Property. The Property is a three-story commercial building in Mattapan Square consisting of approximately 16,000 square feet. The first floor contains retail space and the second and third floors contain offices. The only income generated by the Debtor is the rental income from the Property.
On or about August 1, 2007, the Debtor secured a loan from NCB, FSB in the original principal sum of $2,300,000 with respect to the Property. The terms and conditions of the loan are evidenced by, among other documents, a Mortgage Note (the "Note"), a Mortgage, Assignment of Leases and Rents and Security Agreement (the "Mortgage"), and an Assignment of Leases and Rents (the "Assignment") (collectively, *587the "Loan Documents"). The original Note was subject to the following basic terms:
a. Principal balance: $2,300,000.00
b. Monthly payment: $14,161.50
c. Maturity date: August 1, 2017
d. Interest rate: 6.25%
e. Default interest rate: 11.25%
Through a series of loan assignments, the Loan Documents were assigned to Blue Hill.4 On or about March 2011, the Debtor defaulted under the Note by failing to remit all amounts due.
U.S. Bank, N.A., as Trustee for the Registered Holders of Morgan Stanley Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2007-IQ16 (the "Trust") filed a claim in the First Bankruptcy (which was subsequently allowed) in the sum of $2,480,134.45.5 The claim was comprised of the following amounts:
Principal: $2,200,816.25
Accrued interest: $132,965.98
Default interest: $94,146.03
Late charges: $7,788.88
Servicing advances: $46,135.13
Escrow credits: ($1,717.82)
On May 10, 2013, the Trust filed a disclosure statement and proposed plan of reorganization in the First Bankruptcy. The Trust attached an appraisal of the Property to its disclosure statement indicating the value of the Property, as of October 5, 2012, was $1,070,000 (In its Cash Collateral Motion filed in this case, the Debtor indicated that the value now is approximately $3.8 to $4.0 million.) As part of its disclosure statement and plan of reorganization, the Trust proposed to take title to the Property "for a deemed payment of $1,070,000."
On May 24, 2013, the Debtor filed its own plan. The Trust objected to the Debtor's plan, and the Debtor objected to the Trust's plan. On May 29, 2013, the Court scheduled a plan confirmation hearing for June 26, 2013. On June 18, 2013, the Debtor and the Trust filed a "Joint Motion to Continue Hearings on Adequacy of Disclosure, Plan Confirmation, Pending Claim Objections and to Further Extend the Use of Cash Collateral," seeking to continue the hearing on plan confirmation and other matters for approximately 30 days. Subsequently, the Court rescheduled the hearing for August 14, 2013.
On October 30, 2013, Judge Hillman conducted a hearing on the competing plans. He continued the hearing to December 4, 2013, and then to January 8, 2014, and March 5, 2014, each time as a result of one of the parties claiming more time was needed in order for them to agree on a consensual plan. On March 4, 2014, the Trust and the Debtor filed a Joint Motion to Set Final Hearing on Plan Confirmation.6 The Court granted the Joint Motion, *588canceled the March 5, 2014 hearing, and ordered the filing of a new disclosure statement and plan before the Court would schedule any further hearings on plan confirmation. It stated in pertinent part: "Because of the radical changes proposed to the disclosure statement and plan, a new disclosure statement and plan must be filed before any further hearing will be scheduled. The parties shall notify the court to the extent that the motions previously scheduled for today still require hearings."
The parties took several additional months to finalize an amended disclosure statement and plan of reorganization. On July 17, 2014, the Debtor filed an agreed upon First Amended Plan of Reorganization7 and a Proposed Form of Disclosure Statement Regarding Debtor's First Amended Plan of Reorganization (the "Disclosure Statement"). The Court approved the Disclosure Statement and held a confirmation hearing on September 18, 2014. In support of confirmation, the Debtor's principal, Andrew Sherman ("Sherman"), filed an Affidavit. Thereafter, the parties filed periodic updates with the Court concerning their ongoing efforts to negotiate mutually agreeable loan documents. On December 2, 2014, the parties filed a Joint Motion for Entry of Proposed Confirmation Order. The Court entered the Confirmation Order that same day (the "Confirmation Order"). The Confirmation Order provided:
The obligations of the Debtor and the guarantors, Andrew Sherman and Sara Sherman, in connection the promissory note dated August 1, 2007 in the original principal amount of $2,300,000.00 (the "Note"), the mortgage on Debtor's property commonly known as 1613-1615 Blue Hill Avenue, Mattapan, Massachusetts and recorded in the Suffolk Registry of Deeds at Book 42285, Page 156 (the "Mortgage"), which is now held by U.S. Bank, National Association, as Trustee for Morgan Stanley Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2007-IQ16 ("U.S. Bank") and an Assignment of *589Leases and Rents at the Property (the "Assignment"), as well as other financing documents (collectively the "Loan Documents") shall be affirmed and reinstated in all respects, except as otherwise modified by the Plan and the terms of this Order. The Debtor shall execute the Modification Agreement attached hereto as Exhibit A (with the loan balances as updated and amended by the noteholder through the date of execution) and shall otherwise cause the Modification Agreement and the closing conditions of the Modification Agreement to be completed.
The Confirmation Order also provided that "in the event that the Modification Agreement and other loan documents have not been duly executed the Court will schedule a hearing on the dismissal of the proceeding."
Approximately two and one-half months after the entry of the Confirmation Order, on February 12, 2015, the parties executed the Modification Agreement. Sherman and his wife, Sara Sherman, signed a Joinder By and Agreement of Guarantor (the "Joinder"). Pursuant to a Fifth Status Report filed by U.S. Bank in accordance with Confirmation Order, U.S. Bank advised the Court that "[t]he Debtor has provided this afternoon (February 12, 2015) by electronic mail copies of certain signature pages intended to effect the closing of the Plan transactions."
Under the Modification Agreement, $658,203.34 in interest, late fees and lender expenses was capitalized and added to the pre-modification principal balance of $2,153,585.28 for a post-modification principal balance of $2,811,788.62. Under the Modification Agreement, the interest rate, monthly payment, and maturity date of the loan remained unchanged. The Modification Agreement provided at Section 2.3 the following:
No Bankruptcy Intent. None of Borrower or Guarantor (collectively, "Borrower Parties") has been a party to any Debtor Proceeding within seven (7) years prior to the Effective Date, other than the Pending Debtor Proceeding. No Borrower Parties has [sic] any intent to (a) file a voluntary petition with any bankruptcy court of competent jurisdiction or to be the subject of any petition under the Bankruptcy Code; (b) be the subject of any order for relief issued under the Bankruptcy Code; (c) file or be the subject of any petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any present or future federal or state act or law relating to bankruptcy, insolvency, or other relief for debtors; (d) seek or consent to or acquiesce in the appointment of any trustee, receiver, conservator, liquidator or assignee for the benefit of creditors; or (e) be the subject of any order, judgment, or decree entered by any court of competent jurisdiction approving a petition filed against such party in connection with any Debtor proceeding. Borrower acknowledges that the filing of any petition or the seeking of any relief in a Debtor Proceeding by any of Borrower Parties, whether directly or indirectly, would be in bad faith and solely for purposes of delaying, inhibiting or otherwise impending [sic] the exercise by Lender of Lender's rights and remedies against Borrower and the Property pursuant to the Loan Documents or at law .
(emphasis supplied). The Modification Agreement provided at Section 3.4(a) the following:
Lender Relief Upon Debtor Proceeding. After an Event of Default, including without limitation, an Event of Default under Section 23(g) of the Security Instrument, *590in the event that any of Borrower Parties shall take any action constituting a Debtor Proceeding (other than the Pending Debtor Proceeding), and such action causes Lender to seek necessary or appropriate relief, then Lender shall be entitled to and Borrower irrevocably consents to (a) entry of an order granting stay relief and/or dismissal of such Debtor Proceeding, on either basis, for cause, (b) entry of an order from the bankruptcy court prohibiting Borrower's use of all "cash collateral" (as defined in Section 363 of the Bankruptcy Code ) and (c) entry of an order that such Debtor Proceeding is a Single Asset Real Estate Case . Moreover, (x) Borrower waives its exclusive right pursuant to Section 1121(b) of the Bankruptcy Code to file a plan of reorganization and irrevocably agrees and consents that Lender may file a plan immediately upon the entry of an order for relief if an involuntary petition is filed against Borrower or upon the filing of a voluntary petition by Borrower; (y) in the event that Lender shall move pursuant to Section 1121(d) of the Bankruptcy Code for an order reducing the 120 day exclusive period, Borrower shall not object to any such motion, and (z) Borrower waives any rights it may have pursuant to Section 108(b) of the Bankruptcy Code. Moreover, in the event that Borrower files or colludes in the filing of any action constituting a Debtor Proceeding, Lender shall immediately become entitled, among other relief to which Lender may be entitled under the Loan Documents, and at law or in equity, (x) to obtain an order from the court dismissing such filing as a bad faith filing and Borrower agrees that such filing shall have been made in bad faith and (y) to obtain an order from the court dismissing such filing as a bad faith filing and Borrower agrees that it will take no action to oppose the entry of such order of dismissal or to dispute a finding of fact by the court that such filing was made in bad faith. The provisions of this Section shall survive the termination of this Agreement.
(emphasis supplied). In addition, Section 3.5(f) provided that "On or before the Execution Date, Borrower shall have made modifications to it organization documents, as such modification have been approved by Lender to incorporate the concept of an independent manager, whose vote will be needed for Borrower to engage in certain major decisions, one of which being the Borrower seeking relief in a Debtor Proceeding."
On August 31, 2016, the Debtor filed a Motion for Entry of Final Decree. The Court granted the motion on October 5, 2016, and the First Bankruptcy was closed on October 24, 2016.
Following the First Bankruptcy, the Debtor continued operating the Property. The Debtor's only income is rental income from the Property. The Maturity Date on the Note was August 1, 2017. The Debtor defaulted on the modified Note by failing to pay the amount due on maturity.
On or about August 3, 2017, Blue Hill sent the Debtor a Notice of Default, and demanded the turnover of all rents. On December 1, 2017, Blue Hill filed a lawsuit against the Debtor and against Andrew and Sara Sherman in the United States District Court for the District of Massachusetts, captioned MSCI 2007-IQ16 Blue Hill Avenue, LLC v. A. Hirsch Realty, LLC, Civil Action No. 17-12359-PBS (D. Mass. Dec. 1, 2017). In addition, Blue Hill scheduled a foreclosure sale for January 5, 2018. The Debtor commenced the instant case, as a single asset real estate case, in the morning of January 5, 2018 (the "Petition *591Date"), in order to stay the foreclosure sale scheduled for later that day.
On January 31, 2018, the Debtor filed its Cash Collateral Motion. With the consent of Blue Hill, the Debtor was authorized to use cash collateral on an interim basis through a continued hearing date of April 3, 2018 and thereafter through a continued hearing on April 23, 2018.
III. POSITIONS OF THE PARTIES
A. Blue Hill
Blue Hill contends that as part of the Debtor's Plan and the Confirmation Order in the First Bankruptcy, the Debtor agreed to the following in the event it filed a subsequent bankruptcy case while it was in default under its modified loan:
(1) such a filing would be deemed in bad faith and subject to dismissal as a bad faith filing, see , e.g. , Modification Agreement, Sections 2.3 and 3.4(a);
(2) that it would not oppose a motion in the subsequent case for relief from the automatic stay, see id., Section 3.4(a); and
(3) that it would agree to the entry of an order in the subsequent case prohibiting the Debtor from using any cash collateral, see id.
Blue Hill adds:
The Debtor entered into these agreements: (a) with the benefit of the advice of counsel; and (b) with notice and the opportunity for hearing by the Debtor and the Debtor's creditors, in order to induce the Trust to consent to a plan that allowed the Debtor to continue operating the Property. And, most importantly, upon confirmation these agreements became binding upon the Debtor and, as with any binding court order, must now be enforced. See In re Malmgren, 277 B.R. 755, 759 (Bankr. E.D. Wis. 2002) ("If an order is to have any true meaning, if a party is to be able to place any justifiable reliance on an order, if a court is to have any credibility and command any respect, then it must enforce its own orders."). See also CHS, Inc. v. Plaquemines Holdings, L.L.C., 735 F.3d 231 (5th Cir. 2013) ("a confirmed plan ... is an order of the court"); 11 U.S.C. § 1141(a) ("the provisions of a confirmed plan bind the debtor"). The Confirmation Order (including the attached Modification Agreement) was even filed with the Suffolk Registry of Deeds on February 23, 2015, as Book 54083, Page 223 (see Ex. C), giving notice of it to all interested parties.
Specifically, Blue Hill, citing CHS, Inc. v. Plaquemines Holdings, L.L.C., 735 F.3d 231, 239 (5th Cir. 2013) ("The legal ramifications of a confirmed reorganization plan are highly significant. '[A] bankruptcy court's order confirming a plan of reorganization is given the same effect as a district court's judgment on the merits for claim preclusion purposes.' "), argues that this Court should enforce the Confirmation Order and dismiss the Debtor's case as the provisions of a confirmed plan bind the Debtor pursuant to 11 U.S.C. § 1141(a). It adds that the binding nature of a plan includes matters incorporated into the plan, citing Charbono v. Sumski (In re Charbono), 790 F.3d 80, 84 (1st Cir. 2015),8 *592and that judicial estoppel should be applied to bar the Debtor from evading the provisions of the Confirmation Order, citing, inter alia , Guay v. Burack, 677 F.3d 10, 16 (1st Cir. 2012). It states:
Having obtained approval of its Plan in the First Bankruptcy by agreeing that a subsequent bankruptcy filing while the Debtor was in default would be subject to dismissal, the Debtor may not now oppose Blue Hill's efforts to hold the Debtor to its agreement.
... Admittedly, while provisions barring a Debtor from filing for bankruptcy or consenting to stay relief are not typically enforced when they are simply included in loan documents, the same is not true when agreed to as part of a prior bankruptcy case. See, e.g. , In re BGM Pasadena, LLC, 2016 WL 1738109 (Bankr. C.D. Cal. April 27, 2016) ("While it is true that courts have generally treated waivers of the automatic stay as unenforceable when they are contained in prepetition agreements between a lender and a borrower (because the interests of third parties, such as unsecured creditors, for whose benefit the automatic stay exists were not considered at the time the agreement was made), the same cannot be said of waivers that are approved after notice and an opportunity for hearing in the context of an earlier bankruptcy case. When such a waiver is made a part of a confirmed plan or a court-approved settlement agreement, either with the consent of unsecured creditors or after they have received notice and an opportunity to object, absent changed circumstances, such waivers have routinely been enforced. ")
(emphasis added).
Blue Hill, citing, inter alia , In re DB Capital Holdings, LLC, 463 B.R. 142, 2010 WL 4925811, at *3 (B.A.P. 10th Cir. 2010), also argues that the Debtor lacked authority to file a bankruptcy petition because it had agreed to amend its organizational documents: (a) so that it would not be authorized to file a second bankruptcy so long as it was in default under its modified mortgage loan (see Plan, Section 4.01, Class 2, (f) ); and (b) "to incorporate the concept of an independent manager whose vote will be needed for Borrower to engage in certain major decisions, one of which being the Borrower seeking relief in a Debtor Proceeding." Modification Agreement, Section 3.5(f). Blue Hill contends that the Debtor lacked authority to file a bankruptcy petition, assuming it complied with the provisions of the Modification Agreement, and, if it failed to incorporate such a provisions, it acted in bad faith in commencing the instant bankruptcy case, thus warranting dismissal.
Blue Hill next contends that dismissal is warranted pursuant to 11 U.S.C. § 1112(b)(1)"for cause," examples of which are set forth in § 1112(b)(4)(A)-(P). Admitting that it has the initial burden of establishing cause, Blue Hill argues that cause exists owing to the absence of good faith, citing In re Plaza Antillana Inc., No. 13-10013 ESL, 2014 WL 585299, at *7-8 (Bankr. D. P.R. Feb. 14, 2014) ("This court in In re Costa Bonita Beach Resort Inc., 479 B.R. 14 (Bankr. D. P.R. 2012) held that lack of good faith (or bad faith) in filing a Chapter 11 petition constitutes "cause" to dismiss a Chapter 11 petition pursuant to 11 U.S.C. § 1112(b)(1)."). Relying upon the Modification Agreement, Section 3.4(a), it argues:
[D]ismissal for cause is warranted because the Debtor agreed-in exchange *593for concessions in the prior bankruptcy, and pursuant to a procedure involving notice, a hearing, and judicial oversight-that in the event it filed a subsequent bankruptcy Blue Hill would be "entitled ... (x) to obtain an order from the court dismissing such filing as a bad faith filing and Borrower agrees that such filing shall have been made in bad faith and (y) to obtain an order from the court dismissing such filing as a bad faith filing and Borrower agrees that it will take no action to oppose the entry of such order of dismissal or to dispute a finding of fact by the court that such filing was made in bad faith. The provisions of this Section shall survive the termination of this Agreement."
Blue Hill also points to the provisions of Section 2.3 of the Modification Agreement where the Debtor acknowledged that a subsequent bankruptcy petition "would be in bad faith and solely for the purposes of delaying, inhibiting or otherwise impending [sic] the exercise of the Lender of Lender's rights and remedies against Borrower and the Property pursuant to the Loan Documents or at law." According to Blue Hill, where the Modification Agreement was an integral part of the consensual plan and Confirmation Order, this court should enforce its contractual provisions. See e.g., In re Excelsior Henderson Motorcycle Mfg. Co., Inc., 273 B.R. 920, 924 (Bankr. S.D. Fla. 2002) (prepetition agreement, in which debtor waived its right to enjoy protection of automatic stay as part of plan confirmation process was enforceable); In re Atrium High Point Ltd. P'ship, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995) (same).
Blue Hill also argues that the Debtor should not be permitted to use cash collateral based upon Section 3.4(a) of the Modification Agreement and that it should be granted relief from the automatic stay. With respect to stay relief, it contends "cause" exists under 11 U.S.C. § 362(d)(1) because the Debtor consented to the request for relief from stay, citing In re Triple A & R. Capital, Inv., Inc., 519 B.R. 581, 584 (Bankr. D. P.R. 2014), aff'd , No. 14-1896, 2015 WL 1133190 (D. P.R. Mar. 12, 2015). Blue Hill also contends that it is entitled to relief from the automatic stay because it lacks adequate protection under 11 U.S.C. § 362(d)(1), and because the Debtor has not met its burden of showing the Property is necessary to an effective reorganization under 11 U.S.C. § 362(d)(2).
B. The Debtor
The Debtor opposes the enforceability of a collection of bankruptcy waivers contained in the parties' pre-petition Modification Agreement, including a waiver of the automatic stay, a waiver of the right to oppose dismissal of the case, and a waiver of the use of cash collateral. According to the Debtor, "[t]aken together, these provisions should not be enforced because they amount to a complete waiver of bankruptcy protection in violation of public policy." The Debtor adds, as an alternative argument that "given the facts and circumstances of the Debtor's current chapter 11 case, even if the Debtor's pre-petition waiver of the automatic stay, right to oppose dismissal, or waiver of the use of cash collateral are not per se unenforceable, Blue Hill's motion should be denied because there is no basis for relief from stay, there is no cause for the dismissal of this case, and Blue Hill's interest is adequately protected" and its unsecured creditors would be harmed.
The Debtor maintains that this Court should examine the waiver provisions "as a whole and not in separate distinct pieces" because the extent of the waivers benefitting Blue Hill are tantamount a direct waiver of the right to file a bankruptcy *594petition. The Debtor contends that enforcing its prior consent to immediate dismissal of its present case, either be it outright or as a bad faith filing, is indistinguishable from a waiver of the right to file a bankruptcy petition. In addition, quoting In re Jenkins Court Assocs. Ltd. P'ship., 181 B.R. 33, 37 (Bankr. E.D. Pa. 1995), it observes that " '[a]s a practical matter, there may be little significant distinction between the enforcement of a pre-petition waiver of the automatic stay in a single asset case and the enforcement of a provision prohibiting the filing of a bankruptcy case in the first place,' " although the Debtor notes the contrary authority adopted by the court in In re Atrium High Point Ltd. P'Ship., 189 B.R. 599, 607-08 (Bankr. M.D.N.C. 1995).
The Debtor, citing, inter alia , In re Powers, 170 B.R. 480, 483 (Bankr. D. Mass. 1994), recognizes that in some cases a debtor's waiver of the automatic stay is permissible, though not binding on other creditors. The Debtor urges this Court to consider the following factors taken from the decisions in Atrium High Point and Powers to assess whether the dismissal and stay waiver should be enforced:
1. The circumstances that led to the waiver;
2. The consideration and benefits the debtor received in exchange;
3. Prejudice to the secured creditor if the waiver was not enforced;
4. Harm to other creditors;
5. Likelihood of successful reorganization; and
6. Whether there is equity in the collateral
With respect to the first factor, the circumstances leading to the waivers, the Debtor asserts that it had no bargaining power during plan negotiations prior to confirmation and "the Modification Agreement reveals that Blue Hill obtained far-reaching concessions that effectively handcuffed the Debtor." Moreover, the Debtor contends that the Modification Agreement was essentially a reaffirmation agreement because Blue Hill was undersecured by over $1 million yet the Debtor capitalized over $600,000 of interest and fees, agreed to the "draconian waivers," and received no benefits other than being able to continue its operations while making mortgage payments and attempting to refinance the Property.
The Debtor, on the one hand, maintains that Blue Hill will not be prejudiced by enforcement of the waivers because it is adequately protected because the value of the Property has increased,9 the Debtor is proceeding to propose a plan of reorganization, involving the sale or refinancing of the Property to pay Blue Hill in full. On the other hand, the Debtor contends that unsecured creditors with claims totaling approximately $374,000 will be harmed because there is sufficient equity in the Property that could be realized from a sale or refinancing to pay their claims in full through a reorganization, while they likely would receive nothing if Blue Hill were to foreclose.
With respect to the likelihood of a successful reorganization, the Debtor states that one is "extremely likely" in view of the significant equity in the Property.
C. Blue Hill's Contentions as to Adequate Protection
Blue Hill disputes the Debtor's assertion as to the value of the Property, observing that "The Debtor's unsupported valuation has no basis in reality. In fact, a review of *595the Debtor's financial disclosures in the First Bankruptcy versus its Supplemental Cash Collateral Budget ... in this bankruptcy reveals that the Property's value has not changed appreciably since the First Bankruptcy." While noting that NOI [net operating income] is used to determine the value of a commercial property using the income approach, Blue Hill observes that the Debtor's Proposed Cash Collateral Budget, when compared to prior budgets from the First Bankruptcy, shows "(a) marginally higher rental income (an increase of about 10% from 2013-2014); (b) 30% higher expenses; and (c) a lower total yearly NOI." It adds:
The lack of any appreciable increase in value from the First Bankruptcy is further corroborated by an Appraisal commissioned by Blue Hill and conducted by Colliers International Valuation and Advisory Services dated August 28, 2017, which opines that the Property's as-is market value as of the appraisal date was $2,850,000. Based on the above, it is clear that the Debtor's unsupported value of $3.8 to $4.0 million is wholly unrealistic and contrary to accepted appraisal methodologies.
IV. DISCUSSION
A. Applicable Law
Courts considering waivers of bankruptcy protections most often do so in the context of waivers of the protection of the automatic stay. Because Blue Hill seeks relief from the automatic stay as an alternative to dismissal, this Court shall only consider its request to enforce the waiver of the automatic stay at this time. Nevertheless, the Court observes that it would appear that the Debtor did not modify its organizational documents to incorporate the concept of an independent manager as Sherman executed the bankruptcy petition on behalf of the Debtor, thus lending credence to Blue Hill's dismissal arguments.
Courts are divided as to the enforceability of prepetition waivers of and restrictions on bankruptcy relief even if they appear in court-approved agreements. See In re BGM Pasadena, LLC, No. 2:16-CV-03172-CAS, 2016 WL 3212243, at *4-5 (C.D. Cal. June 2, 2016) ; In re Triple A & R Capital Inv., Inc., 519 B.R. 581 (Bankr. D. P.R. 2014), aff'd sub nom . In re Triple A & R Capital Inv. Inc., No. BR 14-4744 BKT11, 2015 WL 1133190 (D. P.R. Mar. 12, 2015) ; In re Alexander SRP Apartments, LLC, No. 12-20272, 2012 WL 1910088, at *5-7 (Bankr. S.D. Ga. Apr. 20, 2012). See also In re DB Capital Holdings, LLC, 454 B.R. 804, 815 (Bankr. D. Colo. 2011) ("waivers, unless they were part of a previous bankruptcy proceeding-for example, part of a confirmed plan or stipulation resolving an earlier motion for relief-appear to conflict with the policies and purposes of the Bankruptcy Code, and should not be enforced"); In re Blocker, 411 B.R. 516, 520 (Bankr. S.D. Ga. 2009) (prospective waiver of protections of the automatic stay was valid under 11 U.S.C. § 105, even assuming that debtors were not collaterally estopped from challenging validity of consent order, because debtor was not denied future access to the bankruptcy court); In re Bryan Road, LLC, 382 B.R. 844, 848 (Bankr. S.D. Fla. 2008) ("As a general proposition, prepetition waivers of stay relief will be given no particular effect as part of initial loan documents; they will be given the greatest effect if entered into during the course of prior (and subsequently aborted) chapter 11 proceedings. Although I agree that stay relief provisions in prior chapter 11 plans are entitled to great respect because they have been negotiated in a plan context and approved after notice to all parties in interest, I conclude that the existence of a prior confirmed reorganization *596plan is not a condition precedent to the enforceability of a stay relief agreement. I agree with Judge Laney's analysis [in In re Sky Grp. Int'l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989) ]."); In re Frye, 320 B.R. 786, 791-92 (Bankr. D. Vt. 2005) ("Although pre-petition agreements waiving the protection afforded by the automatic stay are enforceable, such waivers are neither per se enforceable, nor self-executing.... The Court further finds that in deciding whether relief from stay should be granted based on such waivers, the factors identified by the Atrium must be considered"); In re Desai, 282 B.R. 527, 532 (Bankr. M.D. Ga. 2002) (agreeing with the court in Atrium and holding that "[a]lthough prepetition agreements waiving the protection afforded by the automatic stay are enforceable, such waivers are not per se enforceable, nor are they self-executing.... The court further finds that in deciding whether relief from stay should be granted based on such waivers, the following factors should be considered: (1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor's risk and the length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lienholders, and; (4) the feasibility of the debtor's plan."); In re Excelsior Henderson Motorcycle Mfg. Co., Inc., 273 B.R. 920, 924 (Bankr. S.D. Fla. 2002) ("Having determined that the Debtor received valuable consideration [through a restructured note in conjunction with a prior confirmed Chapter 11 plan] in exchange for a benefit it would receive under the Bankruptcy Code, the Court agrees with the holding in Atrium, and finds that the provision waiving the automatic stay is specifically enforceable. To hold otherwise would belie the rationale behind entering into such pre-petition stipulations."); In re Atrium High Point Ltd. P'ship, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995) (holding that the waiver clause in debtor's confirmed plan in its first bankruptcy case was intended to be binding proscription, not just event of default, that the prepetition waivers of automatic stay protection are enforceable in appropriate cases, that enforcing debtor's prepetition waiver of automatic stay did not violate public policy, and that lender could not enforce debtor's prepetition waiver of automatic stay against third-party creditors who had not waived right to object to motion for relief); In re Jenkins Court Assoc. Ltd. P'ship, 181 B.R. 33, 37 (Bankr. E.D. Pa. 1995) (where the waiver was not part of a court approved agreement or part of a reorganization plan, the court held "as a practical matter, there may be little significant distinction between the enforcement of a pre-petition waiver of the automatic stay in a single asset case and the enforcement of a provision prohibiting the filing of a bankruptcy case in the first place."); and In In re Powers, 170 B.R. 480, 484 (Bankr. D. Mass. 1994) (Judge Hillman determined that a debtor's prepetition waiver of the protections of the automatic stay in loan documents was not per se unenforceable, that the waiver was not self-executing, and that the waiver did not bar other creditors, or even the debtor, from responding to creditor's motion for relief from stay). See generally Ari Allan Schnall, Debtor as Fiduciary: A New Angel on why Prepetition Waivers of the Automatic Stay Should not be Enforced , 22 J. Bankr. L. & Prac. 1 Art. 2 (2013).
In In re BGM Pasadena, LLC, No. 2:16-CV-03172-CAS, 2016 WL 3212243, at *4-5 (C.D. Cal. June 2, 2016), the district court summarized the legal landscape on this issue, observing that where the waivers have been the subject of a bankruptcy *597court order, they should generally be enforced:
[T]he bankruptcy court rightly noted, "waivers that are approved after notice and an opportunity for hearing in the context of an earlier bankruptcy case" are not per se (or even generally) unenforceable. Bankruptcy Dkt. 202, at 5. As the bankruptcy court further explained,
When such a waiver is made a part of a confirmed plan or a court-approved settlement agreement, either with the consent of unsecured creditors or after they have received notice and an opportunity to object, absent changed circumstances , such waivers have routinely been enforced. The Debtor in this case has not identified any facts or circumstances that should make this Court unwilling to enforce the parties' earlier court-approved settlement. That agreement contemplated that the Secured Creditor would be entitled to relief from the automatic stay if the Debtor filed another bankruptcy case.
Id. at 6 (emphasis added).
2016 WL 3212243, at *4. The district court added:
Although the bankruptcy court's order does not cite to any cases enforcing pre-petition waivers, there is no shortage of authority supporting the court's statement of the law. See , e.g., In re Frye, 320 B.R. 786, 796 (Bankr. D. Vt. 2005) (enforcing a pre-petition agreement); In re Excelsior Henderson Motorcycle Mfg. Co., 273 B.R. 920 (Bankr. S.D. Fla. 2002) (enforcing a pre-petition agreement); In re Shady Grove Tech Ctr. Assoc. Ltd. P'ship, 216 B.R. 386 (Bankr. D. Md. 1998) (setting forth several factors as to whether cause exists to warrant relief from stay); In re Atrium High Point Ltd. P'ship, 189 B.R. 599 (Bankr. M.D. N.C. 1995) (holding that pre-petition waivers are enforceable in appropriate cases); In re Priscilla Cheeks, 167 B.R. 817 (Bankr. D. S.C. 1994) (enforcing a pre-petition forbearance agreement); In re Jenkins Court Assoc. Ltd. P'ship, 181 B.R. 33 (Bankr. E.D. Pa. 1995) (holding that a pre-petition agreement would not be enforced without further development of the facts); In re Sky Group Int'l, Inc., 108 B.R. 86 (Bankr. W.D. Pa. 1989) (holding that a pre-petition waiver was not self-executing or per se enforceable); In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D. Ga. 1991) (holding that pre-petition waivers are enforceable).
The debtor in the instant case, like the debtors in In re Frye, In re Atrium, and In re Excelsior, "entered into [a] pre-petition agreement [ ] as a result of a negotiated provision of a plan of reorganization in a prior bankruptcy case ." In re Frye, 320 B.R. 786, 789 (Bankr. D. Vt. 2005) (emphasis added). "Enforcing the Debtor's agreement under these conditions does not violate public policy concerns," as this "is not a situation where a prohibition to opposing a motion to relief was inserted in the original loan documents ... " In re Excelsior, 273 B.R. at 924 ; see also In re Frye, 320 B.R. at 789 (noting that the waiver in that case was not in the original loan documents but rather was part of the Forbearance Agreement to which the parties entered after the debtor's first bankruptcy case was filed). Still, to the extent any such waivers are enforceable, the debtor argues that the bankruptcy court impermissibly "failed to implement any recognized balancing test" in finding the wavier to be valid. The bankruptcy court in In re Frye, for example, listed the following factors as relevant to the question whether relief from a stay should be granted based on a waiver:
*598(1) the sophistication of the party making the waiver;
(2) the consideration for the waiver, including the creditor's risk and the length of time the waiver covers;
(3) whether other parties are affected including unsecured creditors and junior lienholders;
(4) the feasibility of the debtor's plan;
(5) whether there is evidence that the waiver was obtained by coercion, fraud or mutual mistake of material facts;
(6) whether enforcing the agreement will further the legitimate public policy of encouraging out of court restructurings and settlements;
(7) whether there appears to be a likelihood of reorganization;
(8) the extent to which the creditor would be otherwise prejudiced if the waiver is not enforced;
(9) the proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time; [and]
(10) whether the debtor has equity in the property and the creditor is otherwise entitled to relief from stay under § 362(d).
Id. at 790-91. The district court in BGM Pasadena, LLC, concluded:
The "weight given to each factor will vary on a case-by-case basis and must be left to the sound discretion of the court, based upon the equities, facts and circumstances presented." Id. at 791. Here, the debtor, who is represented by able counsel, appears to be fairly sophisticated and further appears to have received consideration for the pre-petition waiver that arose from the prior bankruptcy proceeding. The debtor cites no evidence of coercion, fraud, or mutual mistake, nor does the debtor indicate that any compelling change in circumstances has occurred since the agreement was entered and approved in the prior bankruptcy proceeding. Indeed, the waiver is embodied in a bankruptcy-court approved settlement agreement that is only a few years old and whose subject is the same property at issue in the instant bankruptcy proceeding. Finally, enforcement of the waiver will further the legitimate public policy of encouraging out-of-court restructurings and settlements.
2016 WL 3212243, at * 5 (emphasis in original).
In In re Triple A & R Capital Inv., Inc., the United States Bankruptcy Court for the District of Puerto Rico observed:
Although stay waivers were long thought to be unenforceable as against public policy, an increasing number of courts are now enforcing them. There is no controlling law on this subject in this District or this Circuit. A review of the cases nationwide that addressed this issue indicate a trend that appears toward the enforcement of stay waivers. The difficult issue of whether prepetition stay waivers are enforceable, reflects the tension between the public policies favoring out of court workouts, on the one hand, and protecting the collective interest of the debtor's creditors, on the other. Bankruptcy courts that have tackled this issue have used different approaches with conflicting results. Three basic approaches have emerged: (1) uphold the stay waiver in broad unqualified terms on the basis of freedom of contract; (2) reject the stay waiver as unenforceable per se as against public policy; and (3) treat the waiver as a factor in deciding whether "cause" exists to lift the stay. This last approach has gained *599ground in recent years. It is important to note that the courts are in agreement that a prepetition waiver of the automatic stay, even if enforceable, does not enable the secured creditor to enforce its lien without first obtaining stay relief from the bankruptcy court . This requirement is satisfied in this case because PRLP indeed filed a motion requesting the lift of stay.
In re Triple A & R Capital Inv., Inc., 519 B.R. at 584 (footnotes omitted). The court determined that the stay waiver was enforceable because it was included in a stipulation regarding the use of cash collateral and adequate protection that it had approved. Pursuant to the stipulation, the debtor ratified and agreed to be bound by the clause in a forbearance agreement which contained the waiver of the protection of the automatic stay. The court concluded:
[T]he Debtor cites to the holding in In re DB Capital Holdings, LLC, 454 B.R. 804 (Bankr. D. Colo. 2011), for the proposition that a single asset chapter 11 debtor's prepetition waiver, as part of a prepetition forbearance agreement with a lender which prevented any opposition to a motion for stay relief, was unenforceable as too closely approximating, for a single asset debtor, waiver of the right to file for bankruptcy relief. The facts in DB Capital Holdings, LLC closely mirror the facts in this instant case, with one marked and significant departure. Our Debtor, on August 5, 2014, after the order for relief, entered into a Joint Stipulation for Interim Use of Cash Collateral and Adequate Protection ("Stipulation") with PRLP.... The Stipulation was approved by the court on August 26, 2014.
519 B.R. at 584-85 (footnote omitted).
In In re Alexander SRP Apartments, LLC, No. 12-20272, 2012 WL 1910088 (Bankr. S.D. Ga. Apr. 20, 2012), the court observed that pre-petition waivers of stay relief "ordinarily will not be enforced if the waiver was contained in the initial loan document but will be given greatest effect if entered into during the course of prior Chapter 11 proceedings" 2012 WL 1910088, at *5 (citing In re Bryan Road, LLC, 382 B.R. 844, 848 (Bankr. S.D. Fla. 2008) ). The court added that it had previously enforced a pre-petition waiver of the automatic stay, based on the principles of collateral estoppel, where the waiver was part of a court-approved consent order entered in a prior bankruptcy case. Id. (citing In re Blocker, 411 B.R. 516 (Bankr. S.D. Ga. 2009) (Davis, J.) ). The court, citing In re Frye, 320 B.R. at 790-91 (enumerating ten factors important in determining whether a waiver should be enforced), and In re Desai, 282 B.R. at 532 (delineating a four factor test), concluded that waivers of the automatic stay were not per se unenforceable, but the party opposing enforcement of the waiver has the burden of proving that the waiver should not be enforced. 2012 WL 1910088, at *6.
In In re DB Capital Holdings, LLC, 454 B.R. 804, 813-16 (Bankr. D. Colo. 2011), the court noted that the United States District Court for the Southern District of Texas had observed that enforcement was generally allowable only if the agreement was part of a previous bankruptcy case, not part of the non-bankruptcy loan agreement, explaining:
It is against public policy for a debtor to waive the pre-petition protection of the Bankruptcy Code. In re Huang, 275 F.3d 1173, 1177 (9th Cir. 2002). As to waivers of the automatic stay, however, the majority view, and the trend in bankruptcy decisions, is that pre-bankruptcy waivers of the automatic stay are sometimes enforceable.
*600In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996) (collecting cases); see also In Re Bryan Road, LLC, 382 B.R. 844, 848 (Bankr. S.D. Fla. 2008). Some courts have dissented, however, and held that waivers of the automatic stay are unenforceable. Id. (collecting cases). Bankruptcy courts have typically enforced the waiver agreements arising from forbearance agreements or previous Chapter Eleven filings. In dicta, these courts have expressed a general proposition that pre-petition waivers of stay of relief will be given no particular effect if they are part of the original loan documents but will be given greater effect if they are entered into during the course of prior bankruptcy proceedings. In Re Bryan Road, 382 B.R. at 848 ; In re Atrium High Point Ltd. Partnership, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995) (noting that a pre-petition waiver the court held enforceable was not contained in the original loan documents but rather in the debtor's reorganization plan).
In re DB Capital Holdings, LLC, 454 B.R. at 814 (quoting Wells Fargo Bank Minn., N.A. v. Kobernick, 2009 WL 7808949, at *7 (S.D. Tex. May 28, 2009), aff'd , 454 Fed.Appx. 307 (5th Cir. 2011) (footnote omitted). The Colorado bankruptcy court concluded that, in a single-asset Chapter 11 case, the debtors' purported waiver, as part of prepetition forbearance agreement with lender with deed of trust lien against that asset, of right to oppose lender's motion for stay relief in event that they later filed for bankruptcy relief, was unenforceable as too closely approximating a waiver of right to file for bankruptcy relief. Id. at 816. See also In re Jenkins Court Assoc. Ltd. P'ship, 181 B.R. at 37 (cited with approval in In re Clouse, 446 B.R. 690 (Bankr. E.D. Pa. 2010) ). See also In re Excelsior Henderson Motorcycle Mfg. Co., Inc., 273 B.R. 920 (Bankr. S.D. Fla. 2002) (bankruptcy court enforced a provision waiving the automatic stay which was set forth in the plan confirmed by the court in the first bankruptcy case).
In In re Powers, 170 B.R. 480 (Bankr. D. Mass. 1994), Judge Hillman determined that pre-petition agreements waiving opposition to relief from the automatic stay may be enforceable in appropriate cases. The waiver in the Powers case was part of an agreement that was executed when the debtor was the subject of an earlier Chapter 11 case, although it is unclear whether the court actually approved the agreement as the case was dismissed shortly after the agreement was executed. Judge Hillman observed that "the waiver is a primary element to be considered in determining if cause exists for relief from the automatic stay under § 362(d)(1). However, the existence of the waiver does not preclude third parties, or the debtor, from contesting the motion." 170 B.R. at 484. He added:
Once the pre-petition waiver has been established, the burden is upon the opposing parties to demonstrate that it should not be enforced. In addition to the extraordinary matters which Judge Paskay listed in [In re] B.O.S.S. Partners [I], supra [37 B.R. 348 (Bankr. M.D. Fla. 1984) ], the Court will consider other factors, such as the benefit which the debtor received from the workout agreement as a whole; the extent to which the creditor waived rights or would be otherwise prejudiced if the waiver is not enforced; the effect of enforcement on other creditors; and, of course, whether there appears to be a likelihood of a successful reorganization. While the last is generally considered an element of proof under § 362(d)(2)(B), an analysis in accordance with the discussion in *601In re Building 62 Ltd. Partnership, 132 B.R. 219, 222 (Bankr. D. Mass. 1991) is certainly relevant in the present context.
In re Powers, 170 B.R. at 484.
Although the courts authoring the decisions referenced above examine issues such as whether prepetition waivers can be self-executing; whether such waivers can affect nonwaiving parties; and whether a bankruptcy debtor is a separate entity from the prepetition debtor that may have waived the stay, there is consensus "[s]tay waivers are not self-executing, nonwaiving creditors cannot be bound by a waiver entered into by others, and the debtor who waived the stay prepetition cannot escape that waiver by claiming to be a separate entity from the prepetition debtor." Ari Allan Schnall, Debtor as Fiduciary: A New Angel on why Prepetition Waivers of the Automatic Stay Should not be Enforced , 22 J. Bankr. L. & Prac. 1 Art. 2 (2013). The author of that article observed:
One scenario worth noting is where a waiver of a future automatic stay is made part of an order or reorganization plan in a previous bankruptcy case. Depending on the circumstances, it may be that all creditors in the first bankruptcy case are deemed parties to the waiver, and therefore if the debtor files a second bankruptcy petition shortly thereafter, there may be few, if any, nonwaiving creditors. See, e.g. , In re Blocker, 411 B.R. 516 (Bankr. S.D. Ga. 2009), motion for stay pending appeal denied , 411 B.R. 521 (Bankr. S.D. Ga. 2009) and motion for stay pending appeal denied , 2009 WL 2340700 (S.D. Ga. 2009) (enforcing waiver of relief that was present in consent order in previous Chapter 12 bankruptcy order regarding lift stay motion in that case); In re Wald, 211 B.R. 359 (Bankr. D. N.D. 1997) (enforcing waiver that was part of stipulation in previous bankruptcy); In re Atrium High Point Ltd. Partnership, 189 B.R. 599, 28 Bankr. Ct. Dec. (CRR) 254 (Bankr. M.D. N.C. 1995) (recognizing waiver in debtor's confirmed plan in previous case, noting, though, that creditors not parties to the waiver cannot be bound by such waiver).
Id. at n.33.
B. Analysis
The Court agrees with those decisions in which courts have upheld contractual provisions waiving the protections afforded by the automatic stay when they are incorporated in court orders approving settlement agreements or orders confirming Chapter 11 plans while employing a multi-factor approach.10 In particular, the Court finds that the frequently cited decision in In re Atrium High Point Ltd. P'ship, 189 B.R. 599 (Bankr. M.D. N.C. 1995), to be persuasive. In that case, the court observed:
Although an order of this court granting relief from stay may debilitate the Debtor *602somewhat, the Debtor accepted that risk when it agreed to the prepetition waiver of the automatic stay. There was no prepetition waiver in the original loan agreement or under the First or Second Modification. The agreement not to object to the motion to lift stay was bargained for under the Third Modification and under this Debtor's first confirmed plan of reorganization. The Debtor received a lower interest rate and a five-year extension of the loan. Ohio National received the Debtor's covenant not to oppose a motion to lift stay in a subsequent bankruptcy filing.
Enforcing the Debtor's agreement under these conditions does not violate public policy concerns. This is not a situation where a prohibition to opposing a motion to relief from stay was inserted in the original loan documents. The Debtor received significant benefits under the Third Modification and the confirmed plan treatment of Ohio National. In exchange for these benefits, the Debtor bargained away its right to oppose a motion to lift stay in a subsequent bankruptcy proceeding. Accordingly, the court will not consider the objection to relief from stay filed by the Debtor.
Id. at 607. Although the court in Atrium determined that the waiver was enforceable as to the debtor, it denied relief from the automatic stay because nine, third-party creditors objected to the motion for relief from stay. The Court observed: "unlike the lamentations of the Debtor, their objections carry great weight in the court's resolution of this matter. The court must look at the circumstances under which the waiver arose and consider it as one of a number of factors, including the possibility of equity in the collateral and the impact of third-party creditors affected by the motion for relief from stay." Id. at 608. Accordingly, because the waiver of the automatic stay contained in the Modification Agreement is not per se unenforceable, the Debtor, as the party opposing enforcement of the waiver, has the burden of proving that the waiver should not be enforced. In re Alexander SRP Apartments, LLC, 2012 WL 1910088, at *5. See also In re BGM Pasadena, LLC, 2016 WL 3212243, at *4-5. In this regard, the Court finds that the most important factor for the purposes of this case is "the proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time." 2016 WL 3212243, at * 5 (citing In re Frye, 320 B.R. at 791 ).
The Court concludes that the waiver of the protection of the automatic stay constitutes "cause" under 11 U.S.C. § 362(d)(1) for relief from the automatic stay and that the Debtor has not satisfied that burden of demonstrating that Blue Hill is adequately protected or otherwise not entitled to rely upon the waiver of the automatic stay approved by Judge Hillman as part of a consensual plan of reorganization in its prior case.
The Debtor, who was represented by an experienced bankruptcy attorney in its prior Chapter 11 case, negotiated the Modification Agreement over several months, agreed to incorporate the terms of the Modification Agreement into its plan of reorganization, and the bankruptcy judge entered an order confirming its plan and approving the Modification Agreement in form. As a result, it was able to emerge from Chapter 11 in control of the Property. Although the Debtor asserts that it lacked bargaining power and the Modification Agreement was tantamount to a reaffirmation agreement, there is no evidence that the Modification Agreement was anything but a negotiated, arms' length settlement between two sophisticated parties.
*603The Debtor argues that Blue Hill is adequately protected, that there is equity in the Property, and that it has a likelihood of a successful reorganization because it is pursuing a dual tract of a sale or refinancing to pay all its creditors, including Blue Hill, in full. Blue Hill disagrees. This Court concludes that Blue Hill has established that it has a colorable claim to relief and that it is entitled to relief from the automatic stay. As the Untied States Court of Appeals for the First Circuit observed in Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26 (1st Cir. 1994),
[A] hearing on a motion for relief from stay is merely a summary proceeding of limited effect, and adopt the [Matter of] Vitreous Steel [Prods. Co., 911 F.2d 1223 (7th Cir.1990) ] court's holding that a court hearing a motion for relief from stay should seek only to determine whether the party seeking relief has a colorable claim to property of the estate. The statutory and procedural schemes, the legislative history, and the case law all direct that the hearing on a motion to lift the stay is not a proceeding for determining the merits of the underlying substantive claims, defenses, or counterclaims. Rather, it is analogous to a preliminary injunction hearing, requiring a speedy and necessarily cursory determination of the reasonable likelihood that a creditor has a legitimate claim or lien as to a debtor's property. If a court finds that likelihood to exist, this is not a determination of the validity of those claims, but merely a grant of permission from the court allowing that creditor to litigate its substantive claims elsewhere without violating the automatic stay.
Id. at 33-34.
The Debtor's arguments that the waivers approved in its first Chapter 11 bankruptcy case are not binding and that changes in circumstances, such as appreciation in value of the Property, warrant relief from the Court's Confirmation Order in the prior case, ignore the res judicata effect of the order of confirmation in the First Bankruptcy and the statutory directive of 11 U.S.C. § 1141(a). The provisions of the confirmed plan and the final order confirming it in the First Bankruptcy are binding on the Debtor, who is barred from now attempting to claim that the provisions of the final order confirming the plan entered by Judge Hillman are not valid. Accordingly, the Court rejects the Debtor's contention that changes in its circumstances, including appreciation in the value of the Property, warrant relief from the prior Confirmation Order which incorporated the Modification Agreement.
A bankruptcy court's order confirming a reorganization plan is a final judgment, which binds the debtor, any creditor, and equity security holder to the terms and effect of a confirmed plan. 11 U.S.C. § 1141(a). See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 275, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) ; Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 152, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009). "Once a plan is confirmed, neither a debtor nor a creditor may assert rights that are inconsistent with its provisions." Johnson v. Laing (In re Laing), 146 B.R. 482, 484 (Bankr. N.D. Okla. 1992) (citations omitted), aff'd, 31 F.3d 1050 (10th Cir. 1994). See also Republic Supply Company v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987) (holding that provisions of a confirmed plan are binding "[r]egardless of whether [a] provision is inconsistent with the bankruptcy laws or within the authority of the bankruptcy court, it is nonetheless included in the Plan, which was confirmed by the bankruptcy court without objection and was not appealed."). Thus, for example, where a debtor agrees to except a debt *604from discharge in a Chapter 11 plan that is confirmed, the agreement and order of confirmation are binding in a subsequent bankruptcy case even though a waiver of discharge is generally unenforceable in a subsequent bankruptcy. See Laing, 146 B.R. at 485-86.
In the present case, the Debtor's request that the Court disregard Judge Hilman's Confirmation Order and the provisions of the consensual plan of reorganization that incorporated the Modification Agreement, is contrary to the binding effect of the final Confirmation Order. The Debtor presented the First Amended Plan and the Modification Agreement, and it proposed the Confirmation Order to the bankruptcy court; it now is barred from taking the position in this case that the Modification Agreement and Confirmation Order are unenforceable. The Debtor's request that the Court exercise its discretion to not enforce the waivers in the prior case, and find that on balance the harm to the Debtor outweighs the harm to the mortgagee, ignores the binding effect of the Confirmation Order in the First Case, and is an improper collateral attack on the Confirmation Order.
Moreover, the Debtor's arguments are contrary to the doctrine of judicial estoppel which protects the integrity of the judicial system by preventing a party from taking inconsistent, mutually exclusive positions in judicial proceedings. See New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001). See also Guay v. Burack, 677 F.3d 10, 16 (1st Cir. 2012) ("Where one succeeds in asserting a certain position in a legal proceeding one may not assume a contrary position in a subsequent proceeding simply because one's interests have changed."); Alternative Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 33 (1st Cir. 2004) ("The doctrine's primary utility is to safeguard the integrity of the courts by preventing parties from improperly manipulating the machinery of the judicial system .... In line with this prophylactic purpose, courts typically invoke judicial estoppel when a litigant is 'playing fast and loose with the courts.' ").
After the mortgagee had filed a competing plan in the First Bankruptcy, the Debtor agreed to a number of terms, including the waivers, in order to present a consensual plan to the Court. The Debtor's position in this case is inconsistent with the negotiated Modification Agreement and terms of the consensual plan and with the Confirmation Order entered by the court in the First Bankruptcy. The Debtor now seeks to renege on these agreements and violate the Confirmation Order, a position that this Court cannot countenance.
V. CONCLUSION
In accordance with the foregoing, the Court shall enter an order granting Blue Hill's alternative request for relief from the automatic stay.
The Court may take judicial notice of its own docket. See LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 8 (1st Cir. 1999) ("The bankruptcy court appropriately took judicial notice of its own docket.").
Blue Hill's predecessor objected to Marlene Sherman's claim in the First Bankruptcy, alleging that it was not a loan but an equity contribution to the Debtor. Marlene Sherman filed a response in which she represented that she was Andrew Sherman's mother, had lent him $432,500 for construction of the property, that as of the filing date $335,400 had been repaid, inclusive of interest, and that $80,000 remained due and owing.
In the Debtor's First Bankruptcy, it listed unsecured claims totaling $211,950 on Schedule F-Creditors Holding Unsecured Nonpriority Claims, $162,050 less than on Schedule E/F in the present case.
According to Blue Hill, the Trust, defined above, "assigned the Loan Documents to Blue Hill so that it could take possession of the Property following the scheduled foreclosure sale. Blue Hill's sole member is U.S. Bank, N.A., as Trustee for the Registered Holders of Morgan Stanley Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2007-IQ16."
The Trust represented that NCB, FSB assigned the loan documents to LaSalle Bank, National Association, as Trustee for the Holders of Morgan Stanley Capital I, Inc. Commercial Mortgage Pass-Through Certificates Series 2007-IQ16. It further represented that Bank of America, N.A. subsequently became the successor in interest to LaSalle Bank as Trustee and U.S. Bank, in turn, became the successor of Bank of America, N.A. as Trustee.
This Joint Motion provides:
US Bank and the Debtor have negotiated a proposed consensual treatment of the US Bank secured claim in this proceeding, pursuant to which the Debtor's Plan will be amended to provide the following treatment of the US Bank claim:
a. The obligations of the Debtor and all the guarantors Andrew Sherman and Sara Sherman in connection with ... the "Loan Documents" ... shall be affirmed and reinstated in all respects, except as otherwise modified by the terms of the Amended Plan; ...
f. The Debtor will appropriately amend its organizational documents to preclude the commencement of any bankruptcy proceeding at any time at which there is a default under the Loan Documents; ...
j. No payments will be made under the Plan to Andrew Sherman, including his relatives or affiliates....
k. No post confirmation payments will be made to Andrew Sherman, including his relatives or affiliates, for any reason at any time at which the obligations to US Bank are in default....
n. US Bank will withdraw its pending Plan of Reorganization.
Id., Section 1.
With respect to the treatment of the Class 2 Claim of U.S. Bank, the First Amended Plan of Reorganization substantially incorporated the terms set forth in the Joint Motion and specifically provided, in pertinent part, the following:
(e) The Debtor and guarantors Andrew Sherman and Sara Sherman, will execute amended Loan Documents in a form and manner acceptable to U.S. Bank.
(f) ... The Debtor will appropriately amend its organizational documents to preclude the commencement of any bankruptcy proceeding at any time at which there is a default under the Loan Documents.
(g) The Debtor will not make any post-confirmation payments to Andrew Sherman, including his relatives or affiliates, for any reason, at any time at which the obligations to U.S. Bank are in default.
In Charbono, the standard form confirmed by the bankruptcy court contained a tax return production requirement that required the debtor to provide a copy of each federal income tax return (or any request for extension) directly to the Trustee within seven days of the filing of the return (or any request for extension) with the taxing authority. "The bankruptcy court's decree confirming the Plan incorporated the tax return production requirement and, thus, that requirement became an order of the court." 790 F.3 at 84. The United States Court of Appeals for the First Circuit upheld a fine of $100 as a sanction for the Debtor's failure to deliver a copy to the Chapter 13 trustee of his request for an extension of the filing deadline for his federal income tax return within the time allowed under the terms of the confirmed plan.
As noted above, the Debtor ascribes a value of approximately $3.8 to $4.0 million to the Property and avers that Blue Hill's claim is approximately $2.6 million.
Use of the multi-factor approach does not warrant an evidentiary hearing in this case. Although the parties indicate that there are facts in dispute (i.e., whether Andrew and Sara Sherman were represented by counsel in the First Bankruptcy; the value of the Property; the amount of Blue Hill's claim; the amount of unsecured claims against the Debtor's estate; whether the Debtor continued to make payments on the Note after it matured; whether enforcement of any or all of the waivers in the Modification Agreement will harm the Debtor's unsecured creditors (Blue Hill contends that this is a disputed issue of law, not a disputed fact); whether the Debtor has a likelihood of a successful reorganization (Blue Hill contends that this is a disputed issue of law, not a disputed fact); and whether failure to enforce any or all of the waivers in the Modification Agreement will harm Blue Hill (Blue Hill contends that this is a disputed issue of law, not a disputed fact), this Court can assess those factors without conducting an evidentiary hearing based upon the record of proceedings in this case and the First Bankruptcy. | 01-04-2023 | 11-22-2022 |
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